MT2220A_Solution 09s

MT2220A_Solution 09s - 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 $30 and the firm is selling 12 units. The total cost of the firm is $400 of which $50 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) Firm should shut down in the short run if P<AVC. P=30 VC = TC - FC = 400 - 50 = 350 AVC = VC/Q = 350/12 = 29.17 Since 30 > 29.17, the firm should continue to produce in the short run. (b) Firm should exit the market in the long run if P < ATC. P = 30 TC = 400 ATC = TC/Q = 400/12 = 33.33. Therefore, 30<33.33 and the firm should exit the market in the long run. 2 points each – they should give the condition for shut-down and exit
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MT2220A_Solution 09s - Name: Id #: Midterm II Basic...

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