1. A firm will continue to operate an unprofitable business if _exceeds _cost. 2. Your firm has...

Question:

1. A firm will continue to operate an unprofitable business if _________exceeds _________cost.
2. Your firm has a total revenue of $500, a total cost of $700, and a variable cost of $600. You should _________ (operate/shut down) because _________exceeds.
3. A firm that is losing money should continue to operate in the short run if the market price exceeds_________.
4. Your firm has a price of $5, an average total cost of $7, and an average variable cost of $4. In the short run, you should _________ (operate/shut down) because _________exceeds_________. In the long run, you should _________ (stay in/exit) the market because _________exceeds_________.
5. The break-even price for switchgrass varies with _________, and on average is _________per ton.
6. Changes in the Break-Even Price. Consider a switchgrass farmer whose initial break-even price is$76 = $36 explicit cost + $40 for land. For each of the following changes, explain the effects on the farmer s production cost and break-even price.
a. The cost of fertilizer increases.
b. The market price of alfalfa increases.
7. Advice for an Unprofitable Firm. You€™ve been hired as an economic consultant by a price-taking firm that produces baseball caps. The firm already has a factory, so it is operating in the short run. The price of caps is $5, the hourly wage is $12, and each cap requires $1 worth of material. The firm has experimented with different workforces and the results are shown in the first two columns of the following table
a. Fill in the blanks in the table.
b. Is it sensible to continue to operate at a loss with 14 workers?
c. Would it be better to operate with 15 workers? Explain, using the marginal principle.

8. A Bluffing Farmer? Consider the following statement from a wheat farmer to his workers: The price of wheat is very low this year, and the most I can get for the crop is $35,000. If I paid you the same amount as I paid you last year ($30,000), I d lose money because I also have to worry about the $20,000 I paid three months ago for seed and fertilizer. I d be crazy to pay a total of $50,000 to harvest a crop I can sell for only $35,000. If you are willing to work for half as much as last year ($15,000), my total cost will be $35,000, so I ll break even. If you don t take a pay cut, I won t harvest the wheat. Is the farmer bluffing, or will the farm workers really lose their jobs if they reject the proposed pay cut?
9. Operate or Shut Down? In Figure, suppose the market price of shirts drops to $2. At this price, the marginal principle will be satisfied at a point below point _________on the marginal-cost curve. Price is _________ (less/greater) than AVC, so the firm will be better off _________ (operating/ shutting down). .

Opportunity Cost
Opportunity cost is the profit lost when one alternative is selected over another. The Opportunity Cost refers to the expected returns from the second best alternative use of resources that are foregone due to the scarcity of resources such as land,...