ECONOMICS

WLSA SHANGHAI ACADAMY

G10 AP Microeconomics Week16 Homework

Name: __Louis Wu________ Class: ____Eta______ Date:

___12.29_______

UNIT 3 . Production, Cost, and the Perfect competition model

(Topic 3.5 & 3.6 & 3.7)

TOTAL: 30’
SECTION 1: Multiple choice questions (20 x1’=20 ’)
INSTRUCTION: Pleaseput your MCQ answers into the table below

1 2 3 4 5 6 7 8 9 10
E D A B A C E E C D
11 12 13 14 15 16 17 18 19 20
E B C E D A E C C D

1. Which of the following best describes a (B) The firm is producing too much and
firm’s profit maximization rule? should reduce its output level until
( A) Produce the quantity where marginal P=MR=AVC
( C) The firm is not maximizing profits and
revenue exceeds marginal cost by the
should raise its price but not change its
greatest amount.
output level
( B) produce the quantity where price is
( D) The firm should increase its marginal
equal to the average total cost
revenue to equal price and reduce its
( C) produce the quantity where price
output level until MR= MC.
exceeds average variable cost by the
( E) The Firm should reduce its price until
greatest amount.
( D) Produce the quantity where average P=MR=MC
variable cost equals average total cost
4. The graph below shows the short-run cost
( E) produce the quantity where marginal
and revenue curves for a perfectly
cost equals marginal revenue competitive firm. Assume that the market
2. Yuk’s Ukuleles is a firm that produces price is P0 and the firm is producing at
ukuleles in a competitive market. quantity Q2. To maximize profit, the firm
Currently, its profits are negative, but its should
profits are the highest this firm can earn
given the current price of ukuleles. Which
of the following correctly describes this
firm’s current status?
(A) P=ATC (Q) and MR (Q) < MC (Q)
(B) P<ATC (Q) and MR (Q) > MC (Q)
( C) P< ATC ( Q) and MR ( Q) > MC ( Q)
(D) P<ATC (Q) and MR (Q) = MC (Q)
(E) P>ATC (Q) and MR (Q) = MC (Q)
( A) Continue to produce quantity Q2 , where
3. Assume a competitive firm is producing average total cost is at its minimum
where price (P) and marginal revenue ( B) Produce quantity Q1 , where price is
(MR) are greater than marginal cost equal to marginal cost
(MC) and average variable cost (AVC). ( C) Produce quantity Q0 , where average
Which of the following is true regarding variable cost is at its minimum
the firm’s short-run output level? ( D) Decrease the price so that price equals
(A) The firm is producing too little and average variable cost
should increase its output level until ( E) Increase the market price to the level of
P=MR=MC the minimum average total cost
 ECONOMICS
WLSA SHANGHAI ACADAMY
G10 AP Microeconomics Week16 Homework
5. The market for boxed pasta is perfectly 8. Which of the following best describes the
competitive. Currently, the price of a box shutdown rule?
of pasta is less than average total cost (A) Exit the industry when P < Average total
(ATC) but greater than average variable cost
cost (AVC). ( B) Chose the Q where MC( Q) = MR ( Q) if
( A) Firms produce in the short run. P>ATC
( B) Firms exit the industry (C) Choose Q = 0 when P > Average
( C) Firms enter the industry variable cost
( D) Firms produce the output where average ( D) Exit the industry when P < Average
total cost is lowest variable cost
( E) Firms shut down (E) Choose Q = 0 when P < Average
variable cost.
6. Which of the following best describes
what is true for a firm to be willing to 9. The cost and revenue curves for a
produce in both the short run and the perfectly competitive industry are shown
long run? in this graph. What best describes how a
(A) P<AVC in the short run; P≤ATC in the firm would respond in the short-run?
long run.
( B) P= AVC in the short run; P< ATC in the
long run.
( C) P≥ AVC in the short run; P≥ ATC in the
long run
( D) P< AVC in the short run; P≥ ATC in the
long run
( E) P≥AVC in the short run; P≤ATC in the
long run

7. The cost and revenue curves for a

perfectly competitive industry are shown
in this graph. What is the price in this ( A) Increase output to increase revenue
market and what quantity will this firm ( B) Exit the industry
produce in the short run? ( C) Shut down
( D) Charge a higher price
( E) Increase output to decrease average total
cost

10. The cost and revenue curves for a

perfectly competitive industry are shown
in this graph. What happens to the
number of firms that market supply curve
in this market if the price of this good
stays at $90 in the long run?
(A) P1 ; Q1
( B) P3 ; Q3
( C) P2 ; this firm will exit the industry
(D) P3 ; this firm will shut down in the short
run
(E) P3 ; Q2
 ECONOMICS
WLSA SHANGHAI ACADAMY
G10 AP Microeconomics Week16 Homework
(A) The number of firms stays the same; the (E) $950,000
market supply decreases
( B) The number of firms decreases; the 13. All of the following are characteristics of
market supply is unaffected. perfectly competitive markets EXCEPT
( C) The number of firms increases; the
(A) Many buyers
market supply increases.
( D) The number of firms decreases, market (B) Perfect information
supply decreases. (C) Exist Barriers to entry
( E) One firm remains in the market; market (D) Many sellers
supply is unchanged. (E) Identical goods

14. market is earning normal economic

11. The cost curves for a firm in a perfectly
profits, which of the following is true?
competitive market are shown in this
graph. All of the following quantity and (A) P > ATC and MC = MR
price combinations are on this firm’s (B) P < ATC and MC = MR
short-run supply curve EXCEPT. ( C) P < MR and MC > ATC
(D) P > MR, P > ATC, and MC = MR
(E) P=ATC=MC=MR

15. Which of the following best

defines market power?
(A) the ability to make a profit in the short
run
( B) a firm’s ability to control the quantity
they produce
( C) the ability to advertise
( D) the ability to control the price of a good
( E) a firm’ s decision to enter or exit a
(A) Q=12; $130 market
(B) Q=8; $35
16. How is the price in a perfectly competitive
(C) Q=14; $214
(D) Q=10; $80 market determined?
(E) Q=5; $20 (A) By the market
( B) By each firm
12. This graph shows the cost curves and ( C) By the strategic interaction of firms
marginal revenue curves for a firm. How ( D) By mutual agreement of firms
much is this firm’s profit? ( E) By the government

17. Which of the following best describes a

firm’s demand curve in a perfectly
competitive market?
( A) straight and vertical
( B) upward sloping
( C) downward sloping then upward sloping
( D) downward sloping
( E) straight and horizontal

(A) $360,000
(B) $400,000
(C) $450,000
(D) -$135,000
 ECONOMICS
WLSA SHANGHAI ACADAMY
G10 AP Microeconomics Week16 Homework
18. Occam’s Razors is a typical firm in a
perfectly competitive market. Its total
revenue from selling 1000 razors is $2500
and its variable costs are $2000. If the
market for razors is in long-run
equilibrium, which of the following can be
inferred based on the above information?
(A) The fixed costs of production are $500
and marginal revenue is $2.
( B) Average total cost will decrease if the
firm decreases output
( C) The marginal cost of a razor is $ 2 . 5 0
and the average fixed cost is $ 0 . 5
( D) The price of a razor is $ 3 and the
marginal cost of a razor is $ 3 .
( E) Average total cost will decreases if the
firm increases output.
19. Glasses, Inc. is a typical firm producing
drinking glasses in a perfectly competitive
industry. Like other firms in this industry,
it's currently making negative economic
profits. What will happen to the number
of firms in the market and the price of
this good when this industry returns to
long-run equilibrium?
( A) The number of firms increases; price
doesn’ t change
( B) The number of firms doesn’ t change;
price increases
( C) the number of firms decreases; price
increases
( D) the number of firms increases; price
decreases
( E) the number of firms decreases; price
decreases
20. If a market is allocatively efficient, what
must be true?
( A) Marginal revenue equals marginal cost.
( B) Total revenue is less than the total cost
( C) Price equals the minimum average total
cost.
( D) The price of a good equals the marginal
cost of the last item produced.
( E) Price is greater than the average total
cost of the last item produced.
 ECONOMICS
WLSA SHANGHAI ACADAMY
G10 AP Microeconomics Week16 Homework
SECTION II: Short-answer questions (10’)

INSTRUCTION: Include correctly labelled diagrams, if useful or required, in explaining

your answers. A correctly labelled diagram must have all axes and curves clearly labelled
and must show directional changes. If the question prompts you to “calculate”, you must
show how you arrived at yourfinal answer

1. Draw a correctly labelled side-by side graphs showing a perfectly competitive firm producing
apples and incurring a loss in the short run. On your graphs show the following
(a) The equilibrium price and quantity in the apple market, labelled PM and QM, respectively.
(b) The profit-maximizing quantity of apple produced by the representative farmer earning a loss,
labelled QL

2. Refer to the graph provided

( a) Assuming it is appropriate for the firm to produce in the short run, what is the firm’ s profit-
maximizing level of output?
At point A, it is 6 bushels of tomatoes.
( b) Calculate the firm’s total revenue.
$20 ×6=$120. The firm’s total revenue is $120.
(c) Calculate the firm’s total cost
$29.5×6=$177 The firm’s total cost is 177 dollar.
(d) Calculate the firm’s profit or loss
$177－$120=$57 The firm’s profit is loss 57 dollar.
(e) IfAVC was $22 at the profit-maximizing level of output, would the firm produce in the short run?
Explain why or why not.
No. The firm will shut down. Because the MR is less than AVC, which means if the firm started to
produce, it will not have the ability to assume variable cost.