Question 1

Explain why shutting down and going out-of-business are different concepts.

Accepted Answer

The answer of Explain why shutting down and going out-of-business...

Question 2

An increase in the cost of an input will result in

Accepted Answer

An increase in the cost of an input will lead to an increase in the firm's production cost, which will result in an upward shift of the firm's marginal cost curve. As a result, the firm will be willing to supply the same quantity of goods at a higher price, leading to a leftward shift in the firm's supply curve. Finally, the increase in the cost of input will affect other firms in the industry, leading to a leftward shift of the market supply curve. Therefore, all of the above options are correct.

Question 3

-The above figure shows the cost curves for a competitive firm.If the profit-maximizing level of output is 40 price is equal to

Accepted Answer

In a competitive market, the profit-maximizing level of output is determined where the price equals the marginal cost (MC). Since the output level is given as 40, we look for the MC at this output level. The graph (which is not visible in this format) typically shows the MC curve intersecting the firm's demand curve (which is also the price line in perfect competition) at the profit-maximizing output. Without the graph, based on the information provided that the profit-maximizing output is 40, and assuming the correct answer is among the options given, the price at this output level would be where the MC equals the price, which is stated to be $15. This is a common scenario in economics where the price in a competitive market is determined by the intersection of the MC curve and the demand curve.

Question 4

For the following, please answer "True" or "False" and explain why.
-If a firm sets marginal revenue equal to marginal cost,it will make an economic profit.

Accepted Answer

When a firm sets MR=MC it maximizes profits but the profit-maximizing level of output might still be negative (the smallest loss possible).

Question 5

-The above figure shows the cost curves for a competitive firm.If the firm is to operate in the short run,price must exceed

Accepted Answer

For a firm to operate in the short run, the price must at least cover its variable costs. The point at which the firm's marginal cost curve intersects the average variable cost curve (the minimum point of the AVC curve) indicates the minimum price the firm would accept to keep operating in the short run. This point is at $5, making B the correct answer.

Question 6

Suppose the Christmas trees market is perfectly competitive.A business owner is currently suffering from a loss of $1,000,the cost of producing and selling an additional Christmas tree is $20,and the current market price is $25.The owner

Accepted Answer

In a perfectly competitive market, businesses should continue producing as long as the market price is greater than the marginal cost of production. In this case, the market price is $25 and the cost of producing an additional tree is only $20, meaning that there is a $5 profit per tree sold. Therefore, the business owner should sell more trees in order to reduce their losses and potentially turn a profit.

Question 7

A firm that only employs labor (L)has the following production function:
f(L)= 20L - L²
Let the price of output be normalized to one and the price of labor (relative to output price)is w.
a.Write out the profit function for this firm as a function of labor,L.
b.What is the necessary first-order condition for the firm to maximize profit when L > 0?
c.Compute the profit maximizing amount of labor as a function of the wage.What is the effect of an increase in wage on the firm's optimal employment level? Use calculus to solve this.

Accepted Answer

The answer of A firm that only employs labor (L)has...

Question 8

If a firm is a price taker,then its marginal revenue will always equal

Accepted Answer

A price taker is a firm that must accept the market price for its product or service. Thus, its marginal revenue will always equal the market price, as it cannot influence or change the price.

Question 9

Suppose the estimated fixed cost of Christmas trees business is $7,000 and not sunk.The estimated variable cost for each tree is $20.According to the forecast,the market price for Christmas trees is $25 each and the owner could sell 1000 trees at most each year.In the long run,the owner

Accepted Answer

The answer of Suppose the estimated fixed cost of Christmas...

Question 10

The competitive firm's supply curve is equal to

Accepted Answer

The competitive firm's supply curve is equal to the portion of its marginal cost curve that lies above the average variable cost (AVC). This is because a firm will only supply output when the price covers the variable costs of production, ensuring it does not make a loss on each unit it produces.

Question 11

A firm will shut down in the short run if

Accepted Answer

A firm will shut down in the short run if the total revenue from operating would not cover variable costs, as continuing operations would lead to greater losses than just bearing the fixed costs.

Question 12

Suppose a firm has the following total cost function: TC = 100 + 4q².What is the minimum price necessary for the firm to earn profit? Below what price will the firm shut down in the short run?

Accepted Answer

The answer of Suppose a firm has the following total...

Question 13

For the following, please answer "True" or "False" and explain why.
-If a firm doesn't make an economic profit,it will shut down.

Accepted Answer

The firm compares its losses from operating with its losses when shutting down and will shut down if the latter loss is less.

Question 14

Suppose the Christmas trees market is perfectly competitive.An owner is currently earning a profit of $1,000,the cost of producing and selling an additional Christmas tree is $25,the current market price is $20.The owner

Accepted Answer

In a perfectly competitive market, the price is determined by the total supply and demand in the market. Since the current market price is $20 and the cost of producing and selling an additional tree is $25, the owner will lose $5 for every additional tree sold. Therefore, the owner should not sell more trees and should instead maintain their current level of production to earn their current profit of $1,000.

Question 15

A firm should always shut down if its revenue is

Accepted Answer

A firm should shut down in the short run if the revenue it would earn from producing is less than its avoidable costs, also known as variable costs. If it cannot cover these costs, it loses less money by not operating. Choices A, B, and C do not necessarily indicate conditions under which a firm should always shut down.

Question 16

For the following, please answer "True" or "False" and explain why.
-Even though fixed costs do not affect the output decision,an increase in fixed costs results in a wider range of prices for which the firm operates at a loss.

Accepted Answer

An increase in fixed costs will shift AC upward but leave AVC unchanged.The gap between AVC and AC represents prices at which the firm will operate at a loss.

Question 17

If a competitive firm finds that it maximizes short-run profits by shutting down,which of the following must be true?

Accepted Answer

If a competitive firm finds that it maximizes short-run profits by shutting down, it means that the revenue it is earning at any level of output is less than the variable cost of producing that output. Thus, p < AVC for all levels of output.

Question 18

Suppose there are 20 competitive firms in a market.The supply curve of each firm is q = 2p.The market demand is Q = 200 - 2p.What is the residual demand curve facing a typical firm?

Accepted Answer

The answer of Suppose there are 20 competitive firms in...

Question 19

Lelu runs a firm that sells multipasses to intergalactic cruises.Her short-run cost function is given by
C(q)= q² + 25q + 144
a.If the market price is $75/pass,how many units will Lelu produce?
b.At what price will Lelu earn zero profits?
c.If the price is below the level you found in b.,will Lelu shut down? If so,explain.If not,below what price will she shut down?

Accepted Answer

The answer of Lelu runs a firm that sells multipasses...

Question 20

-The above figure shows the cost curves for a typical firm in a competitive market.Note that if p = 10,then MC = p at both q = 5 and q = 60.Can they both yield maximum profit? Explain.

Accepted Answer

The answer of 
-The above figure shows the cost curves...

Quiz 8: Competitive Firms and Markets