Econ 351 Chapter 10 Key Terms

Economic Rent

Amount that all firms are willing to pay for an input less the minimum amount necessary to obtain it

Suppose that a competitive firm has a total cost function of C(q)= 3+ 3q+q^2 and marginal cost function of MC(q) =3+2q. Assume that the market price of the firm's product is $9. What is the firm's producer surplus? A) 5 B) 9 C) 12 D) 7 E) 2

B) 9

A perfectly competitive firm produces 3,000 units of a good at a total cost of $36,000. The fixed cost of production is $20,000. The price of each good is $10. Should the firm continue to produce in the short run? A) No, it should shut down because it is making a loss. B) Yes, it should continue to produce because its price exceeds its average fixed cost. C) Yes, it should continue to produce because it is minimizing its loss. D) There is insufficient information to answer the question.

C) Yes, it should continue to produce because it is minimizing its loss.

Bette's Breakfast, a perfectly competitive eatery, sells its "Breakfast Special" (the only item on the menu) for $5.00. The costs of waiters, cooks, power, food etc. average out to $3.95 per meal; the costs of the lease, insurance and other such expenses average out to $1.25 per meal. Bette should A) close her doors immediately. B) continue producing in the short and long run. C) continue producing in the short run, but plan to go out of business in the long run. D) raise her prices above the perfectly competitive level. E) lower her output.

C) continue producing in the short run, but plan to go out of business in the long run.

Assume that price is greater than average variable cost. If a perfectly competitive seller is producing at an output where price is $11 and the marginal cost is $14.54, then to maximize profits the firm should A) continue producing at the current output. B) produce a larger level of output. C) produce a smaller level of output. D) There is not enough information given to answer the question.

C) produce a smaller level of output.

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) both C and D

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) continue operating, but plan to go out of business.

Marginal Revenue

change in revenue resulting from a one-unit increase in output

Price Takers

firm that has no influence over market price and thus takes the price as given

A long-run competitive equilibrium occurs when three conditions hold:

1. All firms in the industry are maximizing profit 2. No firm has incentive to enter/exit market 3. Quantity supplied = quantity demanded

Zero Economic Profit

A firm is earning a normal return on its investment—i.e., it is doing as well as it could by investing its money elsewhere.

Use the following statements to answer this question: I. The firm's decision to produce zero output when the MR < AVC is known as the shutdown rule. II. The firm's supply decision is to generate zero output for all prices below the minimum AVC. A) I and II are true. B) I is true and II is false. C) II is true and I is false. D) I and II are false.

A) I and II are true.

Use the following statements to answer this question. I. The demand curve facing a perfectly competitive firm is the same as its average revenue curve, but not the same as its marginal revenue curve. II. 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 P = AC A) I is false, II is false. B) I is false, II is true. C) I is true, II is false. D) I is true, II is true.

A) I is false, II is false.

Use the below statements to answer this question. I. Both individual buyers and sellers in perfect competition have to take the market price as a given. II. The demand curve for an individual seller's product in perfect competition is the same as market demand. A) I is true, II is false B) I is true, II is true C) I is false, II is true D) I is false, II is false

A) I is true, II is false

In the long-run, the cost function of each firm is C(q)=2q 1/2+0.006q^2. The demand in this market is QD = 1440-200P. Compute the number of firms that will operate in the long-run competitive equilibrium of this market. A) N = 44 B) N = 27 C) N = 68 D) N = 42 E) N = 15

A) N = 44

Use the following two statements to answer this question. I. If, for the last unit of a good produced by a perfectly competitive firm, MR > MC, then in producing it, the firm added more total revenue than it added to total cost. II. In perfect competition, price is equal to average revenue but greater than marginal revenue. A) I is true, II is true B) I is true, II is false C) I is false, II is true D) I is false, II is false

B) I is true, II is false

The shutdown decision can be restated in terms of producer surplus by saying that a firm should produce in the short run as long as A) revenue exceeds producer surplus. B) producer surplus is positive. C) producer surplus exceeds fixed cost. D) producer surplus exceeds variable cost. E) profit and producer surplus are equal.

B) producer surplus is positive.

If a graph of a perfectly competitive firm shows that the MR = MC 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 MR = MC 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) the firm is earning negative profit, but will continue to produce where MR = MC in the short run.

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) $40 million

Jason, a high-school student, mows lawns for families in his neighborhood. The going rate is $12 for each lawn-mowing service. Jason would like to charge $20 because he believes he has more experience mowing lawns than the many other teenagers who also offer the same service. If the market for lawn mowing services is perfectly competitive, what would happen if Jason raised his price? A) He would lose some but not all his customers. B) Initially, his customers might complain but over time they will come to accept the new rate. C) If Jason raises his price he would lose all his customers. D) If Jason raises his price, then all others supplying the same service will also raise their prices.

C) If Jason raises his price he would lose all his customers.

Consider a city that has a number of hot dog stands operating throughout the downtown area. Suppose that each vendor has a marginal cost of $1.50 per hot dog sold and no fixed cost. Suppose the maximum number of hot dogs that any one vendor can sell is 100 per day at a price of $2.00 per hot dog. If the industry is perfectly competitive, will the price remain at $2 for a hot dog? If not, what will the price be? A) Yes, price will remain at $2. B) No, the price will drop to $0.50. C) No, the price will drop to $1.50 D) Can't say anything. We need more information.

C) No, the price will drop to $1.50

Which of the following is NOT a necessary condition for long-run equilibrium under perfect competition? A) No firm has an incentive to enter the market. B) No firm has an incentive to exit the market. C) Prices are relatively low. D) Each firm earns zero economic profit. E) Each firm is maximizing profit.

C) Prices are relatively low.

Producer surplus in a perfectly competitive industry is A) the difference between profit at the profit-maximizing output and profit at the profitminimizing 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) the difference between revenue and variable cost.

Consider a firm with an increasing marginal cost, in a perfectly competitive market. If current output is 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) will increase revenue more than it increases cost.

Which of following is a key assumption of a perfectly competitive market? A) Firms can influence market price. B) Commodities have few sellers. C) It is difficult for new sellers to enter the market. D) Each seller has a very small share of the market. E) none of the above

D) Each seller has a very small share of the market.

Use the below statements to answer this question. I. A very large number of small sellers who sell identical products imply a downward sloping demand for each seller's product. II. The price of a seller's product in perfect competition is determined by a few of the sellers. A) I is true, II is false B) I is true, II is true C) I is false, II is true D) I is false, II is false

D) I is false, II is false

Consider a firm with an increasing marginal cost, in a perfectly competitive market. If current output is less than the profit-maximizing output, which must be true? A) Total revenue is less than total cost. B) Average revenue is less than average cost. C) Average revenue is greater than average cost. D) Marginal revenue is less than marginal cost. E) Marginal revenue is greater than marginal cost.

E) Marginal revenue is greater than marginal cost.

At the profit-maximizing level of output, what is true of the total revenue (TR) and total cost (TC) curves? A) They must intersect, with TC cutting TR from below. B) They must intersect, with TC cutting TR from above. C) They must be tangent to each other. D) They cannot be tangent to each other. E) They must have the same slope

E) They must have the same slope

When the price faced by a competitive firm was $5, the firm produced nothing in the short run. However, when the price rose to $10, the firm produced 100 tons of output. From this we can infer that A) the firm's marginal cost curve must be flat. B) the firm's marginal costs of production never fall below $5. C) the firm's average cost of production was less than $10. D) the firm's total cost of producing 100 tons is less than $1000. E) the minimum value of the firm's average variable cost lies between $5 and $10.

E) the minimum value of the firm's average variable cost lies between $5 and $10.

If a competitive firm has a U-shaped marginal cost curve then A) the profit maximizing output will always generate positive economic profit. B) the profit maximizing output will always generate positive producer surplus. C) the profit maximizing output is found where MC = MR and MC is decreasing. D) the profit maximizing output is found where MC = MR and MC is constant. E) the profit maximizing output is found where MC = MR and MC is increasing.

E) the profit maximizing output is found where MC = MR and MC is increasing.

Profit

difference between total revenue an total cost

Free Entry (or exit)

condition under which there are no special costs that make it difficult for a firm to enter (or exit) an industry

Producer Surplus

sum over all units produced by a firm of differences between the market price of a good and the marginal cost of production

Long-Run Competitive Equilibrium

All firms in an industry are maximizing profit, no firm has an incentive to enter or exit, and price is such that quantity supplied equals quantity demanded.

If a competitive firm's marginal cost curve is U-shaped then A) its short run supply curve is U-shaped too B) its short run supply curve is the downward-sloping portion of the marginal cost curve C) its short run supply curve is the upward-sloping portion of the marginal cost curve D) its short run supply curve is the upward-sloping portion of the marginal cost curve that lies above the short run average variable cost curve E) its short run supply curve is the upward-sloping portion of the marginal cost curve that lies above the short run average total cost curve

D) its short run supply curve is the upward-sloping portion of the marginal cost curve that lies above the short run average variable cost curve

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) marginal revenue equals marginal cost.

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 more flat than the market demand curve. D) perfectly horizontal. E) perfectly vertical.

D) perfectly horizontal.