CFA Practice Question

There are 539 practice questions for this study session.

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
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