Question

5). Which of the following best describes the relationship between supply curve and the marginal cost curve for the purely competitive firm in the short run?

a. The supply curve is the same as the marginal cost curve throughout its upward sloping part.

b. The marginal cost curve and supply curve are the same above the average total cost curve.

c. The supply curve is the same as the marginal cost curve above the average variable cost curve.

d. The marginal cost curve has nothing to do with supply curve.

6). Which of the following best explains the significance of the statement that for firms in a purely competitive market, price equals marginal cost?

a. This has no significance, because profits are maximized or losses minimized when a firm operates at the level at which mariginal cost is equal to marginal revenue.

b. It is of no significance because that equality can be obtained only by government manipulation of price.

c. This has great significance, because when price equals marginal cost, the allocation of resources is most efficient in producing that combination of goods that consumers prefer.

d. The equation has great significance, because at this point the firm is obtaining economic profits.

7.) Which of the following best states why in the short run a firm may decide to continue to produce, even with economic losses?

a. Price is greater than average variable cost but less tha average total cost.

b. Total revenue is greater than total variable cost but less than total cost.

c. All of the above are reasons for continuing production.

d. One of the above is incorrect.

e. Economic losses areless than fixed cost.

Answer 1

a) "C"

For a perfectly competitive market the supply curve and the marginal cost curve is the same above the average variable cost curve. At the point where the supply curve and the marginal cost curve meets is the shutdown point.

b) "C"

That is most significant because at that point the firm under perfect competition is allocative efficient i.e. the cost of the production is equal to the value that the consumer assign to the good.

c) "C"

All the given reasons are correct for the firm to continue production.