CFA Practice Question
Refer to the graph below. If this firm were forced to set price equal to marginal cost, it would likely ______
A. charge a price of $1.
B. charge a price of $9.
C. eventually stop producing.
Explanation: It would stop producing because it cannot cover its average costs.
User Contributed Comments 10
| User | Comment |
|---|---|
| wheel | p=mc mc=mr=3 => q=500 atc=4 if q=500 so p=3 and atc=4 => firm cannot cover costs and most likely it would stop producting |
| cbb1 | Since P must be set at MC (per statement) and MC never crosses over AC (Average Cost), it is clear that this is an economic loss under any scenario. The $9 price is only relevant if this was a monopoly where price could be set about MC to meet Demand. |
| labsbamb | ok well understood |
| StanleyMo | hmm, if government subsidy tax, then the company can still produce. |
| copus | good question. I chose A....I think I will need to work a little harder to get that Nobel Prize! |
| kocas | If the firm was not forced, the answer would be B. |
| YOUCANDOIT | You are close wheel but no cigar yet, price does NOT equal MR=MC This question is based on "marginal cost pricing". The gov't forces the firm to charge where PRICE=DEMAND=MC ...so Q=1000 and P=$1 b/c firms incur a loss at this point, they will eventually stop producing since they can cover their average costs(unless gov't also grant them a subsidy to provide incentives to remain in operation) A is correct, C is the better answer. Note: In "average cost priceing" gov't forces firm to charge PRICE=Demand=ATC (Refer to reading 19) at this point , price |
| YOUCANDOIT | ^correction: firms stop producing b/c they CANT cover their AC |
| JoeHoong | I agree with YOUCANDOIT, but think that A is a better answer, because it's more objective, as it is based on the graph. |
| jayj001 | would have thought A and C cover SR and LR respectively and both valid |