Which of the following best describes the economic break-even point?

• A. It is the point where average variable cost equals price.
• B. It is the level of output at which total revenue equals total cost, including both explicit and implicit costs.
• C. It is the point where marginal cost equals marginal revenue.
• D. It is the level of output at which total revenue equals only explicit costs.

Answer: (B)

Verified step by step guidance

1. Understand the concept of the economic break-even point: it refers to the output level where a firm covers all its costs, including both explicit (out-of-pocket) and implicit (opportunity) costs.
2. Recall that total revenue (TR) is the total amount of money a firm receives from selling its output, calculated as \(TR = P \times Q\), where \(P\) is price and \(Q\) is quantity.
3. Recognize that total cost (TC) includes both explicit costs (like wages, materials) and implicit costs (like foregone income from alternative uses of resources).
4. The economic break-even point occurs where total revenue equals total cost, i.e., \(TR = TC\), ensuring the firm earns zero economic profit but covers all opportunity costs.
5. Compare this with other options: average variable cost equals price relates to short-run shutdown decisions, marginal cost equals marginal revenue relates to profit maximization, and total revenue equals only explicit costs ignores implicit costs, so these do not define the economic break-even point.