7. Refer to the figure above. Suppose the firm is currently producing Q2 units.
ID: 1119543 • Letter: 7
Question
7. Refer to the figure above. Suppose the firm is currently producing Q2 units. What happens if it expands output to Q3 units? A) Its profit increases by the size of the vertical distance df B) It makes less profit. C) It incurs a loss. D) It will be moving toward its profit maximizing output. Refer to the figure above. If the market price is 530, should the firm represented in the diagram continue to stay in business? A) No, it should shut down because it is making a loss. B) No, it should shut down because it cannot cover its variable cost. C) Yes, because it is covering part of its fixed cost. D) Yes, because it is making a profit. 9. When a perfectly competitive firm finds that its market price is below its minimum average variable cost, it will sell A) the output where marginal revenue equals marginal cost. B) any positive output the entrepreneur decides upon because all of it can be sold C) nothing at all; the firm shuts down. D) the output where average total cost equals price. 10. A perfectly competitive firm's short-run supply curve is A) upward sloping and is the portion of the marginal cost curve that lies above the average total cost curve. B) upward sloping and is the portion of the marginal cost curve that lies above the average variable cost curve. C) perfectly elastic at the market price D) horizontal at the minimum average total cost.Explanation / Answer
7 Since the profit is maximum at Q2 unit of output because The difference between TR and TC is maximum. If the firm increases its output from Q2 to Q3, then the difference between TR and TC decreases. It means when the firm moves from output Q2 to Q3, then the profit decreases because the difference between TR and TC decreases.
Hence option B is the correct answer.
8.
When the price is $30, then the profit-maximizing quantity is 180 and it is determined by the condition;
Price=Marginal cost.
At this output level the AVC is $22 and ATC is $36, therefore firm is are able to cover the full variable cost and part of the fixed cost is also covered, therefore firm should continue to produce because it is minimising its loss.
Hence option c is the correct answer.
9.
A perfectly competitive firm will not produce at a quantity where price is less than the average variable cost. Therefore firm will shut down and it will not sell any output.
Hence option C is the correct answer.
10.
A perfectly competitive firm continues to produce, only when it is covering at least its variable cost, therefore it always produces only when the price is greater than AVC. Therefore the firm supply curve is part of rising MC curve which lies above the AVC curve.
Hence option B is the correct answer.
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