Ans 1

Fixed costs are sunk costs and so are not considered while making key business decisions. Sunk costs have already been incurred and the firm can't change them no matter what. Only variable costs (VC) are considered while assessing the operational efficiency of the firm in the short-run. If the firm decides to shut down, the VC will be zero but the firm will still have to cover its fixed costs. Thus, the firm will continue to operate as long as it is able to cover its variables costs, that is, if Revenue >/= VC, the firm should continue to operate but if Revenue < VC, the firm should shut down.

However, if the Revenue equals VC, the firm is generating enough revenue to cover only VCs and not fixed costs. And so the firm is indifferent between operating and shutting down because either way the firm will not be able to cover the fixed costs.

The right answer is Option B - total revenue equals total variable cost.

Ans 2

Economies of scale arise when the cost of production comes down as a firm increases its scale of operations. This happens because the fixed costs that the firm was incurring, are now providing for more units of production.

Graphically, economies of scale are represented by a declining/falling Average Cost Curve. So, when Greg's Carpet Factory experiences economies of scale, its Average Cost Curve will fall initially. But when increasing production does not impact the cost of production, constant returns of scale begin to emerge and as a result, the Average Cost Curve becomes flatter. Now, if the firm continues to experience constant returns of scale, the Average Cost Curve will take an L-shape.

The right answer is Option B - L-shaped.

Ans 3

In the short-run, few inputs like capital remain fixed while others are variable. The firm can increase productivity by raising the quantity employed of only the variable inputs like labor. In the long-run, all inputs are variable.

The right answer is Option A -short-run.