Suppose a Typical Firm in a Competitive Industry Has the Following

question 10

Multiple Choice

Suppose a typical firm in a competitive industry has the following data in the short run: price = $5000; output = 1 million units; ATC = $5300; AVC = $4750.What will likely happen in the long run?

• A)In the long run the industry will expand because firms are earning economic profits.
• B)In the long run the industry will contract because firms are suffering losses.
• C)The size of the industry will remain the same in the long run.
• D)Consumers will avoid this industry because firms are suffering losses.
• E)There is not enough information to formulate an answer.

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Definitions:

Straight-Line Depreciation

A method of calculating the depreciation of an asset which assumes the asset will lose an equal amount of value each year over its useful life.

Payback Period

The amount of time it takes for an investment to generate an amount of income or cash equivalent to the cost of the investment.

Incremental After-Tax Income

The additional net income that results from implementing a new project or decision, after accounting for taxes.

Present Value Factors

Factors used to calculate the present value of a future amount of money or stream of cash flows, considering the time value of money.