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27 Cards in this Set

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Which of the following is NOT necessarily true in a market characterized by perfect competition?

A. Firms can freely exit the market in the short run.
B. There are a large number of firms that all take the market price as given.
C. Consumers know all prices charged by all firms.
D. All firms produce an identical product.
E. Firms can freely enter the market in the long run.


Firms cannot freely exit the market in the short run. In the short run, a firm can shut down and produce no output, but the firm must still pay its fixed costs. It is only in the long run that a firm can exit the market. Firms that are in a perfectly competitive market can freely enter the market in the long run, typically take the price as given, and produce an identical product. Consumers also know all the firms' prices.
Which of the following is NOT necessarily true in a market characterized by perfect competition?




Correct Answer A. Firms can freely exit the market in the short run.

B. There are a large number of firms that all take the market price as given.

C. Consumers know all prices charged by all firms.

Your Answer D. All firms produce an identical product.

E. Firms can freely enter the market in the long run.


Firms cannot freely exit the market in the short run. In the short run, a firm can shut down and produce no output, but the firm must still pay its fixed costs. It is only in the long run that a firm can exit the market. Firms that are in a perfectly competitive market can freely enter the market in the long run, typically take the price as given, and produce an identical product. Consumers also know all the firms' prices.
In general, which of the following is the best explanation of a firm's rule for reaching a profit maximum?

A. Increase price until marginal revenue equals zero.
B. Increase output as long as marginal revenue is greater than marginal cost.
C. Increase price until total revenue equals total cost.
D. Increase output until marginal revenue equals zero.
E. Increase output until total revenue is maximized.


Profit-maximizing firms increase production until the point when profits start falling. As long as marginal revenue exceeds marginal cost, profits increase as output increases. Once marginal revenue falls below marginal cost, however, profits will decrease. Therefore, all profit-maximizing firms increase output when marginal revenue exceeds marginal cost and stop before marginal revenue falls below marginal cost.
In general, which of the following is the best explanation of a firm's rule for reaching a profit maximum?




Your Answer A. Increase price until marginal revenue equals zero.

Correct Answer B. Increase output as long as marginal revenue is greater than marginal cost.

C. Increase price until total revenue equals total cost.

D. Increase output until marginal revenue equals zero.

E. Increase output until total revenue is maximized.


Profit-maximizing firms increase production until the point when profits start falling. As long as marginal revenue exceeds marginal cost, profits increase as output increases. Once marginal revenue falls below marginal cost, however, profits will decrease. Therefore, all profit-maximizing firms increase output when marginal revenue exceeds marginal cost and stop before marginal revenue falls below marginal cost.
Incorrect Answer 3. Which one of the following statements is true under perfect competition?

A. Consumer surplus is maximized.
B. Each firm's demand curve is the market demand curve.
C. Firms choose output so that price equals marginal cost in the long run, but firms may choose to set price above marginal cost in the short run to maximize profits.
D. Each firm's marginal revenue curve is determined by the market price.
E. There is no producer surplus.


Under perfect competition, the market demand curve and market supply curve determine the market-clearing price. This price, then, determines each firm's demand and marginal revenue curves. All profit-maximizing firms choose output so that marginal revenue equals marginal cost in the short run and in the long run.

In the long run, perfect competition is efficient, meaning that it maximizes total surplus. It does not minimize producer surplus or maximize consumer surplus.
3. Which one of the following statements is true under perfect competition?




A. Consumer surplus is maximized.

Your Answer B. Each firm's demand curve is the market demand curve.

C. Firms choose output so that price equals marginal cost in the long run, but firms may choose to set price above marginal cost in the short run to maximize profits.

Correct Answer D. Each firm's marginal revenue curve is determined by the market price.

E. There is no producer surplus.


Under perfect competition, the market demand curve and market supply curve determine the market-clearing price. This price, then, determines each firm's demand and marginal revenue curves. All profit-maximizing firms choose output so that marginal revenue equals marginal cost in the short run and in the long run.

In the long run, perfect competition is efficient, meaning that it maximizes total surplus. It does not minimize producer surplus or maximize consumer surplus.
Consider the market for wheat. Suppose many farmers with identical farms supply the wheat. The market demand and supply of wheat result in an equilibrium price of $2 per bushel of wheat. This graph represents one farmer's average variable cost (AVC) and marginal cost (MC) functions for producing wheat. It also shows the demand curve the farmer faces (D). Because it is horizontal, it is equal to the marginal revenue curve (MR).

Recall that variable costs are the costs that change with the quantity of wheat that the farmer grows, costs such as fuel and fertilizer. If the farmer decides to grow no wheat this year, she can avoid these variable costs. For this farmer, variable costs are the only costs that she can avoid by choosing not to produce wheat this year. In the short run, she cannot avoid such costs as the two-year lease she agreed to with the owner of the farm land.

MC, AVC, and D curves describing a market for wheat


4.1. If this farmer wants to maximize her profit, should she shut down and produce zero bushels of wheat this year?

A. Not enough information to determine the answer
B. No
C. Yes
Consider the market for wheat. Suppose many farmers with identical farms supply the wheat. The market demand and supply of wheat result in an equilibrium price of $2 per bushel of wheat. This graph represents one farmer's average variable cost (AVC) and marginal cost (MC) functions for producing wheat. It also shows the demand curve the farmer faces (D). Because it is horizontal, it is equal to the marginal revenue curve (MR).

Recall that variable costs are the costs that change with the quantity of wheat that the farmer grows, costs such as fuel and fertilizer. If the farmer decides to grow no wheat this year, she can avoid these variable costs. For this farmer, variable costs are the only costs that she can avoid by choosing not to produce wheat this year. In the short run, she cannot avoid such costs as the two-year lease she agreed to with the owner of the farm land.

MC, AVC, and D curves describing a market for wheat


Incorrect Answer 4.1. If this farmer wants to maximize her profit, should she shut down and produce zero bushels of wheat this year?




Your Answer A. Not enough information to determine the answer

Correct Answer B. No

C. Yes


If the farmer produces a positive amount of output, to maximize profit she will produce at the level at which marginal revenue equals marginal cost, represented by the black dot in the graph. At this level of output, the price of $2 per bushel is greater than the farmer's average variable costs of production. This means that she is better off producing this amount of wheat. Her revenue will be price times quantity. The costs that she could avoid are average variable costs times quantity. Because the price is greater than the average variable costs, she comes out ahead if she produces at this level.
Consider the market for wheat. Suppose many farmers with identical farms supply the wheat. The market demand and supply of wheat result in an equilibrium price of $2 per bushel of wheat. This graph represents one farmer's average variable cost (AVC) and marginal cost (MC) functions for producing wheat. It also shows the demand curve the farmer faces (D). Because it is horizontal, it is equal to the marginal revenue curve (MR).

Recall that variable costs are the costs that change with the quantity of wheat that the farmer grows, costs such as fuel and fertilizer. If the farmer decides to grow no wheat this year, she can avoid these variable costs. For this farmer, variable costs are the only costs that she can avoid by choosing not to produce wheat this year. In the short run, she cannot avoid such costs as the two-year lease she agreed to with the owner of the farm land.

MC, AVC, and D curves describing a market for wheat


4.2. Does this farmer earn positive or negative profits in the short run?


A. Positive profits
B. Not enough information to determine the answer
C. Negative profits
Consider the market for wheat. Suppose many farmers with identical farms supply the wheat. The market demand and supply of wheat result in an equilibrium price of $2 per bushel of wheat. This graph represents one farmer's average variable cost (AVC) and marginal cost (MC) functions for producing wheat. It also shows the demand curve the farmer faces (D). Because it is horizontal, it is equal to the marginal revenue curve (MR).

Recall that variable costs are the costs that change with the quantity of wheat that the farmer grows, costs such as fuel and fertilizer. If the farmer decides to grow no wheat this year, she can avoid these variable costs. For this farmer, variable costs are the only costs that she can avoid by choosing not to produce wheat this year. In the short run, she cannot avoid such costs as the two-year lease she agreed to with the owner of the farm land.

MC, AVC, and D curves describing a market for wheat


Incorrect Answer 4.2. Does this farmer earn positive or negative profits in the short run?

A. Positive profits

Correct Answer B. Not enough information to determine the answer

Your Answer C. Negative profits


This farmer will not shut down in the short run, because the price is greater than the average variable cost. However, the graph does not show average total costs. Total costs would include other costs such as the long-term lease payments on the land. In the long run, she need not renew the lease and can thereby avoid the lease payments. In the short run, she does not have this option because the lease has many months to run. If her average total cost is greater than $2, she is not earning economic profits. If her average total cost is less than $2, she is earning economic profits.
Andrea currently owns a piano for her own playing enjoyment. She also works 15 hours a week at the Corbin Tutoring Center earning $15 per hour. She only works at Corbin during the school year, which is 36 weeks long. She is considering quitting Corbin and giving piano lessons instead for $20 per hour. If she gave piano lessons, she would need to pay $10 each week to get the piano tuned. Andrea could quit Corbin and teach piano lessons after school every day for 3 hours, Monday through Friday. She would do this for the same 36-week stretch. Other people would like to enter into the business of teaching piano lessons in their homes, but zoning ordinances do not allow this. (Andrea got a special exemption from the city council.)

What is the dollar value of the yearly economic profit Andrea gains by quitting Corbin and teaching piano lessons?




$
Please enter a whole number, with no decimal point.
Andrea currently owns a piano for her own playing enjoyment. She also works 15 hours a week at the Corbin Tutoring Center earning $15 per hour. She only works at Corbin during the school year, which is 36 weeks long. She is considering quitting Corbin and giving piano lessons instead for $20 per hour. If she gave piano lessons, she would need to pay $10 each week to get the piano tuned. Andrea could quit Corbin and teach piano lessons after school every day for 3 hours, Monday through Friday. She would do this for the same 36-week stretch. Other people would like to enter into the business of teaching piano lessons in their homes, but zoning ordinances do not allow this. (Andrea got a special exemption from the city council.)

What is the dollar value of the yearly economic profit Andrea gains by quitting Corbin and teaching piano lessons?




$ 8

Correct Answer Correct Answer: $ 2340

By teaching piano, Andrea would earn $20 x 15 hours = $300 each week, but she would also have to pay $10 each week for tuning. Her current job at Corbin pays her $15 x 15 hours = $225 each week. If she spends 15 hours a week giving piano lessons, the opportunity cost of her time is the $225 she could have earned at Corbin. Therefore, Andrea's weekly profit from giving piano lessons is $300 - $10 - $225 = $65. Since she would do either one of these jobs for 36 weeks, her annual economic profit from giving piano lessons is $65 x 36 = $2,340.
Consider a perfectly competitive industry in long-run equilibrium. A discovery suddenly reduces the production cost of each unit made by all firms in the industry. Which of these choices best describes how this change would appear in a graph showing the industry equilibrium?

A. The market supply curve shifts up and to the left.
B. Each firm's marginal cost curve shifts up and to the left.
C. The market demand curve shifts down and to the left.
D. The market demand curve shifts up and to the right.
E. Each firm's marginal cost curve shifts down and to the right.
Consider a perfectly competitive industry in long-run equilibrium. A discovery suddenly reduces the production cost of each unit made by all firms in the industry. Which of these choices best describes how this change would appear in a graph showing the industry equilibrium?




A. The market supply curve shifts up and to the left.

Your Answer B. Each firm's marginal cost curve shifts up and to the left.

C. The market demand curve shifts down and to the left.

D. The market demand curve shifts up and to the right.

Correct Answer E. Each firm's marginal cost curve shifts down and to the right.


A discovery that reduces the cost of producing each unit that firms make reduces the marginal cost of production at all output levels. Therefore marginal costs will shift down and to the right. As a result, the market supply curve will also shift down and to the right. The demand curve is not affected by this discovery.
Jennifer makes clay pots. This table summarizes information about her costs of production. At any quantity, Q, average variable cost is variable cost divided by Q. Average total cost is total cost divided by Q. Marginal cost is the increase in variable cost caused by the production of the last unit. (The same increase will apply for total costs because total costs include both variable costs and fixed costs.) For example, at Q = 3, an entry for marginal cost equal to $16 means that the variable cost of producing three units is $16 more than the variable cost of producing two units.

Some of the entries in the table have not been filled in, but there is enough information for you to work out what these entries should be.

Refer to Assignment 7.1 Lesson 13


7.1. What is Jennifer's average variable cost of production when she produces four units of output?

7.2. What is Jennifer's average total cost of production when she produces five pots?

7.3. What is Jennifer's marginal cost of producing the fifth pot?




$
Please enter 2 digits after the decimal point.







$
Please enter 2 digits after the decimal point.
Jennifer makes clay pots. This table summarizes information about her costs of production. At any quantity, Q, average variable cost is variable cost divided by Q. Average total cost is total cost divided by Q. Marginal cost is the increase in variable cost caused by the production of the last unit. (The same increase will apply for total costs because total costs include both variable costs and fixed costs.) For example, at Q = 3, an entry for marginal cost equal to $16 means that the variable cost of producing three units is $16 more than the variable cost of producing two units.

Some of the entries in the table have not been filled in, but there is enough information for you to work out what these entries should be.

Refer to Assignment 7.1 Lesson 13

Incorrect Answer 7.1. What is Jennifer's average variable cost of production when she produces four units of output?




$ 23.21

Correct Answer Correct Answer: $ 17.00

Average variable cost equals variable cost divided by quantity. Thus, at a quantity of four pots, variable cost is $68. Average variable cost will be total variable cost divided by quantity, so average variable cost is $68/4 = $17.00 per pot.



23.32

Correct Answer Correct Answer: 40.80

Average total cost equals total cost divided by quantity. Thus, at a quantity of five units of output for which total cost is $204, Jennifer's average total cost is $204/5 = $40.80 per pot.

$ 13.34

Correct Answer Correct Answer: $ 16.00

The total cost of producing five units of output is $204. The total cost of producing four units of output is $188. The marginal cost of producing the fifth unit is $204 - $188 = $16.00.
The market for wheat is perfectly competitive. The graph below shows the market demand and short-run supply curves. This supply curve shows the increase in output from existing wheat growers when the price increases. In the short run, the number of wheat growers is fixed. In the long run, the number of growers (all with identical costs) can adjust in response to changes in profitability of wheat growing.

This graph shows the wheat market in both short-run and long-run equilibrium. Now suppose the U.S. Surgeon General releases a report promoting diets that are low in wheat-based products.

Graph


8.1. Adjust the graph below to show the short-run effect of this news on the market for wheat.

Tool tip: Click and drag one or both of the curves. Curves will snap into position, so if you try to move the curve and it snaps back to its original position, just try again and drag it a little farther. When you are satisfied with your answer, click the Submit Answer button.
The market for wheat is perfectly competitive. The graph below shows the market demand and short-run supply curves. This supply curve shows the increase in output from existing wheat growers when the price increases. In the short run, the number of wheat growers is fixed. In the long run, the number of growers (all with identical costs) can adjust in response to changes in profitability of wheat growing.

This graph shows the wheat market in both short-run and long-run equilibrium. Now suppose the U.S. Surgeon General releases a report promoting diets that are low in wheat-based products.


Correct Answer 8.1. Adjust the graph below to show the short-run effect of this news on the market for wheat.

Tool tip: Click and drag one or both of the curves. Curves will snap into position, so if you try to move the curve and it snaps back to its original position, just try again and drag it a little farther. When you are satisfied with your answer, click the Submit Answer button.




At each price, the report will decrease the amount of wheat people want to consume. This corresponds to a leftward shift in the demand curve. In the short run, new firms cannot enter the market. As a result, the supply curve remains unchanged.
The market for wheat is perfectly competitive. The graph below shows the market demand and short-run supply curves. This supply curve shows the increase in output from existing wheat growers when the price increases. In the short run, the number of wheat growers is fixed. In the long run, the number of growers (all with identical costs) can adjust in response to changes in profitability of wheat growing.

This graph shows the wheat market in both short-run and long-run equilibrium. Now suppose the U.S. Surgeon General releases a report promoting diets that are low in wheat-based products.

In the short run, what happens to the market-clearing price for wheat as a result of the Surgeon General's report?


A. Price increases
B. Price decreases
The market for wheat is perfectly competitive. The graph below shows the market demand and short-run supply curves. This supply curve shows the increase in output from existing wheat growers when the price increases. In the short run, the number of wheat growers is fixed. In the long run, the number of growers (all with identical costs) can adjust in response to changes in profitability of wheat growing.

This graph shows the wheat market in both short-run and long-run equilibrium. Now suppose the U.S. Surgeon General releases a report promoting diets that are low in wheat-based products.

Graph


Incorrect Answer 8.2. In the short run, what happens to the market-clearing price for wheat as a result of the Surgeon General's report?




Your Answer A. Price increases

Correct Answer B. Price decreases


In the short run, the demand curve shifts to the left and the supply curve remains unchanged, so the market price decreases.
The market for wheat is perfectly competitive. The graph below shows the market demand and short-run supply curves. This supply curve shows the increase in output from existing wheat growers when the price increases. In the short run, the number of wheat growers is fixed. In the long run, the number of growers (all with identical costs) can adjust in response to changes in profitability of wheat growing.

This graph shows the wheat market in both short-run and long-run equilibrium. Now suppose the U.S. Surgeon General releases a report promoting diets that are low in wheat-based products.

Graph


Correct Answer 8.3. In the short run, how does each wheat grower react to the Surgeon General's report?



A. Each grower shuts down
B. Each grower increases its production of wheat
C. Each grower exits the industry
D. Each grower decreases its production of wheat
The market for wheat is perfectly competitive. The graph below shows the market demand and short-run supply curves. This supply curve shows the increase in output from existing wheat growers when the price increases. In the short run, the number of wheat growers is fixed. In the long run, the number of growers (all with identical costs) can adjust in response to changes in profitability of wheat growing.

This graph shows the wheat market in both short-run and long-run equilibrium. Now suppose the U.S. Surgeon General releases a report promoting diets that are low in wheat-based products.

Graph


Correct Answer 8.3. In the short run, how does each wheat grower react to the Surgeon General's report?




A. Each grower shuts down

B. Each grower increases its production of wheat

C. Each grower exits the industry

Your Answer D. Each grower decreases its production of wheat


When the market was in short- and long-run equilibrium before the release of the Surgeon General's report, wheat growers produced at the point at which marginal cost was equal to marginal revenue (which is identical to price in a perfectly competitive market such as wheat). After the release of the Surgeon General's report and the resulting decrease in price of wheat, growers decrease the quantity of wheat they produce to the point at which the new, lower marginal cost equals the price.
The market for wheat is perfectly competitive. The graph below shows the market demand and short-run supply curves. This supply curve shows the increase in output from existing wheat growers when the price increases. In the short run, the number of wheat growers is fixed. In the long run, the number of growers (all with identical costs) can adjust in response to changes in profitability of wheat growing.

This graph shows the wheat market in both short-run and long-run equilibrium. Now suppose the U.S. Surgeon General releases a report promoting diets that are low in wheat-based products.

Graph


Incorrect Answer 8.4. In the graph below, show the short-run effects of the Surgeon General's report on the market for wheat. Then, adjust the graph to show the long-run effect of the report. Recall that, in the long run, the number of wheat growers can adjust. (Note: Assume this is a constant-cost industry, which means that the average cost curves do not shift as the industry expands or contracts.)
The market for wheat is perfectly competitive. The graph below shows the market demand and short-run supply curves. This supply curve shows the increase in output from existing wheat growers when the price increases. In the short run, the number of wheat growers is fixed. In the long run, the number of growers (all with identical costs) can adjust in response to changes in profitability of wheat growing.

This graph shows the wheat market in both short-run and long-run equilibrium. Now suppose the U.S. Surgeon General releases a report promoting diets that are low in wheat-based products.

Graph


Incorrect Answer 8.4. In the graph below, show the short-run effects of the Surgeon General's report on the market for wheat. Then, adjust the graph to show the long-run effect of the report. Recall that, in the long run, the number of wheat growers can adjust. (Note: Assume this is a constant-cost industry, which means that the average cost curves do not shift as the industry expands or contracts.)

At first, the decrease in demand decreases price and causes wheat growers to receive negative profits in the short run. This discourages entry by wheat growers, and actually encourages growers to exit the market. Over time, the decrease in the number of growers will shift the short-run supply curve leftward. Because the growers have the same costs, the new equilibrium will be at the same price as before. So, the price will be the same, but the quantity will be lower.
Which of the following scenarios best illustrates the idea of perfect competition?

A. New companies freely enter the ice cream industry; they all sell vanilla-flavored ice cream, and they do not affect the market price regardless of how much they sell.

B. The ticket prices for a theater are as follows: $4 for children under the age of 12, $6 for seniors, and $9 for adults.

C. The market price for sweaters is $20. A store decides to raise its price to $30, and some consumers will buy those sweaters at $30.

D. The only grocery store in town can vary its prices freely without worrying about affecting demand from shoppers.
Which of the following scenarios best illustrates the idea of perfect competition?




Your Answer A. New companies freely enter the ice cream industry; they all sell vanilla-flavored ice cream, and they do not affect the market price regardless of how much they sell.

B. The ticket prices for a theater are as follows: $4 for children under the age of 12, $6 for seniors, and $9 for adults.

C. The market price for sweaters is $20. A store decides to raise its price to $30, and some consumers will buy those sweaters at $30.

D. The only grocery store in town can vary its prices freely without worrying about affecting demand from shoppers.


In a perfectly competitive market, all producers and consumers are price takers.

For a market to be perfectly competitive, two conditions are necessary. First, there must be many firms producing the same good in the market, and none can have a significant market share. Second, consumers have to regard the products of all producers as equivalent.

The sole grocery store that can change its prices freely is not a price taker; neither is the theater that varies its prices based on age. In the case of the sweater shop, the fact that some consumers are still willing to pay $30 for a sweater implies that they don't see all sweaters as perfect substitutes for each other. This violates the condition that all consumers regard products as standardized commodities. So, this firm is also not a price taker. In a perfectly competitive market, demand will fall to zero for any price above $20.
See Assignment 13, Question 10
Seriously see Assignment 13, Question 10
Suppose that the market for hybrid vehicles is perfectly competitive. In the short run, the market price is $12,000. The graph below shows the marginal cost (MC), average total cost (ATC), and average variable cost (AVC) curves of a typical manufacturer in the market.



11.1. What does the blue shaded area (labeled A) represent?




A. Economic profit

B. Economic loss

C. Total cost

D. Deadweight loss

E. Total revenue

11.2. What does the gray shaded area (labeled B) represent?


A. Deadweight loss

B. Total fixed cost

C. Total revenue

D. Total cost
Suppose that the market for hybrid vehicles is perfectly competitive. In the short run, the market price is $12,000. The graph below shows the marginal cost (MC), average total cost (ATC), and average variable cost (AVC) curves of a typical manufacturer in the market.

Graph


Correct Answer 11.1. What does the blue shaded area (labeled A) represent?




A. Economic profit

Your Answer B. Economic loss

C. Total cost

D. Deadweight loss

E. Total revenue


Profit is defined as the difference between total cost and total revenue. At a price of $12,000, a profit-maximizing firm in a perfectly competitive market will produce 4,000 hybrid vehicles per year, since this is the quantity that corresponds to where marginal cost equals the market price.

Since profit is the difference between total revenue (TR) and total cost (TC), we can rewrite this expression as:

Profit = (Average total revenue - Average total cost) x Quantity produced (Q), or

Profit = (TR/Q - TC/Q) x Q

For a firm in a perfectly competitive market, market price (P) = average revenue, so:

Profit = (P - ATC) x Q

In this case, profit = ($12,000 - $16,000) x 4,000 hybrid vehicles = -$16,000,000, which is an economic loss.

11.2. What does the gray shaded area (labeled B) represent?




Your Answer A. Deadweight loss

B. Total fixed cost

Correct Answer C. Total revenue

D. Total cost


Total revenue is defined as the product of the market price and quantity produced. At a price of $12,000, a profit-maximizing firm in a perfectly competitive market will produce 4,000 hybrid vehicles per year, since this is the quantity that corresponds to where marginal cost equals the market price. Therefore, total revenue = $12,000 x 4,000 hybrid vehicles = $48,000,000, exactly the area of the gray shaded area (labeled B).
Consider the perfectly competitive market for white socks. The graph below shows the marginal cost (MC), average total cost (ATC), and average variable cost (AVC) curves for a typical firm in the industry.

Graph


12.1. If the market price for a pair of socks is 35 cents, how many pairs will a typical firm produce?




A. 250,000 pairs

B. 400,000 pairs

C. 75,000 pairs

D. 150,000 pairs

12.2. Below what price would this firm stop producing in the short run?




A. 40 cents

B. 20 cents

C. 5 cents

D. 10 cents
Consider the perfectly competitive market for white socks. The graph below shows the marginal cost (MC), average total cost (ATC), and average variable cost (AVC) curves for a typical firm in the industry.

Graph


Incorrect Answer 12.1. If the market price for a pair of socks is 35 cents, how many pairs will a typical firm produce?




Your Answer A. 250,000 pairs

Correct Answer B. 400,000 pairs

C. 75,000 pairs

D. 150,000 pairs


A profit-maximizing firm in a perfectly competitive industry will produce up to the point where marginal cost is equal to the market price. At the price of 35 cents, a typical firm will produce 400,000 pairs of socks.

12.2. Below what price would this firm stop producing in the short run?




Your Answer A. 40 cents

B. 20 cents

C. 5 cents

Correct Answer D. 10 cents


The shutdown price corresponds to the height of the average variable cost curve at its minimum. For prices below this level, the firm is unable to cover its variable cost per unit; that is, there is no level of output at which the firm's total revenue covers its variable costs. At prices below 10 cents, the firm maximizes its profits and minimizes its losses by not producing at all.
See Assignment 12.3, Lesson 13
Seriously see Assignement 12.3, Lesson 13
Consider a perfectly competitive yo-yo market. The graph below shows the cost curves for a typical firm in the industry.

Graph


13.1. The shutdown price is ______, while the break-even price is _________.




A. $3; $5

B. $4; $2

C. $2; $4

D. $5; $3

E. $1; $2
Consider a perfectly competitive yo-yo market. The graph below shows the cost curves for a typical firm in the industry.

Graph


Incorrect Answer 13.1. The shutdown price is ______, while the break-even price is _________.




A. $3; $5

Your Answer B. $4; $2

Correct Answer C. $2; $4

D. $5; $3

E. $1; $2


The shutdown price of $2 marks the point at which average variable cost is at its minimum. The break-even price of $4 marks the point at which average total cost is at its minimum.
See Assignment 13.2, Lesson 13
See Assignment 13.2, Lesson 13
Consider a perfectly competitive yo-yo market. The graph below shows the cost curves for a typical firm in the industry.

Graph


13.3. If the market price is $3, the firm's likely decision on production is:




A. To shut down in the short run and exit the industry in the long run.

B. To produce in the short run and exit the industry in the long run.

C. To produce in the short run and produce in the long run.

D. To shut down in the short run and produce in the long run.
Consider a perfectly competitive yo-yo market. The graph below shows the cost curves for a typical firm in the industry.

Graph


Correct Answer 13.3. If the market price is $3, the firm's likely decision on production is:




A. To shut down in the short run and exit the industry in the long run.

Your Answer B. To produce in the short run and exit the industry in the long run.

C. To produce in the short run and produce in the long run.

D. To shut down in the short run and produce in the long run.


The market price of $3 corresponds to a point on the MC curve that is between the firm's ATC and AVC. Therefore, in the short run, although the firm cannot cover fixed costs, it will generate enough revenue to cover its variable costs. The firm will ignore the fixed costs and produce in the short run.

However, in the long run, the firm will exit the industry, since $3 is below the break-even price.
14. True or False: A firm's short-run decision to produce is based solely on profits, which are equal to total revenue minus total cost. If profits are negative, it is best to shut down immediately.




True

False
True or False: A firm's short-run decision to produce is based solely on profits, which are equal to total revenue minus total cost. If profits are negative, it is best to shut down immediately.




True

Your Answer False


A firm's short-run decision is not solely based on whether or not it incurs profits or losses. It depends on whether the market price is below or above its shutdown price, or minimum average variable cost. As long as the market price is above average variable cost, a firm will produce in the short run since it is covering its variable cost. In cases where there are fixed costs and price is equal to or just above the shutdown price, this will mean that the average total cost is higher than the market price, which leads to losses. However, in the short run, a firm's decision to produce is independent of any sunk or fixed costs, so even if it cannot cover fixed costs and earn profits, it will produce nonetheless.
Suppose that the market for motorized scooters is perfectly competitive. The graph below shows the cost curves for a typical firm in the industry. Assume that the market price is $70 for a scooter.

Graph


15.1. What is the firm's total revenue per day at the current market price?




$
Please enter a whole number, with no decimal point.
Suppose that the market for motorized scooters is perfectly competitive. The graph below shows the cost curves for a typical firm in the industry. Assume that the market price is $70 for a scooter.

Graph


Incorrect Answer 15.1. What is the firm's total revenue per day at the current market price?




$ 20

Correct Answer Correct Answer: $ 490

Total revenue is defined as the product of the market price and quantity produced. At a price of $70, a profit-maximizing firm in a perfectly competitive market will produce seven scooters per day, since this is the quantity that corresponds to where marginal cost equals the market price. Therefore, total revenue = $70 x 7 scooters = $490.
Assignment 15.2 and 15.3, Lesson 13
Yup Assignment 15.2 and 15.3, Lesson 13
A perfectly competitive firm has the following short-run total cost. Assume that the fixed cost is zero, and the market price is $80 for a unit of output.

Output Total cost (TC)
0 $0
1 $87
2 $146
3 $204
4 $264
5 $330
6 $408
7 $507


16.1. What is the firm's profit-maximizing level of output?




units
Please enter a whole number, with no decimal point.
A perfectly competitive firm has the following short-run total cost. Assume that the fixed cost is zero, and the market price is $80 for a unit of output.

Output Total cost (TC)
0 $0
1 $87
2 $146
3 $204
4 $264
5 $330
6 $408
7 $507


Incorrect Answer 16.1. What is the firm's profit-maximizing level of output?




1 units

Correct Answer Correct Answer: 6 units

If the price exceeds the marginal cost of increasing output by one unit, the firm will produce another unit. It keeps increasing its output until it reaches a point where increasing output by one more unit has a marginal cost that is greater than the price.

In this example, the marginal cost of increasing output from five to six units is less than the price. The marginal cost of increasing output from six to seven units is greater than the price. So the firm stops at six units. This is its profit-maximizing quantity.

The table below summarizes the firm's marginal cost.

Table
A perfectly competitive firm has the following short-run total cost. Assume that the fixed cost is zero, and the market price is $80 for a unit of output.

Output Total cost (TC)
0 $0
1 $87
2 $146
3 $204
4 $264
5 $330
6 $408
7 $507


16.2. At the current market price, the firm will:




A. Shut down in the short run and produce in the long run.

B. Produce in the short run and produce in the long run.

C. Shut down in the short run and exit the industry in the long run.

D. Produce in the short run and exit the industry in the long run.
A perfectly competitive firm has the following short-run total cost. Assume that the fixed cost is zero, and the market price is $80 for a unit of output.

Output Total cost (TC)
0 $0
1 $87
2 $146
3 $204
4 $264
5 $330
6 $408
7 $507


Correct Answer 16.2. At the current market price, the firm will:




A. Shut down in the short run and produce in the long run.

Your Answer B. Produce in the short run and produce in the long run.

C. Shut down in the short run and exit the industry in the long run.

D. Produce in the short run and exit the industry in the long run.


The firm considers its minimum variable cost in its short-run production decisions. It will produce in the short run if the market price is equal to or greater than its minimum average variable cost. That is, as long as it can cover its variable costs, it will produce in the short run.

The firm considers its minimum average total cost in its long-run production decisions. It will produce in the long run if the market price is equal to or greater than its minimum average total cost; that is, as long as the firm at least breaks even in its economic profits.

The table below summarizes the firm's average variable cost, which equals average total cost since there is no fixed cost.

Output Total cost (TC) Average total cost (ATC)
0 $0 --
1 $87 $87.00
2 $146 $73.00
3 $204 $68.00
4 $264 $66.00
5 $330 $66.00
6 $408 $68.00
7 $507 $72.43

The market price is $80, which is above the minimum average variable cost (and average total cost) of $66. The firm is earning economic profit and will produce both in the short run and in the long run.
17. In the long run there is free entry into a perfectly competitive market. Assume that there is a downward-sloping demand curve for the market. Assume that firms already in the market are making profits. Which of the following sequence of events best describes the change in prices and output as a result of free entry?




A. Demand curve shifts to the left, causing prices to fall; overall output decreases.

B. The short-run industry supply curve shifts to the right, causing prices to fall; overall output increases.

C. Demand curve shifts to the right, causing prices to rise; overall output increases.

D. The short-run industry supply curve shifts to the left, causing prices to rise; overall output decreases.
Incorrect Answer 17. In the long run there is free entry into a perfectly competitive market. Assume that there is a downward-sloping demand curve for the market. Assume that firms already in the market are making profits. Which of the following sequence of events best describes the change in prices and output as a result of free entry?




Your Answer A. Demand curve shifts to the left, causing prices to fall; overall output decreases.

Correct Answer B. The short-run industry supply curve shifts to the right, causing prices to fall; overall output increases.

C. Demand curve shifts to the right, causing prices to rise; overall output increases.

D. The short-run industry supply curve shifts to the left, causing prices to rise; overall output decreases.


Free entry into a market has a supply-side effect on the market. For a given price, output is higher, which causes the short-run industry curve to shift to the right, achieving a new short-run equilibrium price and output. The curve will continue shifting as long as firms continue to enter the market, which means that prices will continue falling while output will continue rising. Firms will stop entering when the market price has fallen to the break-even price, where firms n
See Assignment 18, Lesson 13
See Assignment 18, Lesson 13