AP_Krugman_Textbook

module 58 Introduction to Perfect Competition 589

Section

(^11)
(^) Market
(^) Structures:
(^) Perfect
(^) Competition
(^) and
(^) Monopoly
Tackle the Test: Multiple-Choice Questions

1. A perfectly competitive firm will maximize profit at the
   quantity at which the firm’s marginal revenue equals
   a. price.
   b. average revenue.
   c. total cost.
   d. marginal cost.
   e. demand.


2. Which of the following is correct for a perfectly competitive
   firm?
   I. The marginal revenue curve is the demand curve.
   II. The firm maximizes profit when price equals marginal
   cost.
   III. The market demand curve is horizontal.
   a. I only
   b. II only
   c. III only
   d. I and II only
   e. I, II, and III
   3. A firm is profitable if
   a. TR< TC.
   b.AR< ATC.
   c. MC< ATC.
   d.ATC< P.
   e. ATC > MC.
   4. If a firm has a total cost of $200, its profit-maximizing level
   of output is 10 units, and it is breaking even (that is, earning
   a normal profit), what is the market price?
   a. $200
   b. $100
   c. $20
   d. $10
   e. $2
   5. What is the firm’s profit if the price of its product is $5 and
   it produces 500 units of output at a total cost of $1,000?
   a. $5,000
   b. $2,500
   c. $1,500
   d.−$1,500
   e. −$2,500

Tackle the Test: Free-Response Questions

1. Draw a correctly labeled graph showing a profit-maximizing
   perfectly competitive firm producing at its minimum average
   total cost.

Answer (6 points)

1 point:Vertical axis and horizontal axis labels are correct (“Price, cost of
unit” on vertical axis; “Quantity” on horizontal axis).

1 point:The line representing demand, marginal revenue, and price is
horizontal and correctly labeled.

1 point:Marginal cost is “swoosh” shaped or upward sloping and correctly
labeled.

Q*

MC

ATC

MR = P = D

Price, cost

of unit

Quantity

1 point:Average total cost is U-shaped and correctly labeled.

1 point:Quantity is found where MC=MR.

1 point:Average total cost reaches its minimum point at the

profit-maximizing level of output.

2. Refer to the table provided. Price is equal to $14.
   a. Calculate the firm’s marginal cost at each quantity.
   b. Determine the firm’s profit-maximizing level of output.
   c. Calculate the firm’s profit at the profit-maximizing level of
   output.
   Short -Run Costs for Jennifer and Jason’s Farm
   Quantity of tomatoes Variable cost Total cost
   Q (bushels) VCTC
   0 $0 $14
   11630
   22236
   33044
   44256
   55872
   67892
   7 102 116