Question

can someone explain how these numbers are calculated//explain the answers to 3 & 4?

y all2012).UUCA homework 10-key(fall2019).docx (16.7 KB) 1 > of 2 0 - ZOOM Page TVC Case P AC 1000 TR 5000 8000 TFC $1,500 1000 AVC $5.50 3.00 MC ANSWER 5.00 4.50 3. $1.00 10000 8000 3.00 4.00 6000 Min. Level 2000 9000 7000 3.50 | 4.50 4.00 3. What do you recommend to the firm in case #1? A) increase output. B) decrease output, but not shut down. C) maintain its current rate of output D) shut down. What do you recommend to the firm in case #2? A) increase output. B) decrease output, but not shut down. C) maintain its current rate of output D) shut down

Answer 1

(2) In short-run, a perfectly competitive firm will shut down the production if the price is below AVC.

In case #1, Total Revenue (TR) = 5000

Quantity (Q) = 1000

Total Revenue = Price * Quantity

5000 = Price (1000)

Price = (5000/1000)

Price = $5

AVC = $5.50

Price ($5) < AVC ($5.50)

So, firm will shut down.

Answer: Option (d)

(4) MC is $4.50, AC is $3, AVC is $3.50

In short-run, a perfectly competitive firm produces on that region of MC which is above the AVC and below the AC.

In perfect competition, P = MC

So, price is $4.50.

Hence, Price is above AC and AVC.

So, a firm should decrease the output, but not shut down (because the decrease in output will also decrease the price, but not enough to fall it below AVC)

Answer: Option (b)