Question 1

Assume a perfectly competitive firm's short-run cost is TC = 100 + 160Q + 3Q².If the market price is $196,what should it do?

Accepted Answer

In a perfectly competitive market, the firm will continue operating as long as the market price is greater than or equal to the firm's marginal cost. The marginal cost for this firm is: MC = dTC/dQ = 160 + 6² Setting this equal to the market price and solving for Q: 196 = 160 + 6² ² = 9.3333 MC = 160 + 6(9.3333) = 220 Therefore, the firm should produce 6 units (where MC = MR = $196) and continue operating in the short run.

Question 2

A normal profit is

Accepted Answer

Normal profit occurs when revenues are equal to both the accounting and opportunity costs, meaning the firm covers all its costs, including the opportunity cost of capital.

Question 3

Which of the following characteristics is most important in differentiating between perfect competition and all other types of markets?

Accepted Answer

The most important characteristic in differentiating between perfect competition and all other types of markets is whether or not firms are price takers. In perfect competition, firms are price takers and have no control over the market price, while in all other types of markets, firms have some degree of market power and can influence the market price. While product standardization and market information about price are also important characteristics of perfect competition, they are not as fundamental as the concept of firms being price takers.

Question 4

Demand facing an individual,perfectly competitive firm is

Accepted Answer

In a perfectly competitive market, the individual firm is a price taker and must accept the market price determined by market forces. Therefore, the demand facing the firm is perfectly elastic at the price determined by market forces.

Question 5

Which of the following is false?

Accepted Answer

A monopolist is not a price taker because it has market power to set its own price. The other statements are true for monopolists.

Question 6

Which of the following conditions would definitely cause a perfectly competitive company to shut down in the short run?

Accepted Answer

If the market price falls below the average variable cost (AVC), the company would not be able to cover its variable costs and would therefore shut down in the short run. In this case, it is better to minimize losses by shutting down temporarily rather than continuing operations and incurring greater losses.

Question 7

The principle marginal revenue equal-marginal-cost rule for maximizing profit

Accepted Answer

The principle marginal revenue equal-marginal-cost rule for maximizing profit applies to all firms in all industries, regardless of the market structure. It is a fundamental rule of profit maximization that states that a firm should produce at the quantity where marginal revenue equals marginal cost in order to maximize profits.

Question 8

In perfect competition

Accepted Answer

In perfect competition, there are many firms producing identical goods with no market power to influence the price. Therefore, the firm's demand curve is perfectly elastic, meaning the firm can sell as much output as it wants at the prevailing market price. The firm is a price taker and cannot increase the price of its product without losing all its customers. As a result, the firm's marginal revenue curve is equal to the market price, and it will choose the output level where its marginal cost equals the market price to maximize profits.

Question 9

Mars Inc.produces 100,000 boxes of Snickers bars which sell for $4 a box.If variable costs are $3 per box,and it has $150,000 fixed operating costs,in the short run,it should

Accepted Answer

In the short run, a firm should continue to produce if it can cover its variable costs. Here, the selling price per box ($4) is greater than the variable cost per box ($3), so variable costs are being met.

Question 10

Which is a required characteristic of a perfectly competitive industry?

Accepted Answer

A perfectly competitive industry is characterized by a large number of firms, homogeneous products, easy entry and exit of firms, perfect information, and no market power. Therefore, the answer is none of the above since all the options list characteristics that do not align with that of a perfectly competitive industry.

Question 11

If a perfectly competitive firm incurs an economic loss,it should

Accepted Answer

A perfectly competitive firm should shut down if its economic loss exceeds its fixed costs, as it would be better off not producing and only incurring fixed costs rather than continuing to produce and incurring greater losses.

Question 12

In long-run equilibrium a perfectly competitive firm will operate where the price is

Accepted Answer

In perfect competition, a firm is a price taker, meaning it cannot influence the market price. Therefore, it will produce where MR = MC to maximize profits. In the long run, firms can enter or exit the industry, which will adjust the market supply and demand until the price is equal to the minimum ATC. Therefore, in the long run equilibrium, a perfectly competitive firm will operate where the price is equal to MR, MC, and minimum ATC. This is why option D is the correct choice.

Question 13

A feature of perfect competition is

Accepted Answer

Perfect competition is characterized by a large number of firms producing homogenous or standardized products, with no control over the market price due to the absence of barriers to entry and exit, and complete information about the market. The concept of non-price competition is absent in perfect competition as all firms produce the same product and have no means of distinguishing their product from others. Mutual interdependence among firms usually applies in oligopolies where a few large firms dominate the market. Unique products are not a feature of perfect competition as all firms produce the same standardized product.

Question 14

Assume a profit maximizing firm's short-run cost is TC = 700 + 60Q.If its demand curve is P = 300 - 15Q,what should it do in the short run?

Accepted Answer

The answer of Assume a profit maximizing firm's short-run cost...

Question 15

A perfectly competitive firm sells 15 units of output at the going market price of $10.Suppose its average fixed cost is $15 and its average variable cost is $8.Its contribution margin (i.e.,contribution to fixed cost)is

Accepted Answer

The contribution margin is calculated as (Price - Average Variable Cost) * Quantity. Here, it is ($10 - $8) * 15 = $30.

Question 16

In economic analysis,any amount of profit earned above zero is considered "above normal" because

Accepted Answer

In economic terms, "above normal" profit occurs when a firm's revenue exceeds both its accounting and opportunity costs. Accounting costs are the explicit costs of production, while opportunity costs represent the value of the best alternative use of resources. Earning above these costs indicates the firm is not only covering its explicit costs but also earning more than what it could have earned in the next best alternative, hence making an "above normal" profit.

Question 17

Which of the following markets comes closes to the model of perfect competition?

Accepted Answer

Agriculture comes closest to the model of perfect competition as it has a large number of small producers and buyers, homogeneous products, easy entry and exit, and no significant market power for any individual producer or buyer.

Question 18

For a demand curve that is horizontal,the marginal revenue curve

Accepted Answer

For a horizontal demand curve, the price remains constant regardless of the quantity produced or sold. This means that the marginal revenue earned from selling an additional unit of the good is equal to the price of the good, which is the same as the demand curve. Therefore, the marginal revenue curve will be the same as the demand curve in this case.

Question 19

In perfect competition,if firms enter the market in the long run

Accepted Answer

In perfect competition, if firms enter the market in the long run, the total supply will increase, leading to a greater supply-demand gap resulting in a decrease in market price. This is the essence of the law of supply, which states that an increase in supply results in a decrease in price.

Question 20

According to the shutdown rule,a firm should produce no output in the short run if

Accepted Answer

The shutdown rule states that a firm should produce no output in the short run if price is below minimum average variable cost (AVC). This is because if the price is below the AVC, the firm is not even covering its variable costs and continuing to produce would only result in larger losses. Therefore, it is better to shut down in the short run and minimize losses.

Quiz 8: Pricing and Output Decisions: Perfect Competition and Monopoly Appendices 8A and 8B

Assume a perfectly competitive firm's short-run cost is TC = 100 + 160Q + 3Q².If the market price is $196,what should it do?

A normal profit is

Which of the following characteristics is most important in differentiating between perfect competition and all other types of markets?

Demand facing an individual,perfectly competitive firm is

Which of the following is false?

Which of the following conditions would definitely cause a perfectly competitive company to shut down in the short run?

The principle marginal revenue equal-marginal-cost rule for maximizing profit

In perfect competition

Mars Inc.produces 100,000 boxes of Snickers bars which sell for $4 a box.If variable costs are $3 per box,and it has $150,000 fixed operating costs,in the short run,it should

Which is a required characteristic of a perfectly competitive industry?

If a perfectly competitive firm incurs an economic loss,it should

In long-run equilibrium a perfectly competitive firm will operate where the price is

A feature of perfect competition is

Assume a profit maximizing firm's short-run cost is TC = 700 + 60Q.If its demand curve is P = 300 - 15Q,what should it do in the short run?

A perfectly competitive firm sells 15 units of output at the going market price of $10.Suppose its average fixed cost is $15 and its average variable cost is $8.Its contribution margin (i.e.,contribution to fixed cost) is

In economic analysis,any amount of profit earned above zero is considered "above normal" because

Which of the following markets comes closes to the model of perfect competition?

For a demand curve that is horizontal,the marginal revenue curve

In perfect competition,if firms enter the market in the long run

According to the shutdown rule,a firm should produce no output in the short run if

Quiz 8: Pricing and Output Decisions: Perfect Competition and Monopoly Appendices 8A and 8B

Assume a perfectly competitive firm's short-run cost is TC = 100 + 160Q + 3Q2.If the market price is $196,what should it do?

A normal profit is

Which of the following characteristics is most important in differentiating between perfect competition and all other types of markets?

Demand facing an individual,perfectly competitive firm is

Which of the following is false?

Which of the following conditions would definitely cause a perfectly competitive company to shut down in the short run?

The principle marginal revenue equal-marginal-cost rule for maximizing profit

In perfect competition

Mars Inc.produces 100,000 boxes of Snickers bars which sell for $4 a box.If variable costs are $3 per box,and it has $150,000 fixed operating costs,in the short run,it should

Which is a required characteristic of a perfectly competitive industry?

If a perfectly competitive firm incurs an economic loss,it should

In long-run equilibrium a perfectly competitive firm will operate where the price is

A feature of perfect competition is

Assume a profit maximizing firm's short-run cost is TC = 700 + 60Q.If its demand curve is P = 300 - 15Q,what should it do in the short run?

A perfectly competitive firm sells 15 units of output at the going market price of $10.Suppose its average fixed cost is $15 and its average variable cost is $8.Its contribution margin (i.e.,contribution to fixed cost) is

In economic analysis,any amount of profit earned above zero is considered "above normal" because

Which of the following markets comes closes to the model of perfect competition?

For a demand curve that is horizontal,the marginal revenue curve

In perfect competition,if firms enter the market in the long run

According to the shutdown rule,a firm should produce no output in the short run if

Assume a perfectly competitive firm's short-run cost is TC = 100 + 160Q + 3Q².If the market price is $196,what should it do?