Suppose Wendy\'s Coffee Factory produces and sells in a perfectly competitive ma

Question

Suppose Wendy's Coffee Factory produces and sells in a perfectly competitive market. At Wendy's current level of production, she is producing the profit-maximizing level of coffee. At this quantity the average total cost of a pound of coffee is $5 and marginal revenue is $7. Given this information, what will be the long run equilibrium price of a pound of Wendy's coffee?

A) Greater than $7 (B) $7 (C) Between $5 and $7 (D) $5 (E) Less than $5.

Therefore, which of the following is not true for a firm in perfect competition?

A) Marginal revenue equals the change in total revenue from selling one more unit. (B) Profit equals total revenue minus total cost.

(C) Average revenue is greater than marginal revenue. (D) Price equals average revenue.

Any help would be appreciated, thanks!

Explanation / Answer

1. The long run equilibrium condition of a perfectly competitive firm is Price = minimum point of Long Run Average Cost curve. It is given in the question, that at the profit maximizing level of output or the equilibrium output, the average cost is = $5. At the equilibrium output in perfectly competitive firm, the long run average cost corresponding to the equilibrium output is minimum. So, in long run, the equilibrium price = $5. Option D.

2. Option C.

This is because Marginal Revenue is constant at $7. When Marginal revenue is constant, Average Revenue will also be constant and equal to $7

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