CFA Practice Question

There are 539 practice questions for this study session.

CFA Practice Question

Refer to the graph below. If the government set the selling price equal to the marginal cost, the firm in the graph would be ______

A. making economic profits.
B. sustaining losses and would eventually go out of business.
C. making zero economic profits.
Explanation: At price P4, average cost is greater than average revenue, so the firm is sustaining losses.

User Contributed Comments 6

User Comment
gill15 Why are we at P4? I would've got it right if I knew we were at P4 but all it says is the price is set to MC. MC can be any value along the curve...or do I specifically look at where MC = Demand curve?
gill15 This cant be right as I looked up. If all they gives us is that the price is set to MC I would assume its the price where MC = MR where it is optimal. From there you would look up at the demand curve using that quantity and see that it is a PROFIT produced....

Again I would NOT have looked at price level 4 to begin with...if i did I would get it right but why P4..?
rjdelong In this question there is an atypical AC curve, so whether or not you are at P4, your p=MC<AC. If P < AC that means you are losing $$ at any quantity.
deleseleuc Since the government set the price equal to MC you have to find the P that intersects with the Demand curve, in this case P4.
renataa In the explanation it says:
P4 is greater than the average revenue...where is the Average Revenue curve?
myron @renataa: average revenue is the price, which is the horizontal line at P4. It is below AC curve.
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