module 58 Introduction to Perfect Competition 589
Section
(^11)
(^) Market
(^) Structures:
(^) Perfect
(^) Competition
(^) and
(^) Monopoly
Tackle the Test: Multiple-Choice Questions
- 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. - 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
- 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.
- 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