Suppose a Firm Is Trying to Decide Whether or Not

question 85

Multiple Choice

Suppose a firm is trying to decide whether or not to temporarily shut down to minimize total loss. If price equals average variable cost, then

• A)total revenue equals total fixed cost, and the loss equals total variable cost.
• B)total revenue equals total variable cost, and the loss equals total fixed cost.
• C)total fixed cost is zero.
• D)total variable cost equals total fixed cost.
• E)total cost equals total variable cost.

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Definitions:

Coase Theorem

A legal and economic theory stating that if trade in an externality is possible and there are no transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property rights.

Transaction Costs

The expenses incurred when buying or selling a good or service, which can include search, bargaining, and enforcement costs.

Marginal Social Benefit

The additional benefit to society resulting from one more unit of a good or service being produced and consumed.

Marginal Social Cost

The total cost society bears for the production of an additional unit of a good or service, including both external and private costs.