Microeconomics Chapter 12

The table above gives the total cost information for Hank and Helen's cherry farm. They sell their cherries in a perfectly competitive market, where the price is $6.00 per pound. What is the marginal cost of producing the fifth pound of cherries? A. $16 B. $20 C. $4 D. $8

C. $4 Total cost increases from $16 to $20, which is a $4 increase.

The table above gives the total cost information for Hank and Helen's cherry farm. They sell their cherries in a perfectly competitive market, where the price is $6.00 per pound. If Hank and Helen produce and sell 5 pounds of cherries, what is their total revenue? A. $20 B. $28 C. $6 D. $30

D. $30 Total revenue is $6.00 x 5 = $30.

A firm's decision about whether or not to stay in business should be based on A. its accounting profit. B. its total revenue. C. its total cost. D. its economic profit.

D. its economic profit. This requires that all opportunity costs be taken into account.

The optimal output rule for a price-taking firm is to A. produce at the point at which total revenue equals total cost. B. minimize total cost. C. minimize average cost. D. produce at the point at which price is equal to marginal cost of the last unit produced.

D. produce at the point at which price is equal to marginal cost of the last unit produced. This rule can be used as a guideline even though there will be times when price and marginal cost are not exactly equal.

The graph shows the cost structure of a perfectly competitive firm. What quantity would the firm produce at a market price of $14? A. 24 B. 20 C. 14 D. 22

A. 24 At this point, the firm will earn an economic profit.

A firm's profit is equal to A. total revenue minus total cost. B. marginal revenue minus marginal cost. C. marginal revenue times quantity. D. price times quantity.

A. total revenue minus total cost. Keep in mind that cost is measured as the comprehensive measure of all economic costs.

The graph shows the cost structure of a perfectly competitive firm. When the market price is $11, what is the firm's level of profit? A. $66 B. $0 C. $242 D. $220

B. $0 At a price of $11, the firm will produce at a point at which price equals average total cost.

Which variable(s) can be controlled by the individual perfectly competitive firm? A. Both price and quantity. B. Neither price nor quantity. C. Quantity only. D. Price only.

C. Quantity only. The firm will choose a profit-maximizing quantity in response to the market price.

The change in total revenue generated by one additional unit of output is known as A. optimal revenue. B. incremental revenue. C. dynamic revenue. D. marginal revenue.

D. marginal revenue. The term "marginal" is a standard in economics, referring to a one-unit change.

The graph shows the cost structure of a perfectly competitive firm. At which of the indicated prices would the firm be earning a positive economic profit? A. $6 B. $14 C. $11 D. $9

B. $14 At a price of $14, the firm would produce 24 units and earn an economic profit.

The graph shows the cost structure of a perfectly competitive firm. At which of the indicated prices would the firm continue to operate at a loss throughout the short run? A. $11 B. $9 C. $6 D. $14

B. $9 This price is between AVC and ATC.

If the firm produces a quantity at which total cost exceeds total revenue, then A. economic profit equals accounting profit. B. economic profit is negative. C. economic profit is positive. D. economic profit is zero.

B. economic profit is negative. Such a situation would only exist in the short run in perfect competition, because the losses would encourage some firms to leave the industry.

A firm will be profitable if it produces at a point at which A. price is below average variable cost. B. price is above average total cost. C. price is below average total cost. D. marginal revenue is below average total cost.

B. price is above average total cost. This would mean that total revenue exceeds total cost.

For a perfectly competitive firm, marginal revenue is equal to A. total revenue minus total cost. B. price. C. price times quantity. D. price divided by quantity.

B. price. This is because the firm can sell all it would like at the current market price.

Free entry and exit in an industry guarantees A. that some consumers will be able to negotiate prices below the market average. B. that the number of producers will adjust to changing market conditions. C. that some producers will be able to negotiate prices above the market average. D. that each firm will be selling a product somewhat different from products of other firms in the industry.

B. that the number of producers will adjust to changing market conditions. Entry and exit will occur in response to profitability conditions.

The table above gives the total cost information for Hank and Helen's cherry farm. They sell their cherries in a perfectly competitive market, where the price is $6.00 per pound. If Hank and Helen produce and sell 5 pounds of cherries, what is their profit? A. $ 0 B. $30 C. $10 D. $20

C. $10 Profit equals $30 - $20 = $10.

The graph shows the cost structure of a perfectly competitive firm. At which of the indicated prices would the firm be earning zero economic profit? A. $9 B. $14 C. $11 D. $6

C. $11 This is the one point where price equals average total cost.

The graph shows the cost structure of a perfectly competitive firm. At which of the indicated prices would the firm choose to shut down immediately? A. $14 B. $11 C. $6 D. $9

C. $6 At a market price of $6, the firm would minimize losses by shutting down immediately.

The following diagram shows the market situation for the perfectly competitive market for corn. The corn market is currently at a price that is high enough to generate positive economic profits for perfectly competitive firms in the industry. Part 1: Suppose PLR is the long-run price for this market. Using the copy tool, alter the diagram to show how the market will adjust toward this long-run equilibrium. Part 2: Using a double drop line, identify the new equilibrium quantity-price combination. Label this point E2.

The existence of positive economic profits will induce more firms to enter the market in the long run. The supply will, therefore, increase. You should draw a new supply curve that lies to the right of the original supply curve and which intersects demand at the long-run price. Using the double drop line tool, you should mark this point of intersection as the long-run equilibrium. Review Chapter 12; Section: The Industry Supply Curve.

The following diagram illustrates the cost and revenue situation for a perfectly competitive firm that is maximizing profit. Part 1: Use a double drop line to identify the break-even price and quantity (Qb). Part 2: Use a drop line to identify the shut-down price and quantity (Qs).

The graph shows the marginal cost curve and the average variable and average total cost curves. Remember that since average total cost (ATC) is the sum of average variable cost (AVC) and average fixed cost (AFC) the ATC curve must always lie above the AVC curve. The break-even price would be a price equal to MC at the point where MC crosses ATC. The shut-down price would be a price equal to MC at the point where MC crosses AVC. You may want to refer back to Chapter 12; Section: Production and Profits.