Question

3. "Assuming the long-run average cost curve is U-shaped, a firm will always seek to operate at the lowest point on the long-run average cost curve." True or false? Explain your answer.

4. Why is the total profit curve shaped like a hill? Is it a good thing to go to a point where marginal profit is zero? Explain. What is the value of marginal profit at the profit-maximizing output?

Answer 1

Q1 True.

Firm wants to Operate on lowest point of ATC because total cost are minimum at this point for the given level of output.

Q2 Total profit curve is hill type because when there is increasing returns at lower level of output profit also increases at increasing rate. So profit curve will be increasing.. When decreasing returns starts profit curve starts declining. At the top of the curve marginal profit is zero because slope of total profit curve is zero.

So it is good to operate where marginal profit ia zero because at this total profits will be maximum.

Marginal profits will be zero at profit maximising output.