Test Your Knowledge!

There are four characteristics of an industry that is purely competitive. All of the following are characteristics, except:

If a purely competitive firm produces 12 products, has an average variable cost of $5, an average total cost of $7, and an average economic profit of $3, then what is the selling price of the product?

Which of the following is the “golden rule” of profit-maximization?

Which of the following industries is expected to charge the most competitive price and a price that is closest to the lowest average total cost?

A price ceiling (a government-determined price that is not allowed to exceed a certain amount) is below the free market price. This causes:

Let’s suppose that a perfectly competitive firm can produce a product in the following quantities: 0, 10, 20, 30, 40, 50, and 60. The firm sells its product for $13.50 per product. Let’s suppose that the marginal costs at these quantities are as follows: at quantity 10, marginal cost is $30; at quantity 20, marginal cost is $13; at quantity 30, marginal cost is $10; at quantity 40, marginal cost is $12.75; at quantity 50, marginal cost is $13.90; at quantity 60, marginal cost is $15.85. According the the profit-maximizing rule, at which quantity does the firm have its greatest profits or the least amount of loss?

Q TC MC ATC AVC
0 1,000 – – –
10 1,600 60 160 60
20 2,100 50 105 55
30 2,500 40 83.33 50
40 2,800 30 70 45
50 3,200 40 64 44
60 3,700 50 61.67 45
70 4,300 60 61.43 47.14
80 5,000 70 62.50 50
90 5,800 80 62.44 53.33

Consider the above costs of a purely competitive firm, where Q = Quantity, TC = Total Cost, MC = Marginal Cost, ATC = Average Total Cost, and AVC = Average Variable Cost.

Calculate this firm’s profit maximizing quantity and profit (or loss) when the market price of the computer software equals $43.

Graphically, a firm’s profit-maximizing output can be found by:

Graphically, if a firm is operating above its shutdown point, it maximizes its economic profits (or minimizes its losses), at the point where:

What typically happens in a free market, when firms in pure competition earn above normal, or positive, economic profits?