Question

1. Marginal cost __________ over the range of increasing marginal returns and ___________ over the range of diminishing marginal returns.

a) increases; decreases

b) decreases; increases

c) is constant; decreases

d) increases; is constant

2. The marginal cost curve intersects the average variable cost curve at:

a) its lowest point.

b) its maximum.

c) its end point.

d) no point; the curves don't intersect.

3. Marginal revenue:

a) is the slope of the average revenue curve.

b) equals the market price in perfect competition.

c) is the change in quantity divided by the change in the total revenue.

d) is the price divided by the change in quantity.

4. In perfectly competitive markets, if the price is _________, the firm will _________.

a) greater than ATC; make an economic profit.

b) greater than the minimum AVC; shut down.

c) greater than the minimum AVC but less than ATC; make an economic profit.

d) less than ATC; make an economic profit.

5. A monopolist is likely to _________ and ___________ than a comparable perfectly competitive firm.

a) produce more; charge more.

b) produce less; charge more.

c) produce more; charge less.

d) produce less; charge less.

6. Which of the following is true?

a) Instead of applying the marginal decision rule, monopoly firms just set the price as high as possible.

b) If demand is downward sloping, P=MR.

c) If demand is downward sloping, P=ATC.

d) If demand is downward sloping, P>MR.

Answer 1

1. Marginal cost DECREASES over the range of increasing marginal returns and INCREASES over the range of diminishing marginal returns.

Increasing Returns means Lower Costs per unit just as Diminishing Returns means Higher Costs.

2. The Marginal Cost Curve intersects the Average Variable Cost Curve at: ITS LOWEST POINT

As long as Marginal Cost is less than Average Variable Cost or Average Cost, the two curves (AC Curve and AVC Curve) cannot rise. The AVC Curve falls till the point where MC Curve is below it. At the point of intersection AVC=MC, but after that point MC rises and becomes greater. As a result, AVC also gets pulled up making the point of intersection automatically the lowest point.

3. Marginal Revenue: EQUALS THE MARKET PRICE IN PERFECT COMPETITION

Marginal Revenue (MR) is the increase in total revenue resulting from a one-unit increase in output. Since the price is constant in the Perfect Competition. The increase in total revenue from producing one extra unit will be equal to the price.

4. In perfectly competitive markets, if the price is GREATER THAN ATC , the firm will MAKE AN ECONOMIC PROFIT.

If P > min(ATC), there are Profit opportunities, new firms would enter and market forces will push down the price until P = min(ATC).

5.  A monopolist is likely to PRODUCE LESS and CHARGE MORE than a comparable perfectly competitive firm.

Monopoly produces at a point where Marginal Revenue equals Marginal Costs, but charges the price expressed on the market demand curve for that quantity of production.

6. The following statement is True:-

IF DEMAND IS DOWNWARD SLOPING, P>MR.

For a Monopoly Firm, where demand is downward sloping Marginal Revenue is less than Price.