Question

1. Under a production quota policy, the government can maintain a particular support price by reducing the quantity supplied. To maintain a particular support price, how must the quota amount change if the demand curve becomes more elastic?

Select one:

A. Quota amount depends on the supply curve

B. Quota amount does not change

C. Quota amount decreases

D. Quota amount increases

2.

In the short run, a perfectly competitive profit maximizing firm that has not shut down:  

Select one:

A. is operating on the downward-sloping portion of its AVC curve.

B. is operating on the upward-sloping portion of its AVC curve.

C. is not operating on its AVC curve.

D. is operating at the minimum of its AVC curve.

Answer 1

Answer-1. Correct option is 'C'

Under a production quota policy, the government can maintain a particular support price by reducing the quantity supplied. When the government reduce its quantity supplied, as a result, price will increase. If the demand curve becomes more elastic, it is easier for the consumers to reduce quantity instead of paying higher prices. As a results, the quota amount decreases.

Answer-2. Correct option is 'A'

In the short run, a perfectly competitive profit maximizing firm that has not shut down is operating on the downward-sloping portion of its AVC curve. Average Variable Cost is U-shaped because an increase in output, increase the returns and reduce the total cost. As the curve continues slopes downward, it enter a phase of constant returns where the returns and the output are at their optimum level.