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Reply 780

16

A couple of MCQ I am confused with.

A firm earns supernormal profit when its profit is above that
a) earned by competing firms
b) needed to cover its fixedcosts
c) needed to keep the firm in production in the short run
d) required to keep its resources in their present use

A firm produces at AVC = MC. What will happen initially to AVC and ATC as output rises?

AVC ATC
dec dec
dec inc
inc dec
inc inc

What causes the rise in the rate of interest from r1 to r2 (diagram showing 2 LPCs and fixed money supply. Movement to the right of the first LPC, rising interest rate)

a) an increase in national income
b) an increase in the money supply
c) a reduction in investment expenditure
d) a reduction in the loans made by the private sector

Thanks :biggrin:

a brief explanation would be handy, because i got these questions wrong :redface:

and know the right answers, just can't work out why. Maybe if you have different answers, my friend was shouting out the wrong answers :p:

Reply 781

MeAndBubbles

12

d for the first one. Dunno, but the opportunity cost concept comes into play.

Reply 782

The Sherminator

16

well_tempered

d for the first one

Why? I thought C, because I thought that is the level of normal profit so anything above that is abnormal/supernormal profit?

Reply 783

alex_hk90

19

Shrayans

A firm earns supernormal profit when its profit is above that
a) earned by competing firms
b) needed to cover its fixedcosts
c) needed to keep the firm in production in the short run
d) required to keep its resources in their present use

d) A definition of normal profit is that which is required to keep the firm's resources in their present use.
Supernormal or abnormal profit is anything over and above that.
It's similar to transfer earnings and economic rent for an individual.

Reply 784

The Sherminator

16

Ah.. I didn't know that definition of normal profit. Thanks.
Yea, i like that analogy, makes it easier to understand.

Reply 785

The Sherminator

16

The other two anyone?

Reply 786

MeAndBubbles

12

Shrayans

Why? I thought C, because I thought that is the level of normal profit so anything above that is abnormal/supernormal profit?

No, normal profit is for the Long Run. :smile:

Might be a) for the second one, higher natinoal income means higher demand for money, so LPC shifts right.

Reply 787

The Sherminator

16

well_tempered

No, normal profit is for the Long Run. :smile:

Might be a) for the second one, higher natinoal income means higher demand for money, so LPC shifts right.

Ahh... silly me, normal profit recquired to stay in the industry in the long run! :mad:

Yes, it is a). I hate liquidity preference.... annoying topic.
As higher income, shouldn't you demand less money? Because you need less of a proportion of your income?

Reply 788

MeAndBubbles

12

You get paid Friday, and gradually use the money to buy things, so there is an average money holding. If you start the week with a bigger wage, the average money holding/demand for money, is higher.

Reply 789

The Sherminator

16

well_tempered

You get paid Friday, and gradually use the money to buy things, so there is an average money holding. If you start the week with a bigger wage, the average money holding/demand for money, is higher.

Yes, I understand now :smile:

Thanks.

Thats the third question, can you help on the second one?

Reply 790

MeAndBubbles

12

try it yourself, might have a look later

Reply 791

The Sherminator

16

I have. I did a paper, these were the ones I got wrong. lol

Reply 792

MeAndBubbles

12

Shrayans

I have. I did a paper, these were the ones I got wrong. lol

Sorry, it seemed hard that's all. But it's not,lol.

Just think the MC must cut the AVC at the minimum point on the AVC curve. It's straightforward now.

Reply 793

The Sherminator

16

Yea, thats why I put the answer as increasing and increasing.
The answer scheme says increasing and decreasing. I don't understand how ATC can fall?? Doesn't it rise after the point where MC cuts AVC?

Reply 794

MeAndBubbles

12

AVC must rise as you started at the minimum. ATC also rises, because it has reached a mimum already at a lower output. But I don't know why this happens. I'll let some else answer that.

thanks for the rep.

Reply 795

Apagg

13

ATC = AVC +AFC, so if the fall in AFC exceeds the rise in AVC, ATC can fall.

Ignore this though, as if MC is rising then ATC must rise too, as far as I can see

Reply 796

MeAndBubbles

12

Shrayans

Yea, thats why I put the answer as increasing and increasing.
The answer scheme says increasing and decreasing. I don't understand how ATC can fall?? Doesn't it rise after the point where MC cuts AVC?

Yeh, it does in the diagram I have. Maybe there is something else happening.

Reply 797

The Sherminator

16

well_tempered

AVC must rise as you started at the minimum. ATC also rises, because it has reached a mimum already at a lower output. But I don't know why this happens. I'll let some else answer that.

thanks for the rep.