7. A firm reaches a break-even point (normal profit position) where:
A. marginal revenue cuts the horizontal axis.
B. marginal cost intersects the average variable cost curve.
C. total revenue equals total variable cost.
D. total revenue and total cost are equal.

Question

7.    A firm reaches a break-even point (normal profit position) where:
A.    marginal revenue cuts the horizontal axis.
B.    marginal cost intersects the average variable cost curve.
C.    total revenue equals total variable cost.
D.    total revenue and total cost are equal.

BlackTom AI · Accepted Answer

First, let's restate the question and the options to ensure clarity: A firm reaches a break-even point (normal profit position) where:
A. marginal revenue cuts the horizontal axis.
B. marginal cost intersects the average variable cost curve.
C. total revenue equals total variable cost.
D. total revenue and total cost are equal.

Option A: 'marginal revenue cuts the horizontal axis.' When marginal revenue cuts the horizontal axis (MR = 0), it implies that adding another unit does not bring in additional revenue, which is a different condition than break-even. Break-even is about overall profit being zero, not about MR being zero. This description aligns more with a situation where quantity is at a level with no revenue gained from an extra unit, which is not the standard definition of break-even.

Option B: 'marginal cost intersects the average variable cost curve.' If MC intersects the average variable cost (AVC) curve, that point is related to the shutdown decision and cost structure, but it does not define the break-even point. Break-even is concerned with total revenues covering total costs, not specifically with the relationship between MC and AVC.

Option C: 'total revenue equals total variable cost.' If TR = TVC, the firm covers its variable costs but still has fixed costs to cover. In that scenario, the firm would be covering variable costs but incurring fixed costs, resulting in a loss equal to fixed costs. This is not break-even, since profit is not zero after accounting for fixed costs.

Option D: 'total revenue and total cost are equal.' When TR = TC, total profit is zero, meaning the firm is at its break-even point or normal profit position. This balances all revenues with all costs (both fixed and variable), which is exactly the definition of break-even in most economic analyses.

Putting these together, the condition that matches the standard definition of break-even is the one where total revenue equals total cost, since it ensures zero economic profit and fully covers both variable and fixed costs. The other options describe situations related to revenue, cost components, or alternative breakpoints that do not establish zero profit.

In summary, the analysis shows that break-even corresponds to TR = TC, while the other statements describe different financial or cost relationships that do not define the break-even point.

ECNM1116.32925.202530 Practice Quiz: Pure Competition in the Short Run

7. A firm reaches a break-even point (normal profit position) where: A. marginal revenue cuts the horizontal axis. B. marginal cost intersects the average variable cost curve. C. total revenue equals total variable cost. D. total revenue and total cost are equal.

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