Question

22. Suppose that price is below the minimum average total cost (ATC) but above the minimum average variable cost (AVC) and that the market price is expected to rise at least to ATC in the near future. In the short run, a firm that is a price-taker would: a. immediately shut down and get out of the industry. b. continue to produce a quantity of output such that its marginal revenue equals marginal cost. c. shut down temporarily, in hopes of restarting in the near future. d. cut price and expand output in hopes of achieving economies of scale. e. None of the above.

23. Even though a cartel is often profitable for its members, cartel arrangements contain the seeds of their own disintegration because (more than one answer is correct): a. a price maintained above each cartel member's average variable cost provides each member with an incentive to offer secret price reductions to attract additional customers. b. the profits earned by cartel members will induce and attract new firms to enter the industry. c. cartel members will attempt to garner more of the total profit for themselves by cheating on their agreement with other members. d. cheating on cartel agreements by individual members may be difficult to detect and enforce. e. the demand for the products of cartels is inherently unstable relative to the demand for the products of non-cartel industries.

24. Suppose the airline industry is an oligopolistic market with significant barriers to entry. If this is true, we would expect that (more than one answer is correct): a. each airline will strategically set its own price and output by considering how other airlines might respond. b. if the number of airlines declined because of a series of mergers between major airlines, then collusive behavior in the industry leading to higher prices would be more likely. c. the airfares being charged will be greater than what would be charged in a competitive price-taker market with no entry barriers but less than what would be charged by a pure monopolist. d. the firms in the industry will not attempt to maximize profit.

26. People can travel within Washington, D.C., via the Metro subway system or by taxicabs. Suppose that taxi fares (prices) remain the same, while subway fares (prices) increase for the Metro system. How will the total revenue from subway and taxi travel be affected by the increase in subway fares? The total revenue (more than one answer is correct): a. from taxi fares will increase, and revenue from subway fares will increase, but only if demand for the subway is inelastic. b. from taxi fares will increase, and revenue from subway fares will increase, but only if demand is elastic. c. from subway fares will decrease, and revenue from taxi fares might either increase or decrease. d. from taxi fares will decrease, and revenue from subway fares might either increase or decrease. e. from taxi fares will increase, and revenue from subway fares might either increase or decrease.

Answer 1

22. b. continue to produce a quantity of output such that its marginal revenue equals marginal cost.

Explanation: Since the price is above the minimum average variable cost, by continuing operations, the firm will at least recover some of its fixed costs.