Biology Forums - Study Force

Music.com is earning a total revenue of 100,000 per year. Its annual total fixed costs are 50,000 and its annual total variable costs are 175,000 . What is the operating profit for Music.
 
  com? What is economic profit? Is this firm doing the right thing by continuing to produce in the short run? If conditions don't change what should this firm do in the long run?

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Ques. 2

Books.com is earning a total revenue of 200,000 per year. Its annual total fixed costs are 50,000 and its annual total variable costs are 75,000 . What is the operating profit for Books.com? What is economic profit?
 
  What will be an ideal response?

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Ques. 3

Explain the income and substitution effects of an increase in the interest rate on savings.
 
  What will be an ideal response?

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Ques. 4

For a monopoly able to perfectly price discriminate, the marginal revenue curve coincides with the demand curve.
 
  Indicate whether the statement is true or false

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Ques. 5

Attempts to create a monopoly by having favorable laws passed are examples of rent seeking.
 
  Indicate whether the statement is true or false

(Answer to Q. 1)  Operating profit is revenue minus variable costs (100k - 175k) equals operating profit of -75k. Economic profit is revenue minus total costs (100k - 225k) equals profit of -125k i.e., a loss. This firm should shut down in the short run since it is not minimizing its losses by producing. In the long run this firm should exit the industry.

(Answer to Q. 2)  Operating profit is revenue minus variable costs (200k - 75k) equals operating profit of 125k. Economic profit is revenue minus total costs (200k - 125k) equals economic profit of 75k.

(Answer to Q. 3)  If the interest rate rises, the substitution effect will lead to an increase in saving because the relative cost of current consumption increases. The income effect will cause a decrease in saving because it will require less saving today to reach the target consumption level in the future. Therefore, the effect of an increase in the interest rate on saving is indeterminate.

(Answer to Q. 4)  TRUE

(Answer to Q. 5)  TRUE

Passed my quiz with this!