WorksheetsProfit Maximisation
Total questions: 30
Worksheet time: 3600secs
Which of following is a key assumption of a perfectly competitive market?
Firms can influence the market price.
Commodities have few sellers.
It is difficult for new sellers to enter the market.
Each seller has a very small share of the market.
Use the following statements to answer this question:
I. Markets that have only a few sellers cannot be highly competitive.
II. Markets with many sellers are always perfectly competitive.
I and II are true.
I is true and II is false.
II is true and I is false.
I and II are false.
A few sellers may behave as if they operate in a perfectly competitive market if the market demand is:
composed of many small buyers.
unitary elastic.
very elastic.
highly inelastic.
If managers do not choose to maximize profit, but pursue some other goal such as revenue maximization or growth,
they are more likely to have higher profit than if they had pursued that policy explicitly
they are less likely to be replaced by the board of directors.
they are less likely to be replaced by stockholders.
they are more likely to become takeover targets of profit-maximizing firms.
If any of the assumptions of perfect competition are violated,
graphs with downward-sloping demand curves cannot be used to study the firm.
there may still be enough competition in the industry to make the model of perfect competition usable.
supply-and-demand analysis cannot be used to study the industry.
graphs with flat demand curves cannot be used to study the firm
An association of businesses that are jointly owned and operated by members for mutual benefit is a:
joint tenancy.
corporation.
cooperative.
condominium.
Marginal revenue, graphically, is:
the vertical intercept of a line tangent to the total revenue curve at a given point.
the slope of the total revenue curve at a given point.
the slope of a line from the origin to the end of the total revenue curve.
the slope of a line from the origin to a point on the total revenue curve.
At the profit-maximizing level of output, what is the relationship between the total revenue (TR) and total cost (TC) curves?
They must be tangent to each other.
They must intersect, with TC cutting TR from above.
They must intersect, with TC cutting TR from below.
They must have the same slope.
If current output is less than the profit-maximizing output, then the next unit produced
will increase revenue without increasing cost.
will increase revenue more than it increases cost.
will increase cost more than it increases revenue.
will decrease profit.
The demand curve facing a perfectly competitive firm is
the same as the market demand curve.
perfectly horizontal
downward-sloping and less flat than the market demand curve.
downward-sloping and more flat than the market demand curve.
Because of the relationship between a perfectly competitive firm's demand curve and its marginal revenue curve, the profit maximization condition for the firm can be written as:
AR = MR.
P = AVC.
P = MR.
P = MC.
Suppose your firm operates in a perfectly competitive market and decides to double its output. How does this affect the firm's marginal profit?
Marginal revenue and marginal cost decrease
Marginal cost may change but marginal revenue remains the same
Marginal revenue increases but marginal cost remains the same
Marginal revenue and marginal cost increase
The shaded area in the graph shows:
the amount of profit when 8 units of output are produced.
the deadweight loss associated with the power of the price taking firm.
the profit that could be made if output increases from 7 to 8 units of output.
the increase in profit when output is reduced from 8 to 7 units of output.
The figure describes the cost and revenue structure of a perfectly competitive coffee farm, on a per-unit basis. What is the profit maximizing number of sacks when the price of coffee in the market is $380 dollars?
14 or 22 sacks
22 sacks
14 sacks
6 sacks
The firm in this situation should decide to:
shut down.
produce at a loss.
produce and earn the resulting profit.
produce or shut down, with the same outcome.
Bette's Breakfast, a perfectly competitive eatery, sells its "Breakfast Special" (the only item on the menu) for $5.00. The costs of waiters, cooks, power, food etc. average out to $3.95 per meal; the costs of the lease, insurance and other such expenses average out to $1.25 per meal. Bette should:
close her doors immediately.
continue producing in the short and long run.
continue producing in the short run, but plan to go out of business in the long run.
raise her prices above the perfectly competitive level.
If a competitive firm has a U-shaped marginal cost curve then:
the profit-maximizing output will always generate positive producer surplus.
the profit-maximizing output is found where MC = MR and MC is decreasing.
the profit-maximizing output is found where MC = MR and MC is constant.
the profit-maximizing output is found where MC = MR and MC is increasing.
If a competitive firm's marginal cost curve is U-shaped, then:
its short-run supply curve is U-shaped too
its short-run supply curve is the downward-sloping portion of the marginal cost curve
its short-run supply curve is the upward-sloping portion of the marginal cost curve
its short-run supply curve is the upward-sloping portion of the marginal cost curve that lies above the short-run average variable cost curve
When the price faced by a competitive firm was $5, the firm produced nothing in the short run. However, when the price rose to $10, the firm produced 100 tons of output. From this we can infer that:
the firm's marginal costs of production never fall below $5.
the firm's average cost of production was less than $10.
the firm's total cost of producing 100 tons is less than $1000.
the minimum value of the firm's average variable cost lies between $5 and $10.
The dashed portion of the marginal cost curve refers to:
the portion where an increase in output results in an increase in profit.
the portion where marginal cost is always equal to average total cost (ATC), when ATC is at its minimum
the supply curve of the firm.
the portion of the curve where the firm shuts down when it suffers losses
Which area represents producer surplus in this figure?
The area inside the MC curve and the AVC curve
0DCq*
The area above the MC curve and below the price level, P
ABCD
The shutdown decision can be restated in terms of producer surplus by saying that a firm should produce in the short run as long as:
producer surplus exceeds variable cost.
producer surplus exceeds fixed cost.
producer surplus is positive.
revenue exceeds producer surplus.
Imposition of an output tax on all firms in a competitive industry will result in:
the entry of new firms into the industry.
a leftward shift in the market supply curve.
a downward shift in each firm's average cost curve.
a downward shift in each firm's marginal cost curve.
When market price equals $40, the long run level of output will be:
q1
q2
q3
q2 or q3
In the long run, a firm's producer surplus is equal to the:
economic rent it enjoys from its scarce inputs.
positive economic profit it earns in the long run
difference between total revenue and total variable costs.
difference between total revenue and total fixed costs.
Consider the following statements when answering this question:
I. In the long run, if a firm wants to remain in a competitive industry, then it needs to own resources that are in limited supply.
II. In this competitive market our firm's long-run survival depends only on the efficiency of our production process.
I and II are true.
I is true, and II is false.
I is false, and II is true.
I and II are false.
At P = $80, the profit-maximizing output in the short run is:
22
34
39
50
At P = $80, how much is profit in the short run?
$88
$306
$351
$1000
In long-run competitive equilibrium, a firm that owns factors of production will have an:
economic profit = $0 and accounting profit > $0.
economic profit > $0 and accounting profit = $0.
economic and accounting profit = $0.
economic and accounting profit > $0.
The authors explain that a firm earning a zero economic profit in the long run has earned a competitive return on their investment. What do they mean by "competitive" return in this context?
The firm's return could only be earned under perfect competition and would be smaller under imperfect competition.
The firm's return is at least as larger as the returns earned by other firms.
The firm's return is at least as larger as could be earned in another investment.
The firm's return is negative, which initiates stronger competition among firms in the market.
