Question

If price exceeds the minimum of average variable cost, then comparing marginal revenue to marginal cost indicates how much additional profit is generated by the last unit of production and tells a firm whether it should increase output, decrease output or remain at the present level of output.

True

False

If the firm’s marginal cost is equal to its marginal revenue at the firm’s existing level of production, then the firm should maintain its current level of production to maximize profit.

True

False

Question text

A profit maximizing firm in a competitive market faces a price of $20 for its product. Its average variable cost is $15 and its average fixed cost is $8 at the quantity where marginal cost equals marginal revenue. In the short run, the firm will shut down and incur the total loss of its fixed costs.

True

False

A market is competitive if firms are price takers and goods offered for sale are essentially identical or largely the same for the firms.  

true

False

Answer 1

If price exceeds the minimum of average variable cost, then comparing marginal revenue to marginal cost indicates how much additional profit is generated by the last unit of production and tells a firm whether it should increase output, decrease output or remain at the present level of output. The statement is True, as if price exceeds average variable cost the firm will continue to operate despite suffering losses. Also the firm will produce at a point where marginal revenue equals the marginal cost of production.

If the firm’s marginal cost is equal to its marginal revenue at the firm’s existing level of production, then the firm should maintain its current level of production to maximize profit. The statement is True, as at this level the firm earns maximum revenue and keep the output level constant.

A profit maximizing firm in a competitive market faces a price of $20 for its product. Its average variable cost is $15 and its average fixed cost is $8 at the quantity where marginal cost equals marginal revenue. In the short run, the firm will shut down and incur the total loss of its fixed costs. The statement is False, The firm will continue to operate as the price is more than average variable cost of production.

P	AVC	AFC	ATC	MC
20	15	8	23	20

A market is competitive if firms are price takers and goods offered for sale are essentially identical or largely the same for the firms. The statement is True. In a perfectly competitive market the product is homogeneous and firms has no control over the price and takes the price as is decided by the industry.