经济学原理对应练习 14

Chapter 14

Firms in Competitive Markets

Multiple Choice

1. A market is competitive if

(i) firms have the flexibility to price their own product. (ii) each buyer is small compared to the market. (iii) each seller is small compared to the market. a. (i) and (ii) only b. (i) and (iii) only c. (ii) and (iii) only

d. All of the above are correct. ANS: C PTS: 1 DIF: 1 REF: 14-1 TOP: Competitive markets MSC: Definitional

2. When a firm has little ability to influence market prices it is said to be in

a. a competitive market. b. a strategic market. c. a thin market. d. a power market. ANS: A PTS: 1 DIF: 1 REF: 14-1 TOP: Competitive markets MSC: Definitional

3. In a competitive market, the actions of any single buyer or seller will

a. have a negligible impact on the market price.

b. have little effect on overall production but will ultimately change final product price. c. cause a noticeable change in overall production and a change in final product price. d. adversely affect the profitability of more than one firm in the market. ANS: A PTS: 1 DIF: 2 REF: 14-1 TOP: Competitive markets MSC: Interpretive

Table 14-1 Quantity 1 2 3 4 5 6 7 8 9

4. Refer to Table 14-1. The price and quantity relationship in the table is most likely that faced by a firm in a a. monopoly.

b. concentrated market. c. competitive market. d. strategic market. ANS: C PTS: 1 DIF: 1 REF: 14-1 TOP: Competitive markets MSC: Analytical

Price 13 13 13 13 13 13 13 13 13 574

Chapter 14/Firms in Competitive Markets ? 575

5. Refer to Table 14-1. Over which range of output is average revenue equal to price?

a. 1 to 5 b. 3 to 7 c. 5 to 9

d. Average revenue is equal to price over the whole range of output. ANS: D PTS: 1 DIF: 1 REF: 14-1 TOP: Average revenue MSC: Analytical

6. Refer to Table 14-1. Over what range of output is marginal revenue declining?

a. 1 to 6 b. 3 to 7 c. 7 to 9

d. None; marginal revenue is constant over the whole range of output. ANS: D PTS: 1 DIF: 2 REF: 14-1 TOP: Marginal revenue MSC: Analytical

7. Refer to Table 14-1. If the firm doubles its output from 3 to 6 units, total revenue will

a. increase by less than $39. b. increase by exactly $39. c. increase by more than $39.

d. It cannot be determined from the information provided. ANS: B PTS: 1 DIF: 1 REF: 14-1 TOP: Total revenue MSC: Applicative

8. For a firm in a perfectly competitive market, the price of the good is always

a. equal to marginal revenue. b. equal to total revenue.

c. greater than average revenue.

d. equal to the firm’s efficient scale of output. ANS: A PTS: 1 DIF: 1 REF: 14-1 TOP: Marginal revenue MSC: Interpretive

9. If a firm in a perfectly competitive market triples the number of units of output sold, then total revenue will

a. more than triple. b. less than triple. c. exactly triple.

d. Any of the above may be true depending on the firm’s labor productivity. ANS: C PTS: 1 DIF: 1 REF: 14-1 TOP: Total revenue MSC: Analytical 10. Because the goods offered for sale in a competitive market are largely the same,

a. there will be few sellers in the market. b. there will be few buyers in the market. c. buyers will have market power.

d. sellers will have little reason to charge less than the going market price. ANS: D PTS: 1 DIF: 1 REF: 14-1 TOP: Competitive markets MSC: Interpretive 11. Which of the following is NOT a characteristic of a perfectly competitive market?

a. Firms are price takers.

b. Firms have difficulty entering the market. c. There are many sellers in the market.

d. Goods offered for sale are largely the same. ANS: B PTS: 1 DIF: 1 REF: 14-1 TOP: Competitive markets MSC: Interpretive

576 ? Chapter 14/Firms in Competitive Markets

12. When buyers in a competitive market take the selling price as given, they are said to be

a. market entrants. b. monopolists. c. free riders. d. price takers. ANS: D PTS: 1 DIF: 1 REF: 14-1 TOP: Competitive markets MSC: Definitional 13. When firms are said to be price takers, it implies that if a firm raises its price,

a. buyers will go elsewhere.

b. buyers will pay the higher price in the short run. c. competitors will also raise their prices.

d. firms in the industry will exercise market power. ANS: A PTS: 1 DIF: 2 REF: 14-1 TOP: Competitive markets MSC: Interpretive

14. Which of the following statements best reflects a price-taking firm?

a. If the firm were to charge more than the going price, it would sell none of its goods. b. The firm has an incentive to charge less than the market price to earn higher revenue.

c. The firm can sell only a limited amount of output at the market price before the market price will fall. d. Price-taking firms maximize profits by charging a price above marginal cost. ANS: A PTS: 1 DIF: 2 REF: 14-1 TOP: Competitive markets MSC: Interpretive 15. In a competitive market, no single producer can influence the market price because

a. many other sellers are offering a product that is essentially identical. b. consumers have more influence over the market price than producers do. c. government intervention prevents firms from influencing price. d. producers agree not to change the price. ANS: A PTS: 1 DIF: 2 REF: 14-1 TOP: Competitive markets MSC: Interpretive 16. A competitive firm might choose to set its price below the market price, because

a. this would result in higher average revenue. b. this would result in higher profits. c. this would result in lower total costs. d. None of the above is correct. ANS: D PTS: 1 DIF: 2 REF: 14-1 TOP: Competitive markets MSC: Interpretive

17. Of the following characteristics of competitive markets, which are necessary for firms to be price takers?

(i) There are many sellers.

(ii) Firms can freely enter or exit the market. (iii) Goods offered for sale are largely the same. a. (i) and (ii) only b. (i) and (iii) only c. (ii) only

d. All are necessary. ANS: B PTS: 1 DIF: 2 REF: 14-1 TOP: Competitive markets MSC: Interpretive 18. Suppose a firm in a competitive market produces and sells 8 units of output and has a marginal revenue of $8.00.

What would be the firm's total revenue if it instead produced and sold 4 units of output? a. $4.00 b. $8.00 c. $32.00 d. $64.00 ANS: C PTS: 1 DIF: 2 REF: 14-1 TOP: Marginal revenue MSC: Applicative

Chapter 14/Firms in Competitive Markets ? 577

19. Suppose a firm in a competitive market received $1,000 in total revenue and had a marginal revenue of $10 for the

last unit produced and sold. What is the average revenue per unit, and how many units were sold? a. $5 and 50 b. $5 and 100 c. $10 and 50 d. $10 and 100 ANS: D PTS: 1 DIF: 2 REF: 14-1 TOP: Average revenue MSC: Applicative 20. Whenever a perfectly competitive firm chooses to change its level of output, holding the price of the product constant,

its marginal revenue

a. increases if MR < ATC and decreases if MR > ATC. b. does not change. c. increases. d. decreases. ANS: B PTS: 1 DIF: 1 REF: 14-1 TOP: Competitive firms MSC: Interpretive 21. Suppose a firm in a competitive market reduces its output by 20 percent. As a result, the price of its output is likely to

a. increase.

b. remain unchanged.

c. decrease by less than 20 percent. d. decrease by more than 20 percent. ANS: B PTS: 1 DIF: 1 REF: 14-1 TOP: Competitive markets MSC: Analytical 22. Changes in the output of a perfectly competitive firm, without any change in the price of the product, will change the

firm's

a. total revenue. b. marginal revenue. c. average revenue.

d. All of the above are correct. ANS: A PTS: 1 DIF: 2 REF: 14-1 TOP: Total revenue MSC: Analytical 23. When a profit-maximizing firm in a competitive market has zero economic profit, accounting profit

a. is negative (accounting losses). b. is positive. c. is also zero.

d. could be positive, negative or zero. ANS: B PTS: 1 DIF: 2 REF: 14-1 TOP: Economic profit MSC: Interpretive 24. As a general rule, when accountants calculate profit they account for explicit costs but usually ignore

a. certain outlays of money by the firm. b. implicit costs. c. operating costs. d. fixed costs. ANS: B PTS: 1 DIF: 1 REF: 14-1 TOP: Implicit costs MSC: Interpretive 25. In calculating accounting profit, accountants typically don't include

a. long-run costs. b. sunk costs.

c. explicit costs of production.

d. opportunity costs that do not involve an outflow of money. ANS: D PTS: 1 DIF: 1 REF: 14-1 TOP: Accounting profit MSC: Interpretive

578 ? Chapter 14/Firms in Competitive Markets

Scenario 14-1

As part of an estate settlement Mary received $1 million. She decided to use the money to purchase a small business in Anywhere, USA. If Mary would have invested the $1 million in a risk-free bond fund she could have made $100,000 each year. She also quit her job with Lucky.Com Inc. to devote all of her time to her new business; her salary at Lucky.Com Inc. was $75,000 per year.

26. Refer to Scenario 14-1. At the end of the first year of operating her new business, Mary's accountant reported an

accounting profit of $150,000. What was Mary's economic profit? a. $25,000 loss b. $50,000 loss c. $25,000 profit d. $150,000 profit ANS: A PTS: 1 DIF: 2 REF: 14-1 TOP: Economic profit MSC: Applicative 27. Refer to Scenario 14-1. What are Mary's opportunity costs of operating her new business?

a. $25,000 b. $75,000 c. $100,000 d. $175,000 ANS: D PTS: 1 DIF: 2 REF: 14-1 TOP: Opportunity cost MSC: Applicative

28. Refer to Scenario 14-1. How large would Mary's accounting profits need to be to allow her to attain zero economic

profit?

a. $100,000 b. $125,000 c. $175,000 d. $225,000 ANS: C PTS: 1 DIF: 2 REF: 14-1 TOP: Economic profit MSC: Applicative 29. The Wheeler Wheat Farm sells wheat to a grain broker in Seattle, Washington. Since the market for wheat is

generally considered to be competitive, the Wheeler Farm does not a. choose the quantity of wheat to produce. b. choose the price at which it sells its wheat. c. have any fixed costs of production.

d. set marginal revenue equal to marginal cost to maximize profit. ANS: B PTS: 1 DIF: 1 REF: 14-1 TOP: Competitive markets MSC: Interpretive 30. In a competitive market,

a. no single buyer or seller can influence the price of the product. b. there is a small number of sellers.

c. the goods offered by the different sellers are markedly different.

d. accounting profit is driven to zero as firms freely enter and exit the market. ANS: A PTS: 1 DIF: 1 REF: 14-1 TOP: Competitive markets MSC: Interpretive

31. If ABC Company sells its product in a competitive market, then

a. the price of that product depends on the quantity of the product that ABC Company produces and sells since ABC

Company’s demand curve is downward sloping.

b. ABC Company's total revenue must be proportional to its quantity of output. c. ABC Company's total cost must be proportional to its quantity of output. d. ABC Company's total revenue must be equal to its average revenue. ANS: B PTS: 1 DIF: 2 REF: 14-1 TOP: Total revenue MSC: Analytical

Chapter 14/Firms in Competitive Markets ? 579

32. Which of the following expressions is correct for a competitive firm?

a. Profit = (Quantity of output) x (Price - Average total cost)

b. Marginal revenue = (Change in total revenue)/(Quantity of output) c. Average cost = Total variable cost/Quantity of output

d. Average revenue = (Marginal revenue) x (Quantity of output) ANS: A PTS: 1 DIF: 2 REF: 14-1 TOP: Profit MSC: Definitional 33. For a competitive firm,

a. Total revenue = Average revenue. b. Total revenue = Marginal revenue. c. Total cost = Marginal revenue.

d. Average revenue = Marginal revenue. ANS: D PTS: 1 DIF: 1 REF: 14-1 TOP: Competitive firms MSC: Definitional

34. If a competitive firm is (i) selling 1,000 units of its product at a price of $9 per unit and (ii) earning a positive profit,

then

a. its total cost is less than $9,000. b. its marginal revenue is less than $9. c. its average revenue is greater than $9.

d. the firm cannot be a competitive firm since competitive firms can only earn zero profit. ANS: A PTS: 1 DIF: 2 REF: 14-1 TOP: Profit MSC: Analytical 35. When a competitive firm triples the amount of output it sells,

a. its total revenue triples. b. its average revenue triples. c. its marginal revenue triples. d. its profit must increase. ANS: A PTS: 1 DIF: 2 REF: 14-1 TOP: Total revenue MSC: Analytical

36. Which of the following statements regarding a competitive market is false?

a. There are many buyers and many sellers in the market.

b. Because of firm location or product differences, some firms can charge a higher price than other firms and still

maintain their sales volume.

c. Price and average revenue are equal. d. Price and marginal revenue are equal. ANS: B PTS: 1 DIF: 1 REF: 14-1 TOP: Perfect competition MSC: Interpretive 37. Suppose that in a competitive market the market price is $2.50. What is marginal revenue for the last unit sold by the

typical firm in this market? a. Less than $2.50. b. More than $2.50. c. $2.50.

d. The marginal revenue cannot be determined without knowing the actual quantity sold by the typical firm. ANS: C PTS: 1 DIF: 1 REF: 14-1 TOP: Marginal revenue MSC: Interpretive 38. Which of the following statements regarding a competitive firm is true?

a. Since demand is downward sloping, if a firm increases its level of output, the firm will have to charge a lower

price to sell the additional output.

b. If a firm raises its price, the firm may be able to increase its total revenue even though it will sell fewer units. c. By lowering its price below the market price, the firm will benefit from being able to sell more units at the lower

price than it could have sold by charging the market price. d. For all firms, average revenue equals the price of the good. ANS: D PTS: 1 DIF: 2 REF: 14-1 TOP: Average revenue MSC: Analytical

580 ? Chapter 14/Firms in Competitive Markets

Table 14-2

The following table presents cost and revenue information for Soper’s Port Vineyard. Quantity Produced 0 1 2 3 4 5 6 7 8 COSTS Total Cost 100 150 202 257 317 385 465 562 682 Marginal Cost Quantity Demanded 0 1 2 3 4 5 6 7 8 REVENUES Total Price Revenue 120 120 120 120 120 120 120 120 120 Marginal Revenue -- -- 39. Refer to Table 14-2. Consumers are willing to pay $120 per unit of port wine. What is the total revenue from selling

7 units? a. $120 b. $700 c. $820 d. $840 ANS: D PTS: 1 DIF: 2 REF: 14-1 TOP: Total revenue MSC: Applicative 40. Refer to Table 14-2. Consumers are willing to pay $120 per unit of port wine. What is the total revenue from selling

4 units? a. $120 b. $217 c. $263 d. $480 ANS: D PTS: 1 DIF: 2 REF: 14-1 TOP: Total revenue MSC: Applicative 41. Refer to Table 14-2. Consumers are willing to pay $120 per unit of port wine. What is the marginal revenue from

selling the 3rd unit? a. $50 b. $80 c. $120 d. $140 ANS: C PTS: 1 DIF: 2 REF: 14-1 TOP: Marginal revenue MSC: Applicative 42. Refer to Table 14-2. Consumers are willing to pay $120 per unit of port wine. What is the average revenue when 4

units are sold? a. $50 b. $120 c. $125 d. $130 ANS: B PTS: 1 DIF: 2 REF: 14-1 TOP: Average revenue MSC: Applicative

Chapter 14/Firms in Competitive Markets ? 581

43. Refer to Table 14-2. Consumers are willing to pay $120 per unit of port wine. What is the marginal cost of the 1st

unit? a. $50 b. $75 c. $80 d. $150 ANS: A PTS: 1 DIF: 2 REF: 14-2 TOP: Marginal cost MSC: Applicative 44. Refer to Table 14-2. Consumers are willing to pay $120 per unit of port wine. What is the marginal cost of the 8th

unit? a. $0 b. $100 c. $120 d. $140 ANS: C PTS: 1 DIF: 2 REF: 14-2 TOP: Marginal cost MSC: Applicative 45. Refer to Table 14-2. Consumers are willing to pay $120 per unit of port wine. What is Soper's Port Vineyard's

economic profit at their profit maximizing point? a. $78 b. $243 c. $278 d. $375 ANS: C PTS: 1 DIF: 2 REF: 14-2 TOP: Economic profit MSC: Applicative 46. One of the defining characteristics of a perfectly competitive market is

a. a small number of sellers.

b. a large number of buyers and a small number of sellers. c. a standardized product.

d. significant advertising by firms to promote their products. ANS: C PTS: 1 DIF: 1 REF: 14-1 TOP: Perfect competition MSC: Definitional

47. Which of the following firms is the closest to being a perfectly competitive firm?

a. A hot dog vendor in New York b. Microsoft Corporation c. Ford Motor Company d. The campus bookstore ANS: A PTS: 1 DIF: 1 REF: 14-1 TOP: Perfect competition MSC: Interpretive

48. If the market elasticity of demand for potatoes is -0.3 in a perfectly competitive market, then the individual farmer's

elasticity of demand a. will also be -0.3.

b. depends on how large a crop the farmer produces. c. will range between -0.3 and -1.0. d. will be infinite. ANS: D PTS: 1 DIF: 3 REF: 14-1 TOP: Elasticity MSC: Analytical

49. Free entry means that

a. there are no costs of entering into an industry.

b. no legal barriers prevent a firm from entering an industry. c. a firm's marginal cost is zero.

d. a firm has no fixed costs in the short run. ANS: B PTS: 1 DIF: 2 REF: 14-1 TOP: Entry into industry MSC: Interpretive

582 ? Chapter 14/Firms in Competitive Markets

50. Total profit for a firm is calculated as

a. (marginal revenue) minus (average cost). b. (average revenue) minus (average cost). c. (marginal revenue) minus (marginal cost).

d. (price minus average cost) times (quantity of output). ANS: D PTS: 1 DIF: 1 REF: 14-2 TOP: Profit MSC: Definitional

Table 14-3

Use the information for a competitive firm in the table below to answer the following questions. Quantity 0 1 2 3 4 5 6 7 8 9 Total Revenue $0 9 18 27 36 45 54 63 72 81 Total Cost $10 14 19 25 32 40 49 59 70 82 51. Refer to Table 14-3. At a production level of 4 units which of the following is true?

a. Marginal cost is $6.

b. Total revenue is greater than variable cost. c. Marginal revenue is less than marginal cost. d. The firm is maximizing profit. ANS: B PTS: 1 DIF: 2 REF: 14-2 TOP: Competitive firms MSC: Analytical 52. Refer to Table 14-3. At which quantity of output is marginal revenue equal to marginal cost?

a. 3 b. 6 c. 8 d. 9 ANS: B PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Applicative

53. Refer to Table 14-3. If this firm chooses to maximize profit it will choose a level of output where marginal revenue

is equal to a. 6 b. 7 c. 8 d. 9 ANS: D PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Applicative 54. Refer to Table 14-3. The maximum profit available to this firm is

a. $2 b. $3 c. $4 d. $5 ANS: D PTS: 1 DIF: 1 REF: 14-2 TOP: Profit MSC: Applicative

Chapter 14/Firms in Competitive Markets ? 583

55. Refer to Table 14-3. If the firm finds that its marginal cost is $11, it should

a. increase production to maximize profit.

b. increase the price of the product to maximize profit. c. advertise to attract additional buyers to maximize profit. d. reduce production to increase profit. ANS: D PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Analytical 56. Refer to Table 14-3. If the firm finds that its marginal cost is $5, it should

a. reduce fixed costs by lowering production. b. increase production to maximize profit. c. decrease production to maximize profit.

d. maintain its current level of production to maximize profit. ANS: B PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Analytical

57. The Wheeler Wheat Farm sells wheat to a grain broker in Seattle, Washington. Since the market for wheat is

generally considered to be competitive, the Wheeler Wheat Farm maximizes its profit by choosing a. to produce the quantity at which average variable cost is minimized. b. to produce the quantity at which average fixed cost is minimized.

c. to sell its wheat at a price where marginal cost is equal to average total cost.

d. the quantity at which market price is equal to the farm's marginal cost of production. ANS: D PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Analytical 58. Comparison of marginal revenue to marginal cost

(i) reveals the contribution of the last unit of production to total profit. (ii) is helpful in making profit-maximizing production decisions. (iii) tells a firm whether its fixed costs are too high. a. (i) only

b. (i) and (ii) only c. (ii) and (iii) only d. (i) and (iii) only ANS: B PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Interpretive 59. If marginal cost exceeds marginal revenue, the firm

a. is most likely to be at a profit-maximizing level of output. b. should increase the level of production to maximize its profit. c. must be experiencing losses.

d. may still be earning a positive accounting profit. ANS: D PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Analytical 60. When marginal revenue equals marginal cost, the firm

a. should increase the level of production to maximize its profit. b. may be minimizing its losses, rather than maximizing its profit. c. must be generating positive economic profits. d. must be generating positive accounting profits. ANS: B PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Analytical

61. As a general rule, profit-maximizing producers in a competitive market produce output at a point where

a. marginal cost is increasing. b. marginal cost is decreasing. c. marginal revenue is increasing. d. price is less than marginal revenue. ANS: A PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Analytical

Chapter 14/Firms in Competitive Markets ? 589

Figure 14-4

The figure below depicts the cost structure of a firm in a competitive market.

85. Refer to Figure 14-4. When market price is P5, a profit-maximizing firm's profits can be represented by the area

a. P5 Q3.

b. (P5 - P3) Q2. c. (P5 - P4) Q3.

d. When market price is P5 there are no profits. ANS: C PTS: 1 DIF: 2 REF: 14-2 TOP: Profit MSC: Analytical 86. Refer to Figure 14-4. Firms would be encouraged to enter this market for all prices that exceed

a. P1. b. P2. c. P3.

d. None of the above is correct. ANS: C PTS: 1 DIF: 2 REF: 14-2 TOP: Profit MSC: Analytical

87. Refer to Figure 14-4. When market price is P2, a profit-maximizing firm's losses can be represented by the area

a. (P3 - P2) Q2. b. (P2 - P1) Q2.

c. At a market price of P2, the firm does not have losses.

d. At a market price of P2 the firm has losses, but the reference points in the figure don't identify the losses. ANS: D PTS: 1 DIF: 2 REF: 14-2 TOP: Profit MSC: Analytical

590 ? Chapter 14/Firms in Competitive Markets

Figure 14-5

The figure below depicts the cost structure of a firm in a competitive market.

88. Refer to Figure 14-5. When market price is P1, a profit-maximizing firm's total revenue can be represented by the

area a. P1 × Q2. b. P2 × Q2. c. P3 × Q2. d. P1 × Q3. ANS: A PTS: 1 DIF: 2 REF: 14-2 TOP: Total revenue MSC: Analytical 89. Refer to Figure 14-5. When market price is P4, a profit-maximizing firm's total cost can be represented by the area

a. P4 × Q1 b. P4 × Q4 c. P2 × Q4

d. Total costs cannot be determined from the information in the figure. ANS: C PTS: 1 DIF: 2 REF: 14-2 TOP: Total cost MSC: Analytical

90. Refer to Figure 14-5. When market price is P1, a profit-maximizing firm's total profit or loss can be represented by

which area? a. P1 × Q3; profit b. (P3 – P1) × Q2 ; loss c. (P2 – P1) × Q1; loss

d. We can't tell because we don't know fixed costs. ANS: B PTS: 1 DIF: 2 REF: 14-2 TOP: Profit MSC: Analytical 91. When a profit-maximizing firm is earning profits, those profits can be identified by

a. P × Q.

b. (MC – AVC) × Q. c. (P – ATC) × Q. d. (P – AVC) × Q. ANS: C PTS: 1 DIF: 2 REF: 14-2 TOP: Profit MSC: Interpretive

Chapter 14/Firms in Competitive Markets ? 591

92. When a profit-maximizing competitive firm finds itself minimizing losses because it is unable to earn a positive

profit, this task is accomplished by producing the quantity at which price is equal to a. sunk cost.

b. average fixed cost. c. average variable cost. d. marginal cost. ANS: D PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Interpretive 93. When a profit-maximizing firm's fixed costs are considered sunk in the short run, then the firm

a. can set price above marginal cost.

b. must set price below average total cost. c. will never show losses.

d. can safely ignore fixed costs when deciding how much output to produce. ANS: D PTS: 1 DIF: 2 REF: 14-2 TOP: Sunk costss MSC: Interpretive

94. A competitive firm's short-run supply curve is part of which of the following curves?

a. Marginal revenue b. Average variable cost c. Average total cost d. Marginal cost ANS: D PTS: 1 DIF: 2 REF: 14-2 TOP: Supply curve MSC: Definitional

95. If a profit-maximizing firm in a competitive market discovers that, at its current level of production, price is greater

than marginal cost, it should a. shut down.

b. reduce its output, but continue operating. c. keep output the same. d. increase its output. ANS: D PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Interpretive 96. For any given price, a firm in a competitive market will maximize profit by selecting the level of output at which

price intersects the

a. average total cost curve. b. average variable cost curve. c. marginal cost curve. d. marginal revenue curve. ANS: C PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Interpretive 97. By comparing marginal revenue and marginal cost, a firm in a competitive market is able to adjust production to the

level that achieves its objective, which we assume to be a. maximization of total revenue. b. maximization of profit.

c. minimization of variable cost. d. minimization of average total cost. ANS: B PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Interpretive

592 ? Chapter 14/Firms in Competitive Markets

98. When a restaurant stays open for lunch service even though few customers patronize the restaurant for lunch, which

of the following principles is (are) best demonstrated? (i) Fixed costs are sunk in the short run.

(ii) In the short run, only fixed costs are important to the decision to stay open for lunch. (iii) If revenue exceeds variable cost, the restaurant owner is making a profitable strategic decision to remain open for

lunch.

a. (i) and (ii) only b. (ii) and (iii) only c. (i) and (iii) only

d. All are demonstrated. ANS: C PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Interpretive 99. In the long run, a profit-maximizing firm will choose to exit a market when

a. average fixed cost is falling. b. variable costs exceed sunk costs.

c. marginal cost exceeds marginal revenue at the current level of production. d. total revenue is less than total cost. ANS: D PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Analytical

100. One of the most important determinants of the success of free-market capitalism is

a. enlightened governments selecting firms that should not be allowed to exit a market. b. free entry and exit in markets.

c. government regulation of market participants.

d. having a few large firms rather than thousands of small ones. ANS: B PTS: 1 DIF: 2 REF: 14-2 TOP: Competitive markets MSC: Interpretive

101. A profit-maximizing firm in a competitive market is currently producing 200 units of output. It has average revenue

of $9 and average total cost of $7. It follows that the firm's

a. average total cost curve intersects the marginal cost curve at an output level of less than 200 units. b. average variable cost curve intersects the marginal cost curve at an output level of less than 200 units. c. profit is $400.

d. All of the above are correct. ANS: D PTS: 1 DIF: 3 REF: 14-2 TOP: Profit maximization MSC: Applicative 102. A profit-maximizing firm in a competitive market is able to sell its product for $7. At its current level of output, the

firm's average total cost is $10. The firm’s marginal cost curve crosses its marginal revenue curve at an output level of 9 units. The firm experiences a a. profit of more than $27. b. profit of exactly $27. c. loss of more than $27. d. loss of exactly $27. ANS: D PTS: 1 DIF: 3 REF: 14-2 TOP: Profit MSC: Applicative 103. If a competitive firm is currently producing a level of output at which marginal revenue exceeds marginal cost, then

a. a one-unit increase in output will increase the firm's profit. b. a one-unit decrease in output will increase the firm's profit. c. total revenue exceeds total cost. d. total cost exceeds total revenue. ANS: A PTS: 1 DIF: 2 REF: 14-2 TOP: Competitive firms MSC: Analytical

Chapter 14/Firms in Competitive Markets ? 593

104. If a competitive firm is currently producing a level of output at which marginal cost exceeds marginal revenue, then

a. average revenue exceeds marginal cost. b. the firm is earning a positive profit.

c. a one-unit decrease in output would increase the firm's profit. d. All of the above are correct. ANS: C PTS: 1 DIF: 2 REF: 14-2 TOP: Competitive firms MSC: Analytical 105. If a competitive firm is currently producing a level of output at which profit is not maximized, then it must be true

that

a. marginal revenue exceeds marginal cost. b. marginal cost exceeds marginal revenue. c. total cost exceeds total revenue. d. None of the above is correct. ANS: D PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Interpretive 106. At the profit-maximizing level of output,

a. marginal revenue equals average total cost. b. marginal revenue equals average variable cost. c. marginal revenue equals marginal cost. d. average revenue equals average total cost. ANS: C PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Interpretive

107. The intersection of a firm's marginal revenue and marginal cost curves determines the level of output at which

a. total revenue is equal to variable cost. b. total revenue is equal to fixed cost. c. total revenue is equal to total cost. d. profit is maximized. ANS: D PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Interpretive 108. For a certain firm, the 100th unit of output that the firm produces has a marginal revenue of $10 and a marginal cost

of $7. It follows that

a. the production of the 100th unit of output increases the firm's profit by $3.

b. the production of the 100th unit of output increases the firm's average total cost by $7. c. the firm's profit-maximizing level of output is less than 100 units.

d. the production of the 110th unit of output must increase the firm’s profit by less than $3. ANS: A PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Analytical 109. A certain competitive firm sells its output for $20 per unit. The 50th unit of output that the firm produces has a

marginal cost of $22. Which of following is not necessarily true?

a. Production of the 50th unit of output increases the firm's total revenue by $20. b. Production of the 50th unit of output increases the firm's total cost by $22. c. Production of the 50th unit of output decreases the firm's profit by $2.

d. Production of the 50th unit of output increases the firm’s average variable cost. ANS: D PTS: 1 DIF: 2 REF: 14-2 TOP: Competitive firms MSC: Analytical

594 ? Chapter 14/Firms in Competitive Markets

Scenario 14-2

Assume a certain firm is producing Q = 1,000 units of output. At Q = 1,000, the firm's marginal cost equals $15 and its average total cost equals $11. The firm sells its output for $12 per unit. 110. Refer to Scenario 14-2. At Q = 1,000, the firm's profit amounts to

a. $-200. b. $1,000. c. $3,000. d. $4,000. ANS: B PTS: 1 DIF: 2 REF: 14-2 TOP: Profit MSC: Applicative 111. Refer to Scenario 14-2. At Q = 999, the firm's total cost amounts to

a. $10,985. b. $10,990. c. $10,995. d. $10,999. ANS: A PTS: 1 DIF: 3 REF: 14-2 TOP: Total cost MSC: Applicative

112. Refer to Scenario 14-2. At Q = 999, the firm's profit amounts to

a. $993. b. $997. c. $1,003. d. $1,007. ANS: C PTS: 1 DIF: 3 REF: 14-2 TOP: Profit MSC: Applicative 113. Refer to Scenario 14-2. To maximize its profit, the firm should

a. increase its output.

b. continue to produce 1,000 units.

c. decrease its output, but continue to produce. d. shut down. ANS: C PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Analytical 114. Which of these curves is the competitive firm's short-run supply curve?

a. The average variable cost curve above marginal cost. b. The average total cost curve above marginal cost. c. The marginal cost curve above average variable cost. d. The average fixed cost curve. ANS: C PTS: 1 DIF: 2 REF: 14-2 TOP: Supply curve MSC: Definitional

115. A competitive firm's marginal cost curve is regarded as its supply curve because

a. the position of the marginal cost curve determines the price for which the firm should sell its product. b. among the various cost curves, the marginal cost curve is the only one that slopes upward.

c. the marginal cost curve determines the quantity of output the firm is willing to supply at any price. d. the firm is aware that marginal revenue must exceed marginal cost in order for profit to be maximized. ANS: C PTS: 1 DIF: 2 REF: 14-2 TOP: Supply curve MSC: Interpretive 116. A competitive firm has been selling its output for $20 per unit and has been maximizing its profit, which is positive.

Then, the price rises to $25 and the firm makes whatever adjustments are necessary to maximize its profit at the now-higher price. Once the firm has adjusted, which of the following statements is correct? a. The firm's quantity of output is higher than it was previously. b. The firm's average total cost is higher than it was previously. c. The firm's marginal revenue is higher than it was previously. d. All of the above are correct. ANS: D PTS: 1 DIF: 2 REF: 14-2 TOP: Competitive firms MSC: Interpretive

Chapter 14/Firms in Competitive Markets ? 595

117. A competitive firm has been selling its output for $10 per unit and has been maximizing its profit. Then, the price

rises to $14 and the firm makes whatever adjustments are necessary to maximize its profit at the now-higher price. Once the firm has adjusted, which of the following statements is correct? a. The firm's marginal revenue is lower than it was previously. b. The firm's marginal cost is lower than it was previously.

c. The firm's quantity of output is higher than it was previously. d. All of the above are correct. ANS: C PTS: 1 DIF: 2 REF: 14-2 TOP: Competitive firms MSC: Interpretive 118. Which of the following statements is correct regarding a firm's decision-making?

a. The decision to shutdown and the decision to exit are both short-run decisions. b. The decision to shutdown and the decision to exit are both long-run decisions.

c. The decision to shutdown is a short-run decision, whereas the decision to exit is a long-run decision. d. The decision to exit is a short-run decision, whereas the decision to shutdown is a long-run decision. ANS: C PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Interpretive 119. A firm that shuts down temporarily

a. still has to pay its variable costs, but not its fixed costs. b. still has to pay its fixed costs, but not its variable costs. c. still has to pay both its variable costs and its fixed costs. d. has to pay neither its variable costs nor its fixed costs. ANS: B PTS: 1 DIF: 2 REF: 14-2 TOP: Fixed costs MSC: Interpretive

120. A firm that exits its market

a. still has to pay its variable costs, but not its fixed costs. b. still has to pay its fixed costs, but not its variable costs. c. still has to pay both its variable costs and its fixed costs. d. has to pay neither its variable costs nor its fixed costs. ANS: D PTS: 1 DIF: 2 REF: 14-2 TOP: Fixed costs MSC: Interpretive

121. A firm will shut down in the short run if the total revenue that it would get from producing and selling its output is

less than its

a. opportunity costs. b. fixed costs. c. variable costs. d. total costs. ANS: C PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Interpretive 122. A firm will shutdown in the short run if, for all positive levels of output,

a. its loss exceeds its fixed costs.

b. its total revenue is less than its variable costs.

c. the price of its product is less than its average variable cost. d. All of the above are correct. ANS: D PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Interpretive

123. A firm's marginal cost has a minimum value of $2, its average variable cost has a minimum value of $4, and its

average total cost has a minimum value of $5. Then the firm will shut down if the price of its product falls below a. $2. b. $4. c. $5.

d. There is not enough information given to answer the question. ANS: B PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Analytical

596 ? Chapter 14/Firms in Competitive Markets

124. The complete description of a competitive firm's supply curve is as follows: The competitive firm's short-run supply

curve is that portion of the

a. average variable cost curve that lies above marginal cost. b. average total cost curve that lies above marginal cost. c. marginal cost curve that lies above average variable cost. d. marginal cost curve that lies above average total cost. ANS: C PTS: 1 DIF: 2 REF: 14-2 TOP: Supply curve MSC: Definitional 125. Which of these types of costs can be ignored when an individual or a firm is making decisions?

a. Sunk costs b. Marginal costs c. Variable costs d. Information costs ANS: A PTS: 1 DIF: 1 REF: 14-2 TOP: Sunk costss MSC: Interpretive

126. Suppose you bought a ticket to a football game for $30, and that you place a $35 value on seeing the game. If you lose

the ticket, then what is the maximum price you should pay for another ticket? a. $5 b. $30 c. $35 d. $65 ANS: C PTS: 1 DIF: 2 REF: 14-2 TOP: Sunk costss MSC: Interpretive

127. The competitive firm's long-run supply curve is that portion of the marginal cost curve that lies above average

a. fixed cost. b. variable cost. c. total cost. d. revenue. ANS: C PTS: 1 DIF: 2 REF: 14-2 TOP: Supply curve MSC: Definitional 128. Assume a firm is producing 800 units of output, and it sells each unit for $6. Its average total cost is $4. Its profit is

a. $-1,600. b. $1,600. c. $3,200. d. $8,000. ANS: B PTS: 1 DIF: 2 REF: 14-2 TOP: Profit MSC: Applicative 129. Susan quit her job as a teacher, which paid her $36,000 per year, in order to start her own catering business. She spent

$12,000 of her savings, which had been earning 10 percent interest per year, on equipment for her business. She also borrowed $12,000 from her bank at 10 percent interest, which she also spent on equipment. For the past several months she has spent $1,000 per month on ingredients and other variable costs. Also for the past several months she has taken in $3,500 in monthly revenue.

a. In the short run, Susan should shut down her business and in the long run she should exit the industry.

b. In the short run, Susan should continue to operate her business, but in the long run she should exit the industry. c. In the short run, Susan should continue to operate her business, but in the long run she will probably face

competition from newly entering firms.

d. In the short run, Susan should continue to operate her business, and she is also in long-run equilibrium. ANS: B PTS: 1 DIF: 3 REF: 14-2 TOP: Profit maximization MSC: Analytical

Chapter 14/Firms in Competitive Markets ? 597

130. A firm in a competitive market has the following cost structure:

Output 0 1 2 3 4 5

If the market price is $4, this firm will

a. produce two units in the short run and exit in the long run. b. produce three units in the short run and exit in the long run. c. produce four units in the short run and exit in the long run. d. shut down in the short run and exit in the long run. ANS: B PTS: 1 DIF: 3 REF: 14-2 TOP: Profit maximization MSC: Applicative

131. A competitive market is in long-run equilibrium. If demand decreases, we can be certain that price will

a. fall in the short run. All firms will shut down and some of them will exit the industry. Price will then rise to reach

the new long-run equilibrium.

b. fall in the short run. No firms will shut down, but some of them will exit the industry. Price will then rise to reach

the new long-run equilibrium.

c. fall in the short run. All, some, or no firms will shut down, and some of them will exit the industry. Price will then

rise to reach the new long-run equilibrium.

d. not fall in the short run because firms will exit to maintain the price. ANS: C PTS: 1 DIF: 3 REF: 14-2 TOP: Competitive markets MSC: Analytical 132. Starting from a situation in which a firm in a competitive market produces and sells 500 doorknobs for a price of $10

per doorknob, which of the following events would decrease the firm's average revenue? a. The firm increases its output above 500 doorknobs. b. The firm decreases its output below 500 doorknobs. c. The market price of doorknobs rises above $10. d. The market price of doorknobs falls below $10. ANS: D PTS: 1 DIF: 1 REF: 14-2 TOP: Average revenue MSC: Interpretive

Total Cost $5 $10 $12 $15 $24 $40 598 ? Chapter 14/Firms in Competitive Markets

133. Suppose the total cost for various levels of output for a competitive firm are given in the table below:

Q 0 1 2 3 4 5 6 7 8 9

If the market price is $8, how many units should the firm produce to maximize profit? a. 5 b. 6 c. 7 d. 8 ANS: B PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Analytical

134. The following table gives the average total cost of production for various levels of output for a competitive firm:

TC 10 12 15 19 24 30 37 46 55 65

Q 0 1 2 3 4 5

If the firm's fixed cost of production is $3 and the market price is $10, how many units should the firm produce to maximize its profit? a. 1 b. 2 c. 3 d. 4 ANS: C PTS: 1 DIF: 3 REF: 14-2 TOP: Profit maximization MSC: Analytical

ATC -- 10 8 7 8 10

Chapter 14/Firms in Competitive Markets ? 599

135. The following table presents the total cost of production for various levels of output for a competitive firm:

Q 0 1 2 3 4 5

What is the lowest price at which this firm might choose to operate? a. $2.00 b. $3.00 c. $4.00 d. $5.00 ANS: B PTS: 1 DIF: 3 REF: 14-2 TOP: Profit maximization MSC: Analytical

136. The competitive firm's short-run supply curve

a. is its marginal revenue curve, but only the portion where marginal revenue exceeds marginal cost. b. is its marginal cost curve.

c. is its marginal cost curve, but only the portion above the minimum of average total cost. d. is its marginal cost curve, but only the portion above the minimum of average variable cost. ANS: D PTS: 1 DIF: 2 REF: 14-2 TOP: Supply curve MSC: Interpretive 137. Which of the following could be used to calculate the profit for a firm?

a. Profit = MR - MC b. Profit = MR - TC c. Profit = (P - MC)Q d. Profit = (P - AC)Q ANS: D PTS: 1 DIF: 2 REF: 14-2 TOP: Profit MSC: Definitional

138. Suppose that a firm is currently maximizing its short-run profit at an output of 50 units. If the current price is $9, the

marginal cost of the 50th unit is $9, and the average cost of producing 50 units is $4, what is the firm's profit? a. $0 b. $200 c. $250 d. $450 ANS: C PTS: 1 DIF: 2 REF: 14-2 TOP: Profit MSC: Analytical 139. Which of the following represents the firm's short-run condition for shutting down?

a. Shut down if TR < TC b. Shut down if TR < FC c. Shut down if P < ATC d. Shut down if TR < VC ANS: D PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Definitional 140. Which of the following represents the firm's long-run condition for exiting a market?

a. Exit if P < MC b. Exit if P < FC c. Exit if P < ATC d. Exit if MR < MC ANS: C PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Definitional

TC 4 9 12 13 20 29 600 ? Chapter 14/Firms in Competitive Markets

141. Consider a competitive market with 50 identical firms. Suppose the market demand is given by the equation QD =

200 - 10P and the market supply is given by the equation QS = 10P. In addition, suppose the following table shows the marginal cost of production for various levels of output for firms in this market.

Q 0 1 2 3 4 5

How many units should a firm in this market produce to maximize profit? a. 1 b. 2 c. 3 d. 4 ANS: B PTS: 1 DIF: 3 REF: 14-2 TOP: Profit maximization MSC: Analytical 142. When determining whether to shutdown in the short run, a competitive firm should

a. ignore fixed costs. b. ignore variable costs. c. ignore sunk costs.

d. Both a and c are correct ANS: D PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Analytical 143. Competitive firms that earn a loss in the short run should

a. shut down if P < AVC. b. raise their price. c. lower their output. d. All of the above ANS: A PTS: 1 DIF: 1 REF: 14-2 TOP: Profit maximization MSC: Interpretive

144. Mrs. Smith is operating a firm in a competitive market. The market price is $6.50. At her profit-maximizing level of

output, her average total cost of production is $7.00 and her average variable cost of production is $6.00. a. Mrs. Smith is earning a loss and should shutdown in the short run.

b. Mrs. Smith is earning a loss but should continue to operate in the short run. c. Mrs. Smith is earning a profit since the price is above the average variable cost.

d. Without knowing Mrs. Smith's marginal cost we cannot determine whether she should stay in business or shut

down.

ANS: B PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Applicative 145. Mrs. Smith operates a business in a competitive market. The current market price is $8.50, and at her

profit-maximizing level of production, the average variable cost is $8.00 and the average total cost is $8.25. a. Mrs. Smith should shut down her business in the short run but continue to operate in the long run.. b. Mrs. Smith should continue to operate in the short run but shut down in the long run. c. Mrs. Smith should continue to operate in both the short run and long run. d. Mrs. Smith should shut down in both the short run and long run. ANS: C PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Applicative

MC -- 5 10 15 20 25 Chapter 14/Firms in Competitive Markets ? 601

146. Suppose a firm operates in the short run at a price above its average total cost of production. In the long run the firm

should expect

a. new firms to enter the market. b. the market price to fall. c. its profits to fall. d. All of the above ANS: D PTS: 1 DIF: 1 REF: 14-2 TOP: Profit maximization MSC: Applicative 147. In a competitive market the current price is $7, and the typical firm in the market has ATC = $7.50 and AVC = $7.15.

a. In the short run firms will shut down, and in the long run firms will leave the market.

b. In the short run firms will continue to operate, but in the long run firms will leave the market. c. New firms will likely enter this market to capture any remaining economic profits. d. In the long run the market will cease to exist. ANS: A PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Applicative 148. In a competitive market the price is $8. A typical firm in the market has ATC = $6, AVC = $5, and MC = $8. How

much economic profit is the firm earning in the short run? a. $0 per unit b. $1 per unit c. $2 per unit d. $3 per unit ANS: C PTS: 1 DIF: 2 REF: 14-2 TOP: Profit MSC: Analytical 149. Consider a firm operating in a competitive market. The firm is producing 40 units of output, has an average cost of

production equal to $5, and is earning $240 economic profit in the short run. What is the current market price? a. $9 b. $10 c. $11 d. $12 ANS: C PTS: 1 DIF: 3 REF: 14-2 TOP: Profit MSC: Analytical 150. You purchase a $30, nonrefundable ticket to a play at a local theater. Ten minutes into the show you realize that it is

not a very good show and place only a $10 value on seeing the remainder of the show. Alternatively you could leave the theater and go home and watch TV or read a book. You place an $8 value on watching TV and a $6 value on reading a book.

a. You should leave the theater since the net benefit from seeing the remainder of the show is -$20, while going

home will earn you at least $8 of satisfaction.

b. You should stay and watch the remainder of the show. c. You should go home and watch TV. d. You should go home and read a book. ANS: B PTS: 1 DIF: 2 REF: 14-2 TOP: Sunk costss MSC: Applicative

151. The accountants hired by Davis Golf Course have determined total fixed cost to be $75,000, total variable cost to be

$130,000, and total revenue to be $145,000. Because of this information, in the short run, Davis Golf Course should a. decide to shut-down.

b. decide to exit the industry.

c. decide to stay open because shutting down would be more expensive. d. decide to stay open because they are making an economic profit. ANS: C PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Analytical

Table 14-4

The following table presents cost and revenue information for John’s Vineyard.

COSTS REVENUES 602 ? Chapter 14/Firms in Competitive Markets

Quantity Produced 0 1 2 3 4 5 6 7 8 Total Cost 0 50 102 157 217 285 365 462 582 Marginal Cost -- Quantity Demanded 0 1 2 3 4 5 6 7 8 Price 80 80 80 80 80 80 80 80 80 Total Revenue Marginal Revenue -- 152. Refer to Table 14-4. What is the marginal cost of the 5th unit?

a. $55 b. $60 c. $68 d. $80 ANS: C PTS: 1 DIF: 2 REF: 14-2 TOP: Marginal cost MSC: Applicative 153. Refer to Table 14-4. What is the marginal cost of the 8th unit?

a. $0 b. $68 c. $120 d. $242 ANS: C PTS: 1 DIF: 2 REF: 14-2 TOP: Marginal cost MSC: Applicative 154. Refer to Table 14-4. What is the total revenue from selling 4 units?

a. $80 b. $320 c. $360 d. $480 ANS: B PTS: 1 DIF: 2 REF: 14-2 TOP: Total revenue MSC: Applicative 155. Refer to Table 14-4. What is the total revenue from selling 7 units?

a. $80 b. $210 c. $540 d. $560 ANS: D PTS: 1 DIF: 2 REF: 14-2 TOP: Total revenue MSC: Applicative 156. Refer to Table 14-4. What is the marginal revenue from selling the 1st unit?

a. $50 b. $80 c. $160 d. $170 ANS: B PTS: 1 DIF: 2 REF: 14-2 TOP: Marginal revenue MSC: Applicative 157. Refer to Table 14-4. What is the marginal revenue from selling the 5th unit?

a. $12 b. $68 c. $80 d. $480 ANS: C PTS: 1 DIF: 2 REF: 14-2 TOP: Marginal revenue MSC: Applicative

Chapter 14/Firms in Competitive Markets ? 603

158. Refer to Table 14-4. What is the average revenue when 4 units are sold?

a. $0 b. $80 c. $90 d. $320 ANS: B PTS: 1 DIF: 2 REF: 14-2 TOP: Average revenue MSC: Applicative 159. Refer to Table 14-4. At what quantity does John’s Vineyard maximize profits?

a. 3 b. 6 c. 7 d. 8 ANS: B PTS: 1 DIF: 3 REF: 14-2 TOP: Profit maximization MSC: Applicative

160. Refer to Table 14-4. What is John’s Vineyard's economic profit at its profit-maximizing output level?

a. $25 b. $75 c. $115 d. $225 ANS: C PTS: 1 DIF: 3 REF: 14-2 TOP: Economic profit MSC: Applicative

Table 14-5 Quantity 12 13 14 15 16 17 161. Refer to Table 14-5. This table provides information on a firm’s output, marginal revenue, and marginal cost. If the

firm is currently producing 14 units, what would you advise them to do? a. Decrease quantity to 13 units. b. Increase quantity to 17 units. c. Continue to operate at 14 units. d. Increase quantity to 16 units. ANS: D PTS: 1 DIF: 1 REF: 14-2 TOP: Profit maximization MSC: Applicative 162. Refer to Table 14-5. This table provides information on a firm’s output, marginal revenue, and marginal cost for a

firm. If the firm is maximizing profit, how much profit is it earning? a. $0.00 b. $1.00 c. $10.00

d. There is insufficient data to determine the firms profit. ANS: D PTS: 1 DIF: 2 REF: 14-2 TOP: Profit MSC: Applicative

Marginal Cost $5.00 $6.00 $7.00 $8.00 $9.00 $10.00 Marginal Revenue $9.00 $9.00 $9.00 $9.00 $9.00 $9.00

604 ? Chapter 14/Firms in Competitive Markets

163. Cold Duck Airlines flies between Tacoma and Portland. The company leases planes on a year-long contract at a cost

that averages $600 per flight. Other costs (fuel, flight attendants, etc.) amount to $550 per flight. Currently, Cold Duck's revenues are $1,000 per flight. All prices and costs are expected to continue at their present levels. If it wants to maximize profit, Cold Duck Airlines should a. drop the flight immediately. b. continue the flight.

c. continue flying until the lease expires and then drop the run. d. drop the flight now but renew the lease if conditions improve. ANS: C PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Analytical 164. Raiman's Shoe Repair also produces custom-made shoes. When Mr. Raiman produces 12 pairs a week, the marginal

cost of the twelfth pair is $84, and the MR of that unit is $70. What would you advise Mr. Raiman to do? a. Shut down the business.

b. Produce more custom-made shoes. c. Decrease the price.

d. Produce fewer custom-made shoes. ANS: D PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Analytical 165. Carla's Candy Store is maximizing profits by producing 1,000 pounds of candy per day. If Carla's fixed costs

unexpectedly increase and the market price remains constant, then the short run profit-maximizing level of output a. is less than 1,000 pounds. b. is still 1,000 pounds.

c. is more than 1,000 pounds. d. becomes zero. ANS: B PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Analytical 166. The firm will make the most profits if it produces the quantity of output at which

a. marginal cost equals average cost. b. profit per unit is greatest.

c. marginal revenue equals total revenue. d. marginal revenue equals marginal cost. ANS: D PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Interpretive

167. Joe's Garage operates in a perfectly competitive market. At the point where marginal cost equals marginal revenue,

ATC = $20, AVC = $15, and the price per unit is $10. In this situation, a. Joe's Garage is earning a positive economic profit. b. Joe's Garage should shut down immediately.

c. Joe's is losing money in the short run, but should continue to operate. d. the market price will rise in the short run to increase profits. ANS: B PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Analytical 168. If there is an increase in market demand in a perfectly competitive market, then in the short run

a. there will be no change in the demand curves faced by individual firms in the market. b. the demand curves for firms will shift downward. c. the demand curves for firms will become more elastic. d. profits will rise. ANS: D PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Analytical 169. A sunk cost is one that

a. changes as the level of output changes in the short run.

b. was paid in the past and will not change regardless of the present decision. c. should determine the rational course of action in the future. d. has the most impact on profit-making decisions. ANS: B PTS: 1 DIF: 2 REF: 14-2 TOP: Sunk costs MSC: Definitional

Chapter 14/Firms in Competitive Markets ? 605

170. A corporation has been steadily losing money on one of its product lines. The factory used to produce that product

cost $20 million to build 10 years ago. The firm is now considering an offer to buy that factory for $15 million. Which of the following statements about the decision to sell or not to sell is correct?

a. The firm should turn down the purchase offer because the factory cost more than $15 million to build. b. The $20 million spent on the factory is a sunk cost, and that should not affect the decision.

c. The $20 million spent on the factory is an implicit cost, which should be included in the decision. d. The firm should sell the factory only if it can reduce its costs elsewhere by $5 million. ANS: B PTS: 1 DIF: 2 REF: 14-2 TOP: Sunk costs MSC: Analytical 171. In a market with 1,000 identical firms, the short-run market supply is the

a. marginal cost curve (above average variable cost) for a typical firm in the market. b. quantity supplied by the typical firm in the market.

c. sum of the prices charged by each of the 1,000 individual firms. d. sum of the quantities supplied by each of the 1,000 individual firms. ANS: D PTS: 1 DIF: 2 REF: 14-3 TOP: Supply curve MSC: Interpretive

Figure 14-6

In the figure below, panel (a) depicts the linear marginal cost of a firm in a competitive market, and panel (b) depicts the linear market supply curve for a market with a fixed number of identical firms.

172. Refer to Figure 14-6. If there are 200 identical firms in this market, what level of output will be supplied to the

market when price is $1.00? a. 2,000 b. 5,000 c. 10,000 d. 20,000 ANS: D PTS: 1 DIF: 2 REF: 14-3 TOP: Supply curve MSC: Applicative 173. Refer to Figure 14-6. When 100 identical firms participate in this market, at what price will 15,000 units be supplied

to this market? a. $1.00 b. $1.50 c. $2.00

d. It cannot be determined from the information provided. ANS: B PTS: 1 DIF: 2 REF: 14-3 TOP: Supply curve MSC: Applicative

606 ? Chapter 14/Firms in Competitive Markets

174. Refer to Figure 14-6. If at a market price of $1.75, 52,500 units of output are supplied to this market, how many

identical firms are participating in this market? a. 75 b. 100 c. 250 d. 300 ANS: D PTS: 1 DIF: 3 REF: 14-3 TOP: Supply curve MSC: Applicative 175. When existing firms in a competitive market are profitable, an incentive exists for

a. new firms to seek government subsidies that would allow them to enter the market. b. new firms to enter the market, even without government subsidies. c. existing firms to raise prices.

d. existing firms to increase production. ANS: B PTS: 1 DIF: 2 REF: 14-3 TOP: Competitive markets MSC: Interpretive 176. When new firms have an incentive to enter a competitive market, their entry will

a. increase the price of the product.

b. drive down profits of existing firms in the market. c. shift the market supply curve to the left. d. increase demand for the product. ANS: B PTS: 1 DIF: 2 REF: 14-3 TOP: Competitive markets MSC: Interpretive 177. When firms have an incentive to exit a competitive market, their exit will

a. lower market price.

b. necessarily raise the costs of firms that remain in the market. c. raise profits for firms that remain in the market. d. reduce demand for the product. ANS: C PTS: 1 DIF: 2 REF: 14-3 TOP: Competitive markets MSC: Interpretive

178. In a perfectly competitive market, the process of entry and exit will end when, for firms in the market,

a. price is equal to average variable cost.

b. marginal revenue is equal to average variable cost. c. economic profits are zero. d. accounting profits are zero. ANS: C PTS: 1 DIF: 2 REF: 14-3 TOP: Competitive markets MSC: Interpretive

Chapter 14/Firms in Competitive Markets ? 607

179. If the figure in panel (a) reflects the long-run equilibrium of a profit-maximizing firm in a competitive market, the

figure in panel (b) most likely reflects

a. perfectly inelastic long-run market supply.

b. the idea that free entry and exit of firms in the market lead to only one market price in the long run. c. the product of the individual supply curves of all firms in the market. d. the fact that zero profits cannot be sustained in the long run. ANS: B PTS: 1 DIF: 2 REF: 14-3 TOP: Supply curve MSC: Interpretive 180. In a competitive market with free entry and exit, the process of entry and exit ends when, for the typical firm in the

market,

a. marginal revenue is equal to long-run average total cost. b. total revenue is equal to average total cost. c. average revenue exceeds marginal cost. d. accounting profit is driven to zero. ANS: A PTS: 1 DIF: 2 REF: 14-3 TOP: Competitive markets MSC: Analytical 181. When new firms enter a perfectly competitive market,

a. demand increases.

b. the short-run market supply curve shifts right. c. the short-run market supply curve shifts left.

d. existing firms will increase prices to keep the new firms from entering. ANS: B PTS: 1 DIF: 2 REF: 14-3 TOP: Supply curve MSC: Interpretive

182. When new firms enter a perfectly competitive market,

a. economic profits of existing firms will continue to be zero.

b. entering firms will earn zero economic profit upon entry into the market.

c. existing firms may see their costs rise as more firms compete for limited resources. d. prices will rise as existing firms raise prices to keep new firms out of the market. ANS: C PTS: 1 DIF: 2 REF: 14-3 TOP: Competitive markets MSC: Interpretive 183. In a competitive market with free entry and exit, if all firms have the same cost structure, then

a. all firms will operate at efficient scale in the short run. b. all firms will operate at efficient scale in the long run. c. the price of the product will differ across firms.

d. the number of sellers in the market will steadily decrease over time. ANS: B PTS: 1 DIF: 2 REF: 14-3 TOP: Competitive markets MSC: Interpretive

608 ? Chapter 14/Firms in Competitive Markets

184. If all existing firms and all potential firms have the same cost curves, there are no inputs in limited quantities, and the

market is characterized by free entry and exit, then the long-run a. market supply curve is equal to the sum of marginal cost. b. supply curve for the market must slope downward. c. market supply curve must slope upward.

d. supply curve for the market is horizontal and equal to the minimum of long-run average cost for each firm. ANS: D PTS: 1 DIF: 2 REF: 14-3 TOP: Supply curve MSC: Interpretive 185. When all firms and potential firms in a market have the same cost curves, the long-run equilibrium of a competitive

market with free entry and exit will be characterized by firms a. earning small levels of economic profit. b. facing the prospect of future losses. c. operating at efficient scale.

d. that band together to raise market prices. ANS: C PTS: 1 DIF: 2 REF: 14-3 TOP: Competitive markets MSC: Interpretive

Scenario 14-3

In March of 2000 a study sponsored by the Food Consumer Safety Board found that consumption of irradiated grapefruit increased the health of laboratory rats. As a result of national press coverage of the report, the demand for irradiated grapefruit increased dramatically. Organic farmers were able to switch from organic production of grapefruit to

irradiated production with no additional cost. Assume that the grapefruit market satisfies all of the attributes of perfect competition.

186. Refer to Scenario 14-3. As a result of the increase in the demand for grapefruit, we would predict that in the short

run that the

a. production of grapefruit would be at efficient scale. b. price of grapefruit would rise.

c. total cost for existing irradiated grapefruit producers must rise.

d. number of firms in the market would fall as prices fall and firms exit the market. ANS: B PTS: 1 DIF: 2 REF: 14-3 TOP: Competitive markets MSC: Analytical 187. Refer to Scenario 14-3. If the increased production of irradiated grapefruit caused a rise in the marginal

transportation costs of moving irradiated grapefruit to market, the

a. short-run market supply curve for irradiated grapefruit would be affected, but not the long-run market supply. b. long-run market supply curve for irradiated grapefruit would be perfectly elastic. c. long-run market supply of irradiated grapefruit would be downward sloping. d. long-run market supply of irradiated grapefruit would be upward sloping. ANS: D PTS: 1 DIF: 2 REF: 14-3 TOP: Supply curve MSC: Analytical 188. In the long-run equilibrium of a competitive market, the number of firms in the market adjusts until the market

demand is satisfied at a price equal to

a. average fixed cost for the marginal firm.

b. the maximum of marginal cost of the marginal firm. c. the minimum of average total cost of the marginal firm. d. the minimum of average variable cost of the marginal firm. ANS: C PTS: 1 DIF: 2 REF: 14-3 TOP: Competitive markets MSC: Interpretive 189. The entry of new firms into a competitive market will

a. increase market supply and increase market prices. b. increase market supply and decrease market prices. c. decrease market supply and increase market prices. d. decrease market supply and decrease market prices. ANS: B PTS: 1 DIF: 2 REF: 14-3 TOP: Competitive markets MSC: Interpretive

Chapter 14/Firms in Competitive Markets ? 609

190. The exit of existing firms from a competitive market will

a. increase market supply and increase market prices. b. increase market supply and decrease market prices. c. decrease market supply and increase market prices. d. decrease market supply and decrease market prices. ANS: C PTS: 1 DIF: 2 REF: 14-3 TOP: Competitive markets MSC: Interpretive

191. When firms are neither entering nor exiting a perfectly competitive market,

a. total revenue must equal total variable cost for each firm. b. economic profits must be zero.

c. price must equal average variable cost for each firm. d. Both a and c are correct. ANS: B PTS: 1 DIF: 2 REF: 14-3 TOP: Competitive markets MSC: Interpretive

192. When entry and exit behavior of firms in an industry does not affect a firm's cost structure,

a. the long-run market supply curve must be horizontal.

b. the long-run market supply curve must be upward-sloping. c. the long-run market supply curve must be downward-sloping.

d. we can't tell anything about the shape of the long-run market supply curve. ANS: A PTS: 1 DIF: 2 REF: 14-3 TOP: Supply curve MSC: Interpretive

Figure 14-7

193. Refer to Figure 14-7. When the market is in long-run equilibrium at point A in panel (b), the firm represented in

panel (a) will

a. have a zero economic profit.

b. have a negative accounting profit. c. exit the market.

d. choose to increase production to increase profit. ANS: A PTS: 1 DIF: 2 REF: 14-3 TOP: Profit maximization MSC: Analytical

610 ? Chapter 14/Firms in Competitive Markets

194. Refer to Figure 14-7. Assume that the market starts in equilibrium at point A in panel (b). An increase in demand

from Demand0 to Demand1 will result in a. a new market equilibrium at point D.

b. an eventual increase in the number of firms in the market and a new long-run equilibrium at point C. c. rising prices and falling profits for existing firms in the market. d. falling prices and falling profits for existing firms in the market. ANS: B PTS: 1 DIF: 2 REF: 14-3 TOP: Competitive markets MSC: Analytical 195. Refer to Figure 14-7. If the market starts in equilibrium at point C in panel (b), a decrease in demand will ultimately

lead to

a. more firms in the industry, but lower levels of production for each firm. b. fewer firms in the market.

c. a new long-run equilibrium at point D in panel (b).

d. lower prices once the new long-run equilibrium is reached. ANS: B PTS: 1 DIF: 2 REF: 14-3 TOP: Competitive markets MSC: Analytical 196. Refer to Figure 14-7. Suppose a firm in a competitive market, like the one depicted in panel (a), observes market

price rising from P1 to P2. Which of the following could explain this observation? a. The entry of new firms into the market.

b. The exit of existing consumers from the market.

c. An increase in market supply from Supply0 to Supply1. d. An increase in market demand from Demand0 to Demand1. ANS: D PTS: 1 DIF: 2 REF: 14-3 TOP: Competitive markets MSC: Analytical 197. When managers of firms in a competitive market observe falling profits, they are likely to infer that the market is

characterized by

a. a violation of conventional market forces. b. over-investment.

c. the entry of new firms.

d. too few firms in the market. ANS: C PTS: 1 DIF: 2 REF: 14-3 TOP: Competitive markets MSC: Interpretive 198. Suppose a competitive market is comprised of firms that face identical cost curves. The firms experience an increase

in demand that results in positive profits for the firms. Which of the following events are then most likely to occur? (i) New firms will enter the market.

(ii) In the short run, price will rise; in the long run, price will rise further. (iii) In the long run, all firms will be producing at their efficient scale.

a. (i) and (ii) only b. (i) and (iii) only c. (ii) and (iii) only d. (i), (ii) and (iii) ANS: B PTS: 1 DIF: 2 REF: 14-3 TOP: Competitive markets MSC: Interpretive 199. When firms in a perfectly competitive market face the same costs, in the long run they must be operating

a. under diseconomies of scale.

b. with small, but positive, levels of profit. c. at their efficient scale.

d. where price is equal to average fixed cost. ANS: C PTS: 1 DIF: 2 REF: 14-3 TOP: Competitive markets MSC: Interpretive

Chapter 14/Firms in Competitive Markets ? 611

200. When some resources used in production are only available in limited quantities, it is likely that the long-run supply

curve in a competitive market is a. downward sloping. b. upward sloping. c. horizontal. d. vertical. ANS: B PTS: 1 DIF: 2 REF: 14-3 TOP: Supply curve MSC: Interpretive 201. When a competitive market experiences an increase in demand that induces an increase in production costs, which of

the following is most likely to arise?

a. The long-run market supply curve will be upward sloping. b. The condition of free entry into the market will be violated. c. Producer profits will fall in the long run.

d. The long-run market supply curve will be horizontal as new firms enter and drive the price downward. ANS: A PTS: 1 DIF: 2 REF: 14-3 TOP: Supply curve MSC: Interpretive 202. When firms in a competitive market have different costs, it is likely that

a. free entry and exit in the market will be violated. b. the market will no longer be considered competitive. c. long-run market supply will be downward sloping.

d. some firms will earn positive economic profits in the long run. ANS: D PTS: 1 DIF: 2 REF: 14-3 TOP: Competitive markets MSC: Interpretive 203. Regardless of the cost structure of firms in a competitive market, in the long run

a. firms will experience rising demand for their products. b. the marginal firm will earn zero economic profit.

c. firms will experience a less competitive market environment.

d. exit and entry is likely to lead to a horizontal long-run supply curve. ANS: B PTS: 1 DIF: 2 REF: 14-3 TOP: Competitive markets MSC: Interpretive 204. A long-run supply curve is flatter than a short-run supply curve because

a. firms can enter and exit a market more easily in the long run than in the short run. b. long-run supply curves are sometimes downward sloping.

c. competitive firms have more control over demand in the long run. d. firms in a competitive market face identical cost structures. ANS: A PTS: 1 DIF: 2 REF: 14-3 TOP: Supply curve MSC: Interpretive

205. A market might have an upward-sloping long-run supply curve if

a. firms have different costs.

b. consumers exercise market power over producers.

c. all factors of production are essentially available in unlimited supply.

d. the entry of new firms into the market has no effect on the cost structure of firms in the market. ANS: A PTS: 1 DIF: 2 REF: 14-3 TOP: Supply curve MSC: Interpretive 206. When new entrants into a competitive market have higher costs than existing firms,

a. accounting profits will be the primary determinant of entry into the market. b. sunk costs become an important determinant of the short-run entry strategy. c. market price must be rising.

d. all firms will earn zero economic profit once the new equilibrium is reached. ANS: C PTS: 1 DIF: 2 REF: 14-3 TOP: Competitive markets MSC: Interpretive

612 ? Chapter 14/Firms in Competitive Markets

207. The assumption of a fixed number of firms is appropriate for analysis of

a. the short run, but not the long run. b. the long run, but not the short run. c. both the short run and the long run. d. neither the short run nor the long run. ANS: A PTS: 1 DIF: 1 REF: 14-3 TOP: Competitive markets MSC: Interpretive

208. In a particular market, there are 500 firms. Each firm has a marginal cost of $30 when it produces 200 units of output.

One point on the market supply curve is a. Quantity = 200, Price = $30 b. Quantity = 500, Price = $30 c. Quantity = 100,000, Price = $30 d. Quantity = 100,000, Price = $15,000 ANS: C PTS: 1 DIF: 2 REF: 14-3 TOP: Supply curve MSC: Applicative 209. Entry into a market by new firms will

a. increase the supply of the good. b. increase profits of existing firms. c. increase the price of the good.

d. raise the marginal cost of producing the good. ANS: A PTS: 1 DIF: 2 REF: 14-3 TOP: Competitive markets MSC: Interpretive 210. In a long-run equilibrium, the marginal firm has

a. price equal to average total cost. b. total revenue equal to total cost. c. economic profit equal to zero. d. All of the above are correct. ANS: D PTS: 1 DIF: 2 REF: 14-3 TOP: Competitive firms MSC: Interpretive

211. In the long-run equilibrium of a market with free entry and exit, if all firms have the same cost structure, then

a. marginal cost exceeds average total cost.

b. the price of the good exceeds average total cost. c. average total cost exceeds the price of the good. d. firms are operating at their efficient scale. ANS: D PTS: 1 DIF: 2 REF: 14-3 TOP: Profit maximization MSC: Interpretive 212. In the long-run equilibrium of a market with free entry and exit, marginal firms are operating

a. at the point where average variable cost equals marginal cost. b. at the minimum point on their marginal cost curves. c. at their efficient scale.

d. where accounting profit is zero. ANS: D PTS: 1 DIF: 2 REF: 14-3 TOP: Competitive firms MSC: Interpretive

213. Suppose a competitive market has a horizontal long-run supply curve and is in long-run equilibrium. If demand

decreases, we can be certain that in the short-run, a. at least some firms will shut down.

b. price will fall below marginal cost for some firms. c. price will fall below average total cost for some firms. d. at least some firms will exit the industry. ANS: C PTS: 1 DIF: 2 REF: 14-3 TOP: Competitive markets MSC: Analytical 214. There are 500 identical firms in a competitive market. The firms do not use any resources that are available in limited

quantities, and all of them have the following long-run cost structure:

Chapter 14/Firms in Competitive Markets ? 613

Output 0 1 2 3 4 5

Total Cost $0 $10 $12 $15 $24 $40 The long-run supply curve for this market is a. positively sloped.

b. horizontal at a price of $3.33. c. horizontal at a price of $5. d. horizontal at a price of $7. ANS: C PTS: 1 DIF: 3 REF: 14-3 TOP: Profit maximization MSC: Analytical

215. Consider a competitive market with a large number of identical firms. The firms in this market do not use any

resources that are available only in limited quantities. In long-run equilibrium, market price a. is determined by demand.

b. is determined by the minimum point on the firms' average total cost curve. c. is determined by the minimum point on the firms' average variable cost curve. d. depends on how many firms exist in the industry. ANS: B PTS: 1 DIF: 2 REF: 14-3 TOP: Supply curve MSC: Interpretive 216. Consider a competitive market with a large number of identical firms. The firms in this market do not use any

resources that are available only in limited quantities. In this market, an increase in demand will a. increase price in the short run, but not in the long run. b. increase price in the long run, but not in the short run. c. increase price both in the short and the long run. d. not affect price in either the short or the long run. ANS: A PTS: 1 DIF: 2 REF: 14-3 TOP: Competitive markets MSC: Interpretive 217. Which of the following statements is false?

a. In a long-run equilibrium, marginal firms make zero economic profit.

b. To maximize profit, firms should produce at a level of output where price equals average variable cost.

c. The amount of gold in the world is limited. Therefore, the gold jewelry market probably has a long-run supply

curve that is upward sloping.

d. Long-run supply curves are typically more elastic than short-run supply curves. ANS: B PTS: 1 DIF: 2 REF: 14-3 TOP: Competitive markets MSC: Interpretive 218. In the short run, a market consists of 100 identical firms. The market price is $8, and the total cost to each firm of

producing various levels of output is given in the table below. What will total quantity supplied be in the market?

Q 0 1 2 3 4 5

TC 1 7 14 22 31 41

Chapter 14/Firms in Competitive Markets ? 619

6. News reports from the western United States occasionally report incidents of cattle ranchers slaughtering a large

number of newborn calves and burying them in mass graves rather than transporting them to markets. Assuming that this is rational behavior by profit-maximizing \ANS:

If the selling price is not sufficient to cover the variable cost of sending them to market this behavior would make sense.PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Analytical

7. Use a graph to demonstrate the circumstances that would prevail in a perfectly competitive market where firms are

experiencing economic losses. Identify costs, revenue, and the economic losses on your graph. Using your graph, determine whether this firm will shut down in the short run, or choose to remain in the market. Explain your answer. ANS:

The loss and revenue are identified on the individual firm's graph. Total cost is equal to the sum of the losses and revenue. The decision about whether this firm shuts down or remains in the market depends upon the position of average variable cost. If average variable cost is below P0 at output level Q0, the firm will remain in the market. If average variable cost is above P0 at output level Q0 the firm will shut down in the short run.

PTS: 1 DIF: 2 TOP: Profit maximization

REF: 14-2

MSC: Analytical

8. At its current level of production a profit-maximizing firm in a competitive market receives $12.50 for each unit it produces and faces an average total cost of $10. At the market price of $12.50 per unit, the firm's marginal cost curve crosses the marginal revenue curve at an output level of 1,000 units. What is the firm's current profit? What is likely to occur in this market and why? ANS:

$2,500; firms are likely to enter this market since existing firms are earning economic profits. PTS: 1 DIF: 2 REF: 14-2 TOP: Profit MSC: Analytical

9. Give two reasons why the long-run industry supply curve may slope upward. Use an example to demonstrate your

reasons. ANS:

Some resource used in production may be available only in limited quantities and firms may have different cost

structures. The example provided in the text for the first reason is the market for farm products. As more people become farmers, the price of land is bid up since its supply is limited. As the price of farm land is bid up, the costs of all farmers in the market rise. The example used to support the second reason is the market for painters. Anyone can enter the market for painting services, but not everyone has the same costs because some painters work faster than others.PTS: 1 DIF: 3 REF: 14-3 TOP: Supply curve MSC: Interpretive

620 ? Chapter 14/Firms in Competitive Markets

10. If identical firms that remain in a competitive market over the long run make zero economic profit, why do these

firms choose to remain in the market? ANS:

Because a normal rate of return on their investment is included as part of the opportunity cost of production.PTS: 1 DIF: 2 REF: 14-3 TOP: Economic profit MSC: Interpretive

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