Question

The following information is relevant for an individual firm operating in a perfectly competitive market.

Output	30
Variable Cost	$800
Fixed Cost	$1,200
Marginal Cost	$60
Price	$60

What will be the firm's production decision in the short-run?

• Exit

• Shutdown

• Other firms will enter into the market

• Operate

A fixed cost is a cost that:

• exists only in the long-run.

• does not vary with output.

• changes based on the number of workers.

• varies with output.

True or False:

A reason economies of scale exists is due to: Old tools and equipment can no longer be used.

• FALSE

• TRUE

Suppose you have the following information on a firm:

Marginal Revenue	$240
Marginal Cost	$250

Assume it is their goal to maximize profit.

Marginal Revenue	$240
Marginal Cost	$250

• Decrease output to maximize profit.

• Not enough iniformation to determine.

• They are producing the profit maximizing level of output.

• Increase output to maximize profit.

Answer 1

Ques1: Total Revenue = Price * Quantity Produced

= $60 * 30 = $1800

Total Cost = Fixed Cost + Variable Cost

= $1200 + $800

= $2000

Profit will be = Total Revenue - Total Cost

= $1800 - $2000

= -$200

Since the firm is incurring a loss and is able to recover its variable cost. It will continue his business operation.

Hence OPTION D is correct.

Ques2: Fixed cost is a cost that does not vary with level of output.

OPTION B IS CORRECT.

Ques3: False, Economies of scale means as we increase all inputs to the production, the long-run average cost curve will decline as output increases.

Ques4: Marginal Revenue = $240

Marginal Cost = $250

Since Marginal Cost is higher than Marginal revenue.

Since we don't know the output produced by the firm and also the prices are not given. Hence we can not suggest what the firm must do in order to maximize the profit.

hence option B is correct that is insufficient information