Quiz 8

Refer to Exhibit 23-8. What is the total cost of firm B at the profit-maximizing (or loss-minimizing) level of production?

$1,650

Refer to Exhibit 23-10. What price does this perfectly competitive firm receive for its product?

$25

Refer to Exhibit 23-10. What is the marginal revenue and marginal cost, respectively, of the 7th unit of output?

$25 and $30

Refer to Exhibit 23-8. What is the profit (loss) of firm A at the profit-maximizing (or loss-minimizing) level of production?

$300

Consider the following data: equilibrium price = $9, quantity of output produced = 1,000 units, average total cost = $7, and average variable cost $5. Given this, total revenue is __________, total cost is __________, and total fixed cost is __________.

$9,000; $7,000; $2,000

Refer to Exhibit 23-8. What is the profit (loss) of firm B at the profit-maximizing (or loss-minimizing) level of production?

-$600

Refer to Exhibit 23-10. What quantity of output should the profit-maximizing firm produce?

6

In order for a firm to continue producing, price must exceed __________ and total revenue must exceed __________.

AVC; total variable costs

Consider the following data: equilibrium price = $10, quantity of output produced = 100 units, average total cost = $13, and average variable cost = $7. What will the firm do and why?

Continue to produce in the short run, because price is greater than average variable cost.

Which of the following is not an assumption of the theory of perfect competition?

Each firm produces and sells a differentiated product.

T or F If the firm is producing a quantity of output for which MC > MR, then the firm should increase production to increase its profits.

False

T or F: A perfectly competitive firm should shut down production in the short run if price is less than average fixed cost at the loss-minimizing level of output.

False

T or F: In a perfectly competitive market, the market demand curve is perfectly elastic.

False

T or F: One of the assumptions upon which the theory of perfect competition is built is that each firm produces and sells a heterogeneous product.

False

Which of the following is not a condition of long-run competitive equilibrium?

Marginal revenue is greater than marginal cost

Refer to Exhibit 23-7. What is the profit at 60 units of output?

NOT 75 or 90

In perfect competition, the firm's marginal revenue curve is

NOT a and c

In the theory of perfect competition, the assumptions of many buyers and sellers, the production of a homogeneous product, and the possession of all relevant information by buyers and sellers imply that the perfectly competitive firm

NOT a and c

Equilibrium price is $10 in a perfectly competitive market. For a perfectly competitive firm, MR = MC at 1,200 units of output. At 1,200 units, ATC is $23, and AVC is $18. The best policy for this firm is to __________ in the short run. Also, this firm earns __________ of __________ if it produces and sells 1,200 units.

NOT continue

If a seller is a price taker it means that the seller sells his product at the price

NOT he chooses

When a perfectly competitive firm incurs losses, it follows that price

NOT is less than marginal revenue.

A perfectly competitive firm that wants to maximize profits or minimize losses will produce in the short run as long as

NOT price is above marginal revenue

At the quantity of output for which total revenue equals total cost,

NOT profit is maximized

A firm operating in a perfectly competitive market finds itself producing a level of output for which marginal revenue is less than marginal cost. In order to maximize profits (or minimize losses), the firm should

NOT raise in price

Which of the assumptions below assures us that economic profit will be zero in long-run equilibrium for perfectly competitive firms?

NOT smallness of firms

In the theory of perfect competition, the assumption of easy entry into and exit from the market implies

NOT zero economic profits in both the short run and the long run OR positive economic profits in the long run

Does a real-world market have to meet all the assumptions of the theory of perfect competition before it is considered a perfectly competitive market?

No, probably no real-world market meets all the assumptions of the theory of perfect competition. All that is necessary is that a real-world market behave as if it satisfies all the assumptions.

The profit-maximization rule is as follows:

Produce the quantity of output at which marginal revenue equals marginal cost.

A perfectly competitive firm can produce its current level of output at an average total cost of $10 and a marginal cost of $8. If the market price of the product is currently $8, what should the firm do?

The answer depends upon the relationship between price and average variable cost. The firm should shut down if average variable cost is $8 or greater, but the firm should continue to produce the current level of output if average variable cost is less than $8.

Which of the following statements is false?

The firm's supply curve is that portion of its AVC curve that lies above its MC curve.

Which of the following statements is false?

The theory of perfect competition is completely and accurately descriptive of most real-world firms.

Firm X is producing the quantity of output at which marginal revenue equals marginal cost. It is earning

There is not enough information to answer the question.

T or F: A perfectly competitive firm is a price taker.

True

T or F: For a perfectly competitive firm, the demand curve it faces is horizontal at the price determined in the market.

True

T or F: In order for a firm to earn economic profits, price must exceed average total cost.

True

Real-world markets that approximate the four assumptions of the theory of perfect competition include

a and c

For a perfectly competitive firm,

a, b, and c

In long-run competitive equilibrium, the market equilibrium price equals

a, b, and c

Refer to Exhibit 23-2. For the firm that faces the demand curve in the exhibit,

a, b, and c

If, for the last unit of a good produced by a perfectly competitive firm, MR > MC, then in producing that unit the firm

added more to total revenue than it added to total costs.

A firm that is a price taker can sell

any quantity of product it can produce at the market equilibrium price.

If, for a perfectly competitive firm, price is greater than average variable cost, then it follows that

b and c

In the theory of perfect competition,

b and d (b)the single firm faces a horizontal demand curve. d)the market demand curve is downward sloping.)

Perfectly competitive firms are price takers for all of the following reasons except that

barriers to exit force firms to sell at the market price.

Which of the following is a characteristic of perfect competition?

buyers and sellers having all relevant information

Equilibrium price is $22 in a perfectly competitive market. For a perfectly competitive firm, MR = MC at 200 units of output. At 200 units, ATC is $23, and AVC is $18. The best policy for this firm is to __________ in the short run. Also, this firm earns __________ of __________ if it produces and sells 200 units.

continue to produce, losses, $200

Equilibrium price is $10 in a perfectly competitive market. For a perfectly competitive firm, MR = MC at 233 units of output. At 233 units, ATC is $12, and AVC is $9. The best policy for this firm is to __________ in the short run. Also, total fixed cost equals __________ for this firm.

continue to produce; $699

A "price taker" is a firm that

does not have the ability to control the price of the product it sells.

The market demand curve in a perfectly competitive market is

downward sloping

A perfectly competitive market is initially in long-run competitive equilibrium. Then, market demand falls. This causes the marginal revenue curves for existing firms to shift __________ and for these firms to produce __________ output. Some of the existing firms will end up __________.

downward, less, exiting the market

For a price taker, market equilibrium price is $100. At 50 units, MR = MC, ATC = $80, and AVC = $70. This price taker will

earn $1,000 profits if it produces 50 units.

A perfectly competitive market is initially in long-run competitive equilibrium. Then, market demand increases. As a result, existing firms in the market begin to __________. By the time all adjustments have been made, profits will __________.

earn positive economic profit; be back at zero

A firm that is a price taker will not sell any of its product for less than the equilibrium price because

it can sell all it can produce at the equilibrium price.

As firms exit an industry, the industry supply curve shifts __________ and the equilibrium price __________ until long-run competitive equilibrium is established and the surviving firms are earning __________ economic profits.

leftward; rises; zero

The price charged by a perfectly competitive firm is determined by

market demand and market supply, together.

When a perfectly competitive firm incurs losses, it follows that price

must be below average total cost.

If a firm is a price taker, its demand curve is

perfectly elstic

If firms are earning zero economic profits, they must be producing at an output level at which

price equals average total cost.

In the short run, the best policy for a perfectly competitive firm is to

produce and sell its product as long as price is greater than average variable cost.

A perfectly competitive market is initially in long-run competitive equilibrium. Then, market demand increases. This causes existing firms in the market to __________ and __________. As a result of the latter, the market supply curve shifts __________.

produce more output; new firms to enter the market; rightward

When the perfectly competitive firm produces the quantity of output at which marginal revenue equals marginal cost, it naturally

produces the quantity of output at which marginal cost equals price, since for the perfectly competitive firm price equals marginal revenue.

Which of the following is not a characteristic of perfect competition?

sellers produce and sell a heterogeneous product

The perfectly competitive firm should produce in the

short run if price is below average total cost but above average variable cost.

Equilibrium price is $8 in a perfectly competitive market. For a perfectly competitive firm, MR = MC at 150 units of output. At 150 units, ATC is $11, and AVC is $10. The best policy for this firm is to __________ in the short run. Also, total fixed cost equals __________ and total variable cost equals __________ for this firm.

shut down; $150; $1,500

Marginal revenue is

the change in total revenue brought about by selling an additional unit of the good.

Marginal revenue is defined as

the change in total revenue caused by selling one additional unit of output.

If MR > MC, then

the firm can increase its profits (or minimize its losses) by increasing output.

For a perfectly competitive firm,

the marginal revenue curve and the demand curve are the same.

If the perfectly competitive firm is producing an output level at which price equals marginal cost, it is

there is not enough information to answer the question

Refer to Exhibit 23-4. The firm sells its product at P1 and produces Q1. Given this situation,

total cost is equal to area 1 + area 2 + area 3.

Which of the following is the best example of a homogeneous good?

wheat

In long-run equilibrium, the perfectly competitive firm earns __________ economic profits.

zero