Which of the following statements is/are TRUE?
1) If the market price falls below the Average Fixed Costs (AFC) of production then the firm will minimize losses by “shutting down” production.
2) A firm will earn an economic profit if it sells output at a market price that exceeds the Average Variable Costs (AVC) of production.
3) At the current level of production
(q) the Marginal Revenue is (MR=) $25 and Marginal Cost is (MC=) $20 the perfectly competitive firm should decrease its’ level of production.
A. Only Statement (1) is TRUE.
B. Only Statements (2) and (3) are TRUE.
C. Only Statement (3) is TRUE.
D. Only Statements (1) and (3) are TRUE.
E. None of the Statements is TRUE.
Profit, which equals total revenue minus total cost (i.e., variable cost plus fixed cost), is maximized when the marginal revenue equals the marginal cost. If the equilibrium price is below the average variable cost it is beneficial to shut down the firm.
Answer and Explanation:
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1) is True because by shutting down, the firm has to pay only fixed costs and can avoid variable costs.
2) is False because if the price is above AVC…
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