Practice Problem 1

If a graph of a perfectly competitive firm shows that the point occurs where MR is above AVC but below ATC, A) the firm is earning negative profit, and will shut down rather than produce that level of output. B) the firm is earning negative profit, but will continue to produce where in the short run. C) the firm is still earning positive profit, as long as variable costs are covered. D) the firm is covering explicit, but not implicit, costs. E) the firm can cover all of fixed costs but only a portion of variable costs.

B

If the market price for a competitive firm's output doubles, then: A) the profit maximizing output will double. B) the marginal revenue doubles. C) at the new profit maximizing output, price has increased more than marginal cost. D) at the new profit maximizing output, price has risen more than marginal revenue. E) competitive firms will earn a positive economic profit in the long-run.

B

The demand curve facing a perfectly competitive firm is: A) the same as its average revenue curve, but not the same as its marginal revenue curve. B) the same as its average revenue curve and its marginal revenue curve. C) the same as its marginal revenue curve, but not its average revenue curve. D) not the same as either its marginal revenue curve or its average revenue curve. E) not defined in terms of average or marginal revenue.

B

A firm maximizes profit by operating at the level of output where: A) average revenue equals average cost. B) average revenue equals average variable cost. C) total costs are minimized. D) marginal revenue equals marginal cost. E) marginal revenue exceeds marginal cost by the greatest amount.

D

A firm never operates: A) at the minimum of its ATC curve. B) at the minimum of its AVC curve. C) on the downward-sloping portion of its ATC curve. D) on the downward-sloping portion of its AVC curve. E) on its long-run marginal cost curve.

D

A firm has an increasing marginal cost curve. If the firm's current output is two units less than the profit-maximizing output, then the next unit produced A) will decrease profit. B) will increase cost more than it increases revenue. C) will increase revenue more than it increases cost. D) will increase revenue without increasing cost. E) may or may not increase profit.

C

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? A) $85 million B) $70 million C) $40 million D) $30 million

C

In the short run, a perfectly competitive firm earning positive economic profit is: A) on the downward-sloping portion of its ATC. B) at the minimum of its ATC. C) on the upward-sloping portion of its ATC. D) above its ATC. E) below its ATC.

C

In the short run, a perfectly competitive profit maximizing firm that has not shut down: A) is operating on the downward-sloping portion of its AVC curve. B) is operating at the minimum of its AVC curve. C) is operating on the upward-sloping portion of its AVC curve. D) is not operating on its AVC curve. E) can be at any point on its AVC curve.

C

Marginal revenue, graphically, is: A) the slope of a line from the origin to a point on the total revenue curve. B) the slope of a line from the origin to the end of the total revenue curve. C) the slope of the total revenue curve at a given point. D) the vertical intercept of a line tangent to the total revenue curve at a given point. E) the horizontal intercept of a line tangent to the total revenue curve at a given point.

C

Producer surplus in a perfectly competitive industry is: A) the difference between profit at the profit-maximizing output and profit at the profit-minimizing output. B) the difference between revenue and total cost. C) the difference between revenue and variable cost. D) the difference between revenue and fixed cost. E) the same thing as revenue.

C

An improvement in technology would result in: A) upward shifts of MC and reductions in output. B) upward shifts of MC and increases in output. C) downward shifts of MC and reductions in output. D) downward shifts of MC and increases in output. E) increased quality of the good, but little change in MC.

D

At every output level, a firm's short-run average cost (SAC) equals or exceeds its long-run average cost (LAC) because: A) diminishing returns apply in the short run. B) returns to scale only exist in the long run. C) opportunity costs are taken into account in the short run. D) there are at least as many possibilities for substitution between factors of production in the long run as in the short run. E) none of the above

D

Because of the relationship between a perfectly competitive firm's demand curve and its marginal revenue curve, the profit maximization condition for the firm can be written as: A) P = MR. B) P = AVC. C) AR = MR. D) P = MC. E) P = AC.

D

The demand curve facing a perfectly competitive firm is A) the same as the market demand curve. B) downward-sloping and less flat than the market demand curve. C) downward-sloping and flatter than the market demand curve. D) perfectly horizontal. E) perfectly vertical.

D

A firm's producer surplus equals its economic profit when: A) average variable costs are minimized. B) average fixed costs are minimized. C) marginal costs equal marginal revenue. D) fixed costs are zero. E) total revenues equal total variable costs.

D

A variable cost function of the form: VC = 23 + Q + 7Q2 implies a marginal cost curve that is: A) linear. B) downward sloping. C) U-shaped. D) quadratic.

A

In the short run, a perfectly competitive firm earning negative economic profit is: A) on the downward-sloping portion of its ATC curve. B) at the minimum of its ATC curve. C) on the upward-sloping portion of its ATC curve. D) above its ATC curve.

A

The key assumption required for us to use a linear variable cost function of the form VC = bq is that: A) marginal cost must be constant and equal to b. B) marginal cost must be increasing at rate b. C) fixed costs must be zero. D) marginal cost is always greater than average variable cost.

A

A variable cost function of the form: implies a marginal cost curve that is: A) constant. B) upward sloping. C) U-shaped. D) quadratic.

B

Firms often use patent rights as a: A) barrier to exit. B) barrier to entry. C) way to achieve perfect competition. D) none of the above

B

A Cobb-Douglas production function: A) exhibits constant returns to scale. B) exhibits increasing returns to scale. C) exhibits decreasing returns to scale. D) can exhibit constant, increasing, or decreasing returns to scale.

D

A price taker is: A) a firm that accepts different prices from different customers. B) a consumer who accepts different prices from different firms. C) a perfectly competitive firm. D) a firm that cannot influence the market price. E) both C and D

E

If price is between AVC and ATC, the best and most practical thing for a perfectly competitive firm to do is: A) raise prices. B) lower prices to gain revenue from extra volume. C) shut down immediately, but not liquidate the business. D) shut down immediately and liquidate the business. E) continue operating, but plan to go out of business.

E

Which of the following is true of cost curves? A) The ATC curve goes through the minimum of the MC curve. B) The AVC curve goes through the minimum of the MC curve. C) The MC curve goes through the minimum of the ATC curve, to the left of the minimum of the AVC curve. D) The MC curve goes through the minimum of the AVC curve, to the right of the minimum of the ATC curve. E) The MC curve goes through the minimum of both the AVC curve and the ATC curve.

E

At the current level of output, long-run marginal cost is $50 and long-run average cost is $75. This implies that: A) there are neither economies nor diseconomies of scale. B) there are economies of scale. C) there are diseconomies of scale. D) the cost-output elasticity is greater than one.

B