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Reply 780

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

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

Reply 782

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

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

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

Reply 785

The other two anyone?

Reply 786

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

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

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

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

try it yourself, might have a look later

Reply 791

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

Reply 792

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

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

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

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

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

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.


So they should both rise? Thats what I have been thinking as well... but the answer says otherwise....

No probs :smile:

Reply 798

It might be a typo in the mark scheme

Reply 799

Who is the author of the questions? It's almost certainly wrong.

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