Question 1

A perfectly competitive firm will maximize profits (or minimize losses)so long as price (marginal revenue)is:

Accepted Answer

The answer of A perfectly competitive firm will maximize profits...

Question 2

If a market is perfectly competitive and is in long-run equilibrium,which of the following conditions does not hold?

Accepted Answer

In perfect competition, if the market is in long-run equilibrium, the existing firms are earning only normal profits (zero economic profit) because of easy entry and exit. The price is equal to the minimum long-run average cost of production, and the value of the last unit produced equals the cost of producing it. Therefore, there is no incentive for additional firms to enter the market because they cannot earn higher profits than the existing firms. Choice D violates this condition because additional firms have no incentive to enter the market.

Question 3

Which of the following statements is definitely true when price is less than average total cost for a firm producing the profit-maximizing level of output in the short run?

Accepted Answer

When price is less than average total cost for a firm producing the profit-maximizing level of output in the short run, the firm is incurring an economic loss. This means that the total revenue earned by the firm is less than the total opportunity cost of the resources used in production, including both explicit and implicit costs. Option A is incorrect because it only refers to explicit costs, while economic profit takes into account implicit costs as well. Option B is incorrect because shutting down would only minimize losses if the firm's fixed costs were greater than its variable costs, but this is not specified in the question. Option C is incorrect because negative total revenue is not a meaningful concept.

Question 4

Assume that at the current market price,a perfectly competitive firm's profit-maximizing level of output yields total revenues that are just equal to total costs.Which of the following statements applies to this firm?

Accepted Answer

Since total revenue equals total cost, the firm is earning zero economic profit (i.e. breaking even). In a perfectly competitive market, firms can continue to operate in the short run and earn zero economic profit. Therefore, the firm should continue to operate. Option A is incorrect because if the firm shut down, it would not even earn zero economic profit. Option B is incorrect because the firm can continue to operate in the short run without minimizing losses since it is already breaking even. Option D is incorrect because increasing explicit costs would increase total costs and reduce economic profit, which is zero.

Question 5

Widgets R Us,which is a price-taking firm,is currently producing 250 units of output.The market price is $3 per unit,the marginal cost of the 250th unit is $2.75,average total cost is $3.50 per unit,and average variable cost is $2.50 per unit.What advice should you give Widgets R Us?

Accepted Answer

Since the marginal cost of producing the 250th unit ($2.75) is less than the market price ($3), Widgets R Us should increase output to reduce losses. This is because producing another unit would add more to revenue than to costs, thus reducing losses.

Question 6

Assume a perfectly competitive firm is producing 500 units of output,P = $7,ATC of the 500ᵗʰ unit is $6,marginal cost of the 500ᵗʰ unit = $7,and AVC of the 500ᵗʰ unit = $5.Based on this information,the firm is:

Accepted Answer

The firm is earning an economic profit because P > ATC. The profit per unit is $1 ($7 - $6), and for 500 units, this results in a total economic profit of $500.

Question 7

By continuing to operate when price is greater than average variable cost but less than average total cost,a firm limits its losses to:

Accepted Answer

When a firm operates in the short run, it should continue producing as long as price is greater than average variable cost. This is because at this level of output, the firm is covering all of its variable costs and some of its fixed costs. If the firm shuts down, it would only avoid its variable costs, but it would still have to pay its fixed costs. Therefore, the firm should continue operating as long as price is greater than average variable cost but less than average total cost.

If the firm operates in this range, it will make some revenue that is sufficient to cover its variable costs, and some of its fixed costs. Therefore, it limits its losses to the difference between its total fixed costs and the amount by which total revenue exceeds total variable costs. This is because the fixed costs are sunk costs that the firm cannot recover, and so they must be borne by the firm whether it operates or shuts down. Thus, the best choice is C.

Question 8

A perfectly competitive firm will minimize its losses by shutting down when:

Accepted Answer

A firm in perfect competition will minimize its losses by shutting down in the short run when the price (P) is less than the average variable cost (AVC) at the profit-maximizing level of output, because it cannot cover its variable costs.

Question 9

The perfectly competitive firm's supply curve:

Accepted Answer

In perfect competition, the firm is a price taker, meaning it cannot influence the market price. Therefore, the firm's supply curve is determined solely by its marginal cost curve. In the short run, the supply curve is its marginal cost curve above the minimum point on the average variable cost (AVC) curve. This is because the firm would not produce if the price is below its average variable cost, as it would result in losses.

Question 10

When a perfectly competitive firm is in long-run equilibrium:

Accepted Answer

In long-run equilibrium, a perfectly competitive firm's total revenues would equal the sum of its total explicit and implicit costs (option A). In addition to that, the firm would be operating at the minimum of its LRAC (Long-Run Average Cost) curve, which implies that the firm is producing at the most efficient scale of production (option B). Lastly, the firm would earn zero economic profit in the long run because of the ease of entry and exit for new firms in the market, resulting in no barriers to entry to drive out economic profits (option C). Therefore, all of the above options (A, B, and C) are true when a perfectly competitive firm is in long-run equilibrium.

Question 11

Assume there is a decrease in the market demand for a good sold by price-taking firms that are initially producing the profit-maximizing level of output.For the individual firm,this would result in:

Accepted Answer

When there is a decrease in market demand, the market price for the good will also decrease. Price-taking firms will have to lower their own prices in order to remain competitive. As a result, the profit-maximizing quantity of output for each individual firm will decrease because they will be selling fewer units at a lower price. This is consistent with the law of demand, which states that as the price of a good decreases, the quantity demanded of that good will increase.

Question 12

Assume there is a decrease in the market demand for a good sold by price-taking firms that are initially producing the profit-maximizing level of output.How will the market adjust over time?

Accepted Answer

When there is a decrease in market demand, price-taking firms producing at the profit-maximizing level will experience a reduction in price and demand for their product, leading to potential losses. To eliminate these losses, some firms will exit the market, reducing supply. This reduction in supply, in turn, causes the price to rise until the remaining firms no longer incur losses, restoring equilibrium.

Question 13

Assume a perfectly competitive firm is producing 300 units of output,P = $10,ATC of the 300ᵗʰ unit is $8,marginal cost of the 300ᵗʰ unit = $10,and AVC of the 300ᵗʰ unit = $6.Based on this information,the firm is:

Accepted Answer

The firm is earning an economic profit because the price ($10) is greater than the average total cost ($8) for the 300th unit. The economic profit is calculated as (P - ATC) * Q = ($10 - $8) * 300 = $2 * 300 = $600.

Question 14

By shutting down when price is less than average variable cost at the profit-maximizing level of output,a perfectly competitive firm will limit its losses to its:

Accepted Answer

By shutting down when the price is less than the average variable cost, a perfectly competitive firm minimizes its losses to the total fixed costs, as it avoids incurring additional variable costs.

Question 15

Assume there is an increase in the number of consumers in the market for a good sold by perfectly competitive firms that are initially producing the profit-maximizing level of output.For the individual firm,this would result in:

Accepted Answer

An increase in the number of consumers leads to higher demand. In a perfectly competitive market, this results in a higher equilibrium price and quantity, allowing firms to increase both price and the profit-maximizing quantity of output.

Question 16

Assume that as the firms in a perfectly competitive industry expand output,the prices of productive inputs increase.All else constant,this would cause the individual firms' marginal cost curves to ________ and the market supply curve to become ________.

Accepted Answer

If the prices of productive inputs increase as firms expand output, the firms' marginal cost curves will shift up due to higher input costs. This means that they will have to spend more to produce each additional unit of output. As a result, the market supply curve will become steeper because it will require a higher price to induce firms to produce each additional unit of output.

Question 17

When price is greater than average variable cost but less than average total cost at the profit-maximizing level of output,a firm should:

Accepted Answer

If a firm is producing at a level where price is greater than average variable cost but less than average total cost, it is still covering its variable costs but not its fixed costs. This means that it is not making a profit, but it is not losing money on every unit produced either. Therefore, the best option for the firm is to continue producing at this level of output where marginal revenue equals marginal cost, as this will allow it to at least cover its variable costs and contribute towards covering its fixed costs. This is because shutting down or reducing output further would result in even greater losses, while increasing output would lead to even higher fixed costs that the firm cannot cover.

Question 18

When price is less than average variable cost at the profit-maximizing level of output,a firm should:

Accepted Answer

When price is less than average variable cost, the firm cannot cover its variable costs, which means it's incurring losses on every unit it produces. Therefore, it's better for the firm to shutdown to minimize losses, as continuing operations would lead to greater losses than just covering fixed costs. Fixed costs are sunk in the short run, so the decision to shutdown is based on variable costs.

Question 19

Which of the following is not an option for a perfectly competitive firm in the short run?

Accepted Answer

In the short run, a perfectly competitive firm cannot exit the market altogether as it has already invested in fixed costs such as equipment and machinery. It can only choose to shut down temporarily and wait for better market conditions or adjust its level of production based on demand. Therefore, option D is not an option for a perfectly competitive firm in the short run.

Question 20

Assume a perfectly competitive firm is producing 300 units of output,P = $10,ATC of the 300ᵗʰ unit is $11,marginal cost of the 300ᵗʰ unit = $10,and AVC of the 300ᵗʰ unit = $9.Based on this information,the firm is:

Accepted Answer

In the short run, a perfectly competitive firm should continue to operate as long as it can cover its variable costs, which in this case is $9 (AVC of the 300th unit). Therefore, the firm should produce and sell 300 units at a price of $10 per unit, generating a total revenue of 300 x $10 = $3000. The total cost of production would be 299 units at AVC of $9 ($2691) and 1 unit at ATC of $11 ($11), making the total cost $2702. The firm's total revenue ($3000) is greater than its total cost ($2702), meaning it is incurring a loss of $298 ($3000 - $2702 = $298). Therefore, the firm should continue to operate in the short run, but it is not earning an economic profit.

Quiz 7: Market Structure: Perfect Competition

A perfectly competitive firm will maximize profits (or minimize losses) so long as price (marginal revenue) is: