Question

7. A profit maximizing firm in a competitive market produces replica toy cars. Suppose the market price for replica toy cars decreases to $12. At the profit maximizing (loss minimizing) quantity of 20,000 toy cars, the ATC is equal to $15 and the AFC is equal to $5. Given these conditions the
(x) firm will experience losses of $60,000 since price is less than average total cost.
(y) the firm will continue to produce 20,000 toy cars since it would lose $40,000 more if it shut down and did not produce any toy cars.
(z) firm will continue its production of toy cars in the short run since it is producing at its profit maximizing (loss minimizing) quantity and price exceeds average variable cost at that quantity.
A. (x), (y) and (z) B. (x) and (y) only
C. (x) and (z) only D. (y) and (z) only
E. (x) only

8. A profit maximizing firm in a competitive market produces deck chairs. The firm, which is a price-taker, faces a price of $35 for its product. Its average variable cost is $28 and its average fixed cost is $9 at the quantity where marginal cost equals marginal revenue. In the short run, the firm
A. will be earning both economic and accounting profits.
B. will experience losses but will continue to produce deck chairs.
C. will shut down and incur the total loss of its fixed costs.
D. will shut down and incur the total loss of its variable costs.
E. should raise the price of its product.

Answer 1