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Cost Structure of a Perfectly Competitive Firm

In a perfectly competitive industry, the market price is $25. A firm is currently producing 10,000 units of output, its average total cost is $28, its marginal cost is $20, and its average variable cost is $20. Given these facts, explain whether the following statements are true or false:

a. The firm is currently producing at the minimum average variable cost.
b. The firm should produce more output to maximize its profit.
c. Average total cost will be less than $28 at the level of output that maximizes the firm's profit.

Solution Preview

a. The firm is currently producing at the minimum average variable cost.
We know that the AVC curve and the MC curve intersect each other when AVC is minimum in the case of a normal U-shaped cost curve. In the given case MC=AVC, we can say that the firm is currently producing at the minimum average variable cost.

b. The firm should produce more output to ...

Solution Summary

This solution analyzes the cost structure of a firm and discusses its implications in a perfectly competitive environment. This is completed in 244 words.

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