Question

 1: If a firm is facing an exogenously given price, P_0, and industry conditions change such that the new market price is P₁ > P₀, which of the following is true?

a. None of the other options are correct.

b. The total revenue curve will become steeper, with an increase in slope on the graph, with dollars on the vertical axis and firm quantity on the horizontal axis.

c. The total revenue curve will reach its maximum at a new, higher output than under the old price, P0, and total revenue would decline for further increases in output.

d. There will be no change to the total revenue curve of this individual firm.

e The total revenue curve will shift up vertically on the graph, with dollars on the vertical axis and firm quantity on the horizontal axis.

 2: A firm facing an exogenously given market price, P₀, will find its short run profit maximizing output is always where:

a. Average total cost is just tangent to marginal revenue

b. Marginal cost is equal to marginal revenue at a level greater than average variable cost

c. Marginal cost is equal to marginal revenue at a level greater than average variable cost AND average total cost is just tangent to marginal revenue

d. Marginal revenue exceeds average total cost

e. Marginal cost is minimized

Answer 1

Firms are working on exogenous given price, we can say that the given firms are perfectly competitive.

1)

Slope of curve is equal to marginal revenue. Marginal Revenue will increase following a increase in price. Hence the slope of total revenue curve will become more steeper.

Correct option is

b. The total revenue curve will become steeper, with an increase in slope on the graph, with dollars on the vertical axis and firm quantity on the horizontal axis.

2)

To maximize its profit, a perfectly competitive firm sets its output level such that MC=MR=Price. A firm shuts down in short run if average variable cost is less than price i.e. Marginal Cost. So, a perfectly competitive firm continue its operations in short run if average variable cost is higher than the marginal cost (equal to price in the case of perfectly competitive firm).

Correct option is

b. Marginal cost is equal to marginal revenue at a level greater than average variable cost