Question

The market for fertilizer is perfectly competitive. Firms in the market are producing output but are currently making economic losses.Which of the following statements is true about the price of fertilizer? Check all that apply.
The price of fertilizer must be less than marginal cost.
The price of fertilizer must be less than average total cost.
The price of fertilizer must be equal to average variable cost.

Answer 1

Answer:

The correct answer is: The price of fertilizer must be less than average total cost.

Explanation:

In a perfectly competitive labor market, the firm is price takers. These firms are able to maximize their profit at the point where the price is equal to marginal revenue.  

If the firm is incurring losses and still operating, it means that the price is higher than the average variable cost but lower than the average total cost.  

If the price was lower than the average variable cost, the firm would have stopped production. A price equal to the average variable cost implies zero economic profit. When the price is greater than the average total cost the firm is earning profits.