ECON 200: Principles of Economics

Problem Set #4
Due: Friday October 8, 2021

Please answer the following questions.

Multiple Choice Questions: [6 points]

1. Primary Objective of a firm is to:
a. Maximize economic profit
b. Avoid an economic loss
c. Maximize total revenue
d. Maximize accounting profit

2. If two painters can paint 300 square feet of wall in an hour, and three painters can
paint 400 square feet, what is the marginal product of the third painter
a. 100
b. 200
c. 300
d. 400

3. In perfect competition, the elasticity of demand for a representative firm is:

a. 0
b. 1
c. Between 0 and 1
d. infinite

4. Which of the following describes the market structure of perfect competition?

a. Many firms, low barriers to entry, some control over price, and product
differentiation
b. Many firms, low barriers to entry, no control over price, and identical
products with no differentiation
c. A few firms producing similar products, significant barriers to entry, and
some control over price
d. Useful because it demonstrates how market structure can affect resource
allocation, prices, and output

5. Perfectly competitive firms have no individual control over the

a. Quantity of output produced
b. Quantities of inputs used
c. Price of the product
d. Types of goods produced
 6. Which of the following is true in a perfect competition?
a. P > MR
b. P > MC
c. P = MR < MC
d. P = MR = MC

Answer the questions below using as much detail as possible when needed. Please show
your; otherwise, you will not receive full credit.

1. Explain whether each statement is true or false.

a. A perfectly competitive firm is a price-taker. [2 points]
True, the equilibrium price is the price it sells at.

b. A perfectly competitive firm makes zero profit in the long-run. [2 points]

False, In a perfectly competitive market, there are so many firms producing the
same products that, in the long-run, none of the firms can attain enough power
to influence the industry. In the long-run, all of the possible causes of economic
profits are eventually assumed away in the model of perfect competition.

2. Suppose a person wants to open a coffee shop knowing that the coffee industry is a
perfectly competitive market. The cost of production is given in the following table. [10 points]

Quantity TC FC VC ATC AVC MC MR

(Output)

0 6 6 0 0 0 0 0

1 10 6 4 10 4 4 6

2 12 6 6 6 3 1 6

3 16 6 10 5.3 3.3 1.3 6

4 22 6 16 5.5 4 1.5 6

5 30 6 24 6 4.8 1.6 6

6 42 6 36 7 6 2 6

7 60 6 54 8.6 7.7 2.6 6

8 84 6 78 10.5 9.75 3 6

9 120 6 114 13.3 12.7 4 6

10 170 6 164 17 16.4 5 6

a. What is the break-even price? What is the shut-down price?

Break even price- 2 coffees ($12)
Shut down price- 1 coffee ($6)

b. Suppose that the price market price for the coffee is $6. In the short run, will the
coffee shop earn a profit? In the short run, should the coffee shop produce or shut down?
Yes it will earn a profit. It should produce.

c. If the market price of the coffee is $6, show the profit maximizing level of output.
When MC= MR.

d. Explain why marginal revenue is $6 when the price of the coffee is $6.
It is $6 because it is the increase in revenue that results from the sale of one
additional unit of output.

e. Suppose that the price at which the coffee shop can sell at $2 per cup. In the short
run, will it earn a profit? In the short run, should it produce or shut down?
No, it will not earn a profit. It should shut down.