Question

True/False

1. Suppose a firm can only vary the quantity of labor hired in the short run. An increase in the cost of capital will increase the firm's marginal cost.

2. A horizontal demand curve for a firm implies that the firm is selling in a competitive market.

3. If a profit-maximizing firm finds that, at its current level of production, MR < MC, it will operate at a loss.

Answer 1

1)

False statement:

Increase in cost of capital will not increase marginal cost. Since capital has been assumed as fixed input.

2)

True statement:

Demand curve in competitive market is horizontal for any firm. Firm can supply at prevailing price only. Firm does not have control over the price of good.

3)

False statement:

MR = MC is profit maximization condition. But if MC > MR, it does not mean that firm is incurring loss. Loss depends on AC and Price level of product. Firm suffers loss if P < AC.