Question

Evaluate each of the following statements. If a statement is true, explain why; if it is false, identify the mistake and try to correct it. a. A profit-maximizing firm in a perfectly competitive industry should select the output level at which the difference between the market price and marginal cost is greatest. b. An increase in fixed cost lowers the profit-maximizing quantity of output produced in the short run.

Short answer

Question: In a perfectly competitive market, identify if the following statements are true or false and provide an explanation or correction: a) A profit-maximizing firm should select the output level where the difference between the market price and the marginal cost is the greatest. b) An increase in fixed costs directly affects the profit-maximizing quantity of output produced in the short run. Answer: a) False. A profit-maximizing firm in a perfectly competitive industry should select the output level at which the market price is equal to the marginal cost, not where the difference between them is greatest. b) False. An increase in fixed costs does not directly affect the profit-maximizing quantity of output produced in the short run.

Step-by-step solution

Statement a: Analyzing the Profit-Maximizing Output Level

In a perfectly competitive market, a firm's goal is to maximize profit. A firm can do this by selecting the output level where the market price is equal to the marginal cost (MC). If the market price is greater than MC, the firm can increase profits by producing more. If the market price is less than MC, the firm should produce less to minimize losses. Thus, the statement is false. The firm should select the output level at which the market price equals the marginal cost, not where the difference between them is greatest.

Correcting Statement a

A profit-maximizing firm in a perfectly competitive industry should select the output level at which the market price is equal to the marginal cost.

Statement b: Analyzing the Effect of an Increase in Fixed Costs

In the short run, fixed costs do not have an impact on a firm's profit-maximizing quantity of output. Remember that fixed costs are costs that do not change as output levels change, such as rent or equipment. In the short run, a firm will continue to produce at the output level where the market price equals the marginal cost because this is the point where the firm maximizes its profit or minimizes its losses. The statement is false since an increase in fixed costs will not directly affect the profit-maximizing quantity of output produced in the short run.

Correcting Statement b

An increase in fixed costs does not directly affect the profit-maximizing quantity of output produced in the short run.