Question

If marginal cost exceeds marginal revenue, the firm

A)should reduce its average fixed cost in order to lower its marginal cost.

B)may still be earning a positive accounting profit

C)should increase the level of production to maximize its profit.

D)is most likely to be at a profit-maximizing level of output.

Who is a price taker in a competitive market?

A)both buyers and sellers

B)buyers only

C)sellers only

D)neither buyers nor sellers

For a competitive firm,

A)total cost equals marginal revenue.

B)average revenue equals marginal revenue.

C)total revenue equals average revenue.

D)total revenue equals marginal revenue

In the short-run, a firm's supply curve is equal to the

A)average total cost curve above its marginal cost curve.

B)marginal cost curve above its average total cost curve.

C)average variable cost curve above its marginal cost curve.

D)marginal cost curve above its average variable cost curve.

When marginal revenue equals marginal cost, the firm

A)Should increase the level of production to maximize its profit

B)must be generating positive economic profits

C)should cease producing

D)must be generating positive accounting profits.

Profit maximizing firms in competitive industries with free entry and exit face a price equal to the lowest possible

A)total cost of production.

B)fixed cost of production.

C)marginal cost of production.

D)average total cost of production.

At the profit-maximizing level of output,

A)marginal revenue equals average variable cost.

B)marginal revenue equals average total cost.

C)average revenue equals average total cost.

D)marginal revenue equals marginal cost.

If firms are competitive and profit maximizing, the price of a good equals the

A)fixed cost of production.

B)marginal cost of production.

C)average total cost of production.

D)total cost of production.

Answer 1

Answers

Question: If marginal cost exceeds marginal revenue, the firm

D) is most likely to be at a profit-maximizing level of output.

When the marginal cost (MC) just exceeds the marginal revenue(MR), the firm is likely to be at or near the profit-maximizing level of output, because at profit-maximizing level of output, the MR=MC.

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Question : Who is a price taker in a competitive market?

Answer: A) both buyers and sellers.

In a competitive market, there are many sellers in the market producing or sell identical goods.On the other side, there are many buyers also in the market,buying the goods.Both the buyers and sellers have perfect knowledge about the market. The market price is determined by free interplay of demand and supply forces, and no individual seller or buyer can influence the market price , i.e., both buyers and sellers are price taker here.

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Question: For a competitive firm,

Answer: B) average revenue equals marginal revenue.

Total Revenue (TR) = Price(P) * Quantity(Q)

Average Revenue(AR) = TR / Q = P * Q / Q = P

Marginal Revenue(MR) = Change in total revenue due to change in one additional unit of output(Q).

Or, MR = TR / Q , where '' stands for change.

Or, MR = (P * Q) / Q = P * Q/ Q = P [as price is given in the market, so it is constant. So P = 0]

MR = P

As AR = P , and also MR = P,

Average revenue(AR) equals marginal revenue(MR)

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Question: In the short-run, a firm's supply curve is equal to the

Answer: D) marginal cost curve above its average variable cost curve.

Figure-1

In the above figure, quantity is measured on the horizontal axis, and the cost and revenue are measured on the vertical axis. . The 'MC", 'AVC', and 'ATC' are marginal cost, average variable cost and average total cost curves respectively. The upward portion of the MC curve above the AVC curve, i.e., section 'LS' is the short-run supply curve of the firm in perfectly competitive market.

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Question: When marginal revenue equals marginal cost, the firm

Answer: C) should cease producing.

With the given price level in the market, a firm produces the profit maximizing output, where marginal revenue(MR) equals the marginal cost(MC). If the firm produces beyond this level of output, the marginal cost exceeds the marginal revenue, and the firm earns loss. So the firm ceases production when marginal revenue equals marginal cost.

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Question: Profit maximizing firms in competitive industries with free entry and exit face a price equal to the lowest possible

Answer: C) marginal cost of production.

In a perfectly competitive industry, at the given price level, the firm produces profit maximizing quantity of output, where MR = MC. Now, as MR=P(price), so at the profit maximizing point, MC is also equals the price. So the given price is equal to the firm's lowest possible marginal cost of production.

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Question: At the profit-maximizing level of output,

Answer: D) marginal revenue equals marginal cost.

The firm will never sell a good that's price doesn't even cover the extra cost firm bears for an extra unit of output.

So, at the profit maximizing level of output, the marginal revenue equals the marginal cost.

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Question: If firms are competitive and profit maximizing, the price of a good equals the

Answer: B) marginal cost of production.

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Figure-2.

In the above figure, the quantity is measured on the horizontal axis, and the price (P),cost(C), and revenue(R) are measured on the vertical axis. In the perfectly competitive market, in short-run, at the given price, a firm faces a horizontal demand curve which coincides with MR and AR curves. In the above figure,at the given market price P_1,, the faces its demand curve 'D', which horizontal and coincides with MR and AR curves. SO D=MR=AR. The the given market price, the firm produces the profit maximizing output Q₁.

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