Question

7. The short-run supply curve for a firm in a perfectly competitive market
(x) is determined, in part, by the comparison of marginal costs and marginal revenue for the firm.
(y) is reflected in that part of the marginal cost curve that lies above the average variable cost curve.
(z) will be influenced by fixed costs.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (x) only

8. At the current level of output, a profit-maximizing firm in a competitive market earns average revenue of $48, and has an average total cost of $43. If the firm's marginal cost curve is equal to its average total cost curve at an output level of 40,000 units, then the firm would earn a profit of _________ at its current level of output.
A. exactly $200,000
B. less than $200,000
C. more than $200,000
D. Any of the above
E. None of the above

9. A competitive firm (price-taker) is able to sell its output for $10 per unit. The 1,000th unit of output that the firm produces has a marginal cost of $12. It follows that the production and sale of the 1,000th unit of output
(x) increases the firm’s total revenue by $10, but increases the firm’s total cost by $12.
(y) decreases the firm’s profit by $2 since price is less than marginal cost by $2.
(z) indicates that the firm should necessarily shut down in the short run since marginal cost exceeds marginal revenue at the output amount of 1,000 units.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (x) only

Answer 1

Solution:

7. One thing is pretty direct: the short run supply curve for a perfectly competitive market is the marginal cost, beyond the point where it cuts the average variable costs curve (or that part of marginal cost curve which lies above the average variable cost curve). Since, fixed costs are independent of the quantity produced, they do not impact marginal cost and variable costs in any way, and so the supply curve (which is the marginal cost curve) will not be influenced.

Thus, the correct option is (b) x and y only.

8. Profit maximization for a perfectly competitive firm occurs where the marginal cost equals the price level (which is same as average revenue). Further, under perfect competition, firms being price takers will have constant price of $48. Also, note that the marginal cost curve cuts the average total cost curve at its minimum, thus at 40,000 units of output, average cost curve must be minimum, and beyond this marginal cost is higher than the average cost. So, at current production level, since, MC (= P) = $48, and average cost = $43 (MC > AC), output must be greater than 40,000 units. Profit = (average revenue - average total cost)*quantity = (48 - 43)*Q

Profit = 5*Q

With Q > 40,000, profit > 5*40000 = 200000.

Thus, the correct option is (c) more than 200,000

9. As we know that the marginal revenue is the additional total revenue earned by the firm on selling an additional unit and the marginal cost is the additional cost incurred by an additional unit produced, statement (x) here justifies these definitions accurately enough.

Here price is less than the marginal cost by $2, but profit (or loss) is measured by divergence between the price and the average total cost(and not between the price and marginal cost), so statement y is not correct. Finally, shut down point is found by comparison between the price (or equivalently marginal cost curve as it marks the supply curve in short run) and average variable cost curve ,In this case, firm should simply reduce production as to increase profit (or over more loss), and not shut it down. So, the correct option is (e) x only.