The market price of the product produced by Jones Inc, is 6 per unit, which is higher than the average cost of 4 per unit at the profit maximizing output level. The average variable cost of production is 3.5 per unit. If demand for its product declines due to introduction of cheaper substitutes and the market price of the product falls to 3.8 per unit, which of the following statements will be true?
a. The firm will close down in the short run.
b. The firm will continue production as long as the market price is above average variable cost.
c. The firm will continue production as long as the market price exceeds fixed cost.
d. The firm will minimize it losses by producing where average variable cost equals 3.8.
Question 2
One assumption of the model of perfect competition is that entry into the market is easy. This implies that:
a. there are government licensing requirements for a firm to enter the market.
b. there are no significant economies of scale relative to the size of the market.
c. one firm has gained a patent in the industry.
d. significant economies of scale do exist in the industry.
e. there is no government intervention.
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