Question 1
The Razor-Thin Disposable Razor Company is a perfectly competitive firm producing where
MR =
MC. The current market price of a disposable razor is $3.00. The firm sells 1,800 disposable razors. Its
AVC is $2.00 and its
AFC is $1.50. What should Razor-Thin do?
◦ Continue to produce because price exceeds
AVC.◦ Shut down and produce zero razors because price is less than
ATC.◦ Decrease production so that
AVC will decrease.
◦ Increase production so that
AFC will decrease.
Question 2
The Speedy Typesetting Company, a perfectly competitive firm, is currently producing where
P =
MC and is earning a normal profit. The yearly licensing fee that this firm must pay for the use of a statistical software program was just increased from $1,000 to $1,200. In the short run, this firm will most likely
◦ reduce the amount of output it produces because its cost curves have shifted up and to the left.
◦ continue to produce the same amount of output because only its fixed costs have increased.
◦ produce more units of output to increase revenue to cover the additional fixed costs.
◦ shut down because it will no longer be earning a normal profit.
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