Question

4. When a profit-maximizing firm in a competitive market is able to generate enough revenue to pay all of its variable costs and some of its fixed costs, it should, in the short run,
A. shut down until it is able to produce where average revenue exceeds average fixed cost.
B. shut down and incur a loss in the amount of its fixed costs.
C. continue to produce as long as marginal cost is less than average revenue.
D. continue to produce as long as revenue is sufficient to pay fixed costs.
E. continue to produce since revenue is enough to cover variable costs even though revenue is not enough to cover both its fixed costs and variable costs.
 

5. A competitive firm (price-taker) is able to sell its output for $10 per unit. The 1,000th unit of output that the firm produces has a marginal cost of $12. It follows that the production and sale of the 1,000th unit of output
(x) increases the firm’s total revenue by $10, but increases the firm’s total cost by $12.
(y) decreases the firm’s profit by $2 since price is less than marginal cost by $2.
(z) indicates that the firm should necessarily shut down in the short run since marginal cost exceeds marginal revenue at the output amount of 1,000 units.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (x) only

6. Which of the following statements is (are) correct?
(x) When a profit-maximizing firm is earning profits, those profits can be identified as (P – ATC)  Q.
(y) When a perfectly competitive firm makes a decision to shut down in the short run, it is likely that price is below the minimum of average total cost but above the minimum of average variable cost.
(z) As a general rule, profit-maximizing firms in a competitive market produce output at a point where the value of marginal cost and marginal revenue are both decreasing.
A. (x), (y) and (z) B. (x) and (y) only
C. (x) and (z) only D. (y) and (z) only
E. (x) only

Answer 1

Ans.4- (E)

A perfectly competitive firm must continue to produce as long as its price is greater than average variable cost.If it is unable to cover its average variable cost then it must shut down.

Ans.5- (B)

X is true because price =marginal revenue=10 so firm's total revenue increase by 10.Similarly marginal cost increase by 12.

Y is true because change in profit= change in total revenue- change in total cost = 10-12=-2

Z is false because the firm should necessarily shut down in the short run only if price is less than average variable cost(AVC) but we don't have any information about AVC.

Ans.6- (E)

X is true because profits can be written as (P-ATC)*Q for any firm

Y is false because a perfectly competitive firm shuts down only if its price is lesser than minimum point of average variable cost.

Z is also false because P=AR=MR are constant for a competitive firm and hence horizontal.