Question

In: Economics

Suppose a bakery faces a market price of $4 per loaf of bread. Suppose the optimal...

Suppose a bakery faces a market price of $4 per loaf of bread. Suppose the optimal quantity (Q*) of bread is 2,500 and at this quantity the average total cost (ATC) is $2.5 per loaf. What would be the short-run profit of the bakery?

a. $10,000.

b. $6,250.

c. $3,750.

d. $2,500.

Suppose a pizzeria faces a market price of $20 for a large pizza. Suppose the optimal quantity (Q*) of pizzas is 1,500. What would the average total cost have to be at Q* in order for the pizzeria to break-even in the short-run?

a. $75.

b. $25.

c. $20.

d. $17.5.

What is the long-run effect when new firms enter into a perfectly competitive industry?

a. They drive up the long-run equilibrium price.

b. They reduce the equilibrium quantity.

c. They increase each individual firm's demand.

d. They eliminate economic profits.

Which of the following happens when firms in an industry are incurring losses?

a. New firms will be drawn into the industry, thereby driving down the average cost of production.

b. New firms will be drawn into the industry, thereby raising the price.

c. Some firms will leave the industry in the long run.

d. All firms will leave the industry in the long run.

Expert Solution

Suppose a bakery faces a market price of $4 per loaf of bread. Suppose the optimal quantity (Q*) of bread is 2,500 and at this quantity the average total cost (ATC) is $2.5 per loaf. What would be the short-run profit of the bakery?

a. $10,000.

b. $6,250.

c. $3,750.

Right answer. Average profit per unit = 4 - 2.5 = 1.5. Total profit = 2500 * 1.5 = 3750

d. $2,500.

Suppose a pizzeria faces a market price of $20 for a large pizza. Suppose the optimal quantity (Q*) of pizzas is 1,500. What would the average total cost have to be at Q* in order for the pizzeria to break-even in the short-run?

a. $75.

b. $25.

c. $20.

Break even is where the profit is zero. So average total cost will be equal to price.

d. $17.5.

What is the long-run effect when new firms enter into a perfectly competitive industry?

a. They drive up the long-run equilibrium price.

b. They reduce the equilibrium quantity.

c. They increase each individual firm's demand.

d. They eliminate economic profits. Right answer - they drive price down resulting in elimination of (super-normal) profits)

Which of the following happens when firms in an industry are incurring losses?

a. New firms will be drawn into the industry, thereby driving down the average cost of production.

b. New firms will be drawn into the industry, thereby raising the price.

c. Some firms will leave the industry in the long run.

Right answer. Some firms leaving will drive the price up eliminating the losses for the remaining firms.

d. All firms will leave the industry in the long run.

Rahul Sunny answered 2 years ago

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