"economics"exercise:The Firm and Market Structures

B is correct. An increase in the policy rate will likely raise the potential penalty that banks will have to pay if they run short of liquidity and thereby reduces their willingness to lend.

A is incorrect because commercial banks normally increase their base rates immediately (not gradually) following the announcement of an increased policy rate because they want to avoid the possibility of lending at rates lower than they might be charged by the central bank. Through open market operations, the central bank can essentially force banks to borrow from the central bank at the policy rate.

C is incorrect because an increase in the policy rate will likely lead to a tightening of the money supply and a higher penalty for liquidity shortfalls. As a result, commercial banks will expand their liquidity to avoid potential shortfalls.

B is correct. The optimal output level is 60 units because that level produces the highest profit:

C is incorrect. Although it is the highest price level (with output > 0), marginal revenue exceeds marginal cost, the profit of $45,400 can be further increased by additional output. Notice though that this is the widest spread between MR and MC.

A is incorrect. Although this is the production capacity level, and the highest level of revenue possible, it should not be the chosen output level because total profit can be increased by lowering production to only 60 units.