Question 1

Zoe,the owner of Zoe's Bakery,determines that,at her optimal level of production in the short run,P < ATC and P > AVC.In the short run,Zoe should:

Accepted Answer

In the short run, Zoe should continue to operate even though she is taking an economic loss because her total revenue is still covering her variable costs. Shutting down immediately would result in even more losses and potentially losing customers. Raising the price may further decrease demand and potentially result in even lower revenue. Therefore, continuing to operate at the optimal level of production is the best choice for Zoe in the short run.

Question 2

A perfectly competitive firm is definitely earning an economic profit when:

Accepted Answer

In a perfectly competitive market, firms will continue to enter until economic profits are driven to zero in the long run. Therefore, if a firm is earning an economic profit, it must be because its price (P) is greater than its average total cost (ATC). This is represented by choice B, as long as the firm is producing at a level where marginal revenue equals marginal cost (MR=MC). If P>MC, the firm could still earn an economic profit, but it would not be maximizing its profits because it could increase output and earn even more profit until P=MC. Similarly, if P<ATC, the firm would be incurring a loss and would not be earning an economic profit.

Question 3

The short-run shutdown price is the:

Accepted Answer

In the short run, a firm will shut down if its revenue is less than its variable costs (AVC). Therefore, the minimum of the AVC curve represents the short-run shutdown price. The other options are not necessarily indicative of a shutdown decision.

Question 4

A perfectly competitive firm will continue producing in the short run as long as it can cover its _____ cost.

Accepted Answer

In the short run, a perfectly competitive firm can only adjust its variable costs, as fixed costs are already sunk. Therefore, the firm will continue producing as long as it can cover its variable cost, which is the cost of producing each additional unit of output.

Question 5

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

Accepted Answer

The break-even price occurs when the firm is earning zero economic profit. This means the revenue earned is equal to the costs incurred. At the break-even point, the firm is covering all its costs, including both variable and fixed costs. The minimum value of average total cost represents the point where the firm is just covering all its costs, which is the break-even point. Thus, the correct answer is D.

Question 6

Mikail's perfectly competitive camera memory card-producing factory is making positive economic profits.If the price of memory cards is $9,Mikail's output is 3 000 cards a month,and his monthly average total cost is $7,what is his monthly profit?

Accepted Answer

Mikail's monthly profit is calculated as (Price - Average Total Cost) x Quantity = ($9 - $7) x 3,000 = $6,000.

Question 7

A perfectly competitive small organic farm produces 1 000 cauliflower heads in the short run.At this quantity,ATC = $6 and AFC = $2.The market price is $3 per head and is equal to MC.To maximize profits or minimize losses,this farm should:

Accepted Answer

In the short run, the farm's total revenue is 1 000 x $3 = $3 000. Its total variable cost is (1 000 x $6) = $6 000. Its fixed cost is 1 000 x $2 = $2 000. Therefore, its total cost is $6 000 + $2 000 = $8 000. 
Since the farm's total revenue does not cover its total variable cost, it incurs an economic loss of $5 000 in the short run. In this case, the best choice is for the farm to shut down in the short run and minimize its losses, as its total revenue is not even covering its variable cost.

Question 8

Many furniture stores run "going-out-of-business" sales but never actually go out of business.Assume that furniture is sold in a perfectly competitive market.For a furniture firm to actually shut down in the short run,the price of furniture must be _____ than the _____ average variable cost.

Accepted Answer

In the short run, a firm will shut down if the price of the product is less than the average variable cost (AVC). This is because the firm is unable to cover its variable costs and will incur losses. Therefore, if a furniture store is running a going-out-of-business sale but never actually goes out of business, it suggests that the price of furniture is still above the minimum AVC, and hence the firm is able to cover its variable costs and remain in business. Thus, the correct answer is B, lower than the minimum AVC.

Question 9

For a perfectly competitive firm,the short-run supply curve is the:

Accepted Answer

The short-run supply curve for a perfectly competitive firm is the portion of the marginal cost (MC) curve that lies above the average variable cost (AVC), starting from the shutdown point. This is because a firm will only supply output in the short run if it can cover its variable costs, hence the MC curve above AVC represents the firm's supply curve.

Question 10

The LOWEST point on a perfectly competitive firm's short-run supply curve corresponds to the minimum point on the _____ curve.

Accepted Answer

In perfectly competitive markets, firms operate at the lowest point of their AVC (average variable cost) curve in the short run. This is because at prices below this point, the firm would be unable to cover their variable costs and would shut down. The minimum point on the AVC curve corresponds to the point where the marginal cost curve intersects it. Therefore, the correct answer is B: AVC.

Question 11

Which statement is TRUE?

Accepted Answer

If the price falls below average variable cost, the firm will not be able to cover its variable costs and it will incur losses in the short run. Therefore, it would be better for the firm to shut down and minimize its losses.

Question 12

If the price is below average total cost,then in the short run a perfectly competitive firm should:

Accepted Answer

The answer of If the price is below average total...

Question 13

The short-run supply curve for a perfectly competitive firm is the ____ cost curve above the _____ price.

Accepted Answer

In the short-run, a perfectly competitive firm will produce where marginal cost equals marginal revenue. The short-run supply curve for the firm is therefore the portion of the marginal cost curve that is above the shutdown price, which is equal to minimum average variable cost. This means that the correct answer is D, as the short-run supply curve is the marginal cost curve above the shutdown price.

Question 14

The short-run supply curve for a perfectly competitive firm is its:

Accepted Answer

The short-run supply curve for a perfectly competitive firm is its marginal cost curve above its average variable cost curve. This is because a firm will only supply output in the short run if the price (or marginal revenue, which equals price in perfect competition) covers its average variable costs.

Question 15

During the summer,Alex runs a lawn-mowing service,and lawn-mowing is a perfectly competitive industry.In the short run,Alex will shut down if the:

Accepted Answer

In the short run, Alex will only shut down if total revenues cannot cover variable costs. This is because in the short run, fixed costs are already sunk costs and cannot be recovered, so they do not influence the decision to shut down or continue operating. Only variable costs, such as labor and fuel costs for mowing equipment, must be covered by total revenue to make it worthwhile for Alex to continue operating in the short run.

Question 16

If the price is greater than the average variable cost and less than the average total cost at the profit-maximizing quantity of output in the short run,a perfectly competitive firm will:

Accepted Answer

When the price is greater than the average variable cost but less than the average total cost, a perfectly competitive firm will continue to produce in the short run to cover its variable costs and some of its fixed costs, even though it is incurring an economic loss. This is because shutting down would result in a greater loss, equal to the total fixed costs.

Question 17

If the price is consistently below the average variable cost,then in the short run a perfectly competitive firm should:

Accepted Answer

If the price is consistently below the average variable cost, it means that the revenue from selling the output is not enough to cover the variable costs of production. In this situation, the firm is making a loss in the short run. The best option for the firm is to shut down temporarily and minimize its losses. By shutting down, the firm can avoid paying the variable costs and only incur the fixed costs, which it has to bear whether it produces or not. If the price remains below the average variable cost in the long run, the firm should exit the market because it cannot sustain its operations and remain profitable.

Question 18

Suppose Sarah's pottery studio is charging the market price,which is slightly higher than her average total cost.This means that Sarah:

Accepted Answer

If Sarah's pottery studio is charging a price slightly higher than her average total cost, then she is earning a small economic profit. This means that she is covering all her costs and earning a profit on top of that. Option A is incorrect as breaking even means that revenue is equal to total cost. Option B is incorrect as there is no reason for immediate shutdown if she is making a profit. Option D is incorrect as incurring a small economic loss means that revenue is less than total cost, which is not the case here.

Question 19

Consider a perfectly competitive firm in the short run.Assume that it is sustaining economic losses but continues to produce at the profit-maximizing (loss-minimizing)output.Which statement is FALSE?

Accepted Answer

If a firm is sustaining economic losses but continues to produce, its marginal cost must be less than the price it is receiving for its product (since price is less than average total cost). In a competitive market, price equals marginal revenue, which also equals marginal cost. Therefore, if marginal cost is less than price, it must be less than average variable cost as well.

Question 20

A perfectly competitive firm will incur an economic loss but will continue to produce a positive quantity of output in the short run if the price is:

Accepted Answer

A perfectly competitive firm will continue to produce in the short run as long as the price covers its average variable costs, even if it doesn't cover the average total costs, because it can still cover some of its fixed costs.

Quiz 12: Perfect Competition and the Supply Curve