Question 19 In a perfectly competitive market, a firm may have losses in the short run....

Question 19 In a perfectly competitive market, a firm may have losses in the short run. Suppose the firm’s total costs are $1,000 and fixed costs are $200 when outputs are 100. The market-determined price of the good is $9 per unit. Which of the following statement is true?

a. The price is less than the average variable cost

b. The firm should shut down business

c. The firm should continue doing business

d. The price is less than average fixed cost

Solutions

Expert Solution

Answer - C. The firm should continue doing business.

The firm is operating in the short run. The firm is producing output of 100 units. Lets assume it is the profit maximizing output. At this output, the price (MR) is $9 per unit.

From the above, it can be seen that at the given output level, the Total Cost is $1,000 and Fixed Cost is $200.

As we know that TC is the combination of Fixed and Variable cost, in the given question the variable cost will be $800.

TC = FC + VC

$1,000 = $200 + VC
VC = $800.

Calculate the Average Total Cost and Average Variable Cost

ATC = TC / Quantity

ATC = $1,000 / 100 = $10

AVC = VC / Quantity

AVC - $800 / 100 = $8

It is clear from the above that the firm is incurring losses because the Price is less than the ATC (PATC). But is can be seen that the price is greater than the average variable cost (PAVC). Any price below that AVC, the firm will shut down in the short run. But here the firm will continue to operate in the short run because the price is more than the average variable cost. If the firm shuts down then the loss will be equal to Fixed Cost and it will be more than the loss if the firm continue to produce.

Therefore, in the given condition the firm should continue to doing the business.

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

A perfectly competitive firm is making losses in the short-run. Will the market price rise or...

A perfectly competitive firm is making losses in the short-run. Will the market price rise or fall in the long-run? Explain your answer.

Consider a perfectly competitive firm in the short run. Assume that it is sustaining economic losses...

Consider a perfectly competitive firm in the short run. Assume that it is sustaining economic losses but continues to produce. At the profit-maximizing (loss-minimizing) output, all of these statements are true EXCEPT: A. Marginal cost is less than average total cost B. Marginal cost is less than average variable cost C. Price is equal to marginal cost D. Marginal cost is equal to marginal revenue

You are operating a firm in a perfectly competitive market. In the short run, you have...

You are operating a firm in a perfectly competitive market. In the short run, you have fixed costs of $30. Your variable costs are given in the following table: Q VC 0 0 1 100 2 150 3 180 4 220 5 300 6 390 If the market price is $56, what is the profit-maximizing level of output?

The short-run supply curve for an individual firm operating in a perfectly competitive market is: a....

The short-run supply curve for an individual firm operating in a perfectly competitive market is: a. the marginal cost curve at or above the average total cost curve. b. the marginal cost curve at or above the average variable cost curve. c. the marginal revenue curve at or above the average total cost curve. d. the marginal revenue curve at or above the average variable cost curve.

QUESTION 11 In the short-run, if a perfectly competitive firm is producing at a price below...

QUESTION 11 In the short-run, if a perfectly competitive firm is producing at a price below average total cost, its economic profit is positive. zero. negative. positive, zero, or negative. QUESTION 12 Assume that a firm's marginal revenue barely exceeds marginal cost. To maximize profit, teh firm should: expand output. contract output. maintain output. there is insufficient information to answer the question. QUESTION 13 In the short run, a perfectly competitive firm will stay in business as long as: Price...

QUESTION 13 In the short run, a perfectly competitive firm will stay in business as long...

QUESTION 13 In the short run, a perfectly competitive firm will stay in business as long as: Price equals average revenue. marginal revenue is greater than marginal cost. price exceeds average variable cost. price is less than average variable cost. QUESTION 14 Suppose that price is below the minimum average total cost (ATC) but above the minimum average variable cost (AVC), and the market price is expected to rise at least to ATC in the near future. In the short...

7. The short-run supply curve for a firm in a perfectly competitive market (x) is determined,...

7. The short-run supply curve for a firm in a perfectly competitive market (x) is determined, in part, by the comparison of marginal costs and marginal revenue for the firm. (y) is reflected in that part of the marginal cost curve that lies above the average variable cost curve. (z) will be influenced by fixed costs. A. (x), (y) and (z) B. (x) and (y) only C. (x) and (z) only D. (y) and (z) only E. (x) only 8....

A profit-maximizing firm in a perfectly competitive market operates in the short run with total fixed...

A profit-maximizing firm in a perfectly competitive market operates in the short run with total fixed costs of D $2,250 and total variable costs (TVC) as is below. The firm can only produce integer amounts of output (Q): Q (Output) TVC (Total Variable Cost 0 0.00 1 2,500 2 4,000 3 5,000 4 6,200 5 7,600 6 9,360 7 11,500 8 13,860 9 16,450 10 19,200 11 22,310 3a. How much output should the firm produce if it can sell...

A profit-maximizing firm in a perfectly competitive market operates in the short run with total fixed...

A profit-maximizing firm in a perfectly competitive market operates in the short run with total fixed costs of $6,500.00 and total variable costs (TVC) as is below. The firm can only produce integer amounts of output (Q) Q TVC 0 0.00 1 8,000.00 2 15,000.00 3 20,000.00 4 23,000.00 5 25,000.00 6 29,000.00 7 33,500.00 8 39,000.00 9 46,000.00 10 53,500.00 11 61,200.00 12 72,000.00 _______3. (2.5 pts.) How much output should the firm produce if it can sell all...

Consider a perfectly competitive market that is currently in a short-run equilibrium, and where each firm...

Consider a perfectly competitive market that is currently in a short-run equilibrium, and where each firm in the market is making strictly positive profits. Each firm in the market is using a technology called the type A technology. Suppose that the type A technology is available in some finite number. Passed some threshold, new firms that would enter the market would have to use the type B technology, a different (and inferior) technology. The type B technology results in a...

Subjects