21. A firm in a purely competitive industry has a typical cost structure. The no

Question

21.A firm in a purely competitive industry has a typical cost structure. The normal rate of profit in the economy is 7 percent. This firm is earning $18 on every $200 invested by its founders.

Instructions: Enter your answers as whole numbers.

a. What is its percentage rate of return?

b. Is the firm earning an economic profit?

     

     If so, how large?

c. Will this industry see entry or exit?

     

d. What will be the rate of return earned by firms in this industry once the industry reaches long-run equilibrium?

25. Marginal revenue is the

change in total revenue associated with the sale of one more unit of output.

change in average revenue associated with the sale of one more unit of output.

difference between product price and average total cost.

change in product price associated with the sale of one more unit of output.

26. A competitive firm in the short run can determine the profit-maximizing (or loss-minimizing) output by equating

marginal revenue and marginal cost.

price and average fixed cost.

price and marginal revenue.

price and average total cost.

27. Suppose you find that the price of your product is less than minimum AVC. You should

close down because total revenue exceeds total variable cost.

minimize your losses by producing where P = MC.

close down because, by producing, your losses will exceed your total fixed costs.

maximize your profits by producing where P = MC.

30. Which of the following distinguishes the short run from the long run in pure competition?

Firms can enter and exit the market in the long run but not in the short run.

Firms use the MR = MC rule to maximize profits in the short run but not in the long run.

Firms attempt to maximize profits in the long run but not in the short run.

The quantity of labor hired can vary in the long run but not in the short run.

Explanation / Answer

21. a) Rate of return = Earning/Investement  

Earning =$18

Investement = $200

Rate of return = 18/200 = 9%

b) Rate of profit of economy = 7%

Company rate of profit = 9%

Company rate of profit - Rate of profit of economy = 9%-7% = 2% >0

So, company is earning a economic proft of 2%.

c. As Industry is purely competitive in nature , so it will like large numbers of producers compete with each other to satisfy the wants and needs of a large number of consumer. In this industry there will be barier of entry or exit.  In perfectly competitivemarkets, there are no barriers to entry or exit. This is a main critical characteristic of perfectly competitive markets because companies are able to freely enter and exit in response to potential profit.

So , yes Industry will be see lot of entry or exit.

d. As industry is purely competitive , there will be lot of producer to serve the market and no one will determine the price of product. Firms will compete untill company rate of profit = rate of profit of economy.

At long run equilibirium rate of returns earned by firm in this industry = Rate of return of economy = 7%

25 ) Marginal revenue is the additional revenue or income generated from the sale of one additional goods or service. It is calculated by comparing the total revenue generated from a given number of sales (e.g. 1000 units), and the total revenue generated from selling one extra unit (i.e. 1001 units).

Marginal Revenue = Total Revenue Generated by selling n+1 units - Total revenue generated by selling n units

Answer A :change in total revenue associated with the sale of one more unit of output.

26 ) For any firm, regardless of market structure , profit maximisation (Minimisation) output can be determined by equating marginal revenue vs marginal cost

For perfect competition in order to maximize profit the MNR must equal zero. MNR = MR – MC = 0
MR = MC

Answer A marginal revenue and marginal cost

27) Average variable cost (AVC) = Total variable cost / Total output

three factors that determine the prodcution decision - Price , Average total Cost(ATC), Average variable cost (AVC)

Profit Maximisation

Produce the quantity that equates MR and MC. Generate positive economic profit

Loss Minimization :

Produce the quantity that equates MR and MC. Incur economic loss less than fixed cost.

Shutdown

Stop producing in the short run as Incuring economic loss equal to fixed cost.

Ans C) close down because, by producing, your losses will exceed your total fixed costs.

30) in Short run firm rate of return >Economic rate of return so it is difficult for firm to enter and exit the market but in long term Firm rate of return = Economic rate of return so firms can enter and exit the market

Ans A Firms can enter and exit the market in the long run but not in the short run.

Situation Results Price > ATC

Profit Maximisation

Produce the quantity that equates MR and MC. Generate positive economic profit

ATC<Price>AVC

Loss Minimization :

Produce the quantity that equates MR and MC. Incur economic loss less than fixed cost.

Price <AVC

Shutdown

Stop producing in the short run as Incuring economic loss equal to fixed cost.

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