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Marginal Revenue and Production Economics

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Stage III of the short-run Production Function is

A) the most efficient mix of inputs.
B) the least costly level of output.
C) where additional units of inputs will lead to less output.
D) where additional units of inputs will lead to more output

In the short run, which of the following would indicate that a perfectly competitive firm is producing an output for which it is receiving a normal profit?

A) P > AC B) AVC < P < AC C) P = AC D) P = AVC

Assume a firm employs 10 workers and pays each $10 per hour. Further assume that the MP of the 10th worker is 4 units of output and that the price of the output is $2. According to economic theory, in the short run,

A) the firm should hire additional workers.
B) the firm should reduce the number of workers employed.
C) the firm should continue to employ 10 workers.
D) More information is required to answer this question.

In long run equilibrium monopolistic competition results in:
a. P > AC and MR = MC.
b. P = MR and AC = MC.
c. P < MR and AC < MC.
d. P = AC and MR = MC.

Which of the following products is the best example of perfect competition?

A) automobiles B) apples
C) soap D) video cassettes

In economic analysis, any amount of profit earned above zero is considered "above normal" because

A) normally firms are supposed to earn zero profit.
B) this would indicate that the firm's revenue exceeded both its accounting and opportunity cost.
C) this would indicate that the firm was at least earning a profit equal to its opportunity cost.
D) this would indicate that the firm's revenue exceeded its accounting cost.

Suppose a firm is currently maximizing its profits (i.e., following the MR=MC rule). Assuming that it wants to continue maximizing its profits, if its fixed costs increase, it should

A) maintain the same price.
B) raise its price.
C) lower its price.
D) Not enough information to answer this question.

In general, a perfectly competitive industry will sell:
a. less output at lower prices than monopoly.
b. more output at higher prices than monopoly.
c. less output at higher prices than monopoly.
d. more output at lower prices than monopoly.

In monopoly and perfectly competitive markets, profits are maximized when:
a. MC = AC.
b. P > AC.
c. MR = MC.
d. MR = P.

Two goods are ________ if the quantity consumed of one increases when the price of the other decreases.
A) normal B) superior C) complementary D) substitute

Which of the following is most likely to indicate a statistically significant regression

A) t > R2 B) R2 > .90 C) t >2 D) &#963;2> 4

Nature's Best, Inc., supplies asparagus to canners located throughout the Mississippi River valley. Like several grain and commodity markets, the market for asparagus is perfectly competitive. The company's technology defines a marginal cost per ton of asparagus given by the relation:

MC = $1.50 + $0.0005Q

Calculate the industry price necessary for the firm to supply 500, and 2,000 pounds.

Calculate the quantity supplied by Nature's Best at industry prices of $1.50, and $2.75 per ton.

Merton Labs, Inc., was an early participant in the market for post-heart attack medications. However, thecompany's market share has quickly eroded from entry of the generic market during the past year as some important basic patents expired. More entry and downward pressure on both prices and profits is expected during the coming year.

Use Merton's price, output and total cost data, as given, to complete the following table:

Price Output total Marginal Total Marginal Average
per (000) Revenue Revenue Cost Cost Cost
unit (000) (000) (000) ($000) ($)
$3 0 $ 6
28 1 30
26 2 52
24 3 72
22 4 90
20 5 100
18 6 108
16 7 133

If the market is a monopoly, identify Merton's long run equilibrium, assuming cost conditions remain constant.

The following questions refer to this regression equation. (Standard errors in parentheses, in that order. All variables are monthly values)
QD = 5,000 - 10 P + 1300 A + 4 Px + 2 I, (5,234) (2.29) (505) (1.75) (1.5)
R2 = 0.65
N = 120
F = 35.25
Standard error of Y estimate = 555
Q = Quantity demanded
P = Price = 5,000
A = Advertising expense = 54,000
Px = price of competitor's product = 4,000
I = average monthly income = 2,800

Calculate the elasticity for the following variables and briefly comment on whether it is elastic or inelastic.

Price elasticity

Advertising elasticity

Cross price elasticity

Income elasticity

Interpret the meaning of the R2 in this case.

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Solution Summary

Marginal Revenue is assessed.