Microeconomics Lecture #12

The table shows total cost and total revenue information for a perfectly (or purely) competitive firm. If this firm chooses to operate, what will its profit equal? Enter a negative number for a loss.

$-420

Uncle Jeremey's farm has costs and revenue as seen in the graph. What price will Uncle Jeremy receive per unit at the profit-maximizing level of output?

$3

The table shows total cost and total revenue information for a perfectly (or purely) competitive firm. Firms earning a loss will sometimes shut down in the short run. What quantity will the firm produce if it shuts down in the short run?

0 units

The table shows the cost and revenue information for a perfectly (or purely) competitive firm that produces external hard drives. Use whole numbers. When profit maximizing, what is the firm's profit?

14 units Proft = $1,400 - $400 = $1,000

The table shows the cost and revenue information for a perfectly (or purely) competitive firm that produces external hard drives. Use whole numbers. Production of how many units would yield the lowest profits?

17 units Profit = $1,700 - $874 = $826

The graph shows the relevant curves for an individual firm in a perfectly (or purely) competitive industry. Adjust the horizontal price line to show a price at which the firm will shut down immediately.

A firm will shut down with certainty when price falls below AVC. A price this low means that the firm is experiencing a loss (because P is less than ATC) and should not stay open while earning this loss (because P is less than AVC).

The long-run industry supply curve in _____ is upward sloping. A. An increasing-cost industry B. A decreasing-cost industry

A. An increasing-cost industry An industry whose long-run industry equilibrium price is higher means average costs have increased and the LRIS is upward-sloping.

Classify the assumptions according to whether or not each item is an assumption made under perfect competition (also known as pure competition or competitive industry). Price-taking behavior A. Assumed in perfect competition B. Not assumed in perfect competition

A. Assumed in perfect competition

The graph shows the marginal cost (MC), average total cost (ATC), and marginal revenue (MR) curves for a perfectly (or purely) competitive firm. Note that the demand (D) curve is the same as the MR curve for such a firm. Assume that the cost curves are representative of other firms in the industry. What is going to happen to the price of this product? A. It will increase B. It will decline C. It will stay the same

A. It will increase

Classify the assumptions according to whether or not each item is an assumption made under perfect competition (also known as pure competition or competitive industry). Significant barriers to entry A. Not assumed in perfect competition B. Assumed in perfect competition

A. Not assumed in perfect competition

The graph shows the marginal cost (MC), average total cost (ATC), and marginal revenue (MR) curves for a perfectly (or purely) competitive firm. Note that the demand (D) curve is the same as the MR curve for such a firm. Assume that the cost curves are representative of other firms in the industry. In the long run, this market will A. experience exit by some firms B. experience entry of additional firms

A. experience exit by some firms

The hypothetical production data is for a profit-maximizing firm. Suppose the market price falls from $200 to $182 and the firm does not shut down. True or False: If the market price is $160, then the firm will shutdown.

Average Total Cost = Total Cost / Quantity 0 units ATC = $10,000 / 0 = 0 100 units ATC = ($10,000 + $18,000) / 100 = $280 200 units ATC = ($10,000 + $30,000) / 200 = $200 300 units ATC = ($10,000 + $46,000) / 300 = $186.67 400 units ATC = ($10,000 + $66,000) / 400 = $190 500 units ATC = ($10,000 + $92,000) / 500 = $204 Average Variable Cost = Total Variable Cost / Quantity 0 units AVC = 0 100 units AVC = $18,000 / 100 = $180 200 units AVC = $30,000 / 200 = $150 300 units AVC = $46,000 / 300 = $153.33 400 units AVC = $66,000 / 400 =$165 500 units AVC = $92,000 / 500 = $184 A firm may continue to operate in the short-run and earn a negative economic profit when the price falls somewhere between the minimum of the average variable cost and the minimum of the average total cost. $153.33 < $160 < $186.67 False The firm will continue to operate at a market price of $160

The long-run industry supply curve in _____ is downward sloping. A. An increasing-cost industry B. A decreasing-cost industry

B. A decreasing-cost industry A lower price implies lower average costs, and a downward-sloping LRIS, which is known as a decreasing-cost industry.

Classify the assumptions according to whether or not each item is an assumption made under perfect competition (also known as pure competition or competitive industry). Firms selling a similar but differentiated good A. Not assumed in perfect competition B. Assumed in perfect competition

B. Assumed in perfect competition

The graph shows the marginal cost (MC), average total cost (ATC), and marginal revenue (MR) curves for a perfectly (or purely) competitive firm. Note that the demand (D) curve is the same as the MR curve for such a firm. Assume that the cost curves are representative of other firms in the industry. Given the current price, this firm will A. Earn a positive economic profit B. Earn a negative economic profit C. Earn zero economic profit

B. Earn a negative economic profit ATC is higher than the price. This means that it costs the firm more to produce each unit than it receives from buyers.

Which choice is not a characteristic of a competitive market? A. Little or no barriers to entry B. Firms have some degree of control over prices C. A large number of firms offering similar products D. Firms sell similar products

B. Firms have some degree of control over prices

Classify the assumptions according to whether or not each item is an assumption made under perfect competition (also known as pure competition or competitive industry). A small number of producers A. Assumed in perfect competition B. Not assumed in perfect competition

B. Not assumed in perfect competition

Vamplife is a company that produces blood for vampire consumption. In this market, assume that there are many firms, entry and exit is relatively easy, and firms sell a homogeneous product. Vamplife is a firm in which market structure? A. Monopoly B. Perfect competition C. Monopolistic competition D. Oligopoly

B. Perfect competition

In the short run, perfectly (or purely) competitive firms will maximize their profit by producing which of the choices? Select all that apply. A. Any quantity where marginal revenue > marginal cost B. The quantity where marginal revenue = marginal cost C. The largest quantity possible, not considering costs or revenues D. A small quantity to drive up the price E. The quantity where price equals marginal cost

B. The quantity where marginal revenue = marginal cost E. The quantity where price equals marginal cost

Cody and Suha just purchased a piece of land and a tractor. They plan to start growing and selling organic peas. They have heard that the market for organic peas is perfectly competitive. What does that mean in terms of long-run profit? A. Firms will earn negative economic profits in the long run. B. Firms will earn zero accounting profit in the long run. C. Firms will earn zero economic profit in the long run. D. Firms will earn positive economic profits in the long run.

C. Firms will earn zero economic profit in the long run. When perfect competition exists and economic profits are positive, new firms will enter the market. When economic profits are negative, some firms will exit the market. This is the reason firms in perfect competition earn zero economic profit in the long run.

Cody and Suha just purchased a piece of land and a tractor. They plan to start growing and selling organic peas. They have heard that the market for organic peas is perfectly competitive. Cody and Suha want to know the quantity they should produce to maximize profit. As their economic advisor, you recommend that they A. Produce as much as possible, regardless of cost B. Produce until marginal revenue is equal to price C. Produce until marginal cost is equal to marginal revenue D. Produce until price falls below the average variable cost

C. Produce until marginal cost is equal to marginal revenue

Rambutan is a fruit prized in Eastern Asia for its unique hairy look. Once peeled, it reveals a sweet, slightly sour, grape-like, gummy-tasting fruit. Shown is a graph for a perfectly or purely competitive rambutan farmer. If the market price fell to $9.51, then A. This firm would be incurring a loss B. This firm would be at its shut down price C. This firm would be breaking even (zero profit) D. This firm would be making an economic profit

C. This firm would be breaking even (zero profit) At MR = $9.51, MR crosses the MC curve at the same point as the ATC curve. Since MR = ATC at the profit-maximizing quantity, the firm is breaking even.

The graph shows the relevant curves for an individual firm in a perfectly (or purely) competitive industry. Which of the choices best explains why this price will cause the firm to shut down instead of continuing to operate at a loss? A. total revenue > total variable costs B. total revenue > total fixed costs C. total revenue < total fixed costs D. total revenue < total variable costs E. total variable costs > total fixed costs F. total variable costs < total fixed costs

D. total revenue < total variable costs If P is less than AVC, it necessarily means that total revenue is less than total variable costs.

The hypothetical production data is for a profit-maximizing firm. Suppose the market price falls from $200 to $182 and the firm does not shut down. True or False: Since the firm is still operating, the firm must be earning a positive profit.

False Whether you assume this amount represents the minimum value on the ATC curve or not, it is not possible to determine if short-run economic profit is positive.

True or False: In general, the market demand curve in a perfectly competitive market is perfectly elastic.

False The market demand curve is not perfectly elastic but downward-sloping, consistent with the law of demand.

True or False: An individual firm in a perfectly competitive market can obtain a higher price for its product by reducing output.

False The market determines the price of the product, and an individual firm acting by itself does not have the power to change this price.

The table shows the cost and revenue information for a perfectly (or purely) competitive firm that produces external hard drives. Use whole numbers. What price does this firm charge for each hard drive?

Fixed Cost = $100

For firms in perfectly (purely) competitive markets, long-run economic profits are ____ because firms will ____ this market if profits are less than that and ____ if profits are greater than that.

For firms in perfectly (purely) competitive markets, long-run economic profits are zero because firms will exit this market if profits are less than that and enter if profits are greater than that.

The table shows total cost and total revenue information for a perfectly (or purely) competitive firm. If the cost and revenue numbers in the table will continue forever (permanently), is it better for this firm to A. Shut down immediately B. Continue to operate indefinitely C. Continue to operate in the short run, and exit the market in the long run

If the firm shuts down, that means they are temporarily suspending production, not exiting the market. If they are minimizing losses, they are still operating. In the long run, it is better to exit the market than to continue to take losses year after year. C. Continue to operate in the short run, and exit the market in the long run

Papa Mel's is an alfalfa farm in a perfectly competitive industry. The market demand and supply for alfalfa is shown in the market graph. Based on this information, move the line segment in Papa Mel's graph to show the correct placement of the demand curve for Papa Mel's alfalfa.

In perfect competition, price is equal to demand and marginal revenue. Supply and demand curves intersect at a price of $5, which is the market price.

The graph illustrates an average total cost (ATC) curve (also sometimes called average cost), marginal cost (MC) curve, average variable cost (AVC) curve, and marginal revenue (MR) curve (which is also the market price) for a perfectly competitive firm that produces terrible towels. Assume that the firm is profit-maximizing and does not shutdown in the short run. What is the firm's total revenue?

MR = MC at a market price of $400 and an output of 260 units Total Revenue = Price x Quantity TR = $400 x 260 = $104,000

Vamplife is a company that produces blood for vampire consumption. In this market, assume that there are many firms, entry and exit is relatively easy, and firms sell a homogeneous product. Refer to the table to determine how many gallons of blood Vamplife should produce in order to maximize profit.

Marginal Revenue = ∆TR / ∆Q 0 units MR = 0 1 unit MR = ($120 - 0) / (1 - 0) = $120 2 units MR = ($240 - $120) / (2 - 1) = $120 3 units MR = ($360 - $240) / (3 - 2) = $120 4 units MR = ($480 - $360) / (4 - 3) = $120 5 units MR = ($600 - $480) / (5 - 4) = $120 Marginal Cost = ∆TC / ∆Q 0 units MC = 0 1 unit MC = ($50 - $25) / (1 - 0) = $25 2 units MC = ($80 - $50) / (2 - 1) = $30 3 units MC = ($190 - $80) / (3 - 2) = $110 4 units MC = ($340 - $190) / (4 - 3) = $150 5 units MC = ($500 - $340) / (5 - 4) = $160 Firms should sell all units that cause profits to rise. If MR > MC, then increasing production increases profits. For the first three gallons, MR > MC, meaning profits increase when these units are produced. For the fourth and fifth gallons, MR < MC, meaning profits fall when these units are produced. Number of gallons: 3 gal

The table shows the cost and revenue information for a perfectly (or purely) competitive firm that produces external hard drives. How many units should this firm produce to maximize profits?

Marginal Revenue = ∆TR / ∆Q MR = ($1400 - $1300) / (14 - 13) = $100 Marginal Cost = ∆TC / ∆Q MC = ($402 - $302) / (14 - 13) = $100 14 units

The table shows the cost and revenue information for a perfectly (or purely) competitive firm that produces external hard drives. Use whole numbers. What is the marginal revenue received from the 11th unit?

Marginal Revenue = ∆TR / ∆Q MR = ($1,100 - $1,000) / (11 - 10) = ($100 / 1) = $100

The table shows the cost and revenue information for a perfectly (or purely) competitive firm that produces external hard drives. Use whole numbers. What is the marginal cost of producing the 11th unit?

Marginal cost = ∆TC / ∆Q MC = ($174 - $136) / (11 - 10) = $38

Papa Mel's is an alfalfa farm in a perfectly competitive industry. The market demand and supply for alfalfa is shown in the market graph. What is Papa Mel's profit-maximizing level of output? A. 8 bales B. 3 bales C. 6 bales D. 5 bales

Profit-maximizing level is where marginal revenue is equal to marginal cost. C. 6 bales

Rambutan is a fruit prized in Eastern Asia for its unique hairy look. Once peeled, it reveals a sweet, slightly sour, grape-like, gummy-tasting fruit. Shown is a graph for a perfectly or purely competitive rambutan farmer. What is the firm's profit/loss? Round to the nearest penny.

Profit = 7 bushels of rambutan x ($12.11 - $10.11) per bushel of rambutan = $14

The table shows the cost and revenue information for a perfectly (or purely) competitive firm that produces external hard drives. Use whole numbers. How many units should this firm produce to maximize profits?

Profit = Total Revenue - Total Cost 10 units Profit = $1,000 - $136 = $864 11 units Profit = $1,100 - $174 = $926 12 units Profit = $1,200 - $245 = $955 13 units Profit = $1,300 - $302 = $998 14 units Proft = $1,400 - $400 = $1,000 15 units Profit = $1,500 - $535 = $965 16 units Profit = $1,600 - $688 = $912 17 units Profit = $1,700 - $874 = $826 Maximizing Units: 14 units

The graph illustrates an average total cost (ATC) curve (also sometimes called average cost), marginal cost (MC) curve, average variable cost (AVC) curve, and marginal revenue (MR) curve (which is also the market price) for a perfectly competitive firm that produces terrible towels. Assume that the firm is profit-maximizing and does not shutdown in the short run. What is the firm's profit? Enter a negative number for a loss.

Profit = Total Revenue - Total Cost Profit = $104,000 - $169,000 = -$65,000

Uncle Jeremey's farm has costs and revenue as seen in the graph. Assuming that he maximizes his profit, how much profit will Uncle Jeremy earn?

Profit = Total Revenue - Total Cost Total Revenue = $3 x 7 units = $21 Total Cost = $1 x 7 units = $7 Profit = $21 - $7 = $14

Uncle Jeremey's farm has costs and revenue as seen in the graph. What is Uncle Jeremy's profit-maximizing output?

Profit-Maximizing Output: 7 Competitive firms maximize profit by choosing the level of output where the marginal revenue and the marginal cost of the last unit are the same.

The table shows total cost and total revenue information for a perfectly (or purely) competitive firm. What will the profits be if this firm shuts down?

Profits = Total Revenue - Total Costs 0 units Profits = 0 - $500 = -$500 1 unit Profits = $135 - $600 = -$465 2 units Profits = $270 - $710 = -$440 3 units Profits = $405 - $830 = -$425 4 units Profits = $540 - $960 = -$420 5 units Profits = $675 - $1100 = -$425 6 units Profits = $810 - $1250 = -$440 7 units Profits = $945 - $1410 = -$465 8 units Profits = $1080 - $1580 = -$500 9 units Profits = $1215 - $1760 = -$545 10 units Profits = $1350 - $1950 = -$600 If the firm shuts down, the profits will be -$500

The diagram depicts a cost curve graph of a price-taking firm that is currently operating and producing cherries. Identify each item in the graph of this cherry producer. The average total cost (ATC), marginal cost (MC), and marginal revenue (MR) curves are already labeled.

The firm maximizes profits at a level of output where marginal revenue (MR) is equal to marginal cost (MC). This is the market price. The profit-maximizing level of output, Q, occurs where price (also MR) intersects the MC curve. The average total cost (ATC) at that quantity occurs where P = MC. Draw a line up from P = MC until you reach the ATC curve, yielding the top portion of the profits box. The ATC curve is above the price, which means the profits will be negative (the firm has losses).

The table shows total cost and total revenue information for a perfectly (or purely) competitive firm. Firms sometimes prefer to minimize losses by continuing to operate in the short run. What quantity will the firm produce to minimize losses in the short run?

The smallest loss is -$425 Quantity = 4 units

Rambutan is a fruit prized in Eastern Asia for its unique hairy look. Once peeled, it reveals a sweet, slightly sour, grape-like, gummy-tasting fruit. Shown is a graph for a perfectly or purely competitive rambutan farmer. This firm is incurring a ____. In the long run, firms will ____ this market.

This firm is incurring a profit. In the long run, firms will enter this market.

The graph illustrates an average total cost (ATC) curve (also sometimes called average cost), marginal cost (MC) curve, average variable cost (AVC) curve, and marginal revenue (MR) curve (which is also the market price) for a perfectly competitive firm that produces terrible towels. Assume that the firm is profit-maximizing and does not shutdown in the short run. What is the firm's total cost?

Total Cost = Average Total Cost x Quantity TC = $650 x 260 = $169,000

True or False: In a perfectly competitive market, average revenue is equal to the market price.

True The average revenue over all of the units sold is equal to the market price.

The hypothetical production data is for a profit-maximizing firm. Suppose the market price falls from $200 to $182 and the firm does not shut down. True or False: If the price increases to $200, then the firm will earn a positive economic profit.

True A price of $200 is greater than the minimum value of ATC, $186.67. It follows that the firm will produce and earn a positive economic profit.

True or False: In general, an individual firm in a perfectly competitive market faces a perfectly elastic demand curve.

True Price is fixed, and individual firms face a perfectly elastic demand curve.

True or False: In a perfectly competitive market, marginal revenue is equal to the market price.

True The marginal revenue from an additional unit sold is equal to the market price.

The graph shows the market demand and supply curves for corn, and assume it to be a perfectly (or purely) competitive good. Suppose that it is discovered that corn farmers are earning positive economic profits. Assuming all else remains the same, show how the market responds to this discovery in the graph.

When corn farmers are earning profits, new firms enter the industry, shifting the supply curve to the right. Buyers' behavior will not change, so the demand curve will not shift.