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Author Question: True, false, or uncertain? Any firm that is not covering fixed costs should shut down in the short ... (Read 110 times)

NguyenJ

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on: Jul 1, 2018
True, false, or uncertain? Any firm that is not covering fixed costs should shut down in the short run.
 
  Indicate whether the statement is true or false

Question 2

The initial price of a cup of coffee is 1, and at that price, 400 cups are demanded. If the price falls to 0.90, the quantity demanded will increase to 500.
 
  a. Calculate the (arc) price elasticity of demand for coffee.
  b. Based on your answer, is the demand for coffee elastic or inelastic?
  c. Based on your answer to a., if the price of coffee is increased by 10, what will happen to the revenues from coffee? Carefully explain how you know.


Chocorrol77

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Reply #1 on: Jul 1, 2018
Answer to Question 1

False. Fixed costs are sunk and should have no effect on short-run decisions. If a firm is not covering variable costs, it should shut down, because those costs are avoidable.

Answer to Question 2

a. Arc elasticity = -2.11
b. Elastic
c. Revenues will fall. Demand is elastic, and thus a 1 increase in price will lead to a greater percentage decrease in quantity demanded. Revenues fall because the price increase does not make up for the reduction in sales.


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