Exam 9: Long-Run Costs and Output Decisions

Pappy's Popcorn Emporium operates in a perfectly competitive industry and hires you as an economic consultant. Pappy's is currently producing at a point where market price equals its marginal cost. Its market price is greater than its average variable cost but less than its average total cost. You advise Pappy's to

Refer to the data provided in Table 9.4 below to answer the question(s) that follow. Table 9.4 -Refer to Table 9.4. If the market price is $40, then to maximize profits this firm should produce

Refer to Scenario 9.10 below to answer the question(s) that follow. SCENARIO 9.10: Investors put up $1,040,000 to construct a building and purchase all equipment for a new cafe. The investors expect to earn a minimum return of 10 percent on their investment. The cafe is open 52 weeks per year and serves 900 meals per week. The fixed costs are spread over the 52 weeks (i.e. prorated weekly). Included in the fixed costs is the 10% return to the investors and $2,000 in other fixed costs. Variable costs include $2,000 in weekly wages, and $600 per week in materials, electricity, etc. The cafe charges $6 on average per meal. -Refer to Scenario 9.10. The economic profit is

If, at the output where marginal revenue equals marginal cost, price is between average total cost and average variable cost, a firm will continue to produce in the short run.

Billy Bob's Fertilizer Engineers, a perfectly competitive firm, is incurring a loss, but the price is still above minimum average variable cost. Then in the short run this firm should ________, and in the long run, if there is no change in economic conditions, this firm should ________.

If a perfectly competitive firm shuts down in the short run and exits the industry in the long run, the firm's short run condition is

A firm must earn an economic profit in order to receive a normal rate of return.

When a decrease of a firm's scale of production leads to lower average costs per unit produced, there is an increasing return to scale.

Refer to the information provided in Figure 9.4 below to answer the question(s) that follow. Figure 9.4 -Refer to Figure 9.4. In the short run, if economic conditions do not change, this firm should produce ________ units of output and will earn a total revenue ________.

Refer to Scenario 9.5 below to answer the question(s) that follow. SCENARIO 9.5: Investors put up $520,000 to construct a building and purchase all equipment for a new restaurant. The investors expect to earn a minimum return of 10 percent on their investment. The restaurant is open 52 weeks per year and serves 900 meals per week. The fixed costs are spread over the 52 weeks (i.e. prorated weekly). Included in the fixed costs is the 10% return to the investors and $1,000 per week in other fixed costs. Variable costs include $1,000 in weekly wages and $600 per week for materials, electricity, etc. The restaurant charges $3 on average per meal. -Refer to Scenario 9.5. The weekly economic profit is

If a firm's total revenue is less than its total variable cost, it should shut down.

When ________ scale of production leads to ________ average costs, an industry exhibits increasing returns to scale.

Refer to the information provided in Figure 9.1 below to answer the question(s) that follow. Figure 9.1 -Refer to Figure 9.1. The profit-maximizing price of wheat is ________ per bushel.

Refer to Scenario 9.7 below to answer the question(s) that follow. SCENARIO 9.7: Julio borrowed $80,000 from his great aunt to open a coffee stand at a local flea market. He agrees to pay his great aunt a 5% yearly return on the money she lent him. His other yearly fixed costs equal $16,000. His variable costs equal $60,000. He sold 50,000 cups of coffee during the year at a price of $3.00 per cup. -Refer to Scenario 9.7. Julio's total fixed costs equal

In the short run average costs eventually ________ because of diminishing returns, and in the long run average costs eventually ________ because of diseconomies of scale.

Assume the market for orange juice is perfectly competitive. Orange juice producers currently earn a zero economic profit. Orange juice producers will likely begin to incur economic losses in the short run, and some producers will exit the industry until those remaining earn a zero economic profit, if consumers

A firm suffers losses if

Refer to the information provided in Figure 9.1 below to answer the question(s) that follow. Figure 9.1 -Refer to Figure 9.1. If this farmer maximizes profits, his average fixed costs will be

Refer to the information provided in Figure 9.2 below to answer the question(s) that follow. Figure 9.2 -Refer to Figure 9.2. If demand for wheat is D₂, then a profit-maximizing firm will produce ________ units and earn a profit of ________.

Refer to Scenario 9.5 below to answer the question(s) that follow. SCENARIO 9.5: Investors put up $520,000 to construct a building and purchase all equipment for a new restaurant. The investors expect to earn a minimum return of 10 percent on their investment. The restaurant is open 52 weeks per year and serves 900 meals per week. The fixed costs are spread over the 52 weeks (i.e. prorated weekly). Included in the fixed costs is the 10% return to the investors and $1,000 per week in other fixed costs. Variable costs include $1,000 in weekly wages and $600 per week for materials, electricity, etc. The restaurant charges $3 on average per meal. -Refer to Scenario 9.5. In the long run, the restaurant will want to