Question

4. A firm will begin to experience diminishing returns at the output where marginal A. cost increases B. cost decreases. C. product increases. D. both B and C 5. Marginal cost is average variable cost when A. equal to; average total cost is minimized B. less than; total cost is maximized C. greater than; average fixed cost is minimized D. equal to; average variable cost is minimized. 6. Assume Dell Computer Company operates in a perfectly competitive market producing 5,000 computers per day. At this output level, price exceeds this firm's marginal and average variable costs. To maximize profits, Dell should A. make no adjustments as they are already maximizing their profits. B. increase their output C. decrease their output. D. stop producing since it is earning a loss. 7. A farmer producing bushels of soybeans in the perfectly competitive soybean industry is currently maximizing profits. If the market price of soybeans falls and the farmer adjusts output to the new price, he will produce soybeans and make profit. A fewer; the same B. fewer, less C. more; more D. the same bushels of; the same

Answer 1

Answer 4. Option A. firm will Experience diminishing returns at the output when marginal cost increases.

In in diminishing returns to factor Total production increases at diminishing rate while marginal product falls and and comes to a point where it becomes zero. The marginal cost curve is a u shaped curve due to law of variable proportion. In the increasing returns to factor, marginal cost declines while in the diminishing returns to factor marginal cost rises as in this stage output increases at diminishing rate.

Answer 5. Option D . Marginal cost is equal to average variable cost when average variable cost is minimised.

relationship between marginal cost and average variable cost is identical to the relationship between marginal cost and average cost. Initially marginal cost and average variable cost both declines but marginal cost is less than average variable cost. Marginal cost curve passes through the minimum point of both average variable cost curve and average cost curve. That is marginal cost is equal to average variable cost when Average variable cost is minimum. After this both marginal cost and average variable cost rises but marginal cost is more than average variable cost.

Answer 6. Option B. To maximize profit Dell should increase output.

In perfect competition, Price = marginal revenue ( MR) = Average revenue

Condition for maximizing profit,

MR = MC = PRICE

Also, MC > MR after level if output.

It is given that the form is operating 5,000 computers per day and price exceeds firms marginal and average variable cost at this level of output. In this case price on marginal revenue is greater than marginal cost which means that additional unit of output leads to greater additional revenue then the additional cost of production. By increasing output profit will rise. If marginal costs is not rising but falling at the point of equilibrium, the form should be enjoying increasing returns to factor. Stopping production when returns are rising would amount to to losing profits which the firm can earn by increasing the output.

Answer 7. Option B. if the market price of soybeans falls and the farm and adjust output to the new price he will produce fewer Soya beans and make less profit.

In perfect competition price remains constant. Also price is equal to average revenue and marginal revenue of the firm. Price of the commodity falls, then the marginal revenue and the revenue will fall by the same amount. This means that now marginal revenue curve will intersect marginal cost curve at the lower level of output. As in the case price has decreased, in order to maximize profit the producer has to lower the output level also. when the price and output level falls the revenue of the firm also falls and thereby the profit level declines.