In a perfectly competitive industry, the market price is $25. A firm is currently producing 10,000...

In a perfectly competitive industry, the market price is $25. A firm is currently producing 10,000 units of output, its average total cost is $28, its marginal cost is $20, and its average variable cost is $20. Given these facts, explain whether the following statements are true or false:

a. The firm is currently producing at the minimum average variable cost

b. The firm should produce more output to maximize its profit

c. Average total cost will be less than $28 at the level of output that maximizes the firm's profit.

Solutions

Expert Solution

a. Here AVC=MC. As Mc intersects AVC at its minimum so min(AVC)=$20. The firm is producing at $25 which is higher than the minimum average variable cost. So the given statement is FALSE.

b. Here P=$25 but ATC is $28. As P>ATC so the firm can maximize its profit by producing more output till P=ATC. So the given statement is TRUE.

c.Maximizing profit means profit become zero. The firm will maximize its profit when P=ATC=$28. So the given statement is FALSE.

Rahul Sunny answered 1 year ago

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