Question

if a firm in a competitive industry is making zero economic profit but still producing, it must be the case that:
a. mc = mr < atc.
b. mc = mr = atc.
c. mc = mr > atc.
d. mc = atc > mr.

Explanation:

Step1: Recall profit-maximizing rule

In competitive markets, firms maximize profit (or minimize loss) where $MC = MR$, and they produce only if $MR \geq AVC$.

Step2: Define zero economic profit

Zero economic profit means total revenue equals total cost, so $\frac{TR}{Q} = \frac{TC}{Q}$, which simplifies to $P = ATC$. In competitive markets, $P = MR$, so $MR = ATC$.

Step3: Combine conditions

Since profit-maximizing rule requires $MC = MR$, and zero economic profit requires $MR = ATC$, we get $MC = MR = ATC$.

Answer:

b. MC = MR = ATC.