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Question 3

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A firm shuts down if price is

Select one:

below minimum average variable cost.

above minimum average fixed cost.

below average total cost.

less than marginal cost.

above minimum average variable cost.

Question 4

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A perfectly competitive firm's supply curve includes its marginal cost curve at all prices above minimum

Select one:

average variable cost.

average fixed cost.

total variable cost.

total cost

average total cost.

Question 5

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A firm is producing the profit-maximizing amount of output when it is producing where its ________ curve intersects its ________ curve.

Select one:

marginal cost; average variable cost

marginal cost; marginal revenue

total cost; total revenue

marginal cost; average total cost

average total cost; average variable cost

Question 6

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GM will temporarily lay off 1,300 employees as the company stops production of the electric car, Chevy Volt, for five weeks. GM had hoped to sell 10,000 Volts last year, but ended up selling just 7,671. It plans to maintain inventory levels by adjusting production to match demand.

Source: Politico, March 2, 2012

The shutdown decision ________ total fixed cost and ________ total variable cost.

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does not change; does not change

does not change; increases

does not change; decreases

increases; does not change

decreases; decreases

Question 7

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In the short run, a firm in a perfectly competitive market

Select one:

chooses the price that maximizes its economic profit.

chooses the price that minimizes its marginal cost.

always makes an economic profit.

can make an economic profit, incur an economic loss, or break even.

shuts down if it incurs an economic loss.

Question 8

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Franklin is a fiddlehead farmer. He sold 10 bags of fiddleheads last month, with total fixed cost of $100 and total variable cost of $50.

Suppose the price of fiddleheads is expected to stay at $10 per bag for the foreseeable future, and Franklin's production and cost figures are expected to stay the same. His total fixed cost consists entirely of rent on land, and his five-year lease on the land runs out at the end of the month. Should Franklin renew the lease?

Select one:

Insufficient information to answer.

No, because in the long run, zero economic profit is a signal to move factors of production out of fiddlehead farming.

Yes, because total revenue will still cover total fixed cost.

Yes, because total revenue will still cover total variable cost and a portion of total fixed cost.

No, because total revenue must cover all costs for factors of production to remain in fiddlehead farming in the long run.

Question 9

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If firms exit an market, the

Select one:

price of the good falls.

total market output increases.

economic profit of the remaining firms stay the same.

economic profit of the remaining firms decrease.

market supply curve shifts leftward.

Question 10

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If firms in a perfectly competitive market are making an economic profit, new firms will enter. This entry shifts the market

Select one:

demand curve leftward, and the market price falls.

supply curve rightward, and the market price falls

demand curve rightward, and the market price rises.

supply curve leftward, and the market price rises.

Answer 1

Ans) 1) A firm will shutdown if the price is below AVC. It is because since the firm is unable to recover even its variable cost, operating at this price will bring additional loss.

Option a (below minimum average variable cost)

2) That portion of marginal cost curve which is above minimum of AVC is the supply curve for an individual firm. It is because, no firm will supply below this price.

Option a (average variable cost)

3) A profit maximising point is where MR and MC curve intersect i.e are equal.

Option b (marginal cost and marginal revenue)

4) Fixed cost is independent of level of production while variable cost depends upon the level of production and it increases with increase in production and decreases with decrease in production.

Option c (does not change, decreases)

5) In short run, a profit maximising firm produces the quantity where MR and MC curve intersect. A Perfectly competitive firm does not have any control over price, it accepts market price i.e it is price taker.

In short run, a Perfectly competitive firm can earn positive, negative or zero economic profit. While in long run, it will always earn zero economic profit.

Option d (can make economic profit, incur an economic loss or can break even)

(As per rules and time constraint only one question is allowed. However I have answered first five. Kindly ask other questions separately. Thank you.)