Question

1.

Which of the following is true for a firm in a perfectly competitive market?

		Its short-run supply curve is the average variable cost curve.
		Its short-run supply curve is vertical.
		Its short-run supply curve is negatively sloped.
		Its short-run supply curve is the marginal cost curve above the average variable cost curve.

2.

A ________ cost is one that is incurred once and cannot be recovered, such as painting a sign on a building.

		sunk
		marginal
		fixed
		variable

3.

What is the principal objective of a firm?

		To maximize revenues
		To maximize production
		To minimize cost
		To maximize profits

4.

Which of the following intersects with the marginal cost curve?

		Average total cost curve at its lowest point
		Average total cost curve at its highest point
		Average fixed cost curve at its lowest point
		Average variable cost curve at its highest point

Answer 1

1) The option 4 is correct. In perfect competition the short run supply curve is the MC curve above the AVC curve.

In perfect competition the firm tries to produce the amount of output which equates the marginal cost and revenue to maximize its profits. Here the firm moves up and down in Mc curve to produce goods. As a result the supply curve is the marginal cost curve in perfectly competitive market.

2) Sunk cost is the correct answer.

Once the sunk cost is incurred it is not able to recover in any means. Thus sunk cost is said to be unrecoverable. This type of cost has no relevance in current as well as future budgetary concerns. Therefore the sunk cost are not at all considered in taking a decision regarding an investment proposal. Some of the examples of sunk cost are hiring bonus, research and development, marketing study etc.

3) The answer to maximize the profits is correct one.

The fundamental and basic objective of every organization is to increase the profits. All the business firm are profits motivated. A firm with zero profits is not able to survive in the market. Profits are essential for business to expand the operations, attain growth, increase reputation etc.

4) The option 1 is the correct one. MC curve intersects average total cost curve at the minimum or lowest point.

It happens because the marginal cost for producing the next unit of output affects the average total cost. There is a point at which both eh marginal cost curve and average total cost curve meets together in the graph. This is the point where the MC will become higher than average total cost. Here each and every new product will lead to an increase in AC.