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A set of 16 multiple choice questions about competitive markets and monopolistic firms.

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Calculations for involving profits and inverse demand curves

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1. Assume this firm is operating in a competitive market.

Q output TC MC ATC
2  $48 $4 $24
3  53  5 17.67
4  64 11 16
5  87 23 17.4
6 128 41 21.33
7 193 65 27.57
8 288 95 36

If the market price is $25 what output level should the firm choose?
D) 5, profit

The firm will choose the point where MC is closest to P, which is at 5 units.

2. Farley Frozen Yogurt is a perfectly competitive firm. The market price of a frozen yogurt cake is $8. Farley sells 200 frozen yogurt cakes. Its AVC is $9 and its AFC is $2. Farley should:
B) Decrease production.

Since this firm is in perfect competition there should exist a point where ATC= MR. MR in perfect competition is price. The firm is overproducing if its ATC is greater than the price. By reducing output, its variable costs will fall to $6 per unit and it will be able to stay in business.

3. Assume the market for beef is perfectly competitive. Beef producers are currently earning a zero economic profit. If consumers switch from beef to chicken, which of the following is most likely to occur?

B) Beef producers will incur economic losses in the short run. Some producers will exit the industry until those remaining beef producers are earning a zero economic profit.

The decline in the demand for beef causes prices and revenues to fall for beef producers. They will incur losses and some will leave the industry. Those remaining will cut production and costs so that they can again earn zero profits.

4. If P = $8 and MC = $5 + 0. 2Q, the competitive firm's profit-maximizing level of output is:
E) 15
MC = MR when 8= 5 + .2 Q.
This gives ...

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