Question

1.) Fill in the blank from the choices inside the parentheses:

If a firm the profit maximizing level of output results in total revenue less than total cost, describe the long run effect on the market. Existing firms in the market are earning (economic losses, 0 economic profits, or economic profits). This will result in (existing firms exiting, new firms entering, or existing firms shutting down). Due to the above, market supply will (increase, decrease, or remain unchanged). and equilibrium price will (decrease, increase, or remain unchanged). Finally, (economic profits will increase, economic profits will be reduced, economic losses will increase, or economic losses will be reduced)   

2.) In the long-run, if firms are earning zero economic profit

A. Firms will exit until profits are sufficiently high.

B. Government intervention is required to solve a market failure.

C. Firms will increase the price of goods.

D. The market is in long-run equilibrium.   

3.) A firm operating in a perfectly competitive market faces a market price of $20 and sells 40 units.

What is the firm's Total Revenue? $  

What is the firm's Average Revenue? $  

What is the firm's Marginal Revenue? $

4.) Many firms experience economies of scale when increasing output. Why does increasing returns to scale occur? Check all that apply.

A. Better utilization of managers

B. Workers fail to learn their jobs

C. Salaried workers earn higher wages

D. The per-unit cost of research and development falls

E. Advertising expenses increase

5.) An industry is said to be in the long-run when:

A. a firm has the ability to shutdown.

B. there are no more fixed resources.

C. all prices have become variable.

D. after 5 years has passed.

Answer 1

1.

economic profits

new firms entering

increase

decrease

economic profits will be reduced

( when firms earn economic profit, then other firms enter in the market. It increases the market supply and price increases. As a result, economic profit reduces to be zero and long run equilibrium is achieved)

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2.

D

At long run equilibrium, economic profit becomes zero for all the firms in perfect competition.

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3.

A

Total revenue = 20*40 = $800

Average revenue = $20

Marginal revenue = $20

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4.

A

D

These two factors bring efficiency and productivity of the organization, leading to increasing return to scale.

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5.

B

When different resources are variable in nature, then it is long run.