Question

If price exceeds the minimum of average total cost, then comparing marginal revenue to marginal cost
(x) tells a firm the total amount of profit that it will generate.
(y) indicates how much additional profit is generated by the last unit of production.
(z) tells a firm whether it should increase output, decrease output or remain at the present level of output.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (z) only

A profit maximizing firm in a competitive market produces widgets. Suppose the market price for widgets increases to $15. At the profit maximizing (loss minimizing) quantity of 25,000 widgets, the ATC is equal to $18 and the AFC is equal to $5. Given these conditions the
(x) firm will continue its production of widgets in the short run since it is producing at its profit maximizing (loss minimizing) quantity and price exceeds average variable cost at that quantity.
(y) firm will experience a loss of $75,000 since total revenue is $375,000 and total cost is $450,000.
(z) the firm will continue to produce 25,000 widgets since it would lose $125,000 if it shut down and did not produce any widgets.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (x) only

A profit maximizing firm in a competitive market produces T-shirts. Suppose the market price for T-shirts decreases to $8. At the profit maximizing (loss minimizing) quantity of 40,000 T-shirts, the AVC is equal to $6 and the AFC is equal to $2. Given these conditions the
(x) firm will experience zero economic profits since price is equal to average total cost.
(y) the firm will continue to produce 40,000 T-shirts in the short run since it would earn an accounting profit at that level of production.
(z) firm will exit in the long run because firms must receive more than zero economic profit in the long run in order to stay in business.
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

Answer 1 - Option D

Y and Z only

The comparison of the MR with MC will tell the additional profit that the firm generates with the additional units. It also helps to compare the price with the cost thus facilitates to decide what quantity to produce .

However the total amount of total profit can only be known if total cost will be known which is not given in the question. Hence Y and Z will be correct.

Answer 2 - Option A

X , Y and Z

Since AVC is $13 and the price is $15. Thus the production will be continued.

However total revenue will be 375000 and total cost will be $450000. There will be a loss of $ 75000.

If the firm shuts down, it will not occur the variable costs , but the fixed costs will be inccured which will be $5 * 25000 (125000). This will be the loss . Hence the firm will not want to incur this loss and will continue to produce 25000 units.

Answer 3 - Option B

X and Y only.

The firm is in no profit no loss condition because the ATC = Price i.e $ 8.

The firm will continue the production because the price exceeds the AVC of $ 6 . Hence the firm will not have to shut down.

But the firm will not exit in the long run . Since it is a perfectly competitive firm , it will only earn normal profits at which MR = MC . Normal profits mean 0 economic profit. It is the condition for the perfectly competitive firm to exist and will not have to leave the market .