Use the following to answer questions 5 through 9: 5. Suppose that market price
ID: 1100089 • Letter: U
Question
Use the following to answer questions 5 through 9:
5. Suppose that market price is $10. Given this price, a perfectly competitive firm should:
A) continue to produce in the short-run but shut down in the long-run.
B) continue to produce in both the short-run and the long-run.
C) shut down in the short-run but continue production in the long-run.
D) shut down immediately.
6. Suppose that market price is $8. Given this price, a perfectly competitive firm should:
A) continue to produce in the short-run but consider shuting down in the long-run.
B) continue to produce in both the short-run and the long-run.
C) shut down in the short-run but continue production in the long-run.
D) shut down immediately.
7. Suppose that market price is $6. Given this price, a perfectly competitive firm should:
A) continue to produce in the short-run but shut down in the long-run.
B) continue to produce in both the short-run and the long-run.
C) shut down in the short-run but continue production in the long-run.
D) shut down immediately.
8. A perfectly competitive firm breaks even when the market price is:
A) $6. B) $7. C) $10. D) between $8 and $10.
9. The shut down point for this perfectly competitive firm is at a market price:
A) of $6. B) between $6 and $8. C) between $8 and $10. D) of $10.
Explanation / Answer
5.B perfectly competitve firms make no supernormal profits. As long as the market offers a firm more that what it costs to produce a good it should operate. Your equilibrium point is where P(MR as a perfectly competitive firm) equals MR. Here you are getting $10 per unit which is more than what it costs you to manufacture it (ATC).
answer B
6.A) 7) D 8) D 9 B) concept behind 6,7,8 & 9 now the price that market offers is lower that what it takes you to manufacture the good. But there are two components to the cost. One is Variable cost the other is Fixed cost. Fixed cost is what you have paid to setup the firm like land, machinery etc. Variable cost it what you pay for your daily operations. As long as you can recover the variable cost you are fine. You may still continue production hoping that perhaps someday the prices may rise and then you can recover your fixed cost. But if you cannot recover you variable costs then you will soon deplete all your cash and you will have nothing to run the company. This is when you should shutdown immediately
Sources: Masters in Economics
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