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Question 1 of 13

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You must read each slide, and complete any questions on the slide, in sequence.

Consider the following graph: The graph represents a competitive firm. The marginal cost (MC) curve, average total cost (ATC) curve, and price (P) line corresponding to each level of output (Q) are given in the graph.

The graph shows ‘Quantity’ on the horizontal axis, from 0 to 90 in increments of 10. The vertical axis shows the ‘Price’, ranging from 0 to 6 in single increments. A horizontal dotted line at price level 4 is labeled P(1). The ATC curve starts at point G on P(1) which corresponds to the value 10 on the horizontal axis. It ends at point I on P(1) which corresponds to 90 on the horizontal axis. The MC curve starts at value 30 on the horizontal axis and approximately at 0 on the vertical axis.  It slopes upward to intersect the ATC curve at point J which corresponds to 50 on the horizontal axis and 2 on the vertical axis. It also intersects the dotted line P(1) at point H. This point corresponds to the value 60 on the horizontal axis.

A competitive firm maximizes profits if P equals .

3
The correct formula is P = MC. If Q is too low, the firm will forego profits, and if Q is too high, the firm will lose money.

The graph shows ‘Quantity’ on the horizontal axis, from 0 to 90 in increments of 10. The vertical axis shows the ‘Price’, ranging from 0 to 6 in single increments. A horizontal dotted line at price level 4 is labeled P(1). The ATC curve starts at point G on P(1) which corresponds to the value 10 on the horizontal axis. It ends at point I on P(1) which corresponds to 90 on the horizontal axis. The MC curve starts at value 30 on the horizontal axis and approximately at 0 on the vertical axis.  It slopes upward to intersect the ATC curve at point J which corresponds to 50 on the horizontal axis and 2 on the vertical axis. It also intersects the dotted line P(1) at point H. This point corresponds to the value 60 on the horizontal axis.

If P = $4, point determines the profit-maximizing quantity.

3
P crosses MC at point H, which determines the profit-maximizing quantity.

The graph shows ‘Quantity’ on the horizontal axis, from 0 to 90 in increments of 10. The vertical axis shows the ‘Price’, ranging from 0 to 6 in single increments. A horizontal dotted line at price level 4 is labeled P(1). The ATC curve starts at point G on P(1) which corresponds to the value 10 on the horizontal axis. It ends at point I on P(1) which corresponds to 90 on the horizontal axis. The MC curve starts at value 30 on the horizontal axis and approximately at 0 on the vertical axis.  It slopes upward to intersect the ATC curve at point J which corresponds to 50 on the horizontal axis and 2 on the vertical axis. It also intersects the dotted line P(1) at point H. This point corresponds to the value 60 on the horizontal axis.

If P = $4, the profit-maximizing quantity in this graph is units.

3
Point H is located at a P of $4 and a Q of 60 units. ATC is minimized at Q = 50, but point H lies to the right of this.

The graph shows ‘Quantity’ on the horizontal axis, from 0 to 90 in increments of 10. The vertical axis shows the ‘Price’, ranging from 0 to 6 in single increments. A horizontal dotted line at price level 4 is labeled P(1). The ATC curve starts at point G on P(1) which corresponds to the value 10 on the horizontal axis. It ends at point I on P(1) which corresponds to 90 on the horizontal axis. The MC curve starts at value 30 on the horizontal axis and approximately at 0 on the vertical axis.  It slopes upward to intersect the ATC curve at point J which corresponds to 50 on the horizontal axis and 2 on the vertical axis. It also intersects the dotted line P(1) at point H. This point corresponds to the value 60 on the horizontal axis.

If P = $4 and Q = 60 units, how much is this firm’s revenue? Answer using a whole number. $

3
Revenue = P × Q. Here, revenue = $4 × 60 = $240.

The graph shows ‘Quantity’ on the horizontal axis, from 0 to 90 in increments of 10. The vertical axis shows the ‘Price’, ranging from 0 to 6 in single increments. A horizontal dotted line at price level 4 is labeled P(1). The ATC curve starts at point G on P(1) which corresponds to the value 10 on the horizontal axis. It ends at point I on P(1) which corresponds to 90 on the horizontal axis. The MC curve starts at value 30 on the horizontal axis and approximately at 0 on the vertical axis.  It slopes upward to intersect the ATC curve at point J which corresponds to 50 on the horizontal axis and 2 on the vertical axis. It also intersects the dotted line P(1) at point H. This point corresponds to the value 60 on the horizontal axis.

In this graph, ATC at Q = 60 units is closest to .

3
ATC is minimized at P = $2.00, but point H lies to the right of this. At Q = 60 units, ATC has risen.

The graph shows ‘Quantity’ on the horizontal axis, from 0 to 90 in increments of 10. The vertical axis shows the ‘Price’, ranging from 0 to 6 in single increments. A horizontal dotted line at price level 4 is labeled P(1). The ATC curve starts at point G on P(1) which corresponds to the value 10 on the horizontal axis. It ends at point I on P(1) which corresponds to 90 on the horizontal axis. The MC curve starts at value 30 on the horizontal axis and approximately at 0 on the vertical axis.  It slopes upward to intersect the ATC curve at point J which corresponds to 50 on the horizontal axis and 2 on the vertical axis. It also intersects the dotted line P(1) at point H. This point corresponds to the value 60 on the horizontal axis.

If Q = 60 units and ATC = $2.25, how much is this firm’s total cost (TC)? Answer using a whole number. $

3
Since ATC = TC/Q, then TC = ATC × Q. Here, total cost = $2.25 × 60 = $135.

The graph shows ‘Quantity’ on the horizontal axis, from 0 to 90 in increments of 10. The vertical axis shows the ‘Price’, ranging from 0 to 6 in single increments. A horizontal dotted line at price level 4 is labeled P(1). The ATC curve starts at point G on P(1) which corresponds to the value 10 on the horizontal axis. It ends at point I on P(1) which corresponds to 90 on the horizontal axis. The MC curve starts at value 30 on the horizontal axis and approximately at 0 on the vertical axis.  It slopes upward to intersect the ATC curve at point J which corresponds to 50 on the horizontal axis and 2 on the vertical axis. It also intersects the dotted line P(1) at point H. This point corresponds to the value 60 on the horizontal axis.

If Q = 60 units and ATC = $2.25, how much is this firm’s profit? Answer using a whole number. $

3
Profit can either be revenue – cost or (P - ATC) × Q. Using the first method, profit = $240 − $135 = $105. Using the second, profit per unit = $4 − $2.25 = $1.75, and profit = $1.75 × 60 = $105.

The graph shows ‘Quantity’ on the horizontal axis, from 0 to 90 in increments of 10. The vertical axis shows the ‘Price’, ranging from 0 to 6 in single increments. A horizontal line at price level 2 is labeled P(2). The ATC curve starts at point G which corresponds to the value 10 on the horizontal axis, and 4 on the vertical axis. It meets the line P(2) at point J. This corresponds to 50 on the horizontal axis. The ATC curve ends at point I which corresponds to 90 on the horizontal axis, and 4 on the vertical axis. The MC curve starts at value 30 on the horizontal axis and approximately at 0 on the vertical axis.  It slopes upward to intersect the ATC curve and P(2) line at point J. Point H is also indicated on the MC curve corresponding to 60 on the horizontal axis and 4 on the vertical axis.

In the long run, a competitive firm maximizes profits if P equals MC, equals .

3
In the long run, competition forces firms to operate at the lowest (total) costs possible.

The graph shows ‘Quantity’ on the horizontal axis, from 0 to 90 in increments of 10. The vertical axis shows the ‘Price’, ranging from 0 to 6 in single increments. A horizontal line at price level 2 is labeled P(2). The ATC curve starts at point G which corresponds to the value 10 on the horizontal axis, and 4 on the vertical axis. It meets the line P(2) at point J. This corresponds to 50 on the horizontal axis. The ATC curve ends at point I which corresponds to 90 on the horizontal axis, and 4 on the vertical axis. The MC curve starts at value 30 on the horizontal axis and approximately at 0 on the vertical axis.  It slopes upward to intersect the ATC curve and P(2) line at point J. Point H is also indicated on the MC curve corresponding to 60 on the horizontal axis and 4 on the vertical axis.

In this graph, minimum ATC occurs when P = .

3
ATC is minimized where Q = 50 units.

The graph shows ‘Quantity’ on the horizontal axis, from 0 to 90 in increments of 10. The vertical axis shows the ‘Price’, ranging from 0 to 6 in single increments. A horizontal line at price level 2 is labeled P(2). The ATC curve starts at point G which corresponds to the value 10 on the horizontal axis, and 4 on the vertical axis. It meets the line P(2) at point J. This corresponds to 50 on the horizontal axis. The ATC curve ends at point I which corresponds to 90 on the horizontal axis, and 4 on the vertical axis. The MC curve starts at value 30 on the horizontal axis and approximately at 0 on the vertical axis.  It slopes upward to intersect the ATC curve and P(2) line at point J. Point H is also indicated on the MC curve corresponding to 60 on the horizontal axis and 4 on the vertical axis.

If P = $2, the profit-maximizing quantity in this graph is units.

3
ATC is minimized where Q = 50 units.

The graph shows ‘Quantity’ on the horizontal axis, from 0 to 90 in increments of 10. The vertical axis shows the ‘Price’, ranging from 0 to 6 in single increments. A horizontal line at price level 2 is labeled P(2). The ATC curve starts at point G which corresponds to the value 10 on the horizontal axis, and 4 on the vertical axis. It meets the line P(2) at point J. This corresponds to 50 on the horizontal axis. The ATC curve ends at point I which corresponds to 90 on the horizontal axis, and 4 on the vertical axis. The MC curve starts at value 30 on the horizontal axis and approximately at 0 on the vertical axis.  It slopes upward to intersect the ATC curve and P(2) line at point J. Point H is also indicated on the MC curve corresponding to 60 on the horizontal axis and 4 on the vertical axis.

If P = $2 and Q = 50, how much is this firm’s revenue? Answer using a whole number. $

3
P × Q. Here, revenue = $2 × 50 = $100.

The graph shows ‘Quantity’ on the horizontal axis, from 0 to 90 in increments of 10. The vertical axis shows the ‘Price’, ranging from 0 to 6 in single increments. A horizontal line at price level 2 is labeled P(2). The ATC curve starts at point G which corresponds to the value 10 on the horizontal axis, and 4 on the vertical axis. It meets the line P(2) at point J. This corresponds to 50 on the horizontal axis. The ATC curve ends at point I which corresponds to 90 on the horizontal axis, and 4 on the vertical axis. The MC curve starts at value 30 on the horizontal axis and approximately at 0 on the vertical axis.  It slopes upward to intersect the ATC curve and P(2) line at point J. Point H is also indicated on the MC curve corresponding to 60 on the horizontal axis and 4 on the vertical axis.

If Q = 50 units and ATC = $2.00, how much is this firm’s total cost (TC)? Answer using a whole number. $

3
Since ATC = TC/Q, then TC = ATC × Q. Here, TC = $2 × 50 = $100.

The graph shows ‘Quantity’ on the horizontal axis, from 0 to 90 in increments of 10. The vertical axis shows the ‘Price’, ranging from 0 to 6 in single increments. A horizontal line at price level 2 is labeled P(2). The ATC curve starts at point G which corresponds to the value 10 on the horizontal axis, and 4 on the vertical axis. It meets the line P(2) at point J. This corresponds to 50 on the horizontal axis. The ATC curve ends at point I which corresponds to 90 on the horizontal axis, and 4 on the vertical axis. The MC curve starts at value 30 on the horizontal axis and approximately at 0 on the vertical axis.  It slopes upward to intersect the ATC curve and P(2) line at point J. Point H is also indicated on the MC curve corresponding to 60 on the horizontal axis and 4 on the vertical axis.

If Q = 50 units and ATC = $2.00, how much is this firm’s profit? Answer as a whole number. $

3
Competitive firms earn zero profit in the long run. In addition, cost – revenue = $100 − $100 = $0.