Question

QUESTION 4 If the price of a product consistently exceeds its average cost, one can definitely conclude that the firm: o is earning a normal rate of return. O is maximizing its long-run profit. O is producing at its most efficient level of output. O is earning a positive economic profit. O is producing at the minimum efficient scale.

Answer 1

The answer is option D- is earning a positive economic profit.

A change in the market price in the short term induces the profit-maximizing company to change its optimum output level. This optimal output occurs if the price is equal to the marginal cost, provided that the marginal cost exceeds the average variable cost. The company's supply curve is therefore the marginal cost curve, higher than average variable cost. (When the price falls below the average variable cost, the company will shut down.) In the long run, the company will adjust its inputs to the same long-run marginal cost as the market price. It functions on a short-run marginal cost curve at this level of output where the short-run marginal cost is the same as the value.