Question

At the current level of output, a profit-maximizing firm in a competitive market earns average revenue of $25, has an average total cost of $22 and an average variable cost of $17. If the firm's marginal cost curve is equal to its average total cost curve at an output level of 20,000 units, then the firm earns profit of $60,000 at its current level of output.

True

False

The short-run supply for a firm in a perfectly competitive market will not be influenced by the size of fixed costs if price is less than average total cost but more than average variable cost at the profit maximizing quantity.

True

False

For a firm in a perfectly competitive market the price of the good is always equal to marginal revenue, but less than average revenue and equilibrium market price

True

False

Answer 1

Answer : 1) The answer is "True".

For perfectly competitive firm the price is equal to the average revenue. Here the average revenue is $25 and average total cost is $22. So, per unit profit = average revenue - average total cost = 25 - 22 = $3. Total profit at 20,000 units = per unit profit * quantity = 3 * 20,000 = $60,000.

Therefore, the given statement is true.

2) The answer is "False".

The marginal cost only depends on variable cost. The fixed cost does not influence the marginal cost. For perfectly competitive firm the short-run supply curve is the part of marginal cost curve which lies above the average variable cost curve. This means that for perfectly competitive firm the short-run supply curve does not influenced by the fixed cost at profit-maximizing quantity level. Therefore, the given statement is false.

3) The answer is "False".

For perfectly competitive firm the market price is the equilibrium market price which is equal to the marginal revenue and average revenue. This means that for perfectly competitive firm, market price = equilibrium market price = average revenue = marginal revenue. Therefore, the given statement is false.