Question

When the price faced by a firm in a very competitive industry was $5, the firm produced nothing in the short run. However, when the price rose to $10, the firm produced 100 tons of output. From this we can infer that.

Group of answer choices

(a) The firm’s marginal cost curve must be flat

(b) The firm’s marginal costs of production never fall below $5

(c) The firm’s average cost of production was less than $10

(d) The firm’s total cost of producing 100 tons is less than $1000

(e) The minimum value of the firm’s average variable cost lies between $5 and $10

Answer 1

The answer is the e part.

The minimum value of the firm's average variable cost lies between $5 and $10. A firm in a perfect competition does not produce anything as long as the price is not equal to and greater than the minimum of average variable cost. Thus the minimum of average variable cost must lie above $5. Since the firm has agreed to produce at $10, it must be between $5 and $10. Otherwise, below the average cost of $5, the firm will be in a shut down situation and prefer to shut down its operation.