False

Reason:

A manager in a price-taking, competitive industry does make the decision about whether to produce any output, but uses the average variable costs.

homogeneous product

unrestricted entry and exit

price-taking behavior

w > ARP.

Reason:

When w > ARP, TVC > TR, therefore the revenue from output sold does not cover the variable costs of producing.

Click and drag on elements in order

Place these steps for implementing the profit-maximizing output decision in order beginning with the first step.

1. Forecast the price of the product

2. Estimate average variable cost and marginal cost

3. Check the shutdown rule

4. If P>AVCmin, find the output level where P = SMC

5. Compute profit or loss

P x MP.

ΔTRΔ/ΔTRΔI.

MR x MP.

large, positive

Reason:

Negative cross price elasticity indicates complement goods.

exists when it is difficult for new firms to enter a market.

protect the profits of existing firms.

hinder the introduction of goods to compete with those that already exist.

exclusive franchises.

patents.

licenses.

economies of scale.

government created entry barriers.

False

Reason:

Firms gain sales through advertising, but can also establish barriers to entry through advertising. But, advertising also allows competitors to inform customers of their product.

False

Reason:

Economies of scale would not present an entry barrier unless the demand for the output were relatively low compared to the scale of production needed to minimize costs.

can be a barrier to entry.

should be ignored because they do not affect post-entry profit.

MR = MC.

Reason:

MR < P for the monopoly firm, so profit is maximized where MR = MC.

the firm should shut down in the short-run.

Reason:

The firm should shut down because it is not covering the costs of the variable input.

can continue to earn a profit as no new firms can enter.

will adjust plant size as demand conditions warrant.

may leave the industry if earning losses.

large number of relatively small firms

unrestricted entry and exit

similar product

Click and drag on elements in order

Order the steps for the profit-maximizing output and pricing decision for the firm with market power.

1. Estimate the demand equation

2. Find the inverse demand equation

3. Solve for marginal revenue

4. Estimate average variable cost and marginal cost

5. Find the output and price where MR = SMC

6. Check the shut-down rule

zero

Reason:

New firms will enter and drive down prices and drive profits to zero.

1. Refer to the graph below:

These are the cost curves for a perfectly competitive firm. If market price is $20, how much profit will the firm earn?

-$3,000

When P=20,Q=100

AC=50

TR=20*100=2000

TC=50*100=5000

Loss=TC-TR=5000-2000=3000

Profit=-3000

2. Suppose that the manager of a firm operating in a perfectly competitive market has estimated the average variable cost function to be:

AVC = 4.0 - 0.0024Q + 0.000006Q^2

Fixed costs are $500. Average variable cost reaches its minimum value at ____ units of output, and the minimum value of average variable cost is $____.

200; $3.76

AVC is minimum when , AVC and MC curves intersect each other.

Following the condition we get,

4- .0024Q+ .000006Q2 = 4 - .0048Q + .000018Q2

Or, .0024Q = .000012Q2

Or, Q = 200

Putting value of Q in the AVC equation we get,

AVC = 4- .0024*200 + .000006(200)2

= 4- .48 +.24 =$ 3.76

Average variable cost reaches its minimum value at 200 units of output, and the minimum value of average variable cost is $3.76.

3. Suppose that the manager of a firm operating in a perfectly competitive market has estimated the average variable cost function to be:

AVC = 4.0 - 0.0024Q + 0.000006Q^2

Fixed costs are $500. The marginal cost function is:

MC = 4.0 -0.0048Q + 0.000018Q^2

AVC = average variable cost function = 4- .0024Q+ .000006Q2

FC= fixed cost = $500.

AVC*Q = TVC= 4Q-.0024Q2 + .000006Q3

TC = TVC+FC = 4Q-.0024Q2 + .000006Q3+ 500.

MC = dTC/dQ = 4 - .0048Q + .000018Q2

5. When a perfectly-competitive industry is in long-run equilibrium,

6. Refer to the graph below:

These are the cost curves for a perfectly competitive firm. If market price is $50, how much profit will the firm earn?

$3,000

In a competitive market equilibrium condition:P=MC

When P=50 ,quantity=300

AC=40

TR=P*Q=50*300=15,000

TC=AC*Q=40*300=12,000

Profit=TR-TC=15,000-12,000=3,000

Answer-$3,000

AVC = 4.0 - 0.0024Q + 0.000006Q^2

Fixed costs are $500. If the forecasted price of the firm's output is $4.00, how much output will the firm produce in the short run (round to the nearest unit)?

MC = 4

Or, 4 - .0048Q + .000018Q2 = 4

Or, Q* = 266.67 = 267

The firm should produce 267 output.

9. Refer to the graph below:

These are the cost curves for a perfectly competitive firm. If market price is $50, how much output will the firm produce?

300 units

MC curve above the minimum of AVC is the supply curve. Hence at P = $50, output is 300 units

10. Suppose that the manager of a firm operating in a perfectly competitive market has estimated the average variable cost function to be:

AVC = 4.0 - 0.0024Q + 0.000006Q^2

Fixed costs are $500. If the firm shuts down, how much profit (loss) will the firm earn?

-$500

It is a perfectly competitive market, if a firm shuts down if will suffer a loss equal to fixed costs.

11. Refer to the graph below:

These are the cost curves for a perfectly competitive firm. At what level of output will the firm break even?

250

Break-even point is the point where total revenue and total cost are equal so it means no profit and no loss.

Now to find break-even from cost curves we need to look at the minimum of average total cost curve or the point or the point where marginal cost and average total cost both are equal.

The reason why we are taking a minimum of ATC is that above minimum of ATC a firm will achieve profit and below the minimum of ATC the firm will suffer loss hence break-even will be at a minimum of ATC or ATC = MC

So from the above graph, ATC is minimum at 250 units also ATC and MC are equal at this point.

12. Suppose that the manager of a firm operating in a perfectly competitive market has estimated the average variable cost function to be:

AVC = 4.0 - 0.0024Q + 0.000006Q^2

Fixed costs are $500. If the forecasted price of the firm's output is $4.00, how much profit (loss) will the firm earn (round to the nearest dollar)?

-$444

Variable Cost = AVC * Q = ( 4 - 0.0024Q + 0.000006Q2 ) * Q

Fixed cost = 500

Total Cost = VC + FC = ( 4 - 0.0024Q + 0.000006Q2 ) * Q + 500

Marginal cost = d TC / d Q = 4 - 0.0048Q + 0.000018Q2

Price = $4

P = MC ( solving it we get Q)

so , Q = 266.67 units

Total revenue = P * Q = 1066.67

Total cost = 1509.79

Loss = TC - TR = 1509.79 - 1066.67 = 443.12

2. Refer to the graph below:

The figure shows the demand and cost curves facing a monopoly in the short run. The firm earns profits of...

$120

P = TR - TC

$300 - $180

3. The market demand for a monopoly firm is estimated to be:

Qd = 80,000 - 400P + 3M + 2000PR

where Q is output,

P is price,

M is income,

and PR is the price of a related good. The manager has forecasted the values of M and PR will her $60,000 and $15, respectively, in 2018. For 2018, the forecasted demand function is...

Q= 80,000 -400P + 3(60,000) + 2000(15)

=80000 - 400P + 180000 + 30000

Q = 290,000 - 400P

5. Refer to the graph below:

The figure shows the demand and cost curves facing a monopoly in the short run. The profit-maximizing level of output is...

60 units

The profit maximizing level of output is 60. At this quantity, MR = MC and for a monopolistic it would be beneficial to produce at a quantity where the Marginal Revenue equals the Marginal cost. At quantity = 60, the MR curve intersects the MC curve which indicates that both are same here and firm is operating at profit maximizing level of output.

6. Refer to the graph below:

The figure shoes the demand and cost curve facing a monopoly in the short run. The firm will sell its output at a price of...

7. The market demand for a monopoly firm is estimated to be:

Qd = 80,000 - 400P + 3M + 2000PR

where Q is output,

P is price,

M is income,

and PR is the price of a related good. The manager has forecasted the values of M and PR will her $60,000 and $15, respectively, in 2018. For 2018, the marginal revenue function is...

MR = 725 - 0.005Q

When M=60000 and PR=15, then Qd=80000-400P+3*60000+2000*15

=290000-400P

Thus the inverse demand function P=290000/400-Qd/400

=725-0.0025Qd

Total Revenue TR=P*Qd

=(725-0.0025Qd)*Qd

=725Qd-0.0025Qd^2

Thus the **Marginal Revenue MR=d(TR)/dQd=725-0.005Qd**

8. The market demand for a monopoly firm is estimated to be:

Qd = 80,000 - 400P + 3M + 2000PR

where Q is output,

P is price,

M is income,

and PR is the price of a related good. The manager has forecasted the values of M and PR will her $60,000 and $15, respectively, in 2018. The average variable cost function is estimated to be:

AVC = 725 - 0.01Q + 0.000001Q^2

Total fixed cost in 2018 is expected to be $50,000. The profit-maximizing level of output for 2011 is...

both have market power