ECO1050 – Principles of Economics-Marginal Cost, Revenue, and Pure Competition

Marginal Cost, Revenue, and Pure Competition Assignment Worksheet
This assignment deals with the recognition and application of pure competition cost and revenue information that is graphically presented. Use the graph below to answer the following questions.

Microeconomic Problem

  1. How do you know that the firm represented in the graph above is a purely competitive firm?

  2. To maximize profits, this firm will produce at what output level (one letter)?

  3. Explain why this MR=MC position is the profit-maximizing position for any firm.

  4. What is the product price (one letter)?

  5. What is this firm’s average revenue (one letter)?

  6. At profit-maximizing output, what is this firm’s average variable cost (one letter)?

  7. At profit-maximizing output, what four letters indicate:

  • Total revenue? (Remember, four letters—a rectangle.)

  • Total cost?

  • Total variable cost?

  • Total fixed cost?

  • Total economic profit?

8.    If price falls below what point, this firm will not operate in the short run? (No letter needed, just an explanation.)
9.    What will happen to this firm’s price, output, and economic profit in the long run? Why? 
10.  Where will the price settle in the long run? Remember, all purely competitive firms are theoretically doomed to make only normal profit in the long run. (Again, no letter answer, just an explanation.)
11.  Why is the long-run equilibrium position of a purely competitive firm productively and allocatively efficient?



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