chunty

Under perfect competition, a firm will be inclined to increase output as long as which of the following conditions exists?

A) Marginal revenue is greater than the average cost.

B) Marginal revenue is greater than marginal cost.

C) Marginal cost is less than average cost.

---

A firm will continue to expand output as long as it is possible to earn an economic profit. In other words, a firm will expand output as long as marginal revenue is greater than marginal cost.

chunty

A perfectly competitive firm will continue to increase output so long as which of the following conditions exists?

A) Market price is greater than marginal cost.

B) Marginal revenue is positive.

C) Marginal revenue is greater than price.

---

A perfectly competitive firm will tend to expand its output so long as the market price is greater than marginal cost since price and marginal revenue are equal. In the short term and long term, profit is maximized when marginal cost and marginal revenue are equal (i.e., MC = MR).

chunty

Which of the following most accurately describes the relationship between price (P), marginal cost (MC), and marginal revenue (MR) at the profit maximizing output level for a firm in a perfectly competitive industry?

A) P = MC = MR.

B) P > MC < MR.

C) P > MC = MR.

---

For a perfectly competitive firm, maximum profit occurs at the output level where marginal revenue equals marginal cost. And, since the demand curve faced by each firm in perfect competition is horizontal, marginal revenue is equal to price.

chunty

A perfectly competitive firm will not expand its output beyond the quantity where:

A) the marginal cost is greater than marginal revenue.

B) the market price is equal to its marginal cost.

C) its marginal revenue is positive.

---

A perfectly competitive firm will tend to expand its output so long as the market price is greater than marginal cost. In the short term and long term, profit is maximized when P = MC.

chunty

A competitive firm will tend to expand its output as long as:

A) the market price is greater than the marginal cost.

B) its marginal revenue is greater than the market price.

C) its marginal revenue is positive.

---

A competitive firm faces a flat demand curve. This means the price is constant and the marginal revenue line is flat. A firm will continue to produce as long as MR > MC, so the competitive firm will produce as long as P > MC. It will stop when MC = MR = P.

chunty

In the long run, a perfectly competitive firm will earn:

A) small economic profits.

B) large economic profits.

C) zero economic profits.

---

Zero economic profits means the firm is earning a normal rate of return and a positive accounting profit. Since perfectly competitive firms have no barriers to entry, economic profits cannot be positive in the long run because new competitors will enter the market place driving down economic profits to zero.

chunty

Which of the following statements about monopolies is most accurate?

A) Monopolists charge the highest possible price.

B) A monopolist's optimal production quantity is at the point where marginal revenue equals marginal cost.

C) A monopoly structure is characterized by a well-defined product for which there are no good complements.

---

All firms maximize profits where MR = MC. Because of a downward-sloping demand curve and high barriers to entry, monopolists can charge a price higher than MC. Like other price searchers, monopolists take price from the demand curve (at the quantity where MR=MC).
Both remaining statements are false. A monopoly structure is characterized by a well-defined product for which there are no good substitutes. Monopolists want to maximize profits, not price.

chunty

Which of the following is least accurate regarding the relationship between price (P), marginal revenue (MR), average total cost (ATC), and marginal cost (MC) at the profit maximizing output under monopoly?

A) MR < ATC.

B) P = MR.

C) MR = MC.

---

To maximize profit, all firms expand output until marginal revenue equals marginal cost. Price is determined from the demand curve, which is above the marginal revenue curve since a monopoly faces a downward sloping demand curve.

chunty

Consider the following statements:
Statement 1: “A natural monopoly exists when economies of scale are so pronounced that all of an industry’s demand should be supplied by one firm.”
Statement 2: “Monopoly is characterized by a single seller of a distinct product for which no good substitutes exist.”
Statement 3: “Average cost pricing is a form of regulation that is intended to force monopolists to reduce output to the point where the monopolist’s average total cost curve intersects its marginal cost curve.”
Which of the following best describes the accuracy of these statements?

Statement 1

Statement 2

Statement 3

A) Correct Correct Incorrect

B) Correct Incorrect Correct

C) Incorrect Correct Incorrect

---

Statement 3 is incorrect because average cost pricing attempts to force the monopolist to produce where the average total cost curve intersects the demand curve and to charge a price equal to ATC.

chunty

Which of the following is least relevant when explaining why monopoly firms can earn positive economic profits over the long term?

A) Control over production input resources.

B) The existence of economies of scale.

C) The ability to use price discrimination.

---

High entry barriers due to economies of scale, government licensing, resource controls, and patents prevent new firms from entering the market to exploit positive economic profit opportunities.