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Chapter 11: MANAGERIAL DECISIONS IN COMPETITIVE MARKETS
11-1
Which of the following is NOT a condition of a perfect competition:
a.
products produced by rival firms are perfect substitutes
b.
any individual firm cannot affect market supply
c.
unrestricted entry and exit d. industry sales are small
e.
each firm has complete knowledge about production and prices
11-2
In a perfectly competitive market
a.
a firm must lower price to attract more customers.
b.
the additional revenue from selling one more unit of output is less than price.
c.
demand facing the industry is perfectly elastic.
d.
all of the above e.
none of the above
11-3
For a price-taking firm, marginal revenue
a.
is the addition to total revenue from producing one more unit of output.
b.
decreases as the firm produces more output.
c.
is equal to price at any level of output.
d.
both a and b e. both a and c
11-4
Total cost schedule for a competitive firm:
Output
0
1
2
3
4
5
Total Cost
$ 10
60
80
110
165
245
If market price is $60, how many units of output will the firm produce?
a. Zero units of output because the firm shuts down.
b. 1 unit of output. c. 2 units of output. d.
3 units of output. e.
none of the above.
11-5
If market price is $60, what is the maximum profit the firm can earn?
a.
$10 b. Zero profit, the firm shuts down c. $75 d. $80 e. $85
11-6
If market price is $30, how many units of output will the firm produce?
a. 0, the firm shuts down b. 1 c. 2 d. 3 e.
4
11-7
In a perfectly competitive industry the market price is $25. A firm is currently producing 10,000
units of output; average total cost is $28, marginal cost is $20, and average variable cost is $20.
The firm should
a.
raise price because the firm is losing money.
b.
keep output the same because the firm is producing at minimum average variable cost.
c.
produce more because the next unit of output increases profit by $5.
d.
produce less because the next unit of output decreased profit by $3.
e.
shut down because the firm is losing money.
11-8
Below, the graph on the left shows the short-run marginal cost curve for a typical firm selling in a perfectly
competitive industry. The graph on the right shows current industry demand and supply.
If the firm’s demand and marginal revenue curves were drawn in the left-hand graph, what would
be the elasticity of demand?
a.
zero b. 6 c. 0.6 d. infinitely elastic e.
unitary
11-9
What is the marginal revenue for the FIRM from selling the 250th unit of output?
a.
$10 b. $8 c. $6 d. $4 e. zero
11-10
What output should the firm produce?
a.
200 b. 250 c. 150 d. 300
11-11 The graph below shows demand and marginal cost for a perfectly competitive firm. If the firm is producing
100 units of output, increasing output by one unit would ______ the firm’s profit by $______ .
a.
increase, $3 b. increase, $2 c. decrease, $1 d. increase, $1e.
decrease, $2
11-12 If the firm is producing 300 units of output, decreasing output by one unit would ______ the firm’s
profit by $______.
a.
decrease, $2 b. increase, $2 c. increase, $3 d. decrease, $5 e. increase, $5
11-13 In order to minimize losses in the short run, a perfectly competitive firm should shut down if
a.
total revenue is less than total cost.
b.
total revenue is less than total fixed cost.
c.
total revenue is less than total variable cost.
d.
total revenue is less than the difference between total fixed cost and total variable cost.
11-14 Below, the graph on the left shows the shortrun cost curves for a firm in a perfectly competitive
market, and the graph on the right shows the current market conditions in this industry. In order to
maximize profit, how much output should the firm produce?
a.
20 units b.
40 units c.
50 units d.
60 units e.
11-15 What is the maximum amount of profit the firm can earn?
a.
$ 50 b. $ 40 c. $ 80 d. $150
80 units
11-16 What do you expect to happen in the long-run?
a.
Market supply will decrease. b. Market price will decrease.
c.
The firm's profit will decrease. d.
both b and c e. all of the above
11-17 Which of the following is NOT a characteristic of long-run equilibrium for a perfectly competitive firm?
a.
Price is greater than long-run average cost. b. Price is equal to long-run marginal cost.
c.
Economic profit is zero.
d.
The firm produces the output level at which long-run average cost is at its minimum.
11-18 When total fixed costs increase,
a.
the profit-maximizing level of output falls.
b.
the firm may be forced to shut down if total fixed costs get too high.
c.
economic profit decreases. d. both a and b e. both b and c
11-19 A competitive firm will maximize profit by producing the level of output at which:
a.
the last unit of output produced adds the same amount to total revenue as to total cost.
b.
the additional revenue from the last unit of output produced exceeds the additional cost of
the last unit by the largest amount.
c.
the firm's total revenue exceeds total cost by the largest amount.
d.
both a and b e. both a and c
11-20 Firm A and firm B both have total revenues of $200,000 and total costs of $250,000; firm A has
total fixed costs of $40,000, while firm B has total fixed costs of $70,000. Which of the following
statements are true in the short run?
a.
Firm A should operate. b.
Firm B should operate.
c.
Firm A should shut down. d.
Firm B should shut down. e.
both b and c
11-22 Which of the following is NOT a characteristic of an increasing cost competitive industry? As the
industry expands in the long run,
a.
the price of product remains constant. b. the prices of some inputs rise.
c.
the cost of production increases. d.
the number of firms increase.
e.
none of the above
11-23 Which of the following is NOT a characteristic of a constant cost competitive industry? As the
industry expands in the long run,
a.
the price of the product remains constant. b.
inputs prices remain constant.
c.
the cost of production remains constant. d.
the number of firms remain constant.
e.
none of the above
11-24 An industry is in long-run competitive equilibrium. The price of a substitute good increases.
a.
The product price will rise. b. New firms will enter the market.
c.
Firms will begin earning economic profit. d.
a and b e.
all of the above
11-25
A typical firm in a perfectly competitive market made positive economic profits last period. This period,
a.
c.
market supply will increase. b. market price will rise.
the firm will produce more. d. the firm's profits will increase.
11-26 Suppose that a perfectly competitive industry is in long-run equilibrium. Then the price of a
complement good decreases. What will happen?
a.
Next period a typical firm will increase output.
b.
Next period a typical firm will earn positive economic profit.
c.
Eventually firms will exit the industry.
d.
both a and b e. all of the above will happen
11-27 The table below shows a competitive firm's short-run production function. Labor is the firm's only
variable input, and market price for the firm's product is $2 per unit.
Units of Labor
3
4
5
6
7
Units of Output
370
490
570
600
620
How much does the fifth unit of labor add to the firm's total revenue?
a.
$160 b. $80 c. $60d. $40e. $10
11-28 If the wage rate is $200, how many units of labor will the firm employ?
a.
3 b.
4 c.
5 d.
6e.
0, the firm shuts down
11-29 If the wage rate is $200, the firm should
a.
b.
c.
d.
shut down because average revenue product is $200, which is less than marginal revenue product.
shut down because average revenue product is $228, which is greater than the wage rate.
produce because average revenue product is $200, which is less than marginal revenue product.
produce because average revenue product is $245, which is greater than the wage rate .
11-30 If market price for the firm's product increases to $5, how many units of labor will the firm employ
at a wage rate of $200?
a. 0, the firm shuts down b.4 c. 5 d.
6 e.
7
11-31 A competitive firm will maximize profit by hiring the amount of an input at which
a.
the last unit of the input hired adds the same amount to total revenue as to total cost.
b.
the additional revenue from the last unit of the input hired exceeds the additional cost of
the last unit by the largest amount.
c.
the last unit of the input hired adds the same amount to total output as to total cost.
d.
the additional output from the last unit of the input hired exceeds the additional cost of the
last unit by the largest amount.
11-32 A firm in a competitive industry faces a market price for output of $25 and a wage rate of $750. At
the current level of employment (50 units of labor), the marginal product of labor is 20. In order to
maximize profit, the firm should
a.
hire less labor because the firm is suffering a loss of $12,500.
b.
hire less labor because hiring the last unit of labor decreased profit by 250.
c.
hire more labor because hiring another unit of labor would increase profit by $500.
d.
keep the level of employment the same because the firm is earning a profit of $500.
11-33
The graph above shows the cost curves for a perfectly competitive firm. If market price is $5, how
much output will the firm produce?
a.
0 units b. 200 units. C. 500 units. D. 600 units
11-34
If market price is $5, how much profit will the firm earn?
a
$600 b. $900 c. $3,000d.
$600
11-35 If market price is $3, how much profit will the firm earn?
a.
$200 b. $200 c. $400 d.
$400
11-37 The firm will break even if price is:
a.
$2 b. $3.80 c. $5 d. $6
11-38 Which of the following CANNOT be true at any output along a perfectly competitive firm's shortrun supply curve?
a.
Average total cost is greater than marginal cost.
b.
Marginal cost is greater than average total cost.
c.
Average variable cost is greater than marginal cost.
d.
Marginal cost is greater than average variable cost.
11-39 In a perfectly competitive market,
a.
a firm can attract more customers by lowering its price.
b.
a firm can sell as much as it wants at the existing market price.
c.
the additional revenue from selling one more unit of output is less than the market price.
d.
both a and c e. both b and c
11-45 In a perfectly competitive market
a.
b.
c.
d.
a firm faces a perfectly elastic demand because there is unrestricted entry and exit.
if a firm raises its price, it will lose some, but not all, of its customers.
when a firm sells another unit of output, the addition to total revenue is equal to market price.
all of the above e. none of the above
11-46
The figure above shows cost curves for a perfectly competitive firm. Suppose that market price is
$2.60. A firm producing 800 units of output
a.
is earning the maximum amount of profit, $880.
b.
is earning the maximum amount of profit, $2,080.
c.
should produce 500 units of output instead, to earn profits of $500.
d.
should produce 1100 units of output instead, to earn profits of $1,100.
e.
should shut down
11-47 A profit-maximizing firm will break even when market price is:
a.
$ 0.60 b.
$ 0.80 c.
$1.50 d.$1.60
11-48 If market price is $0.70, a profit-maximizing firm will produce _____ units of output and earn
profits of _____.
a.
500, $450 b. 500, $50 c. zero, $450 d. zero, $400
11-49 In a competitive industry the market-determined price is $12. A firm is currently producing 50
units of output; average total cost is $10, marginal cost is $15, and average variable cost is $7. In
order to maximize profit, the firm should:
a.
produce more because the firm is earning a profit of $100.
b.
keep output the same because the firm is earning a profit of $100
c.
produce more because the next unit of output increases profit by $2
d.
produce less because the last unit of output decreased profit by $3
11-50 Consider the short-run supply curve for a perfectly competitive industry. In general, which of the
following statements are true?
a.
The short-run industry supply is obtained by horizontally summing the supply curves of all
the individual firms in the industry.
b.
The industry supply curve tends to be flatter (more elastic) than the horizontal sum of all
the industrial firms' supply curves.
c.
Short-run supply for a perfectly competitive industry is flat for constant cost industries.
d.
both a and b
e.
none of the above are true in general
11-51 In a competitive market characterized by increasing costs, the
a.
long-run industry supply curve gives the minimum long-run average cost of production at
various levels of industry output.
b.
long-run industry supply curve gives the long-run marginal cost of production at various
levels of industry output.
c.
long-run industry supply curve is upward sloping.
d.
both a and b e. all of the above
Fill-in-the-Blank
11-1F A perfectly competitive firm’s demand is ____________ elastic and equal to ____________ which
is equal to ____________.
11-2F Use the following graph on a competitive firm’s short-run cost curves to answer this question.
The price of the product is $35.
a.
The firm produces ____________ units of output. Total revenue is $____________ and
total cost is $____________.
b.
The firm makes a profit (loss) of $____________.
The price of the product is $20.
c.
The firm produces ______ units of output. Total revenue is $____________ and total cost
is $____________.
d.
The firm makes a profit (loss) of $____________.
e.
The firm’s total revenue at a price of $20 covers all of its variable cost, and the firm has
$____________ left to apply toward paying its ________________________. If the firm
shuts down and produces nothing it would lose an amount equal to its _________________
f.
At any price below (approximately) $_________, the firm would shut down.
11-3F In longrun competitive equilibrium, product price equals __________________ and also equals
__________________. Thus, economic profit equals $___________, however, firms have not
incentive to exit the industry because each firm earns enough revenue to cover all its explicit costs
of operation and pay its owners an amount equal to ______________________________.
11-4F Firms in a perfectly competitive industry are earning an economic profit.
a.
Product price will ___________ because ______________________________.
b.
After longrun competitive equilibrium comes about there will be ___________ (fewer,
more, the same number of) firms in the industry and the industry will produce __________
(less, more, the same amount of) output.
c.
In longrun competitive equilibrium each firm will earn ___________ economic profit.
11-5F The following graph showing a perfectly competitive firm’s long-run cost curves.
a.
b.
c.
d.
e.
If price is $70, the firm will produce __________ units of output.
If price is $70, total revenue will be $__________ and total cost will be $__________.
If price is $70, the firm makes $__________ economic profit.
In longrun competitive equilibrium, the firm will produce __________ units of output and
sell them at a price of $________ if this is a constant cost industry.
In long-run equilibrium, the firm’s economic profit is $_________.