CFA Practice Question

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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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