ECON 1P91 Lecture Notes - Lecture 7: Deadweight Loss, Allocative Efficiency, Longrun

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20 May 2016

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Where tr is just enough to cover tvc (all variable costs) Only fixe costs remain (economic costs= fixed costs) Even with zero output, still have fixed costs. Firm indifferent at this point can produce or shut down. If price falls below the minimum average variable costs, the firm will shut down (p< min avc) Short run supply curve is marginal cost curve at and above minimum point of average variable cost curve. Q=2200 q # firms = q (a) industry or market (b) firm. At q, find atc economic profit (p-ac)q (a) All costs identical in the long run long-run market supply is horizontal. Long-run average cost curve (lrac)is at capacity. Value consumers place on a good minus price paid for it. Measured by area between demand curve and price paid. Enter until economic profit = zero (normal profits) Innovation and technological change can create substitutes and weaken existing monopolies. They serve to protect the firm from competition.

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20) When price is less than average variable cost at the profit-maximizing level of output, a firm should: A) continue to produce the level of output at which marginal revenue equals marginal cost if it is operating in the long run. B) shutdown, because it cannot even cover all of its variable costs let alone its fixed costs if it stays in business. C) shutdown, because it will lose nothing in that case. D) continue to produce the level of output at which marginal revenue equals marginal cost if it is operating in the short run. 21) When price is greater than average variable cost but less than average total cost at the profit-maximizing level of output, a firm should: A) continue to produce the level of output at which marginal revenue equals marginal cost. B) shutdown to minimize its losses. C) reduce output to the level at which price equals average variable cost to minimize its losses. D) increase output to minimize its losses. 22) Assume that at the current market price, a perfectly competitive firm's profit-maximizing level of output yields total revenues that are just equal to total costs. Which of the following statements applies to this firm? A) The firm should increase its explicit costs to reduce its tax burden. B) The firm should shut down right now. C) The firm should continue to operate in the short run to minimize losses, but shut down if things don't improve over the long run. D) The firm is earning zero economic profit and should continue to operate. 23) The perfectly competitive firm's supply curve: A) coincides with its perfectly elastic demand curve. B) is the firm's average total cost curve above the shutdown point. C) is perfectly inelastic at the market price. D) is the firm's marginal cost curve above the minimum point on the AVC curve. 24) Assume there is a decrease in the market demand for a good sold by price-taking firms that are initially producing the profit-maximizing level of output. How will the market adjust over time? A) Firms will exit the market, causing price to rise until losses are eliminated. B) Firms will exit the market, causing price to fall until positive profits are eliminated. C) Firms will enter the market, causing price to fall until positive profits are eliminated. D) Firms will enter the market, causing price to rise until losses are eliminated. 25) What is the "most efficient capacity" for the perfectly competitive firm? A) The plant size for which Price = AR. B) The plant size at which LRAC is at its minimum. C) The plant size at which MR = MC. D) The plant size at which any of the SRATC curves are tangent to the LRAC curve.

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ECON 1P91 Lecture Notes - Lecture 7: Deadweight Loss, Allocative Efficiency, Longrun

ECON 1P91 Full Course Notes

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