BB 107 Spring Tutorial 8 Q
Part A: MCQ
1. When a purely competitive industry is facing a short-run profit which statement is true?
A. Average total cost is less than marginal cost.
B. Price and average total cost are equal.
C. Marginal cost is at its maximum level.
D. Marginal revenue is greater than price.
2. The long-run supply curve in a constant-cost industry would be:
3. An economy is producing at the least-cost rate of production when:
A. Price and the minimum average total cost are equal.
B. Marginal cost is greater than average total cost.
C. Marginal revenue is greater than price.
D. Price and marginal revenue are equal.
4. If a purely competitive firm is producing at the MR = MC output level and earning an economic profit, then:
A. The selling price for this firm is above the market equilibrium price.
B. New firms will enter this market.
C. Some existing firms in this market will leave.
D. There must be price fixing by the industry's firms.
5. A constant-cost industry is one in which:
A. A higher price per unit will not result in an increased output.
B. If 100 units can be produced for $100, then 150 can be produced for $150, 200 for $200, and so forth.
C. The demand curve and therefore the unit price and quantity sold seldom change.
D. The total cost of producing 200 or 300 units is no greater than the cost of producing 100 units.
6. In the short-run purely competitive firms earn ________ in equilibrium while in the long-run firms earn ________ in equilibrium, respectively.
A. normal profits; economic profits
B. profits or losses; profits or losses
C. profits; normal profit
D. profits or losses; normal profit
Part B: Short Answer
1. A firm in a purely competitive industry has a typical cost structure. The normal rate of profit in the economy is 5 percent. This firm is earning $15 on every $150 invested by its founders. What is its percentage rate of return? Is the firm earning an economic profit? If so, how large? Will this industry see entry or exit? What will be the rate of return earned by firms in this industry once the industry reaches long-run equilibrium?
2. Why is the equality of marginal revenue and marginal cost essential for profit maximization in all market structures? Explain why price can be substituted for marginal revenue in the MR = MC rule when an industry is purely competitive. LO3
3. A purely competitive wheat farmer can sell any wheat he grows for $10 per bushel. His five acres of land show diminishing returns because some are better suited for wheat production than others. The first acre can produce 1000 bushels of wheat, the second acre 900, the third 800, and so on. Draw a table with multiple columns to help you answer the following questions. How many bushels will each of the farmer’s five acres produce? How much revenue will each acre generate? What are the TR and MR for each acre? If the marginal cost of planting and harvesting an acre is $7000 per acre for each of the five acres, how many acres should the farmer plant and harvest? LO3
4. Assume the following cost data are for a purely competitive producer: LO3
a. At a product price of $56, will this firm produce in the short run? If it is preferable to produce, what will be the profit-maximizing or loss-minimizing output? What economic profit or loss will the firm realize per unit of output?
b. Answer the questions of 4a assuming product price is $41.
c. Answer the questions of 4a assuming product price is $32.