Question

Assume that a perfectly competitive firm faces the market equilibrium price P*=$6. When the firm maximizes its positive profit in the short-run, its average total cost (ATC) and marginal cost (MC) are most likely as

		ATC=6 and MC=4
		ATC=6 and MC=6
		ATC=4 and MC=4
		ATC=4 and MC=6

Answer 1

Since the profit maximizing condition of the perfectly competitive firm is

P=MC

As it has been given that a perfectly competitive firm faces the market equilibrium price P*=$6. When the firm maximizes its positive profit in the short-run, its average total cost (ATC) and marginal cost (MC) are most likely as $6, this is because firm maximises its positive profit.

Hence MC will be $6.

Positive Profit=(P-ATC)Q

Hence for positive profit ATC must be less than price $6. Hence ATC must be $4 because for ATC only two values are given $4, and $6. At ATC $6, profit will be zero but at ATC $4, there will be positive profit.

Hence option fourth is the correct answer.