1. A normal profit is a. revenues minus opportunity cost of zero. b. revenues mi
ID: 1116173 • Letter: 1
Question
1. A normal profit is
a. revenues minus opportunity cost of zero.
b. revenues minus accounting cost of zero.
c. revenues minus accounting and opportunity cost of zero.
2. According to the shutdown rule, a firm should produce no output in the short run if
a. price is below minimum average variable costs.
b. price is below minimum average total cost.
c. total revenues are lower than total fixed costs.
d. price is above minimum average total cost.
d. a zero accounting profit.
3. The kinked demand curve model best reflects
a. price rigidities in oligopolistic markets.
b. a game theory approach to price-output decisions.
c. All of the above
4. When a firm has the power to establish its price
a. P > MR.
b. P < MR.
5. Which of the following is an example of a barrier to entry?
a. A newspaper sells advertising space to businesses.
b. A firm is lacking a website.
c. A firm is open for business only at certain hours of the day, and has its doors locked at other times.
d. The government grants licenses to taxicab drivers, without which it is illegal to operate a taxicab.
c. P = MC.
d. P = MR.
Explanation / Answer
(1) (c)
Economic profit = Revenue - Accounting costs - Opportunity cost
Normal profit means that Economic profit is zero, therefore
Normal profit = Revenue - Accounting costs - Opportunity cost of zero
(2) (a)
If price < Minimum AVC, the firm cannot cover its variable costs with revenue, and shuts down.
(3) (c)
(4) P > MR
When a firm has price setting power, demand curve is downward sloping & profit is maximized by setting MR equal to MC. Since MR lies below demand curve, it means that Price is higher than MR.
(5) (d)
The government-granted license is a barrier to entry.
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