Why do high fixed costs force firms to shut down temporarily or shut down forever?
What will be an ideal response?
If a firm finds that the revenue it earns from the output it produces and sells does not even cover its fixed costs, then the firm will shut down. In many cases in the real world, the shutdown is temporary and part of business conditions firms may face. For example, oil wells are shut down if the price of oil does not cover the fixed costs of oil production. Seasonal resorts shut down over the off-season months because there are not enough paying customers to cover the fixed costs. In a recession, businesses will shut down factories because product demand and revenues do not cover fixed costs. Shutdowns are more common than typically thought and are often temporary until economic conditions and revenues expand to cover the fixed costs. If economic conditions do not improve, however, a business may be forced to shut down forever because it cannot ever cover its fixed costs.
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When you hire a company to paint your house, you cannot be sure of the quality of paint that was used. This situation is an example of
a. moral hazard. b. the adverse selection problem. c. the market for lemons. d. the principal-agent problem.
In which of these instances is demand said to be perfectly inelastic?
a. An increase in price of 2% causes a decrease in quantity demanded of 2%. b. A decrease in price of 2% causes an increase in quantity demanded of 0%. c. A decrease in price of 2% causes a decrease in total revenue of 0%. d. An increase in price of 2% causes a decrease in quantity demanded of 1/2%.
In a system of 100-percent-reserve banking,
a. banks do not accept deposits. b. banks do not influence the supply of money. c. loans are the only asset item for banks. d. All of the above are correct.
Sources of microeconomic failure that may require government intervention include all of the following except:
A.) The abuse of market power. B.) The need for private goods. C.) The need for public goods. D.) Inequities in the distribution of goods and services.