ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The answer depends on firm’s profit margin (or average profit), which is the relationship between price and average total cost. If the price that a firm charges is higher than its average cost of production for that quantity produced, then the firm’s profit margin is positive and it is earning economic profits.

Detailed explanation-2: -If the price received by the firm causes it to produce at a quantity where price equals average cost, which occurs at the minimum point of the AC curve, then the firm earns zero profits.

Detailed explanation-3: -P = ATC-the firm earns a normal profit and zero economic profit. (The firm breaks even.) P < ATC-the firm incurs an economic loss. A firm incurring economic losses must decide whether to shut down temporarily: ♦ If P > AVC, the firm continues to produce.

Detailed explanation-4: -If price exceeds average total cost, then a firm generates an economic profit, that is, above normal profit, by producing at the quantity that equates marginal revenue and marginal cost. However, if price falls below average total cost, then the firm incurs an economic loss.

Detailed explanation-5: -Economic Profit: The firm’s average total cost is less than the price of each additional product at the profit-maximizing output. The economic profit is equal to the quantity output multiplied by the difference between the average total cost and the price.