Question

True or False?

1. a.) If the market price is currently above the shut-down price, the firm will be making positive profits.

b.) A competitive firm's supply curve is identical to its marginal cost curve.

c.) A competitive firm will exit the industry in the long run if the price of its product falls below its average cost.

Answer 1

Option A and option B are false and option C is true

when the market price is greater than the shutdown price it indicates that the competitive firm is producing and is not shutting down its operation. For profit the price must be greater than the average total cost

The supply curve of a competitive firm is identical to rising portion of the marginal cost curve above the minimum of average variable cost.

Exit can occur only in the long run and this happens when the price falls below the average cost in the short run.