Question

At its current level of​ quantity, a perfectly competitive​ firm's marginal revenue is​ $2.50, its

short−run marginal cost is​ $2.50 and its long−run marginal cost is​ $2.00. Which of the following statements is​ true?

A. The firm is maximizing its long−run profit, but not its short−run profit.

B. The firm is maximizing its short−run profit, but not its long−run profit.

C. The firm should increase its production to maximize profit in the short−run.

D. The firm should decrease its production to maximize profit in the short−run.

If a perfectly competitive firm is producing the short−run profit−maximizing quantity and is earning negative economic​ profits, the firm should anticipate​ ________.

A. the market supply to decrease

B. new firms to enter the market

C. the market supply to increase

D. the market equilibrium price to decrease

Answer 1

1

B. The firm is maximizing its short−run profit, but not its long−run profit.

Explanation :

Firm maximises it's profit where MR equals MC. Here short run MC and MR equals so firm is maximizing Short run profit.

Because marginal revenue and marginal cost are not equal in the long run it is not maximising profit.

2.

A. the market supply to decrease

Explanation :

When firm earns negative economic profit, existing firms will exit the industry. So, supply curve will decrease as number of suppliers will decrease and thus price will increase.