Using Figure 9.1, explain what a firm would do in the short run if the market price of its product were at P2 and it produced Q2. Is the firm earning an economic profit? An operating profit? Explain.

The firm would continue to produce in th

Exam 9: Long-Run Costs and Output Decisions

The S.G. Allen Fabric Company sells cotton fabric in a perfectly competitive market at a price of $4 per yard. Its marginal cost, average variable cost, and average total cost curves can be seen below: Find the profit-maximizing level of output and mark it q*. Shade in the area of profit earned by the firm. Is it positive or negative? How do you know?

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Question 1

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The firm is earning a negative economic profit (loss). We know this because price is less than average total cost. This means that total revenue (price * quantity) will be less than total cost (average total cost * quantity).

Define long-run industry supply curve. Draw a graph of a long-run industry supply curve for a decreasing-cost industry. Explain one factor that could lead to an industry being a decreasing-cost industry.

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Question 2

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The long-run industry supply curve is a graph that traces out price and total output over time as an industry expands. A decreasing-cost industry can result from external economies of scale such as reduced per unit transportation costs as an industry expands.

Suppose the paper industry is in long-run competitive equilibrium and the demand for paper increases. If the industry has external diseconomies of scale, what will happen to the price of paper in the long run?

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Question 3

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The price of paper will rise. First, the increase in demand will push the price up. This will lead to positive profits in the paper industry and new firms will enter. Because the industry has external diseconomies of scale, as new firms enter, the long-run average cost curves of firms will shift up. The new long-run price of paper will be at the minimum point of the new long-run average cost curve.

The PPB Corporation sells ping pong balls in a perfectly competitive market at a price of $1 each. The firm's marginal cost, average total cost, and average variable cost curve can be represented by the following: Should the firm continue to operate in the short run? Explain.

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Question 4

Critically evaluate the following statement. "Short-run costs curves must be downward-sloping because after all labor is increasingly more productive."

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Question 5

How do increasing returns to scale affect the shape of the long-run average cost curve?

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Question 6

The ERT Company sells lead pencils in a perfectly competitive market for $5 per box of a dozen pencils. The firm currently produces 2,500 boxes of lead pencils each week and average total cost at this level of production is $5.15. What level of profit is this firm earning? Explain.

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Question 7

What does it mean for a firm to be breaking even?

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Question 8

Using Figure 9.1, explain what a firm would do in the short run if the market price of its product were at P₂ and it produced Q₂. Is the firm earning an economic profit? An operating profit? Explain.

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Question 9

Why is it not a contradiction to say that a firm is simultaneously earning an accounting profit but suffering an economic loss?

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Question 10

Is it possible for the average fixed cost curve to have the shape depicted above? Explain.

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Question 11

Suppose that a firm is currently earning revenues that are smaller than its total costs. The firm's managers are trying to decide whether or not the firm should shut down in the short run. On what information should the manager's decision be based?

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Question 12

A firm is currently selling its output for $10 per unit and is producing where marginal revenue equals marginal cost at an output level of 100 units. If the firm's total variable costs are $900 and its fixed costs are $300 should it produce in the short run or shut down?

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Question 13

Why is the minimum of the average variable cost curve called the shutdown point?

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Question 14

Netflix introduced DVD rentals via US Mail whereby customers do not have to leave their home to rent movies. They also introduced the concept of no-late fees. Netflix has enjoyed strong profits over the last few years. However, what does economic theory tell us should happen to these profits in the long run and why?

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Question 15

How do constant returns to scale affect the shape of the long-run average cost curve?

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Question 16

Using the two graphs below determine the number of firms that are operating in this industry.

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Question 17

If a firm's short-run average cost curves are u-shaped, does this imply that the long-run average cost curve must also be u-shaped?

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Question 18

What is meant by operating profit or net operating revenue?

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Question 19

Marty's Seafood Company sells fish in a perfectly competitive market. The market price is currently $3 per pound. At its current level of production, long-run average cost at Marty's Seafood Company is $2.75 per pound. If Marty's Seafood Company is representative of firms in the industry, is this industry in equilibrium? Explain.

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Question 20

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Define long-run industry supply curve. Draw a graph of a long-run industry supply curve for a decreasing-cost industry. Explain one factor that could lead to an industry being a decreasing-cost industry.

Suppose the paper industry is in long-run competitive equilibrium and the demand for paper increases. If the industry has external diseconomies of scale, what will happen to the price of paper in the long run?

The PPB Corporation sells ping pong balls in a perfectly competitive market at a price of $1 each. The firm's marginal cost, average total cost, and average variable cost curve can be represented by the following: Should the firm continue to operate in the short run? Explain.

Critically evaluate the following statement. "Short-run costs curves must be downward-sloping because after all labor is increasingly more productive."

How do increasing returns to scale affect the shape of the long-run average cost curve?

The ERT Company sells lead pencils in a perfectly competitive market for $5 per box of a dozen pencils. The firm currently produces 2,500 boxes of lead pencils each week and average total cost at this level of production is $5.15. What level of profit is this firm earning? Explain.

What does it mean for a firm to be breaking even?

Using Figure 9.1, explain what a firm would do in the short run if the market price of its product were at P₂ and it produced Q₂. Is the firm earning an economic profit? An operating profit? Explain.

Why is it not a contradiction to say that a firm is simultaneously earning an accounting profit but suffering an economic loss?

Is it possible for the average fixed cost curve to have the shape depicted above? Explain.

Suppose that a firm is currently earning revenues that are smaller than its total costs. The firm's managers are trying to decide whether or not the firm should shut down in the short run. On what information should the manager's decision be based?

A firm is currently selling its output for $10 per unit and is producing where marginal revenue equals marginal cost at an output level of 100 units. If the firm's total variable costs are $900 and its fixed costs are $300 should it produce in the short run or shut down?

Why is the minimum of the average variable cost curve called the shutdown point?

How do constant returns to scale affect the shape of the long-run average cost curve?

Using the two graphs below determine the number of firms that are operating in this industry.

If a firm's short-run average cost curves are u-shaped, does this imply that the long-run average cost curve must also be u-shaped?

What is meant by operating profit or net operating revenue?

The Scope and Method of Economics

The Economic Problem: Scarcity and Choice

Demand, Supply, and Market Equilibrium

Demand and Supply Applications

Elasticity

Household Behavior and Consumer Choice

The Production Process: the Behavior of Profit-Maximizing Firms

Short-Run Costs and Output Decisions

Input Demand: the Labor and Land Markets

Input Demand: the Capital Market and the Investment Decision

General Equilibrium and the Efficiency of Perfect Competition

Monopoly and Antitrust Policy

Oligopoly

Monopolistic Competition

Externalities, Public Goods, and Social Choice

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