A certain competitive firm sells its output for $10 per unit. The 200th unit of output...

A certain competitive firm sells its output for $10 per unit. The 200th unit of output that the firm produces has a marginal cost of $11. Which of the following is not necessarily true?

Select one: a. Production of the 200th unit of output increases the firm's total revenue by $10.

b. Production of the 200th unit of output increases the firm's variable cost by $11.

c. Production of the 200th unit of output increases the firm's total cost by $11.

d. Production of the 200th unit of output increases the firm's average variable cost.

Solutions

Expert Solution

Ans: d) Production of the 200th unit of output increases the firm's average variable cost.

Explanation:

Under perfect competition , the industry is the price maker whereas the firm is the price taker. It means there is an unique price in the market . Firms are not able to change the market price. They can sell or produce as much as they can at the prevailing market price.

So under perfect competition , Price = Marginal Revenue = Average Revenue ( P = MR = AR)

Total Revenue = Price * Quantity

In the above scenario , price remains constant. so the total revenue increase by $10 at each successive levels of output.

Increase in fixed cost does not have any impact on the marginal cost whereas the variable costs have.

Marginal cost = Change in Total cost / Change in Quantity

Average variable cost ( AVC ) = Total variable cost / Quantity

Rahul Sunny answered 1 year ago

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