Question

1. Assume the following: sales price is $9, output is 5,000 units, average total cost is $12, marginal cost is $9, and average variable cost is $9.50. What should the firm do and why?

]A. Continue to operate and reduce costs to earn a profit

B. Shut down because the firm’s earning a loss of $15.00

C. Shut down because the price is less than the average variable cost

D. Continue to produce because price can be increased

2. For a firm in a perfectly competitive market, which of the following is true?

A. Its short-run supply curve is vertical

B. Its short-run supply curve is the average variable cost curve.

C. Its short-run supply curve is the marginal cost curve above the average variable cost curve.

D. Its short-run supply curve is negatively sloped.

3. If a profit-maximizing, perfectly competitive firm is producing at a point on the marginal cost curve between average variable cost and average total cost, it should do which of the following?

A. Shut down in the short run'

B. Leave the market in the short run

C. Continue producing in the short run

D. Increase the fixed costs

4. For the perfectly competitive, profit-maximizing firm, ____________.

A. P = MR > MC

B. P > MR = MC

C. P > MR > MC

D. P = MR = MC

Answer 1

1.Shut down because the price is less than the average variable cost

When the firm is selling its porduct less than the average variable cost, it means that the firm is unable to procure it fixed costs. This firm should shut down.

2.Its short-run supply curve is the marginal cost curve above the average variable cost curve.

Its above the average variable cost , as it needs to operate above shutdown point.

3. Continue producing in the short run

The firm should continue producing in the short term as there is a possibility that if they increase production they might break even in the long run.

4 P = MR > MC

The firm cannot make super normal profits, thus it should aim for break even.