Question 1

A price taking firm that has TC = 2q²+ 10 and faces a market price of Pe = 8 will produce what quantity?

Accepted Answer

To determine the optimal quantity, the firm should produce where marginal cost (MC) equals the market price (Pe). The firm's marginal cost can be found by taking the derivative of total cost (TC) with respect to quantity (q):

MC = dTC/dq = 2S1U1P12S1S1P0S1U1P1S1P0

Setting this equal to the market price of Pe = 8:

8 = 2S1U1P12S1S1P0S1U1P1S1P0

Solving for q, we get:

q = 2

Therefore, the firm should produce a quantity of 2 to maximize its profit. Choice C is the correct answer.

Question 2

Andrew's demand for fish is: Q_A=12- 3P. Betty's demand for fish is: Q_B=16- 4P and Cathy's demand for fish is: Q_C=20- 5P. Q is the number of pounds of fish and P is the price of fish per pound. If Andrew, Betty and Cathy are the only people living in their village, what is the total market demand for fish in the village?

Accepted Answer

To find the total market demand for fish in the village, you add up the individual demand functions of Andrew, Betty, and Cathy. Adding the constants (12 + 16 + 20 = 48) and the coefficients of P (-3 - 4 - 5 = -12), you get the total market demand for fish as Q = 48 - 12P.

Question 3

Market supply is:

Accepted Answer

Market supply is the sum of the quantities supplied by all firms in a given market at each price. It represents the relation between price and the total quantity that firms are willing to sell. Option A is the sum of AVC curves, which is not market supply. Option C is the level of profit a firm requires, which is not related to market supply. Option D is not true because market supply can be defined even if a firm faces only a portion of the demand curve.

Question 4

A competitive equilibrium:

Accepted Answer

A competitive equilibrium requires a price where the quantity demanded equals quantity supplied, which is known as market clearing. This is necessary when there is perfect competition in the market, and it leads to Pareto-efficiency. Therefore, option A is incorrect as competitive equilibrium can be Pareto-optimal. Option C is incorrect as Walrasian optimality is a type of competitive equilibrium. Option D is incorrect as individuals do not set prices in a competitive equilibrium.

Question 5

The competitive firm's supply curve:

Accepted Answer

The competitive firm's supply curve represents the profit-maximizing quantity of output for each price level, as it reflects the quantities the firm is willing to supply at different prices.

Question 6

Suppose that short- run SMC = 10 + 2Q for an individual firm in a competitive market. If there are 100 identical firms in this market, then the short- run supply curve can be written as:

Accepted Answer

The short-run supply curve for an individual firm is given by its short-run marginal cost (SMC), which is P = 10 + 2Q. For 100 identical firms, the market supply curve is the horizontal summation of individual supply curves, resulting in P = 10 + 0.02Q.

Question 7

A perfectly competitive market's short- run supply curve:

Accepted Answer

The short-run supply curve in a perfectly competitive market is derived from the horizontal summation of all individual firms' short-run supply curves, reflecting the total quantity supplied at each price level by all firms in the market.

Question 8

A necessary condition for an industry to be in long- run competitive equilibrium is:

Accepted Answer

In long-run competitive equilibrium, firms in the industry must be producing at their efficient scale, which means that their short-run and long-run marginal costs are equal. This ensures that resources are being used efficiently and that there are no opportunities for firms to increase profits by adjusting their output levels. Choices A, C, and D are not necessary conditions for long-run competitive equilibrium.

Question 9

If a competitive firm has TC = q³- 40q²+ 430q + 100, what is the minimum price that the firm must receive for its output in order for it to be willing to produce?

Accepted Answer

The answer of If a competitive firm has TC =...

Question 10

In long run equilibrium:

Accepted Answer

In long run equilibrium, the market is in a state where there is no incentive for firms to enter or leave. This means that the existing firms are earning normal profits and there are no excess profits to be made that would attract new firms, nor are there significant losses that would force existing firms to exit the market. Therefore, choice A is correct. Choices B and D are not correct because in long run equilibrium, while prices and quantities are stable, they are not necessarily predictable for long periods of time and there is no Walrasian auctioneer determining them. Choice C is also not correct because in long run equilibrium, no firms enter or leave the market.

Question 11

In the short run marginal product of labor initially rises and then falls there may be two output levels where marginal revenue equals marginal cost. In this case how does a firm choose the appropriate output level?

Accepted Answer

In the context of marginal revenue equaling marginal cost, firms typically choose the output level where the marginal cost is rising. This is because, in the short run, the initial increase in the marginal product of labor leads to decreasing marginal costs. However, as production increases further, diminishing returns set in, causing the marginal product of labor to fall and marginal costs to rise. The point where marginal revenue equals marginal cost and marginal cost is rising is typically associated with profit maximization, as it ensures that the firm is not producing in the inelastic portion of the demand curve, where additional units would lower profit.

Question 12

A reservation price:

Accepted Answer

The reservation price is the maximum amount a consumer is willing to pay for a good or service, reflecting the highest value they place on it.

Question 13

There are 100 identical demanders of product y, and the demand function for each individual is y = 10 - p. The production function for any firm is y = min(z₁,z₂). If the industry were to produce 700 units of y, then aggregate requirements would be:

Accepted Answer

The production function y = min(z1, z2) implies that both inputs z1 and z2 are required in equal amounts to produce y. To produce 700 units of y, both z1 and z2 must be 700.

Question 14

In a constant- cost industry:

Accepted Answer

In a constant-cost industry, the long run supply curve is horizontal because firms can always enter or exit the market without affecting the cost of production for all firms in the industry. As a result, the industry can expand or contract without any significant change in the cost of production. However, the short run market supply curve is upward sloping as firms must increase production and incur higher costs in order to meet increased demand. Therefore, choices A, B, and D are incorrect.

Question 15

Producer's surplus:

Accepted Answer

Producer's surplus is the difference between the price at which a producer is willing to sell a good and the actual price they receive. It can be calculated by finding the area above the supply curve and below the equilibrium price. In a perfectly competitive market, producer's surplus is equal to individual firm rents, which are the amount of revenue earned above the cost of production. Therefore, choice B is correct. Choices A, C, and D are incorrect because they do not accurately describe producer's surplus.

Question 16

A firm will not produce in a competitive industry if:

Accepted Answer

A firm in a competitive industry will not produce if the price is less than the short-run average variable cost (SAVC), as it would not cover the variable costs of production, leading to a situation where shutting down temporarily minimizes losses.

Question 17

The market demand is given by P = 108 - 2.5Q. If there are 12 identical firms with TC = 3Q²+ 18, what is the profit of each firm?

Accepted Answer

The profit of each firm is given by:π = TR - TCTR = P * QP = 108 - 2.5QTR = (108 - 2.5Q) * QTR = 108Q - 2.5Q^2TC = 3Q^2 + 18π = 108Q - 2.5Q^2 - 3Q^2 - 18π = 108Q - 5.5Q^2 - 18To find the profit-maximizing quantity, we take the derivative of π with respect to Q and set it equal to zero:dπ/dQ = 108 - 11Q = 011Q = 108Q = 108/11 = 9.82Since Q must be an integer, the profit-maximizing quantity is Q = 9.Substituting Q = 9 into the profit function, we get:π = 108(9) - 5.5(9)^2 - 18π = 972 - 495 - 18π = 359Therefore, the profit of each firm is $359.

Question 18

Suppose the total cost to produce quantity q is TC(q)= 250 + q²/10. If this firm is a price- taker and the market price is p = 10, then the firm's total cost will be:

Accepted Answer

The firm's total cost, given by TC(q) = 250 + q²/10, simplifies to TC(q) = 250 since the term involving q becomes 0. If the market price is p = 10, then the total revenue (TR) for selling q units is TR = p*q = 10*q. For the firm to cover its total cost with its total revenue, the amount of q produced and sold must be such that TR = TC. Therefore, the total cost is equal to the total revenue, not directly to the price or marginal revenue, and it certainly is not zero.

Question 19

If the initial allocation of wealth and abilities change:

Accepted Answer

The answer of If the initial allocation of wealth and...

Question 20

A market is composed of five demanders with the following reservation prices, $30, $25, $40, $75, and four suppliers' supplies with the following reservation prices, $75, $55, $80 and $85. Which of the following is a competitive equilibrium price?

Accepted Answer

In a competitive equilibrium, the price is set such that the quantity demanded equals the quantity supplied. To find the equilibrium price, we need to order the demanders and suppliers from highest to lowest reservation prices:

Demanders: 
$75, $40, $30, $25

Suppliers: 
$85, $80, $75, $55

Starting with the highest reservation prices, we can see that the fourth supplier's reservation price ($55) is lower than the third demander's reservation price ($75), so we can eliminate the fourth supplier and move to the next highest reservation price. We can continue this process until we find the price at which the quantities demanded and supplied are equal.

At a price of $75, only one supplier (with a reservation price of $75) is willing to sell, but there are no demanders willing to buy at that price. At a price of $55, three suppliers (with reservation prices of $55, $75, and $80) are willing to sell, but only one demander (with a reservation price of $75) is willing to buy at that price. At a price of $40, two suppliers (with reservation prices of $55 and $75) are willing to sell, and two demanders (with reservation prices of $40 and $75) are willing to buy at that price. However, there are still three demanders that are not able to purchase at this price.

Finally, at a price of $60, all four suppliers (with reservation prices of $55, $75, $80, and $85) are willing to sell, and all five demanders (with reservation prices of $25, $30, $40, $75, and $75) are willing to buy at that price. This is the competitive equilibrium price where the quantity demanded equals the quantity supplied. Therefore, the answer is (C) $60.

Quiz 8: The Theory of Perfect Competition

A price taking firm that has TC = 2q²+ 10 and faces a market price of Pe = 8 will produce what quantity?

Market supply is:

A competitive equilibrium:

The competitive firm's supply curve:

Suppose that short- run SMC = 10 + 2Q for an individual firm in a competitive market. If there are 100 identical firms in this market, then the short- run supply curve can be written as:

A perfectly competitive market's short- run supply curve:

A necessary condition for an industry to be in long- run competitive equilibrium is:

If a competitive firm has TC = q³- 40q²+ 430q + 100, what is the minimum price that the firm must receive for its output in order for it to be willing to produce?

In long run equilibrium:

In the short run marginal product of labor initially rises and then falls there may be two output levels where marginal revenue equals marginal cost. In this case how does a firm choose the appropriate output level?

A reservation price:

There are 100 identical demanders of product y, and the demand function for each individual is y = 10 - p. The production function for any firm is y = min(z₁,z₂) . If the industry were to produce 700 units of y, then aggregate requirements would be:

In a constant- cost industry:

Producer's surplus:

A firm will not produce in a competitive industry if:

The market demand is given by P = 108 - 2.5Q. If there are 12 identical firms with TC = 3Q²+ 18, what is the profit of each firm?

Suppose the total cost to produce quantity q is TC(q) = 250 + q²/10. If this firm is a price- taker and the market price is p = 10, then the firm's total cost will be:

If the initial allocation of wealth and abilities change:

A market is composed of five demanders with the following reservation prices, $30, $25, $40, $75, and four suppliers' supplies with the following reservation prices, $75, $55, $80 and $85. Which of the following is a competitive equilibrium price?

Quiz 8: The Theory of Perfect Competition

A price taking firm that has TC = 2q2 + 10 and faces a market price of Pe = 8 will produce what quantity?

Market supply is:

A competitive equilibrium:

The competitive firm's supply curve:

Suppose that short- run SMC = 10 + 2Q for an individual firm in a competitive market. If there are 100 identical firms in this market, then the short- run supply curve can be written as:

A perfectly competitive market's short- run supply curve:

A necessary condition for an industry to be in long- run competitive equilibrium is:

If a competitive firm has TC = q3 - 40q2 + 430q + 100, what is the minimum price that the firm must receive for its output in order for it to be willing to produce?

In long run equilibrium:

In the short run marginal product of labor initially rises and then falls there may be two output levels where marginal revenue equals marginal cost. In this case how does a firm choose the appropriate output level?

A reservation price:

There are 100 identical demanders of product y, and the demand function for each individual is y = 10 - p. The production function for any firm is y = min(z1,z2) . If the industry were to produce 700 units of y, then aggregate requirements would be:

In a constant- cost industry:

Producer's surplus:

A firm will not produce in a competitive industry if:

The market demand is given by P = 108 - 2.5Q. If there are 12 identical firms with TC = 3Q2 + 18, what is the profit of each firm?

Suppose the total cost to produce quantity q is TC(q) = 250 + q2/10. If this firm is a price- taker and the market price is p = 10, then the firm's total cost will be:

If the initial allocation of wealth and abilities change:

A market is composed of five demanders with the following reservation prices, $30, $25, $40, $75, and four suppliers' supplies with the following reservation prices, $75, $55, $80 and $85. Which of the following is a competitive equilibrium price?

A price taking firm that has TC = 2q²+ 10 and faces a market price of Pe = 8 will produce what quantity?

If a competitive firm has TC = q³- 40q²+ 430q + 100, what is the minimum price that the firm must receive for its output in order for it to be willing to produce?

There are 100 identical demanders of product y, and the demand function for each individual is y = 10 - p. The production function for any firm is y = min(z₁,z₂) . If the industry were to produce 700 units of y, then aggregate requirements would be:

The market demand is given by P = 108 - 2.5Q. If there are 12 identical firms with TC = 3Q²+ 18, what is the profit of each firm?

Suppose the total cost to produce quantity q is TC(q) = 250 + q²/10. If this firm is a price- taker and the market price is p = 10, then the firm's total cost will be: