# 1: The cost structure for a firm in a competitive market. Price MC ATC AVC P7
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Question
# 1: The cost structure for a firm in a competitive market. Price MC ATC AVC P7 P6 P5 P4 P3 P2 PI 01 02 03 Q4 Q5 Quantity the firm finds that it can minimize its profit loss by producing its output at, 10. Refer to Figure #1. When price falls from P4 to P1 a. Qi 11. Refer to Figure #1. When price rises from P4 to P7, the firm finds that a. profit is still maximized at a production level of Q2 c. it can earn a positive profit by increasing production to Qu b. it can earn a positive profit by increasing production to Q d. fixed costs are lower at a production level of Q4. 12. Refer to Figure #1. The firm will shut down temporarily if it realizes that the market price is between P1 and P4 . Under such circumstance, the firmm a. still has to pay its variable costs, but not its fixed costs. c. still has to pay both its variable costs and its fixed costs. b. still has to pay its fixed costs, but not its variable costs. d. has to pay neither its variable costs nor its fixed costs. 13. In the long run, a perfectly competitive market, with economic losses will NOT experience: a. an increase in equilibrium price as firms exit. c. a decrease in equilibrium price as old firms exit. b. more firms exit as long as they still make an economic loss. d. all of the above. 14. Because a monopolist has market power, which of the following is NOT a characteristic of a monopolist? RMUNNICHAExplanation / Answer
10. Q1
Reason: At Q1, price equals AVC, which minimizes loss and makes production possible in short run.
11. It can earn positive profit by increasing production to Q3
Reason: At Q3, profits are higher since profits at this production point are: (P7-P5)Q3
12. The firm still has to pay fixed costs but not variable costs
Reason: At price lying between P1 and P4, price will be greater than AVC but lower than ATC.
This means variable costs are being covered and only a part of fixed costs is covered.
13. Decrease in price as old firms exit
Reason: Due to economic losses, more firms will exit the market.
This will reduce market supply of goods, thereby shifting supply curve to left and price to increase.
14. When it produces an extra unit of output, it must lower its price on all of its production
Reason: For a monopolist, profit maximization involves setting MR = MC and producing additional unit of output does mot involve reducing or changing prices.
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