A purely competitive firm is faced with a marginal revenue curve ...

[ts19998]

A purely competitive firm is faced with a marginal revenue curve that lies everywhere below the average variable cost curve. Would this firm be able to operate in the short run? Explain.
 
  What will be an ideal response?

Question 2

In 1999, both the equilibrium price and equilibrium quantity of widgets increased. Use supply and demand analysis to explain how these changes could have occurred.
 
  What will be an ideal response?

[Viet Thy]

Answer to Question 1

In order to operate in the short run the firm would have to enjoy at least an operating profit. In this case the firm would never have total revenue that would exceed total variable cost. Therefore, it should shut down.

Answer to Question 2

There are two possible causes of the increase in price: an increase in demand or a decrease in supply. If demand increases, equilibrium quantity also rises. Thus, this could be the cause of the changes in the widget market. On the other hand, a decrease in supply raises equilibrium price but lowers the equilibrium quantity sold. This means that it could not be the cause of the change described. Therefore, the change described in the widget market must have been caused by an increase in the demand for widgets.

[ts19998]

Excellent

[cici]

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