Question 1

Scenario 9-1 Assume a certain competitive price-taker firm is producing Q = 1,000 units of output. At Q = 1,000, the firm's marginal cost equals $15 and its average total cost equals $11. The firm sells its output for $12 per unit.
Refer to Scenario 9-1. To maximize its profit, the firm should

Accepted Answer

The firm should decrease its output because the marginal cost ($15) is greater than the price ($12), indicating that producing the last unit is not profitable. However, since the price is greater than the average total cost ($11), the firm should continue to produce to cover its costs and make a profit.

Question 2

For a certain firm, the 100th unit of output that the firm produces has marginal revenue equal to $10 and a marginal cost of $7. It follows that

Accepted Answer

Marginal revenue (MR) is the additional revenue that a firm earns from producing one additional unit of output. In this case, the MR of the 100th unit is $10. Marginal cost (MC) is the additional cost that a firm incurs in producing one additional unit of output. In this case, the MC of the 100th unit is $7.

For a profit-maximizing firm, the rule is to produce more if MR is greater than MC (i.e. MR > MC) and to produce less if MR is less than MC (i.e. MR < MC). If MR is equal to MC (i.e. MR = MC), the firm is producing the profit-maximizing level of output.

Since MR ($10) is greater than MC ($7) for the 100th unit, producing the 100th unit will increase the firm's profit. Specifically, it will increase the firm's profit by the difference between MR and MC for the 100th unit, which is $3. Therefore, choice A is the best answer.

Choice B is incorrect because producing the 100th unit does not affect the firm's average total cost (ATC), which is the total cost divided by the quantity of output produced. Choice C is also incorrect because we do not know the firm's profit-maximizing level of output based on the information given. Finally, choice D is incorrect because we do not have enough information to determine the effect of producing the 110th unit on the firm's profit.

Question 3

The intersection of a firm's marginal revenue and marginal cost curves determines the level of output at which

Accepted Answer

The point at which marginal revenue equals marginal cost represents the most efficient level of output for the firm, meaning that it is producing the level of output at which it is maximizing profit. This is because at this level of output, the additional revenue generated by producing one more unit of output (marginal revenue) is just equal to the additional cost incurred to produce that unit (marginal cost), so any further increase in production would actually lead to a decrease in profit.

Question 4

Which of the following statements best reflects the production decision of a profit-maximizing firm in a competitive price-taker market when price falls below the minimum of average variable cost?

Accepted Answer

When price falls below the minimum of average variable cost, the firm cannot cover its variable costs and must shut down production. By shutting down, the firm minimizes its losses because it is better off not producing than producing at a loss.

Question 5

Scenario 9-1 Assume a certain competitive price-taker firm is producing Q = 1,000 units of output. At Q = 1,000, the firm's marginal cost equals $15 and its average total cost equals $11. The firm sells its output for $12 per unit.
Refer to Scenario 9-1. At Q = 999, the firm's profit amounts to

Accepted Answer

The answer of Scenario 9-1 Assume a certain competitive price-taker...

Question 6

Profit-maximizing firms enter a competitive market when, for existing firms in that market,

Accepted Answer

In a competitive market, firms aim to maximize profits by producing where marginal revenue (the additional revenue from producing an additional unit) equals marginal cost (the additional cost of producing an additional unit). In the long run, firms enter the market when they can earn a positive economic profit, which occurs when price exceeds average total cost. Therefore, the correct answer is D.

Question 7

Suppose the equilibrium price in a competitive price-taker market is $10 and a firm in the industry charges $9. Which of the following is true?

Accepted Answer

If the firm charges a lower price than the market equilibrium price, it will have excess demand for its product. This means that the firm will not be able to meet the demand for its product and may have to ration sales. Therefore, the firm will sell less output than its competitors. Additionally, the lower price will also result in lower profit margins for the firm, as it will not be able to cover its costs as effectively. Thus, the firm will make less profit than it could at the $10 price.

Question 8

Scenario 9-1 Assume a certain competitive price-taker firm is producing Q = 1,000 units of output. At Q = 1,000, the firm's marginal cost equals $15 and its average total cost equals $11. The firm sells its output for $12 per unit.
Refer to Scenario 9-1. At Q = 999, the firm's total cost amounts to

Accepted Answer

The total cost at Q = 1,000 is $11,000 (1,000 units * $11 average total cost). The marginal cost of producing the 1,000th unit is $15, so the total cost at Q = 999 is $11,000 - $15 = $10,985.

Question 9

When price is greater than marginal cost for a firm in a competitive market,

Accepted Answer

When price is greater than marginal cost, it means the firm is not producing as much output as they could be in order to maximize profit. There are still opportunities to increase production and earn more revenue, which would eventually lead to higher profits. This is because each additional unit produced will contribute more to revenue than it will to marginal cost. Therefore, the best choice is C: there are opportunities to increase profit by increasing production.

Question 10

In competitive price-taker markets, if one firm raises its price,

Accepted Answer

In competitive price-taker markets, each firm has little or no control over the market price as they are too small relative to the market. Therefore, if one firm increases its price while others do not, that firm will lose revenues as consumers will switch to other firms offering cheaper prices. The other firms in the market are likely to maintain their prices as lowering them could lead to a price war and reduced profits for all firms.

Question 11

Claude's Copper Clappers sells clappers for $40 each in a competitive price-taker market. At its present rate of output, Claude's marginal cost is $40, average variable cost is $45, and average total cost is $60. Claude should

Accepted Answer

Claude's Copper Clappers is currently producing at a loss since the average total cost is greater than the price it is selling clappers for. Therefore, Claude should shut down in the short run to minimize losses. In the long run, Claude should consider exiting the market or decreasing costs to produce at a lower average total cost.

Question 12

If a competitive price-taker firm is currently producing a level of output at which marginal revenue exceeds marginal cost, then

Accepted Answer

If marginal revenue exceeds marginal cost, it means that producing an additional unit of output will bring in more revenue than the cost of producing it. This means that the firm can increase its profit by producing and selling that additional unit. Therefore, a one-unit increase in output will increase the firm's profit.

Question 13

If a competitive price-taker firm is currently producing a level of output at which marginal cost exceeds marginal revenue, then

Accepted Answer

If a competitive price-taker firm is currently producing a level of output at which marginal cost exceeds marginal revenue, it means that the firm is producing beyond the point where marginal revenue equals marginal cost, which is where profit is maximized. In this case, the firm is producing too much output and is experiencing diminishing returns to scale. Therefore, a one-unit decrease in output would reduce the firm's costs more than the reduction in revenue, leading to an increase in profit. Hence, option C is correct. Option A is incorrect because if the firm is producing beyond the profit-maximizing output level, then average revenue will be lower than marginal revenue. Option B is incorrect because if the firm is producing beyond the profit-maximizing output level, then it is incurring losses.

Question 14

The Wheeler Wheat Farm sells wheat to a grain broker in Seattle, Washington. Since the market for wheat is generally considered to be competitive, the Wheeler Wheat Farm maximizes its profit by choosing

Accepted Answer

In a competitive market, farmers will choose to produce the quantity at which their marginal cost of production is equal to the market price. If they produce less than this quantity, then they will be able to sell their output at a higher price than their marginal cost, and so they will be able to increase their profit by producing more. If they produce more than this quantity, then they will be selling their output at a price lower than their marginal cost, and so they will be reducing their profit by producing more. Therefore, to maximize their profit, farmers will choose the quantity at which their marginal cost equals the market price.

Question 15

Scenario 9-1 Assume a certain competitive price-taker firm is producing Q = 1,000 units of output. At Q = 1,000, the firm's marginal cost equals $15 and its average total cost equals $11. The firm sells its output for $12 per unit.
Refer to Scenario 9-1. At Q = 1,000, the firm's profit amounts to

Accepted Answer

At Q = 1,000, the firm's revenue is $12,000 (1,000 units x $12 per unit). Its total cost is $11,000 (1,000 units x $11 per unit). Therefore, its profit is $1,000 ($12,000 - $11,000).

Question 16

A firm in competitive price-taker market is maximizing profit at Q = 3,000. Then its fixed cost increases. The profit-maximizing output is now

Accepted Answer

The answer of A firm in competitive price-taker market is...

Question 17

Claude's Copper Clappers sells clappers for $40 each in a competitive price-taker market. At its present rate of output, Claude's marginal cost is $39, average variable cost is $25, and average total cost is $45. To improve his profit/loss situation, Claude should

Accepted Answer

Claude is currently producing at a point where marginal revenue (which is equal to the selling price of $40 in a competitive market) is greater than marginal cost of production, which is $39. Thus, producing more will increase his profits by $1 for each additional unit produced. Moreover, since average variable cost is less than the selling price, he is covering his variable costs and some part of fixed costs. Therefore, increasing output will lead to a higher contribution towards covering the fixed costs, which will further improve the profit/loss situation of Claude.

Question 18

Suppose Thelma and Louise both sell fried green tomatoes in a competitive price-taker market. If Louise increases her output,

Accepted Answer

The answer of Suppose Thelma and Louise both sell fried...

Question 19

Farmer Fanny sells her crops in a competitive price-taker market. If she produces 500 bushels for total revenue of $2,500 and if harvesting the 501st bushel would raise her total cost from $2,500 to $2,505, her

Accepted Answer

The answer of Farmer Fanny sells her crops in a...

Question 20

Competitive price-taker firms respond to changing market conditions by varying their

Accepted Answer

The answer of Competitive price-taker firms respond to changing market...

Quiz 9: Price Takers and the Competitive Process

Scenario 9-1 Assume a certain competitive price-taker firm is producing Q = 1,000 units of output. At Q = 1,000, the firm's marginal cost equals $15 and its average total cost equals $11. The firm sells its output for $12 per unit. Refer to Scenario 9-1. To maximize its profit, the firm should