Suppose a Risk-Neutral Competitive Firm Must Produce Output Before the Market

question 101

Multiple Choice

Suppose a risk-neutral competitive firm must produce output before the market price is known.If the uncertain price is given by p = p* + e,where e is a random term with an expected value of zero,a competitive firm should shut down in the short run if:

• A) p* < AVC.
• B) p* + e < AFC.
• C) p* < AFC.
• D) p* < MC.

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Definitions:

Project Profitability Index

The ratio of the net present value of a project’s cash flows to the investment required.

Net Present Values

refers to the calculation that determines the present value of a series of future cash flows by discounting them at a certain rate, often used for assessing the profitability of investments.

Incremental Cost Approach

An analysis method that evaluates the additional costs of making decisions, comparing the costs that change with the decision versus those that do not change.

Purchase Cost

The amount paid to buy goods, materials, or assets.