Question

1. Bill runs a school for trapeze artists. The school has fixed costs of $10 million, variable costs of $4 million, and total revenue of $15 million. In the short run the school will _____ and in the long run the school will _____.

a) operate; stay in business

b) operate; go out of business

c) shut down; stay in business

d) shut down; go out of business

2. If you know the price at which a firm sells its output, then to find the output at which the firm maximizes its profits you MUST know the firm's

a	average total costs.
b	average variable costs.
c	average fixed costs.
d	marginal costs.

Answer 1

Since the perfectly competitive firm profit-maximizing condition are

P=MC

Since Bill runs a school for trapeze artists. The school has fixed costs of $10 million, variable costs of $4 million, and total revenue of $15 million.

Total revenue=$15 million

TC=TVC+TFC

=4+10

=$14 million

Profit=TR-TC

=15-14

=$1 million

Since firm is making economic profit of $1 million in the short-run, so firm will operate in the short-run and it will also stay in the long-run in the business.

Hence option a is the correct answer.

2.

Since the perfectly competitive firm profit-maximizing condition are

P=MC

So If an individual knew the price at which a firm sells its output, then to find the output at which the firm maximizes its profits he must be knowing the marginal cost.

This is because for maximizing profit

Price and MC are equated.

Hence option d is the correct answer.