MT2120A_Solution09s

MT2120A_Solution09s - Name: Id #: Midterm II Basic...

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Id #: Midterm II Basic Economics I UC Irvine Wilima Wadhwa Economics 20A Spring 2009 This exam consists of four questions. Answer all questions and explain all your answers. Read the entire exam carefully before you begin. Good Luck! 1. (4 points) Consider a profit maximizing competitive firm. The market price for the firm’s product is $25 and the firm is selling 10 units. The total cost of the firm is $300 of which $30 is fixed cost. (a) Should the firm shut down in the short run? Why? (b) Should the firm remain in the industry in the long run? Why? Solution: (a) The firm should shut down in the short run if P < AVC. P=25. VC = TC - FC = 300 - 30 = 270 AVC = VC/Q =270/10=27 Therefore, 25<27 and the firm should shut down in the short run. (b) The firm should exit the market in the long run if P<ATC. P = 25 TC = 300 ATC = 300/10 = 30 Therefore, 25 < 30 and the firm should leave the market in the long run. 2 points each – they should give the condition for shut-down and exit
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This note was uploaded on 03/11/2012 for the course ECON 20A 45206 taught by Professor Chen during the Spring '12 term at UC Irvine.

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MT2120A_Solution09s - Name: Id #: Midterm II Basic...

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