Question

1. For competitive firms, they set marginal cost equal to market price at profit-maximizing level of output.
2. In the short run, marginal revenue curve faced by a competitive firm is downward-sloping.
3. Competitive firms always produce a positive amount of output in the short run (q > 0).
4. Competitive firms earn zero economic profit in the long run equilibrium.

All these are True False Questions

Answer 1

(1) (TRUE): For competitive firms, they set marginal cost equal to the market price at a profit-maximizing level of output.

A perfectly competitive firm is a price taker. The firm takes the price determined by the market at the intersection point of market demand and market supply curve. A firm sells each unit of output at the same price (i.e., the price determined by the market). Hence, Price, marginal revenue and average revenue all are the same for the perfectly competitive firm.

A perfectly competitive firm produces at P = MC in order to maximize profit.

(2) (FALSE): In the short run, the marginal revenue curve faced by a competitive firm is downward-sloping.

The marginal revenue curve is horizontal to X-axis.

(3) (FALSE): Competitive firms always produce a positive amount of output in the short-run (q > 0).

The competitive firm produces zero units of output in the short-run if the price is below the AVC.

(4) (TRUE): Competitive firms earn zero economic profit in the long-run equilibrium.

In the long-run equilibrium, a competitive firm produces at the P = MC = Min.ATC.

Hence, P =ATC in the long run.

Profit = TR - TC

Profit = P*Q - ATC*Q

Profit = Q(P -ATC)

Profit = 0.