BR9A: Bridge: Competition in the Short Run
Question 1
Jared runs a personal training studio, earning \$5,000 last month. His fixed costs are \$4,000, and his variable costs are \$3,500. Should Jared shut down his business immediately?
A. No, because \$5,000 covers his fixed costs.
B. Yes, because \$5,000 does not cover his fixed costs.
C. No, because \$5,000 covers his variable costs.
D. Yes, because he is losing money.
Hint
Fixed costs are sunk in the short run.Answer
C. No, because \$5,000 covers his variable costs. Because Jared will incur his fixed costs of \$4,000 regardless of whether he stays in business or shuts down, his fixed costs are sunk and should therefore play no role in his decision about whether to shut down or remain in business. Instead, the question is whether his earnings cover his variable costs. If his earnings exceed his variable costs, then he can pay his workers and defray some of his fixed costs. Therefore, in that case, he should remain in business, at least temporarily. If his earnings fall short of his variable costs, then he is losing more money by remaining in business than by shutting down and so should shut down immediately. Since Jared's earnings of \$5,000 cover his variable costs, he should remain in business, at least in the short run.Question 2
Suppose apples sell in a perfectly competitive market at \$2 per pound. Dimitri has several apple trees in his yard. If Dimitri sells apples at the local farmer’s market, what is his total revenue and marginal revenue when he sells the 100th pound of apples?
A. Total revenue is \$2; marginal revenue is \$200.
B. Total revenue is \$2; marginal revenue is \$2.
C. Total revenue is \$200; marginal revenue is \$200.
D. Total revenue is \$200; marginal revenue is \$2.
Hint
Total revenue is price multiplied by quantity. Marginal revenue is the revenue gained through the sale of an additional unit of output. What specific relationship obtains between price and marginal revenue in perfect competition?Answer
D. Total revenue is \$200; marginal revenue is \$2. Total revenue for Dimitri will be$P \times Q = \$2 \times 100 = \$200$
In perfect competition, price equals marginal revenue, so marginal revenue is \$2.
Question 3
Mara’s Puzzle Factory is operating at a quantity at which marginal revenue is \$20, marginal cost is \$15, and average total cost is \$10. What should Mara do to maximize profits?
A. Shut down her business because it is losing money.
B. Increase her production of puzzles.
C. Decrease her production of puzzles.
D. Leave her production exactly where it is because she has already maximized her profits.
Hint
Whether a firm should produce more output depends on whether the revenue obtained from doing so exceeds the cost.Answer
B. Increase her production of puzzles. To maximize profit, a firm should produce additional units of output up to the point where marginal revenue equals marginal cost. Since Mara's marginal revenue of \$20 exceeds her marginal cost of \$15, she should increase her production of puzzles.Question 4
If Will’s Print Shop competes in a perfectly competitive market and he charges \$10 per printing job, what is the marginal revenue of his 3rd print job?
A. \$3.33
B. \$20.00
C. \$30.00
D. \$10.00