Greencom is currently producing 20 units of output. At this level of output, Greencom’s marginal revenue is $6, marginal cost is $6, and average total cost is $9. If Greencom operates in a perfectly competitive market and sells all 20 units of output for $10 per unit, it can be concluded that

Question

BlackTom AI · Accepted Answer

First, let's restate the scenario and what the numbers imply. Greencom is producing 20 units, with price P = $10 in a perfectly competitive market, marginal revenue MR = $6, marginal cost MC = $6 at that output, and average total cost ATC = $9. If all 20 units are sold at $10, total revenue TR = 20 × 10 = $200, while total cost TC = ATC × Q = 9 × 20 = $180. Profit (economic profit) = TR − TC = $20, which is positive.

Option 1: 'Greencom is earning negative economic profit.' This would require TR < TC. Here TR > TC, so this is incorrect because the firm makes more revenue than it costs, not less.

Option 2: 'Greencom is earning zero economic profit.' Zero economic profit would occur if TR = TC, i.e., price equals average total cost. Since $10 > $9, there is a surplus over cost, so this option is false.

Option 3: 'Greencom would earn more profit by decreasing output.' Given MC = MR at the current output, the firm is maximizing short-run profit where marginal cost equals marginal revenue. Since price is above average total cost (P > ATC), reducing output would reduce total profit, so this suggestion is incorrect.

Option 4: 'Greencom would earn more profit by increasing output.' If MR = MC at the current output, increasing output would require MC to rise above MR, and since price exceeds ATC, expanding output could still raise profit up to the point where MR = MC, but without additional information about the MC schedule beyond 20 units, we cannot assert that increasing output would increase profit. However, the fact that P > ATC indicates existing positive economic profit at Q = 20. This option implies a pure increase in profit from more output, which is not guaranteed and contradicts the standard profit-maximization condition MR = MC at the optimum. Therefore this statement is not justified as true.

Option 5: 'Greencom is earning positive economic profit.' This aligns with the calculation TR − TC = $200 − $180 = $20, a positive amount, and with price above ATC (P = $10 > ATC = $9). This confirms positive economic profit.

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