Which of the following statements is true about a firm operating at market equilibrium?

• A. The firm always earns positive economic profit at equilibrium.
• B. The firm produces at a level where average total cost is minimized.
• C. The firm produces where marginal cost equals marginal revenue.
• D. The firm sets price above the equilibrium price to maximize profit.

Answer: (C)

Verified step by step guidance

1. Understand the concept of market equilibrium for a firm: At equilibrium, a firm chooses the output level where its profit is maximized given the market price.
2. Recall the profit maximization rule: A firm maximizes profit by producing the quantity where marginal cost (MC) equals marginal revenue (MR). This is because producing beyond this point would increase cost more than revenue, and producing less would leave potential profit unearned.
3. Analyze the statement about economic profit: At equilibrium, firms in perfectly competitive markets typically earn zero economic profit in the long run, not always positive profit. So, the statement about always earning positive economic profit is generally false.
4. Consider the statement about average total cost (ATC): While firms may produce where ATC is minimized in the long run, the key condition for profit maximization is MC = MR, not necessarily minimizing ATC at equilibrium.
5. Evaluate the statement about price setting: In perfectly competitive markets, firms are price takers and cannot set prices above the equilibrium price without losing all customers, so the statement about setting price above equilibrium to maximize profit is false.