Question

1.      The MR = MC rule applies

Multiple Choice

a.       in the long run but not in the short run.

b.      in the short run but not in the long run.

c.       in both the short run and the long run.

d.      only to a purely competitive firm.

2.     A firm in a purely competitive industry is currently producing 1,000 units per day at a total cost of $700. If the firm produced 800 units per day, its total cost would be $450, and if it produced 500 units per day, its total cost would be $425.

Instructions: Round your answers to 2 decimal places.

a. What are the firm's ATC at these three levels of production?      

At 1,000 units per day, ATC=

At 800 units per day, ATC=

At 500 units per day, ATC=

b. If every firm in this industry has the same cost structure, is the industry in long-run competitive equilibrium?

Yes or no

c. From what you know about these firms’ cost structures, what is the highest possible price per unit that could exist as the market price in long-run equilibrium?

d. If that price ends up being the market price and if the normal rate of profit is 10 percent, then how big will each firm’s accounting profit per unit be?

3. Karen runs a print shop that makes posters for large companies. It is a very competitive business. The market price is currently $1 per poster. She has fixed costs of $250. Her variable costs are $1,000 for the first thousand posters, $800 for the second thousand, and then $750 for each additional thousand posters.

Instructions: Round your answers to 3 decimal places.

a. What is her AFC per poster (not per thousand!) if she prints 1,000 posters?

    

     

     What if she prints 2,000 posters?

    

     What if she prints 10,000 posters?

    

b. What is her ATC per poster if she prints 1,000?

    

     What if she prints 2,000?

    

     What if she prints 10,000?

    

c. If the market price fell to 70 cents per poster, would there be any output level at which Karen would not shut down production immediately?   

YES OR NO

Answer 1

1) The MR=MC rule applies in both the short run and the long run

so, correct option is C.

2) a) At 1,000 units per day, ATC= 700/1000 = 0.70

b) At 800 units per day, ATC= 450/800 = 0.56

c) At 500 units per day, ATC= 425/500 = 0.85

b) this industry is not in long run equilibirium because the firms in the industry are not producing at the minimum point on their ATC curves.

c) from these three output levels the highest that the long run equilibirium price could be is $0.56 because this is the lowest of the ATC per unit that we know and in the long run equilibirium firms must be producing at the lowest possible ATC per unit.

d) if $0.56 ends up being the market equilibirium price in the long run and the normal rate of profit is 10% that must hold in long run equilibirium, then the firm accounting profit per unit is 5.6 cents ( 10% * 0.56)