Economics Test 3

Based on the information in the table , how many units should the profit-maximizing perfectly competitive firm produce?

74

Which of the following is an assumption of perfect competition?

Each firm produces and sells a homogeneous product.

If price is above AVC at the quantity of output at which MR = MC, then it follows that

TR>TVC

Marginal revenue is

the change in total revenue resulting from the sale of one more unit of output.

Refer to the exhibit and assume that the quantity sold is equal to the quantity produced. At a quantity of 16 units, price is ____________ and ATC is _________ and AVC is ______________.

$10, $6.25, there is not enough information to answer

Consider the following data: equilibrium price = $15, quantity of output produced = 10,000 units, average total cost = $12, and average variable cost $7. Given this data, total revenue is __________, total cost is __________, and total fixed cost is __________

$150,000; $120,000; $50,000

Refer to Exhibit 22-3. Based upon the information provided in this table, what is the maximum profit this firm can earn?

$16

Refer to Exhibit 22-1. The dollar amounts that go in blanks (C) and (D) are, respectively

$21 and $21

Structure of Perfect competition

1. A very large number of small, insignificant firms 2. product is homogeneous 3. no control over price, firms are price takers 4. no barriers to enter or exit

Refer to the exhibit. The dollar amounts that go in blanks A through D are, respectively,

12,12,12,12

Refer to Exhibit 22-2. What quantity of output should the profit-maximizing firm produce and sell?

14 units

PICTURE- Refer to Exhibit 22-2. What is the maximum profit this firm can earn?

3

Refer to Exhibit 22-2. What is the change in profit that would result if the firm produced and sold 12 units instead of 11 units of this good?

4

Refer to the exhibit. The perfectly competitive, profit-maximizing firm will produce ____ units of output, charge a price of _______ per unit, and earn a profit of _____________.

60,6,60

Based on the information in the table , how much profit is the firm earning at the profit-maximizing level of output?

70

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 = $8, quantity of output produced = 120 units, average total cost = $10, average variable cost = $4. What will the firm do in the short run and why?

Continue to produce, because price is greater than average variable cost.

Which of the following assumptions contributes to a perfectly competitive firm being a price taker?

Each firm in the market supplies such a small part of the market that each firm has no influence over price. b.Firms sell a homogeneous product. c.Buyers and sellers have all relevant information about prices, product quality, and sources of supply.

Why must firms earn zero economic profit in long-run competitive equilibrium?

If firms are not earning zero economic profit, there will be entry into or exit from the market.

A perfectly competitive firm that seeks to either maximize profit or minimize losses will produce the level of output at which

MR = MC

A profit-maximizing perfectly competitive firm will seek to produce the level of output at which

MR=MC

Assume the following for a perfectly competitive industry: (1) there is no incentive for firms to enter or exit the industry; (2) for some firms in the industry, short-run average total cost is greater than long-run average total cost at the level of output at which marginal revenue equals marginal cost; (3) all firms in the industry are currently producing the quantity of output at which marginal revenue equals marginal cost? Is the industry in long-run competitive equilibrium?

No, because of numbers 2 and 3

Refer to the exhibit. If the firm produces Q2, is it guaranteed to earn a profit?

No, because the highest price it charges may end up being less than average total cost.

Refer to the exhibit. If the firm produces Q2, is it guaranteed to earn a profit?

No, because the highest price it charges may end up being less than average total cost. Yes, because it continues to produce as long as MR is greater than MC.

Is it possible for a perfectly competitive firm to be maximizing profits, but not achieving resource allocative efficiency?

No, it is not possible, because the output at which MR = MC is also the output at which P = MC

Refer to the exhibit. At the profit-maximizing output level, average fixed cost is

Not enough info

Refer to the exhibit. What quantity does the profit-maximizing or loss-minimizing firm produce?

Q2, where the difference between "what is coming in" on the last unit and "what is going out" is zero.

Consider the following data: equilibrium price = $8, quantity of output where MR equals MC = 500 units, average total cost = $10, average variable cost = $9. What will the perfectly competitive firm do in the short run and why?

Shut down, because price is less than average variable cost

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

In the short-run, if P < ATC, a perfectly competitive firm should

There is not enough information to answer the question

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

Wheat

If market demand rises in a perfectly competitive market, it follows that

a perfectly competitive firm's marginal revenue will rise.

homogeneous

a product a consumer buys and cannot tell a difference ex) beans

The price at which a perfectly competitive firm sells its product is determined by

all sellers and buyers of the product, collectively.

Positive economic profit serves as

an incentive for individuals to produce. a signal identifying where resources are most welcome.

The theory of perfect competition generally assumes that

buyers and sellers act independently of other buyers and sellers

The market demand curve in a perfectly competitive market is ___________ while the individual firm's demand curve (that it faces) is _______________.

downward-sloping, horizontal

The theory of perfect competition assumes that

each buyer and each seller may act independently of other buyers and sellers, respectively.

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

each firm produces and sells a differentiated product.

If an industry is in long-run competitive equilibrium and experiences a decrease in demand, then as a result the equilibrium price will __________, which will cause the representative firm's __________ curve to shift downward and some firms will __________ the industry

fall; demand; exit

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

firms are producing a level of output at which price is greater than marginal cost

Resources are allocated efficiently when

firms produce the quantity of output at which price is equal to marginal cost

Refer to Exhibit 22-6. A perfectly competitive firm operating in the market depicted in graph (1) faces the demand curve depicted in

graph 3

The long-run (industry) supply curve in a constant-cost industry is

horizontal

The market supply curve is the

horizontal sum of all the individual firms' supply curves.

The short-run industry or market supply curve is the

horizontal summation of the short-run supply curves for all the firms in the industry.

The demand curve of a perfectly competitive firm is

horizontal, equal to marginal revenue, perfectly elastic

Assume an increasing-cost industry that is initially in long-run competitive equilibrium. An increase in demand will cause a(n) _______________ in prices and profits and, as a result, firms will ___________ the industry, causing the market supply curve to shift _____________.

increase, enter, rightward

In a perfectly competitive market, profit maximization __________ with resource allocative efficiency, which holds that __________________.

is consistent, P = MC.

The demand curve facing a perfectly competitive firm

is perfectly horizontal

Suppose that a decreasing-cost industry is initially in long-run competitive equilibrium, and then demand increases. After full adjustment, the new equilibrium price will be

lower than the initial equilibrium price.

That portion of the perfect competitive firm's ____________ that is above its ______________ is its ______________________.

marginal cost curve, AVC curve, supply curve

The perfectly competitive firm will seek to produce the level of output for which

marginal cost equals marginal revenue

A perfectly competitive firm's short run supply curve is that portion of the firm's ______________ curve that lies _________________________

marginal cost, above its average variable cost curve

A perfectly competitive firm should increase its level of production as long as

marginal revenue is greater than marginal cost

If total revenue is increasing at a constant rate, what does this condition imply about marginal revenue?

marginal revenue is positive and is constant

If a perfectly competitive firm is producing the level of output at which marginal revenue equals marginal cost, the firm is earning

not enough information

Types of competition

perfect competition, monopolistic competition, oligopoly, monopoly

In the theory of perfect competition, the firm faces a demand curve that is __________ and the market demand curve is __________.

perfectly elastic, downward sloping

The perfectly competitive firm's short-run supply curve is the

portion of its marginal cost curve that lies above its average variable cost curve

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

Resource allocative efficiency occurs when a firm

produces the quantity of output at which price equals marginal cost.

______________ exists if a firm produces its output at the lowest per-unit cost.

productive efficiency

differential

products that are different with each producer

Perfectly competitive industries are

relatively easy to enter or exit

The situation in which firms produce the level of output at which price is equal to marginal cost is termed

resource allocative efficiency.

A perfectly competitive firm will continue to increase its production as long as marginal

revenue is greater than marginal cost.

As firms enter Industry ABC, the industry's supply curve shifts __________ and the equilibrium price of the good being produced__________ until long-run competitive equilibrium is established. This cycle will continue until the firms in Industry ABC are earning __________ economic profits.

rightward, falls, zero

The perfectly competitive firm should produce in the

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

In the short run, if a perfectly competitive firm's average variable cost curve lies above its demand curve at all levels of output, the firm should

shut down since price is less than average variable cost.

Price taker

the firm takes the price as given by the market the firm (on its own) does not have the ability to set its price

Refer to Exhibit 22-4. The firm sells its product at P1 and produces Q1. Given this situation,

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

An increasing-cost industry is characterized by _________________ long-run supply curve.

upward sloping

Due to the law of diminishing marginal returns, marginal cost curves are ________ and as a result market supply curves are __________.

upward-sloping, upward-sloping

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

wheat

The assumption of easy entry into and exit from the market in the theory of perfect competition implies that firms will tend to earn ______________ in long-run equilibrium.

zero economic profit