Microeconomics CH 10 HW
Consider a profit-maximizing firm in a competitive industry. Under which of the following situations would the firm choose to produce where MR = MC?
- Minimum AVC < P < minimum ATC. - P > minimum ATC.
Why do the demand and MR curves have the same shape?
Demand is perfectly elastic, and MR is constant and equal to P.
Strictly speaking, pure competition is relatively rare. Then why do we study it?
It produces ideal results in terms of low-cost production and allocative efficiency, which can be used as a basis of comparison.
If it is possible for a perfectly competitive firm to do better financially by producing rather than shutting down, then it should produce the amount of output at which:
MR = MC
Use the following demand schedule to determine total revenue and marginal revenue for each possible level of sales: Fill the graph using whole numbers:
Product Price | 2, 2, 2, 2, 2, 2 Quantity Demanded | 0, 1, 2, 3, 4, 5 Total Revenue | Marginal Revenue |
A purely competitive firm whose goal is to maximize profit will choose to produce the amount of output at which:
TR exceeds TC by as much as possible.
a) What can you conclude about the structure of the industry in which this firm is operating?
The industry is purely competitive.
True or False: "Marginal revenue is the change in total revenue associated with additional units of output."
True
Suppose that the paper clip industry is perfectly competitive. Also assume that the market price for paper clips is 2 cents per paper clip. The demand curve faced by each firm in the industry is:
a horizontal line at 2 cents per paper clip.
A purely competitive wheat farmer can sell any wheat he grows for $25 per bushel. His five acres of land show diminishing returns because some are better suited for wheat production than others. The first acre can produce 1,000 bushels of wheat, the second acre 900, the third 800, and so on. a) Use the table below to help answer the following questions. How many bushels will each of the farmer's five acres produce? How much revenue will each acre generate? What are the TR and MR for each acre? b) If the marginal cost of planting and harvesting an acre is $22,500 per acre for each of the five acres, how many acres should the farmer plant and harvest?
a) Acre | 1, 2, 3, 4, 5 That Acre's Yield (Bushels) | 1000, 900, 800, 700, 600 That Acre's Revenue | 25000, 22500, 20000, 17500, 15000 TR | 25000, 47500, 67500, 85000, 100000 MR | 25000, 22500, 20000, 17500, 15000 b) 2 acres
Briefly state the basic characteristics of pure competition, pure monopoly, monopolistic competition, and oligopoly. Into which of these market classifications does each of the following most accurately fit? In each case, justify your classification. a) A supermarket in your hometown. b) The steel industry. c) A Kansas wheat farm. d) The commercial bank in which you have an account. e) The automobile industry.
a) Oligopoly b) Oligopoly c) Pure competition d) Monopolistic Competition e) Oligopoly
The firm should produce in the short run as long as the price
exceeds the average variable cost.
When an industry is purely competitive, price can be substituted for marginal revenue in the MR = MC rule because
the demand curve is perfectly elastic and the price is constant regardless of the quantity demanded, so MR is constant and equal to price.
The equality of marginal revenue and marginal cost is essential for profit maximization in all market structures because when this is true
the last unit produced adds more to revenue than costs, and its production must necessarily increase profits or reduce losses.
Consider the statement: "Even if a firm is losing money, it may be better to stay in business in the short run." This statement is
true, if the loss is less than the fixed cost.
