Question

Indicate whether each of the following statements is true or false.

1. T F Suppose a firm’s cost function is given by c(q) = 1/4 q² + 5q + 25. This firm’s average total cost is lowest at q = 10.

2. T F In the short run, fixed costs need to be paid even if the firm produces nothing and increase as the firm decides to produce more.

3. T F Supposing that a firm has increasing marginal costs, it will maximize profit when its marginal revenue is equal to its marginal cost.

4. T F Demand for the factors of production (capital, labor) is derived from the cost minimization process of firms that use those factors.

5. T F In a perfectly competitive market, we assume that firms choose a price and quantity to maximize their profits.

Answer 1

1. T

The average cost is or or . The AC would be minimum or or or or or or . Hence, the AC is lowest indeed at where q=10.

2. F

It is true that the fixed costs are paid even if there is zero production, but the fixed cost does not increase as firms decide to produce more. The fixed cost is constant for all production levels, even if the production level is zero.

3. T

The profit maximization of firm will happen at the production level where MC=MR. It doesn't matter if MC is increasing or constant, the condition MC=MR is what required for profit maximization.

4. T

The demand for inputs is indeed derived from the cost minimization process, which yields the conditional input demand. The profit maximization process also yields input demand, but in terms of market price of the product.

5. F

In a perfectly competitive market, firms does not choose price, as the price is a given in the market. As in perfectly competitive market, there are many sellers, an individual firm can not alter their price and maximize profit at the same time.