Costs and Market Price

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Econ 102: Sec.07 Problem Set #6: Due on Tuesday, 26-April-2011 Note: 1. Do it LOL. Do it independently. Do it carefully. 2. Write your answer on the answer sheet attached (last page). I only collect the answer sheets on Tuesdays, before the class begins. So you can keep the questions. And if you cannot make Tuesday class, please send me your answers via email before Tuesday class ends. Use attachments, please. 3. Good Luck!

1. In a competitive market, the actions of any single buyer or seller will a. have a negligible impact on the market price. b. have little effect on market equilibrium quantity but will affect market equilibrium price. c. affect marginal revenue and average revenue but not price. d. adversely affect the profitability of more than one firm in the market. Table 14-1 Quantity Total Revenue 0 $0 1 $7 2 $14 3 $21 4 $28

2.

Refer to Table 14-1. For a firm operating in a competitive market, the price is a. $0. b. $7. c. $14. d. $21.

3. Suppose that a firm operating in perfectly competitive market sells 400 units of output at a price of $4 each. Which of the following statements is correct?

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i) Marginal revenue equals $4. ii) Average revenue equals $100. iii) Total revenue equals $1,600. a. b. c. d. i) only iii) only i) and iii) only i), ii), and iii)

4.

For a certain firm, the 100th unit of output that the firm produces has a marginal revenue of $10 and a marginal cost of $11. It follows that the a. production of the 100th unit of output increases the firm's profit by $1. b. production of the 100th unit of output increases the firm's average total cost by $1. c. firm's profit-maximizing level of output is less than 100 units. d. production of the 110th unit of output must increase the firm’s profit by less than $1.

5.

Charlene sells cotton candy. The cotton candy industry is competitive. Charlene hires a business consultant to analyze her company’s financial records. The consultant recommends that Charlene increase her production. The consultant must have concluded that Charlene’s a. total revenues exceed her total accounting costs. b. marginal revenue exceeds her total cost. c. marginal revenue exceeds her marginal cost. d. marginal cost exceeds her marginal revenue. Scenario 14-1 Assume a certain firm is producing Q = 1,000 units of output. At Q = 1,000, the firm's marginal cost equals $15 and its average total cost equals $11. The firm sells its output for $12 per unit.

6.

Refer to Scenario 14-1. At Q = 1,000, the firm's profits equal a. $-200. b. $1,000. c. $3,000. d. $4,000. Refer to Scenario 14-1. At Q = 999, the firm's total cost amounts to a. $10,985. b. $10,990. c. $10,995. d. $10,999.

7.

8.

If a profit-maximizing firm in a competitive market discovers that, at its current level of production, price is greater than marginal cost, it should

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xgu@econ.rutgers.edu

a. b. c. d.

shut down. reduce its output, but continue operating. keep output the same. increase its output.

9. A firm in a competitive market has the following cost structure: Output 0 1 2 3 4 5 Total Cost $5 $10 $12 $15 $24 $40

If the market price is $16, this firm will a. produce four units in the short run and exit in the long run. b. produce five units in the short run and exit in the long run. c. produce five units in the short run and face competition from new market entrants in the long run. d. shut down in the short run and exit in the long run.

10. Mrs. Smith operates a business in a competitive market. The current market price is $8.50, and at her profit-maximizing level of production, the average variable cost is $8.00, and the average total cost is $8.25. Which of the following statements about Mrs. Smith’s firm is correct? a. Mrs. Smith should shut down...
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