SolutionsCF8e-Ch9 - Case/Fair Microeconomics Solutions...

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Case/Fair Microeconomics Solutions CHAPTER 9 1. (a) Disagree. Constant returns to scale means that the long-run average cost curve is flat over most of its range. (b) Disagree. A firm suffering losses will continue to operate as long as total revenue covers variable cost. 2. The enterprise is suffering a $20,000 economic loss. TR  = $100,000, X q = $5 X 20,000, TC = $120,000. Fixed costs are $30,000 (10% annually on $300,000: the opportunity cost of capital). That makes TVC =  $90,000 ( TC–TFC =  120,000 – 30,000). Thus, revenue covers variable cost, profit on operations is 100,000 – 90,000 = 10,000. The firm should operate in the short run but exit in the long run. 3. Increasing returns is a reduction in average costs in the long run, when all inputs can be optimally adjusted. Diminishing returns is an increase in marginal costs in the short run, when only one input can be varied and others are held fixed. 4. One could make a case that some economies probably exist in all five, but the case is much stronger in electric power (needs a big power plant or dam) and aircraft manufacturing (requires
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This note was uploaded on 04/13/2008 for the course ECON EC101 taught by Professor Todd during the Spring '08 term at BU.

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SolutionsCF8e-Ch9 - Case/Fair Microeconomics Solutions...

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