Suppose a perfectly competitive firm faces the following situation: P = $6, outp
ID: 1109068 • Letter: S
Question
Suppose a perfectly competitive firm faces the following situation: P = $6, output = 2,000, ATC = $7, MC = $6, and AVC = $6.50. Which statement is an accurate description of the firm's situation? The firm incurs losses, but is not minimizing its losses. The firm incurs profits but is not maximizing its profits. The firm incurs losses and is minimizing its losses. The firm is maximizing profits. Suppose a perfectly competitive firm is in the following situation: P = $10, output = 3,000, ATC = $11, MC = $10, and AVC = $7.50. Which statement is an accurate description of the firm's situation? The firm incurs losses but should shut down to lose less. The firm incurs profits but should increase output to maximize its profits. The firm incurs losses but is also minimizing its losses. The firm incurs losses but should increase output to lose less. Suppose a perfectly competitive firm faces the following situation: P = $6, output = 2,000, ATC = $7, MC = $6, and AVC = $6.50. Which statement is an accurate description of the firm's situation? The firm incurs losses, but is not minimizing its losses. The firm incurs profits but is not maximizing its profits. The firm incurs losses and is minimizing its losses. The firm is maximizing profits.Explanation / Answer
Q1
Answer
The firm incurs losses but is not minimizing its losses
The firm has P<AVC so the firm is increasing losses by producing the firm should shut down to minimize losses in short run.
Profit=(P-ATC)*Q=(6-7)*2000=-$2000
but if the firm shut down then the loss is equal to fixed cost
Fixed cost=(ATC-AVC)*Q=(7-6.5)*2000=1000
the loss is $1000 if the firm shut down so the firm is not minimizing losses
Q2
Answer
The firm incurs losses but is also minimizing its losses.
Profit=(10-11)*3000=-3000
loss of $3000
if the firm shutdown then
loss=(ATC-AVC)*Q=(11-7.5)*3000=10500
the frim is incurring losses but the firm is minimizing the losses
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