In a perfectly competitive market, in the long run, the marginal cost of a firm

Question

In a perfectly competitive market, in the long run, the marginal cost of a firm becomes equal to its minimum average total cost.

Generally, The price a firm charges for its product is equal to its total revenue divided by the number of units sold.

In a perfectly competitive firm to maximize profit a firm must make sure that the price it charges does not exceed its marginal cost.

Firms in a competitive market can never make economic profits while they may make biasness (accounting) profits.

When a perfectly competitive firm is making a positive economic profit its average revenue must be greater than its average total cost.

To maximize its profit a firm always produces at the quantity level where it can charge the highest price and earn the greatest revenue; this strategy is consistent with setting is MC equal to price.

When a firm in a competitive market is making a positive economic profit its business profit may be positive or negative.

The price a monopolist charges may or may not be above its average cost but it is always above its MR.

When demand curve is a downward-sloping straight line (linear) marginal revenue will be greater than MC at all output leveles.

A) True
B) False

Explanation / Answer

In a perfectly competitive market, in the long run, the marginal cost of a firm becomes equal to its minimum average total cost. A) True[in the long run in a perfectly competitive market, all firms will be operating at the efficient level, i.e. minimum of its ATC curve. Also, MC cuts ATC at its minimum. And the profit maximizing condition is that P=MR=MC=min. ATC with all firms earning zero profits in the long run] B) False 2. Generally, The price a firm charges for its product is equal to its total revenue divided by the number of units sold. A) True[ We have TR=P*Q, i.e. P=TR/Q] B) False 3. In a perfectly competitive firm to maximize profit a firm must make sure that the price it charges does not exceed its marginal cost. A) True[ In a perfectly competitive market P=MR and profits are maximized when MR=MC. If MR=P>MC then for each additional unit sold, the firm is adding more to revenue than to costs. Hence the firm should increase production to increase profits] B) False 4. Firms in a competitive market can never make economic profits while they may make biasness (accounting) profits. A) True B) False[ In the short run firms in a competitive market can make economic profits. However in the long run, all firms earn zero economic profits though their business accounting profits are positive] 5. When a perfectly competitive firm is making a positive economic profit its average revenue must be greater than its average total cost. A) True[ Profit =TR-TC = (P*Q)

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