In: Economics
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
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.