Question

1.

The ________ cost pricing rule means that the government can regulate a natural monopoly to minimize deadweight loss without forcing the private firm out of the market.

variable

total

average

marginal

fixed

2.If the short-run supply curve and the demand curve intersect below the long-run supply curve, firms will experience ________ economic profits, meaning the price is ________ the minimum point on the average total cost curve.

zero; above positive; above negative; below positive; below negative; above

3.If firms in a competitive market are incurring economic losses, the long-run market supply curve

shifts upward. shifts downward. is above the point where the short-run market supply curve and the demand curve intersect. and the short-run market supply curve and the demand curve all intersect at the same point. is below the point where the short-run market supply curve and the demand curve intersect.

4.Use the following scenario to answer the following questions: Babak owns a sports practice facility called Boston Batting Cages in Boston, Massachusetts. During the first year of operation, Boston Batting Cages incurred many costs. In that year, Babak spent $5,000 on labor, $2,000 on maintenance, and $1,000 on electricity. Babak took out a loan to open his business, in which he would have earned $1,500, and his previous job, which he could get back at any time, paid him $50,000. If Boston Batting Cages received $80,000 in revenues, what were the accounting profits?

$80,000 $50,000 $51,500 $20,500 $72,000

Answer 1

1. Option C Average

Average cost pricing is one of the ways the government regulates a monopoly market. Monopolists tend to produce less than the optimal quantity pushing the prices up. The government may use average cost pricing as a tool to regulate prices monopolists may charge.Average cost pricing forces monopolists to reduce price to where the firm's average total cost (ATC) intersects the market demand curve. The effect on the market would be increased production and decrease price, increase social welfare (efficient resource allocation) and to generate a normal profit for monopolist (Price = ATC) .

2. Option C negative, below

If the short-run supply curve and the demand curve intersect below the long-run supply curve, firms will experience negative economic profits, meaning the price is below the minimum point on the average total cost curve.

Short run is a period in which supply can be changed by changing only the variable factors, fixed factors remaining the same. That way, if the firm shuts down, it has to bear fixed costs. That is why in the short run, the firm will supply commodity till price is either greater or equal to average variable cost. Thus a firm will continue supplying the commodity till marginal cost is equal to price or average revenue. Under perfect competition average revenue is equal to marginal revenue, so the firm will produce up to that point where marginal revenue and marginal cost are equal.Short run supply curve of a perfectly competitive firm is that portion of marginal cost curve which is above average variable cost curve.

3.Option A shift Upward

If firms in a competitive market are incurring economic losses, the long-run market supply curves shifts upward.

If firms in an industry are experiencing economic losses, some will leave. The supply curve shifts to the left, increasing price and reducing losses. Firms continue to leave until the remaining firms are no longer suffering losses—until economic profits are zero.

4.Option E $72000

Accounting Profit = Total Revenue - Explicit Costs

Explicit Costs = Labor + Maintenance + Electricity

= 5000 + 2000 + 1000 = $8000

Accounting Profit = $80000 - $8000 = $72000