Review Theory of the Firm:
1. Define Marginal Cost.
2. Define Fixed Cost.
3. Define Economic Profit.
Price Quantity Total Cost
0 12
28 1 22
24 2 32
20 3 42
16 4 52
12 5 62
8 6 72
Base your answers to the following questions
on the previous table.
4. What is the marginal cost of the 5th unit?
5. What
is the average fixed cost at 4 units?
6. What is total variable cost at 3 units?
7. What is the marginal revenue of the 6th unit?
What does that indicate about elasticity of demand?
8. What output will the firm produce? Explain
why.
9. What is the profit/loss situation at the best
operating output?
10. What is the law of diminishing marginal
returns?
11. Why does it occur?
# of Workers Total Product
0 0
1 6
2 14
3 24
4 30
5 34
6 32
Use the information in the previous table to answer the next three
questions (12-14).
12. After which worker does diminishing marginal
returns set in? ____________________
13. What is the marginal product of the 2nd
worker _______ of the 6th worker _______?
14. What condition exists when the 6th
worker is employed?
15. What is the relationship between marginal cost
and marginal product?
16. Describe one force that can cause economies of
scale.
17. How are economies of scale different than
increasing marginal returns?
18. What kind of firm does the previous graph represent? How do you know?
19. Given the information in the previous graph:
a) highlight the firm's best operating output and price.
b) is the firm earning a profit, breaking even or losing money? (how can you tell?)
c) what should the firm do in the short run?
20. If firms in a perfectly competitive market face short run economic
profits, what will happen to market output and market price in the long run?
Explain why.
21. Which of the following conditions will not be found in a perfectly competitive
market?
a. Individual
firms are price takers.
b. Everyone
involved in the market is fully informed about prices, quantity and other
market conditions.
c. There
are many firms in the market.
d. Any
firm may enter or exit the market in the
long run.
e. While
the products sold by firms are similar, there is some degree of product
differentiation.
22. Is this firm producing the productively
efficient level of output?
23. Which of
the following would cause the price of peanut butter to fall while the quantity
purchased increased?
a. The price of
peanuts (used to make peanut butter) decreases
b. The price of
peanuts (used to make peanut butter) increases
c. The price of
jelly (a complementary good) increases
d. The price of
jelly (a complementary good) decreases
e. Consumer incomes
increase
24. A pure monopolist’s demand curve…
a. is perfectly inelastic
b. is highly elastic
c. coincides with its marginal revenue curve
d. lies below its marginal revenue curve
e. lies
above its marginal revenue curve
25. What would happen to the price and quantity of
pens sold in the KO Bookstore if a Staples Office Supply Store opened at the
corner of Kingswood Road and Outlook Avenue?
Refer to the diagram above as you answer the
following questions.
26. Highlight the firm's profit maximizing price and output.
27. What rectangle represents the firm's total revenue? _______________
28. What rectangle represents the firm's total cost? _______________
29. What rectangle represents the firm's profit/loss? ________________
30. Is this firm operating at the socially optimum output? Why or why not.
31. How would an increase in variable costs affect this firm's price and output?
32.
Which of the following is not a
precondition for price discrimination?
a. The product involved must be a durable good.
b. The good or service cannot be resold by
original buyers.
c. The seller must be able to segment the
market, that is, to distinguish buyers with different elasticities of demand.
d. The seller must possess some degree of
monopoly power.
33. If an industry has many sellers that offer differentiated
products, and entry into the
industry is easy,
then it is best classified as ___________________
34. Describe two barriers
to entry.
35. Which of the
following statements is not true of
oligopoly markets?
a. Firms seek to avoid price competition.
b. Significant economies of scale often exist in
such industries.
c. Firms
act independently and are not worried about the actions of their competitors.
d. Firms often compete through the use of
advertising campaigns.
e. Some oligopoly markets use the price leader/ price follower model to determine price.
36. What
kind of firm does the previous diagram depict? How can you tell?
37. How would the firm determine its best operating
output?
38. How is the firm doing in terms of
profitability?
39. What time period does the diagram depict?
40. Is the firm economically efficient? Why or why
not?
41. Highlight the consumers' surplus.
42. What is a natural monopoly?
43. Draw a diagram of an unregulated natural
monopoly that shows its profit maximizing price and output.
44. What is an example of a natural monopoly?
45. With reference to your graph, state where the
government would set price and quantity in order to achieve a fair return.
46. With
reference to your graph, state where the government would set price and
quantity in order to achieve the socially optimum output.