Firm and market structures

The short-term shutdown point of production for a firm operating under perfect competition will most likely occur when:

• Price is equal to average total cost

• Marginal revenue is equal to marginal cost

• Marginal revenue is equal to average variable costs

Answer explanation

The firm should shut down production when marginal revenue is less than or equal to average variable cost.

Under conditions of perfect competition, a company will break even when market price is equal to the minimum point of the:

• Average total cost curve

• Average variable cost curve

• Short-run marginal cost curve

Answer explanation

A company is said to break even if its total revenue is equal to its total cost. Under conditions of perfect competition, a company will break even when market price is equal to the minimum point of the average total cost curve.

A company will shut down production in the short run if total revenue is less than total:

• Fixed costs

• Variable costs

• Opportunity costs

Answer explanation

A company will shut down production in the short run when total revenue is below total variable costs.

A company has total variable costs of $4 million and fixed costs of $3 million. Based on this information, the company will stay in the market in the long term if total revenue is at least:

• $3.0 million

• $4.5 million

• $7.0 million

Answer explanation

A company will stay in the market in the long term if total revenue is equal to or greater than total cost. Because total costs are $7 million ($4 million variable costs and $3 million fixed costs), the company will stay in the market in the long term if total revenue equals at least $7 million.

When total revenue is greater than total variable costs but less than total costs, in the short term, a firm will most likely:

• Exit the market

• Stay in the market

• Shut down production

Answer explanation

When total revenue is enough to cover variable costs but not total fixed costs in full, the firm can survive in the short run but would not be able to maintain financial solvency in the long run.

Under conditions of perfect competition, in the long run, firms will most likely earn:

• Normal profits

• Positive economic profits

• Negative economic profits

Answer explanation

Competition should drive prices down to long-run marginal cost, resulting in only normal profits being earned.

A firm that increases its quantity produced without any change in per-unit cost is experiencing:

• Economies of scale

• Diseconomies of scale

• Constant returns to scale

Answer explanation

Output increases in the same proportion as input increases occur at constant returns to scale.

A company is experiencing economies of scale when:

• Cost per unit increases as output increases

• It is operating at a point on the LRAC curve at which the slope is negative

• It is operating beyond the minimum point on the long-run average total cost curve

Answer explanation

Economies of scale occur if, as the firm increases output, cost per unit of production falls. Graphically, this definition translates into an LRAC with a negative slope.

Diseconomies of scale most likely result from:

• Specialization in the labor force

• Overlap of business functions and product lines

• Discounted prices on resources when buying in larger quantities

Answer explanation

As the firm increases output, diseconomies of scale and higher av- erage total costs can result when business functions and product lines overlap or are duplicated.

A firm is operating beyond minimum efficient scale in a perfectly competitive industry. To maintain long-term viability, the most likely course of action for the firm is to:

• Operate at the current level of production

• Increase its level of production to gain economies of scale

• Decrease its level of production to the minimum point on the long-run average total cost curve

Answer explanation

The firm operating at greater than long-run efficient scale is subject to diseconomies of scale. It should plan to decrease its level of production.