ECON 300 CHAPTER 8 REVIEW QUESTIONS

Suppose your firm operates in a perfectly competitive market and decides to double its output. How does this affect the firm's marginal profit?

Marginal revenue increases but marginal cost remains the same

If current output is less than the profit-maximizing output, which must be true?

Marginal revenue is greater than marginal cost.

At the profit-maximizing level of output, marginal profit

is zero.

Three hundred firms supply the market for paint. For fifty of the firms, their short-run average variable costs are minimized at $10 and short-run total costs are minimized at $15. For the remaining firms, the short-run average variable costs and short-run average total costs are minimized at $20 and $25, respectively. If each firm has a U-shaped marginal cost curve then the short-run market supply curve is

kinked at $20

A firm maximizes profit by operating at the level of output where

marginal revenue equals marginal cost.

Owners and managers

may be different people with different goals, but in the long run firms that do best are those in which the managers pursue the goals of the owners.

In the short run, a perfectly competitive firm earning negative economic profit is

on the downward-sloping portion of its ATC curve.

A firm never operates

on the downward-sloping portion of its AVC curve.

In the short run, a perfectly competitive firm earning positive economic profit is

on the upward-sloping portion of its ATC.

In many rural areas, electric generation and distribution utilities were initially set up as cooperatives in which the electricity customers were member-owners. Like most cooperatives, the objective of these firms was to:

operate at zero profit in order to provide low electricity prices for the member-owners.

Marginal profit is negative when:

output exceeds the profit-maximizing level.

Suppose all firms have constant marginal costs that are the same for each firm in the short run. In this case, the market level supply curve is ________ and producer surplus equals ________:

perfectly elastic, zero

The shutdown decision can be restated in terms of producer surplus by saying that a firm should produce in the short run as long as

producer surplus is positive.

Producer surplus in a perfectly competitive industry is

the difference between revenue and variable cost.

An industry analyst observes that in response to a small increase in price, a competitive firm's output sometimes rises a little and sometimes a lot. The best explanation for this finding is that

the firm's marginal cost curve is horizontal for some ranges of output and rises in steps.

If current output is less than the profit-maximizing output, then the next unit produced

will increase revenue more than it increases cost.

A perfectly competitive hardware manufacturer has total revenue of $85 million, total variable costs of $45 million, and fixed costs of $10 million. What is the firm's producer surplus?

$40 million

An industry has 1000 competitive firms, each producing 50 tons of output. At the current market price of $10, half of the firms have a short-run supply curve with a slope of 1; the other half each have a short-run supply curve with slope 2. The short-run elasticity of market supply is

3/10

Which of the following events does NOT occur when market demand shifts leftward in an increasing-cost industry?

As firms exit, the market price rises and attracts other firms to enter the market.

Suppose a technological innovation

Average fixed cost curve

The "perfect information" assumption of perfect competition includes all of the following except one. Which one?

Consumers can anticipate price changes.

In a constant-cost industry, price always equals

LRMC and minimum LRAC.

Use the following statements to answer this question: I. Markets may be highly (but not perfectly) competitive even if there are a few sellers. II. There is no simple indicator that tells us when markets are highly competitive.

I and II are true

Suppose a plant manager ignores some implicit marginal costs of production so that the perceived MC curve is below the actual MC curve. What is the likely outcome from this error?

Firm produces more than optimal quantity and earns lower profits

Use the following statements to answer this question: I. An increase in the firm's fixed costs will also shift the firm's short-run supply curve to the left. II. An increase in the firm's fixed costs will not shift the firm's short-run supply curve to the right or left, but it may alter how much of the marginal cost curve is used to form the short-run supply curve.

I and II are false.

Consider the following statements when answering this question I. If the cost of producing each unit of output falls $5, then the short-run market price falls $5. II. If the cost of producing each unit of output falls $5, then the long-run market price falls $5.

I is false, and II is true.

Consider the following statements when answering this question I. In the long run, if a firm wants to remain in a competitive industry, then it needs to own resources that are in limited supply. II. In this competitive market our firm's long-run survival depends only on the efficiency of our production process.

I is false, and II is true.

Use the following statements to answer this question: I. Under perfect competition, an upward shift in the marginal cost curve (perhaps due to a higher price for a variable input) also shifts the average variable cost curve upward. II. Under perfect competition., an upward shift in the marginal cost curve (perhaps due to a higher price for a variable input) reduces firm output but may increase firm profits.

I is true and II is false.

Suppose a firm has unavoidable fixed costs of $500,000 per year, and it decides to shut down. What is the firm's producer surplus?

PS is positive in this case, but we cannot determine the value based on the given information

An increasing-cost industry is so named because of the positive slope of which curve?

The industry's long-run supply curve

Suppose we plot the total revenue curve with quantity on the horizontal axis and revenue on the vertical axis (as in Figure 8.1 in the book). Under price-taking behavior, the total revenue curve should be:

a straight line from the origin with slope equal to the market price.

In the short run, a perfectly competitive firm earning negative economic profit

is on the upward-sloping portion of its AVC.

In long-run competitive equilibrium, a firm that owns factors of production will have an

economic profit = $0 and accounting profit > $0.

In the long run, a firm's producer surplus is equal to the

economic rent it enjoys from its scarce inputs.

Suppose your firm has a U-shaped average variable cost curve and operates in a perfectly competitive market. If you produce where the product price (marginal revenue) equals average variable cost (on the upward sloping portion of the AVC curve), then your output will:

exceed the profit-maximizing level of output.

A firm's producer surplus equals its economic profit when

fixed costs are zero.

Generally, long-run elasticities of supply are

greater than short-run elasticities, because firms can make alterations to plant size and input combinations to be more flexible in production.

The long-run supply curve in a constant-cost industry is linear and

horizontal.

One practical implication of a kinked market supply curve is that:

the market supply elasticity for a price increase may be different than the market supply elasticity for a price decrease at the kink point.

If a competitive firm has a U-shaped marginal cost curve then

the profit maximizing output is found where MC = MR and MC is increasing.

The demand curve facing a perfectly competitive firm is

the same as its average revenue curve and its marginal revenue curve.

When the TR and TC curves have the same slope,

they are the furthest from each other.