Ch 10 Quiz

In maximizing profit a firm will always produce that output where total revenues are at a maximum.

• True

• False

Answer explanation

Firm’s goal is not to maximize its total revenue but to maximize the economic pro

Under the purely competitive market structure, a profit-maximizing firm will freely increase or decrease the price of its product based on the market demand

• True

• False

Answer explanation

A profit-maximizing firm under pure competition will be price taker, rather than price setter

Under the purely competitive market structure, a firm will still operate its business with a loss in a short run

• True

• False

Answer explanation

A profit-maximizing firm under pure competition will minimize loss in the short run by producing the output at which price or marginal revenue equals marginal cost

From Consider This... in Ch.10 p.207) An unprofitable motel will stay open in the short-run ifprice (average nightly room rate) exceeds average fixed cost

• True

• False

Answer explanation

Not average fixed cost, but average variable cost (AVC)

The demand curve for a purely competitive firm is perfectly elastic, i.e., completely horizontal.

• True

• False

For an individual firm in pure competition, the firm's average revenue and marginal revenue at any output level are both equal to the product's price

• True

• False

If MR > MC for a competitive firm, it should reduce its level of output in order to make MR equal to MC

• True

• False

Answer explanation

Not reduce, but raise

A competitive firm maximizes profit or minimizes loss in the short run by producing the output at which MR (=P) = MC, provided that market price is below the minimum average variable cost

• True

• False

Answer explanation

. provided that market price exceeds the minimum average variable cost, i.e. P > Min AVCSee p.20

Under the purely competitive market structure, production will result in economic profit if price exceeds average total cost

• True

• False

Market supply in a competitive industry is the horizontal sum of the individual supply curves of all of the firms in the industry

• True

• False