Production, Cost & Perfect Competition unit test
A test on this unit alone, marked as a percentage and a letter grade — for the test your class is actually sitting, rather than for May. Answer everything, then submit once: seeing the answer to question 3 before attempting question 4 makes the final percentage meaningless.
Why MC cuts averages at their minimums
Where diminishing returns begins
Why entry and exit drive profit to zero
Total product
LRATC as an envelope
Short-run supply curve of a competitive firm
The shut-down rule
Average product
The cost identities
Marginal cost
What zero economic profit means
Long-run equilibrium in perfect competition
Short answer 1. Define or explain: Why the cost curves are U-shaped
3 ptsShort answer 2. Define or explain: Where MC crosses ATC and AVC
3 ptsShort answer 3. Define or explain: Minimum efficient scale
3 ptsShort answer 4. Define or explain: Why a firm produces at a loss in the short run
3 ptsFree response
7 ptsA perfectly competitive firm faces a market price of $9. At its profit-maximizing output of 800 units, average total cost is $11 and average variable cost is $7. (a) Calculate the firm’s total profit or loss at this output. Show your work. (b) State whether the firm should continue producing in the short run and justify your answer by comparing the loss from producing with the loss from shutting down. (c) Draw a correctly labeled graph of this firm showing the market price, the marginal cost curve, the average total cost curve and the average variable cost curve, and shade the area representing the loss. (d) Assume the entire industry faces similar conditions. Explain what happens in the long run to the number of firms, the market price, and each remaining firm’s economic profit.
Calculate the firm’s total profit or loss.
State whether to continue producing, comparing the loss from producing with the loss from shutting down.
Draw a labeled graph with the four curves and shade the loss.
Explain the long-run adjustment in firm numbers, price and economic profit.