Question

In a perfectly competitive industry, the market price is GH¢25. A firm is currently producing 10,000 units of output, its average total cost is GH¢28, its marginal cost is GH¢20, and its average variable cost is GH¢20. Given these facts, indicate whether the following statements are true or false and explain:
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 GH¢28 at the level of output that maximizes the firm’s profit.

Answer 1

A) True, The minimum average variable cost is where at where average variable cost is equal to marginal cost.at current output average variable cost= marginal cost=20

B) In perfect competition profit Maximizing condition is: P= MC

So at Current Production,

P{25)>MC(20), means additional unit gives more Revenue (p) than it cost( MC). So firm can increase profit by Increasing Production to level , where p= MC.

So statement is true.

C)True, because Average Total cost ( 28)> marginal cost (20).,so it means average total cost is higher than marginal cost,so average total cost will decrease as Production Increases.

So at profit Maximizing quantity ( higher than current Production), average cost will be lower than 28.

Note: if ATC>MC,ATC will decrease

If ATC<MC, ATC will increase.