Problem Set 9
1) Draw the typical average total cost, average variable cost, and marginal cost curves for
a profit – maximizing, price – taking firm.
a) Show the case where price equals average total cost.
b) Show the rectangles that represent fixed costs and variable costs. What happens to
the size of these areas as the market price increases? Show this in your diagram.
2) Fill out the table below, and then answer the following questions.
Q
TC
0
8
1
12
2
14
3
20
4
30
5
50
TFC
TVC
ATC
AVC
MC
a) Suppose the firm is a price – taker. If the price is $15 per unit, will this firm be
earning economic profits? How much? What quantity will it produce?
b) What is the breakeven price? What is the shutdown price?
3) For cases A through F, would you
(1) operate or shutdown in the short run?
(2) expand your plant or exit the industry in the long run?
A
B
C
D
E
F
Total Revenue
1500
2000
2000
5000
5000
5000
Total Cost
1500
1500
2500
6000
7000
4000
Total Fixed Cost
500
500
200
1500
1500
1500
Multiple Choice Questions
1) Refer to the graph below. Only one statement is entirely coherent. According to the
graph, total revenue derived from producing 225 units is sufficient to:
a)
cover variable cost, leave an operating profit, and cover part of fixed costs.
b)
cover both fixed and variable costs but result in losses.
c)
cover fixed cost, leave an operating profit, and cover part of variable costs.
d)
cover exactly the variable cost, leaving an operating loss equal to the fixed cost.
2) Refer to the graph below. When market price equals $20, the profit-maximizing firm:
a)
Produces 500 units of output and earns economic profit of $4,000.
b)
Produces 320 units of output and earns economic profit of $3,200.
c)
Produces 500 units of output and earns economic profit of $5,000.
d)
Produces 320 units of output and earns zero economic profit.
3) Refer to the graphs below. Given market and cost conditions, which of the firms
below earns a normal rate of return?
a)
C
b)
B
c)
D
d)
A
e)
All of the firms above earn a normal rate of return.
4) Refer to the graph below. How much of the total fixed cost is this firm unable to pay if
it produces 450 units?
a)
None. The firm is able to cover all of its fixed cost.
b)
The entire amount because demand lies above the value of AVC.
c)
$900
d)
$360
e)
$540
5) Refer to the graphs below. Which of the firms below chooses to produce output at a
loss?
a)
A, C, and D.
b)
Both A and C
c)
A
d)
D
e)
C
6) Refer to the graph below. Which of the following statements is/are correct?
a)
b)
c)
d)
e)
If the price level rises above P0, the firm will choose to produce even though it
will suffer a loss.
At the price level P0, the firm in question is indifferent between producing Q0
units or shutting down.
If the price level falls below P0, the firm will shut down.
The price level P0 is sufficient to cover all of the firm's variable costs if it
chooses to produce, but none of the fixed cost.
All of the above.
7) When a firm expands its scale of operations, and such expansion leads to lower cost
per unit, we say that the firm exhibits:
a)
Decreasing returns to scale.
b)
A fixed factor of production.
c)
Constant returns to scale.
d)
Diminishing returns.
e)
Increasing returns to scale.
8) Refer to the following graph. The firm in question exhibits economies of scale:
a)
b)
Along the decreasing portion of the long-run average cost curve (LRAC), up to
q*.
At q*, where LRAC is minimum.
c)
Along the increasing portion of the long-run average cost curve (LRAC), after q*.
d)
Anywhere along the LRAC, as long as increasing the scale of operations does not
affect cost per unit.
9) Which of the following conditions exist in long-run competitive equilibrium?
a)
b)
The level of output produced coincides with the minimum point on the LRAC
curve.
P = LRAC
c)
Individual firms operate at the most efficient scale of plant.
d)
SRAC = SRMC
e)
All of the above.
10) Refer to the graph below. Which of the following are the tendencies of this industry in
the long run?
a)
Industry contraction and higher prices.
b)
Industry expansion and lower prices.
c)
Industry contraction and lower prices.
d)
Industry expansion and higher prices.