Question 1

If a firm shuts down in the short run,

Accepted Answer

Even if a firm shuts down in the short run, it still incurs its fixed costs such as rent, insurance, or salaries of permanent staff. However, it avoids incurring variable costs such as raw material or electricity. Therefore, it is not true that a firm will lose all operating costs (choice A) or its losses will be equal to zero (choice B). Similarly, it incurs only its explicit costs but not only explicit costs (choice D).

Question 2

-In the above figure, if the market price is less than $7, the firm

Accepted Answer

If the market price is less than $7, the firm will produce 0 units because it would not cover the variable costs, leading to a shutdown point.

Question 3

-Using the above figure, the perfectly competitive firm in the diagram will earn an economic profit if the market price is

Accepted Answer

The answer of 
-Using the above figure, the perfectly competitive...

Question 4

A firm's total explicit costs are $1,000. Its total implicit costs are $500, and it has a total revenue of $900. This firm receives

Accepted Answer

The firm's total revenue of $900 is less than the sum of its explicit and implicit costs ($1,000 + $500 = $1,500). Therefore, this firm is experiencing a loss and is not receiving either an economic profit or an accounting profit.

Question 5

-Using the above figure, the short-run break-even price for the perfectly competitive firm will be

Accepted Answer

The answer of 
-Using the above figure, the short-run break-even...

Question 6

The owner of a perfectly competitive firm that is earning economic losses in the short run

Accepted Answer

In a perfectly competitive market, if a firm is earning economic losses, it means the firm's total revenue is less than its total costs, including both explicit and implicit costs. Implicit costs include the opportunity cost of the owner's time and resources. Therefore, if the firm is incurring economic losses, it implies that the owner is earning less than what they could earn in their next best alternative, such as working for someone else.

Question 7

-Using the above figure, the perfectly competitive firm should shut down if the market price is below

Accepted Answer

The answer of 
-Using the above figure, the perfectly competitive...

Question 8

A firm's total explicit costs are $1,000. Its total implicit costs are $500, and it has a total revenue of $1500. This firm receives

Accepted Answer

The answer of A firm's total explicit costs are $1,000....

Question 9

When a firm is at its short-run break-even point,

Accepted Answer

At its short-run break-even point, the firm's total revenue equals its total variable costs plus total fixed costs, resulting in economic profits equal to zero. However, the firm is still earning enough to cover its costs and is therefore earning a nominal rate of return on investment. Therefore, the best choice is C.

Question 10

Suppose a perfectly competitive firm can produce 20,000 bushels of corn a year at an output at which marginal cost equals marginal revenue. The market price of corn per bushel is $1.00. The firm's total costs per year are $50,000 and fixed costs per year are $25,000. In the short run, this firm should

Accepted Answer

The answer of Suppose a perfectly competitive firm can produce...

Question 11

In the short run, in a perfectly competitive market, a firm will shut down if

Accepted Answer

In the short run, a firm in a perfectly competitive market will shut down if it is unable to cover its variable costs. This means that P < AVC for all levels of output. If the price is below average variable cost, the firm incurs a loss on every unit produced and sold. Therefore, it is better to shut down temporarily and avoid further losses.

Question 12

The break-even price for a perfectly competitive firm is the price that is equal to

Accepted Answer

The break-even price for a perfectly competitive firm occurs where price equals the average total cost (ATC) of production. At this point, the firm is earning enough revenue to cover all of its costs, including both fixed and variable costs, but is not making any profit. Therefore, the correct answer is B, which represents the ATC of production.

Question 13

Suppose the price of an item in a perfectly competitive market is $3. For a firm in this market, MC = MR at an output of 100 units. The average total cost at this output level is $4 per unit, and TVC is $80. We may conclude that

Accepted Answer

In a perfectly competitive market, firms should continue to produce as long as the price is greater than the average variable cost (P > AVC). In this case, the price is $3 and the TVC is $80, so the AVC is $0.80 ($80/100 units). Since $3 > $0.80, the firm should continue to produce. Additionally, since the price is equal to the MC at an output of 100 units, the firm is maximizing its profit at this level of output. The fact that average total cost is $4 per unit and that the total cost is $400 is not relevant for determining whether the firm should continue to produce in the short run.

Question 14

For a perfectly competitive firm facing the short-run break-even price,

Accepted Answer

In the short-run, a perfectly competitive firm will continue to produce as long as it can cover its variable costs, even if it is not covering all its fixed costs. When the price of its product is equal to its short-run break-even price, the firm is earning enough revenue to cover both its variable and fixed costs, but it is not earning any additional economic profit. Therefore, the firm has an economic profit of zero. It should continue to produce at the current level as long as the price remains at or above the short-run break-even price. There is no need to shut down or expand production in this scenario.

Question 15

The short-run break-even price is

Accepted Answer

The short-run break-even price is the price at which a firm's total revenues equal its total costs, meaning that the company is not making a profit or a loss. This is the point at which the company has covered all of its expenses but is not generating any additional revenue.

Question 16

A firm's total explicit costs are $1,000. Its total implicit costs are $500, and it has a total revenue of $2000. This firm receives

Accepted Answer

The firm's accounting profit is calculated as revenue minus only the explicit costs, which is $2,000 - $1,000 = $1,000.
However, to calculate economic profit, we need to subtract both explicit and implicit costs from revenue. Thus, the economic profit is $2,000 - $1,000 - $500 = $500. Since the economic profit is positive, the firm receives both an economic profit and an accounting profit.

Question 17

-In the above figure, if the market price is $8, the firm

Accepted Answer

Without a specific figure provided, we generally consider that if a firm's market price covers its average variable costs but not its total costs, it will continue to produce in the short run to cover some of its fixed costs, even though it incurs an economic loss. This is because shutting down would mean a loss equal to all fixed costs, whereas continuing production allows the firm to cover at least some fixed and variable costs.

Question 18

-In the above figure, if the market price is $10, the firm

Accepted Answer

The answer of 
-In the above figure, if the market...

Question 19

Suppose a perfectly competitive firm can produce 20,000 bushels of corn a year at an output at which marginal cost equals marginal revenue. The market price of corn per bushel is $2.00. The firm's total costs per year are $50,000 and fixed costs per year are $25,000. In the short run, this firm should

Accepted Answer

In the short run, the firm should produce 20,000 bushels of corn because the firm's total revenue from producing 20,000 bushels of corn is $40,000 (20,000 bushels x $2.00 per bushel), which is less than the total cost of $50,000, but it covers the variable cost of production (marginal cost). If the firm were to shut down, it would still have to pay the fixed costs of $25,000, resulting in a loss of $25,000. Therefore, producing 20,000 bushels of corn allows the firm to minimize losses in the short run. Alternatively, the firm could try to increase economic profit by producing more corn if it believes it can achieve economies of scale and increase its efficiency in production, but this would require long-term planning and investment.

Question 20

The owner of a perfectly competitive firm is currently earning an economic profit of zero. This owner

Accepted Answer

The fact that the firm is earning a zero economic profit means that it is earning enough revenue to cover both its variable costs and its fixed costs. Therefore, shutting down (A) or raising the price (B) would not be beneficial. Continuing to produce in the short-run is profitable as long as revenue covers variable costs, and shutting down in the long run (D) is not necessary since the firm is covering its fixed costs. Therefore, the best choice is C.

Quiz 23: Perfect Competition