Question 1

A firm should shut down in the short run if it cannot cover _____, and it should exit the industry in the long run if it cannot cover:

Accepted Answer

In the short run, a firm should shut down if it cannot cover its variable costs because it would lose more by continuing to operate than by stopping production. In the long run, a firm should exit the industry if it cannot cover all of its costs, including both fixed and variable costs, because it is not profitable to continue operating.

Question 2

A firm's _____ cost is its variable cost divided by quantity.

Accepted Answer

Average variable cost is calculated by dividing the total variable cost by the quantity of output produced. This gives the cost of producing each unit of output when considering only the costs that vary with the level of production.

Question 3

A firm pays $500,000 per year on costs that it cannot alter in the short run. This year, it expects to produce 100 units, and it will pay $400,000 on the inputs to produce those 100 units. What is this firm's average variable cost?

Accepted Answer

The average variable cost (AVC) is calculated by dividing the total variable costs by the quantity of output produced. In this case, the total variable costs are $400,000 for 100 units, so AVC = $400,000 / 100 = $4,000.

Question 4

In a perfectly competitive market, the market price is $2, and firms are producing 100 units. At a quantity of 100 units, average total cost is $4, and average variable cost is $3. In the short run, firms will:

Accepted Answer

In the short run, firms will shut down if the price is below the average variable cost. Since the market price ($2) is below the average variable cost ($3), firms will shut down. Exiting the market is a long-term decision, not a short-term one like shutting down. The price remaining at $2 is a separate issue and depends on market conditions and demand.

Question 5

Allium Industries has fixed costs of $1,000 and variable costs of $5,000 when it produces 1,000 units. The market price of Allium Industry's product is $4. Which of the following statements is true?

Accepted Answer

The firm should shut down immediately because it cannot cover its variable costs at the market price of $4 per unit. With total variable costs of $5,000 for 1,000 units, the variable cost per unit is $5, which is higher than the market price.

Question 6

If a firm is earning revenues that cover all of its variable costs and some, but not all, of its total cost, then it:

Accepted Answer

When a firm covers all its variable costs and some of its total costs, it means it's covering its variable costs plus contributing to its fixed costs. This situation suggests it's better to continue operating in the short run to minimize losses, even though it's not making a profit. Shutting down would mean not covering any fixed costs, leading to higher losses.

Question 7

If a firm's price covers some of its fixed costs but all of its variable cost, it:

Accepted Answer

When a firm's price covers all of its variable costs plus some of its fixed costs, it means that by continuing to operate, the firm can contribute to covering its fixed costs, which are incurred regardless of the level of production. Shutting down would mean the firm incurs a loss equal to its total fixed costs. Therefore, the firm should continue to produce as long as the price covers the variable cost, and aim to produce at the quantity where marginal cost (MC) is equal to marginal revenue (MR) to maximize profit or minimize losses.

Question 8

If a firm is earning revenue that cannot cover its fixed cost or its variable cost, then it:

Accepted Answer

If a firm cannot cover its fixed or variable costs, it means operating leads to greater losses than shutting down. Shutting down immediately minimizes losses to just the fixed costs, as variable costs are avoided.

Question 9

Daisy Enterprises has revenues of $400,000, fixed costs of $100,000, and variable costs of $500,000. Daisy Enterprises:

Accepted Answer

Daisy Enterprises should shut down immediately because its total costs ($600,000, which is the sum of fixed costs of $100,000 and variable costs of $500,000) exceed its revenues ($400,000). This means it cannot cover its variable costs, let alone make a profit, indicating an immediate shutdown is the most financially prudent decision.

Question 10

The market for corn bread mix is perfectly competitive. The lowest average variable cost for firm X in this market is $1, and the lowest average total cost is $3. At what price would this firm shut down immediately?

Accepted Answer

A firm in a perfectly competitive market will shut down immediately if the price falls below the lowest average variable cost, which is $1 in this case. Therefore, at a price of $0.75, the firm would shut down.

Question 11

Firm Y's lowest average variable cost of its product is $4, and its lowest average total cost is $9. What price would make firm Y shut down in the short run?

Accepted Answer

In the short run, a firm will shut down if the price falls below its average variable cost. Since Firm Y's lowest average variable cost is $4, any price below $4 would make it shut down. Therefore, $3 is the correct answer.

Question 12

Alpha, Inc. knows that its lowest average variable cost is $400 and its lowest average total cost is $1,000. What price would make Alpha, Inc. willing to produce in the short run but not in the long run?

Accepted Answer

In the short run, a firm is willing to produce as long as the price covers its average variable costs, which is $400 for Alpha, Inc. Therefore, any price above $400 would make the firm willing to produce in the short run. However, in the long run, the firm would not produce unless the price also covers its average total costs, which is $1,000. Thus, a price of $420 would satisfy the condition of being above the average variable cost but below the average total cost, making it the correct choice.

Question 13

The marginal cost curve for Maisie's Muffins intersects its average variable cost curve at a price of $2 and intersects its average total cost curve at a price of $4. What is the minimum price that this firm needs to get to NOT shut down in the short run or the long run?

Accepted Answer

The answer of The marginal cost curve for Maisie's Muffins...

Question 14

Beta LLC's marginal cost curve intersects its average variable cost curve at $4 and intersects its average total cost curve at $10. What price will cause Beta LLC to shut down immediately?

Accepted Answer

A firm will shut down immediately if the price falls below its average variable cost. Since the marginal cost curve intersects the average variable cost curve at $4, any price below $4 would cause the firm to shut down. Therefore, $2 is the correct answer.

Question 15

Gamma Corporation's marginal cost curve intersects its average variable cost curve at $100 and intersects its average total cost curve at $800. What happens at a price of $700?

Accepted Answer

At a price of $700, Gamma Corporation covers its average variable costs (since $700 is above the $100 intersection point) but does not cover its average total costs (since $700 is below the $800 intersection point). This means it can cover its variable costs and some of its fixed costs in the short run, making it viable to produce in the short run. However, in the long run, it cannot sustain production without covering all its costs, including fixed costs, hence it will not produce in the long run.

Question 16

. Use the figure Costs for a Firm. What price makes this firm willing to operate in the short run but not in the long-run?
​
Figure: Costs for a Firm

Accepted Answer