Question

Multiple choice
1. If a business firm is not operating at the point where MR = MC, then:
a. it should shut down.
b. it cannot be earning a profit.
c. its profit is zero.
d. it is not earning the maximum potential profit.

2. If, at the point where MR = MC, the firm incurs losses, in the short run the firm should:
a. shut down.
b. decrease output.
c. continue at its current output if P > AVC.
d. continue at its current output if P > ATC.

Answer 1

1. If a business firm is not operating at the point where MR = MC, then:
d. it is not earning the maximum potential profit.
Because MC = MR is profit-maximizing condition.
2. If, at the point where MR = MC, the firm incurs losses, in the short run the firm should:
c. continue at its current output if P ¬> AVC.
In such way it will cover its variable costs.