Question 1

A perfectly competitive firm's supply curve is its marginal cost curve above the average variable cost curve.

Accepted Answer

In a perfectly competitive market, a firm will produce where marginal cost equals price. As long as the price is higher than the average variable cost, the firm will continue to produce. Therefore, the supply curve (which shows the quantity of a good a firm is willing and able to supply at different prices) is the same as the marginal cost curve above the average variable cost curve.

Question 2

The market for new drugs is not usually perfectly competitive, since the companies manufacturing these drugs are usually granted patents, and this restricts entry into the industry.

Accepted Answer

Patents grant exclusive rights to the manufacturer for a specific period of time, which limits competition and market entry.

Question 3

Use the following to answer questions: 
-(Table: Variable Costs for Lawns) Look at the table Variable Costs for Lawns. During the summer, Alex runs a lawn-mowing service, and lawn-mowing is a perfectly competitive industry. Assume that costs are constant in each interval; that is, the variable cost of mowing 1 through 10 lawns is $100. His only fixed cost is $1,000 for the mower. His variable costs include fuel, his time, and mower parts. Which of the following is a point on the industry short-run supply curve?

Accepted Answer

The answer of Use the following to answer questions: 
-(Table:...

Question 4

Use the following to answer questions: 
-(Table: Variable Costs for Lawns) Look at the table Variable Costs for Lawns. During the summer, Alex runs a lawn-mowing service, and lawn-mowing is a perfectly competitive industry. Assume that costs are constant in each interval; that is, the variable cost of mowing 1 through 10 lawns is $100. His only fixed cost is $1,000 for the mower. His variable costs include fuel, his time, and mower parts. If the price for mowing a lawn is $70, how much is Alex's total revenue at the profit-maximizing output?

Accepted Answer

The answer of Use the following to answer questions: 
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Question 5

In the short run, the fixed costs of running a farm should play no role in determining the level of production.

Accepted Answer

In the short run, fixed costs do not vary with the level of production, so decisions about production levels are based on variable costs, not fixed costs.

Question 6

Use the following to answer questions: 
-(Table: Variable Costs for Lawns) Look at the table Variable Costs for Lawns. During the summer, Alex runs a lawn-mowing service, and lawn-mowing is a perfectly competitive industry. Assume that costs are constant in each interval; that is, the variable cost of mowing 1 through 10 lawns is $100. His only fixed cost is $1,000 for the mower. His variable costs include fuel, his time, and mower parts. If the price for mowing a lawn is $70, how much is Alex's total cost at the profit-maximizing output?

Accepted Answer

To find the profit-maximizing output, we need to find the quantity at which marginal cost equals price.
From the table, we can see that the variable cost for mowing 11-20 lawns is $150, and for mowing 21-30 lawns is $200.
So, the marginal cost of mowing 10 lawns is $100, of mowing 20 lawns is $150, and of mowing 30 lawns is $200.
Since the price for mowing a lawn is $70, we can see that Alex will maximize profit by mowing the maximum number of lawns possible at a marginal cost of $70 or less. 
From the table, we can see that the marginal cost of mowing 30 lawns is $200, which is greater than the price of $70. 
So, the profit-maximizing output is to mow 20 lawns. 
Thus, the total variable cost of mowing 20 lawns is $150, and adding the fixed cost of $1,000 for the mower, the total cost at the profit-maximizing output is $2,800 (150*2 + 1,000).

Question 7

Use the following to answer questions: 
-(Table: Variable Costs for Lawns) Look at the table Variable Costs for Lawns. During the summer, Alex runs a lawn-mowing service, and lawn-mowing is a perfectly competitive industry. Assume that costs are constant in each interval; that is, the variable cost of mowing 1 through 10 lawns is $100. His only fixed cost is $1,000 for the mower. His variable costs include fuel, his time, and mower parts. If the price for mowing a lawn is $70, how many lawns will Alex mow?

Accepted Answer

The answer of Use the following to answer questions: 
-(Table:...

Question 8

If a perfectly competitive firm reduces its output, the market price will increase.

Accepted Answer

In a perfectly competitive market, individual firms are price takers, meaning the actions of a single firm do not affect the market price. The market price is determined by the overall supply and demand in the market.

Question 9

Use the following to answer questions: 
-(Table: Variable Costs for Lawns) Look at the table Variable Costs for Lawns. During the summer, Alex runs a lawn-mowing service, and lawn-mowing is a perfectly competitive industry. Assume that costs are constant in each interval; that is, the variable cost of mowing 1 through 10 lawns is $100. His only fixed cost is $1,000 for the mower. His variable costs include fuel, his time, and mower parts. If the price for mowing a lawn is $70, how much is Alex's profit at the profit-maximizing output?

Accepted Answer

The answer of Use the following to answer questions: 
-(Table:...

Question 10

Use the following to answer questions: 
-(Table: Variable Costs for Lawns) Look at the table Variable Costs for Lawns. During the summer, Alex runs a lawn-mowing service, and lawn-mowing is a perfectly competitive industry. Assume that costs are constant in each interval; that is, the variable cost of mowing 1 through 10 lawns is $100. His only fixed cost is $1,000 for the mower. His variable costs include fuel, his time, and mower parts. If the price for mowing a lawn is $40, how much is Alex's total cost at the profit-maximizing output?

Accepted Answer

To find the profit-maximizing output, we need to find the quantity at which Alex's marginal cost equals the price he receives for mowing each lawn.

From the table, we can see that the marginal cost of mowing 21-30 lawns is $40, which is the same as the price. Therefore, Alex's profit-maximizing output is mowing 21-30 lawns.

To calculate his total cost at this output level, we add up all his variable costs for mowing 21-30 lawns, which is $150. We also need to include his fixed cost of $1,000 for the mower.

So, Alex's total cost at the profit-maximizing output is $1,150 ($1,000 for fixed cost + $150 for variable cost).

Therefore, the answer is D) $1,500.

Question 11

A perfectly competitive firm's demand curve is perfectly elastic at the market-determined price.

Accepted Answer

In perfect competition, the firm is a price taker and cannot influence the market price. Thus, the firm's demand curve is perfectly elastic at the market-determined price. Any attempt by the firm to charge a higher price would result in no sales, as consumers have many other identical options available at the market price.

Question 12

In the short run, if a perfectly competitive firm chooses to produce, then its profits are maximized by producing the quantity of output where marginal cost equals marginal revenue.

Accepted Answer

In the short run, a perfectly competitive firm maximizes profits by producing at the quantity where marginal cost equals marginal revenue, which is also equal to price. This is because in perfect competition, the firm is a price taker and faces a horizontal demand curve, so it can only sell additional units of output at the market price. Therefore, producing any quantity below where marginal cost equals price would mean the firm is not fully utilizing its resources and missing out on potential profits, while producing any quantity above where marginal cost equals price would mean the firm is incurring more costs than revenue and thus reducing profits.

Question 13

If the Kansas corn market is perfectly competitive, it means there is easy entry into this market.

Accepted Answer

In a perfectly competitive market, there are no barriers to entry or exit, so firms can easily enter or exit the market as they please. Therefore, there is easy entry into the market.

Question 14

Use the following to answer questions: 
-(Table: Variable Costs for Lawns) Look at the table Variable Costs for Lawns. During the summer, Alex runs a lawn-mowing service, and lawn-mowing is a perfectly competitive industry. Assume that costs are constant in each interval; that is, the variable cost of mowing 1 through 10 lawns is $100. His only fixed cost is $1,000 for the mower. His variable costs include fuel, his time, and mower parts. If the price for mowing a lawn is $40, how much is Alex's profit at the profit-maximizing output?

Accepted Answer

The answer of Use the following to answer questions: 
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Question 15

Microsoft's Windows operating system is a standardized product, since everyone who buys a particular version of the product gets exactly the same thing. This means that Microsoft is a perfectly competitive firm.

Accepted Answer

Microsoft is not a perfectly competitive firm because it has a significant market share and the Windows operating system has a lot of differentiation from similar products, making it more of a monopolistically competitive firm.

Question 16

Use the following to answer questions: 
-(Table: Variable Costs for Lawns) Look at the table Variable Costs for Lawns. During the summer, Alex runs a lawn-mowing service, and lawn-mowing is a perfectly competitive industry. Assume that costs are constant in each interval; that is, the variable cost of mowing 1 through 10 lawns is $100. His only fixed cost is $1,000 for the mower. His variable costs include fuel, his time, and mower parts. Which of the following is a point on Alex's short-run supply curve?

Accepted Answer

According to the table, Alex's variable cost for mowing 21-30 lawns is $220, and for mowing 31-40 lawns is $360. Therefore, his marginal cost (MC) of producing the 40th lawn (the last lawn in the third interval) is $140. In a perfectly competitive market, a firm's short-run supply is equivalent to its marginal cost curve above its minimum average variable cost (AVC).

To find Alex's minimum AVC, we need to calculate his total variable cost (TVC) per unit of output. In the first interval, TVC is $100 for 10 lawns, so the TVC per lawn is $10. In the second interval, TVC is $180 for 20 lawns, so TVC per lawn is $9. In the third interval, TVC is $360 for 40 lawns, so TVC per lawn is $9. To find Alex's minimum AVC, we need to find the interval in which AVC is lowest. Alex's AVC in the first interval is $20, in the second interval is $18, and in the third interval is $18. Therefore, his minimum AVC is $18 per lawn, which occurs in the second and third intervals.

Since his MC at Q = 40 is $140 and his minimum AVC is $18, his short-run supply curve intersects the price axis at P = $18 and Q = 40. However, this point is not among the answer choices. Out of the given options, the closest answer is C, P = $60; Q = 40. This point is on the third interval, where Alex mows 31-40 lawns. At this level of output, his variable cost is $360, which gives him an AVC of $9 and an MC of $140. Therefore, he is willing to supply 40 lawns at a price of $60.

Question 17

Use the following to answer questions: 
-(Table: Variable Costs for Lawns) Look at the table Variable Costs for Lawns. During the summer, Alex runs a lawn-mowing service, and lawn-mowing is a perfectly competitive industry. Assume that costs are constant in each interval; that is, the variable cost of mowing 1 through 10 lawns is $100. His only fixed cost is $1,000 for the mower. His variable costs include fuel, his time, and mower parts. If the price for mowing a lawn is $40, how much is Alex's profit per unit at the profit-maximizing output?

Accepted Answer

The answer of Use the following to answer questions: 
-(Table:...

Question 18

Use the following to answer questions: 
-(Table: Variable Costs for Lawns) Look at the table Variable Costs for Lawns. During the summer, Alex runs a lawn-mowing service, and lawn-mowing is a perfectly competitive industry. Assume that costs are constant in each interval; that is, the variable cost of mowing 1 through 10 lawns is $100. His only fixed cost is $1,000 for the mower. His variable costs include fuel, his time, and mower parts. If the price for mowing a lawn is $70, how much is Alex's profit per unit at the profit-maximizing output?

Accepted Answer

The answer of Use the following to answer questions: 
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Question 19

According to the optimal output rule, profits are maximized when firms produce where the difference between marginal revenue and marginal cost is the largest.

Accepted Answer

Profits are maximized when firms produce where marginal revenue equals marginal cost, not where the difference between them is the largest.

Question 20

Lawn mowing is a perfectly competitive industry. Alex's Lawn-Mowing Service should shut down in the short run whenever his profits are negative.

Accepted Answer

Alex's Lawn-Mowing Service should only shut down in the short run if the revenue it earns cannot cover its variable costs. If it can cover its variable costs but not its fixed costs, it should continue operating to minimize losses.

Quiz 11: Perfect Competition and the Supply Curve

A perfectly competitive firm's supply curve is its marginal cost curve above the average variable cost curve.

The market for new drugs is not usually perfectly competitive, since the companies manufacturing these drugs are usually granted patents, and this restricts entry into the industry.

In the short run, the fixed costs of running a farm should play no role in determining the level of production.

If a perfectly competitive firm reduces its output, the market price will increase.

A perfectly competitive firm's demand curve is perfectly elastic at the market-determined price.

In the short run, if a perfectly competitive firm chooses to produce, then its profits are maximized by producing the quantity of output where marginal cost equals marginal revenue.

If the Kansas corn market is perfectly competitive, it means there is easy entry into this market.

Microsoft's Windows operating system is a standardized product, since everyone who buys a particular version of the product gets exactly the same thing. This means that Microsoft is a perfectly competitive firm.

According to the optimal output rule, profits are maximized when firms produce where the difference between marginal revenue and marginal cost is the largest.

Lawn mowing is a perfectly competitive industry. Alex's Lawn-Mowing Service should shut down in the short run whenever his profits are negative.