Managerial Economics: A Problem Solving Approach
5th Edition
ISBN: 9781337106665
Author: Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher: Cengage Learning
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Question
Chapter 9, Problem 1MC
To determine
Long run.
Expert Solution & Answer
Explanation of Solution
In the long run, firms produce according to the market situations. This would eliminate the excess
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Students have asked these similar questions
(1) Use the graph to answer the question below. The quantity is measured in thousands of units.
What will this firm decide to do in the long run?
A-It will stay in the market because the price is above its AVC at its profit-maximizing output.
B-It will leave the market because the price is below its ATC at its profit-maximizing output.
C-It will increase its price to point B to earn normal profit.
D-It will increase its output until its profit-maximizing output level is equal to B.
E-Insufficient data to determine.
(2) A dairy farmer is operating in a perfectly competitive market. The market price for milk is between the farmer's average variable cost and average total cost at the profit-maximizing level of output. What will the farmer do?
A-Produce more milk. B-Produce less milk. C-Shut down in the short run. D-Operate in the short run and leave the industry in the long run. E-Insufficient information to determine
(3) A firm operating in a perfectly competitive market cannot…
True or False? Briefly discuss.
a. If a firm makes zero economic profit, the firm earns revenue that exceeds its economic costs.
b. If a firm makes zero economic profit, it must shut down.
c. If a firm makes zero economic profit, it can be earning positive accounting profit.
d. If a firm makes zero economic profit, it has no fixed costs.
1. What is profit? What is the difference between accounting profit and economic profit?2. What is the importance of ensuring profit maximization in an organization?
Chapter 9 Solutions
Managerial Economics: A Problem Solving Approach
Knowledge Booster
Similar questions
- Bob's lawn mowing service is a profit maximizing, competitive firm. Bob mows lawns for $27 each. His total cost each day is $280, of which $30 is a fixed cost. He mows 10 lawns a day. What can you say about Bob's economic and accounting profits in the short run ? A. Economic profits are minus $10 and accounting profits are $20 B.Economic profits are $20 and accounting profits are minus $10 C. None Which one?arrow_forwardIf you're a manager in a highly competitive business such where should you put your most effort to maximize profit? Pricing or cost cutting?arrow_forwardWhen are you are you expecting companies to produce in the short run?A. costs equal equal revenueB. price equals marginal revenueC. Average costs equal marginal costsD.marginal revenue equals marginal costarrow_forward
- Explain how short-run economic profits become long-run economic costs. When profits fall to zero, are owners worse off? Why or why not?arrow_forwardI. A company produces at an output level where marginal cost is equal to marginal revenue and has the following revenue and cost levels: Total revenue = $1,450 Total cost = $1,500 Total variable cost = $1,300 What would you suggest? a. Shut down. b. Continue to produce because the loss is less than the total fixed cost. c. Increase production to lower the marginal cost. e. Raise the price. II. At current long-run production levels, the marginal revenue of a competitive firm is $15 and the marginal cost of the firm is $15. If the market is perfectly competitive, the firm should a. cut back on production. b. stop production all together. c. produce more. d. continue producing at current levels.arrow_forwardWould a firm earning zero economic profit continue to produce, even in the long run? In long-run competitive equilibrium, a firm earning zero economic profit A. will not continue to produce because this return is not covering its opportunity costs. B. will not continue to produce because it would be better off shutting down. C. will not continue to produce because such profit corresponds with negative accounting profit. D. will continue to produce because such profit is as high a return as could be earned elsewhere. E. will not continue to produce because it could earn a better return in another industry.arrow_forward
- Which of the following profits represent economic profit? Choose all that apply. a. A restaurant makes $10,000 per month in total revenue. Supplies cost $2,000 per month, and labor costs are $3,000 per month. The restaurant's profit is $5,000. b. During the summer, you make ten go-karts and sell each one for $100. It costs you $200 in supplies You could have made $500 during the summer if you had chosen to deliver phone books. Your total profit is $300. c. A high-end airplane company sells five private jets per year. Each jet is sold for $10 million. The profit margin is 12 percent . If you were to change course and make yachts with the same available resources , you would make no additional profit. d. Your company sells 1, 000 cars per month . Each car costs $20,000 . Your cost for parts is $4 million . Your labor costs are $3 million . Your total profit is $13 million .arrow_forwardMike Wazovsky runs a business that produces marmalade in small jars. He is proud of his business degree and brags a lot about how great and efficient his business is. Mike points that his biggest achievement is that his business currently has ATC < MC < MR. (a) Does Mike make positive profit? How do you know? (b) Is it possible to improve profit in the short-run in Mike's business? If yes, how? if no, why? (c) If Mike were to maximize proft, what will happen with the output of marmalade in Mike's business in the long-run (assuming anyone can easily make similar and same quality marmalade) relative to the current output?arrow_forwardThinking on the Margin to Increase Profitability Have you ever walked into a restaurant for lunch and found it almost empty? Why, you might ask, does the restaurant even bother to stay open? It might seem that the revenue from so few customers could possible cover the cost of running the restaurant. Provide an opinion using the concepts of sunk costs, marginal cost and marginal revenue.arrow_forward
- a. A firm operating in a perfectly competitive market is earning K20 million economic profits. What is the firms accounting profits if the opportunity cost is K30 millionb. What will be the firm’s economic profits in the long run? c. Company ‘A’ has been recording accounting profits averaging K50 million by investing in project C. It could earn K60 million and K70 million in projects D and E, respectively. What is the company’s current economic profit? d. Advise management what to do in the long run e. Project ‘B’ has a net present value of zero after applying a discount rate of 10%, which is the risk adjusted required rate of return that takes into account the riskiness of the project. What return is earned on this project f. After a risk assessment, it is discovered that project ‘B’ has become more risky and the risk adjusted required return to use must be 12%. Will the net present value of project ‘B’ still remain zero?arrow_forwardCaroline opens a lemonade stand for two hours. She spends $15 for ingredients and sells $50 worth of lemonade. In the same two hours, she could have mowed the neighbor's yard and earned $10. a. What are Caroline’s explicit and implicit costs? b. What is Caroline’s accounting profit? What is her economic profit? Show how you calculated each profit.arrow_forwardExplain using diagrams, the law of diminishing returns What is the difference between Economic Profit and Accounting Profit? Which is better to use in business analysis? At what point would a firm shut down its operations Define using diagrams Economies of Scale, Diseconomies of Scale, Constant Returns to scalearrow_forward
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