Theory of the Firm

^{The diagram shows the costs and revenues for a profit maximising firm in a market. The most likely outcome for the firm, assuming no change in costs or demand, is to}

• Continue in business and make supernormal profit ZYWX

• Continue in business and raise the price

• Continue in business and cut the price

• Continue in business in the short run but shut down in the long run

• Shut down immediately

At the end of a day’s trading a flower seller cuts the prices of all the stock that has reached its ‘sell by’ date. This pricing strategy is most likely to be

• Fixed cost pricing

• Limit pricing

• Revenue maximisation pricing

• Predatory pricing

• Productive efficiency pricing

In December 2009 the Royal Mail announced that it had made a 4% increase in profits compared to 2008, despite a fall of 3 million items a day in the amount of post being sent. The most likely reason for the increase in profits was

• An increase in contestability in the postal market

• A fall in the real price of postage stamps

• A rise in nominal wages of postal workers

• A fall in employment in the Royal Mail

• External diseconomies of scale in the Postal industry

The chart below shows the usage-based market share of internet web browsers in Europe. In 2008 the Microsoft computer software company was fined €1.68 billion by the European Competition Commission for pre-installing its browser, Internet Explorer, on computers running the Windows operating system. In December 2009, Microsoft agreed to allow consumers to choose their web browser on setup

• An increase in the five-firm concentration ratio in the web browser market

• An increase in profitability for Microsoft

• An increase in advertising revenues for Internet Explorer web spac

• A worsening of the quality of the browser products offered in the market

• A decrease in market share for Internet Explorer

_{In August 2009 the Competition Commission published a Groceries Supply Code of Practice. Large supermarket chains were paying very low prices to some suppliers. Which types of market power does this suggest the large supermarket chains have?}

• Monopsony

• Monopolistic competitive

• Perfectly competitive

• Natural monopoly

• Competitive monopoly

_{General Motors made a loss of $4.3 billion in 2009. Under which one of the following conditions are firms such as this likely to keep operating?}

• The market is highly contestable

• They are covering average variable costs in the short run

• They are covering marginal costs in the short run

• There are low sunk costs in the industry

• Total revenue is less than total cost in the long run

_{The diagrams below show the costs, revenue and profit for a profit maximising firm. What can be inferred from these diagrams?}

• The firm operates in a perfectly competitive market in the short run

• The firm will produce at a quantity of 6,000 units in the long run

• There are barriers to entry and exit

• He firm will produce at any output between 2,650 and 8,000 units

• The firm is making a loss