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Problem Set 11
Econ 202 (03, 04, and 05) Spring 2003
(Dr. Tin-Chun Lin)
1. A perfectly competitive firm in the short-run maximizes its profit by producing the
output where:
(A) Marginal cost equals price.
(B) Marginal cost equals marginal revenue.
(C) Total revenue minus total cost is at a maximum.
(D) All of the above.
(Answer: (D))
2. Assume that a firm’s marginal revenue exceeds marginal cost. Under these
conditions the firm should:
(A) Expand output.
(B) Contract output.
(C) Maintain output.
(D) There is insufficient information to answer the question.
(Answer: (A))
3. If a competitive firm is losing money than it should:
(A) Always shut down.
(B) Shut down if its losses are greater than total fixed costs.
(C) Shut down if its total fixed costs are greater than losses.
(D) Raised its price.
(Answer: (B))
4. A profit maximizing producer always chooses to produce the level where
(A) Average variable cost exceeds marginal cost.
(B) Average revenue is greater than marginal cost.
(C) Marginal revenue equals marginal cost.
(D) Average total cost is less than average revenue.
(Answer: (C))
5. Suppose product price is fixed at $24; MR=MC at Q=200; AFC=$6; AVC=$16.
What do you advise this firm to do?
(A) Increase output.
(B) Decrease output.
(C) Shut down operations.
(D) Stay at the current output; the firm is earning a profit of $400.
(E) Stay at the current output; the firm is losing $200.
(Answer: (D))
6.
Unit Quantity
12
13
14
15
16
17
Marginal Cost
$5
6
7
8
9
10
Marginal Revenue
$9
9
9
9
9
9
In Exhibit shown above, this firm is currently producing 14 units of output. What would
you advise this firm to do?
(A) Decrease output to 13.
(B) Increase output to 15.
(C) Remain at 14 units of output.
(D) Increase output to 16.
(E) Increase output to 17.
(Answer: (D))
7. Pat’s Pizza Kitchen is a price taker. It has the following hourly costs:
Output (pizzas per hour)
0
1
2
3
4
5
6
Total cost (dollars per hour)
10
21
30
41
54
69
86
a. If pizzas sell for $14, what is Pat’s profit-maximizing output per hour? What is
his profit? (Answer: the profit-maximizing level of output is four pizzas per hour;
the total profit is $2.)
b. What is Pat’s shutdown point? (Answer: the shutdown point is two pizzas.)
c. Derive Pat’s supply curve. (Answer: you can do it by yourself.)
d. What price will cause Pat to leave the pizza industry? (Answer: if the price
remains below $13.50, Pat will leave the industry.)
e. What price will cause other firms with costs identical to Pat’s to enter the
industry? (Answer: at any price greater than $13.50, firms enter the industry.)
f. What is long-run equilibrium price of pizzas? (Answer: the long-run equilibrium
price per pizza is $13.50.)
8. (True or False) A perfectly competitive industry faces a completely elastic demand
curve. (Answer: False)
9. (True or False) The firm in a perfect competitive industry makes a decision about
price but not its level of output. (Answer: False)
10. Perfectly competitive firms maximizes profits when marginal cost equals
(A) Marginal revenue.
(B) Price.
(C) Average revenue.
(D) All of the above.
(E) None of the above.
(Answer: (D))