Chapter 14: SOLUTIONS TO TEXT PROBLEMS:

Quick Quizzes

1. When a competitive firm doubles the amount it sells, the price remains the same, so its total revenue doubles.

2. The price faced by a profit-maximizing firm is equal to its marginal cost because if price were above marginal cost, the firm could increase profits by increasing output, while if price were below marginal cost, the firm could increase profits by decreasing output.

A profit-maximizing firm decides to shut down in the short run when price is less than average variable cost. In the long run, a firm will exit a market when price is less than average total cost.

3. In the long run, with free entry and exit, the price in the market is equal to both a firm’s marginal cost and its average total cost, as Figure 1 shows. The firm chooses its quantity so that marginal cost equals price; doing so ensures that the firm is maximizing its profit. In the long run, entry into and exit from the industry drive the price of the good to the minimum point on the average-total-cost curve.

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Figure 1

Questions for Review

1. A competitive firm is a firm in a market in which: (1) there are many buyers and many sellers in the market; (2) the goods offered by the various sellers are largely the same; and (3) usually firms can freely enter or exit the market.

2. Figure 2 shows the cost curves for a typical firm. For a given price (such as P*), the level of output that maximizes profit is the output where marginal cost equals price (Q*), as long as price is greater than average variable cost at that point (in the short run), or greater than average total cost (in the long run).

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Figure 2

3. A firm will shut down temporarily if the revenue it would get from producing is less than the variable costs of production. This occurs if price is less than average variable