According to the table above, at a price of $.70 this firm will produce a) 6 uni

Question

According to the table above, at a price of $.70 this firm will produce

a) 6 units b/c that maximizes profits b) 8 units bc that maximizes profit c) the firm will not produce d) 8 units because that minimizes losses

2) If economic losses exist in a perfectly competitive market, then

A) firms will enter the market in the short run

B) firms will exit the market in the short run

C) firms will enter the market in the long run

D) there will be no change in the number of firms in the market

E) firms will exit the market in the long run

3)Import quotas on products will increase the price consumers pay for imported products and:

A) demand increases more than supply

B) decrease the volume of imports

C) have no effect on the volume of imports or exports

D) decrease the volume of exports

E) increase the volume of exports

4)A perfectly competitive firm should operate if

A) P<MC

B) P>MC

C) the demand curve facing the firm lies below the minimum point on its ATC curve but above the minimum point on its VC curve

D) the demand curve facing the firm lies above its minimum point on its AVC

E)the demand curve facing the firm lies above the minimum point on its ATC curve.

5)Diseconomies of scale arise primarily because:

A)of the difficulties involved in managing and coordinating a large business enterprise.

B)firms must be large both absolutely and relative to the market to employ the most efficient productive techniques available.

C)beyond some point marginal product declines as additional units of a variable resource (labor) are added to a fixed resource (capital).

D)the short-run average total cost curve rises when marginal product is increasing.

ATC AVC MC MR S.70 S.70 S.70 S.70 S.70 S.70 S.70 S.70 S.70 S.70 S.70 Output $1.00 S.80 S.70 $.50 S.50 S.70 $.80 S.86 $1.00 $1.50 $2.00 $1.40 $1.16 $1.00 S.90 $.86 $.85 S.86 .87 $.94 1.00 $.90 S.83 $.75 S.70 $.70 S.71 $.73 S.76 S.84 6 10

Explanation / Answer

Q1. A perfectly competitive firm maximizes its profit when it produces that level of output at which price equals marginal cost.

A perfectly competitive firm is a price taker and has to accept the price as given by the market.

In other words, price for a perfectly competitive firm remain fixed and it can sell as much output as it wants at that price.

In given case, price is $0.70. Firm can sell as much as it wants at this price.

However, firm will sell that number of units corresponding to which this given price equals marginal cost.

The given table shows that price ($0.70) is equal to marginal cost ($0.70) when 6 units are produced.

So, firm will produce 6 units as it maximizes its profit.

Hence, the correct answer is option (a).

Q2. In a perfectly competitive market, economic losses or economic profit is a short-run phenomenon. In long-run, firms in perfectly competitive market earn only normal profit. This is because existence of economic loss or economic profit trigger exit or entry into perfectly competitive market (as entry and exit is free in such market).

This entry or exit changes the number of firms in market in long-run in such a fashion that either economic loss or economic profit gets eliminated and firms can earn only normal profit.

It should be noted that economic loss in short-run triggers exit of firms in the long-run while economic profits triggers entry of firms in the long-run.

Hence, the correct answer is option (E).

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