Week 7

DIAGRAM 11 Answer the next question(s) on the basis of the following data confronting a firm: Refer to the above data. At the profit-maximizing output the firm's total revenue is: $48. $32. $80. $64.

$48.

DIAGRAM 13 Answer the next question(s) on the basis of the following cost data for a firm that is selling in a purely competitive market. Refer to the above data. If the market price for this firm's product is $14, it will produce: 0 units at a loss of $150. 3 units at a loss of $168. 3 units at an economic profit of zero. 4 units at a loss of $138.

0 units at a loss of $150.

DIAGRAM 11 Answer the next question(s) on the basis of the following data confronting a firm: Refer to the above data. If the firm's minimum average variable cost is $10, the firm's profit-maximizing level of output would be: 2. 3. 4. 5.

3.

DIAGRAM 13 Answer the next question(s) on the basis of the following cost data for a firm that is selling in a purely competitive market. Refer to the above data. If the market price for this firm's product is $24, it will produce: 4 units at a loss of $150. 6 units at a loss of $90. 3 units at an economic profit of zero. 4 units at a loss of $138.

4 units at a loss of $138.

DIAGRAM 9 Refer to the above diagram. At P1, this firm will produce: 47 units and break even. 47 units and realize an economic profit. 66 units and earn only a normal profit. 24 units and earn only a normal profit.

47 units and realize an economic profit.

DIAGRAM 13 Answer the next question(s) on the basis of the following cost data for a firm that is selling in a purely competitive market. Refer to the above data. If the market price for this firm's product is $68.07, it will produce: 8 units at an economic profit of zero. 6 units at a loss of $90. 9 units at an economic profit of $281.52. 8 units at an economic profit of $130.48.

8 units at an economic profit of $130.48.

DIAGRAM 14 Answer the next question(s) on the basis of the following cost data for a firm that is selling in a purely competitive market: Refer to the above data. If the market price for the firm's product is $32, the competitive firm will produce: 8 units at an economic profit of $16. 5 units at a loss of $10. 8 units at a loss equal to the firm's total fixed cost. 7 units at an economic profit of $41.50.

8 units at an economic profit of $16.

DIAGRAM 13 Answer the next question(s) on the basis of the following cost data for a firm that is selling in a purely competitive market. Refer to the above data. If the market price for this firm's product is $86.95, it will produce: 9 units at an economic profit of zero. 6 units at a loss of $90. 9 units at an economic profit of $281.52. 8 units at an economic profit of $130.48.

9 units at an economic profit of $281.52.

DIAGRAM 16 Refer to the above short-run data. Which of the following is correct? This firm will maximize its profit at 440 units of output. Any level of output between 100 and 440 units will yield an economic profit. This firm's marginal revenue rises with output. Any level of output less than 100 units or greater than 440 units is profitable.

Any level of output between 100 and 440 units will yield an economic profit.

DIAGRAM 12 Refer to the above diagram. To maximize profit or minimize losses this firm will produce: K units at price C. D units at price J. E units at price A. E units at price B.

E units at price A.

A competitive firm will produce in the short run so long as its price exceeds its average fixed cost. True False

False

Although individual purely competitive firms can influence the price of their product, these firms as a group cannot influence market price. True False

False

DIAGRAM 7 Refer to the above diagram. Total costs are minimized at output level B. True False

False

DIAGRAM 7 Refer to the above diagram. This firm will maximize profits by producing output D. True False

False

In maximizing profit a firm will always produce that output where total revenues are at a maximum. True False

False

In the short run a competitive firm will always choose to shut down if product price is less than the lowest attainable average total cost. True False

False

The demand curve for a purely competitive industry is perfectly elastic, but the demand curves faced by individual firms in such an industry are downsloping. True False

False

Which of the following statements applies to a purely competitive producer? It will not advertise its product. In long-run equilibrium it will earn an economic profit. Its product will have a brand name. Its product is slightly different from those of its competitors.

It will not advertise its product.

DIAGRAM Refer to the above diagram. The firm's supply curve is the segment of the: MC curve above its intersection with the AVC curve. MC curve above its intersection with the ATC curve. AVC curve above its intersection with the MC curve. ATC curve above its intersection with the MC curve.

MC curve above its intersection with the AVC curve.

The short-run supply curve of a purely competitive producer is based primarily on its: AVC curve. ATC curve. AFC curve. MC curve.

MC curve.

In the short run, a purely competitive firm will earn a normal profit when: P = AVC. P > MC. that firm's MR = market equilibrium price. P = ATC.

P = ATC.

DIAGRAM 10 Refer to the above diagram for a purely competitive producer. The lowest price at which the firm should produce (as opposed to shutting down) is: P1. P2. P3. P4.

P2.

DIAGRAM 8 Refer to the above diagram. The firm will produce at a loss if price is: less than P1. P2. P3. P4.

P2.

DIAGRAM 8 Refer to the above diagram. This firm will earn only a normal profit if product price is: P1. P2. P3. P4.

P3.

DIAGRAM 8 Refer to the above diagram. The firm will realize an economic profit if price is: P1. P2. P3. P4.

P4.

Which of the following is characteristic of a purely competitive seller's demand curve? Price and marginal revenue are equal at all levels of output. Average revenue is less than price. Its elasticity coefficient is 1 at all levels of output. It is the same as the market demand curve.

Price and marginal revenue are equal at all levels of output.

DIAGRAM 7 Refer to the above diagram. At output C production will result in an economic profit. True False

TRUE

Which of the following statements is correct? The demand curve for a purely competitive firm is perfectly elastic, but the demand curve for a purely competitive industry is downsloping. The demand curve for a purely competitive firm is downsloping, but the demand curve for a purely competitive industry is perfectly elastic. The demand curves are downsloping for both a purely competitive firm and a purely competitive industry. The demand curves are perfectly elastic for both a purely competitive firm and a purely competitive industry.

The demand curve for a purely competitive firm is perfectly elastic, but the demand curve for a purely competitive industry is downsloping.

DIAGRAM 7 Refer to the above diagram. At output C production will result in an economic profit. True False

True

DIAGRAM 7 Refer to the above diagram. If the firm produced D units of output at price G, it would earn a normal profit. True False

True

Marginal revenue is the addition to total revenue resulting from the sale of one more unit of output. True False

True

Price and marginal revenue are identical for an individual purely competitive seller. True False

True

The term imperfect competition refers to every market structure besides pure competition. True False

True

The total revenue curve of a competitive seller graphs as a straight, upsloping line. True False

True

A purely competitive seller is: both a "price maker" and a "price taker." neither a "price maker" nor a "price taker." a "price taker." a "price maker."

a "price taker."

Which of the following industries most closely approximates pure competition? agriculture farm implements clothing steel

agriculture

For a purely competitive seller, price equals: average revenue. marginal revenue. total revenue divided by output. all of these.

all of these.

DIAGRAM 10 Refer to the above diagram for a purely competitive producer. The firm will produce at a loss at all prices: above P1. above P3. above P4. between P2 and P3.

between P2 and P3.

A purely competitive seller's average revenue curve coincides with: its marginal revenue curve only. its demand curve only. both its demand and marginal revenue curves. neither its demand nor its marginal revenue curve.

both its demand and marginal revenue curves.

Price is constant or given to the individual firm selling in a purely competitive market because: a. the firm's demand curve is downsloping. b. of product differentiation reinforced by extensive advertising. c. each seller supplies a negligible fraction of total supply. d. there are no good substitutes for its product.

c. each seller supplies a negligible fraction of total supply.

A perfectly elastic demand curve implies that the firm: must lower price to sell more output. can sell as much output as it chooses at the existing price. realizes an increase in total revenue which is less than product price when it sells an extra unit. is selling a differentiated (heterogeneous) product.

can sell as much output as it chooses at the existing price.

Marginal revenue is the: change in product price associated with the sale of one more unit of output. change in average revenue associated with the sale of one more unit of output. difference between product price and average total cost. change in total revenue associated with the sale of one more unit of output.

change in total revenue associated with the sale of one more unit of output.

Suppose you find that the price of your product is less than minimum AVC. You should: minimize your losses by producing where P = MC. maximize your profits by producing where P = MC. close down because, by producing, your losses will exceed your total fixed costs. close down because total revenue exceeds total variable cost.

close down because, by producing, your losses will exceed your total fixed costs.

Which of the following is not a basic characteristic of pure competition? considerable nonprice competition no barriers to the entry or exodus of firms a standardized or homogeneous product a large number of buyers and sellers

considerable nonprice competition

The demand curve in a purely competitive industry is ______, while the demand curve to a single firm in that industry is ______. perfectly inelastic, perfectly elastic downsloping, perfectly elastic downsloping, perfectly inelastic perfectly elastic, downsloping

downsloping, perfectly elastic

The MR = MC rule can be restated for a purely competitive seller as P = MC because: each additional unit of output adds exactly its price to total revenue. the firm's average revenue curve is downsloping. the market demand curve is downsloping. the firm's marginal revenue and total revenue curves will coincide.

each additional unit of output adds exactly its price to total revenue.

DIAGRAM 10 Refer to the above diagram for a purely competitive producer. If product price is P3: the firm will maximize profit at point d. the firm will earn an economic profit. economic profits will be zero. new firms will enter this industry.

economic profits will be zero.

In answering the next question(s), assume a graph in which dollars are measured on the vertical axis and output on the horizontal axis.Refer to the above information. For a purely competitive firm, total revenue: graphs as a straight, upsloping line. is a straight line, parallel to the vertical axis. is a straight line, parallel to the horizontal axis. graphs as a straight, downsloping line.

graphs as a straight, upsloping line.

For a purely competitive firm total revenue: is price times quantity sold. increases by a constant absolute amount as output expands. graphs as a straight upsloping line from the origin. has all of these characteristics.

has all of these characteristics.

In answering the next question(s), assume a graph in which dollars are measured on the vertical axis and output on the horizontal axis.Refer to the above information. For a purely competitive firm, marginal revenue: graphs as a straight, upsloping line. is a straight line, parallel to the vertical axis. is a straight line, parallel to the horizontal axis. graphs as a straight, downsloping line.

is a straight line, parallel to the horizontal axis.

The loss of a purely competitive firm which shuts down in the short run: is equal to its total variable costs. is zero. is equal to its total fixed costs. cannot be determined.

is equal to its total fixed costs.

Marginal revenue for a purely competitive firm: is greater than price. is less than price. is equal to price. may be either greater or less than price.

is equal to price.

The marginal revenue curve of a purely competitive firm: lies below the firm's demand curve. increases at an increasing rate as output expands. is horizontal at the market price. is downsloping because price must be reduced to sell more output.

is horizontal at the market price.

In the short run a purely competitive seller will shut down if product price: equals average revenue. is greater than MC. is less than AVC. is less than ATC.

is less than AVC.

DIAGRAM 15 Refer to the above diagram. The profit-maximizing output: is n. is k. is h. cannot be determined from the information given.

is n.

Assume the XYZ Corporation is producing 20 units of output. It is selling this output in a purely competitive market at $10 per unit. Its total fixed costs are $100 and its average variable cost is $3 at 20 units of output. This corporation: should close down in the short run. is maximizing its profits. is realizing a loss of $60. is realizing an economic profit of $40.

is realizing an economic profit of $40.

If a purely competitive firm is maximizing economic profit: it is necessarily maximizing per-unit profit. it may or may not be maximizing per unit profit. then per-unit profit will be minimized. it is necessarily overallocating resources to its product.

it may or may not be maximizing per unit profit.

If a purely competitive firm shuts down in the short run: its loss will be zero. it will realize a loss equal to its total variable costs. it will realize a loss equal to its total fixed costs. it will realize a loss equal to its total costs.

it will realize a loss equal to its total fixed costs.

A purely competitive firm's short-run supply curve is: the upward sloping portion of its marginal cost curve. the upward sloping portion of its average variable cost curve. its marginal cost curve above average variable cost. its average total cost curve.

its marginal cost curve above average variable cost.

In the short run the individual competitive firm's supply curve is that segment of the: average variable cost curve lying below the marginal cost curve. marginal cost curve lying above the average variable cost curve. marginal revenue curve lying below the demand curve. marginal cost curve lying between the average total cost and average variable cost curves.

marginal cost curve lying above the average variable cost curve.

A competitive firm in the short run can determine the profit-maximizing (or loss-minimizing) output by equating: price and average total cost. price and average fixed cost. marginal revenue and marginal cost. price and marginal revenue.

marginal revenue and marginal cost.

If a purely competitive firm is producing at the P = MC output and realizing an economic profit, at that output: marginal revenue is less than price. marginal revenue exceeds ATC. ATC is being minimized. total revenue equals total cost.

marginal revenue exceeds ATC.

When a firm is maximizing profit it will necessarily be: maximizing profit per unit of output. maximizing the difference between total revenue and total cost. minimizing total cost. maximizing total revenue.

maximizing the difference between total revenue and total cost.

Assume for a competitive firm that MC = AVC at $12, MC = ATC at $20, and MC = MR at $16. This firm will: realize a profit of $4 per unit of output. maximize its profit by producing in the short run. minimize its losses by producing in the short run. shut down in the short run.

minimize its losses by producing in the short run.

The demand schedule or curve confronted by the individual purely competitive firm is: relatively elastic, that is, the elasticity coefficient is greater than unity. perfectly elastic. relatively inelastic, that is, the elasticity coefficient is less than unity.

perfectly elastic.

If a firm is confronted with economic losses in the short run, it will decide whether or not to produce by comparing: marginal revenue and marginal cost. price and minimum average variable cost. total revenue and total cost. total revenue and total fixed cost.

price and minimum average variable cost.

In the short run a purely competitive seller will shut down if: it cannot produce at an economic profit. price is less than average variable cost at all outputs. price is less than average fixed cost at all outputs. there is no point at which marginal revenue and marginal cost are equal.

price is less than average variable cost at all outputs.

Which of the following is not a characteristic of pure competition? price strategies by firms a standardized product no barriers to entry a larger number of sellers

price strategies by firms

DIAGRAM 9 Refer to the above diagram. At P3, this firm will: produce 14 units and realize an economic profit. produce 62 units and earn only a normal profit. produce 40 units and incur a loss. shut down in the short run.

produce 40 units and incur a loss.

DIAGRAM 14 Answer the next question(s) on the basis of the following cost data for a firm that is selling in a purely competitive market: Refer to the above data. If the market price for the firm's product is $28, the competitive firm will: produce 4 units at a loss of $17.40. produce 7 units at a loss of $14.00. close down in the short run. produce 6 units at a loss of $23.80.

produce 7 units at a loss of $14.00.

A firm finds that at its MR = MC output, its TC = $1,000, TVC = $800, TFC = $200, and total revenue is $900. This firm should: shut down in the short run. produce because the resulting loss is less than its TFC. produce because it will realize an economic profit. liquidate its assets and go out of business.

produce because the resulting loss is less than its TFC.

On a per unit basis economic profit can be determined as the difference between: marginal revenue and product price. product price and average total cost. marginal revenue and marginal cost. average fixed cost and product price.

product price and average total cost.

The principle that a firm should produce up to the point where the marginal revenue from the sale of an extra unit of output is equal to the marginal cost of producing it is known as the: output-maximizing rule. profit-maximizing rule. shut-down rule. break-even rule.

profit-maximizing rule.

Suppose a firm in a purely competitive market discovers that the price of its product is above its minimum AVC point but everywhere below ATC. Given this, the firm: minimizes losses by producing at the minimum point of its AVC curve. maximizes profits by producing where MR = ATC. should close down immediately. should continue producing in the short run, but leave the industry in the long run if the situation persists.

should continue producing in the short run, but leave the industry in the long run if the situation persists.

DIAGRAM 9 Refer to the above diagram. At P4, this firm will: shut down in the short run. produce 30 units and incur a loss. produce 30 units and earn only a normal profit. produce 10 units and earn only a normal profit.

shut down in the short run.

If total revenue is less than total variable costs at the MR = MC output, a purely competitive firm should: shut down. produce, but will necessarily realize a loss. produce and may or may not realize a profit. increase its output.

shut down.

In answering the next question(s), assume a graph in which dollars are measured on the vertical axis and output on the horizontal axis.Refer to the above information. For a purely competitive firm: marginal revenue will graph as an upsloping line. the demand curve will lie above the marginal revenue curve. the marginal revenue curve will lie above the demand curve. the demand and marginal revenue curves will coincide.

the demand and marginal revenue curves will coincide.

If at the MC = MR output, AVC exceeds price: new firms will enter this industry. the firm should produce the MC = MR output and realize an economic profit. the firm should shut down in the short run. the firm should expand its plant.

the firm should shut down in the short run.

The lowest point on a purely competitive firm's short-run supply curve corresponds to: the minimum point on its ATC curve. the minimum point on its AVC curve. the minimum point on its AFC curve. the minimum point on its MC curve.

the minimum point on its AVC curve.

In a purely competitive industry: there will be no economic profits in either the short run or the long run. economic profits may persist in the long run if consumer demand is strong and stable. there may be economic profits in the short run, but not in the long run. there may be economic profits in the long run, but not in the short run.

there may be economic profits in the short run, but not in the long run.

Economists use the term imperfect competition to describe: all industries which produce standardized products. any industry in which there is no nonprice competition. a pure monopoly only. those markets which are not purely competitive.

those markets which are not purely competitive.

The MR = MC rule applies: to firms in all types of industries. only when the firm is a "price taker." only to monopolies. only to purely competitive firms.

to firms in all types of industries.

Firms seek to maximize: per unit profit. total revenue. total profit. market share.

total profit.

A firm reaches a break-even point (normal profit position) where: marginal revenue cuts the horizontal axis. marginal cost intersects the average variable cost curve. total revenue equals total variable cost. total revenue and total cost are equal.

total revenue and total cost are equal.

In the short run a purely competitive firm will maximize profit by producing that output at which: total revenue exceeds total cost by a maximum amount. total revenue exceeds total cost by a minimum amount. total revenue and total cost are equal. total fixed cost equals total variable cost.

total revenue exceeds total cost by a maximum amount.

A purely competitive firm should produce in the short run if its total revenue is sufficient to cover its: total variable costs. total costs. total fixed costs. marginal costs.

total variable costs.

A purely competitive firm's short-run supply curve is: perfectly elastic at the minimum average total cost. upsloping and equal to the portion of the marginal cost curve that lies above the average variable cost curve. upsloping and equal to the portion of the marginal cost curve that lies above the average total cost curve. upsloping only when the industry has constant costs.

upsloping and equal to the portion of the marginal cost curve that lies above the average variable cost curve.

In the short run a purely competitive firm that seeks to maximize profit will produce: where the demand and the ATC curves intersect. where total revenue exceeds total cost by the maximum amount. that output where economic profits are zero. at any point where the total revenue and total cost curves intersect.

where total revenue exceeds total cost by the maximum amount.

If a firm in a purely competitive industry is confronted with an equilibrium price of $5, its marginal revenue: may be either greater or less than $5. will also be $5. will be less than $5. will be greater than $5.

will also be $5.