Q: Which formula correctly expresses economic profit?

$$\text{Economic Profit} = \text{Total Revenue} - (\text{Explicit Costs} + \text{Implicit Costs})$$

Q: If a firm’s price is $$1.13, its ATC is 0.93$$, and it sells 1,225 units, what is its profit?

$$(1.13 - 0.93) \times 1,225 = 245$$

Question 1

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

Accepted Answer

Each seller can influence the market price.

Question 2

A firm in a perfectly competitive market maximizes profit by producing the quantity where:

Accepted Answer

$$MR = MC$$

Question 3

If the market price falls below a firm’s average variable cost (AVC) in the short run, what should the firm do?

Accepted Answer

Shut down production temporarily.

Question 4

Which formula correctly expresses economic profit?

Accepted Answer

$$	ext{Economic Profit} = 	ext{Total Revenue} - (	ext{Explicit Costs} + 	ext{Implicit Costs})$$

Question 5

Suppose a firm’s total cost increases from $$400 to 450 $$when output increases from 100 to 120 units. What is the marginal cost of producing each additional unit?

Accepted Answer

$$2.50$$

Question 6

Which of the following best describes the law of diminishing returns?

Accepted Answer

Adding more of a variable input to fixed inputs will eventually cause the marginal product of the variable input to decline.

Question 7

A firm’s producer surplus is:

Accepted Answer

The area above the supply (MC) curve and below the market price.

Question 8

If a firm’s price is $$1.13, its ATC is 0.93$$, and it sells 1,225 units, what is its profit?

Accepted Answer

$$(1.13 - 0.93) 	imes 1,225 = 245$$

Question 9

Which of the following is true about sunk costs?

Accepted Answer

They should not affect current or future production decisions.

Question 10

In the long run, if firms in a perfectly competitive market are earning positive economic profits, what will happen?

Accepted Answer

New firms will enter the market, driving profits to zero.

Question 11

Which of the following best describes economies of scale?

Accepted Answer

Average total cost falls as output increases.

Question 12

If the price elasticity of supply $$e_s \u003e 1$$, supply is:

Accepted Answer

Elastic

Question 13

A firm’s short-run supply curve is:

Accepted Answer

The portion of its marginal cost curve above average variable cost.

Question 14

Suppose a government subsidy for ethanol decreases from $$0.25 to 0.20 $$per gallon. What happens to the average total cost (ATC) for ethanol producers?

Accepted Answer

ATC increases by $0.05 per gallon.

Question 15

Which of the following is an example of an implicit cost?

Accepted Answer

The salary the owner could earn working elsewhere.

Question 16

If a firm’s marginal cost (MC) is below its average total cost (ATC), what happens to ATC as output increases?

Accepted Answer

ATC decreases.

Question 17

Which of the following would make the price elasticity of supply higher for a firm?

Accepted Answer

The firm has a large inventory of finished goods.

Question 18

If the market price is $$1.00, the ATC is 1.25$$, and the firm produces 2 million gallons, what is the firm’s profit?

Accepted Answer

$$(1.00 - 1.25) 	imes 2,000,000 = -500,000$$

Question 19

Which of the following is true about long-run competitive equilibrium?

Accepted Answer

Firms earn zero economic profit.

Question 20

If a firm’s marginal product of labor becomes negative, what does this imply?

Accepted Answer

Adding more workers decreases total output.

Sellers and Incentives in Perfect Competition: Microeconomics Study Notes

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