ECON 202 Lecture Notes - Lecture 17: Marginal Utility, Productive Efficiency, Allocative Efficiency

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violetsquirrel937

31 Mar 2017

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Suppose a firm in a perfectly competitive market is making a loss. It would like the price to be higher, but it is a price-taker, so it cannot raise the price. If the firm shuts down, it will still need to pay its fixed costs. The firm needs to decide whether to incur only its fixed costs, or to produce and incur some variable costs, but obtain some revenue. The firm"s fixed costs should be treated as sunk costs (costs that hale already been paid and cannot be recovered, b/c even if they haven"t literally been paid yet, the firm is till obliged to pay them. Sunk costs should be irrelevant to your decision making. The supply curve of a firm in the short run. The firm"s shut down decision is based on its variable costs. Total revenue < variable cost (p x q) (vc) Dividing both sides by q, we obtain.

Related Questions

1. If the ATC curve is above the demand curve in a perfectly competitive firm, the firm will have a:

2. If the ATC curve is below the demand curve in a perfectly competitive firm, the firm will have a:

3. Even if in the short run, a perfectly competitive firm has a profit; in the long run, they always break even because:

- low barriers to entry

- profit incentives attract new firms

- perfectly homogenous products

- all of the above

4. A perfect competitor would:

- never charge above market price but might charge below market price

- never charge below market price but might charge above market price

- always change the market price

- none of the above

5. The crucial aspect of competition among firms that leads to the condition of zero profits in the long run is

- the number of firms in the industry is fixed

- free entry and exit of firms in the industry

- fixed costs equal zero

- all costs are at their least cost level.

mauvewombat755

1. Competitive markets are characterized by

a. The interdependence of firms.

b. A small number of buyers and sellers.

c. Free entry and exit by firms.

d. Unique products.

2. A firm that shuts down temporarily has to pay

a. Both its variable costs and fixed costs.

b. Its variable costs but not its fixed costs.

c. Its fixed costs but not its variable costs.

d. Neither its variable costs nor its fixed costs.

3. A profit-maximizing firm will shut down in the short run when

a. Average revenue is greater than the average fixed cost.

b. Price is less than the average total cost.

c. Average revenue is greater than marginal cost.

d. Price is less than average variable cost.

brownsea-lion330

Match the following.

constant-cost industry	A market structure in which a large number of firms sell a homogenous product or service with no restrictions on entry or exit and each firm is a price-taker.
increasing-cost industry	The demand facing a price-taking firm.
long-run equilibrium	A firm produces zero output but must still pay its fixed costs.
marginal revenue product	Price below which a firm shuts down in the short run.
perfect competition	All firms produce where price equals long-run marginal cost, and economic profits are zero.
perfectly elastic demand	Industry in which input prices rise as all firms in the industry expand output.
shut down	Industry in which input prices remain constant as all firms in the industry expand output.
the shut-down price	The additional revenue earned by hiring one more unit of a variable input.

viridianhare336

ECON 202 Lecture Notes - Lecture 17: Marginal Utility, Productive Efficiency, Allocative Efficiency

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