Question

4. Which of the following is NOT a true statement about market conditions for firms under perfect competition a. Each firm will produce as efficiently as possible b. Consumer surplus is maximized. c. Economic profits of firms will always be zero in the long run. d. Government intervention must move markets to equilibrium. c. Price - Long-Run Marginal Cost - min Long-Run Average Cost 5. In the market shown on the graph on the right ATC a. Mark profit maximizing (or loss minimizing) 0. b. Mark area that stands for profit or loss. c. Explain what will happen in this industry in the long run. Will firms enter or exit this industry? Will price increase or decrease? 6. A profit-maximizing competitive firm shuts down in the short-run when a. MR - MC b. MRAVC c. MR- P d. PMC 7. Farley Frozen Yogurt is a perfectly competitive firm. The market price of a frozen yogurt cake is 58. Farley sells 200 frozen yogurt cakes. Its AVC is $9 and its AFC is $2. Farley should: a. Continue to produce. b. Decrease production. c. Increase production. d. Shut down. 8. Sometimes we walk into a restaurant for lunch and find it almost empty. The firm is losing money on cost of running the restaurant. Why does the restaurant remain open? a. Shutting down during lunch would not reduce the marginal cost. b. Many of a restaurant's costs, such as the rent, kitchen equipment, tables, plates, are variable. c. When the owner is deciding whether to serve lunch, only the variable costs are relevant. d. The owner shuts down the restaurant at lunchtime only if the revenue fails to cover fixed costs. 9. Assume the market for beef is perfectly competitive. Beef producers are currently earning a zero economic profit. If consumers switch from beef to chicken, which of the following is most likely to occur? a. Beef producers will incur economic losses in both the short run and the long run. b. Beef producers will incur economic losses in the short run. Some producers will exit the industry until those remaining beef producers are earning a zero economic profit. c. Beef producers will incur economic losses in the short run. Some producers will exit the industry until those remaining beef producers are earning an economic profit. d. Beef producers will earn economic profits in the short run and there will be no additional adjustments in the long run.

Answer 1

Answer 4. Government intervention must move markets to Equilibrium.

Reason- Under perfect competition, there is no need for government intervention, the supply and demand interact at economically efficient point.

Answer 5.

a. Profit maximising level Q* is where MC=MR

b. Loss is in green rectangle

c. In the long run, Firms will exit the industry as they are suffering losses.

The reduced supply will lead to rise in prices .So firms will earn Normal profit in the long run.

Answer 6. P<AVC

Reason- Under perfect competition, the firms will leave the industry when the profits cannot even cover the variable cost. Im other words when P<AVC

Answer 7. d. Shut down

Reason- Since P= $8 and AVC=$9, P<AVC so firm should shut down.

Note-According to HOMEWORKLIB RULES first four parts can be answered.