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, and why.
a. The firm is currently producing at the minimum average variable cost.
b. The firm should produce more output to maximize profit.
c. Average total cost will be less than $28 at the level of output that maximizes the firm’s
take a shot, what do you think.
Hint: true, true, true
a. False. The firm is not currently producing at the minimum average variable cost. The firm's average total cost is $28, which is higher than its average variable cost of $20. The minimum average variable cost is the point at which the average variable cost curve is at its lowest point, and the firm is producing at the most efficient level. In this case, the firm is producing at a level where its average total cost is higher than the average variable cost, so it is not producing at the minimum average variable cost.
b. True. The firm should produce more output to maximize profit. To determine whether the firm should produce more or less output, we need to consider the relationship between marginal cost and marginal revenue. In a perfectly competitive market, the firm maximizes profit by producing at the level of output where marginal cost equals marginal revenue. In this case, the marginal cost is $20 and we do not have information about the marginal revenue. However, if the marginal revenue is higher than $20, then the firm should produce more output to maximize profit.
c. False. Average total cost will not be less than $28 at the level of output that maximizes the firm's profit. The average total cost is the total cost per unit of output. In a perfectly competitive market, the firm maximizes profit by producing at the level of output where marginal cost equals marginal revenue. The average total cost is not taken into consideration in this decision-making process. Therefore, average total cost can be higher or lower than $28 at the level of output that maximizes the firm's profit.