Average total costs???

Question

If Carol's Crayon Factory's price exceeds its average total cost in the short run, then
A. it should shut down
B. it is earning a profit
C. profits are being maximized
D. it should increase output
E. it should decrease output

Answer 1

In this question, the term "average total cost" means the total amount of money that Carol has to pay to make her crayons. Price means that price that Carol charges for her crayons. Therefore, Carol's price minus Carol's cost equals Carol's profit or loss. Since the question says that Carol's price is more than her cost, then we know:

The answer is "B" -- Carol's factory is earning a profit. Here's why.

If the price of crayons is more than the cost of making them, then there is a profit. Under the law of supply and demand, price is determined by only two factors: supply (how many crayons are for sale by all factories) and demand (how many crayons the public wants to buy). Notice that the "cost" of making crayons is not a factor in the price of crayons, but "cost" is a factor in profit, because price minus cost equals profit.

With this background, let's look at each choice:

"A" is not correct. Since Carol is making a profit, she should not shut down her factory.

"B" is correct, as noted above. Since Carol's price is more than her cost, she is making a profit.

"C" is not correct, simply because we do not have enough information to determine what would happen if Carol increased or decreased her sales price. If she increased her price for crayons, there are two possibilities: (1) her profit would increase, or (2) her profit would decrease. If the result were (2), then this answer, "C", would be correct. But we don't know whether (1) or (2) would happen, so the answer "C" is not correct.

"D" is not correct, for much the same reason: we do not have enough information to determine what would happen if Carol increased or decreased her output. The total output by all factories is called "supply". If Carol increased her output, there are two possibilities: (1) her profit would increase, or (2) her profit would decrease. If the result were (1), then this answer, "D", would be correct: Carol should increase her output, because that would increase her profit. But we don't know whether (1) or (2) would happen, so the answer "D" is not correct.

"E" is not correct, for exactly the same reason that "D" is not correct.

Please spend a few minutes reading and thinking about this, and it should be clear. If not, then please re-post and we'll try to answer your additional questions.

Hope this helps.

Answer 2

These are too easy , even without doing the reading .
If you can't answer these simple questions for your homework ,
And can't manage to read the text ,
You may wish to switch to another class .

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