Question

6) In the long run the profits for a perfectly competitive firm is theoretically zero (select) [accounting, economic] profit(s) because of competition

7) For the P.C. firm in the long run Average Revenue is equal to the: (3 answers!)

a) the price

b) the economic cost

c) the marginal cost

d) the explicit cost

e) the accounting cost

f) the explicit-implicit cost

g) the implicit price

8) Karen runs a print shop that makes posters for large companies. It is a very competitive business. Her Short Run numbers are as Follows: The market price is currently $1 per poster. She has fixed costs of $250. Her variable costs are $1,000 for the first thousand posters, $800 for the second thousand, and then $750 for each additional thousand posters.

What is her AFC per poster (not per thousand!) if she prints 1,000 posters? (select) $ [0.25, 0.12, 1, 25]

What is her ATC per poster if she prints 1,000? (select) $ [1.25, 1.025, 0.25, 12.5]

What is her ATC per poster if she prints 2,000? (select) $ [1.25, 1.025, 0.25, 12.5]

What is the Profit (Accounting) if she prints 1000 posters? (select) $ [0, -25, -50, -250]

Should she produce (select) [indifferent between producing and not, yes produce, no shut down]

What is the Profit (Accounting) if she prints 2000 posters? (select) $ [1000, 0, -50, 50]

Should she produce (select) [indifferent between producing and not, yes produce, no shut down]

Answer 1

(6) In long run, perfect competitors earn zero economic profit.

(7) Average revenue = (a) Price, (b) Economic cost, (c) Marginal cost

(8)

TC = Fixed cost + Total Variable Cost = 250 + TVC

(I) When Q = 1,000,

AFC = TFC/Q = $250/1,000 = $0.25

(II) When Q = 1,000,

TC = 250 + 1,000 = 1,250

ATC = TC/Q = $1,250/1,000 = $1.25

(III) When Q = 2,000,

TC = 250 + 1,000 + 800 = 2,050

ATC = 2,050/2,000 = $1.025

(IV) When Q = 1,000,

Profit = TR - TC = (P x Q) - TC = (1 x 1,000) - 1,250 = 1,000 - 1,250 = - $250

(V) As Profit is negative, she will shut down.

(VI) When Q = 2,000,

Profit = TR - TC = (P x Q) - TC = (2 x 1,000) - 1,250 = 2,000 - 2,050 = - $50

(VII) As Profit is negative, she will shut down.