Practice Questions #6
1. The condition that ensures that consumers get the goods they want is:
MR=P
P=MC
P=AC
P=ATC
2. Harry and Sally own a firm ("Sohu") that produces computers in a perfectly competitive market. They produce 1,000 computers per week at a cost of $700 per computer, which is the lowest possible long-run average cost. The market price is $900. Which of the following is true?
a Sohu's current output level is efficient because average cost is minimized.
b Society would be better off if Sohu increased its current output level becauseprice exceeds marginal cost.
c.Society would be better off if Sohu increased its current output level because price exceeds average cost.
d.Society would be better off if Sohu decreased its current output level because this will increase the firm's profits.
3. Groundnuts are sold by a monopoly and goat cheese is sold by perfectly competitive firms. When both markets are in equilibrium,
- P> MC for both goods
- P=MC for both goods
- P>MC for groundnuts and P=MC for goat cheese
- P=MC for groundnuts and P>MC for goat cheese.
4. Suppose the perfect competitive firm's Average Revenue is 5 . And her total cost function is TC=(1/3)Q3-3 Q2+14Q-22, then marginal cost function is MC=Q2- 6Q+14, where Q is the quantity of good. Then how much is her profit?
5. Relative to perfect competition, imperfect competition will produce
- Higher prices and higher output
- Higher prices and lower output
- Lower prices and higher output
- Lower prices and lower output
6. When the price is 10, we know that a perfectly competitive firm makes maximum profit. We also know that the long run marginal cost function for the firm is: LMC = Q2 - 12Q + 46. If there are 100 identical firms in the market, then the total quantity of the good in equilibrium will be:
7. Consider the data of Miaojie's firm in a world of perfect competition.
| P=MR=AR |
AC |
AVC |
AFC |
| 5 |
4.5 |
4 |
0.5 |
| 4 |
4 |
3.3 |
y |
| 3 |
4.2 |
2.5 |
1.7 |
| 2 |
X |
2 |
2.5 |
| 1 |
5.5 |
2.5 |
3 |
(a)According to the relationship among AC, AVC and AFC, how much is x and y?
(b)When Miaojie gets zero profit, then what is the price of his product?
(c)What is his shutdown price?
(d)Why he will continue to produce when P< AC and P>AVC?
8.Given the profit-maximizing output level, a firm will seek to minimize costs. The connection between utility maximization and profit maximization is less evident. This example lets you work through the link between the maximizing behavior of households and of the firms.
(a). What, in words, is the utility maximizing rule?
(b) With two goods, X and Y, what is the utility-maximizing formula?
(c) What, in words, is the profit-maximization rule?
(d) Write down an explanation of the meaning of MC
(e) Now, write down the profit-maximizing formula. Does it hold for all profit maximizers?
(f)Let's generalize by noting that Px= MCx and Py=MCy in a world of perfect competition where good X and good Y are produced.
Observe that the two results combined give: MU x / MU y = MC x / MC y. The perfectly competitive model results in the production of exactly those quantities of each of the goods requested by consumer, given their opportunity costs.
Now, let's violate the equalities in this formula to check understanding. Suppose now: MU x =100, MC x=80 and MU y =120, MC y= 60. Substitute these values into the formula. What does this mean?
(g) What should be the response?
(h) What will happen to each of the four values?