Question 11 2 points When a pricetaker firm is operating in

Question 11 (2 points) When a price-taker firm is operating in a perfectly competitive market, marginal revenue will always equal average total cost one minus the elasticity of the market demand curve. total revenue. price.

Solution

Q11. Price is the correct choice. The reason is that demand curve faced by the firm is horizontal and so the price, marginal revenue and average revenue all are equal to each other. Firm cannot change the price and so it is fixed by nature and is changed only when demand or supply change

Q12. Correct choice is 7 units. Since price is fixed at 500, the firm looks for the value in marginal cost schedule where MC is equal to or less than 500 but is closest to it. Here MC for 7th unit is (3450 - 3050) which is $400. The MC for 8th unit is (4000- 3450) = $550 which exceeds $500. Hence firm produces 7 units.

Q13. Profit is $50. Note that revenue is $500*7 = $3500 and total cost for 7 units is $3450 so profit is $3500 - $3450 = $50

Q14. It is the rising portion of MC above the minimum of AVC because below this firm does not produce anything.