Question

1. The following are five true-false questions. Write in whether true T or false   F

1. In the short run, fixed costs are irrelevant in determining a firm's optimal level of output._______

2. In the short run, a competitive firm will not produce unless price is equal to average total costs.__________

3. If a purely competitive firm is producing a level of output greater than its profit-maximizing output, then marginal revenue is greater than marginal cost._________

4. Economic profit is the difference between total revenue and marginal revenue_________

5. Competitive firms are price takers largely because of intensive advertising by their competitors.__________

Answer 1

A) True. Marginal cost determines the output level which is part of variable costs.

B) False. In short run firms will produce even if price is less than average total cost but it must not less than average variable cost.

C) False. At profit maximising level of output MR = MC and MC is increasing while MR is constant. So output greater then this will have higher marginal cost then marginal revenue.

D) False. Economic profit is the difference between total revenue and explicit+ implicit costs.

E) False. In competitive industry there is no advertising and firms take price because there are many firms and all are producing homogeneous product and consumers have all the information.