The Owner of Tie-Dyed T-Shirts, a Perfectly Competitive Firm, Hires

question 89

Multiple Choice

The owner of Tie-Dyed T-shirts, a perfectly competitive firm, hires you to give him economic advice. He tells you that the market price for his shirts is $15 and that he is currently producing 200 shirts at an AVC of $10 and an ATC of $20. You tell him he should continue to operate in the short run because

• A) he is earning an economic profit of $4,000.
• B) his loss from operating in only $2,000 which is less than his loss if he shuts down.
• C) he has to pay this fixed costs of $2,000 if he shuts down which is greater than his loss when he operates.
• D) In fact you do not tell him to operate-he should shut down since he has a loss.

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Definitions:

Real GDP

Gross Domestic Product adjusted for inflation, measuring the value of goods and services produced in an economy at constant prices.

Business Quarters

Divisions of the fiscal year into four equal parts, typically three months each, used by businesses to report earnings and assess performance.

Demand-Pull Inflation

An economic condition where prices rise because the demand for goods exceeds supply.

Cost-Push Inflation

Inflation caused by an increase in the cost of production, such as higher raw material costs, which is passed on to consumers in the form of higher prices.