Give an example of a firm that decides to shut down because it cannot cover variable costs. Use hypothetical numbers and avoid using any examples provided in the text.
What will be an ideal response?
but should show a thorough understanding of why a firm shuts down because it can’t cover variable costs. For example, let’s say a soybean farmer decides to expand production, which means hiring more employees and paying more for transportation and irrigation. As a result, his average variable costs increase from $100,000 a year to $130,000 a year. However, the market price for soybeans does not increase as expected. Instead, it remains at about $5 per bushel. To make matters worse, the amount he sells decreases slightly from 25,000 bushels per year to 23,000 bushels per year. As a result, the farmer cannot meet the average variable cost of $130,000 because 23,000 x $5 = $115,000. However, he believes that demand and price will increase soon because of a new plastics formula that requires soybeans. Therefore, the farmer decides to shut down operations for one year until they are profitable again.
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Increasing marginal returns to labor might occur at low levels of labor input because of
A) increasing average costs. B) differing factor proportions. C) increasing specialization of tasks. D) decreasing use of machinery and increasing use of technology.
Producer surplus is equal to the area
A) under the demand curve and above the supply curve. B) above the supply curve and below the price line. C) under the demand curve. D) under the supply curve. E) under the demand curve and above the price line.
Suppose that the absolute price elasticity for cookies equals 0.9. We could then say that the demand for cookies is
A) elastic. B) inelastic. C) unit-elastic. D) perfectly elastic.
In the short run, a perfectly competitive firm suffering a loss
a. will close if P < AVC b. will shut down operations if P < MC c. cannot leave the industry even if P < AVC d. can sell off all its resources to competitors e. can raise the price to increase revenues