Question

Refer to the diagram given below and choose the correct statement.

Options

• K is the equilibrium point as MC = AC

• MC = AVC at T and firm enjoys normal profit.

• E is the equilibrium point, but the firm stops production due to loss.

• E is the equilibrium point as both the equilibrium conditions have been satisfied.

Answer 1

E is the equilibrium point as both the equilibrium conditions have been satisfied.

Explanation: 

E is the short-run equilibrium because MC = MR at E and the MC curve cuts the MR (AR) curve from below, satisfying the required first- and second-order conditions for equilibrium. Although the firm makes a loss here (AR < AC), price P₀ is above AVC so the firm continues producing (it does not shut down).