2. Profit Maximization: Production Breakeven, Shutdown and Economies of Scale

Under perfect competition, the demand curve faced by a firm is:

A. Downward-sloping

B. Vertical

C. Horizontal

D. U-shaped

C. Horizontal

Under perfect competition, the total revenue (TR) curve is:

A. Linear, with a slope equal to price per unit

B. U-shaped

C. Downward-sloping

D. Horizontal

A. Linear, with a slope equal to price per unit

Under imperfect competition, the demand curve faced by a firm is:

A. Horizontal

B. Downward-sloping

C. Vertical

D. Perfectly elastic

B. Downward-sloping

A firm maximizes profit by producing the quantity where:

A. P = ATC

B. TR = TC

C. P = SMC and SMC is rising

D. AVC = AFC

C. P = SMC and SMC is rising

The breakeven point occurs when:

A. TR = TC

B. TR > TC

C. TR < TVC

D. MR = AVC

A. TR = TC

At the breakeven point, a firm earns:

A. Maximum economic profit

B. A loss

C. Zero revenue

D. Normal economic profit

D. Normal economic profit

In the short run, sunk costs should be:

A. Doubled

B. Included in variable costs

C. Ignored when deciding whether to continue operating

D. Added to marginal cost

C. Ignored when deciding whether to continue operating

A firm should continue operating in the short run if it can cover its:

A. Fixed costs

B. Variable costs

C. Total costs

D. Sunk costs

B. Variable costs

The shutdown point occurs at the:

A. Maximum AVC

B. Minimum ATC

C. Maximum ATC

D. Minimum AVC

D. Minimum AVC

The breakeven point occurs at the:

A. Minimum ATC

B. Minimum AVC

C. Maximum AVC

D. Minimum AFC

A. Minimum ATC

If TR = TC, the firm's short-run decision is to:

A. Shut down

B. Exit the market

C. Stay in the market

D. Increase fixed costs

C. Stay in the market

If TR = TVC but TR < TC, the firm's short-run decision is to:

A. Stay in the market

B. Shut down production

C. Exit immediately

D. Stop producing permanently

B. Shut down production

If TR < TVC, the firm's short-run decision is to:

A. Stay in the market

B. Increase production

C. Shut down production

D. Earn normal economic profit

C. Shut down production

If TR = TVC but TR < TC, the firm's long-run decision is to:

A. Stay in the market

B. Exit the market

C. Shut down temporarily only

D. Increase output

B. Exit the market

In the short run, which statement is correct?

A. All factors of production are variable

B. No factors of production are variable

C. At least one factor of production is variable

D. All costs are fixed

C. At least one factor of production is variable

In the long run:

A. All factors of production are variable

B. All factors of production are fixed

C. At least one factor is fixed

D. Variable costs do not exist

A. All factors of production are variable

The Short-Run Average Total Cost (SATC) curve represents average total cost when:

A. No costs are fixed

B. Some costs are fixed

C. All costs are fixed

D. Production is zero

B. Some costs are fixed

The Long-Run Average Total Cost (LATC) curve represents average total cost when:

A. Some costs are fixed

B. All costs are fixed

C. No cost is fixed

D. Only variable costs exist in the short run

C. No cost is fixed

Economies of scale occur when:

A. Per-unit cost increases as production increases

B. Per-unit cost decreases as production increases

C. Total revenue decreases as production increases

D. Fixed cost increases as production decreases

B. Per-unit cost decreases as production increases

The LRAC curve has a negative slope under:

A. Diseconomies of scale

B. Constant returns to scale

C. Economies of scale

D. Shutdown conditions

C. Economies of scale

Diseconomies of scale occur when:

A. Per-unit cost increases as production increases

B. Per-unit cost decreases as production increases

C. Price equals marginal cost

D. TR equals TC

A. Per-unit cost increases as production increases

The LRAC curve has a positive slope under:

A. Economies of scale

B. Diseconomies of scale

C. Perfect competition

D. Breakeven conditions

B. Diseconomies of scale

Under imperfect competition, the total revenue (TR) curve:

A. Is always horizontal

B. Rises when MR is positive and demand is elastic

C. Always rises at a constant rate

D. Is always equal to total cost

B. Rises when MR is positive and demand is elastic

Under imperfect competition, when demand is elastic:

A. MR is positive

B. MR is negative

C. MR is zero

D. AVC is zero

A. MR is positive

When demand is inelastic under imperfect competition:

A. MR is positive

B. MR is negative

C. TR always increases

D. Price equals AVC

B. MR is negative

A firm should produce at the profit-maximizing quantity where:

A. SMC is falling

B. P = ATC

C. P = SMC and SMC is rising

D. TR = TVC

C. P = SMC and SMC is rising

Which cost should be ignored when making a short-run operating decision?

A. Variable cost

B. Marginal cost

C. Sunk cost

D. Total variable cost

C. Sunk cost

If TR > TC, the firm is:

A. Earning an economic profit

B. Earning a loss

C. At the shutdown point

D. At the breakeven point

A. Earning an economic profit

If TR < TC but TR > TVC, the firm should in the short run:

A. Exit the market

B. Stay in the market

C. Shut down production

D. Stop producing permanently

B. Stay in the market

If TR < TVC, the firm should in the short run:

A. Stay in the market

B. Increase production

C. Shut down production

D. Expand production

C. Shut down production

If TR = TC, the firm earns:

A. An economic loss

B. An economic profit

C. Normal economic profit

D. Negative revenue

C. Normal economic profit

Which condition represents the shutdown point?

A. TR = TC

B. TR = TVC

C. TR > TC

D. TR < TVC

B. TR = TVC

Which condition represents the breakeven point?

A. TR = TC

B. TR = TVC

C. TR < TVC

D. TR > TC

A. TR = TC

A firm that covers its variable costs but not its total costs should:

A. Shut down immediately

B. Stay in the market in the short run

C. Exit the market immediately

D. Stop producing permanently

B. Stay in the market in the short run

What is the main difference between the short run and the long run?

A. In the short run, all costs are variable

B. In the long run, all factors of production are variable

C. In the long run, no production is possible

D. In the short run, no factors are variable

B. In the long run, all factors of production are variable

Economies of scale mean that:

A. Per-unit cost decreases as production increases

B. Per-unit cost increases as production increases

C. Total cost becomes zero

D. Price decreases as production decreases

A. Per-unit cost decreases as production increases

Diseconomies of scale mean that:

A. Per-unit cost decreases as output increases

B. Per-unit cost increases as output increases

C. Fixed costs become zero

D. Revenue equals total cost

B. Per-unit cost increases as output increases

Which curve is used to analyze economies and diseconomies of scale?

A. Demand curve

B. MR curve

C. LRAC curve

D. AVC curve

C. LRAC curve

A negative slope of the LRAC curve indicates:

A. Diseconomies of scale

B. Economies of scale

C. Shutdown

D. Breakeven

B. Economies of scale

A positive slope of the LRAC curve indicates:

A. Economies of scale

B. Perfect competition

C. Diseconomies of scale

D. Normal profit

C. Diseconomies of scale