Question 1

If the price is greater than both the marginal cost and the average variable cost,what should the firm do?

Accepted Answer

Since the price is greater than both marginal cost and average variable cost, the firm is making a profit on each unit produced. Therefore, it should increase its production level in order to maximize its profits.

Question 2

What should the firm do when it faces the following conditions:
Average total cost = $60
Average variable cost = $40
Marginal cost = $35
Marginal revenue = $35

Accepted Answer

When marginal cost is greater than marginal revenue, the firm should shut down.

Question 3

The accompanying table represents the quantity produced,the total revenue,and the total cost of a firm operating in a perfectly competitive market.Refer to this table to answer the following questions.
 
-Assuming that all firms have the same cost structure,the price is

Accepted Answer

The price is equal to the marginal cost, which is $5.

Question 4

What should the firm do if there is no possible output where the price would at least be equal to average variable costs?

Accepted Answer

If there is no possible output where the price would at least be equal to average variable costs, it means that the firm is unable to cover its variable costs with the revenue earned from selling its products. In such a scenario, it is best for the firm to shut down in the short run, as continuing to produce and sell at a loss would only lead to further losses. However, the firm may consider re-entering the market in the long run if it believes that the demand conditions or cost structure may change in its favor.

Question 5

A company produces at an output level where marginal revenue is equal to marginal cost and has the following revenue and cost levels:
Marginal cost curve intersects the average variable cost curve at $150.
Marginal cost curve intersects the average total cost curve at $200.
Marginal cost curve intersects the marginal revenue curve at $170.
What would you suggest this firm should do in the short run?

Accepted Answer

The firm should continue to produce at a loss because the price ($170) is above the average variable cost ($150) but below the average total cost ($200). This means the firm can cover its variable costs and some fixed costs, minimizing losses in the short run.

Question 6

The accompanying table represents the quantity produced,the total revenue,and the total cost of a firm operating in a perfectly competitive market.Refer to this table to answer the following questions.
 
-When profits are maximized,profits are equal to

Accepted Answer

The answer of The accompanying table represents the quantity produced,the...

Question 7

Where is a perfectly competitive firm's break-even output level?

Accepted Answer

A perfectly competitive firm's break-even output level is where the firm produces enough output to cover all of its costs, including the fixed costs. This occurs at the minimum point of the average total cost curve, where the average cost equals the price the firm receives for its output. At this point, the firm is earning zero economic profit, but is covering all of its costs.

Question 8

Kimiko owns a cupcake shop in Newport Beach,California.The market for cupcakes is very competitive.At Kimiko's current production level,her marginal cost is $25 and her marginal revenue is $29.To maximize profits,Kimiko should

Accepted Answer

To maximize profits, a firm should produce until marginal cost (MC) equals marginal revenue (MR). Since Kimiko's MR ($29) is higher than her MC ($25), increasing production will increase profits until MC equals MR.

Question 9

At the current level of output,the following data exists:
Price = $20
Marginal cost = $6
Average variable cost = $10
Average total cost = $13
What must be true at this level of output?

Accepted Answer

The firm should increase output because the price ($20) is greater than the marginal cost ($6), indicating that producing more will increase profit.

Question 10

Marcy owns a photography business in Mobile,Alabama.The market for photography is very competitive.At Marcy's current production level,her marginal cost is $15 and her marginal revenue is $12.In order to maximize profits,Marcy should

Accepted Answer

To maximize profits, a firm should produce until marginal cost (MC) equals marginal revenue (MR). Since Marcy's MC ($15) is greater than her MR ($12), she should decrease production to align MC closer to MR, thereby maximizing profits.

Question 11

Which of the following conditions will result in the firm making an economic profit?

Accepted Answer

Economic profit occurs when total revenue (P) exceeds total costs (ATC), which includes both fixed costs (F) and variable costs (S). Therefore, P > ATC, which is satisfied in option A.

Question 12

In the short run,under what conditions should the firm shut down?

Accepted Answer

In the short run, if the price is less than the average variable cost, the firm should shut down. This is because the firm is not generating enough revenue to cover its variable costs, such as wages or raw materials, and is better off ceasing operations and minimizing losses in the short run.

Question 13

At what point does the profit-maximizing perfectly competitive firm produce?

Accepted Answer

The profit-maximizing perfectly competitive firm produces at the point where marginal revenue (MR) is equal to marginal cost (MC), as this is the point where additional units of production bring in the same amount of revenue as they cost to produce. At this point, the firm is not making any additional profit or loss from producing more or less output. Therefore, the answer is E, where marginal revenue is equal to marginal cost.

Question 14

When marginal revenue is greater than marginal cost,the firm should

Accepted Answer

When marginal revenue is greater than marginal cost, it means that producing one more unit will generate more revenue than the cost of producing it. This implies that the firm is not yet producing at the profit-maximizing quantity. Therefore, the best choice is to increase the level of output to maximize profits.

Question 15

A firm will shut down in the short run

Accepted Answer

In the short run, a firm will shut down when price is below average variable costs at all levels of output. This is because the firm is unable to cover even its variable costs, which means it is incurring losses on each unit produced. Shutting down in the short run allows the firm to minimize its losses by avoiding any further variable costs.

Question 16

What is true for the perfectly competitive firm's output level at the break-even point?

Accepted Answer

At the break-even point for a perfectly competitive firm, price equals marginal revenue and also equals average total cost, indicating the firm is covering all its costs, including opportunity costs, but not making economic profits.

Question 17

A company produces at an output level where marginal cost is equal to marginal revenue and has the following revenue and cost levels:
Total revenue = $1,450
Total cost = $1,500
Total variable cost = $1,300
What would you suggest?

Accepted Answer

The company should continue to produce because the loss is less than the total fixed cost. In this case, the total cost is $1,500 and the total revenue is $1,450, resulting in a loss of $50. However, the total fixed cost is not given and could be higher than $50. Therefore, it is more profitable for the company to continue producing and earning revenue to offset the fixed costs, rather than shutting down and incurring the full amount of fixed costs as a loss.

Question 18

If a competitive firm can make enough revenue to cover its variable costs,the firm will

Accepted Answer

If a competitive firm can make enough revenue to cover its variable costs, it can choose to remain open and continue producing in the short run, even if it is not earning a profit. This is because shutting down would incur additional costs, such as severance pay for workers and rental fees for space. Therefore, the best choice is D, to choose to remain open.

Question 19

A company produces at an output level where marginal revenue is equal to marginal cost and has the following revenue and cost levels:
Marginal cost curve intersects the average variable cost curve at $140.
Marginal cost curve intersects the average total cost curve at $150.
Marginal cost curve intersects the marginal revenue curve at $200.
What would you suggest this firm should do in the short run?

Accepted Answer

In the short run, a firm should continue to produce as long as the price (or marginal revenue, MR) is above the average variable cost (AVC). Here, MR ($200) is above both AVC and ATC (with ATC at $150 at the point of intersection with MC), indicating the firm is covering all its costs and making a profit. The profit per unit can be calculated as the difference between the price (MR) and the ATC at the point of production, which is $200 - $150 = $50.

Question 20

The perfectly competitive firm's short-run shutdown price equals

Accepted Answer

The firm will shut down if the price falls below the minimum of the average variable cost. This is because in the short run, the fixed costs cannot be changed, and therefore the firm will still have to cover its fixed costs even if it stops producing. However, if the price is below the minimum of the average variable cost, then continuing to produce will result in losses that cannot even cover the variable costs, let alone the fixed costs. Therefore, E is the correct choice.

Quiz 9: Firms in a Competitive Market