Econ Mirco Chap. 6

Average revenue is:

all of the listed choices are correct.

Let's suppose that a baseball team sold four million tickets last year at an average price of $10 (hypothetical example). The franchise's other revenue was $45 million. Its operating costs was $77 million. Assuming it had no other costs or revenues, how much profit did it make?

$8 million.(The revenue from tickets was $40 million (4 million times $10). The revenue from other sources was $45 million. So total revenue was $85 million. Total costs were $77 million. Therefore, total profits were $85 million minus $77 million = $8 million.)

Consider the above table with output and total cost data for a purely competitive firm. If the market price that this firm faces is $110, then the profit maximizing (or loss minimizing) output is:

28 (Profit is total revenue minus total cost. Calculate this for every output and see for which output it is greatest. Another way to calculate maximum profit is to compute marginal revenue, and then to see at which output marginal revenue is closest to marginal cost (contingent upon the profit-maximizing conditions - see profit-maximizing rule).

Let's suppose that a perfectly competitive firm can produce a product in the following quantities: 0, 10, 20, 30, 40, 50, and 60. And let's suppose that the marginal revenues and marginal costs at these quantities are as follows: at quantity 10, marginal revenue is $14 and marginal cost is $30; at quantity 20, marginal revenue is $14, and marginal cost is $13; at quantity 30, marginal revenue is $14, and marginal cost is $10; at quantity 40, marginal revenue is $14, and marginal cost is $13; at quantity 50, marginal revenue is $14, and marginal cost is $14.35; at quantity 60, marginal revenue is $14 and marginal cost is $16. According the the profit-maximizing rule, at which quantity does the firm have its greatest profits or the least amount of loss?

40

Let's suppose that a perfectly competitive firm has the following demand and cost data. At output 40, marginal revenue is $6, and marginal cost is $2.50. At output 41, marginal revenue is $6, and marginal cost is $3.00. At output 42, marginal revenue is $6, and marginal cost is $4.00. At output 43, marginal revenue is $6, and marginal cost is $5.50. At output 44, marginal revenue is $6, and marginal cost is $6.40. At output 45, marginal revenue is $6, and marginal cost is $7.25. At output 46, marginal revenue is $6, and marginal cost is $9.50. How many products should the firm produce in order to maximize its profits? You can assume that the firm's price is greater than its average variable cost.

43

In any industry, which of the following condition(s) must be satisfied for a firm to maximize its profits?

All of the listed choices are conditions for profit-maximization.

Which of the following is the "golden rule" of profit-maximization?

First make sure that price exceeds the average variable cost (otherwise shut down); then look for the output at which a rising MC is equal to or comes closest to (without exceeding) MR.

Which of the following companies are the most likely to operate in a market structure called perfect competition?

Internet companies selling computer parts online.

Which of the following is a correct method for calculating profit and average profit?

Profit is total revenue minus total cost and average profit is total profit divided by the output produced.

Scenario I: Let's assume that the price of a video game that is sold in a perfectly competitive market, and for which the cost functions are given above, is $11. What is the profit-maximizing (or loss-minimizing) output and profit (loss) of this firm? Scenario II: Same question if the price of the game drops to $7.50. Scenario III: Same question if the price of the game falls to $5.00. Which of the following respective answers is correct?

Scenario I: output = 35; Scenario II: output = 15; Scenario III: output = 0.

What typically happens in a free market, when firms in pure competition earn above normal, or positive, economic profits?

The positive economic profits attract other suppliers to the market. This increases total supply and lowers the market price. In the long run, positive economic profits disappear.

Graphically, a firm's shut down point occurs:

at the bottom point of the AVC (average variable cost) curve.

In the long run, firms in a perfectly competitive industry operate at an output where:

average total cost is at its lowest point and economic profits are zero.

A firm's total revenue (TR) is:

equal to the price of the product (P) times the number of products sold (Q). (Total Revenue = P x Q.)

Firms that are monopolistically competitive:

face a substantial amount of competition. (Monopolistically competitive firms face significant competition. Firms in these industries are relatively small, and the barriers to enter a monopolistically competitive firm are low. The products they offer can be of very high quality.)

Graphically, a firm's profit-maximizing output can be found by

identifying the intersection of the non-falling part of the MC curve and the MR curve and making sure that the price of the product is greater than the average variable cost

It is not likely that firms in pure competition charge excessive prices and make excessive profits in the long run because

if firms in pure competition make excessive profits in the short run, then new firms will enter the industry, supply will increase, and the price will come down.

A firm in any industry should shut down (close down temporarily) when:

its average variable cost exceeds its price.

Most companies in the United States operate in a

monopolistically competitive or oligopoly market structure. (A purely competitive market, because of the way it is defined, is practically non-existent. Monopolistically competitive and oligopoly industries are much more prevalent.)

Please fill in the blanks. If a firm's average cost is greater than its price, then its profits are ______________. If a firm's average cost is less than its price, then its profits are ______________. If a firm's average cost equals its price, then its profits are ______________. If a firm's average VARIABLE cost is greater than its price, then ________________.

negative; positive; zero; the firm should temporarily shut down.

Firms in perfect competition are usually:

not excessively profitable in the long run. They have normal profits.

Calculate this firm's profit maximizing quantity and profit (or loss) when the market price of the computer software equals $59.

quantity = 60; profit = -$160