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440 Miller Economics Today, 16th Edition
53) What does a perfectly competitive firm do to maximize profits?
54) Why should a perfect competitor produce at which price equals marginal cost?
55) Why should a firm not produce more than the rate of output at which marginal revenue equals
marginal cost?
56) How do we determine whether a firm has maximized profits?
Chapter 23 Perfect Competition 441
23.5 Short Run Profits
Total
Output Costs
100 $400
101 402
102 405
103 409
104 414
105 420
106 427
107 435
1) Refer to the above table. If the price is $5, the perfectly competitive firm should produce
A) 104 units. B) 105 units. C) 106 units. D) 107 units.
2) Refer to the above table. If the price is $5, the maximum economic profits this firm could earn is
A) $520. B) $420. C) $414. D) $106.
3) Refer to the above table. If the price is $6, the perfectly competitive firm should produce
A) 104 units. B) 105 units. C) 106 units. D) 107 units.
4) Refer to the above table. If the price is $6 the maximum profit this firm could earn is
A) $210. B) $414. C) $420. D) $630.
5) Refer to the above table. If the price is $3, the perfectly competitive firm should produce
A) 102 units. B) 105 units. C) 103 units. D) 104 units.
6) Refer to the above table. If the price is $3 the maximum profit this firm could earn is
A) $99. B) $306. C) $100. D) $99.
7) A firm in a perfectly competitive industry faces the following cost and revenue conditions: ATC
$6; AVC $3; MR MC $5. The firm is
A) earning economic profits.
B) experiencing economic losses.
C) experiencing zero profits.
D) in a position in which it should shut down.
8) In the above figure, if the firm is facing demand curve d2
,
then to maximize profits it will
produce at output level
A) A. B) B. C) C. D) D.
9) In the above figure, if d3 is the relevant demand curve for this firm, then which level of output
will maximize this firm s profits or minimize its losses?
A) A B) B C) C D) D
10) In the above figure, if d4 is the relevant demand curve for this firm, then which level of output
will maximize this firm s profits or minimize its losses?
A) A B) B C) C D) D
11) In the above figure, if d1 is the relevant demand curve for this firm, then which level of output
will maximize this firm s profits or minimize its losses?
A) A B) B C) C D) D
12) If the firm in the above figure produces output level D, it incurs an average fixed cost of
production equal to the distance
A) DK. B) RN. C)
J
L. D) KR.
13) What is always true about the short run equilibrium position for a firm in perfect competition?
A) MR MC P ATC AR B) TR TC
C) MR MC P AR D) MC ATC
14) Profit per unit is the difference between
A) average revenue and average total cost. B) marginal revenue and marginal cost.
C) total revenue and total cost. D) average revenue and marginal cost.
15) A perfectly competitive firm is maximizing profits in the short run. This implies that the firm is
earning the most economic profits possible, which
A) must be positive.
B) must be either zero or positive.
C) can be positive, negative, or zero.
D) exist at the point at which price equals total cost.
16) Refer to the above figure. Profits will equal zero
A) when the price equals $1. B) when the price equals $2.
C) when the price equals $4. D) at prices between $1 and $2.
17) Refer to the above figure. Profits will be positive
A) when the price equals $1. B) when the price equals $2.
C) at prices between $1 and $2. D) when the price is above $2.
18) Refer to the above figure. The firm will just be covering all of its variable cost but none of its
fixed cost
A) when the price equals $1. B) when the price equals $2.
C) when the price equals $4. D) at prices between $1 and $2.
19) Refer to the above figure. Profits will be negative
A) when the price equals $2. B) when the price is above $2.
C) when the price is below $2. D) only when the price equals $1.
20) Refer to the above figure. The firm s short run shutdown price is
A) at $1. B) at $2. C) at $4. D) above $4.
21) The difference between price and average total cost is
A) total costs. B) marginal costs.
C) average profit. D) an irrelevant quantity.
22) Refer to the above figure. When the price in the market is $4, economic profits will equal
A) $100. B) $200. C) $300. D) $400.
23) Refer to the above figure. If the market price is equal to A, which statement can be made about
economic profits?
A) Economic profits are positive and equal to ABCG.
B) Economic profits are positive and equal to ABEF.
C) Economic profits are negative and equal to GCEF.
D) Economic profits are negative and equal to ABQ 0.
24) Refer to the above figure. If the market price is equal to A, which statement can be made about
profits?
A) Profits are positive and equal to BCEA. B) Profits are positive and equal to BCFG.
C) Profits are negative and equal to BCEA. D) Profits are negative and equal to GFQ 0.
25) Refer to the above figure. In order to stay open in the short run, this firm must
A) earn a positive profit.
B) receive a price equal to or greater than the minimum of its average variable cost.
C) receive a price exactly equal to its average total cost.
D) recover its fixed cost.
26) In the above figure, what is the profit maximizing output and price?
A) 8, $7 B) 10, $8 C) 12, $10 D) 10, $10
27) In the above figure, what is the profit at the profit maximizing output level?
A) $70 B) $2 C) $20 D) $10
28) In the above figure, what is the price the firm receives if the output is 8?
A) $10 B) $2 C) $7 D) $8
29) Suppose a perfectly competitive asparagus farm can produce six containers of asparagus at an
output at which marginal cost equals marginal revenue. The price per container of asparagus is
$100 and the average total cost is $75. What is the profit or loss that this asparagus farm is
earning?
A) $450.00 B) $600.00 C) $150.00 D) $450.00
30) Suppose a perfectly competitive ukulele factory can produce 35 ukuleles at an output at which
marginal cost equals marginal revenue. The price per ukulele is $1300 and the average total cost
is $1500. What is the profit or loss that this furniture factory is earning?
A) $700.00 B) $7,000.00 C) $1,050.00 D) $450.00
31) In principle, how do we determine a perfectly competitive firm s profit maximizing output and
maximum profits given information about the market clearing price, and about the marginal
cost and average total cost curves of the firm? Explain in words.
32) Can a firm make losses by producing the rate of output at which marginal revenue equals
marginal cost? Why?
33) By producing at an output rate at which marginal revenue equals marginal cost, a firm is
definitely making positive economic profits. Do you agree or disagree? Why?
Chapter 23 Perfect Competition 451
23.6 The Short Run Break Even Price and the Short Run Shutdown Price
1) When a firm earns zero economic profits,
A) it cannot continue to produce.
B) it has not covered its opportunity costs.
C) it has a positive accounting profit.
D) it has average revenue that is less than average cost.
2) The short run break even price
A) is the price at which the firm s current liabilities are paid off.
B) is the price at which a firm s total revenues equal total costs.
C) occurs at the output at which the firm yields a below normal rate of return.
D) occurs at the output at which the firm yields a positive economic profit.
3) In the above figure, the firm will shut down if price falls below
A) F. B) I. C) H. D) E.
4) In the above figure, the firm will shut down if quantity falls below
A) A. B) B. C) C. D) D.
5) The firm in the above figure breaks even when market price is
A) H. B) E. C) I. D) G.
6) The firm in the above figure breaks even when quantity is
A) A. B) B. C) C. D) D.
7) In the short run, the perfectly competitive firm will always earn an economic profit when
A) P ATC. B) P AVC. C) P MC. D) P ATC.
8) A company finds that at the output level at which marginal cost equals marginal revenue, TC
$500, TVC $400, and TR $450. Your advice to the firm is
A) shut down, as TC TR.
B) reduce output to reduce the cost of production.
C) increase output to reduce the per unit cost of production.
D) continue to produce because loss is less than TFC.
9) A company finds that at its present level of production, MC AVC at $15, MC ATC at $20,
and MC MR at $17. Your advice to the firm regarding its short run operations is
A) to continue production, as it is earning an economic profit of $2 per unit.
B) to continue production, as it is earning an economic profit of $3 per unit.
C) to shut down.
D) to continue production at a loss.
10) A company finds that at its present level of production, MR MC at $14, MC AVC at $15, and
MC ATC at $20. Your advice to the firm regarding its short run operations is
A) to continue production, as it is earning an economic profit of $1 per unit.
B) to continue production, as it is earning an economic profit of $6 per unit.
C) to shut down.
D) to continue production at a loss.
11) Suppose that in a perfectly competitive market, the market price is $10. A firm in that market
has marginal cost of $10, average total cost of $12, and it is producing 100 units. The firm is
A) earning $1,000 in total economic profits and is maximizing economic profits.
B) earning $200 in total economic profits and is maximizing economic profits.
C) earning zero total economic profits and is not maximizing economic profits.
D) incurring $200 in total economic losses and is minimizing economic losses.
12) In the above figure, if price is equal to P4
,
the firm will
A) earn positive economic profits. B) incur an economic loss.
C) earn zero economic profits. D) shut down.
13) If price is $5, marginal cost is $5, average total cost is $3, and the quantity produced is 150 units,
then the perfectly competitive firm is
A) not maximizing economic profit.
B) earning $2 in economic profits and is maximizing economic profits.
C) earning $150 in economic profits and is not maximizing economic profits.
D) earning $300 in economic profits and is maximizing economic profits.
14) Suppose the market price is $5, marginal cost is $4, and average total cost is $2. The perfectly
competitive firm in that market is
A) earning $3 in economic profits per unit of output and is not maximizing profits.
B) earning $2 in economic profits per unit of output and is maximizing profits.
C) earning $1 in economic profits per unit of output and is not maximizing profits.
D) none of the above: Insufficient information is given.
15) In the above figure, assume d1is the demand curve faced by this firm. Which is true?
A) This firm is earning an economic profit.
B) This firm is experiencing an economic loss.
C) This firm is breaking even.
D) This firm s total costs equal EJA0.
16) In the above figure, assume d3is the demand curve faced by this firm. Which is true?
A) This firm is earning an economic profit.
B) This firm is experiencing an economic loss.
C) This firm is breaking even.
D) This firm s total revenues equal HRD0.
17) In the above figure, when price is below E, this firm should
A) lower prices.
B) continue to operate as is.
C) attempt to lower ATC and to raise AVC.
D) shut down.
18) For a perfectly competitive firm, the short run break even point occurs at the level of output
where
A) P MR MC. B) MR P MC.
C) MR P MC. D) P MC ATC.
19) At the short run break even point, the perfectly competitive firm is
A) earning positive economic profits. B) earning zero economic profits.
C) earning negative economic profits. D)
j
ust covering its total variable costs.
20) When a firm is earning zero economic profits,
A) accounting profit is zero. B) total revenue is greater than total cost.
C) P ATC. D) P is greater than ATC.
21) At the short run break even point, the firm is
A) earning zero accounting profit. B) losing money.
C) earning zero economic profit. D) ready to shutdown.
22) A perfectly competitive firm s short run break even output occurs
A) at the minimum point of its average variable cost curve.
B) at the minimum point of its average total cost curve.
C) at the minimum point of its marginal cost curve.
D) at the intersection of its total cost curve and its marginal revenue curve.
23) According to the above figure, if the firm is earning zero economic profits, what quantity is the
firm selling and at what price?
A) Q 200; P $4 B) Q 1,000; P $5
C) Q 800; P $4 D) Q 1,200; P $7
24) The short run break even price is the point at which
A) price is less than marginal cost.
B) marginal cost, average total cost and marginal revenue are all equal.
C) average variable cost is at a minimum.
D) marginal cost, price and average variable cost are all equal.
25) Economic profits at the short run break even point are
A) positive.
B) negative.
C) equal to zero.
D) indeterminate since they also depend on the size of the fixed costs.
26) Accounting profits at a firm s break even point are
A) positive.
B) negative.
C) zero.
D) indeterminate since we need to know what demand is.
27) At a perfectly competitive firm s short run break even price,
A) P ATC.
B) TR is more than TC.
C) the average cost is below the total revenue line.
D) P AVC, but P AFC.
28) Suppose a perfectly competitive firm faces the following short run cost and revenue conditions:
ATC $6.00; AVC $4.00; MC $3.50; MR $3.50. The firm should
A) increase output. B) increase price.
C) remain at the same position. D) shut down.
29) For a perfectly competitive firm, any price below its minimum AVC is a
A) market price. B) shutdown price.
C) profit maximizing price. D) negative price.
30) The firm will shut down in the short run if
A) the price falls below its minimum AVC. B) the market price rises unexpectedly.
C) P MC. D) P ATC at its minimum.
31) The short run shutdown price occurs where price equals
A) MC. B) AVC at any point.
C) AVC at the minimum point. D) AFC at the minimum point.
32) When a firm has an accounting profit that is negative, it
A) will never produce output, even in the short run.
B) may still have economic profit.
C) has total revenue that is less than total cost.
D) cannot be producing where price equals marginal cost.
33) In the short run, a firm should shut down when
A) P AVC. B) P MC. C) MR MC. D) MR ATC.
34) If AVC is $6 when P MC, a firm
A) will have positive economic profits if price is greater than $6.
B) is producing too little output.
C) should shut down if price is less than $6.
D) is experiencing economies of scale.
