Module 12.1 - Breakeven, Shutdown And Scale

Question 1

What is the definition of the short run for a firm in economics?

Answer 1

The time period over which some factors of production are fixed.

Question 2

What factor is typically assumed to be fixed in the short run?

Answer 2

Capital.

Question 3

What happens to all factors of production in the long run?

Answer 3

All factors of production (costs) are variable.

Question 4

What is the breakeven point for a firm, under perfect competition?

Answer 4

Total sales (total revenue) just cover both fixed and variable costs, resulting in zero economic profit.

Question 5

Under what condition should a firm continue to operate in the short run, in perfect competition.

Answer 5

As long as items are being sold for more than their variable cost.

Question 6

What should a firm do if items are sold for less than their average variable cost, in perfect competition?

Answer 6

Shut down the business in the short run.

Question 7

What is the condition for a firm to shut down in the long run, in perfect competition.

Answer 7

If the price is less than average total cost.

Question 8

How is economic profit determined at price P1?

Answer 8

Price and average revenue equal average total cost, leading to zero economic profit.

Question 9

What happens to economic profit when the price is above P1, in perfect competition?

Answer 9

Economic profit is positive.

Question 10

What happens to economic profit when the price is below P1?

Answer 10

Economic profit is negative, resulting in economic losses.

Question 11

What should a firm do if average revenue is less than average variable cost, in perfect competition.

Answer 11

Shut down production in the short run because losses are greater than its fixed costs.

Question 12

What is the short-run shutdown point?

Answer 12

Point at which average revenue is less than average variable cost.

Question 13

What is the long-run shutdown point, in perfect competition?

Answer 13

If average revenue is less than average total cost.

Question 14

If AR ≥ ATC, what should the firm do in perfect competition?

Answer 14

Stay in the market in both the short and long run.

Question 15

If AR ≥ AVC but AR < ATC, what should the firm do in perfect competition?

Answer 15

Stay in the market in the short run but exit the market in the long run.

Question 16

If AR < AVC, what should the firm do, in perfect competition?

Answer 16

Shut down in the short run and exit the market in the long run.

Question 17

What is the breakeven condition for price-searcher firms?

Answer 17

TR = TC.

Question 18

What should a price searcher firm do if TC > TR > TVC?

Answer 18

Continue to operate in the short run but shut down in the long run.

Question 19

What should a price searcher firm do if TR < TVC?

Answer 19

Shut down in the short run and the long run.

Question 20

What is the shape of the long-run average total cost (LRATC) curve?

Answer 20

U-shaped.

Question 21

What does the downward-sloping segment of the LRATC curve indicate?

Answer 21

Economies of scale (increasing returns to scale) are present.

Question 22

What factors contribute to economies of scale?

Answer 22

• Labor specialization
• Mass production
• Investment in more efficient equipment and technology.

Question 23

What does the upward-sloping segment of the LRATC curve indicate?

Answer 23

Diseconomies of scale are present.

Question 24

What may lead to diseconomies of scale?

Answer 24

• Increasing bureaucracy
• Problems with motivating a larger workforce
• Greater barriers to innovation.

Question 25

What is the minimum efficient scale?

Answer 25

The scale or plant size at which the average total cost of production is at a minimum.

Question 26

What happens to firms that operate at a scale with higher average total costs?

Answer 26

They will experience economic losses and must either leave the industry or change to the minimum efficient scale.

Question 27

What is a condition for constant returns to scale or relatively constant costs across a range of plant sizes.

Answer 27

A relatively flat portion at the bottom of the LRATC curve.

Question 28

Firms facing downward sloping demand curve are called “Price ______. “

Answer 28

Price searcher firms

Question 29

Firms operating in economics of scale can increase competitiveness by________.

Answer 29

Expanding production and reducing costs.

Question 30

Regarding the LRATC curve, average total costs first decrease with larger scale, but eventually ________.

Answer 30

Increase with larger scale

Question 31

What does SRATC n+1 mean in relation to LRATC curve?

Answer 31

Represents a larger scale of operation than SRATC n

Question 32

Each point on LRATC curve that touches SRATC curve represents the _________.

Answer 32

Minimum average total costs for a given plant size or scale of operations.

Question 33

If TC curve exceeds TR, the price searcher firm will want to minimize the economic loss in the short term by _________.

Answer 33

Operating at the quantity corresponding to the smallest (negative) value of TR-TC

Question 34

Break even Points in TR/TC method are ?

Answer 34

Question 35

What is Qmax?

Answer 35

Economic profit maximum.

Question 36

True or False: When computing TR and TC for price searcher firms marginal revenue does equal price.

Answer 36

False. Marginal revenue does not equal price.

Question 37

True or False: For price searching firms we can compare average revenue to ATC & AVC to identify breakeven and shutdown points?

Answer 37

True.

Question 39

In perfect competition, if total revenue just cover both fixed and variable costs price equals both the ______ & ______.

Answer 39

Average revenue and average total costs.