Market Structures & Profit-Maximization TEST REVIEW

1. Kelly earns $350,000 as a professional magician. But, it costs him $300,000 per year to pay for all of his equipment and keep the business up & running. What is Bruce’s accounting profit?

• 1. -$50,000

• 1. $350,000

• 1. $50,000

• 1. $650,000

1. If a firm’s marginal cost is increasing, then which of the following must be true?

• No

• 1. The firm is experiencing increasing marginal returns

• 1. The firm is experiencing diminishing marginal returns

• 1. Units of output are equal to units of input multiplied by variable cost.

A firm sells 1,000,000 units per month. The firm’s total fixed cost is $100,000 & total variable cost is $2,000,000. What is the Average Total Cost of production for this firm?

• $0.10

• $2.10

• $1,000,000

• $1,900,000

1. A firm is experiencing “economies of scale” if its…

• 1. Average variable cost decreases.

• 1. Long-run average total cost decreases.

• 1. Marginal cost decreases.

• 1. Average fixed cost decreases.

A perfectly competitive firm needs to increase production in order to maximize profits. We can conclude that at this level of production…

• 1. The firm’s Average Variable Cost is greater than its Average Total Cost.

• 1. The firm’s Marginal Cost is greater than its Average Fixed Cost.

• 1. The firm’s Marginal Cost is greater than its Marginal Revenue.

• 1. The firm’s Marginal Revenue is greater than its Marginal Cost.

A perfectly competitive firm needs to decrease production in order to maximize profits. We can conclude that at this level of production…

• 1. The firm’s Average Variable Cost is greater than its Average Revenue.

• 1. The firm’s Marginal Cost is greater than its Marginal Revenue.

• 1. The firm is run by a bunch of dorks.

• 1. The firm’s Average Fixed cost is increasing as production increases.

Which of the following is true of a perfectly competitive firm in long-run equilibrium

• 1. Marginal Revenue = Marginal Cost

• 1. Average Total Cost = Average Revenue

• 1. Average Revenue = Marginal Revenue

• 1. All of the Above

Economists represent Perfectly Competitive Markets by drawing side-by-side graphs. What does the “supply” curve on the “market” graph represent?

• 1. The market graph includes all producers in the market. The supply curve represents the willingness of all these producers to supply the good/service at a range of different prices.

• 1. The market graph represents a specific firm, and “supply” tells us how many products that firm would be willing to supply at different prices.

• 1. Consumers’ willingness to buy the good/service in general, from any business in the market.

• 1. Consumers’ willingness to buy the good/service from a specific firm

A profit-maximizing firm in a perfectly competitive market is currently earning $100 of total revenue from the sale of 5 units. The firm is currently in long-run equilibrium. What is the marginal cost of the 5th unit?

• 1. $5

• 1. $20

• 1. $100

• 1. Not enough information to calculate.

1. Why does a monopolistically competitive firm advertise?

   1. shift the demand curve for its product to the left.

   2. make its product more similar to its competitors'

   3. make the demand for its product less price elastic

   4. increase its positive externalities

   5. reduce the industry's barriers to entry

• They want to shift the demand curve to the left (aka. decrease demand)

• They want to make their product more similar to those of their competitors

• They want to make demand for their product more elastic.

• They want to make demand for their product less elastic.