Econ 2030 Recitation #7

Which of the following is a characteristic of a perfectly competitive market?

1. Firms are price makers in the market.
2. There are few firms selling the good in the market.
3. The goods sold in the market are homogeneous.
4. Firms face significant barriers to entering the market.

If the price a firm charges for a good is less than its average total cost of producing it, then the firm is earning an economic profit _____ zero.

1. greater than 
2. less than
3. equal to

Suppose Peter’s Pumpkin Plantation sells pumpkins in a perfectly competitive market.  Suppose further that at his current level of production, Peter’s marginal cost is $1.10 per kilo.  If the market price of pumpkins is $1.20 per kilo, it can be concluded with certainty that Peter’s economic profits are:

1. positive
2. negative
3. increasing
4. decreasing

Suppose Darleen’s Dress Den operates in a perfectly competitive market and is producing its profit-maximizing level of output.  Suppose further that at this level of production its average variable cost of producing dresses is $35, average total cost is $55, and marginal revenue is $45. Darleen should:

1. maintain her current level of production since she is minimizing her losses.
2. maintain her current level of production since she is earning an economic profit equal to zero.
3. maintain her current level of production since she is earning a positive economic profit.
4. shut down immediately.
5. increase production since it will increase her economic profit.
6. decrease production since it will increase her economic profit.

Suppose, at a given point in time, Henry operates the National Cheese Emporium in a perfectly competitive market and is producing his profit-maximizing level of output. Suppose further that at this level of production, Henry's average fixed cost of producing cheese is $2, average variable cost is $7, and marginal cost is $10.

At his current level of production, what is…
a) the average total cost of producing cheese?
b) the marginal revenue from selling cheese?
c) the price of cheese?
d) Henry’s profit from selling cheese?

Over time, what will happen to…
a) the number of firms selling cheese?
b) the price of cheese?
c) the quantity of cheese transacted in the market?
d) the quantity of cheese produced by Henry?
e) profits of firms operating in the cheese market?

Suppose Frank’s Flour Mill operates in a perfectly competitive market and is producing its profit-maximizing level of output.  Suppose further that at this level of production, Frank’s average variable cost of producing a pound of flour is $0.75, his average total cost is $0.85, and his marginal revenue is $0.80. 

At her current level of production, what is…
a) the average fixed cost of producing flour?
b) the marginal cost of producing flour?
c) the price of a pound of flour?
d) Frank’s profit from selling flour?

Over time, what will happen to…
a) the number of firms selling flour?
b) the price of a pound of flour?
c) the quantity of flour transacted in the market?
d) the quantity of flour produced by Frank?
e) profits of firms operating in the flour market?

For ALL firms:

1) Profit = (P – ATC) x Q.
2) Profit-maximizing rule: produce quantity Q* where MR = MC.
3) Remain in business (i.e., produce Q* > 0) if P ≥ AVC.
4) Shut down (i.e., produce Q* = 0) if P < AVC.

In a monopoly, P > MR at all levels of output. Thus...

If a non-price discriminating monopolist is maximizing its profits, we know that it has equated its marginal cost with marginal revenue.

1. True
2. False
True False

Suppose, at a given point in time, Wanda's Wig Warehouse, a non-price discriminating monopolist, is producing at a level of output where marginal cost is greater than marginal revenue.  Everything else held constant, Wanda could increase her firm's profits by _____ the quantity of wigs she produces and _____ the price she charges for them.

1. increasing; increasing
2. increasing; decreasing
3. decreasing; increasing
4. decreasing; decreasing
5. not changing; not changing

Suppose, at a given point in time, Katherine’s Kaftan Korner is a non-price discriminating monopolist selling kaftans and is producing its profit-maximizing level of output.  Suppose further that at this level of production, Katherine's average variable cost of producing a kaftan is $135, her average total cost is $160, and her marginal revenue is $175.

At her current level of production, what is…
a) Katherine’s average fixed cost of producing a kaftan?
b) Katherine’s marginal cost from selling kaftans?
c) the price of a kaftan?
d) Katherine’s profit from selling kaftans?

Will Katherine continue to produce kaftans in the long run? Why or why not?

It can be concluded with certainty that a monopolist's economic profits will be _____ zero in the long run.

1. greater than
2. greater than or equal to
3. equal to
4. less than or equal to
5. less than

Which of the following conditions must hold if a firm is to engage in price discrimination?

1. A firm must be a price taker in its market.
2. Different groups of consumers must have similar preferences for the product.
3. Different groups of consumers must be distinguishable.
4. The transaction costs of one consumer selling the product to another consumer must be low.

Suppose an all-you-can-eat buffet charges $12 per person but allows children under 10 years of age to dine for free.  This pricing scheme is an example of _____-degree price discrimination.

1. first
2. second
3. third

Suppose a store is running a sale on bags of potato chips: $3 each or 4 bags for $10.  This pricing scheme is an example of _____-degree price discrimination.

1. first
2. second
3. third