ECONOMICS
PROFIT
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Marginal revenue is equal to average total cost.
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Marginal revenue is greater than total variable cost.
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Marginal revenue is equal to price, which is greater than average total cost.
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Marginal revenue is equal to marginal cost.
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Price is equal to average total cost.
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Detailed explanation-1: -Assume that a firm is maximizing short-run profits and that price is greater than average variable cost. Which of the following must be true at the firm’s level of output? Marginal revenue is equal to marginal cost.
Detailed explanation-2: -To maximize profit, a short-run perfectly competitive firm will choose the profit maximization point where marginal cost equals marginal revenue. That’s because when marginal revenue is higher than marginal cost, the firm can increase revenue by increasing output.
Detailed explanation-3: -If the price is greater than the average variable cost, the firm should continue generating in the short run. However, if the price is less than the average variable cost, the firm should shut down.
Detailed explanation-4: -A perfectly competitive firm trying to maximize profits in the short run will expand output. as long as marginal revenue is greater than marginal cost.
Detailed explanation-5: -If price is greater than average variable cost, a firm receives sufficient revenue to pay ALL variable cost plus some fixed cost. As such, the economic loss is LESS than total fixed cost.