Q: A firm in a perfectly competitive market faces the following cost and revenue data at its profit-maximizing output: $$P = 20$$, $$ATC = 18$$, $$Q = 100. $$What is the firm's profit?

$$\displaystyle Profit = (P - ATC) \times Q = (20 - 18) \times 100 = 200$$

Question 1

Which of the following best describes the law of diminishing returns as it applies to the short-run production function?

Accepted Answer

As more units of a variable input are added to fixed inputs, the marginal product of the variable input eventually decreases.

Question 2

Suppose a firm in the short run has total fixed costs (TFC) of $$100 and total variable costs (TVC) of 200 $$when producing 10 units. What is the average total cost (ATC) at this output level?

Accepted Answer

$$\displaystyle ATC = \frac{TFC + TVC}{Q} = \frac{100 + 200}{10} = 30$$

Question 3

Which of the following is NOT a characteristic of a perfectly competitive market?

Accepted Answer

Firms are price makers.

Question 4

A firm in a perfectly competitive market faces the following cost and revenue data at its profit-maximizing output: $$P = 20$$, $$ATC = 18$$, $$Q = 100. $$What is the firm's profit?

Accepted Answer

$$\displaystyle Profit = (P - ATC) 	imes Q = (20 - 18) 	imes 100 = 200$$

Question 5

If a monopolist faces the following demand and cost conditions: $$P = 50 - Q$$, $$MC = 10$$, what is the profit-maximizing quantity?

Accepted Answer

$$\displaystyle MR = MC \Rightarrow Q = 20$$

Question 6

Which of the following best explains why a natural monopoly arises?

Accepted Answer

A single firm can supply the entire market at a lower average cost than multiple firms.

Question 7

In the short run, a perfectly competitive firm should continue to produce as long as:

Accepted Answer

$$\displaystyle P \geq AVC$$

Question 8

Which of the following is true about the relationship between marginal cost (MC) and average total cost (ATC)?

Accepted Answer

When $$MC \u003c ATC$$, $$ATC is $$decreasing.

Question 9

A monopolistically competitive firm in the short run maximizes profit by producing the quantity where:

Accepted Answer

$$\displaystyle MR = MC$$

Question 10

Which of the following is an example of a barrier to entry that can create a monopoly?

Accepted Answer

A government patent granted to a pharmaceutical company.

Question 11

Suppose a firm’s long-run average cost decreases as output increases. This is an example of:

Accepted Answer

Economies of scale.

Question 12

If a perfectly competitive firm is earning zero economic profit in the short run, which of the following must be true?

Accepted Answer

$$\displaystyle P = ATC$$

Question 13

Which of the following best describes allocative efficiency in a perfectly competitive market?

Accepted Answer

Goods are produced up to the point where $$P = MC.$$

Question 14

A monopolist charges a price above marginal cost. Compared to perfect competition, this results in:

Accepted Answer

A deadweight loss and reduced economic efficiency.

Question 15

Suppose a firm’s marginal product of labor (MPL) is decreasing as more workers are hired. What is likely happening to marginal cost (MC)?

Accepted Answer

Marginal cost is increasing.

Question 16

Which of the following is true about the demand curve facing a monopolistically competitive firm?

Accepted Answer

It is downward sloping because the firm has some market power.

Question 17

A firm’s total cost (TC) is given by $$TC = 100 + 5Q + Q^2$. What is the marginal cost (MC) function?

Accepted Answer

$$\displaystyle MC = \frac{dTC}{dQ} = 5 + 2Q$$

Question 18

Which of the following is an example of productive efficiency?

Accepted Answer

A firm produces at the minimum point of its average total cost curve.

Question 19

Suppose a monopolist’s marginal revenue (MR) is less than price (P) at all positive quantities. This is because:

Accepted Answer

The monopolist must lower the price on all units to sell an additional unit.

Question 20

Which of the following is most likely to be considered a monopoly due to control of a key resource?

Accepted Answer

De Beers controlling most of the world’s diamond mines.

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