Which of the following conditions would definitely cause a ...

[dejastew]

Which of the following conditions would definitely cause a perfectly competitive company to shut down in the short run?
 
  A) P < MC
  B) P = MC < AC
  C) P < AVC
  D) P = MR

Question 2

The market for milk is in equilibrium. Recent health reports indicate that calcium is absorbed better in natural forms such as milk, and at the same time, the cost of milking equipment rises. Carefully analyze the probable effects on the market.
 
  What will be an ideal response?

[jojobee318]

Answer to Question 1

C

Answer to Question 2

The heath reports are likely to cause an increase in the demand for milk. Alone, this would increase both the equilibrium price and quantity of milk. The increase in equipment costs will cause a decrease in the supply of milk, and this alone would cause an increase in equilibrium price and a decrease in equilibrium quantity. Taken together, both effects will lead to an increase in price, and thus we can be certain that the equilibrium price will rise. The effect on quantity is unclear as the supply and demand shifts move quantity in different directions.