5. In a perfectly competitive industry, the market price is $25. A firm is curre

Question

5. In a perfectly competitive industry, the market price is $25. A firm is currently producing 10,000 units of output, its average total cost is $28, its marginal cost is $20, and its average variable cost is $20. Given these facts, explain whether the following statements are true or false:
A. The firm is currently producing at the minimum average variable cost.
B. The firm should produce more output to maxiumize its profit.
C. Average total cost will be less than $28 at the level of output that maximizes the firm's profit.

Explanation / Answer

A. True. Marginal cost intersects average variable cost at its minimum. In other words, when they are equal, AVC is minimized. B. True. For firms in perfectly competitive markets we set p = MC to determine profit maximization. Therefore, this firm should be producing where their marginal cost equals $25. C. True. Profit is the vertical distance between the ATC curve and the demand curve time quantity. If they are maximizing profit this means that this "distance" is greatest here. This firm is a price-taker which means that their output does not affect the demand; the only thing that can change are the firms costs.

Related Questions

Navigate

• Browse (All)
• Browse 5
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.