Friday Chapter 14 Review

The individual price-taking firm faces …

(more than one answer is correct)

• A perfectly inelastic demand curve

• A horizontal demand curve

• A perfectly elastic demand curve

• A vertical demand curve

Over the long run, which of the following statements is true about profit-maximizing firms in a perfectly competitive market?

• Economic profits are zero

• Economic profits are negative

• Economic profits are positive

• Accounting profits are zero

Suppose that at price P1, motorcycle manufacturers are making positive economic

profits. Assuming the market in motorcycles is perfectly competitive, which of

the following will occur in the long run?

• The supply curve will shift to the right

• The demand curve will shift to the right

• Price will rise

• Price will remain constant

• Marginal costs will increase

Suppose now that motorcycle producers are making economic losses. Which of

the following will happen in the long run?

(more than one is correct)

• Competitive pressures will drive economic profits toward zero

• Some firms will exit the market

• The supply curve will shift to the right

• The price of motorcycles will rise

Suppose that competitive pressures drive the price of motorcycles downward.

Which of the following statements is an accurate description of the situation that

results?

• Revenues and profits are reduced

• Revenues fall, while profits remain constant

• The supply curve shifts to the left

• Marginal cost rises

• The demand curve shifts to the right

In the figure, by increasing its output from Q1 toQ2, the firm

• increases its profit

• increases its marginal revenue

• reduces its marginal revenue

• decreases its profit

Answer explanation

At Q1, TR-TC=0

At Q2, TR-TC is positive

In the figure, by increasing its output from Q2 to Q3, the firm

• increases its marginal revenue

• reduces its marginal revenue

• decreases its profit

• increases its profit

Answer explanation

At Q2, TR-TC is positive.

At Q3, TR-TC is zero

The figure illustrates a firm's total revenue and total cost curves. Which one of the following statements is FALSE?

• At output Q1 the firm makes zero economic profit

• At an output above Q3 the firm incurs an economic loss

• Economic profit is the vertical distance between the total revenue curve and the total cost

  curve

• At output Q2 the firm incurs an economic loss

Answer explanation

At Q3, TR=TC so economic profit is zero, not negative

The feature of the figure that indicates that the firm is a perfectly competitive firm is the

• fact that the total cost and total revenue curves are farthest apart at output is Q2

• shape of the total revenue curve

• fact that the total cost and total revenue curves cross twice

• shape of the total cost curve

Answer explanation

In perfect competition, the price is fixed (you do not have to lower the price to sell more units). So that means revenue increases at a constant rate (ex; if the price is $5, revenue increases by $5 for every sale). So the graph of Total Revenue must be linear

In the figure, the firm is making an economic loss at

• point a

• points b and d

• points a, b, and d

• point c

Answer explanation

profit is negative at point a