1.As long as price is sufficient to cover __________, the firm is better off by
ID: 1250766 • Letter: 1
Question
1.As long as price is sufficient to cover __________, the firm is better off by operating rather than by shutting down in the short run.Answer
marginal cost
average fixed cost
average variable cost
marginal revenue
2.The owner of Tie-Dyed T-shirts, a perfectly competitive firm, has hired you to give him some economic advise. He has told you that the market price for his shirts is $20 and that he is currently producing 200 shirts at an AVC of $15 in the short run and an AC of $25. What would you recommend to him?
Answer
To continue producing in the short run, as his loss from production is less than his fixed costs, but to exit the industry in the long run if there are no changes in economic conditions.
To shut down in the short run, as he is incurring a loss and to leave the industry in the long run, if there are no changes in economic conditions.
To continue to produce in the short run, even though he is earning a loss, and to expand in the future with the hope of increasing market share and total revenue.
You tell him you cannot make any recommendations until you know what his fixed costs are.
3.Which type of barrier to entry allows the electric company to maintain a monopoly over the production of electricity?
Answer
a patent
economies of scale
diseconomies of scale
ownership of a scarce factor of production.
4. Why can a monopolist continue to make positive profits even in the long-run while a perfectly competitive firm can make only zero economic profits in the long-run?
Answer
Because a monopoly only has one firm while perfect competition has many.
Because monopoly has barriers to entry and perfect competition has free entry.
Because perfect competition has barriers to entry and monopoly has free entry.
Because in perfect competition everyone produces the same product and because in monopoly there are no close substitutes.
5.What is the difference between diminishing returns and diseconomies of scale?
Answer
Diminishing returns is in the short run while diseconomies of scale is in the long run.
Diminishing returns is in the long run while diseconomies of scale is in the short run.
They are both the same thing.
There is no such thing as diseconomies of scale.
6. What does the LAC look like for a firm with constant returns to scale?
Answer
It slopes downwards.
It slopes upwards.
It is a horizontal straight line.
It is a vertical straight line.
7.Natural monopoly occurs when there are:
Answer
large economies of scale.
firms joining together to limit output and raise prices.
different prices for different consumers or groups of consumers.
patents.
8.Suppose we know that a monopolist is maximizing its profits. Which of the following must be true? The monopolist has
Answer
maximized its total revenue.
set price equal to its average cost.
maximized the difference between marginal revenue and marginal cost.
set marginal revenue equal to marginal cost.
Explanation / Answer
1. "average variable cost" 2. "To continue producing in the short run, as his loss from production is less than his fixed costs, but to exit the industry in the long run if there are no changes in economic conditions." 3. "economies of scale" (and government regulation, usually) 4. "Because monopoly has barriers to entry and perfect competition has free entry." 5. This depends on how your book/instructor defines them. Looking at the other questions, I think they want "Diminishing returns is in the short run while diseconomies of scale is in the long run." (The other possible answer is "They are both the same thing.") 6. "It is a horizontal straight line." 7. "large economies of scale." 8. "set marginal revenue equal to marginal cost."
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