Tutorial week 7.
Profit Maximization and Perfect Competition
MULTIPLE CHOICE QUESTIONS
1) A price taker is:
A) a firm that accepts different prices from different customers.
B) a consumer who accepts different prices from different firms.
C) a perfectly competitive firm
D) a firm that cannot influence the market price.
E) both C and D
2) Which of following is a key assumption of a perfectly competitive market?
A) Firms can influence market price.
B) Commodities have few sellers.
C) It is difficult for new sellers to enter the market.
D) Each seller has a very small share of the market.
E) none of the above
3) Which of the following costs may provide barriers to entry in a market?
A) High research and development expenditures
B) License fees
C) Sunk costs associated with specialized facilities
D) all of the above
4) Marginal revenue, graphically, is:
A) the slope of a line from the origin to a point on the total revenue curve.
B) the slope of a line from the origin to the end of the total revenue curve.
C) the slope of the total revenue curve at a given point.
D) the vertical intercept of a line tangent to the total revenue curve at a given point.
E) the horizontal intercept of a line tangent to the total revenue curve at a given point.
5) At the profit-maximizing level of output, what is relationship between the total revenue
(TR) and total cost (TC) curves?
A) They must intersect, with TC cutting TR from below.
B) They must intersect, with TC cutting TR from above.
C) They must be tangent to each other.
D) They cannot be tangent to each other.
E) They must have the same slope.
6) If current output is less than the profit-maximizing output, then the next unit produced
A) will decrease profit.
B) will increase cost more than it increases revenue.
C) will increase revenue more than it increases cost.
D) will increase revenue without increasing cost.
E) may or may not increase profit.
7) At the profit-maximizing level of output, marginal profit
A) is also maximized.
B) is zero.
C) is positive.
D) is increasing.
E) may be positive, negative or zero.
8) The amount of output that a firm decides to sell has no effect on the market price in a
competitive industry because:
A) the market price is determined (through regulation) by the government.
B) the firm supplies a different good than its rivals.
C) the firm's output is a small fraction of the entire industry's output.
D) the short run market price is determined solely by the firm's technology.
E) the demand curve for the industry's output is downward sloping.
9) A firm maximizes profit by operating at the level of output where:
A) average revenue equals average cost.
B) average revenue equals average variable cost.
C) total costs are minimized.
D) marginal revenue equals marginal cost.
E) marginal revenue exceeds marginal cost by the greatest amount.
10) The demand curve facing a perfectly competitive firm is
A) the same as the market demand curve.
B) downward-sloping and less flat than the market demand curve.
C) downward-sloping and more flat than the market demand curve.
D) perfectly horizontal.
E) perfectly vertical.
QUESTIONS FOR DISCUSSION
Question 11. What assumptions are necessary for a market to be perfectly competitive? Why is each
of these assumptions important?
Question 12. Why would a firm that incurs losses choose to produce rather than shut down?
Question 13. Why do firms enter an industry when they know that in the long-run economic profit
will be zero?
EXERCISES
Question 14. The following table contains information for a price taking competitive firm.
Complete the table and determine the profit maximizing level of output (round your answer to the
nearest whole number).
Total Marginal Fixed Average Total Average Marginal
Output Cost Cost Cost Cost Revenue Revenue Revenue
0 5 0
1 7 10
2 11 20
3 17 30
4 27 40
5 41 50
6 61 60
Question 15. Suppose you are the manager of a watchmaking firm operating in a competitive
market. Your cost of production is given by C = 200 + 2q2, where q is the level of output and C is
total cost.
a. If the price of watches is $100, how many watches should you produce to maximize profit?
b. What will the profit level be?
Question 16. Suppose the same firm’s cost function is C(q) = 4q2 + 16.
a. Find variable cost, fixed cost, average cost, average variable cost, and average fixed cost.
b. Find the output that minimizes average cost.
Question 17. A number of stores offer film developing as a service to their customers. Suppose
that each store offering this service has a cost function C(q) = 50 + 0.5q + 0.08q2 and a
marginal cost MC = 0.5 + 0.16q .
A) If the going rate for developing a roll of film is $8.50, is the industry in long-run equilibrium?
➢ If not, find the price associated with long-run equilibrium.
B) Suppose now that a new technology is developed which will reduce the cost of film
developing by 25%. Assuming that the industry is in long-run equilibrium, how much
would any one store be willing to pay to purchase this new technology?