Economics: Ch 7.1: How Perfectly Competitive Firms Make Output Decisions
Dynamo Industries sold 80 packages of fireworks at a market price of $30 per package. If the firm earned a $2,000 profit, then what is the firm's average total cost?
$5 Profit= (Price×Quantity) - (Average Total Cost×Quantity) $2,000=$30×80−ATC×80 $25=$30−ATC ATC=$5
Which of the following are characteristics of a perfectly competitive market?
- Many firms produce identical products - Many buyers are available to buy the product and many sellers are available to sell the product - Sellers and buyers have all relevant information to make rational decisions about a product - Firms can enter and exit the market without any restrictions.
If a firm's total revenue is equal to $1,050 and its total costs are equal to $2,000, then what are its profits (or losses)?
-$950 Profit=$1,050−$2000=−$950
The table below represents a firm's profit for producing and selling flags. Assume that if a firm would have the same profit at two different levels of output, then the firm would choose the greater level of output. Assume that the only levels of output that the firm can produce are the levels of output given in the table. At what level of output does the firm maximize profits?
16 Flags The profit-maximizing output choice for a perfectly competitive firm occurs at the level of output where marginal revenue is equal to marginal cost.
In the graph below, what does the shaded area represent?
Economic Profit Marginal revenue is equal to price, which is above average total cost. Because of this, the shaded area represents economic profit. This rectangle is given the the equation: Profit = (P - ATC) * Q where (P - ATC) is the height of the rectangle and Q is the length.
In a perfectly competitive market, there are limited amounts of buyers and sellers in the industry.
False In a perfectly competitive market, many firms produce identical products, many buyers are available to buy the product and many sellers are available to sell the product, sellers and buyers have all relevant information to make rational decisions about a product, and firms can leave the market without any restrictions.
Use the table below to determine the marginal revenue (MR) and price (P) for Company X selling a product in a market under perfect competition. Company X Total Revenue Quantity (Q) Total Revenue 25 $300 50 $600 75 $900 100 $1200
MR = $12 Price = $12 MR First, solve for marginal revenue. Below is the equation to solve for marginal revenue. Marginal revenue = the change in total revenue / the change in quantity. (1200−300) / (100 - 25) or 900/75 = $12 PRICE Since this market is under perfect competition, marginal revenue equals price because the revenue generated with the additional sale of one more unit is equal to the price of that product. Therefore the price is $12.
Assume for a perfectly competitive firm the market price of one box of tissues is $4. What is the marginal revenue when sales increase from 100 boxes to 200 boxes?
MR = $4 MR= ΔTR / ΔQ MR= (200*4) - (100*4) / 200 - 100
The market price of one package of raspberries sold in a perfectly competitive market is $7. Based on this information, what is the marginal revenue of increasing production from 30 packages to 45 packages?
MR = $7 TR=Q×P TR at 30 packages sold=$7×30=$210 TR at 45 packages sold=$7×45=$315 MR= ΔTR / ΔQ = 315−210 / 45−30
A firm sells peanuts in a perfectly competitive market. Upon increasing production output from 60 packages to 75 packages, the total revenue increased from $300 to $375. What was the marginal revenue of this increase in production?
MR = 5 Marginal revenue is calculated by dividing the change in total revenue by the change in quantity. In this case, the total revenue increased by $75 in response to a quantity increase of 15. The marginal revenue is $75/15=5.
In a perfectly competitive market
Marginal revenue equals the change in total revenue divided by the change in quantity. This implies that the marginal revenue is equal to the market price. Every time a consumer demands one more unit, the firms sell one more unit and revenue goes up by exactly the market price. the demand curve is a horizontal line at the market price.
A perfectly competitive firm, Firm A, recently found out that the market price for the good they produce is decreasing to it's shutdown point. To what price is the good decreasing?
P = $4 The intersection of the average variable cost curve and the marginal cost curve, which shows the price below which the firm would lack enough revenue to cover its variable costs, is called the shutdown point. This point on the graph above is at price equals $4.
The table above shows a demand schedule for a product produced by a monopolist. At which price is the total revenue the highest? $2 20 $4 16 $6 12 $8 8 $10 4
P = $6 Total revenue is maximized when price is $6. Total revenue is equal to price times quantity. TR=P×Q At a price of $2, total revenue is $2(20)=$40. At a price of $4, total revenue is $4(16)=$64. At a price of $6, total revenue is $6(12)=$72. This is the greatest total revenue. At a price of $8, total revenue is $8(8)=$64. At a price of $10, total revenue is $10(4)=$40.
For the company represented in the figure below, what is the shutdown point?
Price = $40 Quantity = 8 The intersection of the average variable cost curve and the marginal cost curve, which shows the price below which the firm would lack enough revenue to cover its variable costs, is called the shutdown point. This point on the graph above is at price equals $40 and quantity equals 8.
It costs a firm that sells blueberry jam $6 to sell a single jar of jam. This firm makes $10 in revenue from each jar of jam it sells. If this firm sells 10 jars of jam, what is its total profit?
Profit $40 Profit equals total revenue minus total cost. Total Profit=Total Revenue-Total Cost =(10×$10)−(10×$6) =$100−$60 =$40
At a price of $10 a firm is willing to sell 100 units of output. At this level of output, it costs the firm an average of $10 to produce a unit of output. What is the total profit of the firm?
Profit = $0 Profit =(P−ATC)∗Q = ($10−$10)∗100 = 0
Looking at the table below calculate profit for this firm in a perfectly competitive market if 20 items were sold and average total cost per item at quantity 20 was $4.50. 5$6 10$6 15$6 20$6 25$6
Profit = $30 profit = (price-average total cost) × quantity =($6.00-$4.50)×20 =$30
Average profit, or profit divided by quantity, is also known as
Profit Margin
At which whole number quantity (Q) of output is profit maximized 1, 2, 3, or 4?
Q = 2 Profit equals total revenue minus total cost. As seen on the graph, total revenue is greater than total cost at quantity 2. Therefore profits are maximized at Q=2.
Using the table below, determine the profit-maximizing output level (output level that produces the most profit) for this firm. At Q=1, profit=TR-TC=10−8=$2 At Q=2, profit=TR-TC=15−10=$5 At Q=3, profit=TR-TC=20−11=$9 At Q=4, profit=TR-TC=25−15=$10 At Q=5, profit=TR-TC=30−25=$5 Notice the greatest profit at Q=4 where profit=$10. At Q=4 profit is maximized.
Q = 4
The company Econislife is deciding what output level will provide profit-maximization. According to the graph below, what level of output will maximize profit?
Q = 40 Profit is maximized when total revenue is furthest above the total cost on a graph. At an output of 40 units profit is greatest; the output of 40 maximizes profits.
The table below represents a firm's profit for producing and selling Blu Ray players. Using the marginal costs and marginal revenues provided, at what level of output does the firm maximize profits? Where: MC = MR or MC = $4 and MR = $4
Q = 80
Take a look at the graph below. The shutdown point for this firm is at which quantity? Enter the letter of the point in the answer box.
Shutdown Point Quantity = 4 The intersection of the average variable cost curve and the marginal cost curve, which shows the price where the firm would lack enough revenue to cover its variable costs, is called the shutdown point. On this graph that point is at quantity = Q.
A firm that sells baseballs has estimated that at its current level of production its variable costs are $70 while its fixed costs are $50. The firm has sold $300 worth of baseballs this year. What is the firm's total profit?
Total Profit = Total Revenue - Total Cost Total Profit=$300−($70+$50) Recall that total costs are equal to fixed costs plus variable costs. Total Profit=$180
It costs a computer firm, on average, $24 to produce a single computer. This firm makes $176 in revenue from each computer it sells. Assume this firm sells 15 computers, what is its total profit?
Total Profit = Total Revenue - Total Cost Total Profit= Price×Quantity - Average Total Cost×Quantity Total Revenue=15x$176=$2,640 Total Cost=15x$24=$360 Total Profit = Total Revenue - Total Cost=$2,640−$360=$2,280
Firms make decisions regarding how to operate based on an industry's market structure.
True Firms make decisions based on the industry's market structure, which is defined by how many sellers are in the market, how easy or difficult it is for a new firm to enter the market, and the types of products sold in the market.
Why is a perfectly competitive firm called a "price taker"
because the market determines the price at which the firm must sell its product
A firms supply curve is equal to _________________ above the minimum point on the ________________curve.
marginal cost; average variable cost the marginal cost curve above the minimum point on the average variable cost curve becomes the firm's supply curve.
Which of the following accurately explains why firms in perfectly competitive markets are price takers?
the pressure of competition forces all firms to accept the prevailing equilibrium price in the market. A perfectly competitive firm is known as a price taker, because the pressure of competing firms forces them to accept the prevailing equilibrium price in the market. If a firm in a perfectly competitive market raises the price of its product by so much as a penny, it will lose all of its sales to competitors.
Which of the following does not apply to an industry's market structure?
who the CEO of the largest company is Firms make decisions based on the industry's market structure, which is defined by how many sellers are in the market, how easy or difficult it is for a new firm to enter the market, and the types of products sold in the market.
