Download Practice Questions Frank – Chapter 6 Perfectly Competitive Supply

Practice Questions
Frank – Chapter 6
Perfectly Competitive Supply
Consider the following table which represents the typing output of Melissa, who divides her time as a night
receptionist in the family hotel (where she can work for as many hours as she likes, for $ 9 an hour) and as a
typist, who is paid $ 2 for every page typed.
Hours
0
1
2
3
4
5
Pages typed
0
10
18
24
28
30
___D__1. What is the marginal product of the third hour of typing ? = from 18 to 24 or 6 pages more
a. 10 pages b. 18 pages c. 8 pages d. 6 pages
___B__2. Does the third hour of typing satisfy the cost-benefit principle ?
a.Yes, since she makes $ 48. (but the total amount is irrelevant – opportunity cost per hour counts)
b.Yes, since the additional amount earned is $ 12. (more than the opportunity cost of $ 9 an hour)
c.No, since she would have made $ 27 as a night receptionist. (for all 3 hours – but only the last counts)
d.No, since the additional amount earned is $ 6.
__B___3. What pay per page would get Melissa to spend just one hour typing?
a.$ 0.50 b.$ 1.00 c.$ 2.00 d.$ 3.50 e.$ 5.00 (at 50 cents, not even the first hour is worth it;
at $ 2, two hours would be worth typing).
__E__4.What pay per page would get Melissa to spend 5 hours typing?
a.$ 0.50 b.$ 1.00 c.$ 2.00 d.$ 3.50 e.$ 5.00 (MP of hour 5 = 2 pages; must be at least $ 4.50
to match opportunity cost)
__C___5. A firm's total profit equals which of the following?
a.Marginal benefit minus marginal cost (allows choice of quantity, but doesn't tell you profit)
b.Price minus variable cost. (if multiplied by Q, would get operating profit, not total profit)
c.(Price minus average cost) times quantity produced. (be able to graph)
d.(Price minus marginal cost) divided by quantity produced.
e.Options A,B and C are equivalent ways to calculate total profit.
__C___6.A firm will be a perfect competitor if:
a.It has the ability to charge whatever price it wants.
b.It has a distinctive product which its competition cannot imitate.
c.It faces a perfectly flat demand curve. (= perfectly elastic; cannot raise price)
d.It has a perfectly flat supply curve.
e.It has a perfectly vertical supply curve.
__A___7.The law of diminishing marginal returns applies:
a.better in the short run than in the long run.
b.better in the long run than in the short run.
c.better in industry than in agriculture.
d.equally well in both the long and the short run.
__B___8.Which of the following factors of production is most likely to be variable in the short run?
a.the location of the firm.
b.the number of employee hours at work.
c.the size of the firm's factory.
d.the amount of specialized machinery used.
__B__9.Suppose 30 employee hours can produce 50 units of output. In the short run, we would expect that in
order to produce 100 units of output, we would require ___ employee hours.
a.an additional 30 hours. (assumes constant returns)
b.more than 30 additional hours. (given diminishing marginal returns)
c.less than 30 additional hours. (possible in the long run, given economies of scale)
d.more than 90 additional hours.
___D__10. A competitive firm maximizes profit when:
a.average costs are at a minimum.
b.total costs are at a minimum.
c.average cost is equal to price.
d.marginal cost is equal to price.
e.average cost is as far below price as possible.
___D__11.A perfectly competitive firm faces a price of $ 5 and is currently producing 3,700 units.
The marginal cost of the last unit produced is $ 3. The firm should, to maximize profit:
a.lower its price
b.raise its price
c.decrease production.
d.increase production. (and so drive its marginal cost up to meet price)
e.not change the amount it is producing.
__E__12. The firm in the last question faces a price of $ 3. It is still producing 3,700 units and the marginal cost
of the last unit is $ 3. The firm should, to maximize profit:
[same options as last question]
__D___13. The concept closest in meaning to “producer surplus” is:
a.Production in excess of the goods that can be sold.
b.Total revenue.
c.Total profit.
d.Operating profit. (= area between price and marginal cost on a graph)
__C__14. A firm will shutdown operations rather than continue producing if the price of their product is less
than the – of production.
a.average total cost
b.total cost
c.minimum average variable cost.
d.fixed cost
e.minimum average fixed cost.
__C__15. A lump-sum tax on a company (of a million dollars a year) will result in the profit maximizing output
of the company --- while an excise tax (of say $ 10 per unit of output) will result in the profit maximizing output
--- [see problem 3, the Paducah slugger company, in the text problems].
a.falling – falling
d.falling – remaining unchanged
b.rising – falling
e.falling -- rising
c.remaining unchanged – falling
f.remaining unchanged – remaining unchanged
The following table shows the total number of bushels of apples harvested each week by workers who are each
paid $ 250 a week. The price of apples is $ 5 unless otherwise specified in the questions. All costs are labor
costs.
Workers
0
5
10
15
20
25
30
Total Product
0
500
900
1200
1400
1500
1560
Marg.Product Avg.Product
-500/5 = 100
400/5 = 80
300/5 = 60
200/5 = 40
100/5 = 20
60/5 = 12
-100
90
80
70
60
52
Marg.Cost Total Cost Average Cost
-1250/500 = 2.50
1250/400 = 3.13
1250/300 = 4.17
1250/200 = 6.25
1250/100 = 12.50
1250/60 = 20.83
-1250
2500
3750
5000
6250
7500
-1250/500
2500/900
3750/1200
5000/1400
6250/1500
7500/1560
Fill in the table and answer the following questions. Show your calculations in the space below each question.
__20__16. What is the marginal product of labor as the number of workers increases from 20 to 25 ?
Change in output / Change in labor = (1500 – 1400) / (25 – 20) = 100 / 5 = 20
__$ 100__17. What is the marginal revenue product of labor as the number of workers increases from 20 to 25 ?
The extra revenue brought in per worker is = MPL * P = 20 * $ 5 = $ 100
Note that since wage is greater than MRPL, it would be unprofitable to produce at this level.
_$ 12.50_18. What is the marginal cost of producing another bushel of apples as the number of workers
increases from 20 to 25 ?
The change in cost / change in output = 5 * 250 / (1500 – 1400) = 1250 / 100 = $ 12.50
Note that the price of apples is only $ 5, so this is not optimal.
__1400 bushels_19. What is the optimal level of output if the price of a bushel of apples rises to $10?
P = MC or as close as possible without P being less than MC requires the firm to hire 20 workers,
and to produce 1400 bushels of apples.
MRPL = wage would lead to the same choice, since the MRPL is 10 * 40 = $ 400 as we move from
15 to 20 workers, but would only be 10 * 20 = $ 200 (less than the wage) as we move from 20 to 25.
_$ 9000_20. What is the operating profit of the firm which is producing at the optimal level (found in last
question) ?
Revenue from 1400 bushels at $ 10 each = $ 14,000
Operating costs or variable costs = $ 250 * 20 workers = $ 5,000
Operating profit = $ 14,000 - $ 5,000 = $ 9000
See your lecture notes for a graph similar to the one requested in question 21. Remember to put quantity of
output (not workers) on the X-axis, and draw the $ 10 price line. The marginal cost will be increasing in a stairstep pattern; with a MC of 2.50 from Q = 0 to Q = 500, then a MC of $ 3.13 from Q = 500 to Q = 900, and so
on. The operating profit will be the area between the MC and the price line. The variable cost will be the area
under the MC curve.