Question

Assume the following is true for a perfectly competitive firm. At the output where MR = MC, ATC > P. Based on this information, which of the following is correct?

1. More information is needed to know if the firm is in the short run or long run and if it should shut down.

2. The firm is definitely in the short run and should shut down.

3. The firm is definitely in the long run and should shut down.

4. More information is needed to know if the firm is in the short run or long run, but it should definitely shut down.

5. The firm is definitely in the short run, but more information is needed to know if it should shut down.

Assume that when a perfectly competitive firm is producing at the output where MR = MC, ATC > P. What should the firm do in the short run?

1. It should definitely shut down.

2. It should stay open if P > AVC.

3. It should shut down if P > AVC.

4. It should definitely stay open.

Market failures refer to situations in which it might be desirable to have the government try to “fix” a problem created in a market. One type of market failure involves public goods. Which of the following is correct regarding public goods?

1. Public goods are excludable.

2. Public goods are depletable.

3. Public goods refer to any good that is provided by the government.

4. Public goods are rarely provided by private firms.

Which of the following is not correct in the graph of a perfectly competitive firm with a profit?

1. The average total cost curve lies entirely above the horizontal price line.

2. The firm’s marginal revenue and price are equal to each other.

3. The average total cost curve dips below the horizontal price line.

4. Price is equal to marginal cost at the profit maximizing output.

In the sales maximization model of oligopoly, firms produce up to the output where marginal revenue equals zero.

True? or False?

When a there are negative externalities, the marginal social cost is below the marginal private cost.

True or False?

Answer 1

1.  It is given that MR=MC, ATC>P , this implies that firm is definitely in the short run because in the long run P=ATC. But more information is needed to know if it should shut down because the firm should down only when P<AVC , so information regarding AVC is neeeded. Hence, option(5) is correct.

2. It is given that MR=MC, ATC>P , it should stay open if P>AVC. Hence, option(2) is correct.

3. Public goods are rarely provided by the private firms , but it not always the case that it provided by the government. Hence, option(4) is correct.

4. If the perfectly competitive is earning a profit , then it is not correct that the average total cost curve lies above the horizontal price line. Because when firm is earning profit ,then ATC curve should lie below the price line.Hence, option(1) is correct.