Question

In: Economics

10. Suppose a perfectly competitive firm’s demand curve is below its average total cost curve. Under...

10. Suppose a perfectly competitive firm’s demand curve is below its average total cost curve. Under which conditions will a firm continue to produce in the short run?

If the supply curve intersects the marginal cost curve above the average variable cost curve

If the demand curve intersects the marginal cost curve above the average variable cost curve.

11. Study Questions and Problems #11 Suppose the industry equilibrium price of residential housing construction is $100 per square foot, and the minimum average variable cost for a residential construction contractor is $110 per square foot. You should advise the owner of the firm to...….

a. Shut down

b. Decrease output

c. Increase output

12.

Suppose independent truckers operate in a perfectly competitive industry and an increase in demand creates positive economic profits for firms in the short run.

Indicate what happens in the long run to each factor in the following table. (Check all that apply.)

Factor

Increases

Remains the Same

Decreases

Price of trucking services (relative to the price when there is an increase in demand)
Industry quantity of output
Profit of trucking firms

True or False: Given these conditions, the independent trucking industry is a constant-cost industry.

True

False

Solutions

Expert Solution

Ans 10.) Option B

If the demand curve intersects the marginal cost curve above the average variable cost , then it means that the price is greater than the average variable cost.

In this case , the producer is atleast able to cover up a full portion of average variable cost plus some of the fixed cost which is better than if the firms shuts down.

Ans 11.) Option A

Price is less than the minimum average variable cost, then it means that neither the firm is equal to cover up the fixed cost, nor is it able to cover up the variable cost and therefore incurring heavy losses.

In other words, when the price is less than the average variable cost then know level of output is capable of producing profit or covering up the fixed cost.
If the firm shuts down, it would have to bear the fixed cost, but would at least be able to save money on the variable cost and thus shutting down the operations would be a better decision than continuing producing the goods.

Ans 12.)

Main feature of the perfect competition market is that in the short run, the producer earns the huge profits, but in the long run, the profit decreases to just a normal profit or we can say zero economic profit.

(a) Price of trucking services: DECREASES
When a producer earns more profit in the short run, then the other producers are attracted towards the market and enter the perfectly competitive market.
Increase in the number of suppliers increases the the supply of trucking services. We know from the property of economics that when there is an increase in the supply of a good, the price of the good decreases. So, the price of trucking services decreases.


(b) Industry output : INCREASES
As we know that number of trucking service providers has increased in the market, therefore the quantity of service also increases.

(C) Profit : DECREASES
When there is an increase in the supply of Record, we know that the price of the good decreases.
Similarly, in the trucking services market, price of the service decreasesbuntil it becomes equal to average total cost.
When the price of the service is equal to the average total cost of providing this service, the producer does not earn any profit.Thus, profit level has decreased in the long run as compared to the short run.


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