Q3(1B03) - Regular Quiz#3 Econ 1B03 Thursday 50 True-False...

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Regular Quiz #3 Econ 1B03 Thursday November 12, 2015 50 True-False Questions Select the correct choice 1. The firm in a perfectly competitive market is currently producing 10 units of output, where AC is at the minimum value of \$10. The current market-price (P) is \$15. The economic profit at the current output is \$50. This firm should neither increase nor decrease its output in the short-run. 2. The firm in a perfectly competitive market is currently producing 10 units of output, where AC is at the minimum value of \$10. The current market-price (P) is \$15. The long-run price in a constant-cost-industry will be \$10. Answer Questions #3-6 on the basis of the following MC function of a representative firm in perfect competition. MC = 10 + q, where q is the output of the firm. Assume that market price (P) is higher than AVC. 3. We can also write firm’s supply function as q = -10 + P. 4. If there are 1000 firms, we can write industry or market-supply function as Q = - 10,000 + 1000P If market price is \$15, then firm’s equilibrium output (q) will be 5 and market equilibrium output will be 10,000 5. If P is \$20, the equilibrium q is 10. If P is \$30, the equilibrium q is 20. We can conclude that MC curve above the minimum point of AVC curve is the firm’s supply curve 6. An up-sloping supply curve of a firm as well as an up-sloping supply curve of the market is based on the assumption of decreasing marginal productivity of labour. 7. If wage-rate increases, both AVC and MC curves will shift up at given output. As output increases in the short-run, total variable cost (TVC) increases, but AFC decreases due to “spread-effect”. 8. Assume that existing firms in perfect competition are making economic profit in the short-run, where P = MC, but P>AC. In the long-run, new firms will enter the market; as a result, the market supply curve will shift to the right and the market price will decrease. In the long-run P = MC > Minimum AC. 9. Efficient allocation rule is P = MC, but cost-efficiency means lowest possible average cost (AC). A perfectly competitive firm in the long-run satisfies the condition of P = AC = MC and AC is at a minimum level. 1

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10. An unregulated profit-maximizing monopolist produces at a point where MR = MC. An unregulated monopolist never produces at a point produces at a point where P = MC. 11. New firms can enter the market or existing firms can start a new plant in the short-run, if economic profit in the short-run is positive.
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