2006 FRQ #2- Profit Maximizing with Perfect Competition

The video tutorial explains cost analysis, focusing on fixed and marginal costs. It covers how to calculate marginal costs and determine the profit-maximizing quantity using the MR equals MC rule. The tutorial also discusses long-run market dynamics, including how profits influence market entry and exit. Finally, it examines the impact of taxes on equilibrium in a constant cost industry, emphasizing that in the long run, the market returns to its original state.

What is the fixed cost of a firm if its total cost is $20 when producing zero units?

• $7

• $20

• $27

• $0

How is the marginal cost of the first unit calculated if the cost increases from $20 to $27?

• By adding fixed cost to variable cost

• By multiplying the total cost by the quantity

• By subtracting fixed cost from total cost

• By dividing the change in total cost by the change in quantity

At what quantity does a firm maximize its profit if the price is $20 and MR equals MC?

• 3 units

• 4 units

• 6 units

• 5 units

What happens to the number of firms in the long run if a firm is making a profit?

• Firms will merge

• The number of firms will remain the same

• Firms will leave the market

• Firms will enter the market

In a constant cost industry, what is the long-run effect of a $2 tax on firms?

• Firms will exit the market permanently

• Firms will permanently increase output

• Firms will permanently reduce output

• There will be no change in the long run