Question

1. If the supply curve is perfectly elastic, then an increase in demand results in no change in the

A. equilibrium quantity but a large increase in the equilibrium price.

B. equilibrium price but a decrease in the equilibrium quantity equal to the change in demand.

C. equilibrium price but an increase in the equilibrium quantity equal to the change in demand.

D. equilibrium quantity or the equilibrium price.

2. The shapes of firms' cost curves are important because

A. they help us determine how the firm will produce.

B. cost curves tell us the profitability of the firm.

C. cost curves give us an idea of what a firm's total revenues will be at different output levels.

D. they help us understand the market that the firm is in.

3. Average fixed cost

A. increases as output rises.

B. remains constant as output rises.

C. equals marginal cost for the first unit of output.

D. decreases as output rises.

Answer 1

Ans.1- (C)

A perfectly elastic supply curve is horizontal which means if there is an increase in demand there won't be any effect on equilibrium price but equilibrium quantity will increase significantly.

Ans.2- (A)

Shape of firm's cost curves indicate how the firm will produce its output. MC curve is normally U-shaped. AFC continues to decline with an increase in output.

Ans.3- (D)

AFC = TFC/Q

TFC is fixed so an increase in quantity produced will lead to a lower AFC. AFC continues to decline with an increase in output.