Question

If Gnomes-R-Us (a perfectly competitive firm) produces at the point where marginal cost intersects the average total cost curve at its minimum point, the firm will earn: (a) short run economic  profit, (b) long run economic porifit, (c) a short-run loss, (d) no profits at all, (e) normal profit. Please explain your answer

Answer 1

the firm is following a perfectly competitive market. here the long run, P=MC gives allocative efficiency, where Ac minimize gives productive efficiency. when MC cuts ATC from its below. the condition for any price determination MR=MC,  

so all the condition will be true for MC cut ATC from its lower point.

1. short-run economic profit, because the only MC intersects AC from its below so it is very possible to earn an economic profit.

2. As no other condition has been given so, in the long run, it will be only a normal profit so economic profit is not possible.

3. A short run loss when AC is above the MR so there is a possibility of loss

4. when the MC=MR=P=AC that case there is no profit. We can inter price No profit means no loss.

5. if AR=MR=P and the ATC touch the price line at its minimum and MC cut ATCfrom its minimum then it will be normal profit.

Here given condition is the MC cuts AC from its below so it can happen in any of these conditions.