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. |