18. A firm should shut down in the short run if:

a. price is greater than average variable costs

b. average fixed costs are greater than marginal revenue

c. price is less than average variable costs

d. total costs are greater than fixed costs

19. A firm is said to be making profits when:

a. marginal revenue exceeds marginal costs.

b. marginal revenue exceeds variable costs.

c. average revenue exceeds average total costs.

d. average revenue exceeds average variable costs.

20 If a competitive firm finds that at current output levels, marginal cost exceeds marginal revenue , it should:

a. shut down.

b. raise prices.

c. increase output.

d. reduce output.

	21. A perfectly competitive firm is a:
	A)	price leader; it can change its price and other firms will adjust.
	B)	price maker, because it has the freedom to set the selling price.
	C)	price taker, because it must accept the market equilibrium price.
	D)	price participant, because it can coordinate its pricing decisions with other firms.

22.	The demand curve for an individual perfectly competitive firm:
	A)	is a downward sloping demand curve.
	B)	is perfectly elastic.
	C)	is perfectly inelastic.
	D)	is equal to the firms average variable cost curve.

Solutions

Expert Solution

18 c. price is less than average variable costs
(Firms shutdown in the short run when P < minimum of AVC because firms are not earning operating profit.)

19. c. average revenue exceeds average total costs.
(Profit = total revenue - total cost = Average revenue*quantity - Average Cost*Quantity = (Average revenue - Average Cost)*Quantity. So, firms earn positive profits when average revenue exceeds average total costs.)

20. b. raise prices.
(For a competitive frim, P = MR = MC. So price should be raised so that it becomes equal to MC.)

21. C) price taker, because it must accept the market equilibrium price.
(A competitive firm is a price taker because there are large number of firms.)

22. B) is perfectly elastic.
(Demand curve for a perfectly competitive firm is horizontal which is perfectly elastic.)

Rahul Sunny answered 1 year ago

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