Question 1

Figure 10.3
 
-Refer to Figure 10.3.Suppose the prevailing price is P₁ and the firm is currently producing its loss-minimizing quantity.Identify the area that represents the loss.

Accepted Answer

The area P₃cbP₁ represents the loss because it is the area between the average total cost curve and the price level P₁, over the quantity produced.

Question 2

Figure 10.4
  
Figure 10.4 shows the cost and demand curves for a profit-maximizing firm in a perfectly competitive market.
-Refer to Figure 10.4.If the market price is $30, the firm's profit-maximizing output level is

Accepted Answer

At a price of $30, the firm can sell all 180 units it produces. To maximize profit, the firm will choose the output level where marginal cost (MC) equals marginal revenue (MR). In Figure 10.4, this occurs at an output level of 180 units, where MC intersects MR at a point on the supply curve. At this output level, the firm's total cost is $2,700 and its total revenue is $5,400, yielding a profit of $2,700. At any output level below or above 180 units, the firm's profit will be less than $2,700. Therefore, the profit-maximizing output level is 180 units.

Question 3

If a perfectly competitive firm's price is above its average total cost, the firm

Accepted Answer

If a perfectly competitive firm's price is above its average total cost, the firm is earning a profit. This means that the revenue generated from the sale of its output is greater than the cost of producing that output.

Question 4

Assume that price is greater than average variable cost.If a perfectly competitive firm is producing at an output where price is $114 and the marginal cost is $102, then the firm is probably producing more than its profit-maximizing quantity.

Accepted Answer

The answer of Assume that price is greater than average...

Question 5

In a graph with output on the horizontal axis and total revenue on the vertical axis, what is the shape of the total revenue curve for a perfectly competitive seller?

Accepted Answer

The answer of In a graph with output on the...

Question 6

Figure 10.4
  
Figure 10.4 shows the cost and demand curves for a profit-maximizing firm in a perfectly competitive market.
-Refer to Figure 10.4.If the market price is $30 and the firm is producing output, what is the amount of the firm's profit or loss?

Accepted Answer

The answer of Figure 10.4
  
Figure 10.4 shows the...

Question 7

How are market price, average revenue, and marginal revenue related for a perfectly competitive firm and why?

Accepted Answer

The answer of How are market price, average revenue, and...

Question 8

Assume that price is greater than average variable cost.If a perfectly competitive seller is producing at an output where price is $11 and the marginal cost is $14.54, then to maximize profits the firm should

Accepted Answer

In perfect competition, firms should produce at a level of output where marginal cost equals marginal revenue to maximize profits. Since the marginal cost is higher than the price, the firm is not maximizing its profits. In this case, the firm should reduce its output level until the marginal cost equals the price. Therefore, the firm should produce a smaller level of output.

Question 9

An increase in a firm's fixed cost will not change the firm's profit-maximizing output in the short run.

Accepted Answer

In the short run, a firm's profit-maximizing output is determined by the intersection of the marginal cost and marginal revenue curves. Fixed costs do not affect this intersection point, so an increase in fixed costs will not change the firm's profit-maximizing output in the short run. However, in the long run, the firm may adjust its level of output and/or exit the industry in response to changes in fixed costs.

Question 10

Figure 10.4
  
Figure 10.4 shows the cost and demand curves for a profit-maximizing firm in a perfectly competitive market.
-Refer to Figure 10.4.What is the amount of its total fixed cost?

Accepted Answer

The total fixed cost is the vertical distance between the total cost curve and the variable cost curve at zero output. In this case, the total fixed cost is $2,520 (where the red dot intersects the y-axis).

It cannot be determined what the output level of the firm is or what its profit is, so we cannot answer any questions related to those variables.

Question 11

If a perfectly competitive firm's price is less than its average total cost but greater than its average variable cost, the firm

Accepted Answer

If the firm's price is less than its average total cost, then it is already incurring a loss. However, if the price is greater than its average variable cost, it means that the firm is at least covering its variable costs and is able to continue operating in the short run. Therefore, the best choice is C, which indicates that the firm is incurring a loss.

Question 12

Assuming a market price of $4, fill in the columns in the following table.What is the profit-maximizing level of production? What are the two ways to determine the profit-maximizing level of production?
 $\begin{array}{|c|c|c|c|c|c|}
\hline \text { Quantity } & \begin{array}{c}
\text { Total } \
\text { Revenue } \
(T R)
\end{array} & \begin{array}{c}
\text { Total Cost } \
(T C)
\end{array} & \text { Profit } & \begin{array}{c}
\text { Marginal } \
\text { Revenue } \
(M R)
\end{array} & \begin{array}{c}
\text { Marginal } \
\text { Cost }(M C)
\end{array} \
\hline 0 & & 3 & & & \
\hline 1 & & 5 & & & \
\hline 2 & & 6 & & & \
\hline 3 & & 9 & & & \
\hline 4 & & 14 & & & \
\hline 5 & & 20 & & & \
\hline 6 & & 28 & & & \
\hline 7 & & 40 & & & \
\hline
\end{array}$

Accepted Answer

The answer of Assuming a market price of $4, fill...

Question 13

A firm's total profit can be calculated as all of the following except

Accepted Answer

While A, B, and C are all valid ways to calculate a firm's total profit, D is not. Marginal profit is the additional profit earned from selling one more unit, so multiplying it by the quantity sold would only give the profit earned from selling the last unit, not the total profit.

Question 14

Figure 10.4
  
Figure 10.4 shows the cost and demand curves for a profit-maximizing firm in a perfectly competitive market.
-Refer to Figure 10.4.If the market price is $30, should the firm represented in the diagram continue to stay in business?

Accepted Answer

At a market price of $30, the firm is able to cover its variable cost and part of its fixed cost. Although it is not making a profit, shutting down would mean incurring a loss equal to its fixed cost. Therefore, the best option for the firm is to continue operating and try to cover all its costs in the long run.

Question 15

For a perfectly competitive firm, which of the following is not true at profit maximization?

Accepted Answer

At profit maximization, a perfectly competitive firm produces at a level where marginal cost equals marginal revenue. This is because in perfect competition, the market price is set by the forces of supply and demand and the firm is a price-taker, meaning it cannot influence the market price. Therefore, the correct answer is A because if market price is greater than marginal cost, the firm could increase production and earn a higher profit.

Question 16

Figure 10.2
 
-Refer to Figure 10.2.What happens if the firm produces more than Q₄ units?

Accepted Answer

If the firm produces more than Q₄ units, it would incur a loss since the marginal cost (MC) is greater than the marginal revenue (MR) beyond Q₄. This implies that the additional units produced would add more to the cost than revenue, leading to a loss for the firm.

Question 17

Figure 10.4
  
Figure 10.4 shows the cost and demand curves for a profit-maximizing firm in a perfectly competitive market.
-Refer to Figure 10.4.If the market price is $30 and if the firm is producing output, what is the amount of its total variable cost?

Accepted Answer

The answer of Figure 10.4
  
Figure 10.4 shows the...

Question 18

A perfectly competitive firm's marginal revenue curve is downward sloping.

Accepted Answer

In a perfectly competitive market, a firm is a price taker and faces a horizontal demand curve, which means its marginal revenue curve is also horizontal and constant. Therefore, it is not downward sloping.

Question 19

A perfectly competitive firm earns a profit when price is

Accepted Answer

A perfectly competitive firm earns a profit when price is greater than minimum average total cost. When price is equal to minimum average total cost, the firm breaks even and earns no profit. When price is below minimum average total cost, the firm incurs losses. Therefore, option B is the correct answer.

Question 20

Figure 10.2
 
-Refer to Figure 10.2.Why is the total revenue curve a ray from the origin?

Accepted Answer

The total revenue curve is a ray from the origin because the firm can sell its product at a constant price. This means that for every unit sold, the revenue earned is the same and therefore the total revenue increases linearly with the number of units sold.

Quiz 10: Firms in Perfectly Competitive Markets

Figure 10.3 -Refer to Figure 10.3.Suppose the prevailing price is P₁ and the firm is currently producing its loss-minimizing quantity.Identify the area that represents the loss.

Figure 10.4 Figure 10.4 shows the cost and demand curves for a profit-maximizing firm in a perfectly competitive market. -Refer to Figure 10.4.If the market price is $30, the firm's profit-maximizing output level is

If a perfectly competitive firm's price is above its average total cost, the firm

Assume that price is greater than average variable cost.If a perfectly competitive firm is producing at an output where price is $114 and the marginal cost is $102, then the firm is probably producing more than its profit-maximizing quantity.

In a graph with output on the horizontal axis and total revenue on the vertical axis, what is the shape of the total revenue curve for a perfectly competitive seller?

Figure 10.4 Figure 10.4 shows the cost and demand curves for a profit-maximizing firm in a perfectly competitive market. -Refer to Figure 10.4.If the market price is $30 and the firm is producing output, what is the amount of the firm's profit or loss?

How are market price, average revenue, and marginal revenue related for a perfectly competitive firm and why?

Assume that price is greater than average variable cost.If a perfectly competitive seller is producing at an output where price is $11 and the marginal cost is $14.54, then to maximize profits the firm should

An increase in a firm's fixed cost will not change the firm's profit-maximizing output in the short run.

Figure 10.4 Figure 10.4 shows the cost and demand curves for a profit-maximizing firm in a perfectly competitive market. -Refer to Figure 10.4.What is the amount of its total fixed cost?

If a perfectly competitive firm's price is less than its average total cost but greater than its average variable cost, the firm

A firm's total profit can be calculated as all of the following except

Figure 10.4 Figure 10.4 shows the cost and demand curves for a profit-maximizing firm in a perfectly competitive market. -Refer to Figure 10.4.If the market price is $30, should the firm represented in the diagram continue to stay in business?

For a perfectly competitive firm, which of the following is not true at profit maximization?

Figure 10.2 -Refer to Figure 10.2.What happens if the firm produces more than Q₄ units?

Figure 10.4 Figure 10.4 shows the cost and demand curves for a profit-maximizing firm in a perfectly competitive market. -Refer to Figure 10.4.If the market price is $30 and if the firm is producing output, what is the amount of its total variable cost?

A perfectly competitive firm's marginal revenue curve is downward sloping.

A perfectly competitive firm earns a profit when price is

Figure 10.2 -Refer to Figure 10.2.Why is the total revenue curve a ray from the origin?