Exam 9: Long-Run Costs and Output Decisions

What does it mean when a firm is earning positive economic profit?

Are the short-run and long-run average cost curves U-shaped for the same reason? Explain.

Using Figure 9.1, explain what a firm would do in the short run if the market price of its product dropped below P₁.

List two reasons why a firm might experience diseconomies of scale.

How does the idea of efficient markets influence the long-run market adjustment mechanism?

What is meant by long-run competitive equilibrium?

What is the distinction between external and internal economies and diseconomies of scale in an industry?

Maxine's Cookie Shop sells chocolate chip cookies in a perfectly competitive market for $2 per dozen. Maxine currently produces 200 dozen cookies per day and average total cost at this level of production is $1.75. What level of profit is this firm earning? Explain.

Use the graph below to show the firm's short-run supply curve of a perfectly competitive firm.

What is the short-run industry supply curve in a perfectly competitive industry?

If revenue in the short run is less than variable costs, what should the firm do??

The table below shows the monthly output and total monthly cost of widgets for three firms in the widget industry. Given the information in the table, can we draw any conclusions about the returns to scale in the widget industry? If so, what does the information suggest about the shape of the long-run average cost curve?

Using Figure 9.1, explain what a firm would do in the short run if the market price of its product were at P₄ and it produced Q₄. Is the firm earning an economic profit? Explain.

Suppose in a purely competitive market that American firms consider labor costs to be mostly variable while Japanese firms consider labor costs to be mostly fixed. What implication would this have for the viability of firms in each country if they compete with one another in the short run? What about the long run?

In economics, what differentiates the short run from the long run?

Assume an electric company has spent $3 billion on a nuclear power plant. It's producing at a price per kilowatt hour that is above its average variable cost. However, after 10 years the price remains below average total cost. If there is no expectation that price will equal or rise above the average total cost what would you expect this company to do with its nuclear power plant? Why is the $3 billion not part of the decision? Explain.

Assume a firm is operating in a purely competitive market facing an upward-sloping long-run supply curve. If the industry is currently making pure economic profit what adjustment processes would take place in this market? What would happen to the industry supply curve, equilibrium quantity and equilibrium price?

How is a long-run average cost curve different from a short-run average cost curve? How are they related?

Evaluate the following statement. If a firm is suffering economic losses then the sensible thing to do is to shut down temporarily.

Bubba's Burgers sells hamburgers in a perfectly competitive market at a price of $1.50 each. At the profit-maximizing (cost-minimizing) level of output, average total cost is $1.90 per hamburger and average variable cost is $1.75 per hamburger. Should the firm continue to operate in the short run? Explain.