5. Why must price cover average variable costs if the firm is to continue operat
ID: 1116682 • Letter: 5
Question
5. Why must price cover average variable costs if the firm is to continue operating?
If price is less than average variable costs, the firm can continue to operate because losses will be covered.
Price does not have to cover average variable costs; it only has to cover average fixed costs.
If price is less than average variable costs, then losses will exceed fixed costs.
If price is less than average variable costs, fixed costs will exceed losses.
6. Why is the short-run supply curve for a perfectly competitive firm not equivalent to the entire marginal cost curve?
Because prices equal to the marginal cost curve cause the firm to shut down.
Because prices below the marginal cost curve cause the firm to shut down.
Because prices below the minimum variable cost curve cause the firm to shut down.
Because prices above the minimum variable cost curve cause the firm to shut down.
7. Assume a competitive industry is in long-run equilibrium and firms in the industry are earning normal profits. Now assume that production technology improves such that average total costs decline by $5 per unit. How will the industry move to a new long-run equilibrium?
It will not move to a new long-run equilibrium. New firms will enter the market, which will increase the price for that good and the long-run equilibrium will remain the same.
The new long-run equilibrium will be where each firm now has a normal profit plus $5.
The fall in costs will result in economic profits and firms will enter the market causing the price to fall until all firms only have normal profits.
Entry will occur and the market price will fall, but there will be so much entry into the market that firms will have losses.
8. Marginal revenue and price are equal for competitive firms because:
price is constant for all levels of output.
price must decrease as quantity increases.
price is the same as average revenue.
its demand curve is upward sloping.
5. Why must price cover average variable costs if the firm is to continue operating?
If price is less than average variable costs, the firm can continue to operate because losses will be covered.
Price does not have to cover average variable costs; it only has to cover average fixed costs.
If price is less than average variable costs, then losses will exceed fixed costs.
If price is less than average variable costs, fixed costs will exceed losses.
6. Why is the short-run supply curve for a perfectly competitive firm not equivalent to the entire marginal cost curve?
Because prices equal to the marginal cost curve cause the firm to shut down.
Because prices below the marginal cost curve cause the firm to shut down.
Because prices below the minimum variable cost curve cause the firm to shut down.
Because prices above the minimum variable cost curve cause the firm to shut down.
Explanation / Answer
Ans:
5) If price is less than average variable costs, then losses will exceed fixed costs.
If price does not exceed average variable cost than firm will incur more loss by operating than by shutting down.If firm operates at a price less than average variable cost it will lose not only fixed cost but also a part of its variable cost. If it shuts down when price is less than average variable cost firms can limit the losses to fixed costs.
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