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A competitive firm is a firm in a market in which: (1) there are many buyers and many sellers in the market; (2) the goods offered by the various sellers are largely the same; and (3) usually firms can freely enter or exit the market.

2. Explain the difference between a firm's revenue and its profit. Which do firms maximize?

A firm’s total revenue equals its price multiplied by the quantity of units it sells. Profit is the difference between total revenue and total cost. Firms are assumed to maximize profit.

3. Draw a production function that exhibits diminishing marginal product of labor. Draw the associated total-cost curve. (In both cases, be sure to label the axes.) Explain the shapes of the two curves you have drawn.

The first graph shows a production function that exhibits diminishing marginal product of labor. Note that this is the simplified production function and following with be the simplified cost curve. The second graph shows the associated total-cost curve. The production function is concave because of diminishing marginal product, while the total-cost curve is convex for the same reason.

4. This chapter discusses many types of cost: opportunity cost, total cost, fixed cost, variable cost, average total cost, and marginal cost. Fill in the type of cost that best completes each sentence.

B. Is falling when marginal cost is below it and rising when marginal cost is above it.

D. In the ice-cream industry in the short run, includes the cost of cream and sugar but not the cost of the factory.

5. Nimbus, Inc., Makes brooms and then sells them door to door. Here is the relationship between the number of workers and Nimbus’s output during a given day:

A. Fill in column of marginal products. What pattern do you see? How might you explain it?

Workers	Output	Marginal Product	Total Cost	Average Total Cost	Marginal Cost
0	0	---	$200	---	---
1	20	20	300	$15.00	$5.00
2	50	30	400	8.00	3.33
3	90	40	500	5.56	2.50
4	120	30	600	5.00	3.33
5	140	20	700	5.00	5.00
6	150	10	800	5.33	10.00
7	155	5	900	5.81	20.00

. Marginal product rises at first, then declines because of diminishing marginal product.

B. A workers cost $100 a day, and the firm has fixed costs of $200. Use this information to fill in the column for total cost

C. Fill in the column for average total cost. (Recall that ATC = TC/Q.) What pattern do you see?

Average total cost is U-shaped. When quantity is low, average total cost declines as quantity rises; when quantity is high, average total cost rises as quantity rises.

D. Now fill in the column for marginal cost. (Recall that Mc = ∆TC/∆Q.) What pattern do you see

Marginal cost is also U-shaped, but rises steeply as output increases. This is due to diminishing marginal product.

F. Compare the column for average total cost with the column for marginal cost. Explain the relationship.

When marginal cost is less than average total cost, average total cost is falling; the cost of the last unit produced pulls the average down. When marginal cost is greater than average total cost, average total cost is rising; the cost of the last unit produced pushes the average up.

6. Are there fixed costs in the long run? What about in the short run? Explain briefly.

The short run is a period with some fixed costs. In the long run, all costs are variable.

Eventually the additional output from adding another worker will be less than the previous worker.

8. How are each of the following calculated: marginal cost, average cost, average variable cost?

Workers	Output	Marginal Product	Total Cost	Average Total cost	Marginal Cost
0	0
1	20
2	50
3	90
4	120
5	140
6	150
7	155