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332sample packet exam III

# 332sample packet exam III - CHAPTER 10COMPETITIVE MARKETS...

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CHAPTER 10—COMPETITIVE MARKETS MULTIPLE CHOICE 1. If P = \$8 and MC = \$5 + 0. 2Q, the competitive firm's profit-maximizing level of output is: a. 5 b. 0.2 c. 8 d. 15 ANS: D 2. For a firm in perfectly competitive market equilibrium: a. MR < AR b. P > AC c. P > MR d. P = MC ANS: D 3. The firm demand curve in a competitive market is: 4. In the short run, a perfectly competitive firm will shut down and produce nothing if: 5. In the long run, firms will exit a perfectly competitive industry if: 6. So long as P > AVC, the competitive firm's short-run supply curve is equal to: a. AVC b. P c. MC d. none of these. ANS: C

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7. Short-run Firm Supply . Nature's Best, Inc., supplies asparagus to canners located throughout the Mississippi River valley. Like several grain and commodity markets, the market for asparagus is perfectly competitive. Marginal cost per ton of asparagus is: MC = \$1.50 + \$0.0005Q A. Calculate the industry price necessary for the firm to supply 500, 1,000, and 2,000 pounds. B. Calculate the quantity supplied by Nature's Best at industry prices of \$1.50, \$2.25, and \$2.75 per pound. ANS: A. The marginal cost curve constitutes the supply curve for firms in perfectly competitive industries. Because P = MR, the price necessary to induce supply of a given amount is found by setting P = MC. Therefore, at: Q = 500: P = MC = \$1.50 + \$0.0005(500) = \$1.75 Q = 1,000: P = MC = \$1.50 + \$0.0005(1,000) = \$2.00 Q = 2,000: P = MC = \$1.50 + \$0.0005(2,000) = \$2.50 B. When quantity is expressed as a function of price, the firm's supply curve can be written: P = MC = \$1.50 + \$0.0005Q 0.0005Q = P - 1.50 Q = 2,000P - 3,000 Therefore, at: P = \$1.50: Q = 2,000(1.50) - 3,000 = 0 P = \$2.25: Q = 2,000(2.25) - 3,000 = 1,500 P = \$2.75: Q = 2,000(2.75) - 3,000 = 2,500 8. Short-run Market Supply . The Fertilizer Supply Co. is a typical distributor in the perfectly competitive fertilizer supply industry. Its marginal cost of output is: MC = \$250 + \$0.05Q where Q is tons of fertilizer produced per year. P = MC = \$250 + \$0.05Q
when quantity is expressed as a function of price, the firm supply curve is: P = \$250 + \$0.05Q 0.05Q = P - 250 Q S = -5,000 + 20P B. If the company is one of 400 such competitors, the industry supply curve is found by simply multiplying the firm supply curve derived in part A by 400. This is equivalent to a horizontal summation of all 400 individual firm supply curves. When quantity is expressed as a function of price we find: Q S = 400(-5,000 + 20P) = -2,000,000 + 8,000P When price is expressed as a function of quantity: Q S = -2,000,000 + 8,000P 8,000P = 2,000,000 + Q S P = \$250 + \$0.000125Q S C. Q S = -2,000,000 + 8,000P = -2,000,000 + 8,000(\$300) = 400,000 9.

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332sample packet exam III - CHAPTER 10COMPETITIVE MARKETS...

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