What condition defines zero profit for a firm in a perfectly competitive market?

• A. Price equals average total cost
• B. Price equals marginal cost
• C. Price equals fixed cost
• D. Price equals average variable cost

Answer: (B)

In a perfectly competitive market, zero economic profit happens when price just covers all costs, including the normal return to entrepreneurship. Here, the price a firm can charge equals its marginal revenue, and in the long run, entry and exit drive profits to zero, so price settles where it equals average total cost. At this point, profit per unit is P minus ATC, which is zero, so total profit is zero even though the firm continues to operate.

Using price equal to marginal cost describes the quantity that maximizes profit for a given price, but it doesn’t determine whether profits are zero—profits can be positive or negative depending on how ATC compares to the price. The other options don’t fit the zero-profit condition: fixed cost is a sunk, nonvarying expense and doesn’t set zero profit by itself, and average variable cost relates to shutdown decisions (P < AVC means the firm would shut down) rather than to earning zero profit in the long run.