Microeconomics Ch.8

Q.R.1 Why would a firm that incurs losses choose to produce rather than shut down?

Losses occur when revenues do not cover fixed costs and variable costs. When revenues can cover variable costs, but not total costs, firms will be better off producing in short run rather than shutting down although they loss. Firms should compare the losses when producing outputs and shutting down, then choose the option that gives the smallest loss. In the short run, if the revenues can still cover the variable costs, losses will be minimized. In the long run, all the costs are variable costs, if firms want to remain in the business, revenues must cover all the costs.

Q.R.9 True or false : A firm should always produce at an output at which long-run average cost is minimized. Explain.

False. Under perfect competition, in the long run, firms will produce at long run average costs are minimized. Firms will adjust the combination of capital and labor in order to minimize average costs. Moreover, prices will be adjusted to close to the minimum average costs because of the entry and exit. However, in the short run, firms may not produce at the optimal long run outputs. For example, if there are any fixed factors of production, firms do not always produce at minimum long run average costs. Firms may produce outputs at the prices that equal to marginal costs and the quantities at these prices will be different from those at the prices at minimum long run average costs.

Q.R.10 Can there be constant returns to scale in an industry with an upward-sloping supply curve? Explain.

Constant returns to scale means the proportional increases in inputs yield the same proportional increase in output. If the supply curves of all inputs are upward sloping, the proportional increases in these inputs will make the prices higher. For example, although inputs that seldom use in production, costs of production will be higher due to production increases in scales. However, firms cannot produce...