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

1) If price is increased, so is the marginal revenue when market is competitive and so we expect that slope of total revenue curve increases. The change in price and quantity may not be same in proportion but since MC is steeper for larger units of output, total revenue should increase but the curve becomes steep. Select B

2) The required condition is P = MR = AR = MC and P > AVC. Price can be greater or smaller than ATC which is not a condition for profit maximization. Select B