Question

1) A perfectly competitive firm faces the following Total revenue, Total cost and Marginal cost functions:

TR = 10Q

TC = 2 + 2Q + Q2

MC = 2 + 2Q

At the level of output maximizing profit , the above firm's level of economic profit is                                                                                                          

A) $0

B) $4

C) $6

D) $8

*Additional information after I did the math: The price this firm charges for its product is $10, the level of output maximizing profit is 4                       

2) A perfectly competitive firm faces the following Total revenue, Total cost and Marginal cost functions:

TR = 10Q

TC = 2 + 2Q + Q2

MC = 2 + 2Q

The above competitive firm will...............if the market price falls to $5.

A) shut down

B) continue to produce

C) produce 5 units.

D) produce 3 units

3) Assume that a perfectly competitive firm has the following revenue and cost functions:

TC = 16875 + 15Q + 0.03Q2

ATC = (16875/Q) + 15 + 0.03Q

AVC = 15 + 0.03Q

MC = 15 + 0.06Q

TR = 60Q

MR= $60

The level of output and price that maximizes the firm's profits, if any, are.......units, and $.........

A) 750 ; $75

B) 750 ; $60

C) 600 ; $75

D) 1,000 ; $60

4) Assume that a perfectly competitive firm has the following revenue and cost functions:

TC = 16875 + 15Q + 0.03Q2

ATC = (16875/Q) + 15 + 0.03Q

AVC = 15 + 0.03Q

MC = 15 + 0.06Q

TR = 60Q

MR= $60

At the Q and P (from Question 42), that maximizes this firm's profit, Should this competitive firm continue to produce or shut-down?

A) The firm must shut down since P < AVC.

B) The firm must shut down since P < ATC.

C) The firm must continue to produce since P > AVC.

D) The firm can go either way, shut down or continue to produce.

5) Assume that a perfectly competitive firm has the following revenue and cost functions:

TC = 16875 + 15Q + 0.03Q2

ATC = (16,875/Q) + 15 + 0.03Q

AVC = 15 + 0.03Q

MC = 15 + 0.06Q

TR = 60Q

MR= $60

The firm's ATC, AVC, and AFC at the profit maximizing level of output are...........;...........; and.........., respectively..

A) $60 ; $37.5 ; and $22.5.

B) $60 ; $22.5 ; and $37.5.

C) $30 ; $27.5 ; and $20.5.

D) $45 ; $35.5 ; and $15.5.

Answer 1

1.

Economic profit = $14

Working note:

TR = 10Q

So, MR = 10

MC = 2+2Q

For profit maximizing output, P = MR = MC

10 = 2+2Q

Q = 8/2 = 4 units

Economic profit = revenue - cost = 10*4 - (2 + 2*4 + 4^2)

Economic profit = $14

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2.

A

Working note:

TC = 2+2Q+Q^2

Variable cost = 2Q+Q^2

AVC = 2 + Q

When profit maximizing output = 4 ( taken from the question 1 with same data)

Then,

AVC = 2+4 = $6

Since the price of $5 is less than AVC of $6, then firm will shut down.

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3.

B

Working note:

For profit maximizing output,

P = MR = MC

60 = 15+.06Q

Q = 45/.06

Q = 750 units

Price = $60

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4.

C

Working note:

AVC = 15 + 0.03Q = 15+.03*750

AVC = $37.5

Since Price is higher than AVC, hence firm will contnue to operate.

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5.

A

Working note:

ATC = 16875/750 + 15+.03*750 = $60

AVC = 15+.03*750 = $37.5

AFC = 16875/750 = $22.5