Question

True or False: When economic profit is zero, producers do not have any incentive to deviate from the current line of production. True or False: Under perfect competition, the per unit revenue of the firm is equal to its marginal revenue True or False: A competitive firm's minimum supply price in the short run is its shutdown price.

Answer 1

Answer:

1. True

2. True

3. True

Explanation:

1. Economic profit is the explicit and implicit costs are subtracted from total revenues. After deducting all the costs from revenue, if we get the zero economic profit, the producers do not get enough chance to have much incentive from the current line of production, or they cannot deviate it from the production level. That is why it is the correct answer.

2. It is true statement. An example can easily show why the statement is true.

Quantity      Per unit revenue         Total revenue       Marginal Revenue $TR_{2} - TR_{1}$

0                              0                                  0                            -

1                               4                                  4                         (4 - 0) = 4

2                              4                                  8                         (8 - 4) = 4

3                              4                                  12                       (12 - 8) = 4

4                              4                                  16                      (16 - 12) = 4

So, the statement under perfect competition is true.

3. The statement is true. The shutdown price in the short-run is that the average variable cost is higher than the price per unit. When the average variable cost is higher than the price per unit, it is a competitive firm's minimum supply price in the short-run. It can happen due to the entrance of the new competitors in the entire market.