In: Economics
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.
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