5学原理（微观）第五版测试题库(14)

Chapter 14

Firms in Competitive Markets

TRUE/FALSE1.

For a firm operating in a perfectly competitive industry, total revenue, marginal revenue, and average revenue are all equal.

ANS: F DIF: LOC: Perfect competition MSC: Interpretive

2 REF: 14-1 NAT: Analytic

TOP: Average revenue | Marginal revenue

2. For a firm operating in a perfectly competitive industry, marginal revenue and average revenue are equal.ANS: T DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Average revenue | Marginal revenue MSC: Interpretive

3.

If a firm notices that its average revenue equals the current market price, that firm must be participating in a competitive market.

ANS: F DIF: LOC: Perfect competition MSC: Interpretive

2 REF: 14-1 NAT: Analytic TOP: Average revenue

4.

A profit-maximizing firm in a competitive market will increase production when average revenue exceeds

marginal cost.ANS: T DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Average revenue MSC: Interpretive

5.

Because there are many buyers and sellers in a perfectly competitive market, no one seller can influence the market price.ANS: T DIF: 1 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Definitional

6. Firms operating in perfectly competitive markets try to maximize profits.ANS: T DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Applicative

7. In competitive markets, firms that raise their prices are typically rewarded with larger profits.ANS: F DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive

8.

When an individual firm in a competitive market increases its production, it is likely that the market price will fall.ANS: F DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive

9. In a competitive market, firms are unable to differentiate their product from that of other producers.ANS: T DIF: 1 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive

10. Firms in a competitive market are said to be price takers because there are many sellers in the market and the

goods offered by the firms are very similar if not identical.ANS: T DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive

929

930 ? Chapter 14/Firms in Competitive Markets

11. A firm's incentive to compare marginal revenue and marginal cost is an application of the principle that

rational people think at the margin.

ANS: T DIF: LOC: Perfect competition MSC: Interpretive

1 REF: 14-2 NAT: Analytic TOP: Profit maximization

12. By comparing the marginal revenue and marginal cost from each unit produced, a firm in a competitive

market can determine the profit-maximizing level of production.ANS: T DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Interpretive

13. Firms operating in perfectly competitive markets produce an output level where marginal revenue equals

marginal cost.ANS: T DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Marginal revenue MSC: Applicative

14. A firm is currently producing 100 units of output per day. The manager reports to the owner that producing

the 100th unit costs the firm $5. The firm can sell the 100th unit for $4.75. The firm should continue to produce 100 units in order to maximize its profits (or minimize its losses).

ANS: F DIF: LOC: Perfect competition MSC: Analytical

2 REF: 14-2 NAT: Analytic TOP: Profit maximization

15. A firm is currently producing 100 units of output per day. The manager reports to the owner that producing

the 100th unit costs the firm $5. The firm can sell the 100th unit for $5. The firm should continue to produce 100 units in order to maximize its profits (or minimize its losses).

ANS: T DIF: LOC: Perfect competition MSC: Analytical

2 REF: 14-2 NAT: Analytic TOP: Profit maximization

16. A firm is currently producing 100 units of output per day. The manager reports to the owner that producing

the 100th unit costs the firm $5. The firm can sell the unit for $6. The firm should produce more than 100 units in order to maximize its profits (or minimize its losses).

ANS: T DIF: LOC: Perfect competition MSC: Analytical

2 REF: 14-2 NAT: Analytic TOP: Profit maximization

17. A dairy farmer must be able to calculate sunk costs in order to determine how much revenue the farm receives

for the typical gallon of milk.ANS: F DIF: 1 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Sunk costs MSC: Interpretive

18. Because nothing can be done about sunk costs, they are irrelevant to decisions about business strategy.ANS: T DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Sunk costs MSC: Interpretive

19. A miniature golf course is a good example of where fixed costs become relevant to the decision of when to

open and when to close for the season.ANS: F DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Sunk costs MSC: Interpretive

20. A popular resort restaurant will maximize profits if it chooses to stay open during the less-crowded “off

season” when its total revenues exceed its variable costs.

ANS: T DIF: LOC: Perfect competition 2 REF: 14-2

TOP: Sunk costs NAT: Analytic MSC: Interpretive

Chapter 14/Firms in Competitive Markets ? 931

21. All firms maximize profits by producing an output level where marginal revenue equals marginal cost; for

firms operating in perfectly competitive industries, maximizing profits also means producing an output level where price equals marginal cost.ANS: T DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Interpretive

22. A firm operating in a perfectly competitive industry will continue to operate in the short run but earn losses if

the market price is less than that firm’s average total cost but greater than the firm’s average variable cost.

ANS: T DIF: LOC: Perfect competition MSC: Interpretive

2 REF: 14-2

TOP: Supply curve NAT: Analytic

23. A firm operating in a perfectly competitive industry will continue to operate in the short run but earn losses if

the market price is less than that firm’s average variable cost.ANS: F DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Interpretive

24. A firm operating in a perfectly competitive industry will shut down in the short run but earn losses if the

market price is less than that firm’s average variable cost.

ANS: T DIF: LOC: Perfect competition MSC: Interpretive

2 REF: 14-2

TOP: Supply curve NAT: Analytic

25. In the short run, a firm should exit the industry if its marginal cost exceeds its marginal revenue.

ANS: F DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Interpretive

26. In making a short-run profit-maximizing production decision, the firm must consider both fixed and variable

cost.

ANS: F DIF: LOC: Perfect competition MSC: Interpretive

2 REF: 14-2 NAT: Analytic TOP: Profit maximization

27. A firm will shut down in the short run if revenue is not sufficient to cover its variable costs of production.

ANS: T DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Shut down MSC: Interpretive

28. Suppose a firm is considering producing zero units of output. We call this shutting down in the short run and

exiting an industry in the long run.ANS: T DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Shut down MSC: Interpretive

29. Suppose a firm is considering producing zero units of output. We call this exiting an industry in the short run

and shutting down in the long run.ANS: F DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Shut down MSC: Interpretive

30. A firm will shut down in the short run if revenue is not sufficient to cover all of its fixed costs of production.ANS: F DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Shut down MSC: Interpretive

31. The supply curve of a firm in a competitive market is the average variable cost curve above the minimum of

marginal cost.

ANS: F DIF: LOC: Perfect competition MSC: Interpretive

2 REF: 14-2

TOP: Supply curve NAT: Analytic

932 ? Chapter 14/Firms in Competitive Markets

32. When a profit-maximizing firm in a competitive market experiences rising prices, it will respond with an

increase in production.

ANS: T DIF: LOC: Perfect competition MSC: Interpretive

2 REF: 14-2 NAT: Analytic TOP: Profit maximization

33. The marginal firm in a competitive market will earn zero economic profit in the long run.

ANS: T DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Economic profit MSC: Interpretive

34. A profit-maximizing firm in a competitive market will earn zero accounting profits in the long run.ANS: F DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Accounting profit MSC: Interpretive

35. In the long run, when price is less than average total cost for all possible levels of production, a firm in a

competitive market will choose to exit (or not enter) the market.

ANS: T DIF: LOC: Perfect competition MSC: Interpretive

2 REF: 14-2 NAT: Analytic TOP: Profit maximization

36. In the long run, when price is greater than average total cost, some firms in a competitive market will choose

to enter the market.ANS: T DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Interpretive

37. In the long run, a firm should exit the industry if its total costs exceed its total revenues.ANS: T DIF: LOC: Perfect competition MSC: Interpretive

2 REF: 14-2 NAT: Analytic TOP: Profit maximization

38. When a resource used in the production of a good sold in a competitive market is available in only limited

quantities, the long-run supply curve is likely to be upward sloping.ANS: T DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Interpretive

39. A firm operating in a perfectly competitive industry will continue to operate if it earns zero economic profits

because it is likely to be earning positive accounting profits.ANS: T DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive

40. A firm operating in a perfectly competitive industry will shut down in the short run if its economic profits fall

to zero because it is likely to be earning negative accounting profits.ANS: F DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive

41. A firm operating in a perfectly competitive market may earn positive, negative, or zero economic profit in the

long run.ANS: F DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive

Chapter 14/Firms in Competitive Markets ? 933

42. A firm operating in a perfectly competitive market may earn positive, negative, or zero economic profit in the

short run.

ANS: T DIF: LOC: Perfect competition MSC: Interpretive

2 REF: 14-3 NAT: Analytic TOP: Long-run supply curve

43. A firm operating in a perfectly competitive market earns zero economic profit in the long run but remains in

business because the firm’s revenues cover the business owners’ opportunity costs.ANS: T DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive

44. A competitive market will typically experience entry and exit until accounting profits are zero.ANS: F DIF: LOC: Perfect competition MSC: Interpretive

2 REF: 14-3 NAT: Analytic TOP: Zero-profit condition

45. The long-run equilibrium in a competitive market characterized by firms with identical costs is generally

characterized by firms operating at efficient scale.ANS: T DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive

46. In the long run, a competitive market with 1,000 identical firms will experience an equilibrium price equal to

the minimum of each firm's average total cost.

ANS: T DIF: LOC: Perfect competition MSC: Interpretive

2 REF: 14-3 NAT: Analytic TOP: Zero-profit condition

47. In a long-run equilibrium where firms have identical costs, it is possible that some firms in a competitive

market are making a positive economic profit.ANS: F DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive

48. When economic profits are zero in equilibrium, the firm's revenue must be sufficient to cover all opportunity

costs.ANS: T DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive

49. The short-run supply curve in a competitive market must be more elastic than the long-run supply curve.ANS: F DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Interpretive

50. The long-run supply curve in a competitive market is more elastic than the short-run supply curve.ANS: T DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Interpretive

934 ? Chapter 14/Firms in Competitive Markets

SHORT ANSWER1.

Describe the difference between average revenue and marginal revenue. Why are both of these revenue measures important to a profit-maximizing firm?ANS:

Average revenue is total revenue divided by the quantity of output. Marginal revenue is the change in total revenue from the sale of each additional unit of output. Marginal revenue is used to determine the profit-maximizing level of production, and average revenue is used to help determine the level of profits. Note that for all firms, price equals average revenue because AR=(PxQ)/Q=P. But only for a firm operating in a perfectly competitive industry does price also equal marginal revenue.

DIF: 2 TOP: Price REF: 14-1

MSC: Definitional

NAT: Analytic

LOC: Perfect competition

2. List and describe the characteristics of a perfectly competitive market.ANS:

There are many buyers and sellers in the market. The goods offered by the various sellers are largely the same. Firms can freely enter or exit the market.

DIF: 2 REF: 14-1 TOP: Competitive markets 3.

NAT: Analytic MSC: Definitional

LOC: Perfect competition

Why would a firm in a perfectly competitive market always choose to set its price equal to the current market price? If a firm set its price below the current market price, what effect would this have on the market?ANS:

The firm could not sell any more of its product at a lower price than it could sell at the market price. As a result, it would needlessly forgo revenue if it set a price below the market price. If the firm set a higher price, it would not sell anything at all because a competitive market has many sellers who would supply the product at the market price.

DIF: 2 REF: 14-1 TOP: Profit maximization 4.

NAT: Analytic

MSC: Analytical

LOC: Perfect competition

Use a graph to demonstrate the circumstances that would prevail in a competitive market where firms are earning economic profits. Can this scenario be maintained in the long run? Explain your answer.

ANS:

In a competitive market where firms are earning economic profits, new firms will have an incentive to enter the market. This entry will expand the number of firms, increase the quantity of the good supplied, and drive down prices and profits. Entry will cease once firms are producing the output level where price equals the minimum of the average total cost curve, meaning that each firm earns zero economic profits in the long run.

DIF: 2 REF: 14-2 TOP: Profit maximization NAT: Analytic

MSC: Analytical

LOC: Perfect competition

Chapter 14/Firms in Competitive Markets ? 935

5.

Explain how a firm in a competitive market identifies the profit-maximizing level of production. When should the firm raise production, and when should the firm lower production?

ANS:

The firm selects the level of output at which marginal revenue is equal to marginal cost. If MR > MC, profit will increase if the firm increases Q. If MR < MC, profit will increase if the firm decreases Q.

DIF: 2 REF: 14-2 TOP: Profit maximization 6.

NAT: Analytic

MSC: Analytical

LOC: Perfect competition

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 \influence such behavior.

ANS:

If the selling price is not sufficient to cover the variable cost of sending the calves to market, this (potentially emotionally upsetting) behavior makes economic sense.

DIF: 2 REF: 14-2 TOP: Profit maximization 7.

NAT: Analytic

MSC: Analytical

LOC: Perfect competition

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 an individual firm will shut down in the short run, or choose to remain in the market. Explain your answer.ANS:

The losses and revenues are identified on the individual firm's graph. Total cost is equal to the sum of the losses and revenue (because profit/loss=TR-TC, so TC=TR+profit/loss). 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.

DIF: 2 REF: 14-2 TOP: Profit maximization 8.

NAT: Analytic

MSC: Analytical

LOC: Perfect competition

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.DIF: 2 TOP: Profit

REF: 14-2

MSC: Analytical

NAT: Analytic

LOC: Perfect competition

936 ? Chapter 14/Firms in Competitive Markets

9.

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

ANS:

1) Some resource used in production may be available only in limited quantities. 2) 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 to 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.

DIF: 3

TOP: Supply curve REF: 14-3 NAT: Analytic

MSC: Interpretive

LOC: Perfect competition

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.

DIF: 2 REF: 14-3 TOP: Economic profit MSC: NAT: Analytic

Interpretive

LOC: Perfect competition

Sec00 - Firms in Competitive Markets

MULTIPLE CHOICE1.

A firm has market power if it can a. maximize profits. b. minimize costs.

c. influence the market price of the good it sells.

d. hire as many workers as it needs at the prevailing wage rate.

1

REF: 14-0 NAT: Analytic TOP: Market power

ANS: C DIF:

LOC: Perfect competition MSC: Definitional

2.

The analysis of competitive firms sheds light on the decisions that lie behind the a. demand curve. b. supply curve.

c. way firms make pricing decisions in the not-for-profit sector of the economy. d. way financial markets set interest rates.

1

REF: 14-0 NAT: Analytic TOP: Competitive market

ANS: B DIF:

LOC: Perfect competition MSC: Interpretive

3.

For any competitive market, the supply curve is closely related to the a. preferences of consumers who purchase products in that market. b. income tax rates of consumers in that market. c. firms’ costs of production in that market. d. interest rates on government bonds.

1

REF: 14-0 NAT: Analytic TOP: Competitive market

ANS: C DIF:

LOC: Perfect competition MSC: Interpretive

Chapter 14/Firms in Competitive Markets ? 937

4.

Suppose that firms in each of the two markets listed below were to increase their prices by 20 percent.

Which pair represents the example where customers would decrease their quantity purchased dramatically in one market and only slightly in the other market due to differences in market structure? a. corn and soybeans b. gasoline and restaurants c. water and cable television

d. spiral notebooks and college textbooks

2

REF: 14-0 NAT: Analytic TOP: Competitive market

ANS: D DIF:

LOC: Perfect competition MSC: Interpretive

Sec01 - Firms in Competitive Markets - What is a Competitive Market?

MULTIPLE CHOICE1.

A key characteristic of a competitive market is that a. government antitrust laws regulate competition. b. producers sell nearly identical products. c. firms minimize total costs. d. firms have price setting power.

1

REF: 14-1 NAT: Analytic TOP: Competitive markets

ANS: B DIF: LOC: Perfect competition MSC: Definitional

2.

Which of the following is not a characteristic of a competitive market? a. Buyers and sellers are price takers.

b. Each firm sells a virtually identical product. c. Free entry is limited.

d. Each firm chooses an output level that maximizes profits.

2

REF: 14-1 NAT: Analytic TOP: Competitive markets

ANS: C DIF: LOC: Perfect competition MSC: Definitional

3.

In a perfectly competitive market,

a. no one seller can influence the price of the product. b. price exceeds marginal revenue for each unit sold.

c. average revenue exceeds marginal revenue for each unit sold.

d. administrative barriers can make it difficult for firms to enter an industry.

1

REF: 14-1 NAT: Analytic TOP: Competitive markets

ANS: A DIF: LOC: Perfect competition MSC: Interpretive

4.

Who is a price taker in a competitive market? a. buyers only b. sellers only

c. both buyers and sellers d. neither buyers nor sellers

1

REF: 14-1 NAT: Analytic TOP: Competitive markets

ANS: C DIF: LOC: Perfect competition MSC: Definitional

5.

Competitive markets are characterized by a. a small number of buyers and sellers. b. unique products.

c. the interdependence of firms. d. free entry and exit by firms.

1

REF: 14-1 NAT: Analytic TOP: Competitive markets

ANS: D DIF: LOC: Perfect competition MSC: Definitional

938 ? Chapter 14/Firms in Competitive Markets

6. 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.

b. c. d. (i) and (ii) only (i) and (iii) only (ii) and (iii) only (i), (ii), and (iii)

2

REF: 14-1 NAT: Analytic TOP: Competitive markets

ANS: C DIF: LOC: Perfect competition MSC: Interpretive

7.

When a firm has little ability to influence market prices it is said to be in a a. competitive market. b. strategic market. c. thin market. d. power market.

1

REF: 14-1 NAT: Analytic TOP: Competitive markets

ANS: A DIF: LOC: Perfect competition MSC: Definitional

8.

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 market equilibrium quantity but will affect market equilibrium price. c. affect marginal revenue and average revenue but not price.

d. adversely affect the profitability of more than one firm in the market.

2

REF: 14-1 NAT: Analytic TOP: Competitive markets

ANS: A DIF: LOC: Perfect competition MSC: Interpretive

9.

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. only a few buyers will have market power.

d. sellers will have little reason to charge less than the going market price.

2

REF: 14-1 NAT: Analytic TOP: Competitive markets

ANS: D DIF: LOC: Perfect competition MSC: Interpretive

10. 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 DIF: LOC: Perfect competition MSC: Interpretive

2 REF: 14-1 NAT: Analytic TOP: Competitive markets

11. Which of the following is not a characteristic of a perfectly competitive market?

a. Firms are price takers.

b. Firms can freely enter the market. c. Many firms have market power.

d. Goods offered for sale are largely the same.

ANS: C DIF: LOC: Perfect competition MSC: Interpretive

2 REF: 14-1 NAT: Analytic TOP: Competitive markets

Chapter 14/Firms in Competitive Markets ? 939

12. Free entry means that

a. the government pays any entry costs for individual firms. 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 DIF: LOC: Perfect competition MSC: Interpretive

2 REF: 14-1 NAT: Analytic TOP: Competitive markets

13. Which of the following industries is most likely to exhibit the characteristic of free entry?

a. nuclear power

b. municipal water and sewer c. dairy farming d. airport security

ANS: C DIF: LOC: Perfect competition MSC: Interpretive

2 REF: 14-1 NAT: Analytic TOP: Competitive markets

14. 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 DIF: LOC: Perfect competition MSC: Definitional

1 REF: 14-1 NAT: Analytic TOP: Competitive markets

15. 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 DIF: LOC: Perfect competition MSC: Interpretive

2 REF: 14-1 NAT: Analytic TOP: Competitive markets

16. 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 DIF: LOC: Perfect competition MSC: Interpretive

2 REF: 14-1 NAT: Analytic TOP: Competitive markets

17. Why does a firm in a competitive industry charge the market price?

a. If a firm charges less than the market price, it loses potential revenue.

b. If a firm charges more than the market price, it loses all its customers to other firms. c. The firm can sell as many units of output as it want to at the market price. d. All of the above are correct.

ANS: D DIF: LOC: Perfect competition MSC: Interpretive

2 REF: 14-1 NAT: Analytic TOP: Competitive markets

940 ? Chapter 14/Firms in Competitive Markets

18. 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 DIF: LOC: Perfect competition MSC: Interpretive

2 REF: 14-1 NAT: Analytic TOP: Competitive markets

19. A competitive firm would benefit from charging a price below the market price because the firm would

achieve

a. higher average revenue. b. higher profits. c. lower total costs.

d. None of the above is correct.

ANS: D DIF: LOC: Perfect competition MSC: Interpretive

2 REF: 14-1 NAT: Analytic TOP: Competitive markets

20. Which of the following characteristics of competitive markets is 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.

b. c. d.

(i) and (ii) only (i) and (iii) only (ii) only

(i), (ii), and (iii)

2

REF: 14-1 NAT: Analytic TOP: Competitive markets

ANS: B DIF: LOC: Perfect competition 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 DIF: LOC: Perfect competition MSC: Analytical

2 REF: 14-1 NAT: Analytic TOP: Competitive markets

22. 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 DIF: LOC: Perfect competition MSC: Interpretive

2 REF: 14-1 NAT: Analytic TOP: Competitive markets

Chapter 14/Firms in Competitive Markets ? 941

23. In a competitive market,

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

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

d. accounting profit is driven to zero as firms freely enter and exit the market.

ANS: A DIF: LOC: Perfect competition MSC: Interpretive

1 REF: 14-1 NAT: Analytic TOP: Competitive markets

24. Which of the following statements regarding a competitive market is not correct?

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 DIF: LOC: Perfect competition MSC: Interpretive

2 REF: 14-1 NAT: Analytic TOP: Competitive markets

25. Which of the following statements regarding a competitive market is not correct?

a. There are many buyers and many sellers in the market. b. Firms can freely enter or exit the market. c. Price equals average revenue. d. Price exceeds marginal revenue.

ANS: D DIF: LOC: Perfect competition MSC: Interpretive

2 REF: 14-1 NAT: Analytic TOP: Competitive markets

26. 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 similar product.

d. significant advertising by firms to promote their products.

ANS: C DIF: LOC: Perfect competition MSC: Definitional

2 REF: 14-1 NAT: Analytic TOP: Competitive markets

27. 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 DIF: LOC: Perfect competition MSC: Applicative

1 REF: 14-1 NAT: Analytic TOP: Competitive markets

28. Firms that operate in perfectly competitive markets try to

a. maximize revenues. b. maximize profits.

c. equate marginal revenue with average total cost. d. Both b and c are correct.

ANS: B DIF: LOC: Perfect competition MSC: Interpretive

2 REF: 14-1 NAT: Analytic TOP: Competitive markets

942 ? Chapter 14/Firms in Competitive Markets Table 14-1 Quantity Total Revenue 0 $0 1 $7 2 $14 3 $21 4 $28 29. Refer to Table 14-1. For a firm operating in a competitive market, the price is a. $0. b. $7. c. $14. d. $21.

ANS: B DIF: LOC: Perfect competition MSC: Applicative

2 REF: 14-1 NAT: Analytic TOP: Competitive markets

30. Refer to Table 14-1. For a firm operating in a competitive market, the marginal revenue is

a. $0. b. $7. c. $14. d. $21.

ANS: B DIF: LOC: Perfect competition MSC: Applicative

2 REF: 14-1 NAT: Analytic TOP: Marginal revenue

31. Refer to Table 14-1. For a firm operating in a competitive market, the average revenue is

a. $21. b. $14. c. $7. d. $0.

ANS: C DIF: LOC: Perfect competition MSC: Applicative

2 REF: 14-1 NAT: Analytic TOP: Average revenue

Table 14-2 Quantity 0 1 2 3 4 5 6 7 8 9 Price $13 $13 $13 $13 $13 $13 $13 $13 $13 $13 32. Refer to Table 14-2. 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 DIF: LOC: Perfect competition MSC: Analytical

2 REF: 14-1 NAT: Analytic TOP: Competitive markets

Chapter 14/Firms in Competitive Markets ? 943

33. Refer to Table 14-2. 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 entire range of output.

ANS: D DIF: LOC: Perfect competition MSC: Analytical

2 REF: 14-1 NAT: Analytic TOP: Average revenue

34. Refer to Table 14-2. 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 entire range of output.

ANS: D DIF: LOC: Perfect competition MSC: Analytical

2 REF: 14-1 NAT: Analytic TOP: Marginal revenue

35. Refer to Table 14-2. 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 DIF: LOC: Perfect competition MSC: Applicative

2 REF: 14-1 NAT: Analytic TOP: Total revenue

36. Firms operating in competitive markets produce output levels where marginal revenue equals

a. price.

b. average revenue.

c. total revenue divided by output. d. All of the above are correct.

ANS: D DIF: LOC: Perfect competition MSC: Applicative

2 REF: 14-1 NAT: Analytic

TOP: Marginal revenue | Average revenue

37. For a competitive firm,

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

d. average revenue equals marginal revenue.

ANS: D DIF: LOC: Perfect competition MSC: Definitional

1 REF: 14-1 NAT: Analytic

TOP: Marginal revenue | Average revenue

38. Suppose that a firm operating in perfectly competitive market sells 100 units of output. Its total revenues

from the sale are $500. Which of the following statements is correct? i) Marginal revenue equals $5. ii) Average revenue equals $5. iii) Price equals $5.

a. b. c. d. i) only iii) only

i) and ii) only i), ii), and iii)

2

REF: 14-1 NAT: Analytic

TOP: Marginal revenue | Average revenue

ANS: D DIF: LOC: Perfect competition MSC: Analytical

964 ? Chapter 14/Firms in Competitive Markets

74. 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 DIF: LOC: Perfect competition MSC: Analytical

2 REF: 14-2 NAT: Analytic TOP: Profit maximization

75. Raiman's Shoe Repair produces custom-made shoes. When Mr. Raiman produces 12 pairs per week, the

marginal cost of the twelfth pair is $84, and the marginal revenue of the twelfth pair 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 DIF: LOC: Perfect competition MSC: Analytical

2 REF: 14-2 NAT: Analytic TOP: Profit maximization

76. 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 DIF: LOC: Perfect competition MSC: Analytical

2 REF: 14-2 NAT: Analytic TOP: Profit maximization

77. 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 DIF: LOC: Perfect competition MSC: Interpretive

2 REF: 14-2 NAT: Analytic TOP: Profit maximization

78. 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 total cost = Total variable cost/Quantity of output d. Average revenue = (Marginal revenue) x (Quantity of output)

ANS: A DIF: LOC: Perfect competition 2 REF: 14-2 TOP: Profit NAT: Analytic MSC: Definitional

79. Total profit for a firm is calculated as

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

d. (price minus average cost) times quantity of output.

ANS: D DIF: LOC: Perfect competition 1 REF: 14-2 TOP: Profit NAT: Analytic MSC: Definitional

Chapter 14/Firms in Competitive Markets ? 965

80. We can measure the profits earned by a firm in a competitive industry as

a. (P - ATC) x Q. b. (P - MC) x Q. c. MR x MC.

d. (MC - ATC) x Q.

ANS: A DIF: LOC: Perfect competition 2 REF: 14-2 TOP: Profit NAT: Analytic MSC: Analytical

81. 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 DIF: LOC: Perfect competition 2 REF: 14-2 TOP: Profit NAT: Analytic MSC: Interpretive

82. 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 DIF: LOC: Perfect competition 2 REF: 14-2 TOP: Profit NAT: Analytic MSC: Applicative

83. 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)xQ d. Profit = (P - ATC)xQ

ANS: D DIF: LOC: Perfect competition 2 REF: 14-2 TOP: Profit NAT: Analytic MSC: Definitional

84. 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 total cost of producing 50 units is $4, what is the firm's profit? a. $0 b. $200 c. $250 d. $450

ANS: C DIF: LOC: Perfect competition 2 REF: 14-2 TOP: Profit NAT: Analytic MSC: Analytical

85. 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 DIF: LOC: Perfect competition 2 REF: 14-2 TOP: Profit NAT: Analytic MSC: Analytical

966 ? Chapter 14/Firms in Competitive Markets

86. Consider a firm operating in a competitive market. The firm is producing 40 units of output, has an average

total 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 DIF: LOC: Perfect competition Figure 14-1

109876543211234567Price3 REF: 14-2 TOP: Profit NAT: Analytic MSC: Analytical

MCATCAVCP1P2P3P48Quantity87. Refer to Figure 14-1. If the market price is P1, in the short run, the perfectly competitive firm will earn

a. positive economic profits.

b. negative economic profits but will try to remain open. c. negative economic profits and will shut down. d. zero economic profits.

ANS: A DIF: LOC: Perfect competition 2 REF: 14-2

TOP: Shut down NAT: Analytic MSC: Interpretive

88. Refer to Figure 14-1. If the market price is P2, in the short run, the perfectly competitive firm will earn

a. positive economic profits.

b. negative economic profits but will try to remain open. c. negative economic profits and will shut down. d. zero economic profits.

ANS: D DIF: LOC: Perfect competition MSC: Interpretive

2 REF: 14-2

TOP: Supply curve NAT: Analytic

89. Refer to Figure 14-1. If the market price is P3, in the short run, the perfectly competitive firm will earn

a. positive economic profits.

b. negative economic profits but will try to remain open. c. negative economic profits and will shut down. d. zero economic profits.

ANS: B DIF: LOC: Perfect competition MSC: Interpretive

2 REF: 14-2

TOP: Supply curve NAT: Analytic

Chapter 14/Firms in Competitive Markets ? 967

90. Refer to Figure 14-1. If the market price is P4, in the short run, the perfectly competitive firm will earn

a. positive economic profits.

b. negative economic profits but will try to remain open. c. negative economic profits and will shut down. d. zero economic profits.

ANS: C DIF: LOC: Perfect competition MSC: Interpretive

2 REF: 14-2

TOP: Supply curve NAT: Analytic

91. Refer to Figure 14-1. Which of the four prices corresponds to a perfectly competitive firm earning positive

economic profits in the short run? a. P1 b. P2 c. P3 d. P4

ANS: A DIF: LOC: Perfect competition MSC: Interpretive

2 REF: 14-2

TOP: Supply curve NAT: Analytic

92. Refer to Figure 14-1. Which of the four prices corresponds to a perfectly competitive firm earning zero

economic profits in the short run? a. P1 b. P2 c. P3 d. P4

ANS: B DIF: LOC: Perfect competition MSC: Interpretive

2 REF: 14-2

TOP: Supply curve NAT: Analytic

93. Refer to Figure 14-1. Which of the four prices corresponds to a perfectly competitive firm earning negative

economic profits in the short run but trying to remain open? a. P1 b. P2 c. P3 d. P4

ANS: C DIF: LOC: Perfect competition MSC: Interpretive

2 REF: 14-2

TOP: Supply curve NAT: Analytic

94. Refer to Figure 14-1. Which of the four prices corresponds to a perfectly competitive firm earning negative

economic profits in the short run and shutting down? a. P1 b. P2 c. P3 d. P4

ANS: D DIF: LOC: Perfect competition MSC: Interpretive

2 REF: 14-2

TOP: Supply curve NAT: Analytic

968 ? Chapter 14/Firms in Competitive Markets

Figure 14-2

19181716151413121110987654321PriceMCATC12345678Quantity95. Refer to Figure 14-2. If the market price is $10, what is the firm’s short-run economic profit?

a. $9 b. $15 c. $30 d. $50

ANS: B DIF: LOC: Perfect competition 3 REF: 14-2 TOP: Profit NAT: Analytic MSC: Analytical

96. Refer to Figure 14-2. If the market price is $10, what is the firm’s total cost?

a. $15 b. $30 c. $35 d. $50

ANS: C DIF: LOC: Perfect competition 3 REF: 14-2

TOP: Total cost NAT: Analytic MSC: Analytical

97. Refer to Figure 14-2. If the market price is $10, what is the firm’s total revenue?

a. $15 b. $30 c. $35 d. $50

ANS: D DIF: LOC: Perfect competition MSC: Analytical

3 REF: 14-2 NAT: Analytic TOP: Total revenue

98. Refer to Figure 14-2. The firm will earn zero economic profit if the market price is

a. $0 b. $6 c. $7 d. $10

ANS: B DIF: LOC: Perfect competition 3 REF: 14-2 TOP: Profit NAT: Analytic MSC: Interpretive

974 ? Chapter 14/Firms in Competitive Markets

120. 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 DIF: LOC: Perfect competition 3 REF: 14-2 TOP: Losses NAT: Analytic MSC: Analytical

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

Output 0 1 2 3 4 5 Total Cost $5 $10 $12 $15 $24 $40 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 DIF: LOC: Perfect competition 3 REF: 14-2 TOP: Losses NAT: Analytic MSC: Applicative

122. 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 are correct.

ANS: A DIF: LOC: Perfect competition 1 REF: 14-2 TOP: Losses NAT: Analytic MSC: Interpretive

123. 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. Which of the following statements about Mrs. Smith’s firm is correct? a. Mrs. Smith is earning a loss and should shut down 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 DIF: LOC: Perfect competition 2 REF: 14-2 TOP: Losses NAT: Analytic MSC: Applicative

Chapter 14/Firms in Competitive Markets ? 975

124. Suppose you value a special watch at $100. You purchase it for $75. On your way home from class one

day, you lose the watch. The store is still selling the same watch, but the price has risen to $85. What should you do?

a. Pay the $85 to buy the watch.

b. Wait to see if the watch goes on sale. If the price drops to $75 or less, buy the watch. c. Wait to see if the watch goes on sale. If the price drops to $25 or less, buy the watch. d. Do not buy the watch.

ANS: A DIF: LOC: Perfect competition 2 REF: 14-2

TOP: Sunk costs NAT: Analytic MSC: Interpretive

125. When fixed costs are ignored because they are irrelevant to a business's production decision, they are called

a. explicit costs. b. implicit costs. c. sunk costs.

d. opportunity costs.

ANS: C DIF: LOC: Perfect competition 1 REF: 14-2

TOP: Sunk costs NAT: Analytic MSC: Interpretive

126. 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 DIF: LOC: Perfect competition 2 REF: 14-2

TOP: Sunk costs NAT: Analytic MSC: Interpretive

127. 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. opportunity costs

ANS: A DIF: LOC: Perfect competition 1 REF: 14-2

TOP: Sunk costs NAT: Analytic MSC: Interpretive

128. 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 DIF: LOC: Perfect competition 2 REF: 14-2

TOP: Sunk costs NAT: Analytic MSC: Interpretive

129. 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 DIF: LOC: Perfect competition 2 REF: 14-2

TOP: Sunk costs NAT: Analytic MSC: Applicative

976 ? Chapter 14/Firms in Competitive Markets

130. 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 $12 value on reading a book.

a. You should stay and watch the remainder of the show. b. You should go home and watch TV. c. You should go home and read a book.

d. You should go home and either watch TV or read a book.

ANS: C DIF: LOC: Perfect competition 2 REF: 14-2

TOP: Sunk costs NAT: Analytic MSC: Applicative

131. 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 DIF: LOC: Perfect competition 2 REF: 14-2

TOP: Sunk costs NAT: Analytic MSC: Definitional

132. When economists refer to a production cost that has already been committed and cannot be recovered, they

use the term a. implicit cost. b. explicit cost. c. variable cost. d. sunk cost.

ANS: D DIF: LOC: Perfect competition 1 REF: 14-2

TOP: Sunk costs NAT: Analytic MSC: Definitional

133. A corporation has been steadily losing money on one of its product lines, Wally’s Widgets. The firm produces

Wally’s Widgets in a factory that 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; that cost 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 DIF: LOC: Perfect competition 2 REF: 14-2

TOP: Sunk costs NAT: Analytic MSC: Analytical

134. If a firm operating in a competitive industry shuts down in the short run, it can avoid paying

a. fixed costs. b. variable costs. c. total costs.

d. The firm must pay all its costs, even if it shuts down.

ANS: B DIF: LOC: Perfect competition 2 REF: 14-2

TOP: Shut down NAT: Analytic MSC: Interpretive

135. Bill operates a boat rental business in a competitive industry. He owns 10 boats and pays $1,000 per month

on the loan that he took out to buy them. He rents each boat for $200 per month. The variable cost for each boat rental is $50. In the off season, Bill should

a. operate his business as long as he rents at least 7 boats per month. b. operate his business as long as he rents at least 1 boat per month. c. operate his business as long as he rents all 10 boats each month. d. raise the price he charges per boat rental.

ANS: B DIF: LOC: Perfect competition 3 REF: 14-2

TOP: Shut down NAT: Analytic MSC: Interpretive

Chapter 14/Firms in Competitive Markets ? 977

136. When a perfectly competitive firm decides to shut down, it is most likely that

a. marginal cost is above average variable cost. b. marginal cost is above average total cost.

c. price is below the firm’s average variable cost. d. fixed costs exceed variable costs.

ANS: C DIF: LOC: Perfect competition 2 REF: 14-2

TOP: Shut down NAT: Analytic MSC: Interpretive

137. When total revenue is less than variable costs, a firm in a competitive market will

a. continue to operate as long as average revenue exceeds marginal cost. b. continue to operate as long as average revenue exceeds average fixed cost. c. shut down. d. raise its price.

ANS: C DIF: LOC: Perfect competition 2 REF: 14-2

TOP: Shut down NAT: Analytic MSC: Analytical

138. When price is below average variable cost, a firm in a competitive market will

a. shut down and incur fixed costs.

b. shut down and incur both variable and fixed costs.

c. continue to operate as long as average revenue exceeds marginal cost. d. continue to operate as long as average revenue exceeds average fixed cost.

ANS: A DIF: LOC: Perfect competition 2 REF: 14-2

TOP: Shut down NAT: Analytic MSC: Interpretive

139. Which of the following statements best reflects the production decision of a profit-maximizing firm in a

competitive market when price falls below the minimum of average variable cost? a. The firm will continue to produce to attempt to pay fixed costs. b. The firm will immediately stop production to minimize its losses. c. The firm will stop production as soon as it is able to pay its sunk costs.

d. The firm will continue to produce in the short run but will likely exit the market in the long run.

ANS: B DIF: LOC: Perfect competition 2 REF: 14-2

TOP: Shut down NAT: Analytic MSC: Interpretive

140. A profit-maximizing firm will shut down in the short run when

a. price is less than average variable cost. b. price is less than average total cost.

c. average revenue is greater than marginal cost. d. average revenue is greater than average fixed cost.

ANS: A DIF: LOC: Perfect competition 2 REF: 14-2

TOP: Shut down NAT: Analytic MSC: Interpretive

141. In the long run, all of a firm's costs are variable. In this case the exit criterion for a profit-maximizing firm is to

shut down if

a. price is less than average total cost. b. price is greater than average total cost.

c. average revenue is greater than average fixed cost. d. average revenue is greater than marginal cost.

ANS: A DIF: LOC: Perfect competition 2 REF: 14-2

TOP: Shut down NAT: Analytic MSC: Interpretive

142. Which of the following statements is correct regarding a firm's decision-making?

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

c. The decision to shut down 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 shut down is a long-run

decision.

ANS: C DIF: LOC: Perfect competition 2 REF: 14-2

TOP: Shut down NAT: Analytic MSC: Interpretive

978 ? Chapter 14/Firms in Competitive Markets

143. A firm that shuts down temporarily has to pay

a. its variable costs but not its fixed costs. b. its fixed costs but not its variable costs. c. both its variable costs and its fixed costs. d. neither its variable costs nor its fixed costs.

ANS: B DIF: LOC: Perfect competition 2 REF: 14-2

TOP: Shut down NAT: Analytic MSC: Interpretive

144. 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 DIF: LOC: Perfect competition 2 REF: 14-2

TOP: Shut down NAT: Analytic MSC: Interpretive

145. A firm will shut down 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 DIF: LOC: Perfect competition 2 REF: 14-2

TOP: Shut down NAT: Analytic MSC: Interpretive

146. 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 DIF: LOC: Perfect competition 2 REF: 14-2

TOP: Shut down NAT: Analytic MSC: Analytical

147. A firm's marginal cost has a minimum value of $50, its average variable cost has a minimum value of $80, and

its average total cost has a minimum value of $90. Then the firm will shut down if the price of its product falls below a. $90. b. $80. c. $50. d. $40.

ANS: B DIF: LOC: Perfect competition 2 REF: 14-2

TOP: Shut down NAT: Analytic MSC: Analytical

148. 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 DIF: LOC: Perfect competition 2 REF: 14-2

TOP: Shut down NAT: Analytic MSC: Definitional

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