Question 1

Figure 8.7 Figure 8.7 shows cost and demand curves facing a profit-maximising, perfectly competitive firm. -Refer to Figure 8.7.At price P₄, the firm would

Accepted Answer

At price P₄, the demand curve intersects with the marginal cost curve, which determines the profit-maximising quantity of output. At this quantity, the price is greater than the average variable cost (AVC), indicating that the firm is covering all of its variable costs including labour and material expenses. Since the price is also greater than the average total cost (ATC), the firm is earning a profit that is greater than zero. Therefore, the best choice is B.

Question 2

Figure 8.7  Figure 8.7 shows cost and demand curves facing a profit-maximising, perfectly competitive firm.
-Refer to Figure 8.7.Identify the firm's short-run supply curve.

Accepted Answer

The firm's short-run supply curve is the portion of the marginal cost curve that lies above the average variable cost curve. In typical diagrams, this is represented from point b upwards, as it is the point where the marginal cost curve intersects the average variable cost curve, indicating the minimum price at which the firm is willing to supply any output.

Question 3

Figure 8.7  Figure 8.7 shows cost and demand curves facing a profit-maximising, perfectly competitive firm.
-Refer to Figure 8.7.Identify the short-run shut down point for the firm.

Accepted Answer

The short-run shutdown point is where the market price (P) falls below the minimum point of the average variable cost (AVC) curve, which is at point b in the given diagram. At this point, the firm is not able to cover its variable costs even in the short run, and it should shut down to minimize losses. Therefore, B is the correct answer.

Question 4

If a firm shuts down in the short run,

Accepted Answer

When a firm shuts down in the short run, it still incurs its fixed costs (such as rent or salaries) because these costs must be paid regardless of the level of production. However, it can avoid variable costs (like materials or hourly wages) by not producing. Therefore, its loss equals its fixed costs.

Question 5

Figure 8.7 Figure 8.7 shows cost and demand curves facing a profit-maximising, perfectly competitive firm. -Refer to Figure 8.7.At price P₄, the firm would produce

Accepted Answer

The profit-maximizing output for a perfectly competitive firm is where marginal cost (MC) equals marginal revenue (MR), which occurs at the point where the two curves intersect. In this case, it occurs at Q₄ units. Therefore, the firm would produce Q₄ units at price P₄.

Question 6

What are the two options for a firm that is operating at a loss in the short run?

Accepted Answer

In the short run, a firm operating at a loss can either shut down temporarily, which means stopping production to avoid variable costs, or continue to produce as long as it can cover its variable costs with the revenue from sales, even if it cannot cover its total costs. This decision is based on whether the firm can cover its variable costs and whether it expects future conditions to improve.

Question 7

If a firm shuts down it

Accepted Answer

When a firm shuts down, it stops production and therefore does not incur variable costs. However, it still has to pay its fixed costs, such as rent or loan payments, which do not change with the level of production.

Question 8

Figure 8.7 Figure 8.7 shows cost and demand curves facing a profit-maximising, perfectly competitive firm. -Refer to Figure 8.7.At price P₁, the firm would produce

Accepted Answer

At price P1, if it is below the firm's average variable cost, the firm would not cover its variable costs and would choose to produce zero units to minimize losses.

Question 9

How are sunk costs and fixed costs related?

Accepted Answer

The answer of How are sunk costs and fixed costs...

Question 10

Ben's Peanut Shoppe suffers a short-run loss.Ben will not choose to shut down if

Accepted Answer

Ben should not shut down if his Shoppe's total revenue exceeds his variable cost. This means that the revenue generated from selling peanuts is enough to cover the cost of producing them, and some of the fixed costs as well. The implicit costs and capital costs may not be relevant in the short run decision to shut down, as they are not directly related to the peanut production process.

Question 11

If total revenue exceeds fixed cost, a firm

Accepted Answer

The answer of If total revenue exceeds fixed cost, a...

Question 12

Figure 8.7 Figure 8.7 shows cost and demand curves facing a profit-maximising, perfectly competitive firm. -Refer to Figure 8.7.At price P₃, the firm would produce

Accepted Answer

At price P₃, the demand and marginal revenue curves intersect at point A which determines the profit-maximizing level of output as Q₃. This is where marginal cost (MC) intersects the marginal revenue (MR) curve. At any level of output below Q₃, the firm could increase profit by producing more. At any level of output above Q₃, the firm incurs a higher cost of production than the revenue earned, leading to a decrease in profit. Therefore, the answer is B.

Question 13

If total variable cost exceeds total revenue at all output levels, a perfectly competitive firm

Accepted Answer

If the total variable cost exceeds total revenue at all output levels, the firm is not making enough to cover its variable costs. In this case, the firm should shut down in the short run to minimize further losses. However, if the firm can make changes to reduce variable costs, it may be able to continue operating in the long run.

Question 14

Market supply is found by

Accepted Answer

Market supply is determined by horizontally summing the relevant part of each individual producer's marginal cost curve. This approach aggregates the quantities that all producers are willing and able to supply at each possible price level, thus constructing the market supply curve.

Question 15

If a firm shuts down in the short run it will

Accepted Answer

In the short run, a firm can only control its variable costs, not its fixed costs. If a firm shuts down, it will still have to pay its fixed costs, such as rent and salaries, but it will not be earning any revenue. Therefore, it will suffer a loss equal to its fixed costs.

Question 16

Figure 8.7 Figure 8.7 shows cost and demand curves facing a profit-maximising, perfectly competitive firm. -Refer to Figure 8.7.At price P₃, the firm would

Accepted Answer

The answer of Figure 8.7  Figure 8.7 shows cost...

Question 17

Figure 8.7 Figure 8.7 shows cost and demand curves facing a profit-maximising, perfectly competitive firm. -Refer to Figure 8.7.At price P₂, the firm would

Accepted Answer

The answer of Figure 8.7  Figure 8.7 shows cost...

Question 18

A perfectly competitive firm produces 3000 units of a good at a total cost of $36 000.The fixed cost of production is $20 000.The price of each good is $10.Should the firm continue to produce in the short run?

Accepted Answer

In the short run, a firm should continue to produce as long as it can cover its variable costs, even if it's incurring a loss, because shutting down would mean a loss equal to total fixed costs. Here, the variable cost is $16,000 ($36,000 total cost - $20,000 fixed cost), and the revenue from producing 3000 units at $10 each is $30,000. Since the revenue exceeds the variable cost, the firm is minimizing its loss by continuing to produce.

Question 19

Ted's Pancake Kitchen suffers a short-run loss.Ted should decide to shut down rather than continue to produce

Accepted Answer

In the short run, a firm should continue to operate if it can cover its variable costs, even if it's not covering its total costs. Shutting down is a better option only if the revenue is less than the variable costs, because fixed costs must be paid regardless of production in the short run.

Question 20

Figure 8.7 Figure 8.7 shows cost and demand curves facing a profit-maximising, perfectly competitive firm. -Refer to Figure 8.7.At price P₂, the firm would produce

Accepted Answer

At price P₂, the firm would produce Q₂ units because in typical supply and demand models, a firm's production level corresponds to the price at which it can sell its goods. The notation suggests a specific quantity associated with a specific price, indicating that at price P₂, the firm is willing and able to produce Q₂ units.

Quiz 8: Firms in Perfectly Competitive Markets

Figure 8.7 Figure 8.7 shows cost and demand curves facing a profit-maximising, perfectly competitive firm. -Refer to Figure 8.7.At price P4, the firm would

Figure 8.7 Figure 8.7 shows cost and demand curves facing a profit-maximising, perfectly competitive firm. -Refer to Figure 8.7.Identify the firm's short-run supply curve.

Figure 8.7 Figure 8.7 shows cost and demand curves facing a profit-maximising, perfectly competitive firm. -Refer to Figure 8.7.Identify the short-run shut down point for the firm.