Assume a perfectly competitive firm is currently producing 5,000 units of output and is earning $15,000 in total revenue. The marginal cost of the 5,000th unit of output is $3. The corresponding average total cost is $3
50 and total fixed costs equal $1250. Based on this information, should this firm continue to operate in the short run? Why or why not?
No, the firm should not continue to operate and should instead shut down. Based on the information in the question, market price (and marginal revenue) equals $3 ($15,000/5,000). In addition, average fixed cost equals $0.25 ($1250/5000). As such the firm's average variable cost, which is equal to the difference between average total cost and average fixed cost, equals $3.25. Because price is less than AVC at the profit-maximizing (in this case loss-minimizing) level of output, the firm will minimize its losses by shutting down.
You might also like to view...
The fact that output gaps will not last indefinitely, but will be closed by rising or falling inflation is the economy's:
A. income-expenditure multiplier. B. self-correcting property. C. short-run equilibrium property. D. long-run equilibrium property.
Economics is the study of how people make
A) subjective judgments. B) themselves worse off. C) money. D) choices.
Which of the following examples reflects product differentiation?
a. When Kerem buys ibuprofen, he always buys the same brand even though all brands use the same formula. b. Maria has to buy Happy Cow yogurt because it is the only organic yogurt a nearby store carries. c. When someone asks Lucas what brand of milk he buys, he can’t remember the name. d. Aisha has difficulty deciding what brand of lipstick to buy because they all seem so similar.
QE2 was an effort to revive the economy in 2010 and 2011. It relied on
A. new tools of monetary policy. B. discretionary fiscal policy. C. the traditional tools of monetary policy. D. all of the options are correct.