Question

1.

If diminishing returns exist, then

Each unit produced will cost incrementally more.

Each unit produced will cost incrementally less.

The total cost curve will be negatively sloped.

The total cost curve will be flat.

2.

For the perfectly competitive firm, the marginal revenue is always

Decreasing.

Constant.

Increasing.

Equal to average total cost.

3.

Greater-than-normal profit represents

Below-average returns to capital.

Exploitation of workers.

Payment for entrepreneurship.

Explicit costs.

4.

A perfectly competitive firm will maximize profits by choosing an output level where

Price equals total cost.

Price equals marginal cost.

Price is greater than marginal cost.

Price is greater than total cost.

Answer 1

1). The diminishing marginal returns is that, the proportional increase in the input results in a less than proportional increase in the output. So the output increases less than proportional to the increase in the output, this will increase the marginal cost to increase. The marginal cost is the addition made to the total cost when an additional output is produced.

Ans: Each unit produced will cost incrementally more.

2). In the perfectly competitive firm the product is identical so the demand would be perfectly elastic, the firm cannot exert any pressure on the market price by changing their output decisions. The market price would be constant and the market price is also equal to the marginal and the average revenue.

Ans: Constant.

3). A firm earns normal profit when total revenue equals the total cost, the firm is break even that is there is zero economic profit. At this level all the fixed and the variable costs are covered , any thing above the normal profit goes to the entrepreneur.

Ans: Payment for entrepreneurship.

4). The firm maximize the profit where the marginal cost equals the marginal revenue , in the perfectly competitive firm the price is also equals the marginal revenue.

Ans: Price equals marginal cost.