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Exam 4: Background to Supply

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Question 1

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Explain the relationship between price elasticity of demand, marginal revenue and economic profit.

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When the price elasticity of demand is i...

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Question 2

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If price is below average total cost, a profit- maximising firm will:

A) raise the price level
B) lower the price level to increase sales
C) continue to operate as long as average revenue is greater than average variable cost
D) shut down, as it cannot cover its total costs

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Question 3

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A firm is producing 100 units, which is its profit- maximising quantity. The price is $1, the total fixed costs are $40 and the average variable cost for each unit is $1.20. The firm's opportunity costs of being in business are included in both the fixed and variable costs. The firm's economic profit is:

If it costs the Delicious Donuts firm $400 to produce 2000 donuts, and $410.20 to produce 2001 donuts, the marginal cost of the last donut produced is:

Why is average revenue equal to price and marginal revenue when the firm is a price taker?

Why might asymmetric information lead to inefficient outcomes?

Worker alienation is not a cause of diseconomies of scale, but can lead to diminishing returns.

As long as marginal revenue is positive, it will be profitable to increase output.

A firm which has a downward- sloping demand curve:

It is virtually impossible in advance to identify a long- run profit- maximising price and output. Which of the following are reasons for this? (Cross out wrong words.) a() Cost and revenue curves are likely to shift unpredictably as a result of the policy pursued. (Yes / No) b() Cost and revenue curves are likely to shift as a result of unpredictable external factors. (Yes / No) c() The firm is likely to experience economies of scale. (Yes / No) d() Some policies may affect both demand and costs. (Yes / No) e() Different managers are likely to make different judgements about the best way of achieving long- run maximum profits. (Yes / No)

Division of labour is an important cause of:

Malthus' forecast of mass starvation as world population increases depends on the existence of:

Producing by- products from waste is an example of economies of scope.

Every point on a firm's LRATC curve corresponds to some point on one of its SRATC curves.

If a firm earns less than normal profit it cannot continue to operate in the short run.

If a firm is a price taker and the market price for its product is $10, then the price the firm charges for its product will also be $10.

Decreasing returns to scale occur when inputs are doubled and output less than doubles.

A firm making roller blades estimates that whenever it doubles labour, capital and all other inputs in the long run, its output also doubles. Assuming input prices do not increase or decrease as the firm expands, what will the firm's long- run average total cost curve look like?

How do external economies of scale arise, and is there a connection with economies of scale?

A profit- maximising firm would shut down in the short run when: