A sign a market is not perfectly competitive

A perfectly competitive firm is a price taker, so its marginal revenue equals the market price. It produces where MR = MC, which means P = MC in equilibrium, both in the short run and the long run.

If price is above marginal cost in equilibrium, the firm must face a downward-sloping demand curve, so its marginal revenue is below price. That only happens when a firm has some market power, as in monopoly, oligopoly or monopolistic competition. So P > MC is a clear sign the market is not perfectly competitive.

The other conditions can all hold in a perfectly competitive market.

Each choice

• A (correct). Price equals marginal cost for a perfectly competitive firm. A price above marginal cost means the firm has market power.
• B. Every competitive firm that is producing in the short run has price at or above AVC, or it would shut down. This is normal for competition, not a sign against it.
• C. Average fixed cost is just fixed cost spread over output. Price can easily be above it in any market, so it tells you nothing about the market structure.
• D. In a competitive market, price equals marginal cost, which measures the opportunity cost of the resources used for the last unit. This fits competition rather than ruling it out.
• E. Accounting profit leaves out implicit costs, so a firm earning zero economic profit, as competitive firms do in the long run, still shows positive accounting profit. Mixing up the two kinds of profit leads here.