ECO100Y1 Exam Solution: Marginal Revenue, Economic Equilibrium, Price Equation

As long as profits remain positive, a firm will want to increase the quantity produced.

Question 3 options:

Question 4 (1 point)

Only variable costs are relevant to a firm's decision to shut down.

Question 4 options:

20) When price is less than average variable cost at the profit-maximizing level of output, a firm should: A) continue to produce the level of output at which marginal revenue equals marginal cost if it is operating in the long run. B) shutdown, because it cannot even cover all of its variable costs let alone its fixed costs if it stays in business. C) shutdown, because it will lose nothing in that case. D) continue to produce the level of output at which marginal revenue equals marginal cost if it is operating in the short run. 21) When price is greater than average variable cost but less than average total cost at the profit-maximizing level of output, a firm should: A) continue to produce the level of output at which marginal revenue equals marginal cost. B) shutdown to minimize its losses. C) reduce output to the level at which price equals average variable cost to minimize its losses. D) increase output to minimize its losses. 22) Assume that at the current market price, a perfectly competitive firm's profit-maximizing level of output yields total revenues that are just equal to total costs. Which of the following statements applies to this firm? A) The firm should increase its explicit costs to reduce its tax burden. B) The firm should shut down right now. C) The firm should continue to operate in the short run to minimize losses, but shut down if things don't improve over the long run. D) The firm is earning zero economic profit and should continue to operate. 23) The perfectly competitive firm's supply curve: A) coincides with its perfectly elastic demand curve. B) is the firm's average total cost curve above the shutdown point. C) is perfectly inelastic at the market price. D) is the firm's marginal cost curve above the minimum point on the AVC curve. 24) Assume there is a decrease in the market demand for a good sold by price-taking firms that are initially producing the profit-maximizing level of output. How will the market adjust over time? A) Firms will exit the market, causing price to rise until losses are eliminated. B) Firms will exit the market, causing price to fall until positive profits are eliminated. C) Firms will enter the market, causing price to fall until positive profits are eliminated. D) Firms will enter the market, causing price to rise until losses are eliminated. 25) What is the "most efficient capacity" for the perfectly competitive firm? A) The plant size for which Price = AR. B) The plant size at which LRAC is at its minimum. C) The plant size at which MR = MC. D) The plant size at which any of the SRATC curves are tangent to the LRAC curve.

Marginal Cost, Revenue, and Pure Competition Assignment Worksheet
Directions
This assignment deals with the recognition and application of pure competition cost and revenue information that is graphically presented. Use the graph below to answer the following questions.
Microeconomic Problem

1. How do you know that the firm represented in the graph above is a purely competitive firm?

2. To maximize profits, this firm will produce at what output level(one letter)?

3. Explain why this MR=MC position is the profit-maximizing position for any firm.

4. What is the product price (one letter)?

5. What is this firm's average revenue (one letter)?

6. At profit-maximizing output, what is this firm's average variable cost (one letter)?

7. At profit-maximizing output, what four letters indicate:

Total revenue? (Remember, four letters' a rectangle.)

Total cost?

Total variable cost?

Total fixed cost?

Total economic profit?

8. If price falls below what point, this firm will not operate in the short run? (No letter needed, just an explanation.)

9. What will happen to this firm's price, output, and economic profit in the long run? Why?

10. Where will the price settle in the long run? Remember, all purely competitive firms are theoretically doomed to make an only normal profit in the long run. (Again, no letter answer, just an explanation.)

11. Why is the long-run equilibrium position of a purely competitive firm productively and allocatively efficient?