Question 1

A student argues: 'To maximise profit, a firm should produce the quantity where the difference between marginal revenue and marginal cost is the greatest. If a firm produces more than this quantity, then the profit made on each additional unit will be falling.' Briefly explain whether you agree with this reasoning.

Question 2

An economics student makes the following remark: 'The economic model of perfectly competitive markets is fine in theory but not very realistic. It predicts that in the long run, a firm in a perfectly competitive market will earn no profits. No firm in the real world would stay in business if it earned zero profits.' Do you agree with this remark? Explain.

Question 3

Arnie sells basketballs in a perfectly competitive market. The table below summarises Arnie's output per day (Q) and total cost (TC). Assume that the market price of a basketball is $10.00.

a) Complete the table

b) What is Arnie's profit-maximizing output? How much will be his profit (or loss)? Briefly explain how you arrived at your answers.

c) Is Arnie's business operating in the short run or long run? Briefly explain why.