Lab 6
Which of the following statements is true when the difference between TR and TC is at its maximum positive value?
A. MR = MC B. Slope of TR = Slope of TC D. Both A and B are true.
Farmer Smith grows corn. The average total cost and marginal cost of growing corn for an individual farmer are illustrated in the graph to the right. Suppose the market for corn is perfectly competitive. If the market price is $32 per bushel, then to maximize profits, farmer Smith should produce _____ thousand bushels of corn. (Enter a numeric response using an integer.)
70
Which of the following is an expression of profit for a perfectly competitive firm? Profit for a perfectly competitive firm can be expressed as
Profit=(P×Q)−(ATC×Q), where P is price, Q is output, and ATC is average total cost.
The firm's profit can be represented by a rectangle with a base equal to the quantity produced and a height equal to the
difference in price and average total cost.
A student argues: "To maximize profit, a firm should produce the quantity where the difference between marginal revenue and marginal cost is the greatest. If a firm produces more than this quantity, then the profit made on each additional unit will be falling." Is the above statement true or false?
False. Profit is maximized at the output level where marginal revenue equals marginal cost.
A student examines the graph to the right and argues, "I believe that a firm will want to produce at Q1, not Q2. At Q1, the distance between price and marginal cost is the greatest. Therefore, at Q1, the firm will be maximizing its profits." Is the student's argument correct or incorrect?
Incorrect. Profits are maximized at the quantity where marginal revenue equals marginal cost.
A startup firm in a perfectly competitive market finds that its average total cost is higher than the market price. Since the firm is incurring short-run losses, the management is debating whether to continue operations. Alex Ferguson, a senior manager, feels that this is a temporary phase and the firm should continue operations. Which of the following, if true, would support Alex's argument?
The current price of the product covers the variable cost of production.
Which of the following is a characteristic of perfectly competitive markets?
There will be no barriers to new firms entering the market.
Why do single firms in perfectly competitive markets face horizontal demand curves?
With many firms selling an identical product, single firms have no effect on market price.
What is a price taker? A price taker is
a firm that is unable to affect the market price.
In 2018, a judge allowed a lawsuit alleging that Kona Brewing Company, which sells Kona beer, had misleadingly marketed Kona as if it were brewed in Hawaii, when it is actually brewed in Oregon, Washington, Tennessee, and New Hampshire. If the market for beer were perfectly competitive, the location of breweries would
not matter to consumers since the product would be homogeneous.
The firm's profit-maximizing quantity is that quantity where
price equals marginal cost.
Assume the market price is $30. The graph shows a firm in a perfectly competitive market operating at a loss. The graph includes the firm's marginal cost curve, average total cost curve, and average variable cost curve.
1.) Use the line drawing tool to graph the firm's demand curve. Label this line 'Demand'. 2.) Use the point drawing tool to plot the firm's profit-maximizing price and quantity. Label this point 'Point A'. 3.) Use the rectangle drawing tool to shade in the firm's profit (Profit/Loss). Properly label this shaded area.
An article in the Wall Street Journal discussing the financial results for bookstore chain Barnes & Noble during the first quarter of 2019 reported that, compared with the same quarter in the previous year, the firm's revenue was unchanged from $1.23 billion, while its profit had improved to $66.9 million from a loss of $63.5 million. Can Barnes & Noble maximize profit without maximizing revenue?
A firm will typically not maximize its revenue at the output level that maximizes its profit. It a firm were to maximize revenue, it would typically produce a larger quantity than it does when maximizing profit.
A firm sells 10,000 units of X per month at the market price of $10. There are many other firms in this industry producing the same variety of X. With all firms producing an identical product, each firm is a price taker in this market. Farah Mahmood and her friend Daniela Rodriguez, both students of economics, are debating the impact of a recent increase in the demand for X. Farah feels that the demand faced by each firm will shift to the right. This in turn will increase the market price. Daniela meanwhile is not sure how much the price will rise because she thinks that the immediate response to the higher demand will be a rightward shift in each firm's supply curve. There were fifteen other firms producing 10,000 units of X per month at $10. When the demand increased, the equilibrium price went up to $11 and two new firms entered the market for X. In spite of this new entry, the supply of X by each firm increased to 10,500 units per month. Which of the following is most strongly supported by this information?
Each firm faces a perfectly elastic demand curve at $11.
Refer to the graph of the demand curve facing a firm in the perfectly competitive market for wheat. The fact that the demand curve is horizontal implies which of the following?
The firm can sell any amount of output as long as it accepts the market price of $7.00.
If a perfectly competitive firm is producing at point A, in the graph, which of the following is true?
The firm earns zero economic profit.
Farmer Brown grows cotton. The average total cost and marginal cost of growing cotton for an individual farmer are illustrated in the graph to the right. Assume the market for cotton is perfectly competitive and that the market price is $38 per bushel. Also assume that farmer Brown is producing the amount of cotton that maximizes profits.
Use the rectangle drawing tool to shade in farmer Brown's profit. Properly label this shaded area.
An article in the Wall Street Journal discussing the financial results for bookstore chain Barnes & Noble during the first quarter of 2019 reported that, compared with the same quarter in the previous year, the firm's revenue was unchanged from $1.23 billion, while its profit had improved to $66.9 million from a loss of $63.5 million. It is possible for profits to increase even if revenue remains unchanged if
costs decrease.
Explain why it is true that for a firm in a perfectly competitive market that P = MR = AR. In a perfectly competitive market, P = MR = AR because
firms can sell as much output as they want at the market price.
Suppose Farmer Smith grows apples. Assume the market for apples is perfectly competitive. The market price of apples is $9.00 per basket. Farmer Smith's demand curve is
horizontal at the market price.
Suppose a firm in a perfectly competitive market is making a profit. Assume the market price is $20. The firm's demand curve is
horizontal at the market price.
The late Nobel Prize-winning economist George Stigler once wrote, "the most common and most important criticism of perfect competition... [is] that it is unrealistic." Despite the fact that few firms sell identical products in markets where there are no barriers to entry, economists believe that the model of perfect competition is important because
it is a benchmark—a market with the maximum possible competition—that economists use to evaluate actual markets that are not perfectly competitive.
When are firms likely to be price takers? A firm is likely to be a price taker when
it represents a small fraction of the total market.
What are the three conditions for a market to be perfectly competitive? For a market to be perfectly competitive, there must be
many buyers and sellers, with all firms selling identical products, and no barriers to new firms entering the market.
What characterizes perfectly competitive markets? Perfectly competitive markets have
many sellers.
What does the shaded area in the second graph represent for a perfectly competitive firm that produces at output level Q?
negative economic profit
A firm sells 10,000 units of X per month at the market price of $10. There are many other firms in this industry producing the same variety of X. With all firms producing an identical product, each firm is a price taker in this market. Farah Mahmood and her friend Daniela Rodriguez, both students of economics, are debating the impact of a recent increase in the demand for X. Farah feels that the demand faced by each firm will shift to the right. This in turn will increase the market price. Daniela meanwhile is not sure how much the price will rise because she thinks that the immediate response to the higher demand will be a rightward shift in each firm's supply curve. Farah's claim that each firm's demand curve will shift right is flawed because:
she is confusing the demand curve faced by the firm with the market demand curve.
How should firms in perfectly competitive markets decide how much to produce? Perfectly competitive firms should produce the quantity where
the difference between total revenue and total cost is as large as possible.
How are prices determined in perfectly competitive markets? In perfectly competitive markets, prices are determined by
the interaction of market demand and supply because firms and consumers are price takers.
Explain why it is true that for a firm in a perfectly competitive market, the profit-maximizing condition MR = MC is equivalent to the condition P = MC. When maximizing profits, MR = MC is equivalent to P = MC because
the marginal revenue curve for a perfectly competitive firm is the same as its demand curve.
