Question

5. The total cost function for a firm in a perfectly competitive market is TC = 350 + 15q + 5q². At its profit maximizing quantity in the short-run, each firm is making a loss but chooses to stay open. Which of the following is/are necessarily true at the profit maximizing quantity?

   1. MR = 15 + 5q

   2. P>15

   3. AR > 350/q + 15 + 5q

   4. Both A and B are true.

   5. Both B and C are true.

   6. All of the above are true.

Answer 1

Answer is option B)

since firm is having loss, so price is less than ATC at all output levels , thus ATC = TC/Q = 350/q + 15 + 5q

So price = AR , should be < ATC for losses.

Option c is false.

In perfect competition, P= MC & P = MR = MC

So MC = derivative of TC = 15+ 10 q

Thus P = MR = 15+10q, so option a is false

Hence d & e, f are wrong too.

So to remain in business , price should be at least equal to minimum of AVC = 15

So P should be > 15

AVC = 15+5q, & minimum AVC = 15