Evaluate each statement as true, false, or uncertain, and explain your answer. a

Question

Evaluate each statement as true, false, or uncertain, and explain your answer.

a. In competitive markets, the difference between price and marginal cost is a measure of profit per unit output which is what firm seeks to maximize.

b. Many defense contractors have indicted that, contrary to popular opintion, the defense contracting business is highly competitive (i.e. perfectly competitive). If this is true, then in long run equilibrium the price is just high enough to cover average production costs and every contractor earns zero economic profit. Thus, if spending on defense is reduced, contractors will go out of business

Explanation / Answer

a.) Equilibrium condition in perfectly competitive market P=MC. Hence this statement is False

b) If defense is competitive market, then in long run firm will be able to just cover the average cost. But if govt reduces spending on defense, then few firms would leave the industry and it will bid down the supply. Fall in supply raises the price level. This statement is also false.

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