Question

This chapter discusses "Firms in a competitive market," concepts like monopolies, etc.

3) Determine whether the following statements are true or false. Explain your answers.

a) A firm will make a profit when the price it charges exceeds the average variable cost of the chosen output level.

b) To maximize profits in the short run, a firm must minimize its costs.

c) if economic profit is positive, firms will exit the market in the short run

d) A firm that receives a price greater than its average variable cost but less than its average cost should shut down

Answer 1

Q3)

(a) False. A firm makes a profit when the price it charges exceeds the average total cost, not the average variable cost at the chosen output level.

(b) True. Maximizing profits and minimizing costs gives the same results as per the duality theorem. Thus, they are essentially the same things.

(c) True. This is, of course, true only when there are no barriers to entry as in perfect competition. If there are barriers to entry as in a monopoly, new firms will not be able to enter. But unless stated otherwise, we assume that the market is competitive.

(d) False. A firms shut down only when the price is lower than the average variable cost. if the firm is covering tis variable costs, it should continue as the fixed costs rre already paid.