1. A firm in a purely competitive industry has a typical cost structure. The normal rate of profit in the economy is 7 percent. This firm is earning $18 on every $200 invested by its founders.

Instructions: Enter your answers as whole numbers.

a. What is its percentage rate of return?

b. Is the firm earning an economic profit?

If so, how large?

c. Will this industry see entry or exit?

d. What will be the rate of return earned by firms in this industry once the industry reaches long-run equilibrium?

2. Marginal revenue is the

change in total revenue associated with the sale of one more unit of output.

change in average revenue associated with the sale of one more unit of output.

difference between product price and average total cost.

change in product price associated with the sale of one more unit of output.

3. A competitive firm in the short run can determine the profit-maximizing (or loss-minimizing) output by equating

marginal revenue and marginal cost.

price and average fixed cost.

price and marginal revenue.

price and average total cost.

4. Suppose you find that the price of your product is less than minimum AVC. You should

close down because total revenue exceeds total variable cost.

minimize your losses by producing where P = MC.

close down because, by producing, your losses will exceed your total fixed costs.

maximize your profits by producing where P = MC.

5. Which of the following distinguishes the short run from the long run in pure competition?

Firms can enter and exit the market in the long run but not in the short run.

Firms use the MR = MC rule to maximize profits in the short run but not in the long run.

Firms attempt to maximize profits in the long run but not in the short run.

The quantity of labor hired can vary in the long run but not in the short run.