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| | <br>(e) the average total cost is at its minimum | | <br>(e) the average total cost is at its minimum |
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| − | Our test-taking tips encourage us to eliminate wrong answers before trying to select the correct answer. Let's look at answer choice (a): the total revenue of the firm cannot be increased. That is wrong because if we increase our output, we could increase our total revenue, even though we may lose money on that additional unit. For example, if we sold chocolate candy bars for $1, we could always increase revenue by selling another one for the below-market-price of 50 cents. We'd lose money on that additional bar, but we'd increase our overall revenue. | + | ''Answer'': Our test-taking tips encourage us to eliminate wrong answers before trying to select the correct answer. Let's look at answer choice (a): the total revenue of the firm cannot be increased. That is wrong because if we increase our output, we could increase our total revenue, even though we may lose money on that additional unit. For example, if we sold chocolate candy bars for $1, we could always increase revenue by selling another one for the below-market-price of 50 cents. We'd lose money on that additional bar, but we'd increase our overall revenue. |
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| | Similarly, answer choice (d) must be wrong because we know that we would continue selling until MR (marginal revenue) declines to where it equals MC (marginal cost). That point were MR=MC is not where MR is the maximum. | | Similarly, answer choice (d) must be wrong because we know that we would continue selling until MR (marginal revenue) declines to where it equals MC (marginal cost). That point were MR=MC is not where MR is the maximum. |
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| | See how the correct answer fits the question as a key fits a lock. The question asked about the "long run" equilibrium of a perfectly competitive firm, which suggests the fact that costs are low. Only answer (e) conveyed how costs are low. That "unlocks" the question. | | See how the correct answer fits the question as a key fits a lock. The question asked about the "long run" equilibrium of a perfectly competitive firm, which suggests the fact that costs are low. Only answer (e) conveyed how costs are low. That "unlocks" the question. |
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| − | 2. Imagine a firm in perfect competition, and in long-run equilibrium. Which of the following statements is true? | + | 2. Suppose a firm has "economies of scale"? What happens when it increases output? |
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| − | (a) | + | (a) its average total costs increase |
| − | <br>(b) | + | <br>(b) its revenue decreases |
| − | <br>(c) | + | <br>(c) its marginal cost increases |
| − | <br>(d) | + | <br>(d) its average total costs decrease |
| − | <br>(e) | + | <br>(e) its costs remain constant. |
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| | + | ''Answer'': |
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| | == Assignment == | | == Assignment == |