Using Figure 9.1, explain what a firm would do in the short run if the market price of its product dropped below P1
What will be an ideal response?
The firm would shut down since it would be suffering an operating loss. For the firm to remain in business in the short run the price must be equal to or greater than the average variable cost.
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In a closed economy with fixed output, an increase in government spending without any change in taxes will lead to a(n):
A. increase in the real interest rate and a decrease in private saving. B. decrease in the real interest rate and an increase in private saving. C. decrease in the real interest rate and no change in private saving. D. increase in the real interest rate and no change in private saving.
What situation gives rise to a surplus?
A) The market clearing price of the good is too high. B) The current price of the good is below its market clearing price. C) The current price of the good is above its market clearing price. D) Supply of the good decreases, but the market price is not permitted to change.