quiz10a - Principles of Economics EC 1 UCLA Dr. Bresnock...

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Principles of Economics EC 1 UCLA Dr. Bresnock Quiz 10 Answers (15 points; 1 point each question) Choose the best answer to each question and mark it on your answer form. A) is incorrect because, as mentioned in (B), firms do not produce if price is below the shutdown point. B) is correct because, for a perfectly competitive firm, they will only do business where price is at or above the shutdown price. At any point below, the firm would lose more by staying in business than they had incurred in fixed costs, and would exit the industry. Thus, a perfectly competitive firm’s supply curve exists on the rising MC curve above this shutdown point. C) is incorrect because a firm will remain in business even if incurring economic losses. This happens because in the short run, firms must incur fixed costs that cannot be reclaimed. A firm must weigh out its economic losses against the losses of wasted fixed costs they would incur if they shut down. Therefore, there is a portion of the MC where a firm is taking losses but should remain in business (portion of MC from min AVC up to but not including min ATC). D) is incorrect because, as mentioned in (B), any price below the shutdown point is irrational and causes firms to exit the industry. 2. In perfect competition, a change in fixed cost: A) will have no effect on price in the short run. B) will have no effect on output in the short run. C) will induce entry or exit in the long run so that price will change enough to leave firms earning zero profits. D) is described by all of the above. A) is correct because firms are price takers, so they can only take the price as given. Only entry and exit in a increasing or decreasing cost industry will cause price changes, but this is a long run effect, not a short run effect. B) is correct because, in the short run, fixed costs are not allowed to change, so short run output cannot change due to fixed cost changes C) is correct because fixed cost changes determine a firm’s ATC. When this changes, it allows firms to earn an economic profit or loss. In the long run, more firms will enter or exit the industry until all economic profits are absorbed by other firms. D) is correct because all of the above are correct. Page 1 1. A perfectly competitive firm's supply curve is the: A) entire MC curve. B) rising part of MC curve beginning at the shutdown point. C) rising part of MC curve beginning at the point at which the firm starts earning economic profit. D) MC curve below the shutdown point.
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Use the following to answer Question 3: Figure: Profit Maximizing 3. The figure shows cost curves for a firm operating in a perfectly competitive market. If the market price is P 3 , the firm will produce quantity _______ and _______ in the short run. A)
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quiz10a - Principles of Economics EC 1 UCLA Dr. Bresnock...

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