Question

In: Economics

1. Assume the following: sales price is $9, output is 5,000 units, average total cost is...

1. Assume the following: sales price is $9, output is 5,000 units, average total cost is $15, marginal cost is $9, and average variable cost is $7.50. What should the firm do and why?

A. Shut down, because average total cost is greater than price

B. Shut down, because of a loss of $5,000

C. Continue to produce, because price is greater than average variable cost

D. Continue to produce, because price is greater than average total cost

2.The price charged by a firm in the perfectly competitive market is set by the __________.

A. market

B. government

C. consumers acting in unison

D. firm itself

3. Any firm that cannot cover its variable costs should __________ in the short run and __________in the long run.

A. decrease output; decrease output

B. decrease output; leave the industry

C. shut down; decrease output

D. shut down; leave the industry

4. Which of the following markets is closest to perfect competition?

A. The market for rough diamonds, where DeBeers controls the bulk of production.

B. The craft beer market, where there are thousands of small local producers each selling their own specialized brand.

C. The potato market, where many producers grow similar produce, frequently in Idaho.

D. The local water provider, where there are many similar providers throughout the country

Solutions

Expert Solution

1. C

Though P < ATC and firm is making loss, since P > AVC, firm continues in short run.

2. A.

Each firm accepts market price as its own price.

3. D

When P < AVC < ATC, firm shuts down in short run & exits market in long run.

4. C

Each of the many farmers produces identical good (potato).


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