1. Suppose you are the manager of a domestic firm that uses an imported product as an input in your production process. Now suppose the domestic government decides to remove a tariff on those imported products. Explain what will happen to your firm's costs. What will happen in the market for the good you produce?
2. Suppose you are the manager of a domestic firm producing a good which is a substitute for an imported good. Further suppose that the domestic government decides to impose a quota on the imported good. Explain what will happen to the demand for the good you produce and what will happen to the price of the good you sell and the amount sold.
3. Just answer the following questions. No explanation necessary.
a. If MP is at its maximum, then what is at its minimum?
b. If AP is at its maximum, then what is at its minimum?
c. If MC is falling then what is MP doing?
d. If MC is greater than AVC, then what will happen to AVC if the firm increases output?
e. As output increases, what happens to total fixed cost?
4. True or False. Explain. "A firm should always build the plant that will allow it to operate at the minimum of LRAC. After all, if it operates there it is taking advantage of the economies of scale in production."
Suppose you're the manager of a perfectly competitive firm and know the following:
Market Price: $5
Current Output Level: 1,000 units
Average Variable Cost at current output level: $3
Marginal Cost at current output level: $5
Total Fixed Cost: $5,000
a. Should the firm continue to produce? Why or why not?
b. Is the firm currently producing the correct output level? Why or why not?
c. Is the firm earning a positive profit? Why or why not?