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Economics Model Answers Thirteen (view source)
Revision as of 17:38, May 20, 2007
, 17:38, May 20, 2007→Intermediate
[[Image:Econ13ab.jpg|right|250px|thumb|Figures A and B]]
[[Image:Econ13ab.jpg|right|250px|thumb|Figures A and B]]
4. Look at Figure B (right). If the price of sale falls below P1 then the firm in the short run will (a) increase Q, (b) increase labor, (c) increase price, or (d) shut down. How much profit is it making at a price of P2?
4. Look at Figure B (right). If the price of sale falls below P1 then the firm in the short run will:
<br>(a) increase Q
<br>(b) increase labor
<br>(c) increase price
<br>(d) shut down.
<br>How much profit is it making at a price of P2?
'''The firm should shut down because P<ATC and P<AVC. At the higher price P2, the firm would be making zero profit but would stay in business because it can pay salaries.'''
5. Look again at Figure B (right). Assume the firm is perfectly competitive. Explain what AFC is, and use the labels on the graph to describe its amount.
5. Look again at Figure B (right). Assume the firm is perfectly competitive. Explain what AFC is, and use the labels on the graph to describe its amount.
'''AFC is average fixed cost.'''
6. Now turn to Figure A (right). What is the opportunity cost of shifting production from B to C?
6. Now turn to Figure A (right). What is the opportunity cost of shifting production from B to C?