ECON 426 Lecture Notes - Lecture 4: Profit Maximization, Marginal Revenue, Production Function

A. A competitive firm

1. can consider only its location in setting the price.
2. must base its competitive price on product differentiation.
3. has the ability to set its own price.
4. must accept the price determined by the intersection of the market supply and demand curves.
5. has no supply curve.

B. If a firm is making an economic profit, then

1. the factors of production are being paid their opportunity costs.
2. there will be no change in the number of firms if the industry is perfectly competitive.
3. the factors of production are being paid less than their opportunity costs.
4. the factors of production are being paid more than their opportunity costs.
5. the firm will exit the industry

C. Along a downward-sloping monopoly demand curve,

1. marginal revenue is greater than price.
2. the elasticity of demand is constant.
3. marginal revenue decreases when the price decreases.
4. marginal revenue is equal to zero when the price is equal to zero

D. If, in the short run, a perfectly competitive firm is producing at a point where the total cost is greater than total revenue, then the firm should

1. shut down because economic profits are negative.
2. continue to produce as long as P > AVC.
3. continue to produce because accounting profits are positive.
4. set a higher price for its output.
5. set a lower price for its output

E. For a perfectly competitive firm, the demand curve is

1. the marginal revenue curve.
2. perfectly inelastic.
3. always equal to marginal cost.
4. the same as the market demand curve

F. A firm in a(n) industry will have the most elastic demand curve

1. monopolistic
2. oligopolistic
3. monopolistically competitive
4. perfectly competitive

G. If the demand curve of a monopolist is in the inelastic range, then

1. total revenue will fall if the price increases.
2. total revenue will be unchanged if the price increases.
3. total revenue will rise if the price increases.
4. the total supply will increase by an equal amount if demand increases.
5. the price will be unchanged if total revenue increases

H. Monopolistic competition and oligopoly are examples of

1. monopoly.
2. perfect competition.
3. theories of consumer behavior.
4. imperfect competition.
5. the extreme cases on the market structure continuum

I. Under which market structure do firms face the flattest (most elastic) demand curve?

1. perfect competition
2. monopolistic competition
3. oligopoly
4. monopoly

J. At the point of long-run equilibrium for a perfectly competitive firm,

1. economic profits are zero.
2. TR > TC.
3. TR < TC.
4. P = AVC.
5. normal profits are zero.

1.

In a perfectly competitive market, in the long run, the marginal cost of a firm becomes equal to its minimum average total cost.

A) True
B) False

2.

Generally, The price a firm charges for its product is equal to its total revenue divided by the number of units sold.

A) True
B) False

3.

In a perfectly competitive firm to maximize profit a firm must make sure that the price it charges does not exceed its marginal cost.

A) True
B) False

4.

Firms in a competitive market can never make economic profits while they may make biasness (accounting) profits.

A) True
B) False

5.

When a perfectly competitive firm is making a positive economic profit its average revenue must be greater than its average total cost.

A) True
B) False

6.

To maximize its profit a firm always produces at the quantity level where it can charge the highest price and earn the greatest revenue; this strategy is consistent with setting is MC equal to price.

A) True
B) False

7.

When a firm in a competitive market is making a positive economic profit its business profit may be positive or negative.

A) True
B) False

8.

In a perfectly competitive market new entries could result in increases in input prices thus making production costs go up.

A) True
B) False

9.

In a perfectly competitive market, in the long run, each firm produces the maximum amount it can produce and charges the lowest price possible. That is why we consider competitive markets efficient.

A) True
B) False

10.

A monopolist always under-produces and charges a price higher than its MC.

A) True
B) False

11.

As the only supplier in the market a monopolist can charge any price it wishes and buyers have no choice but to pay.

A) True
B) False

12.

The marginal revenue is the additional revenue generated by the last unit of labor hired.

A) True
B) False

13.

The price a monopolist charges may or may not be above its average cost but it is always above its MR.

A) True
B) False

14.

When demand curve is a downward-sloping straight line (linear) marginal revenue will be greater than MC at all output leveles.

A) True
B) False

15.

By setting its MR equal to its MC a monopolist determines the output that would maximize its profit.

A) True
B) False

16.

In the long run each competitive firm would produce at the quantity level where its MC is equal to its MR as well as its ATC.

A) True
B) False

17.

A monopoly always makes an economic profit.

A) True
B) False

18.

When a monopoly's ATC is equal to the price it charges it is making normal economic profits.

A) True
B) False

19.

When a monopoly is making a zero economic profit still its MR>ATC.

A) True
B) False

20.

An increase in demand would enable a monopolist to raise its price while reducing its output.

A) True
B) False

21.

The market supply curve in an increasing-cost industry is:

A) a. upward sloping
B) b. downward sloping
C) c. vertical
D) d. horizontal
E) e. none of the above

22.

The total producer surplus is measured by:

A) a. the area between supply and demand curves.
B) b. the difference between the price the consumer is willing and able to pay and the price suppliers wish to charge to maximize their profits.
C) c. the area between the price consumers actually pay and the demand curve.
D) d. the area between the equilibrium market price and the supply curve.
E) e. the consumer willingness to pay as reflected by the equilibrium market price.

23.

. Economists measure economic (social) welfare by the

A) a. net consumer surplus
B) b. sum of consumer and producer surplus
C) c. sum of the net profits made by the industry's competitive firms
D) d. price consumers are willing to pay for one additional unit of a good
E) e. difference between the total consumer surplus and total producer surplus

Question 1 options: