When a Firm Produces a Product That Creates External Costs

question 22

Multiple Choice

When a firm produces a product that creates external costs

• A) the firm produces a level of output larger than would be produced without the external cost.
• B) the firm produces a level of output smaller than would be produced without the external cost.
• C) the firm produces a level of output which would be the same as it would produce without the external cost.
• D) the market provides the efficient level of output even with the existence of the external cost.

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Definitions:

Long-Run Equilibrium

A situation where all factors of production and costs are variable, and all firms in a market are earning zero economic profit, indicating no incentive for market entry or exit.

Competitive Firm

A company operating in a market where there are many buyers and sellers, none of which can influence the market price.

Average Fixed Cost

The fixed costs of production (costs that do not change with the level of output) divided by the quantity of output produced.

Minimum AVC Point

The level of output at which a firm's average variable cost (AVC) is minimized.