6. In the short-run, if the market price is below a competitive firm’s average t
ID: 1121812 • Letter: 6
Question
6. In the short-run, if the market price is below a competitive firm’s average total cost, the firm should:
Select one:
a. shut down only if the price is above its average variable cost.
b. shut down immediately.
c. remain open as long as its price is greater than its average variable cost.
d. expand output in the short-run and expand its production capacity.
7. Which of the following will occur in the long run in response to an unexpected but permanent increase in demand in a constant-cost, competitive industry?
Select one:
a. Resources will move out of the industry.
b. The output of the industry will remain constant.
c. The output will increase with input prices remaining unchanged.
d. The existing firms will not be able to expand output sufficiently without incurring huge costs.
8. The firm's long-run average cost curve always
Select one:
a. reflects the law of diminishing returns
b. reflects constant returns to scale
c. shows the least-cost method of production for each level of output
d. horizontal
9. Issuing a fixed number of licenses to operate a taxicab in a city (that is, imposing restrictions on entry) would mean that :
Select one:
a. the number of cabs and fares are both above the efficient level- that is, the level which would maximize the sum of profits and consumer surplus.
b. the number of cabs is less than the efficient quantity and fares are above the purely competitive levels.
c. the number of cabs is above the efficient level and fares are depressed below the purely competitive level.
d. the number of cabs and fares are both below the efficient level.
10. Which of the following would change the strategy of each player in a Prisoners’ Dilemma model so that each would choose the strategy that would make both of them better off rather than choose their dominant strategy?
Select one:
a. Appeal to their social conscience
b. Refuse to play the game
c. Each player would choose an outside party (a “government”) who would punish a player who chooses their dominant strategy
d. None of the above
Explanation / Answer
Answer 6 - In the short run a competitive firm will remain open as long as its price is greater than its average variable cost. If price is below ATC in the short run firm will earn loss but it will not shut in the short run. Because the firm will be earning its variable cost in the short run.
Option C is the correct answer.
Answer 7 - In the long run, in response to an unexpected but permanent increase in demand in a constant-cost, competitive industry, the existing firms will not be able to expand output sufficiently without incurring huge costs. Because extra resources will be needed in order to meet the increased demand.by the firm.
Option D is the correct answer.
Answer 8 - The firm's long run average cost curve always shows the least-cost method of production for each level of output. The firms try to minimize their long run cost. The LRAC curve shows efficiency in the production.
Option C is the correct answer.
Answer 9 - Issuing a fixed number of licenses to operate a taxicab in a city places a restrictions on entry that leads to inefficiency in the market. The number of cabs is less than the efficient quantity and fares are above the purely competitive levels.
Option B is the correct answer.
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