Refer to Figure 3 . Suppose a firm is operating in the situation depicted in pan

ID: 1160034 • Letter: R

Question

Refer to Figure 3. Suppose a firm is operating in the situation depicted in panel a. Which of the following statements is correct?

a. The firm is earning positive short-run profits.

b. The firm is earning negative short-run profits.

c. The firm is earning zero short-run profits.

d. We cannot determine profits because we do not know the firm’s average total costs.

Refer to Figure 3. If a firm in a monopolistically competitive market was producing the level of output depicted as Qd in panel (d), it would

a. not be maximizing its profit.

b. be minimizing its losses.

c. be losing market share to other firms in the market.

d. be operating at excess capacity.

Refer to Figure 3. The firm depicted in panel b faces a horizontal demand curve. If panel b depicts a profit-maximizing firm,

a. it could be operating in either a perfectly competitive market or in a monopolistically competitive market.

b. it would not have excess capacity in its production as long as it is earning zero economic profit.

c. it is able to choose the price at which it sells its product.

d. the firm can always raise its profit by increasing production since consumers will buy as much as the firm can produce.

Figure 3 Price Price MC MC MR Quantity Qb Quantity Price Price MC ATC Q Quatity Q Quantity

1) Solution: We cannot determine profit because we do not know the firm’s average total cost

Explanation: Without ATC curve we cannot determine profits. Economic profit per unit is computed as price minus average total cost

2) Solution: not be maximizing its profit

Explanation: As supply equals demand thus will not be maximizing its profit

3) Solution: it would not have excess capacity in its production as long as it is earning zero economic profit

Explanation: As long as the firm is earning zero economic profits it would not have excess capacity in its production

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