HW7_anskey - HW7 (Chapter 12) Part I. Multiple Choice...

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HW7 (Chapter 12) Part I. Multiple Choice Questions – Choose the best answer. (40%) 1. B. 2. B. 3. B. 4. C. 5. A. 6. B. 7. B. 8. D. 9. A. 10. D. Part II. Short Answer Questions (60%) 1. Textbook page 296, Q6. Answer: a. An increase in fuel prices raises the airline’s average variable cost, AVC, and marginal cost, MC. If the AVC increases enough, the airline might find that P < AVC, in which case the airline shuts down. However, more commonly the airline will continue to operate. The firm maximizes its profit by producing where MC = MR. The increase in marginal cost leads the firm to decrease its production. b. As illustrated in Figure 12.2, the rise in the marginal cost shifts the MC curve upward from MC 0 to MC 1 . As a result the firm’s profit-maximizing number of flights decreases from 25 million per year to 20 million per year.
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c. The increase in fuel prices raises the airline’s average total cost, ATC. If the ATC increases enough, the airline will find that at its profit-maximizing quantity, P < ATC, which means that the firm incurs an economic loss. d. When firms exit the market, the supply of airline flights decreases and the supply curve shifts leftward. The price of flights rises. The higher price reduces and then, in the long run, eliminates the surviving airlines’ economic losses. 2. Textbook page 296, Q10.
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HW7_anskey - HW7 (Chapter 12) Part I. Multiple Choice...

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