CFA Practice Question

CFA Practice Question

Which of the following is correct?
A. If a firm has rising average costs as it expands output, it is said to experience Economies of Scale.
B. In a competitive market firms are price takers (prices do not change as they sell larger or smaller amounts).
C. When a competitive market is at equilibrium, there is incentive for the owners of firms to exit the industry as their firms make zero economic profits, thus not compensating them for their time and effort.
Explanation: If a firm has falling average costs as it expands output, it is said to experience Economies of Scale. Economic profit is calculated after taking into account the opportunity costs for all inputs, including the owners' time and effort.

User Contributed Comments 2

User Comment
scottm8571 C is not correct. They should be earning normal profits, thus compensating (not NOT) them for time and efforts.
Mikehuynh Under competitive competition, firms are price takers and their main concern is how much they want to sell at the prevailing market price. To maximize profit, firms will produce until MR=MC.
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