If there are fixed costs of production in a competitive indu

If there are fixed costs of production in a competitive industry, the q that solves the firm’s first-order condition

(a) will also solve the firm’s second-order condition.

(b) is the q that leads to the highest possible consumer surplus.

(c) is the same as the q that minimizes AC and AVC.

(d) is the same as the q that minimizes only AC.

Solution

If there are fixed costs of production in a competitive industry, the ‘q’ that solves the firm’s first-order condition

(a) will also solve the firm’s second-order condition.

(b) is the q that leads to the highest possible consumer surplus.

(c) is the same as the q that minimizes AC and AVC.

(d) is the same as the q that minimizes only AC.

Explanation:

The firm’s profit maximization in a competitive industry:

            Max_q (p) = pq – C (q)

If ‘p’ increases production rises along MC (q) curve: MC (q) is the “Supply Curve” of the firm.

            In the short-run equilibrium the positive profits for each firm as long as: p > AC (q), in long-run the industry LR supply curve: horizontal at minimum of the AC curve. Therefore LR Supply curve may be upward – sloping if min AC is rising in market demand quantity.