Question

For each of the following statements, indicate whether it is true, false, or uncertain and explain why. Average total cost is always greater than average variable cost by a constant amount. In the short run, a perfectly competitive firm always maximizes profit when average total cost is at minimum. If a firm shuts down in the short run, its profits will equal zero.

Answer 1

Answer:

All : 1st, 2nd, 3rd are False

Explanation:

1.  Average total cost is always greater than average variable cost by a constant amount : False.

Average Total Cost (ATC) is the total cost per unit of output. ATC = Average Variable cost (AVC) + Average fixed cost (AFC). Total fixed cost (TFC) is the cost which stays same at all levels,  AFC = TFC / Q falls with increasing output. So, ATC is greater by AVC, by AFC (decreasing) amount.  

2. In the short run, a perfectly competitive firm always maximises profit when average total cost is at minimum : False

A perfectly competitive firm maximises profit in short run when difference between its Total Revenue & Total cost is maximum, Marginal Revenue = Marginal Cost & MC > MR after the point.

3.  If a firm shuts down in the short run, its profits will equal zero : False

A firm shuts down in short run, when its price < average variable cost,  or firm's average revenue < average variable cost. This implies that firm must be incurring losses, if it shuts down.