Question

1.A perfectly competitive firm sells 15 units of output at the going market price of $10. Suppose its average fixed cost is $15 and its average variable cost is $8. Its contribution margin (i.e., contribution to fixed cost) is

2. At the point at which P=MC, suppose that a perfectly competitive firm's MC = $100, its AVC = $80 and its AC = $110. This firm should

Select one:

a. continue operating in the short run.

b. shut down immediately.

c. try to take advantage of economies of scale.

d. try to increase its advertising and promotion.

3.

For a demand curve that is horizontal, the marginal revenue curve

Select one:

a. will be to the right of the demand curve and twice as steep.

b. will be the same as the demand curve.

c. will be to the left of the demand curve and half as steep.

d. will be to the right of the demand curve and half as steep.

Answer 1

Question 1

Sales = Units sold * Market price = 15 * $10 = $150

Variable cost = Units sold * AVC = 15 * $8 = $120

Calculate the Contribution Margin -

Contribution margin = Sales - Variable cost = $150 - $120 = $30

The contribution margin is $30.

Question 2

At point of P = MC, MC is $100.

So, P = $100

In short-run, at the level of output produced, if P>AVC, firm continue to operate.

AVC is $80.

In given case, P>AVC.

So, this firm should continue operating in the short-run.

Hence, the correct answer is the option (a).

Question 3

For a demand curve that is horizontal, the marginal revenue curve will be the same as the demand curve.

Hence, the correct answer is the option (b).