Consider a price-taking firm with a minimum efficient scale that is greater than zero. Using a graph, explain how the firm's supply curve is derived. What happens to the firm's supply curve if the cost of producing each unit decreases by $10? Show this in a graph.
What will be an ideal response?
Refer to Figure 9.9. The firm won't produce any output as long as the price of the product is less than ACmin. This is represented by the vertical line from 0 to ACmin. For a price-taking firm, marginal revenue is equal to the product price. Therefore, the firm maximizes profit by producing the level of output for which P = MC. Graphically, when price exceeds ACmin, the firm's supply curve will be determined by its MC curve. In the figure, when price is P1, the firm will supply Q1 units of output. When price rises to P2, the firm increases output to Q2.
The firm's supply curve is thus the vertical line from 0 to ACmin plus the portion of the MC that lies above the AC curve.
If the firm's costs decrease by $10 per unit of output, both MC and AC will decrease by $10. As a result, the firm's supply curve will shift down by $10. See Figure 9.10.
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To reduce the principal-agent problem,
A) managers can take on more risk than they disclose to investors. B) managers can inflate profits on financial statements. C) boards-of-directors can tie the salaries of top management to the profitability of the firm. D) managers can hide liabilities by not disclosing them on financial statements.
Society faces a trade-off in all of the following situations except
A) when deciding who will receive the goods and services produced. B) when deciding how goods and services will be produced. C) when some previously unemployed workers find jobs. D) when deciding what goods and services will be produced.