Question

1a.

If a firm in a perfectly competitive market shuts down in the short run, it will:

A. have total revenue greater than its fixed costs.

B. have to do this because the price is more than the AVC.

C. lose money equal to its total fixed costs.

D. have no losses.

E, still be following the MC=MR rule.

1b.

The “On the Road” bicycle manufacturing company sold 500 bicycles last year. Their fixed costs were $10 per unit, and their variable costs were $15 per unit. If each bike sells for $100, most likely the company had a

A. total profit of $37,000.

B. total profit of $50,000.

C. total loss of $37,000.

D. total loss of $50,000.

E. the company broke even.

Answer 1

1.
C. lose money equal to its total fixed costs.
If a firm is making losses in the short run and shutting down then
=>The price is less than the minimum of the AVC aka Shut down point
=> Total Costs are greater than Total Revenues
=> The firm is incurring all the fixed costs by shutting down
2.
The answer is profit of $37500
The options mentioned are incorrect since none mentions 37500 but instead 37000
so as an approximation you can choose
TR=Price* Quantity=100*500=50000
TC=FC+VC
TC=(10*500)+(15*500)=12500
Profit=Total Revenue-Total Cost
Profit=50000-12500=37500