Suppose the production of helicopters is an industry characterized by increasing returns to scale and an Argentine firm, Cicare, is the only player in this market. The firm caters to the global market and earns a profit of $10 million. Flettner, a German firm has been considering entering this market for a while, but it is aware that its entry will cause each firm to lose about $4 million
Although a government subsidy allows Flettner to enter the helicopter market, the company is unable to reap profits in the long run. Which of the following could have led to this outcome?
a. Flettner experienced high production costs due to inadequate supply of inputs.
b. New firms had entered the helicopter industry.
c. The German government ran a balance of payment deficit.
d. The Argentine government retaliated by subsidizing Cicare.
e. There was very low investment in research and development in this industry.
d
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The aggregate demand curve is Y = 75 - 3?, and the short-run aggregate supply curve is ? = 6.2 + 0.8(Y - 70). Assuming adaptive expectations, calculate the inflation rate and output for the next period
What will be an ideal response?
A firm is currently producing at the point where MC = MR. The situation for the firm at this point is P = $5, Q = 100, ATC = $6, AVC = $4.50. What do you recommend this firm do?
A) Increase production above the current output rate, because MC = MR at this rate of output. B) Continue to produce the current output rate, because P > AVC. C) Shut down, because AVC > P. D) Shut down, because ATC > P.