When the price faced by a competitive firm was $5, the firm produced nothing in the short run. However, when the price rose to $10, the firm produced 100 tons of output. From this we can infer that:
A) the firm's marginal cost curve must be flat.
B) the firm's marginal costs of production never fall below $5.
C) the firm's average cost of production was less than $10.
D) the firm's total cost of producing 100 tons is less than $1000.
E) the minimum value of the firm's average variable cost lies between $5 and $10.

Question

Quizplus · Accepted Answer

The firm's decision to produce at a price of $10 but not at $5 suggests that its average variable cost (and possibly marginal cost) falls between these two prices. This is because a firm will only produce if the price covers the average variable cost.

When the Price Faced by a Competitive Firm Was $5