ECON 1050 Chapter 12: Economics-1 (1) (dragged) 2

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salmoneagle674

17 Sep 2016

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If the firm makes an economic loss, it must decide whether to exit the market or to stay in the market. If the firm decides to stay in the market, it must decide whether to produce something or to shut down temporarily. The decision will be the one that minimizes the firm"s loss. The firm"s loss equals total fixed cost (tfc) plus total variable cost (tvc) minus total revenue (tr) Economic loss = tfc + tvr tr. = tfc + (avc p) x q. If the firm shuts down, q is 0 and the firm still has to pay its tfc. So the firm incurs an economic loss equals to tfc. This economic loss is the largest that the firm must bear. A firm"s shutdown point is the price and quantity at which it is indifferent between producing the profit-maximizing quantity and shutting down. The shutdown point is the minimum avc.

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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.

greenrat247

Q. Write your opinion about the below paragraph? Also, mention any example?

Topic: Your accountant has just told you that your company is losing money. Why might you decide to stay in business anyway?

I would decide to stay in the business because in the short run most costs are fixed in nature. If the business is wound up even then committed fixed cost (unavoidable cost) will continue. After winding up, it is difficult to restart the same business as it would require huge capital and will have fewer customers' confidence.

Whereas if the business is continued during loss or boom period, the business can recover the variable cost (avoidable) and some contribution towards the fixed costs.

Therefore I will consider some situations like shut down or break-even point.

Break-even point is a level of output for a price where firms do not make loss or profit.

Shutdown point occurs when the price of the product is comparatively very low to average total cost (ATC). In this scenario, temporary shut down is the good option.

Q. Write your opinion about the below paragraph? Also, mention any example?

Government bailouts are both good and bad. Good because it infuses cash into the company and instead of all their costs being sunk costs, they can recover some of the capital spent on the government bail out. Moreover, with new capital manufacturers could resume production. However, infusing cash artificially into the system could lead to waste as some managers would to be lazy and not actively adopt cost-saving methods. However, the chances of economic inefficiency during the 2002 bailout would have been low since with government bailouts there was tight oversight and the manufacturing companies were under pressure to bounce-back quickly. So firms bailed out during that period laid off a lot of employees and cut down wages to save costs. This type of drastic cost saving methods can disrupt the optimal level of production along the expansion path, as the labor vs. capital changes would disproportionate.

A. A competitive firm

can consider only its location in setting the price.
must base its competitive price on product differentiation.
has the ability to set its own price.
must accept the price determined by the intersection of the market supply and demand curves.
has no supply curve.

B. If a firm is making an economic profit, then

the factors of production are being paid their opportunity costs.
there will be no change in the number of firms if the industry is perfectly competitive.
the factors of production are being paid less than their opportunity costs.
the factors of production are being paid more than their opportunity costs.
the firm will exit the industry

C. Along a downward-sloping monopoly demand curve,

marginal revenue is greater than price.
the elasticity of demand is constant.
marginal revenue decreases when the price decreases.
marginal revenue is equal to zero when the price is equal to zero

D. If, in the short run, a perfectly competitive firm is producing at a point where the total cost is greater than total revenue, then the firm should

shut down because economic profits are negative.
continue to produce as long as P > AVC.
continue to produce because accounting profits are positive.
set a higher price for its output.
set a lower price for its output

E. For a perfectly competitive firm, the demand curve is

the marginal revenue curve.
perfectly inelastic.
always equal to marginal cost.
the same as the market demand curve

F. A firm in a(n) industry will have the most elastic demand curve

monopolistic
oligopolistic
monopolistically competitive
perfectly competitive

G. If the demand curve of a monopolist is in the inelastic range, then

total revenue will fall if the price increases.
total revenue will be unchanged if the price increases.
total revenue will rise if the price increases.
the total supply will increase by an equal amount if demand increases.
the price will be unchanged if total revenue increases

H. Monopolistic competition and oligopoly are examples of

monopoly.
perfect competition.
theories of consumer behavior.
imperfect competition.
the extreme cases on the market structure continuum

I. Under which market structure do firms face the flattest (most elastic) demand curve?

perfect competition
monopolistic competition
oligopoly
monopoly

J. At the point of long-run equilibrium for a perfectly competitive firm,

economic profits are zero.
TR > TC.
TR < TC.
P = AVC.
normal profits are zero.

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ECON 1050 Chapter 12: Economics-1 (1) (dragged) 2

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