Question 1

A firm in a perfectly competitive industry produces its profit-maximizing quantity, 40 units. Industry price is $3, total fixed costs are $45, and total variable costs are $60. The firm's economic profit is

Accepted Answer

The firm's total revenue is 40 units * $3 = $120. Total costs are $45 (fixed) + $60 (variable) = $105. Economic profit is total revenue minus total costs, which is $120 - $105 = $15.

Question 2

Corn is produced in a perfectly competitive market. The demand for ethanol decreases. This will cause the individual corn farmerʹs marginal revenue to ________ and their profit-maximizing level of output to ________.

Accepted Answer

The demand for ethanol decreasing means less corn is needed for ethanol production, leading to a decrease in the demand for corn. This decrease in demand lowers the price farmers can charge for corn, which decreases their marginal revenue. With lower marginal revenue, the profit-maximizing level of output also decreases, as it's no longer profitable to produce as much corn.

Question 3

Strawberries, a normal good, are produced in a perfectly competitive market. Average consumer incomes increase. This will cause the individual strawberry farmerʹs marginal revenue to ________ and their profit-maximizing level of output to ________.

Accepted Answer

When average consumer incomes increase, demand for a normal good like strawberries rises, leading to higher prices and marginal revenue for individual farmers. Consequently, their profit-maximizing level of output also increases.

Question 4

A farmer producing bushels of soybeans in the perfectly competitive soybean industry is currently maximizing profits. If the market price of soybeans increases and the farmer adjusts output to the new price, he will produce ________ soybeans and make ________ profit.

Accepted Answer

In a perfectly competitive market, if the market price of a product increases, a profit-maximizing producer will increase production to take advantage of the higher price, leading to more profit.

Question 5

Assume Cathy's Cupcake Company operates in a perfectly competitive market producing 10,000 cupcakes per day. At this output level, price equals this firmʹs marginal cost. Assuming price exceeds average variable cost, to maximize profits Cathy's should

Accepted Answer

In a perfectly competitive market, profit maximization occurs where price equals marginal cost, as long as the price is above the average variable cost. Since Cathy's Cupcake Company is operating at this point, they are already maximizing their profits and should make no adjustments.

Question 6

Bubba's Bait and Tackle is maximizing profits, so it must be producing where

Accepted Answer

For a firm to maximize profits, it should produce at the level where marginal revenue (MR) equals marginal cost (MC). This ensures that the cost of producing one more unit is exactly balanced by the revenue it generates, optimizing profit.

Question 7

Refer to the information provided in Table 8.8 below to answer the following question(s).
Table 8.8
 $$\begin{array} { c c c c c } 
\begin{array} { c } 
 \text { Number of } \
\text { FruitBaskets }
\end{array} &\text { TFC } & \text { TVC } & \text { TC } & \text { MC } \
\hline 0 & \$ 100 & \$ 0 & \$ 100 & - - \
\hline 1 & 100 & 20 & 120 & 20 \
\hline 2 & 100 & 30 & 130 & 10 \
\hline 3 & 100 & 42 & 142 & 12 \
\hline 4 & 100 & 62 & 162 & 20 \
\hline 5 & 100 & 92 & 192 & 30 \
\hline 6 & 100 & 136 & 236 & 44 \
\hline
\end{array}$$
-Refer to Table 8.8. Assume that Polynesian Fruit sells fruit baskets in a perfectly competitive market. The market price of a fruit basket is $30. To maximize profits, Polynesian Fruit should sell ________ fruit basket(s) and their profit is ________.

Accepted Answer

To maximize profits in a perfectly competitive market, a firm should produce where marginal cost (MC) is equal to the market price, as long as the price is above average variable cost (AVC). Here, the market price is $30. Looking at the MC column, the closest MC to the market price without going over is $30 at 5 fruit baskets. To calculate profit, subtract total cost (TC) from total revenue (TR). TR is the market price ($30) times the quantity sold (5), which equals $150. TC at 5 baskets is $192. Thus, profit is $150 - $192 = -$42.

Question 8

Assume Cathy's Cupcake Company operates in a perfectly competitive market producing 10,000 cupcakes per day. At this output level, price exceeds the firm's marginal and average variable costs. It follows that producing one more cupcake will cause this firm's

Accepted Answer

In a perfectly competitive market, if the price exceeds the marginal and average variable costs, producing one more unit (in this case, a cupcake) will increase the firm's profits. This is because the revenue from selling the additional cupcake will be greater than the cost of producing it.

Question 9

Refer to the information provided in Table 8.8 below to answer the following question(s).
Table 8.8
 $$\begin{array} { c c c c c } 
\begin{array} { c } 
 \text { Number of } \
\text { FruitBaskets }
\end{array} &\text { TFC } & \text { TVC } & \text { TC } & \text { MC } \
\hline 0 & \$ 100 & \$ 0 & \$ 100 & - - \
\hline 1 & 100 & 20 & 120 & 20 \
\hline 2 & 100 & 30 & 130 & 10 \
\hline 3 & 100 & 42 & 142 & 12 \
\hline 4 & 100 & 62 & 162 & 20 \
\hline 5 & 100 & 92 & 192 & 30 \
\hline 6 & 100 & 136 & 236 & 44 \
\hline
\end{array}$$
-Refer to Table 8.8. Assume that Polynesian Fruit sells fruit baskets in a perfectly competitive market. The market price of a fruit basket is $44. To maximize profits, Polynesian Fruit should sell ________ fruit basket(s) and their profit is ________.

Accepted Answer

To maximize profits in a perfectly competitive market, Polynesian Fruit should produce where marginal cost (MC) equals the market price. Here, MC equals $44 at six fruit baskets. The total revenue at six baskets is $44 * 6 = $264. The total cost is $236, so the profit is $264 - $236 = $28.

Question 10

If a profit-maximizing firm is currently producing output where MR = MC in the short run, it should

Accepted Answer

When a profit-maximizing firm is producing at a level where marginal revenue (MR) equals marginal cost (MC), it is operating at the optimal output level for maximizing profit in the short run. Therefore, it should not change its output.

Question 11

Assume Cathy's Cupcake Company operates in a perfectly competitive market producing 10,000 cupcakes per day. At this output level, price exceeds this firmʹs marginal and average variable costs. To maximize profits, Cathy's should

Accepted Answer

In a perfectly competitive market, if the price exceeds both marginal and average variable costs, the firm can increase profits by increasing output until price equals marginal cost.

Question 12

An individual wheat farmer produces wheat in a perfectly competitive market. A decrease in the market demand for wheat will cause the farmer's marginal revenue to ________ and his profit-maximizing level of output to ________.

Accepted Answer

In a perfectly competitive market, a decrease in market demand for wheat would lead to a decrease in the price of wheat. Since marginal revenue for a perfectly competitive firm is equal to the price of the product, the farmer's marginal revenue would decrease. With lower marginal revenue, the profit-maximizing level of output would also decrease, as it would not be profitable to produce as much wheat at the lower price.

Question 13

Profit-maximizing firms want to ________ the difference between total revenue and total cost.

Accepted Answer

Profit-maximizing firms aim to maximize the difference between total revenue and total cost, as this difference represents profit.

Question 14

In perfect competition, a firm's ________ curve is horizontal.

Accepted Answer

In perfect competition, a firm's marginal revenue curve is horizontal because the firm is a price taker and can sell any quantity of goods at the market price, making the marginal revenue constant for all units sold.

Question 15

If a firm is producing where MR < MC

Accepted Answer

When MR (Marginal Revenue) is less than MC (Marginal Cost), it means that the cost of producing an additional unit is higher than the revenue it generates, indicating that the firm is not maximizing profits by producing that extra unit.

Question 16

Assume Cathy's Cupcake Company operates in a perfectly competitive market producing 10,000 cupcakes per day. At this output level, marginal cost exceeds this firmʹs price. Assuming price exceeds average variable cost, to maximize profits Cathy's should

Accepted Answer

In a perfectly competitive market, if marginal cost exceeds the price, the firm should decrease its output to maximize profits, as long as the price is above the average variable cost. This adjustment helps the firm to align its production with the point where marginal cost equals the price, which is the profit-maximizing condition in perfect competition.

Question 17

A perfectly competitive firm will earn ________ economic profits in the range of output for which the firm's price is above its minimum average total cost.

Accepted Answer

In a perfectly competitive market, when the price is above the minimum average total cost, the firm can cover all its costs and earn a profit, leading to positive economic profits.

Question 18

The profit-maximizing level for all firms in ________ is the output level where MC = MR.

Accepted Answer

The profit-maximizing level for firms in any industry, regardless of market structure, is where marginal cost (MC) equals marginal revenue (MR). This principle applies across different types of markets, including perfect competition, monopoly, monopolistic competition, and oligopoly.

Question 19

Which of the following represents an accurate situation for a perfectly competitive firm?

Accepted Answer

In a perfectly competitive market, the price (P) equals the marginal revenue (MR) because firms are price takers and can sell any quantity of goods at the market price.

Question 20

If a firmʹs demand curve is ________, then at the profit-maximizing level of output P = MR = MC.

Accepted Answer

When a firm's demand curve is perfectly elastic, it means that the firm can sell as much as it wants at the prevailing market price, but cannot charge a higher price. This results in the condition where price (P) equals marginal revenue (MR) and, at the profit-maximizing level of output, equals marginal cost (MC) as well.

Quiz 8: Short-Run Costs and Output Decisions