If a firm can influence the market price by changing its quantity of output, the
ID: 2443098 • Letter: I
Question
If a firm can influence the market price by changing its quantity of output, then the firm
must be a monopoly
has market power
will set the price equal to its average total costs
earns a normal profit in both short-run and long-run
A firm will shutdown in the short-run if
it makes a negative profit.
the market price is lower than its average total cost (ATC).
the market price is lower than its average variable cost (AVC).
the fixed cost can be only covered partially.
must be a monopoly
has market power
will set the price equal to its average total costs
earns a normal profit in both short-run and long-run
A firm will shutdown in the short-run if
it makes a negative profit.
the market price is lower than its average total cost (ATC).
the market price is lower than its average variable cost (AVC).
the fixed cost can be only covered partially.
Explanation / Answer
Answer
1)
The correct answer is (b) has market power.
Monopoly is the extreme case of market power(complete market power). Market power is defined as the ability of a firm to charge price above Marginal cost. More the ability to charge higher price more will be market power. Hence, even if a firm does not have a monopoly but has high market power then he can still charge higher price and hence can influence Market price.
Hence, The correct answer is (b) has market power
2) The correct answer is (c) The market price is lower than its average variable cost(AVC)
A firm has incurred a fixed cost and it cannot do anything with it in a short run. Hence what he has to do is now compare Price with Variable cost because if his price is lesser than Average variable cost then his revenue is not enough to cover Total Variable cost hence it is preferable for him to shut down and by doing that he only looses Fixed cost rather than Fixed cost + (TVC - TR).
Hence, the correct answer is (c) The market price is lower than its average variable cost(AVC)
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