2. Figure 14-2 shows the cost curves for a typical firm. For a given price (such as P^*), the level of output that maximizes profit is the output where marginal cost equals price (Q^*), as long as price is greater than average variable cost at that point (in the short run), or greater than average total cost (in the long run).

3. A firm will shut down temporarily if the revenue it would get from producing is less than the variable costs of production. This occurs if price is less than average variable cost.

4. A firm will exit a market if the revenue it would get if it stayed in business is less than its total cost. This occurs if price is less than average total cost.

5. A firm's price equals marginal cost in both the short run and the long run. In both the short run and the long run, price equals marginal revenue. The firm should increase output as long as marginal revenue exceeds marginal cost, and reduce output if marginal revenue is less than marginal cost. Profits are maximized when marginal revenue equals marginal cost.

6. The firm's price equals the minimum of average total cost only in the long run. In the short run, price may be greater than average total cost, in which case the firm is making profits, or price may be less than average total cost, in which case the firm is making losses. But the situation is different in the long run. If firms are making profits, other firms will enter the industry, which will lower the price of the good. If firms are making losses, they will exit the industry, which will raise the price of the good. Entry or exit continues until firms are making neither profits nor losses. At that point, price equals average total cost.

1. a. Consumption increases because a refrigerator is a good purchased by a household.

2. Investment increases because a house is an investment good.
3. Consumption increases because a car is a good purchased by a household, but investment decreases because the car in Ford’s inventory had been counted as an investment good until it was sold.
4. Consumption increases because pizza is a good purchased by a household.
5. Government purchases increase because the government spent money to provide a good to the public.
6. Consumption increases because the bottle is a good purchased by a household, but net exports decrease because the bottle was imported.
7. Investment increases because new structures and equipment were built.

2. With transfer payments, nothing is produced, so there is no contribution to GDP.

3. Purchases of new housing are included in the investment portion of GDP because housing lasts for a long time. For the same reason, purchases of new cars could be thought of as investment, but by convention, they are not. The logic could apply to any durable good, such as household appliances.

4. If GDP included goods that are resold, it would be counting output of that particular year, plus sales of goods produced in a previous year. It would double-count goods that were sold more than once and would count goods in GDP in several years if they were produced in one year and resold in another.

7. Economists ignore the rise in people's incomes that is caused by higher prices because although incomes are higher, the prices of the goods and services that people buy are also higher. Thus economists prefer to look at real GDP instead of nominal GDP.

8. Many possible answers.