1. Firms should exit the market if: A) sunk costs are a significant portion of t
ID: 1219118 • Letter: 1
Question
1. Firms should exit the market if:
A) sunk costs are a significant portion of the total cost.
B) producer surplus is just equivalent to recoverable costs.
C) price falls below the average cost.
D) marginal cost exceeds the average cost.
2.A firm should exit an industry if:
A) P < MC.
B) P – AC > 0.
C) P– AC < 0.
D) P – AC = 0.
3. More potential sellers ______ the elasticity of ______ firm-level demand. "
A) increase; short-run
B) decrease; short-run
C) increase; long-run
D) decrease; long-run
4. In a constant cost industry, P = AC = $20. Which sequence of events follows an increase in demand?
A) P > AC, firms make an economic profit, existing firms expand output, new firms enter the industry, the short-run supply curve shifts right, price falls until profits return to $0
B) P > AC, firms make an economic profit, existing firms expand output, new firms enter the industry, the short-run supply curve shifts left, price falls until profits return to $0
C) P < AC, firms suffer an economic loss, existing firms reduce output, new firms enter the industry, the short-run supply curve shifts right, price falls until profits exceed $0
D) P = AC, firms make no economic profit, existing firms leave output unchanged, new firms enter the industry, profits remain normal, P = AC = $20
Explanation / Answer
1. Firms should exit the market if:
Best possible answer is A. When sunk costs are a significant portion of the total cost. Sunk costs are the costs which once incurred are not recovered.These cost are the costs which have already been incurred but cannot be recovered. If total costs contains sunk cost as a significant portion, that means a significant portion of your costs has been incurred and cannot be recovered back.
Among other options, even if Price falls below AC as long as you are able to recover AVC, you should not exit the industry.
2. .A firm should exit an industry if:
P-AC<0 and you are not able to recover even your Average Variable costs, then only a firm should exit the industry. A point where P<AC but P=AVC is called the shut down point for a firm.
3. 3. More potential sellers ______ the elasticity of ______ firm-level demand. "
More potential sellers will increase the elasticity of short term firm level demad. If prices decreases or increases by even a small amount, due to a huge no of sellers in the market, there is a significant increase or decrease in the firm level demand.
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