AP Micro Unit 3: Profit Maximization

Suppose your firm operates in a perfectly competitive market and decides to double its output. How does this affect the firm's marginal profit?

Marginal revenue increases but marginal cost remains the same

In the short run, a perfectly competitive firm earning positive economic profit is:

on the upward-sloping portion of its ATC.

That Table 8.1 shows a short-run situation is evident from:

the presence of positive costs at Q = 0

An industry analyst observes that in response to a small increase in price, a competitive firm's output sometimes rises a little and sometimes a lot. The best explanation for this finding is that:

the firm's marginal cost curve is horizontal for some ranges of output and rises in steps.

Refer to Figure 8.6.1 above. At price levels P 2 and P 3, the output levels on the industry supply curve equal:

15 and 21 units of output.

Refer to Figure 8.4.2 above. When the farmer's profit is maximized, total cost equals:

$.6226

Refer to Figure 8.4.2 above. When the coffee farmer maximizes profit, how much is his profit?

$2,134

If current output is less than the profit-maximizing output, which must be true?

Marginal revenue is greater than marginal cost.

A price taker is:

both a perfectly competitive firm and a firm that cannot influence the market price

Several years ago, Alcoa was effectively the sole seller of aluminum because the firm owned nearly all of the aluminum ore reserves in the world. This market was not perfectly competitive because this situation violated the:

price-taking assumption and free entry assumption are correct.

Which of following is an example of a homogeneous product?

both Gasoline and Copper

Use the following statements to answer this question:

I. An increase in the firm's fixed costs will also shift the firm's short-run supply curve to the left.

II. An increase in the firm's fixed costs will not shift the firm's short-run supply curve to the right or left, but it may alter how much of the marginal cost curve is used to form the short-run supply curve.

I and II are false.

Use the following statements to answer this question:

I. Under perfect competition, an upward shift in the marginal cost curve (perhaps due to a higher price for a variable input) also shifts the average variable cost curve upward.

II. Under perfect competition, an upward shift in the marginal cost curve (perhaps due to a higher price for a variable input) reduces firm output but may increase firm profits.

I is true and II is false.

In the short run, a perfectly competitive profit maximizing firm that has not shut down:

is operating on the upward-sloping portion of its AVC curve.

Marginal profit is negative when:

output exceeds the profit-maximizing level.

Ronny's Pizza House operates in the perfectly competitive local pizza market. If the price of pizza cheese increases (ceteris paribus), what is the expected impact on Ronny's profit-maximizing output decision?

Output decreases because the marginal cost curve shifts upward.

Producer surplus in a perfectly competitive industry is:

the difference between revenue and variable cost.

The textbook for your class was not produced in a perfectly competitive industry because:

of all of these reasons.

Suppose a plant manager ignores some implicit marginal costs of production so that the perceived MC curve is below the actual MC curve. What is the likely outcome from this error?

Firm produces more than optimal quantity and earns lower profits.

Refer to Figure 8.4.3 above. When the firm produces the loss-minimizing level of output, it can recover:

all of the variable cost and part of the fixed cost.

Suppose a technological innovation shifts the marginal cost curve downward. Which one of the following cost curves does NOT shift?

Average fixed cost curve

The shutdown decision can be restated in terms of producer surplus by saying that a firm should produce in the short run as long as:

producer surplus is positive.

Suppose the state legislature in your state imposes a state licensing fee of $100 per year to be paid by all firms that file state tax revenue reports. This new business tax:

None of these

Scenario 8.1:

Two soft-drink firms, Fizzle & Sizzle, operate on a river. Fizzle is farther upstream, and gets cleaner water, so its cost of purifying water for use in the soft drinks is lower than Sizzle's by $500,000 yearly.

According to Scenario 8.1, Fizzle and Sizzle:

may or may not be perfect competitors, but their position on the river has nothing to do with it.

Refer to Figure 8.4.2 above. When average variable cost ( AVC) is minimum,

AVC = MC.

Refer to Figure 8.4.2 above. If the farm produces 14 sacks of coffee when market price is $380,

the farmer has lost an opportunity for additional profit.

A few sellers may behave as if they operate in a perfectly competitive market if the market demand is:

very elastic.

Which of the following statements identifies a key difference between condominiums and cooperative housing?

Co-op owners have more control over who can move into their building.

Imposition of an output tax on all firms in a competitive industry will result in:

a leftward shift in the market supply curve.

One practical implication of a kinked market supply curve is that:

the market supply elasticity for a price increase may be different than the market supply elasticity for a price decrease at the kink point.

A firm's producer surplus equals its economic profit when:

fixed costs are zero.

Revenue is equal to:

price times quantity.

A perfectly competitive hardware manufacturer has total revenue of $85 million, total variable costs of $45 million, and fixed costs of $10 million. What is the firm's producer surplus?

$40 million

Use the following statements to answer this question:

I. Markets may be highly (but not perfectly) competitive even if there are a few sellers.

II. There is no simple indicator that tells us when markets are highly competitive.

I and II are true

Short-run supply curves for perfectly competitive firms tend to be upward sloping because:

there is diminishing marginal product for one or more variable inputs and marginal costs increase as output increases are correct.

When the TR and TC curves have the same slope,

they are the furthest from each other.

Refer to Table 8.1. The maximum profit available to the firm is:

$35.

If a graph of a perfectly competitive firm shows that the MR = MC point occurs where MR is above AVC but below ATC,

the firm is earning negative profit, but will continue to produce where in the short run.

Suppose your firm has a U-shaped average variable cost curve and operates in a perfectly competitive market. If you produce where the product price (marginal revenue) equals average variable cost (on the upward sloping portion of the AVC curve), then your output will:

exceed the profit-maximizing level of output.

An improvement in technology would result in:

downward shifts of MC and increases in output.

The demand curve facing a perfectly competitive firm is

perfectly horizontal.

Refer to Figure 8.4.2 above. When profit is maximized, the total revenue of the farmer equals:

$8.360.

Suppose all firms have constant marginal costs that are the same for each firm in the short run. In this case, the market level supply curve is ________ and producer surplus equals ________.

perfectly elastic; zero

A firm maximizes profit by operating at the level of output where:

marginal revenue equals marginal cost.

Average cost for the firm in Table 8.1:

is U-shaped.

When the price faced by a competitive firm was $5, the firm produced nothing in the short run. However, when the price rose to $10, the firm produced 100 tons of output. From this we can infer that:

the minimum value of the firm's average variable cost lies between $5 and $10.

Marginal revenue, graphically, is:

the slope of the total revenue curve at a given point.

If current output is less than the profit-maximizing output, then the next unit produced

will increase revenue more than it increases cost.

In a supply-and-demand graph, producer surplus can be pictured as the:

area between the equilibrium price line and the supply curve to the left of equilibrium output.

Use the following statements to answer this question:

I. Markets that have only a few sellers cannot be highly competitive.

II. Markets with many sellers are always perfectly competitive.

I and II are false.

Refer to Table 8.1. That the firm is perfectly competitive is evident from its:

constant marginal revenue.

The demand curve facing a perfectly competitive firm is:

the same as its average revenue curve and its marginal revenue curve.

Because of the relationship between a perfectly competitive firm's demand curve and its marginal revenue curve, the profit maximization condition for the firm can be written as:

P = MC.

An industry has 1000 competitive firms, each producing 50 tons of output. At the current market price of $10, half of the firms have a short-run supply curve with a slope of 1; the other half each have a short-run supply curve with slope 2. The short-run elasticity of market supply is:

3/10.

Firms often use patent rights as a:

barrier to entry.

At the profit-maximizing level of output, marginal profit

is zero.

Refer to Figure 8.4.1 above. The shaded area in the graph shows:

the profit that could be made if output increases from 7 to 8 units of output.

Refer to Figure 8.3.2 above. The demand of a price taker is illustrated:

in panel (a).

If a competitive firm's marginal cost curve is U-shaped, then:

its short-run supply curve is the upward-sloping portion of the marginal cost curve that lies above the short-run average variable cost curve

Suppose we plot the total revenue curve with quantity on the horizontal axis and revenue on the vertical axis (as in Figure 8.1 in the book). Under price-taking behavior, the total revenue curve should be:

a straight line from the origin with slope equal to the market price.

The total revenue graph consistent with Table 8.1 is:

linear and upward-sloping.

Which of following is a key assumption of a perfectly competitive market?

Each seller has a very small share of the market.

If price is between AVC and ATC, the best and most practical thing for a perfectly competitive firm to do is:

continue operating, but plan to go out of business.

Refer to Figure 8.6.1 above. The minimum variable cost of the firms in this competitive market is:

lower for firm 3.

At the profit-maximizing level of output, what is relationship between the total revenue (TR) and total cost (TC) curves?

They must have the same slope.

A firm never operates:

on the downward-sloping portion of its AVC curve.

In the short run, a perfectly competitive firm earning negative economic profit:

is on the upward-sloping portion of its AVC.

Suppose a firm has unavoidable fixed costs of $500,000 per year, and it decides to shut down. What is the firm's producer surplus?

PS is positive in this case, but we cannot determine the value based on the given information.

If the market price for a competitive firm's output doubles, then:

the marginal revenue doubles.

The authors note that the goal of maximizing the market value of the firm may be more appropriate than maximizing short-run profits because:

All of these

Which of the following costs may provide barriers to entry in a market?

All of these

Refer to Figure 8.6.2 above. Which area represents producer surplus in this figure?

The area above the MC curve and below the price level, P

If any of the assumptions of perfect competition are violated,

there may still be enough competition in the industry to make the model of perfect competition usable.

If a competitive firm has a U-shaped marginal cost curve then:

the profit-maximizing output is found where MC = MR and MC is increasing.

Ronny's Pizza House is a profit maximizing firm in a perfectly competitive local restaurant market, and their optimal output is 80 pizzas per day. The local government imposes a new tax of $250 per year on all restaurants that operate in the city. How does this affect Ronny's profit maximizing decisions?

Ronny's decision depends on the circumstances-if their profits are larger than $250 per year, then the tax does not impact output; otherwise, Ronny's Pizza House will shut down.

What do cooperative firms do if they make a profit?

Cooperatives generally return the profits to their members as a dividend.

The supply curve for a competitive firm is

its MC curve above the minimum point of the AVC curve.

Three hundred firms supply the market for paint. For fifty of the firms, their short-run average variable costs are minimized at $10 and short-run total costs are minimized at $15. For the remaining firms, the short-run average variable costs and short-run average total costs are minimized at $20 and $25, respectively. If each firm has a U-shaped marginal cost curve then the short-run market supply curve is:

kinked at $20.

Refer to Figure 8.4.2 above. The figure describes the cost and revenue structure of a perfectly competitive coffee farm, on a per-unit basis. What is the profit maximizing number of sacks when the price of coffee in the market is $380 dollars?

22 sacks

Refer to Figure 8.4.2 above. How much is the profit lost when the farmer produces 6 sacks instead of 14 sacks?

$1.168

If a competitive firm's marginal costs always increase with output, then at the profit maximizing output level, producer surplus is:

positive because price exceeds average variable costs.

Owners and managers:

may be different people with different goals, but in the long run firms that do best are those in which the managers pursue the goals of the owners.

Use the following statements to answer this question:

I. The firm's decision to produce zero output when the price is less than the average variable cost of production is known as the shutdown rule.

II. The firm's supply decision is to generate zero output for all prices below the minimum AVC.

I and II are true.

The amount of output that a firm decides to sell has no effect on the market price in a competitive industry because:

the firm's output is a small fraction of the entire industry's output.