1.A kinked demand curve is most likely to occur when other firms A) follow any c
ID: 1168820 • Letter: 1
Question
1.A kinked demand curve is most likely to occur when other firms
A) follow any change in price by a rival firm
B) engage in collusive practices
C) follow a downward change in price but not an upward change by a rival firm
D) ignore any change in price by a rival firm
2.In the short run, each perfectly competitive firm is free to
A) increase its plant size
B) increase its volume of output up to its maximum existing capacity
C) charge a price above the market price
D) all of the above
3. If MC equals MR at a point greater than ATC, the perfectly competitive firm will
A)sustain a loss
B)shut down
C) make an economic profit
D) expand output
4.The difference between the price firms would be willing to accept for their goods and the price they actually receive is called
A) consumer surplus
B) consumer efficiency
C) allocative efficiency
D) producer surplus
5.Under perfect competition in the short run, profits among firms can differ if some firms use their resources more efficiently.
Ture or False
6.Under conditions of perfect competition, maximum profit or minimum loss occurs at the point where
A) AR = ATC
B) MR = AR
C) AR = MC
D) AVC = ATC
7. If the AVC is $12, the AFC is $4, the AR is $20, and output is 6,000 units, the total profit is
A) $72,000
B) $48,000
C) $24,000
D) negative $96,000
8. An example of an implicit cost is
A) rent
B) taxes
C) wages
D) forgone interest when investing one’s savings in one’s own business
9. The marginal product refers to the impact of which unit of a productive resource?
A) first
B) middle
C) last
D) average
10. Marginal product can never fall below zero.
Ture or False
Explanation / Answer
(1) (C)
Kinked demand curve is most common in oligopoly when, if a firm cuts its price, others follow suit - but if a firm incraeses its price, others keep their prices same.
(2) (B)
In perfect competition, firms are price takers - they cannot set their own price. And increasing plant size is possible only in the long run.
(3) (C)
For a competitive firm, MR = Price. So, if Price > ATC, the firm will make an economic profit.
(4) (D)
Accordingly, Producer surplus is measured by the area between supply curve and price.
(5) TRUE
In short, run, competitive firms may earn economi profit if they can keep costs below price, for example, by increasing efficiency.
(6) (C)
Profit maximization in perfect competition takes place where Price = MC, and in perfect competition, Price = AR = MR
(7) (C)
Profit = Output x [AR - (AFC + AVC)]
= 6,000 x $(20 - 4 - 12) = $24,000
(8) (D)
Implicit cost is the opportunity cost of an option foregone.
(9) (C)
(10) FALSE
Marginal product can be negative, if total product is decreasing.
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