If a Purely Competitive Firm Is Facing a Situation Where

question 42

Multiple Choice

If a purely competitive firm is facing a situation where the price of its product is lower than the average cost, then all of the following apply, except

• A)the firm is suffering losses, and if things are not expected to improve, the firm will leave the industry.
• B)the firm may be earning some accounting profits, but less than what it could earn elsewhere.
• C)other firms will want to enter the industry because of the positive economic profits.
• D)the firm may earn economic profits in the long run if it expands its plant in order to exploit economies of scale.

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Definitions:

Interest-Bearing Note

A debt instrument that obliges the issuer to pay interest to the holder on the principal amount until maturity.

Forward Contracts

Financial derivatives that obligate the buyer to purchase, and the seller to sell, a particular asset at a predetermined future date and price.

Fair Value Hedge

A hedge of the exposure to changes in fair value of an asset or liability, or an unidentified firm commitment, that is attributable to a particular risk.

Cash Flow Hedge

A type of hedge that protects against the variability in cash flows arising from a particular risk, such as interest rate movements or currency fluctuations.