Question 1
Suppose a perfectly competitive firm is producing a level of output such that its average revenue is less than its lowest average variable cost. The firm should
◦ not change its output.
◦ increase the market price.
◦ expand its output.
◦ reduce its output.
◦ produce zero output.
Question 2
Suppose your trucking firm in a perfectly competitive industry is making zero economic profits in the short run. The federal government imposes a new safety regulation that affects all firms, thus shifting the marginal cost curve upward. As a result your firm's profit maximizing, short-run output will
◦ remain the same since the new regulation does not affect
ATC.
◦ increase as firms will leave the industry at the higher costs, thus driving up the market price.
◦ increase as price rises in the long run.
◦ remain the same because you will pass on the extra costs to the consumers.
◦ decrease because the new
MC curve will intersect the horizontal demand curve at a lower rate of output.
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