Question

1) Suppose a firm is producing 1254 units per day, and total revenue is $1505 per day. Average fixed cost is $1.25 per unit, and average total cost is $1.75 per unit. In the short run should this firm continue to operate, or shut down?

1. Continue to operate
2. Shut down

2) For a perfectly competitive firm, the long-run competitive equilibrium is such that P = SRATC, because if P > SRATC then

1. losses in the industry would cause some existing firms to exit the industry.
2. positive economic profit would attract firms to the industry in order to obtain the profits.
3. firms would not be producing the quantity of output at which MR = MC
4. firms would not be covering total fixed costs.
5. none of the above

3. Landisview Farm Market (LFM) is open only during the Spring and Summer. During the Fall and Winter, when they are closed, they still pay rent on land, taxes, and some utilities. As a perfectly competitive firm, LFM

1. incurs more losses by staying open during the Fall and Winter than by closing.
2. is making a poor decision, because they will incur fewer losses by remaining open during the Fall and Winter.
3. has no tax burden.
4. is able to influence the price of its products by closing during the non-growing season.

4. Consider the following data: equilibrium price = $10, quantity of output produced = 1,000 units, average total cost = $8, and average variable cost $5. Given this, total revenue is - - - - - , total cost is - - - - -, and fixed cost is - - - - -.

1. $6,000; $8,000; $1,000
2. $9,000; $7,000; $8,000
3. $10,000; $8,000; $3,000
4. $9,000; $8,000; $6,000
5. none of the above

Answer 1

(1) - The correct option is (A) - Continue to operate

Given,

output (Q) = 1254 units

Total revenue (TR) = $1505

Average fixed cost (AFC) = $1.25 per unit

Average total cost (ATC) = $1.75 per unit

Average variable cost (AVC) can be computed as follows:

AVC = ATC - AFC

AVC = 1.75 - 1.25

AVC = $0.5 Per unit

Now,

we know that:

TR = Price (P) * Output (Q)

$1505 = P * 1254

P = 1505/1254

P = $1.2 per unit

In short run,

Price is less than ATC (i.e $1.2<1.75) which implies that firm is incurring losses. However, price is greater than AVC (i.e $1.2 > $0.5) which implies that firm will continue to operate in the short run as it is able to cover all of its variable cost and some part of its fixed cost in the short run.

(2) The correct option is B)

If P>SRATC, then it implies that revenue received from the sale of a unit is more than the cost incurred on producing it, which leads to positive economic profit. This economic profit attracts new firms to enter into the industry and they continue to enter until entire economic profit is wiped out.