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1 (a)Why the competitive firm faces a relatively horizontal demand curve.(

(b) The profit maximization rule for a perfectly competitive firm states that the perfectly competitive firm will maximize its profits when it produces that quantity where marginal revenue equals marginal cost for the last unit produced and sold. In your own words explain why the firm is better off producing that quantity where MR = MC rather than that quantity where

MR > MC or that quantity where MR < MC.                                            

(c)Should a firm shut down and why if its revenue is R=$1, 000.                       

  1. Its variable cost VC=$500 and its sunk fixed cost is F= $600.
  2. Its variable cost VC=$1, 500 and its sunk fixed cost is F= $500.

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Related questions

PROFIT MAXIMIZATION

Reminders:

Q: Quantity, TC: Total Costs, VC: Variable Costs, MC: Marginal Costs, MR: Marginal Revenue, TR: Total Revenue

1. Suppose the market for DVD movies is perfectly competitive. The industry price for the movies is $24, and a typical firm has the following total cost data:

Q

TC

VC

MC

MR

TR

Net Profit

0

10

1

33

2

53

3

70

4

90

5

114

6

143

a. Calculate the TR, MR, and MC for each level of output.

b. What condition must be met for the firm to maximize profits? What is the profit maximizing level of output and price for this firm? How much profit would be made?

2. Now suppose that some firms have been able to differentiate their DVDs, and the market has become monopolistically competitive. A typical firm now has the following demand schedule and total cost data:

Q

P

TC

VC

MC

MR

TR

Net Profit

0

40

8

1

35

20

2

30

28

3

25

40

4

20

56

5

15

76

6

10

100

a. Calculate the TR, MR, and MC for each level of output.

b. What condition must be met for the firm to maximize profits? What is the profit maximizing level of output and price for this firm? How much profit would be made?

QUESTION 22

For a perfectly competitive firm, profit maximization (or loss minimization) occurs at the level of output at which

  a.

MR = MC.
  b.

MR = AVC.
  c.

P = ATC.
  d.

MR = ATC.

4 points

QUESTION 23

If MR > MC, then

  a.

profits are being maximized.
  b.

the firm is producing too much of the good to be maximizing profits.
  c.

the firm can increase its profits (or minimize its losses) by increasing output.
  d.

the firm must be incurring losses.

4 points

QUESTION 24

If firms are earning zero economic profits, they must be producing at an output level at which

  a.

price minus marginal cost.
  b.

total revenue equals total costs, in other words, normal profits.
  c.

price equals average variable cost.
  d.

marginal revenue equals marginal cost.
  e.

none of the above

4 points

QUESTION 25

In the theory of perfect competition,

  a.

the market demand curve is horizontal.
  b.

the single firm faces a horizontal demand curve.
  c.

the single firm faces a downward-sloping demand curve.
  d.

the market demand curve is downward sloping.
  e.

b and d

A firm is producing where its marginal costs are at the lowest level. What can one most likely infer from this? a. there is either lost opportunity for further profits by producing more, or the firm should shut-down if it is competitive and price is at that low level. b. It is a price-taker who is producing too much. c. It is a monopolist who is producing the socially optimal quantity. d. The firm is producing rationally.

6. A single-price monopolist sets price a. where MR=demand. b. where supply=demand c. from the demand curve at the quantity for which MC=MR. d. where MR=MC.

7. Assume that the Law of Diminishing Marginal Product applies at the current output level of a competitive firm. The price is $20 and, at the current output level, marginal cost is $16 and average total cost is $20. To maximize profits the firm should: a. produce the current output level, since average revenue (price) = average cost. b. produce more since marginal revenue exceeds marginal cost at current output. c. produce less since marginal revenue is always below average revenue. d. any of the above is possible, without further information.

8. Which of the following statements is true? (i) When a competitive firm sells an additional unit of output, its revenue increases by an amount less than the price. (ii) When a monopoly firm sells an additional unit of output, its revenue increases by an amount less than the price. (iii) Average revenue is the same as price for both competitive and monopoly firms. a. (i) only b. (iii) only c. (i) and (ii) d. (ii) and (iii)

9. If a firm in a competitive market triples the number of units of output sold, then total revenue will a. more than triple. b. less than triple. c. exactly triple. d. All of the above are potentially true.

10. When a competitive firm makes a decision to shut down, it is most likely that a. marginal cost is above average variable cost. b. marginal cost is above average total cost. c. price is below the minimum of average variable cost. d. fixed costs exceed variable costs.

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