Question

There is an equilibrium price of $60 in a perfectly competitive market for a good that can be produced in continuous quantities. One firm in this market has a marginal cost of $60 at q = 15. If this firm produces q =15, it has an economic profit of -$400. Which of the following statements are true?

i) if the firm has fixed costs of $300, then q =15 is the profit maximizing quantity in the short run for this firm

ii) The firm can increase profit by increasing production above q = 15 since this will increase revenue.

iii) If the firm costs of $600, it should produce in the long run since the fixed costs go away.

a) None of them are true

b) Only I is true

c) Only II is true

d) Only III is true

e) Only I and III are true

Answer 1

Marginal cost and price both are $60 when the quantity produced is 15 units. Profit maximizing condition requires that the marginal cost should be equal to marginal revenue. Since it is a perfectly competitive market the marginal revenue will be equal to price which means the current level of 15 units is a profit maximizing level of output. This implies that second statement is not correct. We have no information about the average variable cost due to which we cannot predict whether it will stay in the long run or not. However statement one is correct because it is a profit maximizing quantity in the short run

Option B is correct.