BEEB 2013 MICROECONOMICS

2st SEMESTER 2016/17 SESSION

ASSIGNMENT FIVE

I. A few sellers may behave as if they operate in a perfectly competitive market if the market
demand is:

A) highly inelastic.
B) very elastic.
C) unitary elastic.
D) composed of many small buyers.

2. Use the following statements to answer this question:

I. Markets may be highly (but not perfectly) competitive even if there are a few sellers.
II. There is no simple indicator that tells us when markets are highly competitive.

A) I and II are true

B) I is true and II is false
C) I is false and II is true
D) I and II are false

If price is between AVC and ATC, the best and most practical thing for a perfectly competitive
firm to do is

A) raise prices.
B) lower prices to gain revenue from extra volume.
C) shut down immediately, but not liquidate the business.
D) shut down immediately and liquidate the business.
E) continue operating, but plan to go out of business in losses persist.

3. At the profit-maximizing level of output, what is relationship between the total revenue (TR)
and total cost (TC) curves?

A) They must intersect, with TC cutting TR from below.

B) They must intersect, with TC cutting TR from above.
C) They must be tangent to each other.
D) They cannot be tangent to each other.
E) They must have the same slope.
4. If current output is less than the profit-maximizing output, which must be true?

A) Total revenue is less than total cost.

B) Average revenue is less than average cost.
C) Average revenue is greater than average cost.
D) Marginal revenue is less than marginal cost.
E) Marginal revenue is greater than marginal cost.

5. Suppose your firm operates in a perfectly competitive market and decides to double its output.
How does this affect the firm's marginal profit?

A) Marginal revenue and marginal cost increase

B) Marginal revenue increases but marginal cost remains the same
C) Marginal cost may change but marginal revenue remains the same
D) Marginal revenue and marginal cost decrease

6. Bette's Breakfast, a perfectly competitive eatery, sells its "Breakfast Special" (the only item
on the menu) for $5.00. The costs of waiters, cooks, power, food etc. average out to $3.95 per
meal; the costs of the lease, insurance and other such expenses average out to $1.25 per meal.
Bette should

A) close her doors immediately.

B) continue producing in the short and long run.
C) continue producing in the short run, but plan to go out of business in the long run.
D) raise her prices above the perfectly competitive level.
E) lower her output.

7. In the short run, a perfectly competitive profit maximizing firm that has not shut down

A) is operating on the downward-sloping portion of its AVC curve.

B) is operating at the minimum of its AVC curve.
C) is operating on the upward-sloping portion of its AVC curve.
D) is not operating on its AVC curve.
E) can be at any point on its AVC curve.
8. In a supply-and-demand graph, producer surplus can be pictured as the

A) vertical intercept of the supply curve.

B) area between the demand curve and the supply curve to the left of equilibrium output.
C) area under the supply curve to the left of equilibrium output.
D) area under the demand curve to the left of equilibrium output.
E) area between the equilibrium price line and the supply curve to the left of equilibrium
output.

9. A perfectly competitive hardware manufacturer has total revenue of $85 million, total
variable costs of $45 million, and fixed costs of $10 million. What is the firm's producer
surplus?

A) $85 million
B) $70 million
C) $40 million
D) $30 million

10. The supply curve for a competitive firm is

A) its entire MC curve.

B) the upward-sloping portion of its MC curve.
C) its MC curve above the minimum point of the AVC curve.
D) its MC curve above the minimum point of the ATC curve.
E) its MR curve.

(10 marks)
11. Assume that the market for calculators is a competitive market and can be described by the
following equations;
Demand: P = 14 Q
Supply/MC : P = 4 + Q
where P is the price in ringgit per unit and Q is the quantity in millions of unit. Also assume
that a competitive firms marginal cost of producing calculators is given by MC(q)=3+2q,
where q is the quantity in thousands of unit.
a) What is the level of output q that maximizes the firms profit?
(5 marks)

b) Suppose that the average variable cost of the firm is given by AVC(q)=3+q and the firms
fixed costs are known to be RM3. Will the firm be earning a positive, negative or zero
profit in the short run?
(5 marks)

13. ABC Widget Companys cost function is: C(q) = q4 + 10,240. If the company can sell
all the widgets it produces at the market price of RM1,200 each, then what is its optimal
output (output that maximizes profit or minimizes loss)? Calculate the companys profit or
loss and producer surplus.
(10 marks)