1215

In the long run, if price is below average total cost (ATC) the firm will:

A) keep running.

B) shut down.

C) cover its variable costs.

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If the price is below ATC then the firm is losing money. If the firm believes the price will never exceed ATC the only way to eliminate fixed costs is to go out of business.

1215

In the long-run, a firm operating under perfect competition will:

A) produce a quantity where marginal revenue is less than marginal cost.

B) face a vertical demand curve.

C) generate zero economic profit.

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A firm operating under conditions of perfect competition will generate zero economic profit in the long run. Firms may generate economic profits in the short run, but due to the lack of entry barriers, new competitors will enter the market and prices will adjust downward until economic profits become zero.

1215

A firm operating under perfect competition will experience economic losses when which of the following conditions exists?

A) Marginal cost is less than average total cost.

B) Marginal revenue is greater than average total cost.

C) Market price is less than average total cost.

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Under perfect competition, a firm will experience economic losses when its selling price is less than average total cost.

1215

Assume that a perfectly competitive firm produces 10 units of a good and sells them each for a price (P) equal to $15. If the marginal cost (MC) of the 10th unit is $15 and the average total cost (ATC) is $13, economic profit for the firm is closest to:

A) $0.

B) $20.

C) $120.

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When MR = MC = P, economic profit equals TR – TC. In this case, TR = $150 = 10 × $15 and TC = $130 = 10 × ATC = 10 × $13. So, economic profit is $20 = $150 ? $130.

1215

A profit maximizing firm will expand output as long as marginal revenue is:

A) greater than average fixed cost.

B) greater than marginal cost.

C) less than marginal cost.

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A purely competitive firm will tend to expand its output so long as the market price (marginal revenue) is greater than marginal cost. In the short term and long term, profit is maximized when P = MC.

1215

Suppose a price-taker firm produces baseball bats that sell at a price of $100 each. This firm’s average total cost at the current level of production is $150 per bat, and the average fixed cost is $40 per bat. Which of the following statements is most accurate regarding this firm? They should:

A) continue producing baseball bats because they are covering their fixed costs.

B) shut down in the short run because their average variable cost is greater than their price.

C) shut down in the short run because their average total cost is greater than their price.

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Variable costs = $150 (ATC) ? $40 (AFC) = $110 (AVC). At a selling price of $100 the firm is not covering its variable costs and will have losses greater than its fixed costs if it stays in business.

1215

A perfectly competitive firm will not expand its output beyond the quantity where:

A) the marginal cost is greater than marginal revenue.

B) the market price is equal to its marginal cost.

C) its marginal revenue is positive.

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A perfectly competitive firm will tend to expand its output so long as the market price is greater than marginal cost. In the short term and long term, profit is maximized when P = MC.

1215

Which of the following is most accurate for a price-taker firm in long-run equilibrium when there are no barriers to entry?

A) P = AVC = MR.

B) TC = TR = MC.

C) P = MC = ATC = MR.

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For a price-taker firm, long-run equilibrium is where P = MC = ATC. For price taking firms, P = MC. Competition eliminates economic profits in the long run so that P = ATC.

1215

Under perfect competition, a firm will experience zero long term economic profit when:

A) MC is less than ATC.

B) MC = ATC = MR = price.

C) price is less than average total cost.

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Under perfect competition, a firm will experience zero long term profits when P = MC = MR = ATC. It recovers all costs including opportunity costs and earns zero economic profit.

1215

A firm operating as a price taker will:

A) produce quantity where P = MR = MC.

B) be a revenue maximizer.

C) face an inelastic demand curve.

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A firm operating as a price taker will produce quantity where MC = MR. It will maximize profit and not revenue. In the long run, it will make zero economic profits after taking into account fair return on capital.