Question

52

53

54

52. Adam's Apples, a small firm supplying apples ina perfectly competitive market, decides to cut its production to half this year. Which of the following is likely to occur in this case? a. The market price of apples will increase. b. The market price of apples will decrease. c. The market demand for apples will increase. d. The market price of apples will not be affected. e. The market supply curve of apples will shift rightward. 53. Suppose the marginal cost for the 1,000th unit of a monopolist's output is $40, marginal revenue is $30, the average variable cost of producing 1,000 units is $30, and the average total cost is $50. In order to maximize profit or minimize loss in the short run, the firm should a. shut down. b. continue to produce 1,000 units c. produce fewer than 1,000 units but still operate. d. produce more than 1,000 units. e. increase its plant size to gain economies of scale. 54. Consider two resource markets, A and B, where the demand curves for the resources slope downward. The supply curve of resource A is horizontal, and the supply curve of resource B is vertical. In market A, the equilibrium price is $6, and the equilibrium quantity is 100 units. In market B, the equilibrium price is $20, and the equilibrium quantity is 30 units. Which of the following is true? a. All of the resource earnings in market A are opportunity costs. b. All of the resource earnings in both markets are opportunity costs. c. All of the resource earnings in market B are opportunity costs. d. None of the resource earnings in either market are an opportunity cost. e. None of the resource earnings in either market are economic rent.

Answer 1

52.

Since in the perfectly competitive firm, there are large number of buyers and sellers and they sell identical product and price is determined by industry and not by the firm. So any firm or any buyers can buy or sell any quantity of goods at the market price. It means there is no effect of the individual demand or supply of goods on the market price. It means production decisions cannot affect the market price.

Since Adam’s Apples, is a small firm which supply in a perfectly competitive market, and suddenly it cuts its production by half, then there is no change in the market supply and no change in the price.

Hence option d is the correct answer.

53.

In a monopoly firm profit is maximized by the condition of

MR=MC

Shut-down condition is

MC=minimum of AVC=P

As it has been given that at Q=1000

MC=40

MR=30

AVC=30

ATC=50

Since MC always cuts AVC at its minimum point.

As it is obvious that MC is greater than AVC at Q=1000, it means that by producing at current output level, firm is covering some part of Fixed cost, so firm should produce fewer output so that MR and MC could become could become equal and firm could minimize its loss. Hence firm should produce fewer than 1,000 units but still operate.

Hence option c is the correct answer.

54.

Since there are two resource market A and B, where the demand curves for the resources slope downward. The supply curve of resource A is horizontal, and the supply curve of resources B is vertical. In the market A, the equilibrium price is $6, and the equilibrium quantity is 100 units. In the market B, the equilibrium price is $20, and the equilibrium quantity is 30 units. So here market A and Market B are not related to each other.

Since opportunity cost is the next best alternate use of the opportunity.

The opportunity costs can be defined as forgone of next best alternative opportunity due to taking first best opportunity.

hence it can be said that none of the resources earing in either of the market are an opportunity cost.

Hence option d is the correct answer.