Question 1

Suppose your trucking firm in a perfectly competitive industry is making zero economic profits in the short run.The federal government imposes a new safety regulation that affects all firms,thus shifting the marginal cost curve upward.As a result your firm's profit maximizing short-run output will

Accepted Answer

The new safety regulation increases the marginal cost for all firms, leading to a higher marginal cost curve. Since the industry is perfectly competitive, the market price remains constant. Therefore, the new MC curve will intersect the horizontal demand curve at a lower rate of output, reducing the profit-maximizing short-run output for the firm.

Question 2

Suppose a perfectly competitive firm is producing a level of output such that its average revenue is less than its lowest average variable cost.The firm should

Accepted Answer

In a perfectly competitive market, if a firm's average revenue is less than its lowest average variable cost, it cannot cover its variable costs and should shut down in the short run, producing zero output.

Question 3

If a perfectly competitive firm is faced with average revenue below average variable cost it will produce zero output so as to reduce its

Accepted Answer

If average revenue is below average variable cost, the firm cannot cover its variable costs and will minimize losses by shutting down, incurring only fixed costs.

Question 4

A price-taking firm in the short run should not produce any level of output unless

Accepted Answer

In the short run, a price-taking firm should produce only if its average revenue (price) covers its variable costs. This is because in the short run, the firm cannot adjust its fixed costs, so it must at least cover its variable costs to minimize losses. This condition is expressed by option C, where the firm should produce if average revenue (price) is greater than or equal to average variable cost. Options A, B, and D describe conditions for profit-maximizing output in a perfectly competitive market in the long run. Option E is not necessarily true and may be misleading, as a firm can still continue to produce even if it is not earning positive profits, as long as it covers its variable costs.

Question 5

If a perfectly competitive firm produces at an output level where marginal cost equals marginal revenue,then

Accepted Answer

If a perfectly competitive firm produces at an output level where marginal cost equals marginal revenue, it means that the firm is producing the last unit at a cost that is equal to the revenue it generates. Therefore, the last unit produced adds the same amount to costs as it does to revenue (option A). This is the profit-maximizing output level for the firm as, at this point, any further increase or decrease in output would result in a reduction in profit. Therefore, it is not necessary to reduce or expand output as long as the average variable cost (AVC) is greater than or equal to price (option C). The difference between total revenue (TR) and total cost (TC) would be positive and equal to profit (option D), indicating that the firm is earning a profit at this output level. Shutting down would not be a feasible option as the firm is already producing at a profit-maximizing level (option E). Option B is not correct as the firm is not necessarily maximizing its revenue but rather its profit.

Question 6

FIGURE 9-1
-Refer to Figure 9-1.The diagram shows cost curves for a perfectly competitive firm.The price at which the firm earns zero economic profits is

Accepted Answer

The point where the ATC curve intersects the demand curve is where the firm earns zero economic profits. In this case, that point is P₃. This is where the MC curve also intersects the ATC curve. So, the price at which the firm earns zero economic profits is P₃.

Question 7

Suppose that in a perfectly competitive industry,the market price for the product is $130.A firm is producing the output level at which average total cost equals marginal cost,both of which are $138.Average variable cost is $132.To maximize profits in the short run,the firm should

Accepted Answer

The firm should produce zero output because the price ($130) is less than the average variable cost ($132), meaning the firm would incur a loss on each unit produced. In the short run, it is better to shut down to minimize losses.

Question 8

FIGURE 9-1
-Refer to Figure 9-1.The diagram shows cost curves for a perfectly competitive firm.The short-run shut down price for the firm is

Accepted Answer

The short-run shut down price is the price at which the firm will just cover its variable costs. This is the price at which the firm's total revenue equals its total variable costs. In Figure 9-1, this price is P1.

Question 9

If a perfectly competitive firm in the short run is producing where P = ATC = MC,this firm is

Accepted Answer

In a perfectly competitive market, the profit-maximizing output level is where P=MC, and in the short run, firms can still make profits as long as the price is greater than or equal to the average total cost (P≥ATC). Therefore, when a perfectly competitive firm is producing where P=ATC=MC, it is both producing at its profit-maximizing output level and earning economic profits.

Question 10

Suppose that in a perfectly competitive industry,the market price of the product is $12.Firm A is producing the output level at which average total cost equals marginal cost,both of which are $10.To maximize its profits,Firm A should

Accepted Answer

Firm A should expand its output because the market price ($12) is higher than its marginal cost ($10), indicating that producing more will increase profits.

Question 11

Which of the following statements about a firm in a perfectly competitive industry is true?

Accepted Answer

In a perfectly competitive market, a firm will not produce if the price is below the minimum of the average variable cost (AVC), as it would not be able to cover its variable costs.

Question 12

Consider a perfectly competitive firm in the following position: output = 4000 units,market price = $1,total fixed costs = $2000,total variable costs = $2000,and marginal cost = $1.To maximize profits the firm should

Accepted Answer

The firm should not change its output because it is already producing at the quantity where marginal cost equals price, which is the profit-maximizing level of output for a perfectly competitive firm. If the firm were to reduce its output, it would forego potential revenue from selling additional units. If it were to expand its output, it would incur additional variable costs, which would reduce profits. Therefore, the best choice for the firm is to maintain its current output level.

Question 13

A perfectly competitive firm maximizes its profits by

Accepted Answer

In a perfectly competitive market, a firm is a price taker, meaning it has no control over the price of the product. Therefore, to maximize profits, it must choose the level of output at which marginal revenue equals marginal cost (MC=MR). This is because producing any additional units beyond this point would result in a decrease in profits. Maximal total revenue or total sales do not necessarily lead to maximum profit, as the firm needs to ensure that its costs do not exceed its revenue. Choosing an optimal price is not possible for a firm in a perfectly competitive market, as it can only accept the market-determined price. Similarly, pricing under competitors is not a viable strategy as profits can only be maximized through efficient production, not undercutting prices.

Question 14

Suppose that in a perfectly competitive industry,the market price of the product is $6.A firm is producing the output level at which average total cost equals marginal cost,both of which are $8.Average variable cost is $4.To maximize its profits in the short run,the firm should

Accepted Answer

The answer of Suppose that in a perfectly competitive industry,the...

Question 15

Consider a perfectly competitive firm in the following position: output = 4000,market price = $1,total fixed costs = $2000,total variable costs = $4500,and marginal cost = $1.To maximize profits the firm should

Accepted Answer

The answer of Consider a perfectly competitive firm in the...

Question 16

Suppose a perfectly competitive firm is producing a level of output for which price equals average total cost,and average total cost is less than marginal cost.In order to maximize its profits,the firm should

Accepted Answer

When marginal cost is greater than average total cost, the firm is producing too much and should reduce output to maximize profits.

Question 17

Suppose that in a perfectly competitive industry,the market price of the product is $27.A firm is producing the output level at which average total cost equals marginal cost,both of which are $25.Average variable cost is $23.To maximize profits in the short run,the firm should

Accepted Answer

The answer of Suppose that in a perfectly competitive industry,the...

Question 18

On a graph showing a firm's TC and TR curves,the profit-maximizing level of output is found where

Accepted Answer

The profit-maximizing level of output is where the difference between total revenue (TR) and total cost (TC) is the greatest, which means TR lies above TC by the greatest amount.

Question 19

FIGURE 9-1
-Refer to Figure 9-1.The diagram shows cost curves for a perfectly competitive firm.The firm would incur economic profit at all market prices above

Accepted Answer

A perfectly competitive firm incurs economic profit when the market price is above the average total cost (ATC). In the diagram, P₃ is the price level where the firm covers its ATC, so any price above P₃ results in economic profit.

Question 20

FIGURE 9-1 -Refer to Figure 9-1.The diagram shows cost curves for a perfectly competitive firm.If the market price is P₄ and the firm is producing output level F,this firm should

Accepted Answer

If the market price is P4 and the firm is producing output level F, the firm should expand output to quantity G. This is because the marginal cost of producing the next unit of output is less than the market price, so the firm can increase its profit by producing more output.

Quiz 9: Competitive Markets