Question

19.  

Assume a competitive firm is charging a price of $20 and is selling 275 units. It has an ATC (incorporating opportunity cost) of $14 per unit. Calculate their level of economic profits.

(Hint: Go back to your notes and find the equation for profits...plus in what you know. You have to do some calculations to get tot the answer.)

$  

20.  

If a competitive industry is enjoying economic profits > 0, also called supranormal profits. We learned that in the long run they will make zero economic profits. This is because of the assumption:

A.  firms sell a homogeneous product

B.  firms are all price takers and adopt the market price as their own

C.  there is free entry and exit because there are no barriers keeping other firms out of the industry

D.  there is a large number of buyers and sellings at any one time

5.  

A perfectly competitive firm has a demand curve that is:

A.  downward sloping

B.  upward sloping

C.  vertical

D.  horizontal

6.  

A perfectly competitive firm has a demand curve with an elasticity that is:

		A.  perfectly inelastic
		B.  unitary elastic
		C.  elastic
		D.  perfectly elastic

Answer 1

Q19

Economic profit=(P-ATC)*Q

=(20-14)*275

=1650

Q20

C. there is free entry and exit because there are no barriers keeping other firms out of the industry

if there is profit in the industry new firms will enter the market and then if there is loss then the some of the firms exit the market as there are the free entry and exit

Q5

D. horizontal

the demand curve is horizontal because of the firms have identical product and there are many sellers and no individual can change the price

Q6

D. perfectly elastic

the demand curve is horizontal because of the firms have identical product and there are many sellers and no individual can change price so the demand is perfectly elastic because if the price changes the quantity will go to zero or infinite.

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