Question

Question 32 Refer to the following figure: MC ATC AVC Price 0, 0, 0, 0 0 Quantity The short-run break-even price for the perfectly competitive firm will be

Answer 1

In a perfectly competitive market, the firm acts as a price taker. In the short run, it produces the output for which P=MC. The firm then draw its profit by

$\pi=(P-ATC)\times Q$

For the firm to break even

$\pi=0\\\\ or,\ (P-ATC)\times Q=0\\\\\therefore P=ATC$

As at equilibrium P=MC, then the firm break even at

$P=MC=ATC$

Then the break-even point is where the ATC, MC and price line intersects. This is at price P3.

Therefore, the correct option is: P3