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Consider a firm operating with the following: price = 10, MR = 10, MC = 10, ATC = 10. This firm is a. making an economic profit of 10. b. an example of monopolistic competition. c. going to go out of business in the long run. d. a monopolist for a product with a relatively inelastic demand. e. perfectly competitive in long-run equilibrium.

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Micro Economics For Today

10th Edition
Tucker + 1 other
Publisher: Cengage,
ISBN: 9781337613064

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BuyFindarrow_forward

Micro Economics For Today

10th Edition
Tucker + 1 other
Publisher: Cengage,
ISBN: 9781337613064
Chapter P3, Problem 2KC
Textbook Problem
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Consider a firm operating with the following: price = 10, MR = 10, MC = 10, ATC = 10. This firm is

  1. a. making an economic profit of 10.
  2. b. an example of monopolistic competition.
  3. c. going to go out of business in the long run.
  4. d. a monopolist for a product with a relatively inelastic demand.
  5. e. perfectly competitive in long-run equilibrium.

To determine

 The condition of the firm in the market.

Explanation of Solution

The firms produce the goods and services that are demanded by the people in the economy. The production takes place after making use of the factors of production and that means there will be factor costs to the firm while making production. The costs such as the cost of the raw materials, rent of land, interest on capital, as well as the wage of labor, are the costs of the firm. The additional output due to an additional input of production is known as the marginal product of the input. The profit is the excess revenue made by the firm after deducting the total cost from the total revenue of the firm. When the total cost is higher than the total revenue, there will be an economic loss to the firm. When the revenue of the firm is not even able to cover the average variable cost of production, the firm should shut down its production to avoid further loss to the firm.

Option (e):

It is given that the firm has a price equal to $10 and at the same time, the marginal revenue, marginal cost, as well as the average total cost are also equal to $10. When the firm has a price equal to marginal cost equal to marginal revenue equal to ATC, it indicates that the firm is perfectly competitive in the long run. Thus, option 'e' is correct.

Option (a):

When the price is equal to MR, MC, and ATC, it means that there is no excess revenue to the firm...

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