Question

Which of the following statement(s) is/are true?
(A) Gross profit is the difference between total revenue and total cost.
(B) Average revenue is the same as market price of the commodity.
(C) Long period total cost curve starts from the origin.
(D) ATC and AVC tend to intersect at some level of output.
Choose the correct answer from the options given below:

• A. (A) only.
• B. (B) and (C) only.
• C. (A) and (D) only.
• D. (A), (B) and (C) only.

Hint:

Because \(ATC = AVC + AFC\), the vertical distance between the \(ATC\) and \(AVC\) curves is equal to \(AFC\). Since \(AFC\) decreases as output rises, the two curves draw closer together but never touch.

Answer 1

The Correct Option is B

Step 1: Understanding the Concept:
This question requires an understanding of basic microeconomic concepts, including cost structures, revenue curves, and profit definitions in the short run and long run.

Step 2: Key Formula or Approach:
The relationships can be defined as:
Average Revenue:
\[ AR = \frac{TR}{Y} = \frac{P \cdot Y}{Y} = P \]
Average Total Cost:
\[ ATC = AVC + AFC \]

Step 3: Detailed Explanation:
Let us analyze the statements based on these principles:
- Statement (A): Net profit is the difference between total revenue and total cost. Gross profit is typically defined as total revenue minus variable costs (or cost of goods sold). Thus, statement (A) is incorrect.
- Statement (B): Average Revenue (\(AR\)) is calculated as total revenue divided by the quantity sold. Since \(TR = P \cdot Y\), \(AR\) simplifies to the market price (\(P\)). Thus, statement (B) is true.
- Statement (C): In the long run, all inputs are variable and there are no fixed costs. If production is zero, total cost is also zero. Therefore, the long-run total cost (LTC) curve must start from the origin. Thus, statement (C) is true.
- Statement (D): Since \(ATC = AVC + AFC\), and Average Fixed Cost (\(AFC\)) remains positive at all levels of output, \(ATC\) will always be greater than \(AVC\).
As output increases, \(AFC\) declines toward zero, and the two curves approach each other, but they can never intersect. Thus, statement (D) is incorrect.

Step 4: Final Answer:
Statements (B) and (C) are true.