Question

A firm will continue to operate in the long run only if: Selected Answer: it earns a nonnegative economic profit.

Question 2 Correct A profit-maximizing firm should shut down in the short run if: Selected Answer: total revenue is less than total variable cost.

Question 3 Correct A firm’s long-run average cost curve is estimated by the equation: LAC = 1,000 – 4Q + 0.012Q2. At what quantity is the minimum efficient scale of production? Hint: Write your answer to two decimal places. Selected Answer: 166.67

Question 4 0 out of 10 points Incorrect The production manager of a clothing manufacturer estimates that the total annual cost of producing men’s suits is given by the equation: C = 5,000 + 4,100Q – 8Q2 +0.004Q3. What is the minimum price the firm can accept to not shut down in the short run? Hint: Write your answer to two decimal places. Selected Answer: 105 Response Feedback: Review the section on "Cost Analysis and Optimal Decisions" in chapter six of your text.

Question 5 10 out of 10 points Correct When the long-run average cost is at its minimum, the long-run marginal cost: Selected Answer: is equal to long-run average cost.

Question 6 0 out of 10 points Incorrect Assume that the minimum efficient scale for a typical firm in an industry is 2 million units. The estimated output for the whole industry is 6 million units. Therefore, one can conclude that: Response Feedback: Review the discussion on "Returns to Scale and Scope" in chapter six of your text.

Question 7 10 out of 10 points Correct The minimum efficient scale is important in determining:

Question 8 0 out of 10 points Incorrect A firm produces 100 units of good A at a total cost of $2,124 and separately 200 units of good B at a cost of $1,227. By combining the production of A and B, it is possible to produce the same quantities of A and B respectively at a combined total cost of $2,500. Compute the economies of scope experienced by this firm. Hint: Write your answer to two decimal places. Response Feedback: Review the discussion on "Returns to Scale and Scope" in chapter six of your text.

Answer 1

1. A firm will continue to operate in the long run only if Price is greater or equal to the LRAC at the profit maximizing output level, that is, if the firm is earning non negative Economic profit.

2. A profit maximizing firm should shut down in the short run, if : TR < TVC

Or, (P * Q) < TVC

Or, (PQ/Q) < (TVC/Q)

Or, Price < AVC

3. Minimum efficient scale occurs at the point where LAC is minimized.

When LAC is minimized, then d(LAC)/dQ = 0

Or, d(1000 - 4Q + 0.012Q² )/dQ = 0

Or, -4 + 0.024Q = 0

Or, 0.024Q = 4

Or, Q = (4/0.024) = 166.67

Answer: 166.67