Econ 303 — Quiz #6

Which of the following statements is (are) TRUE of price-taking firms?

I. ΔTR/ΔQ = P = MR
II. Price takers must lower their price to sell additional units of output because demand curves slope downward.
III. If a price taker decides to increase output, the market price will decrease.
IV. Examples of price takers include McDonald's, Burger King, Wendy's, and SONIC Drive-in.

II and III
I, II, III, and IV
I
II and IV

Suppose the market for relay switches is considered perfectly competitive and is in equilibrium at a price of $5,000 per pallet of relay switches. Callahan Relay produces relay switches at an average total cost given by ATC = Q + 1,500,000/Q and marginal cost given by MC = 2Q, where Q measures pallets of relay switches. If Callahan Relay maximizes profit, how much profit will it earn?

$125,000
$4.75 million
$2.5 million
$88,000

Stu owns an ice cream parlor that is usually closed during the winter. This winter, however, Stu is considering opening his business in February instead of March. If Stu opens his store in February, he will earn total revenue of $4,000 for the month, incurring variable costs of $3,500 and fixed costs of $1,500. If the store remains closed during February, Stu will earn no revenues and incur fixed costs of $1,500. Stu should:

open in February because the $4,000 of total revenue exceeds the $3,500 of variable costs.
stay closed in February because he will lose $1,000 if he opens.
stay closed in February because the $500 of operating profit is insufficient to cover the $1,500 of fixed costs.
open in February because the $4,000 of total revenue exceeds the $1,500 of fixed costs.

With which of the following scenarios should a perfectly competitive firm shut down in the short run?

I. P = $80, VC = $180,000, and Q = 2,000
II. TR = $45,000, AVC = $500, ATC = $600, and Q = 84
III. P = $11.55, ATC = $15, and AFC = $2

II and III
III
II
I and III

Suppose a perfectly competitive industry has 300 firms, and the short-run supply curve for each firm is given by Q = 2P. What is the short-run industry supply curve?

QS = 150P
QS = 300 + 2P
QS = 600
QS = 600P

A perfectly competitive firm maximizes profit by producing 500 units of output, selling each unit for $10. The firm's average variable cost is $7 and average fixed cost is $2. What is the firm's producer surplus?

$500
$1,000
$1,500
$1

In a perfectly competitive market, each firm has a long-run total cost given by LTC = 100Q - 10Q2 + 1/3Q3 and long-run marginal cost curve given by LMC = 100 - 20Q + Q2. What is the market's long-run equilibrium price?

$33
$70
$25
$8.50

In a perfectly competitive industry, the equilibrium price is $56 and the minimum average total cost of the industry's firms is $40. If this is a constant-cost industry, we can expect that in the long run, firms will _____ the market, shifting the industry's short-run supply curve _____.

enter; inward until firms are making positive profit.
enter; outward until the minimum average total cost rises to $56.
exit; inward until firms are breaking even.
enter; outward until the new equilibrium price is $40.

Suppose the market for sprouts is in long-run equilibrium. In the short run, what will happen if an E. coli outbreak reduces the demand for sprouts?

The market price of sprouts will fall, causing each firm to produce fewer sprouts.
The marginal cost curve will shift upward for each producer, causing prices to rise and profits to fall.
The marginal cost curve will shift downward for each producer, leaving prices unchanged.
Existing firms will expand output to make up for the decrease in demand.

Which of the following characteristics relate(s) to perfect competition?

I. An industry is dominated by several large firms.
II. Consumers cannot distinguish one firm's product from another.
III. New firms can easily enter the industry.

III
II
II and III
I and II

To maximize profits, a firm should produce where:

MR = MC.
ATC < P < AVC.
P = AVC.
TR/Q = TC/Q.

A firm's short-run total cost is TC = 10,100 + 7,700Q - 100Q2 + Q3/3, and its marginal cost is MC = 7,700 - 200Q + Q2. What is the firm's shutdown price?

$18
$45
$1,100
$200

The perfectly competitive firm's short-run supply curve is:

its average variable cost curve, which lies above marginal revenue.
the portion of its marginal cost curve that lies above average variable cost.
its average total cost curve, which lies above marginal revenue.
the portion of its marginal cost curve that lies above average total cost.

Which of the following statements is (are) TRUE?

I. Free entry to a perfectly competitive industry results in the industry's firms earning zero economic profit in the long run, except for the most efficient producers, who may earn economic rent.
II. In a perfectly competitive market, long-run equilibrium is characterized by LMC < P < LATC.
III. If a competitive industry is in long-run equilibrium, a decrease in demand causes firms to earn negative profit because the market price will fall below average total cost.

II and III
I, II, and III
I
I and III

Which of the following statements is (are) TRUE?

I. As market prices increase, industry output rises because individual firms have upward-sloping marginal cost curves.
II. As market prices increase, industry output rises because high-cost producers enter the industry.
III. As market prices increase, industry output rises because individual firms have upward-sloping short-run supply curves.

II
III
I, II, and III
II and III

In the market for lock washers, a perfectly competitive market, the current equilibrium price is $5 per box. Washer King, one of the many producers of washers, has a daily short-run total cost given by TC = 190 + 0.20Q + 0.0025Q2, where Q measures boxes of washers. Washer King's corresponding marginal cost is MC = 0.20 + 0.005Q. How many boxes of washers should Washer King produce per day to maximize profit?

960
2,125
280
1,450