Question

Firms minimize​ costs; thus, a firm earning​ short-run economic profits will choose to produce at the minimum point on its average total cost curve. Do you agree or disagree with this​ statement?

Answer 1

Options:

a. Disagree: Firms earning profits will produce to the right of the minimum point on the average total cost curve.

b. Disagree: Firms earning short-run profits will produce where the difference between MR and MC is largest.

c. Disagree: The minimum point on the average total cost curve is when output equals zero.

d. Disagree: A firm minimizing costs will produce where marginal cost equals the average total cost of production.

e. Agree: Since firms seek to minimize costs, they will always produce at the minimum point on the ATC curve.

Answer:

B) Disagree: Firms earning short-run profits will produce where the difference between MR and MC is the largest.

Explanation:

In the long run, firms should produce at the minimum point on their average total cost curve (marginal cost = average total cost). But on the short run, the firms may be producing at different levels, sometimes resulting in economic losses or other times resulting in economic profits.

If the firm is making economic profits, that means that it is producing at the level where marginal revenue (price) is higher than marginal cost.