ECON520QUIZ_4Fall2010AnswerKey

ECON520QUIZ_4Fall2010AnswerKey - University of Illinois At...

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University of Illinois At Chicago Microeconomics for Business Decisions (ECON520) Quiz #4 (Fall 2010) Answer Key 1. (8 pts.) If a perfectly competitive seller can increase its profits or minimize its losses by increasing output, then it must be the case that the seller’s (choose the ONE best answer): A. marginal cost exceeds its marginal revenue B. the market price is less than its average variable cost C. marginal revenue exceeds its marginal cost D. price exceeds its marginal revenue E. statements A, B, C, and D are all incorrect As output volume increases, the only way total profit can grow (or total loss decrease) is if incremental revenue from the increase in output volume exceeds the incremental cost to produce it (i.e. marginal revenue exceeds marginal cost). 2. (8 pts.) Assume that a perfectly competitive seller is operating in the short-run, and is producing its profit maximizing (or loss minimizing) level of output. If the seller is earning an economic profit, then all of the following are true except (choose the ONE best answer): A. price is equal to marginal cost B. price is equal to marginal revenue C. price is equal to average total cost D. marginal cost is greater than average total cost E. average total cost is greater than average variable cost If price is equal to average total cost, then the seller is neither earning an economic profit or incurring a loss; the seller is earning zero profit.
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ECON520 Quiz #4 Answer Key (Fall 2010) – Page 2 3. (8 pts.) If the market price for a perfectly competitive firm’s output doubles, then (choose the ONE best answer): A. the profit maximizing level of output will double B. the marginal revenue doubles C. at the new profit maximizing level of output, price has increased more than marginal cost D. at the new profit maximizing level of output, price has increased more than marginal revenue E. none of the above choices are correct In a perfectly competitive market, price is equal to marginal revenue. 4. (8 pts.) Assume a perfectly competitive seller is operating at its short-run profit maximizing (or loss minimizing) level of output. When the market price faced by the seller is $5, the firm produced nothing. When the market price rose to $10, however, the seller produced 100 tons of output. Based on this information only (choose the ONE
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This note was uploaded on 10/30/2010 for the course MBA 520 taught by Professor Mr.bill during the Spring '10 term at Ill. Chicago.

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ECON520QUIZ_4Fall2010AnswerKey - University of Illinois At...

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