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Chapter 14 Firms in Competitive Markets MULTIPLE CHOICE 1. 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. ANS: C PTS: 1 DIF: 1 NAT: Analytic LOC: Perfect competition MSC: Definitional REF: TOP: 14-0 Market power 2. A book store that has market power can a. influence the market price for the books it sells. b. minimize costs more efficiently than its competitors. c. reduce its advertising budget more so than its competitors. d. ignore profit-maximizing strategies when setting the price for its books. ANS: A PTS: 1 DIF: 1 REF: 14-0 NAT: Analytic LOC: Perfect competition TOP: Market power MSC: Applicative 3. 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. ANS: B PTS: 1 DIF: 1 REF: 14-0 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 4. 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. ANS: C PTS: 1 DIF: 1 REF: NAT: Analytic LOC: Perfect competition TOP: MSC: Interpretive 14-0 Competitive markets 5. Suppose a firm in each of the two markets listed below were to increase its price by 20 percent. In which pair would the firm in the first market listed experience a dramatic decline in sales, but the firm in the second market listed would not? a. corn and soybeans b. gasoline and restaurants c. water and cable television d. spiral notebooks and college textbooks ANS: D PTS: 1 DIF: 2 REF: 14-0 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Applicative 1 © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2 ❖ Chapter 14/Firms in Competitive Markets 6. Suppose a firm in each of the two markets listed below were to increase its price by 30 percent. In which pair would the firm in the first market listed experience a dramatic decline in sales, but the firm in the second market listed would not? a. oil and natural gas b. cable television and gasoline c. restaurants and MP3 players d. movie theaters and ballpoint pens ANS: B PTS: 1 DIF: 2 REF: 14-0 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Applicative WHAT IS A COMPETITIVE MARKET? 1. 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. ANS: B PTS: 1 DIF: 1 NAT: Analytic LOC: Perfect competition MSC: Definitional REF: TOP: 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. Entry is limited. d. Each firm chooses an output level that maximizes profits. ANS: C PTS: 1 DIF: 2 REF: NAT: Analytic LOC: Perfect competition TOP: MSC: Definitional 3. Which of the following is a characteristic of a competitive market? a. There are many buyers but few sellers. b. Firms sell differentiated products. c. There are many barriers to entry. d. Buyers and sellers are price takers. ANS: D PTS: 1 DIF: 2 REF: NAT: Analytic LOC: Perfect competition TOP: MSC: Definitional 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 ANS: C PTS: 1 DIF: NAT: Analytic 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. ANS: D PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Definitional 14-1 Competitive markets 14-1 Competitive markets 14-1 Competitive markets 1 REF: TOP: 14-1 Competitive markets 1 REF: TOP: 14-1 Competitive markets © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 3 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. (i) and (ii) only b. (i) and (iii) only c. (ii) and (iii) only d. (i), (ii), and (iii) ANS: C PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Interpretive REF: TOP: 7. A firm that has little ability to influence market prices operates in a a. competitive market. b. strategic market. c. thin market. d. power market. ANS: A PTS: 1 DIF: 1 REF: NAT: Analytic LOC: Perfect competition TOP: MSC: Definitional 14-1 Competitive markets 14-1 Competitive markets 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. ANS: A PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 9. In a competitive market, the actions of any single buyer or seller will a. discourage entry by competitors. b. influence the profits of other firms in the market. c. have a negligible impact on the market price. d. None of the above is correct. ANS: C PTS: 1 DIF: 2 REF: NAT: Analytic LOC: Perfect competition TOP: MSC: Interpretive 14-1 Competitive markets 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. only a few buyers will have market power. d. sellers will have little reason to charge less than the going market price. ANS: D PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition 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: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4 ❖ Chapter 14/Firms in Competitive Markets 12. 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 PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 13. 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 PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Interpretive REF: TOP: 14-1 Competitive markets 14. 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 PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Applicative 15. Which of the following industries is most likely to exhibit the characteristic of free entry? a. cable television b. satellite radio c. mineral mining d. t-shirt silkscreening ANS: D PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Applicative 16. Which of the following industries is least likely to exhibit the characteristic of free entry? a. restaurants b. municipal water and sewer c. soybean farming d. selling running apparel ANS: B PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Applicative 17. Which of the following industries is least likely to exhibit the characteristic of free entry? a. selling running apparel b. wheat farming c. yoga studios d. satellite radio ANS: D PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Applicative © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 5 18. 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 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Definitional 19. 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 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 20. 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 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 21. 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 wants to at the market price. d. All of the above are correct. ANS: D PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 22. 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 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6 ❖ Chapter 14/Firms in Competitive Markets 23. A competitive firm would benefit from charging a price below the market price because the firm would achieve (i) higher average revenue. (ii) higher profits. (iii) lower total costs. a. (i) only b. (ii) and (iii) only c. (i), (ii), and (iii) d. None of the above is correct. ANS: D PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 24. 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. (i) and (ii) only b. (i) and (iii) only c. (ii) only d. (i), (ii), and (iii) ANS: B PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 25. 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: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Analytical 26. The Doris Dairy Farm sells milk to a dairy broker in Prairie du Chien, Wisconsin. Because the market for milk is generally considered to be competitive, the Doris Dairy Farm does not a. choose the quantity of milk to produce. b. choose the price at which it sells its milk. c. have any fixed costs of production. d. set marginal revenue equal to marginal cost to maximize profit. ANS: B PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 27. The Doris Dairy Farm sells milk to a dairy broker in Prairie du Chien, Wisconsin. Because the market for milk is generally considered to be competitive, the Doris Dairy Farm does not choose the a. quantity of milk to produce. b. price at which it sells its milk. c. profits it earns. d. All of the above are correct. ANS: B PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 7 28. 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 PTS: 1 DIF: 1 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 29. 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 PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 30. 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 PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 31. 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 PTS: 1 DIF: 2 REF: NAT: Analytic LOC: Perfect competition TOP: MSC: Definitional 14-1 Competitive markets 32. 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 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Applicative 33. Which of the following firms is the closest to being a perfectly competitive firm? a. the New York Yankees b. Apple, Inc. c. DeBeers diamond wholesalers d. a wheat farmer in Kansas ANS: D PTS: 1 DIF: 1 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Applicative © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 8 ❖ Chapter 14/Firms in Competitive Markets 34. Firms that operate in perfectly competitive markets try to a. maximize revenues. b. maximize profits. c. equate marginal revenue with average total cost. d. All of the above are correct. ANS: B PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Interpretive REF: TOP: 14-1 Competitive markets 35. A seller in a competitive market can a. sell all he wants at the going price, so he has little reason to charge less. b. influence the market price by adjusting his output. c. influence the profits earned by competing firms by adjusting his output. d. All of the above are correct. ANS: A PTS: 1 DIF: 1 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 36. A seller in a competitive market a. can sell all he wants at the going price, so he has little reason to charge less. b. will lose all his customers to other sellers if he raises his price. c. considers the market price to be a “take it or leave it” price. d. All of the above are correct. ANS: D PTS: 1 DIF: 1 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 37. 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. All of the above are correct. ANS: A PTS: 1 DIF: 2 REF: NAT: Analytic LOC: Perfect competition TOP: MSC: Interpretive 14-1 Competitive markets 38. For a firm in a competitive market, an increase in the quantity produced by the firm will result in a. a decrease in the product’s market price. b. an increase in the product’s market price. c. no change in the product’s market price. d. either an increase or no change in the product’s market price depending on the number of firms in the market. ANS: C PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 39. If Cathy’s Coffee Emporium sells its product in a competitive market, then a. the price of that product depends on the quantity of the product that Cathy’s Coffee Emporium produces and sells because Cathy’s Coffee Emporium’s demand curve is downward sloping. b. Cathy’s Coffee Emporium's total revenue must be proportional to its quantity of output. c. Cathy’s Coffee Emporium's total cost must be a constant multiple of its quantity of output. d. Cathy’s Coffee Emporium's total revenue must be equal to its average revenue. ANS: B PTS: 1 DIF: 3 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Total revenue MSC: Analytical © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 9 40. 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 NAT: Analytic LOC: Perfect competition TOP: Total revenue MSC: Analytical 41. If a firm in a perfectly competitive market triples the quantity 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: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Total revenue MSC: Analytical 42. When a competitive firm doubles the quantity of output it sells, its a. total revenue doubles. b. average revenue doubles. c. marginal revenue doubles. d. profits must increase. ANS: A PTS: 1 DIF: 2 REF: NAT: Analytic LOC: Perfect competition TOP: MSC: Analytical 14-1 Total revenue 43. If a firm in a competitive market doubles its number of units sold, total revenue for the firm will a. more than double. b. double. c. increase but by less than double. d. may increase or decrease depending on the price elasticity of demand. ANS: B PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Total revenue MSC: Analytical © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10 ❖ Chapter 14/Firms in Competitive Markets Table 14-1 Quantity 0 1 2 3 4 5 6 7 8 9 Price $5 $5 $5 $5 $5 $5 $5 $5 $5 $5 44. Refer to Table 14-1. The price and quantity relationship in the table is most likely a demand curve faced by a firm in a a. monopoly. b. concentrated market. c. competitive market. d. strategic market. ANS: C PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Analytical 45. Refer to Table 14-1. Over which range of output is average revenue equal to price? a. 1 to 5 units b. 3 to 7 units c. 5 to 9 units d. Average revenue is equal to price over the entire range of output. ANS: D PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Average revenue MSC: Analytical 46. Refer to Table 14-1. Over what range of output is marginal revenue declining? a. 1 to 6 units b. 3 to 7 units c. 7 to 9 units d. Marginal revenue is constant over the entire range of output. ANS: D PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Marginal revenue MSC: Analytical 47. Refer to Table 14-1. If the firm doubles its output from 3 to 6 units, total revenue will a. increase by less than $15. b. increase by exactly $15. c. increase by more than $15. d. Total revenue cannot be determined from the information provided. ANS: B PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Total revenue MSC: Applicative © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 11 Table 14-2 The table represents a demand curve faced by a firm in a competitive market. Price Quantity $4 0 $4 1 $4 2 $4 3 $4 4 $4 5 48. Refer to Table 14-2. A firm operating in a competitive market maximizes total revenue by producing a. 2 units. b. 3 units. c. 4 units. d. as many units as possible. ANS: D PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Total revenue MSC: Applicative 49. Refer to Table 14-2. For a firm operating in a competitive market, the average revenue from selling 3 units is a. $12. b. $4. c. $3. d. $1.25. ANS: B PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Average revenue MSC: Applicative 50. Refer to Table 14-2. For a firm operating in a competitive market, the marginal revenue from selling the 3rd unit is a. $12. b. $4. c. $3. d. $1.25. ANS: B PTS: 1 DIF: 3 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Marginal revenue MSC: Applicative Table 14-3 Quantity 0 1 2 3 4 Total Revenue $0 $7 $14 $21 $28 51. Refer to Table 14-3. For a firm operating in a competitive market, the price is a. $0. b. $7. c. $14. d. $21. ANS: B PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Applicative © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12 ❖ Chapter 14/Firms in Competitive Markets 52. Refer to Table 14-3. For a firm operating in a competitive market, the marginal revenue is a. $0. b. $7. c. $14. d. $21. ANS: B PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Marginal revenue MSC: Applicative 53. Refer to Table 14-3. For a firm operating in a competitive market, the average revenue is a. $21. b. $14. c. $7. d. $0. ANS: C PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Average revenue MSC: Applicative Table 14-4 Quantity 0 1 2 3 4 Total Revenue $0 $15 $30 $45 $60 54. Refer to Table 14-4. For a firm operating in a competitive market, the price is a. $45. b. $30. c. $15. d. $0. ANS: C PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Applicative 55. Refer to Table 14-4. For a firm operating in a competitive market, the marginal revenue is a. $45. b. $30. c. $15. d. $0. ANS: C PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Marginal revenue MSC: Applicative 56. Refer to Table 14-4. For a firm operating in a competitive market, the average revenue is a. $45. b. $30. c. $15. d. $0. ANS: C PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Average revenue MSC: Applicative © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 13 Table 14-5 Quantity 12 13 14 15 16 Total Revenue $132 $143 $154 $165 $176 57. Refer to Table 14-5. The price of the product is a. $9. b. $11. c. $13. d. $15. ANS: B PTS: 1 DIF: 1 NAT: Analytic LOC: Perfect competition MSC: Applicative REF: TOP: 14-1 Competitive markets 58. Refer to Table 14-5. The average revenue when 14 units are produced and sold is a. $9. b. $11. c. $13. d. $15. ANS: B PTS: 1 DIF: 1 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Average revenue MSC: Analytical 59. Refer to Table 14-5. The marginal revenue of the 12th unit is a. $9. b. $10. c. $11 d. The marginal revenue cannot be determined without knowing the total revenue when 11 units are sold. ANS: C PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Marginal revenue MSC: Analytical © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 14 ❖ Chapter 14/Firms in Competitive Markets Table 14-6 The following table presents cost and revenue information for a firm operating in a competitive industry. COSTS REVENUES Quantity Total Marginal Quantity Price Total Marginal Produced Cost Cost Demanded Revenue Revenue 0 $100 -0 $120 -1 $150 1 $120 2 $202 2 $120 3 $257 3 $120 4 $317 4 $120 5 $385 5 $120 6 $465 6 $120 7 $562 7 $120 8 $682 8 $120 60. Refer to Table 14-6. What is the total revenue from selling 7 units? a. $120 b. $490 c. $562 d. $840 ANS: D PTS: 1 DIF: 2 REF: NAT: Analytic LOC: Perfect competition TOP: MSC: Applicative 61. Refer to Table 14-6. What is the total revenue from selling 4 units? a. $120 b. $257 c. $317 d. $480 ANS: D PTS: 1 DIF: 2 REF: NAT: Analytic LOC: Perfect competition TOP: MSC: Applicative 14-1 Total revenue 14-1 Total revenue 62. Refer to Table 14-6. What is the marginal revenue from selling the 3rd unit? a. $55 b. $120 c. $137 d. $140 ANS: B PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Marginal revenue MSC: Applicative 63. Refer to Table 14-6. What is the average revenue when 4 units are sold? a. $60 b. $120 c. $125 d. $197 ANS: B PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Average revenue MSC: Applicative © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 15 64. Which of the following statements is correct? a. For all firms, marginal revenue equals the price of the good. b. Only for competitive firms does average revenue equal the price of the good. c. Marginal revenue can be calculated as total revenue divided by the quantity sold. d. Only for competitive firms does average revenue equal marginal revenue. ANS: D PTS: 1 DIF: 3 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Average revenue | Marginal revenue MSC: Interpretive 65. Suppose a firm in a competitive market earned $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 units b. $5 and 100 units c. $10 and 50 units d. $10 and 100 units ANS: D PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Average revenue MSC: Applicative 66. Which of the following statements regarding a competitive firm is correct? a. Because 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 selling 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 NAT: Analytic LOC: Perfect competition TOP: Average revenue MSC: Analytical 67. Suppose a firm in a competitive market produces and sells 150 units of output and earns $1,800 in total revenue from the sales. If the firm increases its output to 200 units, the average revenue of the 200th unit will be a. less than $12. b. more than $12. c. $12. d. Any of the above may be correct depending on the price elasticity of demand for the product. ANS: C PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Average revenue MSC: Analytical 68. Suppose a firm in a competitive market produces and sells 150 units of output and earns $1,800 in total revenue from the sales. If the firm increases its output to 200 units, total revenue will be a. $2,000. b. $2,400. c. $4,200. d. We do not have enough information to answer the question. ANS: B PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Total revenue MSC: Analytical © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 16 ❖ Chapter 14/Firms in Competitive Markets 69. 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 PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Marginal revenue | Average revenue MSC: Applicative 70. 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 PTS: 1 DIF: NAT: Analytic LOC: Perfect competition TOP: Marginal revenue | Average revenue 1 REF: 14-1 MSC: Definitional 71. 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. (i) only b. (iii) only c. (i) and (ii) only d. (i), (ii), and (iii) ANS: D PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Marginal revenue | Average revenue MSC: Analytical 72. Suppose that a firm operating in perfectly competitive market sells 200 units of output at a price of $3 each. Which of the following statements is correct? (i) Marginal revenue equals $3. (ii) Average revenue equals $600. (iii) Average revenue exceeds marginal revenue, but we don’t know by how much. a. (i) only b. (iii) only c. (i) and (ii) only d. (i), (ii), and (iii) ANS: A PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Marginal revenue | Average revenue MSC: Analytical 73. Suppose that a firm operating in perfectly competitive market sells 300 units of output at a price of $3 each. Which of the following statements is correct? (i) Marginal revenue equals $3. (ii) Average revenue equals $100. (iii) Total revenue equals $300. a. (i) only b. (iii) only c. (i) and (ii) only d. (i), (ii), and (iii) ANS: A PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Marginal revenue | Average revenue MSC: Analytical © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 17 74. Suppose that a firm operating in perfectly competitive market sells 400 units of output at a price of $4 each. Which of the following statements is correct? (i) Marginal revenue equals $4. (ii) Average revenue equals $100. (iii) Total revenue equals $1,600. a. (i) only b. (iii) only c. (i) and (iii) only d. (i), (ii), and (iii) ANS: C PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Marginal revenue | Average revenue MSC: Analytical 75. For a firm operating in a competitive industry, which of the following statements is not correct? a. Price equals average revenue. b. Price equals marginal revenue. c. Total revenue is constant. d. Marginal revenue is constant. ANS: C PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Marginal revenue | Average revenue MSC: Interpretive 76. 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 NAT: Analytic LOC: Perfect competition TOP: Marginal revenue MSC: Interpretive 77. 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 b. $8 c. $32 d. $64 ANS: C PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Marginal revenue MSC: Applicative 78. Whenever a perfectly competitive firm chooses to change its level of output, 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 NAT: Analytic LOC: Perfect competition TOP: Marginal revenue MSC: Interpretive © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 18 ❖ Chapter 14/Firms in Competitive Markets 79. Suppose that in a competitive market the equilibrium 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. exactly $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 NAT: Analytic LOC: Perfect competition TOP: Marginal revenue MSC: Interpretive 80. For an individual firm operating in a competitive market, marginal revenue equals a. average revenue and the price for all levels of output. b. average revenue, which is greater than the price for all levels of output. c. average revenue, the price, and marginal cost for all levels of output. d. marginal cost, which is greater than average revenue for all levels of output. ANS: A PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Marginal revenue | Average revenue MSC: Interpretive 81. 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 NAT: Analytic LOC: Perfect competition TOP: Elasticity MSC: Analytical PROFIT MAXIMIZATION AND THE COMPETITIVE FIRM'S SUPPLY CURVE 1. 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 NAT: Analytic LOC: Perfect competition TOP: Competitive firms MSC: Analytical 2. If a competitive firm is currently producing a level of output at which marginal cost exceeds marginal revenue, 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: B PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Competitive firms MSC: Analytical © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 19 3. 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. decreasing output would increase the firm's profit. d. All of the above are correct. ANS: C PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Competitive firms MSC: Analytical 4. Comparing 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 NAT: Analytic LOC: Perfect competition TOP: Competitive firms MSC: Interpretive 5. 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 NAT: Analytic LOC: Perfect competition MSC: Interpretive REF: TOP: 14-2 Competitive firms 6. 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 NAT: Analytic LOC: Perfect competition TOP: Competitive firms MSC: Interpretive 7. 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 the a. production of the 100th unit of output increases the firm's profit by $3. b. production of the 100th unit of output increases the firm's average total cost by $7. c. firm's profit-maximizing level of output is less than 100 units. d. production of the 99th unit of output must increase the firm’s profit by less than $3. ANS: A PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Competitive firms MSC: Analytical © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 20 ❖ Chapter 14/Firms in Competitive Markets 8. For a certain firm, the 100th unit of output that the firm produces has a marginal revenue of $10 and a marginal cost of $11. It follows that the a. production of the 100th unit of output increases the firm's profit by $1. b. production of the 100th unit of output increases the firm's average total cost by $1. c. firm's profit-maximizing level of output is less than 100 units. d. production of the 110th unit of output must increase the firm’s profit but by less than $1. ANS: C PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Competitive firms MSC: Analytical 9. 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. Production of the 50th unit of output does not necessarily a. increase the firm's total revenue by $20. b. increase the firm's total cost by $22. c. decrease the firm's profit by $2. d. increase the firm’s average variable cost by $0.44. ANS: D PTS: 1 DIF: 3 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Competitive firms MSC: Analytical 10. Sam sells soybeans to a broker in Chicago, Illinois. Because the market for soybeans is generally considered to be competitive, Sam maximizes his 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 at a price where marginal cost is equal to average total cost. d. the quantity at which market price is equal to Sam's marginal cost of production. ANS: D PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Competitive firms MSC: Analytical 11. If a competitive firm is selling 1,000 units of its product at a price of $9 per unit and 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 because competitive firms cannot earn positive profits. ANS: A PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Competitive firms MSC: Analytical 12. If a competitive firm is selling 1,000 units of its product at a price of $8 per unit and earning a positive profit, then a. its average revenue is greater than $8. b. its marginal revenue is less than $8. c. its total cost is less than $8,000. d. All of the above are correct. ANS: C PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Competitive firms MSC: Analytical © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 21 13. Max sells maps. The map industry is competitive. Max hires a business consultant to analyze his company’s financial records. The consultant recommends that Max increase his production. The consultant must have concluded that Max’s a. total revenues exceed his total accounting costs. b. marginal revenue exceeds his total cost. c. marginal revenue exceeds his marginal cost. d. marginal cost exceeds his marginal revenue. ANS: C PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Competitive firms MSC: Interpretive 14. Christopher is a professional tennis player who gives tennis lessons. The industry is competitive. Christopher hires a business consultant to analyze his financial records. The consultant recommends that Christopher give fewer tennis lessons. The consultant must have concluded that Christopher’s a. total revenues exceed his total accounting costs. b. marginal revenue exceeds his total cost. c. marginal revenue exceeds his marginal cost. d. marginal cost exceeds his marginal revenue. ANS: D PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Competitive firms MSC: Interpretive 15. Laura is a gourmet chef who runs a small catering business in a competitive industry. Laura specializes in making wedding cakes. Laura sells 20 wedding cakes per month. Her monthly total revenue is $5,000. The marginal cost of making a wedding cake is $300. In order to maximize profits, Laura should a. make more than 20 wedding cakes per month. b. make fewer than 20 wedding cakes per month. c. continue to make 20 wedding cakes per month. d. We do not have enough information with which to answer the question. ANS: B PTS: 1 DIF: 3 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Competitive firms MSC: Analytical 16. Laura is a gourmet chef who runs a small catering business in a competitive industry. Laura specializes in making wedding cakes. Laura sells 20 wedding cakes per month. Her monthly total revenue is $5,000. The marginal cost of making a wedding cake is $200. In order to maximize profits, Laura should a. make more than 20 wedding cakes per month. b. make fewer than 20 wedding cakes per month. c. continue to make 20 wedding cakes per month. d. We do not have enough information with which to answer the question. ANS: A PTS: 1 DIF: 3 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Competitive firms MSC: Analytical 17. Marcia is a fashion designer who runs a small clothing business in a competitive industry. Marcia specializes in making designer dresses. Marcia sells 10 dresses per month. Her monthly total revenue is $5,000. The marginal cost of making a dress is $400. In order to maximize profits, Marcia should a. make more than 10 dresses per month. b. make fewer than 10 dresses per month. c. continue to make 10 dresses per month. d. We do not have enough information with which to answer the question. ANS: A PTS: 1 DIF: 3 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Competitive firms MSC: Analytical © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 22 ❖ Chapter 14/Firms in Competitive Markets 18. Marcia is a fashion designer who runs a small clothing business in a competitive industry. Marcia specializes in making designer dresses. Marcia sells 10 dresses per month. Her monthly total revenue is $5,000. The marginal cost of making a dress is $500. In order to maximize profits, Marcia should a. make more than 10 dresses per month. b. make fewer than 10 dresses per month. c. continue to make 10 dresses per month. d. We do not have enough information with which to answer the question. ANS: C PTS: 1 DIF: 3 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Competitive firms MSC: Analytical 19. Marcia is a fashion designer who runs a small clothing business in a competitive industry. Marcia specializes in making designer dresses. Marcia sells 10 dresses per month. Her monthly total revenue is $5,000. The marginal cost of making a dress is $600. In order to maximize profits, Marcia should a. make more than 10 dresses per month. b. make fewer than 10 dresses per month. c. continue to make 10 dresses per month. d. We do not have enough information with which to answer the question. ANS: B PTS: 1 DIF: 3 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Competitive firms MSC: Analytical 20. 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, its a. quantity of output is higher than it was previously. b. average total cost is higher than it was previously. c. marginal revenue is higher than it was previously. d. All of the above are correct. ANS: D PTS: 1 DIF: 3 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Competitive firms MSC: Interpretive 21. A competitive firm has been selling its output for $20 per unit and has been maximizing its profit, which is positive. Then, the price falls to $18, and the firm makes whatever adjustments are necessary to maximize its profit at the now-lower price. Once the firm has adjusted, its a. quantity of output is lower than it was previously. b. average total cost is lower than it was previously. c. marginal cost is higher than it was previously. d. All of the above are correct. ANS: A PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Competitive firms MSC: Interpretive 22. 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 nowhigher price. Once the firm has adjusted, its a. marginal revenue is lower than it was previously. b. marginal cost is lower than it was previously. c. 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 NAT: Analytic LOC: Perfect competition TOP: Competitive firms MSC: Interpretive © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 23 23. When profit-maximizing firms in competitive markets are earning profits, a. market demand must exceed market supply at the market equilibrium price. b. market supply must exceed market demand at the market equilibrium price. c. new firms will enter the market. d. the most inefficient firms will be encouraged to leave the market. ANS: C PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive Table 14-7 Suppose that a firm in a competitive market faces the following revenues and costs: Marginal Marginal Quantity Cost Revenue 12 $5 $9 13 $6 $9 14 $7 $9 15 $8 $9 16 $9 $9 17 $10 $9 24. Refer to Table 14-7. If the firm is currently producing 14 units, what would you advise the owners? 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 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Applicative 25. Refer to Table 14-7. If the firm is maximizing profit, how much profit is it earning? a. $0 b. $1 c. $10 d. There is insufficient data to determine the firm’s profit. ANS: D PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit MSC: Applicative © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 24 ❖ Chapter 14/Firms in Competitive Markets Table 14-8 Suppose that a firm in a competitive market faces the following revenues and costs: Quantity Total Revenue Total Cost 0 $0 $3 1 $7 $5 2 $14 $8 3 $21 $12 4 $28 $17 5 $35 $23 6 $42 $30 7 $49 $38 26. Refer to Table 14-8. The firm will not produce an output level beyond a. 4 units. b. 5 units. c. 6 units. d. 7 units. ANS: C PTS: 1 DIF: 2 REF: NAT: Analytic LOC: Perfect competition TOP: MSC: Applicative 14-2 Profit maximization 27. Refer to Table 14-8. The firm will produce a quantity greater than 4 because at 4 units of output, marginal cost a. is less than marginal revenue. b. equals marginal revenue. c. is greater than marginal revenue. d. is minimized. ANS: A PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Applicative 28. Refer to Table 14-8. In order to maximize profits, the firm will produce a. 1 unit of output because marginal cost is minimized. b. 4 units of output because marginal revenue exceeds marginal cost. c. 6 units of output because marginal revenue equals marginal cost. d. 8 units of output because total revenue is maximized. ANS: C PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Applicative © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 25 Table 14-9 Suppose that a firm in a competitive market faces the following revenues and costs: Quantity Total Revenue Total Cost 0 $0 $10 1 $9 $14 2 $18 $19 3 $27 $25 4 $36 $32 5 $45 $40 6 $54 $49 7 $63 $59 8 $72 $70 9 $81 $82 29. Refer to Table 14-9. If the firm produces 4 units of output, a. marginal cost is $4. 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 NAT: Analytic LOC: Perfect competition MSC: Analytical REF: TOP: 14-2 Competitive firms 30. Refer to Table 14-9. At which quantity of output is marginal revenue equal to marginal cost? a. 3 units b. 6 units c. 8 units d. 9 units ANS: B PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Applicative 31. Refer to Table 14-9. In order to maximize profit, the firm will produce 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 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Applicative 32. Refer to Table 14-9. In order to maximize profit, the firm will produce a level of output where marginal cost is equal to a. $5. b. $7. c. $9. d. $10. ANS: C PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Applicative © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 26 ❖ Chapter 14/Firms in Competitive Markets 33. Refer to Table 14-9. The maximum profit available to the firm is a. $2. b. $3. c. $4. d. $5. ANS: D PTS: 1 DIF: 2 REF: NAT: Analytic LOC: Perfect competition TOP: MSC: Applicative 34. Refer to Table 14-9. If the firm’s 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 NAT: Analytic LOC: Perfect competition MSC: Analytical 35. Refer to Table 14-9. If the firm’s 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 NAT: Analytic LOC: Perfect competition MSC: Analytical 14-2 Profit maximization REF: TOP: 14-2 Profit maximization REF: TOP: 14-2 Profit maximization Table 14-10 Suppose that a firm in a competitive market faces the following revenues and costs: Quantity Total Revenue Total Cost 0 $0 $3 1 $7 $5 2 $14 $9 3 $21 $15 4 $28 $23 5 $35 $33 6 $42 $45 7 $49 $59 36. Refer to Table 14-10. The marginal cost of producing the 4th unit is a. $7. b. $8. c. $10. d. $23. ANS: B PTS: 1 DIF: 2 REF: NAT: Analytic LOC: Perfect competition TOP: MSC: Applicative 14-2 Marginal cost 37. Refer to Table 14-10. At which level of production will the firm maximize profit? a. 3 units b. 4 units c. 5 units d. 6 units ANS: A PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Applicative © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 27 38. Refer to Table 14-10. If the firm produces the profit-maximizing level of production, how much profit will the firm earn? a. $2 b. $4 c. $6 d. $8 ANS: C PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit MSC: Applicative 39. Refer to Table 14-10. Which level of production in the table has the lowest average variable cost? a. 1 unit b. 2 units c. 3 units d. 4 units ANS: B PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Average variable cost MSC: Applicative 40. Refer to Table 14-10. At which level of output in the table is average variable cost equal to $6? a. 2 units b. 3 units c. 4 units d. 5 units ANS: D PTS: 1 DIF: 3 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Average variable cost MSC: Applicative 41. Refer to Table 14-10. This firm should continue to produce and sell units as long as the marginal cost of production is less than or equal to a. $3. b. $5. c. $7. d. $9. ANS: C PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Applicative Table 14-11 Suppose that a firm in a competitive market faces the following prices and costs: Price Quantity Total Cost $5 0 $3 $5 1 $5 $5 2 $8 $5 3 $12 $5 4 $17 $5 5 $23 42. Refer to Table 14-11. In order to maximize profits, the firm should stop producing after it makes the a. first unit. b. second unit. c. fourth unit. d. fifth unit. ANS: C PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Analytical © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 28 ❖ Chapter 14/Firms in Competitive Markets 43. Refer to Table 14-11. Marginal revenue equals marginal cost when the firm produces a. 2 units. b. 3 units. c. 4 units. d. 5 units. ANS: C PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Analytical 44. Refer to Table 14-11. The marginal revenue from producing the 3rd unit equals (i) $5. (ii) the price. (iii) the marginal cost. a. (i) only b. (i) and (ii) only c. (ii) only d. (i), (ii), and (iii) ANS: B PTS: 1 DIF: 3 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Analytical 45. Refer to Table 14-11. The marginal revenue from producing the 4th unit equals (i) $5. (ii) the price. (iii) the marginal cost. a. (i) only b. (i) and (ii) only c. (ii) only d. (i), (ii), and (iii) ANS: D PTS: 1 DIF: 3 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Analytical 46. Refer to Table 14-11. If the firm is producing 2 units of output, it should a. produce more units of output because its marginal revenue is greater than its marginal cost. b. fewer units of output because its marginal revenue is less than its marginal cost. c. produce more units of output because its marginal revenue is less than its marginal cost. d. produce fewer units of output because its marginal revenue is greater than its marginal cost. ANS: A PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Analytical 47. Refer to Table 14-11. If the firm is producing 5 units of output, it should produce a. more units of output because its marginal revenue is greater than its marginal cost. b. fewer units of output because its marginal revenue is less than its marginal cost. c. more units of output because its marginal revenue is less than its marginal cost. d. fewer units of output because its marginal revenue is greater than its marginal cost. ANS: B PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Analytical © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 29 Table 14-12 Bill’s Birdhouses Quantity Produced 0 1 2 3 4 5 6 7 8 COSTS Total Cost $0 $50 $102 $157 $217 $285 $365 $462 $582 Marginal Cost -- Quantity Demanded 0 1 2 3 4 5 6 7 8 48. Refer to Table 14-12. What is the marginal cost of the 5th unit? a. $55 b. $60 c. $68 d. $80 ANS: C PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Applicative 49. Refer to Table 14-12. What is the marginal cost of the 8th unit? a. $0 b. $72.75 c. $120 d. $502 ANS: C PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Applicative REVENUES Price Total Revenue $80 $80 $80 $80 $80 $80 $80 $80 $80 REF: TOP: 14-2 Marginal cost REF: TOP: 14-2 Marginal cost 50. Refer to Table 14-12. What is the total revenue from selling 4 units? a. $80 b. $137 c. $320 d. $480 ANS: C PTS: 1 DIF: 2 REF: NAT: Analytic LOC: Perfect competition TOP: MSC: Applicative 51. Refer to Table 14-12. What is the total revenue from selling 7 units? a. $80 b. $382 c. $540 d. $560 ANS: D PTS: 1 DIF: 2 REF: NAT: Analytic LOC: Perfect competition TOP: MSC: Applicative Marginal Revenue -- 14-2 Total revenue 14-2 Total revenue © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 30 ❖ Chapter 14/Firms in Competitive Markets 52. Refer to Table 14-12. What is the marginal revenue from selling the 1st unit? a. $30 b. $50 c. $80 d. $160 ANS: C PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Marginal revenue MSC: Applicative 53. Refer to Table 14-12. 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 NAT: Analytic LOC: Perfect competition TOP: Marginal revenue MSC: Applicative 54. Refer to Table 14-12. What is the average revenue when 4 units are sold? a. $0 b. $68 c. $80 d. $400 ANS: C PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Average revenue MSC: Applicative 55. Refer to Table 14-12. At what quantity does Bill maximize profits? a. 3 b. 6 c. 7 d. 8 ANS: B PTS: 1 DIF: 3 REF: NAT: Analytic LOC: Perfect competition TOP: MSC: Applicative 14-2 Profit maximization 56. Refer to Table 14-12. What is Bill's economic profit at the profit-maximizing output level? a. $25 b. $75 c. $115 d. $225 ANS: C PTS: 1 DIF: 3 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Economic profit MSC: Applicative © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 31 Table 14-13 Diana’s Dress Emporium COSTS Quantity Total Produced Cost 0 $100 1 $150 2 $202 3 $257 4 $317 5 $385 6 $465 7 $562 8 $682 Marginal Cost -- Quantity Demanded 0 1 2 3 4 5 6 7 8 57. Refer to Table 14-13. What is the marginal cost of the 1st unit? a. $50 b. $75 c. $80 d. $150 ANS: A PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Applicative 58. Refer to Table 14-13. What is the marginal cost of the 8th unit? a. $0 b. $100 c. $120 d. $140 ANS: C PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Applicative REVENUES Price Total Revenue $120 $120 $120 $120 $120 $120 $120 $120 $120 REF: TOP: 14-2 Marginal cost REF: TOP: 14-2 Marginal cost Marginal Revenue -- 59. Refer to Table 14-13. In order to maximize profits, how many units should Diana’s Dress Emporium produce? a. 5 b. 6 c. 7 d. 8 ANS: D PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Economic profit MSC: Applicative 60. Refer to Table 14-13. What is Diana’s economic profit at the profit maximizing point? a. $78 b. $243 c. $278 d. $375 ANS: C PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Economic profit MSC: Applicative © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 32 ❖ Chapter 14/Firms in Competitive Markets Table 14-14 The following table presents cost and revenue information for Bob’s bakery production and sales. Quantity Total Cost Marginal Price Total Marginal Cost Revenue Revenue 0 $5.00 --$3.25 --1 $5.50 $3.25 2 $6.50 $3.25 3 $8.00 $3.25 4 $10.00 $3.25 5 $12.50 $3.25 6 $15.50 $3.25 7 $19.00 $3.25 8 $23.00 $3.25 61. Refer to Table 14-14. What is Bob’s total fixed cost? a. $0 b. $3 c. $5 d. $9 ANS: C PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Applicative REF: TOP: 62. Refer to Table 14-14. What is the total revenue from selling 5 units? a. $2.50 b. $3.25 c. $12.50 d. $16.25 ANS: D PTS: 1 DIF: 2 REF: NAT: Analytic LOC: Perfect competition TOP: MSC: Applicative 63. Refer to Table 14-14. What is the marginal revenue of the 4th unit? a. $2.00 b. $3.25 c. $10.00 d. $13.00 ANS: B PTS: 1 DIF: 2 REF: NAT: Analytic LOC: Perfect competition TOP: MSC: Applicative 64. Refer to Table 14-14. At what quantity will Bob maximize his profit? a. 5 units b. 6 units c. 7 units d. 8 units ANS: B PTS: 1 DIF: 2 REF: NAT: Analytic LOC: Perfect competition TOP: MSC: Applicative 14-2 Fixed costs 14-2 Total revenue 14-2 Marginal revenue 14-2 Profit maximization © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 33 65. Refer to Table 14-14. When Bob produces and sells the profit-maximizing quantity, how much profit does he earn? a. $0.25 b. $2.75 c. $4.00 d. $5.25 ANS: C PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit MSC: Applicative 66. Refer to Table 14-14. Suppose that due to a decrease in the market demand for bread the market price of bread drops to $2.75 per loaf. At this new price, what is Bob’s profit-maximizing quantity? a. 5 units b. 6 units c. 7 units d. 8 units ANS: A PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Applicative 67. Refer to Table 14-14. Suppose that due to a decrease in the market demand for bread the market price of bread drops to $2.75. At this new price, if Bob produces and sells the profit-maximizing quantity, how much profit will he earn? a. $0.25 b. $1.25 c. $2.25 d. The firm will lose $6.25. ANS: B PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit MSC: Applicative 68. Which of the following statements best expresses a firm’s profit-maximizing decision rule? a. If marginal revenue is greater than marginal cost, the firm should increase its output. b. If marginal revenue is less than marginal cost, the firm should decrease its output. c. If marginal revenue equals marginal cost, the firm should continue producing its current level of output. d. All of the above are correct. ANS: D PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Analytical 69. Which of the following statements best expresses a firm’s profit-maximizing decision rule? a. If marginal revenue is greater than marginal cost, the firm should increase its output. b. If marginal revenue is less than marginal cost, the firm should shut down in the short run. c. If marginal revenue equals marginal cost, the firm should produce exactly one more unit of output. d. All of the above are correct. ANS: A PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Analytical © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 34 ❖ Chapter 14/Firms in Competitive Markets 70. 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. should reduce its average fixed cost in order to lower its marginal cost. d. may still be earning a positive accounting profit. ANS: D PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Analytical 71. 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: NAT: Analytic LOC: Perfect competition TOP: MSC: Analytical 14-2 Profit maximization 72. In order to maximize profits in the short run, a firm should produce where a. marginal revenue exceeds marginal cost by the greatest amount. b. marginal cost is minimized. c. average total cost is minimized. d. marginal cost equals marginal revenue. ANS: D PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Analytical 73. Profit-maximizing firms in a competitive market produce an output level where a. marginal cost equals marginal revenue. b. marginal cost equals average total cost. c. marginal revenue is increasing. d. price is less than marginal revenue. ANS: A PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Analytical 74. A profit-maximizing firm in a competitive market will always make marginal adjustments to production as long as a. average revenue is greater than average total cost. b. average revenue is equal to marginal cost. c. marginal cost is greater than average total cost. d. price is above or below marginal cost. ANS: D PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Interpretive 75. When price is greater than marginal cost for a firm in a competitive market, a. marginal cost must be falling. b. the firm must be minimizing its losses. c. there are opportunities to increase profit by increasing production. d. the firm should decrease output to maximize profit. ANS: C PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Analytical © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 35 76. Profit-maximizing firms enter a competitive market when existing firms in that market have a. total revenues that exceed fixed costs. b. total revenues that exceed total variable costs. c. average total costs that exceed average revenue. d. average total costs less than market price. ANS: D PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Interpretive 77. 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. continue to produce at the current levels. d. increase its output. ANS: D PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Interpretive 78. 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 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Interpretive 79. 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. maximizing total revenue. b. maximizing profit. c. minimizing variable cost. d. minimizing average total cost. ANS: B PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Interpretive 80. 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 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Applicative © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 36 ❖ Chapter 14/Firms in Competitive Markets 81. 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 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Interpretive 82. 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 earned $4,500 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: C PTS: 1 DIF: 3 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Analytical 83. A firm in a competitive market has the following cost structure: Output Total Cost 0 $5 1 $10 2 $12 3 $15 4 $24 5 $40 If the market price is $16, this firm will a. produce 4 units of output in the short run and exit in the long run. b. produce 5 units of output in the short run and exit in the long run. c. produce 5 units of output in the short run and face competition from new market entrants in the long run. d. shut down in the short run and exit in the long run. ANS: C PTS: 1 DIF: 3 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Applicative © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 37 84. A firm in a competitive market has the following cost structure: Output Total Costs 0 $10 1 $12 2 $15 3 $19 4 $24 5 $30 6 $37 7 $46 8 $55 9 $65 If the market price is $8, how many units of output should the firm produce to maximize profit? a. 5 units b. 6 units c. 7 units d. 8 units ANS: B PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Analytical 85. A firm in a competitive market has the following cost structure: Output ATC 0 -1 $10 2 $8 3 $7 4 $8 5 $10 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 profit? a. 1 unit b. 2 units c. 3 units d. 4 units ANS: C PTS: 1 DIF: 3 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Analytical © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 38 ❖ Chapter 14/Firms in Competitive Markets 86. 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 Q S = 10P. In addition, suppose the following table shows the marginal cost of production for various levels of output for firms in this market. Output Marginal Cost 0 -1 $5 2 $10 3 $15 4 $20 5 $25 How many units should a firm in this market produce to maximize profit? a. 1 unit b. 2 units c. 3 units d. 4 units ANS: B PTS: 1 DIF: 3 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Analytical 87. Mrs. Smith operates a business in a competitive market. The current market price is $8.50. At her profitmaximizing level of production, the average variable cost is $8.00, and the average total cost is $8.25. Mrs. Smith should a. shut down her business in the short run but continue to operate in the long run. b. continue to operate in the short run but shut down in the long run. c. continue to operate in both the short run and long run. d. shut down in both the short run and long run. ANS: C PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Applicative 88. Mrs. Smith operates a business in a competitive market. The current market price is $7.50. At her profitmaximizing level of production, the average variable cost is $8.00, and the average total cost is $8.25. Mrs. Smith should a. shut down her business in the short run but continue to operate in the long run. b. continue to operate in the short run but shut down in the long run. c. continue to operate in both the short run and long run. d. shut down in both the short run and long run. ANS: D PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Applicative 89. Mrs. Smith operates a business in a competitive market. The current market price is $8.10. At her profitmaximizing level of production, the average variable cost is $8.00, and the average total cost is $8.25. Mrs. Smith should a. shut down her business in the short run but continue to operate in the long run. b. continue to operate in the short run but shut down in the long run. c. continue to operate in both the short run and long run. d. shut down in both the short run and long run. ANS: B PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Applicative © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 39 90. 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 are correct. ANS: D PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Applicative 91. 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 rise. c. its profits to rise. d. Both b) and c) are correct. ANS: A PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Applicative 92. The accountants hired by the Brookside Racquet Club 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, the Brookside Racquet Club should a. shut down. b. exit the industry. c. stay open because shutting down would be more expensive. d. stay open because the firm is making an economic profit. ANS: C PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Analytical 93. The accountants hired by the Brookside Racquet Club have determined total fixed cost to be $75,000, total variable cost to be $130,000, and total revenue to be $125,000. Because of this information, in the short run, the Brookside Racquet Club should a. shut down because staying open would be more expensive. b. lower their prices to increase their profits. c. stay open because shutting down would be more expensive. d. stay open because the firm is making an economic profit. ANS: A PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Analytical 94. 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 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Analytical © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 40 ❖ Chapter 14/Firms in Competitive Markets 95. Raiman's Shoe Repair produces custom-made shoes. When Mr. Raiman produces 12 pairs per week, the marginal cost of the 12th pair is $84, and the marginal revenue of the 12th 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 PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Analytical 96. Winona's Fudge Shoppe is maximizing profits by producing 1,000 pounds of fudge per day. If Winona'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: 3 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Analytical 97. 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 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Interpretive 98. A firm in a competitive market currently 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: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Average revenue MSC: Interpretive Scenario 14-1 Assume a certain firm in a competitive market 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. 99. Refer to Scenario 14-1. At Q = 1,000, the firm's profits equal a. $-200. b. $1,000. c. $3,000. d. $4,000. ANS: B PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Applicative REF: TOP: 14-2 Profit © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 41 100. Refer to Scenario 14-1. At Q = 999, the firm's total costs equal a. $10,985. b. $10,990. c. $10,995. d. $10,999. ANS: A PTS: 1 DIF: 3 NAT: Analytic LOC: Perfect competition MSC: Applicative 101. Refer to Scenario 14-1. At Q = 999, the firm's profits equal a. $993. b. $997. c. $1,003. d. $1,007. ANS: C PTS: 1 DIF: 3 NAT: Analytic LOC: Perfect competition MSC: Applicative 102. Refer to Scenario 14-1. 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 NAT: Analytic LOC: Perfect competition MSC: Analytical REF: TOP: 14-2 Total cost REF: TOP: 14-2 Profit REF: TOP: 14-2 Profit maximization 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 $20 and its average total cost equals $25. The firm sells its output for $30 per unit. 103. 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: A PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Analytical 104. Refer to Scenario 14-2. At Q = 1,000, the firm's profits equal a. $-5,000. b. $2,500. c. $5,000. d. $10,000. ANS: C PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Applicative 105. Refer to Scenario 14-2. At Q = 999, the firm's total costs equal a. $24,970. b. $24,975. c. $24,980. d. $25,025. ANS: C PTS: 1 DIF: 3 NAT: Analytic LOC: Perfect competition MSC: Applicative REF: TOP: 14-2 Profit maximization REF: TOP: 14-2 Profit REF: TOP: 14-2 Total cost © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 42 ❖ Chapter 14/Firms in Competitive Markets 106. Refer to Scenario 14-2. At Q = 999, the firm's profits equal a. $4,990. b. $5,000. c. $5,020. d. $5,030. ANS: A PTS: 1 DIF: 3 NAT: Analytic LOC: Perfect competition MSC: Applicative REF: TOP: 14-2 Profit Scenario 14-3 Suppose a certain competitive firm is producing Q=500 units of output. The marginal cost of the 500th unit is $17, and the average total cost of producing 500 units is $12. The firm sells its output for $20. 107. Refer to Scenario 14-3. At Q=500, the firm’s profits equal a. $1,000. b. $4,000. c. $7,000. d. $10,000. ANS: B PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Applicative 108. Refer to Scenario 14-3. At Q=499, the firm’s total costs equal a. $5,983. b. $5,988. c. $5,995. d. $5,999. ANS: A PTS: 1 DIF: 3 NAT: Analytic LOC: Perfect competition MSC: Applicative 109. Refer to Scenario 14-3. At Q=499, the firm’s profits equal a. $3,980. b. $3,992. c. $3,997. d. $4,017. ANS: C PTS: 1 DIF: 3 NAT: Analytic LOC: Perfect competition MSC: Applicative REF: TOP: 14-2 Profit REF: TOP: 14-2 Total cost REF: TOP: 14-2 Profit 110. Refer to Scenario 14-3. If the marginal cost of producing the 501st unit would be $19, producing and selling the 501st unit would a. decrease the firm’s profit by $19. b. decrease the firm’s profit by $2. c. increase the firm’s profit by $1. d. increase the firm’s profit by $3. ANS: C PTS: 1 DIF: 3 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit MSC: Applicative 111. 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 PTS: 1 DIF: 2 REF: NAT: Analytic LOC: Perfect competition TOP: MSC: Definitional 14-2 Profit © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 43 112. 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 PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Definitional REF: TOP: 113. We can measure the profits earned by a firm in a competitive industry as a. (P - ATC) Q. b. (P - MC) Q. c. MR MC. d. (MC - ATC) Q. ANS: A PTS: 1 DIF: 2 REF: NAT: Analytic LOC: Perfect competition TOP: MSC: Analytical 14-2 Profit 14-2 Profit 114. 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 NAT: Analytic LOC: Perfect competition TOP: Profit MSC: Interpretive 115. Assume a firm in a competitive industry 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 NAT: Analytic LOC: Perfect competition TOP: Profit MSC: Applicative 116. 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 - ATC) Q ANS: D PTS: 1 DIF: 2 REF: NAT: Analytic LOC: Perfect competition TOP: MSC: Definitional 14-2 Profit 117. Suppose that a firm in a competitive market 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 PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit MSC: Analytical © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 44 ❖ Chapter 14/Firms in Competitive Markets 118. 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 NAT: Analytic LOC: Perfect competition TOP: Profit MSC: Analytical 119. 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 PTS: 1 DIF: 3 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit MSC: Analytical 120. 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 $6, and is earning $240 economic profit in the short run. What is the current market price? a. $0 b. $6 c. $10 d. $12 ANS: D PTS: 1 DIF: 3 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit MSC: Analytical 121. In the short run, a firm operating in a competitive industry will produce the quantity of output where price equals marginal cost as long as the a. price is less than average total cost. b. marginal revenue exceeds the marginal cost. c. price is greater than average variable cost. d. price is greater than average fixed cost but less than average variable cost. ANS: C PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Interpretive 122. In the short run, a firm operating in a competitive industry will shut down if price is a. less than average total cost. b. less than average variable cost. c. greater than average variable cost but less than average total cost. d. greater than marginal cost. ANS: B PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Interpretive © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 45 123. The short-run supply curve for a firm in a perfectly competitive market is a. horizontal. b. likely to slope downward. c. determined by forces external to the firm. d. the portion of its marginal cost curve that lies above its average variable cost. ANS: D PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Interpretive 124. 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 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Definitional 125. 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: NAT: Analytic LOC: Perfect competition TOP: MSC: Definitional 126. 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: NAT: Analytic LOC: Perfect competition TOP: MSC: Definitional 14-2 Supply curve 14-2 Supply curve 127. When price exceeds average variable cost in the short run, 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 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Interpretive © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 46 ❖ Chapter 14/Firms in Competitive Markets 128. A firm in a competitive market has the following cost structure: Output Total Costs 0 $1 1 $6 2 $9 3 $10 4 $17 5 $26 What is the lowest price at which this firm might choose to operate? a. $2 b. $3 c. $4 d. $5 ANS: B PTS: 1 DIF: 3 REF: NAT: Analytic LOC: Perfect competition TOP: MSC: Analytical 14-2 Supply curve 129. The competitive firm's short-run supply curve is its a. marginal revenue curve, but only the portion where marginal revenue exceeds marginal cost. b. marginal cost curve. c. marginal cost curve, but only the portion above the minimum of average total cost. d. marginal cost curve, but only the portion above the minimum of average variable cost. ANS: D PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Interpretive 130. Suppose a profit-maximizing firm in a competitive market produces rubber bands. When the market price for rubber bands falls below the minimum of its average total cost, but still lies above the minimum of average variable cost, in the short run the firm will a. experience losses but will continue to produce rubber bands. b. shut down. c. earn both economic and accounting profits. d. raise the price of its product. ANS: A PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Losses MSC: Analytical 131. Suppose a profit-maximizing firm in a competitive market produces rubber bands. When the market price for rubber bands rises above the minimum of its average variable cost, but still lies below the minimum of average total cost, in the short run the firm will a. experience losses but will continue to produce rubber bands. b. shut down. c. earn both economic and accounting profits. d. raise the price of its product. ANS: A PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Losses MSC: Analytical © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 47 132. Shrimp Galore, a shrimp harvesting business in the Pacific Northwest, has a 30-year loan on its shrimp harvesting boat. The annual loan payment is $25,000 and the boat has a market (salvage) value that exceeds its outstanding loan balance. Prior to the 2010 shrimp harvesting season, Shrimp Galore's accountant predicted that at expected market prices for shrimp, Shrimp Galore would have a net loss of $75,000 dollars after paying all 2010 expenses (including the annual loan payment). In this case, Shrimp Galore should a. produce nothing and experience a loss of $25,000. b. produce nothing and experience a loss of $75,000. c. continue to operate because expected profits will rise in the future. d. continue to operate even though it predicts a loss of $75,000. ANS: A PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Losses MSC: Analytical 133. 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 NAT: Analytic LOC: Perfect competition TOP: Losses MSC: Interpretive 134. 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 smart decision to remain open for lunch. a. (i) and (ii) only b. (ii) and (iii) only c. (i) and (iii) only d. (i), (ii), and (iii) ANS: C PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Losses MSC: Interpretive 135. 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 NAT: Analytic LOC: Perfect competition TOP: Losses MSC: Applicative © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 48 ❖ Chapter 14/Firms in Competitive Markets 136. 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 NAT: Analytic LOC: Perfect competition TOP: Losses MSC: Analytical 137. A firm in a competitive market has the following cost structure: Output Total Cost 0 $5 1 $10 2 $12 3 $15 4 $24 5 $40 If the market price is $4, this firm will a. produce 2 units in the short run and exit in the long run. b. produce 3 units in the short run and exit in the long run. c. produce 4 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 NAT: Analytic LOC: Perfect competition MSC: Applicative 138. 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 PTS: 1 DIF: 1 NAT: Analytic LOC: Perfect competition MSC: Interpretive REF: TOP: 14-2 Losses REF: TOP: 14-2 Losses 139. 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 PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Losses MSC: Applicative © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 49 Figure 14-1 Suppose that a firm in a competitive market has the following cost curves: Price 13 12 11 MC 10 9 ATC 8 AVC 7 6.3 4.5 6 5 4 3 2 1 1 2 3 4 5 6 7 8 9 10 11 Quantity 140. Refer to Figure 14-1. The firm’s short-run supply curve is its marginal cost curve above a. $1. b. $3. c. $4.50. d. $6.30. ANS: C PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Applicative 141. Refer to Figure 14-1. The firm should shut down if the market price is a. above $8. b. above $6.30 but less than $8. c. above $4.50 but less than $6.30. d. less than $4.50. ANS: D PTS: 1 DIF: 2 REF: NAT: Analytic LOC: Perfect competition TOP: MSC: Applicative 14-2 Shut down 142. Refer to Figure 14-1. If the market price falls below $4.50, the firm will earn a. positive economic profits in the short run. b. negative economic profits in the short run but remain in business. c. negative economic profits in the short run and shut down. d. zero economic profits in the short run. ANS: C PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Shut down MSC: Applicative © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 50 ❖ Chapter 14/Firms in Competitive Markets 143. Refer to Figure 14-1. The firm will earn a negative economic profit but remain in business in the short run if the market price is a. above $6.30 but less than $8. b. above $6.30. c. less than $6.30 but more than $4.50. d. less than $4.50. ANS: C PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Applicative 144. Refer to Figure 14-1. The firm will earn a positive economic profit in the short run if the market price is a. above $6.30. b. less than $6.30 but more than $4.50. c. less than $4.50. d. exactly $6.30. ANS: A PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Applicative 145. Refer to Figure 14-1. If the market price rises above $6.30, the firm will earn a. positive economic profits in the short run. b. negative economic profits in the short run but remain in business. c. negative economic profits and shut down. d. zero economic profits in the short run. ANS: A PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Applicative 146. Refer to Figure 14-1. If the market price is $6.30, the firm will earn a. positive economic profits in the short run. b. negative economic profits in the short run but remain in business. c. negative economic profits and shut down. d. zero economic profits in the short run. ANS: D PTS: 1 DIF: 2 REF: NAT: Analytic LOC: Perfect competition TOP: MSC: Applicative 147. Refer to Figure 14-1. If the market price is $5.00, the firm will earn a. positive economic profits in the short run. b. negative economic profits in the short run but remain in business. c. negative economic profits and shut down. d. zero economic profits in the short run. ANS: B PTS: 1 DIF: 2 REF: NAT: Analytic LOC: Perfect competition TOP: MSC: Applicative 148. Refer to Figure 14-1. If the market price is $4.00, the firm will earn a. positive economic profits in the short run. b. negative economic profits in the short run but remain in business. c. negative economic profits and shut down. d. zero economic profits in the short run. ANS: C PTS: 1 DIF: 2 REF: NAT: Analytic LOC: Perfect competition TOP: MSC: Applicative 14-2 Profit maximization 14-2 Profit maximization 14-2 Profit maximization © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 51 Figure 14-2 Suppose a firm operating in a competitive market has the following cost curves: 10 Price MC 9 ATC 8 AVC 7 P1 6 5 P2 P3 4 3 P4 2 1 1 2 3 4 5 6 7 8 Quantity 149. Refer to Figure 14-2. If the market price is P1, in the short run the 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 PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Shut down MSC: Interpretive 150. Refer to Figure 14-2. If the market price is P2, in the short run the 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 PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Interpretive 151. Refer to Figure 14-2. If the market price is P3, in the short run the 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 PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Interpretive 152. Refer to Figure 14-2. If the market price is P4, in the short run the 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 PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Interpretive © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 52 ❖ Chapter 14/Firms in Competitive Markets 153. Refer to Figure 14-2. Which of the four prices corresponds to a firm earning positive economic profits in the short run? a. P1 b. P2 c. P3 d. P4 ANS: A PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Interpretive 154. Refer to Figure 14-2. Which of the four prices corresponds to a firm earning zero economic profits in the short run? a. P1 b. P2 c. P3 d. P4 ANS: B PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Interpretive 155. Refer to Figure 14-2. Which of the four prices corresponds to a firm earning negative economic profits in the short run but trying to remain open? a. P1 b. P2 c. P3 d. P4 ANS: C PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Interpretive 156. Refer to Figure 14-2. Which of the four prices corresponds to a firm earning negative economic profits in the short run and shutting down? a. P1 b. P2 c. P3 d. P4 ANS: D PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Interpretive © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 53 Figure 14-3 Suppose a firm operating in a competitive market has the following cost curves: 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Price MC ATC 1 2 3 4 5 6 7 8 Quantity 157. Refer to Figure 14-3. 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 PTS: 1 DIF: 3 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit MSC: Analytical 158. Refer to Figure 14-3. If the market price is $10, what is the firm’s total cost? a. $15 b. $30 c. $35 d. $50 ANS: C PTS: 1 DIF: 3 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Total cost MSC: Analytical 159. Refer to Figure 14-3. If the market price is $10, what is the firm’s total revenue? a. $15 b. $30 c. $35 d. $50 ANS: D PTS: 1 DIF: 3 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Total revenue MSC: Analytical 160. Refer to Figure 14-3. The firm will earn zero economic profit if the market price is a. $0 b. $6 c. $7 d. $10 ANS: B PTS: 1 DIF: 3 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit MSC: Interpretive © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 54 ❖ Chapter 14/Firms in Competitive Markets Figure 14-4 Suppose a firm operating in a competitive market has the following cost curves: Price MC ATC AVC P4 P3 P2 P1 Q1 Q2 Q3 Q4 Q5 Quantity 161. Refer to Figure 14-4. When price rises from P2 to P3, the firm finds that a. marginal cost exceeds marginal revenue at a production level of Q2. b. if it produces at output level Q3 it will earn a positive profit. c. expanding output to Q4 would leave the firm with losses. d. it could increase profits by lowering output from Q3 to Q2. ANS: C PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Analytical 162. Refer to Figure 14-4. When price falls from P3 to P1, the firm finds that it a. decreases its fixed costs. b. should produce Q1 units of output. c. should produce Q3 units of output. d. should shut down immediately. ANS: D PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Analytical 163. Refer to Figure 14-4. When price rises from P3 to P4, the firm finds that a. fixed costs decrease as output increases from Q3 to Q4. b. it can earn a positive profit by increasing production to Q4. c. profit is still maximized at a production level of Q3. d. average revenue exceeds marginal revenue at a production level of Q4. ANS: B PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Analytical © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 55 Figure 14-5 Suppose a firm operating in a competitive market has the following cost curves: Price MC ATC AVC P7 P6 P5 P4 P3 P2 P1 Q1 Q2 Q3 Q4 Q5 Quantity 164. Refer to Figure 14-5. When market price is P7, a profit-maximizing firm's short-run profits can be represented by the area a. P7 Q5. b. P7 Q3. c. (P7 - P5) Q3. d. We are unable to determine the firm’s profits because the quantity that the firm would produce is not labeled on the graph. ANS: C PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit MSC: Analytical 165. Refer to Figure 14-5. In the short run, if the market price is higher than P1 but less than P4, individual firms in a competitive industry will earn a. positive profits. b. zero profits. c. losses but will remain in business. d. losses and will shut down. ANS: C PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Losses MSC: Analytical 166. Refer to Figure 14-5. In the short run,if the market price is higher than P4 but less than P6, individual firms in a competitive industry will earn a. positive profits. b. zero profits. c. losses but will remain in business. d. losses and will shut down. ANS: A PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit MSC: Analytical © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 56 ❖ Chapter 14/Firms in Competitive Markets 167. Refer to Figure 14-5. In the short run, if the market price is P4, individual firms in a competitive industry will earn a. positive profits. b. zero profits. c. losses but will remain in business. d. losses and will shut down. ANS: B PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Analytical 168. Refer to Figure 14-5. Firms would be encouraged to enter this market for all prices that exceed a. P1. b. P2. c. P3. d. P4. ANS: D PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit MSC: Analytical 169. Refer to Figure 14-5. When market price is P2, a profit-maximizing firm's losses can be represented by the area a. (P4 - P2) Q2. b. (P2 - P1) (Q2-Q1). c. At a market price of P2, the firm earns profits, not 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 NAT: Analytic LOC: Perfect competition TOP: Losses MSC: Analytical Figure 14-6 Suppose a firm operating in a competitive market has the following cost curves: Price MC ATC AVC P5 P4 P3 P2 P1 Q1 Q2 Q3 Q4 Quantity 170. Refer to Figure 14-6. When market price is P3, a profit-maximizing firm's total revenue a. can be represented by the area P3 Q3. b. can be represented by the area P3 Q2. c. can be represented by the area (P3-P2) Q3. d. is zero. ANS: B PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Total revenue MSC: Analytical © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 57 171. Refer to Figure 14-5. Firms will 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 NAT: Analytic LOC: Perfect competition TOP: Profit MSC: Analytical 172. Refer to Figure 14-6. When market price is P3, a profit-maximizing firm's total costs a. can be represented by the area P2 Q2. b. can be represented by the area P3 Q2. c. can be represented by the area (P3-P2) Q3. d. are zero. ANS: B PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Total cost MSC: Analytical 173. Refer to Figure 14-6. Firms will earn positive profits in the short run if the market price a. is less than P1. b. is greater than P1 but less than P3. c. equals P3. d. exceeds P3. ANS: D PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit MSC: Analytical 174. Refer to Figure 14-6. When market price is P3, a profit-maximizing firm's profit a. can be represented by the area P3 Q3. b. can be represented by the area P3 Q2. c. can be represented by the area (P3-P2) Q3. d. is zero. ANS: D PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit MSC: Analytical 175. Refer to Figure 14-6. Firms will be earn losses in the short run but will remain in business if the market price a. exceeds P3. b. is less than P1. c. is greater than P1 but less than P3. d. exceeds P2. ANS: C PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Losses MSC: Analytical 176. Refer to Figure 14-6. Firms will shut down in the short run if the market price a. exceeds P3. b. is less than P1. c. is greater than P1 but less than P3. d. exceeds P2. ANS: B PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Shut down MSC: Analytical © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 58 ❖ Chapter 14/Firms in Competitive Markets Figure 14-7 Suppose a firm operating in a competitive market has the following cost curves: Price F MC ATC AVC D B C A Quantity 177. Refer to Figure 14-7. Which line segment best reflects the short-run supply curve for this firm? a. ABCF b. CD c. DF d. BCD ANS: A PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Interpretive 178. Refer to Figure 14-7. Which segment of the supply curve represents the firm shutting down? a. ABCD b. BCD c. CD d. AB ANS: D PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Interpretive Figure 14-8 Suppose a firm operating in a competitive market has the following cost curves: Price D MC ATC B C A Quantity © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 59 179. Refer to Figure 14-8. Which line segment best reflects the long-run supply curve for this firm? a. ABCD b. BC c. ABC d. None of the above is correct. We must know the firm’s average variable cost. ANS: A PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive 180. Refer to Figure 14-8. The firm will exit the market for any price on the line segment a. ABCD. b. AB. c. CD. d. None of the above is correct. ANS: B PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive 181. 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 PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Shut down MSC: Interpretive 182. 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 PTS: 1 DIF: 3 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Shut down MSC: Interpretive 183. 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 PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Shut down MSC: Interpretive 184. 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 PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Shut down MSC: Analytical © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 60 ❖ Chapter 14/Firms in Competitive Markets 185. 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 PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Shut down MSC: Interpretive 186. 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 PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Shut down MSC: Interpretive 187. 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 PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Interpretive REF: TOP: 14-2 Shut down 188. 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 PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Shut down MSC: Interpretive 189. 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 PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Shut down MSC: Interpretive 190. 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 PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Interpretive 2 REF: TOP: 14-2 Shut down © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 61 191. 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 NAT: Analytic LOC: Perfect competition TOP: Shut down MSC: Interpretive 192. A firm will shut down in the short run if, for all positive levels of output, a. its losses exceed 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: NAT: Analytic LOC: Perfect competition TOP: MSC: Interpretive 14-2 Shut down 193. 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 is less than a. $5 but more than $2. b. $5. c. $4. d. There is not enough information given to answer the question. ANS: C PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Shut down MSC: Analytical 194. 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 once the price of its product falls below a. $90. b. $80. c. $50. d. $40. ANS: B PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Shut down MSC: Analytical 195. 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 NAT: Analytic LOC: Perfect competition TOP: Shut down MSC: Definitional © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 62 ❖ Chapter 14/Firms in Competitive Markets 196. When determining whether to shut down in the short run, a competitive firm should ignore (i) fixed costs. (ii) variable costs. (iii) sunk costs. a. (iii) only b. (i) and (iii) only c. (ii) only d. (i), (ii), and (iii) ANS: B PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Shut down MSC: Analytical 197. 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. The firm will earn zero profits in both the short run and long run. ANS: A PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Shut down MSC: Applicative 198. Jose's restaurant 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. Jose's restaurant is earning a positive economic profit. b. Jose's restaurant should shut down immediately. c. Jose's restaurant 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 NAT: Analytic LOC: Perfect competition TOP: Shut down MSC: Analytical 199. 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 PTS: 1 DIF: 1 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Sunk costs MSC: Interpretive 200. 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 NAT: Analytic LOC: Perfect competition TOP: Sunk costs MSC: Interpretive © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 63 201. 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 PTS: 1 DIF: 1 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Sunk costs MSC: Interpretive 202. 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. Assume that losing the watch has not altered how you value it. 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 PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Sunk costs MSC: Interpretive 203. 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? Assume that losing the ticket does not alter how you value it. a. $5 b. $30 c. $35 d. $65 ANS: C PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Sunk costs MSC: Interpretive 204. 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 NAT: Analytic LOC: Perfect competition TOP: Sunk costs MSC: Applicative 205. 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 PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Sunk costs MSC: Applicative © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 64 ❖ Chapter 14/Firms in Competitive Markets 206. 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 NAT: Analytic LOC: Perfect competition TOP: Sunk costs MSC: Definitional 207. 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 PTS: 1 DIF: 1 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Sunk costs MSC: Definitional 208. A corporation has been steadily losing money on one of its product lines, plastic flamingo lawn ornaments. The firm produces plastic flamingos 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 PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Sunk costs MSC: Analytical 209. Suppose that you value a hat from your favorite university at $20. The university bookstore has the hat on sale for $15. You purchase the hat but lose it on the way home. What should you do? Assume that losing the hat does not alter how you value it. a. Go back to the bookstore and purchase another hat. b. Wait until the cost of the hat falls to $15 or less before purchasing another hat. c. Wait until the cost of the hat falls to $5 or less before purchasing another hat. d. Do not purchase another hat regardless of the price. ANS: A PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Sunk costs MSC: Applicative 210. In the long run, a firm will enter a competitive industry if a. total revenue exceeds total cost. b. the price exceeds average total cost. c. the firm can earn economic profits. d. All of the above are correct. ANS: D PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Interpretive REF: TOP: 14-2 Long-run supply curve © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 65 211. In the long run, a firm will exit a competitive industry if a. total revenue exceeds total cost. b. the price exceeds average total cost. c. average total cost exceeds the price. d. Both a and b are correct. ANS: C PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Interpretive REF: TOP: 14-2 Long-run supply curve 212. 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 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Analytical 213. A firm that exits its market 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: D PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Interpretive 2 REF: TOP: 14-2 Long-run supply curve 214. 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 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Definitional 215. 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 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Definitional © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 66 ❖ Chapter 14/Firms in Competitive Markets THE SUPPLY CURVE IN A COMPETITIVE MARKET Figure 14-9 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. Price Price (a) Firm (b) Market MC MC $2.00 $2.00 $1.00 $1.00 100 200 Quantity Q1 Q2 Quantity 1. Refer to Figure 14-9. 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 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Applicative 2. Refer to Figure 14-9. If there are 200 identical firms in this market, what level of output will be supplied to the market when price is $2.00? a. 2,000 b. 10,000 c. 20,000 d. 40,000 ANS: D PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Applicative 3. Refer to Figure 14-9. If there are 600 identical firms in this market, what is the value of Q1? a. 6,000 b. 12,000 c. 60,000 d. 120,000 ANS: C PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Applicative © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 67 4. Refer to Figure 14-9. If there are 400 identical firms in this market, what is the value of Q2? a. 4,000 b. 8,000 c. 40,000 d. 80,000 ANS: D PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Applicative 5. Refer to Figure 14-9. 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. The price cannot be determined from the information provided. ANS: B PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Applicative 6. Refer to Figure 14-9. 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: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Applicative Figure 14-10 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. Price Price (a) Firm (b) Market MC MC $4.00 $4.00 $2.00 $2.00 300 600 Quantity Q1 Q2 Quantity 7. Refer to Figure 14-10. If there are 500 identical firms in this market, what is the value of Q1? a. 10,000 b. 20,000 c. 50,000 d. 150,000 ANS: D PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Applicative © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 68 ❖ Chapter 14/Firms in Competitive Markets 8. Refer to Figure 14-10. If there are 500 identical firms in this market, what is the value of Q2? a. 12,000 b. 60,000 c. 240,000 d. 300,000 ANS: D PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Applicative 9. Refer to Figure 14-10. If there are 700 identical firms in this market, what is the value of Q1? a. 140,000 b. 210,000 c. 280,000 d. 420,000 ANS: B PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Applicative 10. Refer to Figure 14-10. If there are 700 identical firms in this market, what is the value of Q2? a. 140,000 b. 210,000 c. 280,000 d. 420,000 ANS: D PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Applicative © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 69 Figure 14-11 10 Price MC 9 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 Quantity 11. Refer to Figure 14-11. The figure above is for a firm operating in a competitive industry. If there were eight identical firms in the industry, which of the following price-quantity combinations would be on the market supply curve? Point Price Quantity A $4 4 B $4 32 C $6 6 D $8 64 a. A only b. A and C only c. B only d. B and D only ANS: D PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Market supply MSC: Analytical 12. The short-run market supply curve in a perfectly competitive industry a. shows the total quantity supplied by all firms at each possible price. b. is perfectly inelastic at the market price. c. is perfectly elastic at the market price. d. shows the variety of prices that different firms will charge for a given quantity. ANS: A PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Definitional 13. In the short-run, a firm's supply curve is equal to the a. marginal cost curve above its average variable cost curve. b. marginal cost curve above its average total cost curve. c. average variable cost curve above its marginal cost curve. d. average total cost curve above its marginal cost curve. ANS: A PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Definitional REF: TOP: 14-3 Supply curve © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 70 ❖ Chapter 14/Firms in Competitive Markets 14. 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 at each price. c. sum of the prices charged by each of the 1,000 individual firms at each quantity. d. sum of the quantities supplied by each of the 1,000 individual firms at each price. ANS: D PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Market supply MSC: Interpretive 15. In a perfectly competitive market, the horizontal sum of all the individual firms' supply curves is a. zero. b. equal to the industry profits. c. the market supply curve. d. a horizontal line. ANS: C PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Market supply MSC: Definitional 16. In a perfectly competitive market, the market supply curve is a. the marginal cost curve above average total cost for a representative firm. b. the horizontal sum of all the individual firms' supply curves. c. the vertical sum of all the individual firms’ supply curves. d. always a horizontal line. ANS: B PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Market supply MSC: Definitional 17. In the short run for 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 NAT: Analytic LOC: Perfect competition TOP: Market supply MSC: Applicative Table 14-15 Quantity 0 1 2 3 4 5 6 Total Cost $2 $7 $10 $11 $18 $27 $38 18. Refer to Table 14-15. What is the lowest price at which this firm would operate in the short run? a. $3. b. $4. c. $5. d. $6. ANS: A PTS: 1 DIF: 3 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Supply curve | Short run MSC: Applicative © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 71 Figure 14-12 Price (a) Price MC (b) ATC P1 Q1 Quantity Quantity 19. Refer to Figure 14-12. 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. perfectly elastic long-run market supply. c. the entry of firms into the industry when some resources used in production are available only in limited quantities. d. the fact that zero profits cannot be sustained in the long run. ANS: B PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Interpretive 20. In a competitive market with identical firms, a. an increase in demand in the short run will result in a new price above the minimum of average total cost, allowing firms to earn a positive economic profit in both the short run and the long run. b. firms cannot earn positive economic profit in either the short run or long run. c. firms can earn positive economic profit in the long run if the long-run market supply curve is upward sloping. d. free entry and exit into the market requires that firms earn zero economic profit in the long run even though they may be able to earn positive economic profit in the short run. ANS: D PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Analytical 21. 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 if 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 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 72 ❖ Chapter 14/Firms in Competitive Markets 22. 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 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 23. In the short run, there are 500 identical firms in a competitive market. The firms do not use any resources that are available in limited quantities, and each of them has the following cost structure: Output Total Cost 0 $0 1 $10 2 $12 3 $15 4 $24 5 $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 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Analytical 24. 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? Quantity Total Costs 0 $1 1 $7 2 $14 3 $22 4 $31 5 $41 a. 200 units b. 300 units c. 400 units d. 500 units ANS: B PTS: 1 DIF: 3 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Analytical © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 73 25. 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 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 26. 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: 2 REF: NAT: Analytic LOC: Perfect competition TOP: MSC: Interpretive 27. Entry into a market by new firms will increase the a. supply of the good. b. profits of existing firms. c. price of the good. d. marginal cost of producing the good. ANS: A PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 Competitive markets 14-3 Competitive markets 28. 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 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 29. When firms have an incentive to exit a competitive market, their exit will a. lower the market price. b. necessarily raise the costs for the firms that remain in the market. c. raise the profits of the firms that remain in the market. d. shift the demand for the product to the left. ANS: C PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 30. 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 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 74 ❖ Chapter 14/Firms in Competitive Markets 31. The entry of new firms into a competitive market will a. increase market supply and increase market price. b. increase market supply and decrease market price. c. decrease market supply and increase market price. d. decrease market supply and decrease market price. ANS: B PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Interpretive 32. The exit of existing firms from a competitive market will a. increase market supply and increase market price. b. increase market supply and decrease market price. c. decrease market supply and increase market price. d. decrease market supply and decrease market price. ANS: C PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 Competitive markets REF: TOP: 14-3 Competitive markets 33. When managers of firms in a competitive market observe falling profits, they may infer that the market is experiencing 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 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 34. Timmy's Trophies operates in a perfectly competitive market. If trophies sell for $20 each and average total cost per trophy is $15 at the profit-maximizing output level, then in the long run a. more firms will enter the market. b. some firms will exit from the market. c. the equilibrium price per trophy will rise. d. average total costs will fall. ANS: A PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Analytical 35. Carol owns a running shoe store that operates in a perfectly competitive market. If running shoes sell for $120 per pair and the average total cost per pair of shoes is $125 at the profit-maximizing output level, then in the long run a. more firms will enter the market. b. some firms will exit from the market. c. the equilibrium price per pair of shoes will fall. d. average total costs will fall. ANS: B PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Analytical © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 75 36. When market conditions in a competitive industry are such that firms cannot cover their total production costs, then a. the firms will suffer long-run economic losses. b. the firms will suffer short-run economic losses that will be exactly offset by long-run economic profits. c. some firms will exit the market, causing prices to rise until the remaining firms can cover their total production costs. d. all firms will go out of business, since consumers will not pay prices that enable firms to cover their total production costs. ANS: C PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 37. If occupational safety laws were changed so that firms no longer had to take expensive steps to meet regulatory requirements, we would expect that a. the demand for products in this industry would increase. b. the market price of products in this industry would decrease in the short run but not in the long run. c. the firms in the industry would make a long-run economic profit. d. competition would force producers to pass the lower production costs on to consumers in the long run. ANS: D PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Analytical 38. The textile industry is composed of a large number of small firms. In recent years, these firms have suffered economic losses, and many sellers have left the industry. Economic theory suggests that these conditions will a. shift the demand curve outward so that price will rise to the level of production cost. b. cause the remaining firms to collude so that they can produce more efficiently. c. cause the market supply to decline and the price of textiles to rise. d. cause firms in the textile industry to suffer long-run economic losses. ANS: C PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Analytical 39. 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: 14-3 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Analytical 40. If there is an increase in market demand in a perfectly competitive market, then in the short run prices will a. rise. b. remain unchanged at the minimum of average total cost. c. fall. d. remain unchanged at the minimum of marginal cost. ANS: A PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Analytical © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 76 ❖ Chapter 14/Firms in Competitive Markets 41. Which of the following statements is not correct? 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 longrun 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 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 42. Which of the following statements is not correct about competitive firms? a. In a long-run equilibrium, firms must be operating at their efficient scale. b. In the short run, the number of firms in an industry may be fixed. c. In the long run, the number of firms can adjust to changing market conditions. d. In the short run, firms must be operating at a level of output where price equals average variable cost. ANS: D PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive Scenario 14-4 As part of an estate settlement Mary received $1 million. She decided to use the money to purchase a small business in Anywhere, USA. Her business operates in a perfectly competitive industry. If Mary would have invested the $1 million in a risk-free bond fund she could have earned $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. 43. Refer to Scenario 14-4. 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. -$150,000 b. -$50,000 c. -$25,000 d. $25,000 ANS: C PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Economic profit MSC: Applicative 44. Refer to Scenario 14-4. 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: 14-3 NAT: Analytic LOC: Perfect competition TOP: Economic profit MSC: Applicative 45. Refer to Scenario 14-4. 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: 14-3 NAT: Analytic LOC: Perfect competition TOP: Economic profit MSC: Applicative © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 77 Scenario 14-5 A study sponsored by the Food Consumer Safety Board found that consumption of irradiated tomatoes increased the health of laboratory rats. As a result of national press coverage of the report, the demand for irradiated tomatoes increased dramatically. Organic farmers were able to switch from organic production of tomatoes to irradiated production with no additional cost. Assume that the tomato market satisfies all of the assumptions of perfect competition. 46. Refer to Scenario 14-5. As a result of the increase in the demand for tomatoes, we would predict that in the short run that the a. production of tomatoes would be at efficient scale. b. price of tomatoes would rise. c. total cost for existing irradiated tomato 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 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Analytical 47. Refer to Scenario 14-5. If the increased production of irradiated tomatoes caused a rise in the marginal transportation costs of moving irradiated tomatoes to market, the a. short-run market supply curve for irradiated tomatoes would be affected but not the long-run market supply. b. long-run market supply curve for irradiated tomatoes would be perfectly elastic. c. long-run market supply of irradiated tomatoes would be downward sloping. d. long-run market supply of irradiated tomatoes would be upward sloping. ANS: D PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Analytical 48. When a profit-maximizing firm in a competitive market has zero economic profit, accounting profit a. is negative. b. is at least zero. c. is also zero. d. could be positive, negative or zero. ANS: B PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Economic profit MSC: Interpretive 49. 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: 14-3 NAT: Analytic LOC: Perfect competition TOP: Accounting profit MSC: Interpretive 50. 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: NAT: Analytic LOC: Perfect competition TOP: MSC: Interpretive 14-3 Accounting profit © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 78 ❖ Chapter 14/Firms in Competitive Markets 51. If the profit-maximizing quantity of production for a competitive firm occurs at a point where the firm’s average total cost of production is falling as production increases, then the firm a. will be earning positive economic profit at the profit-maximizing quantity. b. will have economic profit less than zero at the profit-maximizing quantity. c. will have zero economic profit at the profit-maximizing quantity. d. should increase the quantity of production to increase profit. ANS: B PTS: 1 DIF: 3 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Applicative 52. In a perfectly competitive market, the process of entry and exit will end when a. price equals minimum marginal cost. b. marginal revenue equals marginal cost. c. economic profits are zero. d. accounting profits are zero. ANS: C PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive 53. In a perfectly competitive market, the process of entry and exit will end when (i) accounting profits are zero. (ii) economic profits are zero. (iii) price equals minimum marginal cost. (iv) price equals minimum average total cost. a. (i) and (ii) only b. (ii) and (iii) only c. (ii) and (iv) only d. (i), (ii), (iii), and (iv) ANS: C PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive 54. In a competitive market with free entry and exit, if all firms have the same cost structure, then a. all firms will operate at their efficient scale in the short run. b. all firms will operate at their efficient scale in the long run. c. the price of the product will differ across firms. d. Both a and b are correct. ANS: B PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive 55. In a perfectly competitive market, the process of entry and exit will end when firms face a. marginal revenue equal to long-run average total cost. b. total revenue equal to average total cost. c. average revenue greater than marginal cost. d. accounting profits equal to zero. ANS: A PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Analytical © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 79 56. In the long run, each firm in a competitive industry earns a. zero accounting profits. b. zero economic profits. c. positive economic profits. d. positive, negative, or zero economic profits. ANS: B PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Applicative 57. In the long run, each firm in a competitive industry earns a. zero accounting profits. b. zero economic profits. c. positive economic profits. d. Both a and b are correct. ANS: B PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Applicative REF: TOP: 14-3 Zero-profit condition REF: TOP: 14-3 Zero-profit condition 58. In the long run, assuming that the owner of a firm in a competitive industry has positive opportunity costs, she a. should exit the industry unless her economic profits are positive. b. will earn zero accounting profits but positive economic profits. c. will earn zero economic profits but positive accounting profits. d. should ignore opportunity costs because they are a type of sunk cost that disappears in the long run. ANS: C PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Applicative 59. 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 the minimum of a. average fixed cost for the marginal firm. b. marginal cost of the marginal firm. c. average total cost of the marginal firm. d. average variable cost of the marginal firm. ANS: C PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive 60. 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 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive 61. When firms are neither entering nor exiting a perfectly competitive market, a. total revenue must equal total cost for each firm. b. economic profits must be zero. c. price must equal the minimum of marginal cost for each firm. d. Both a and b are correct. ANS: D PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 80 ❖ Chapter 14/Firms in Competitive Markets 62. 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 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive 63. 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 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive 64. 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: NAT: Analytic LOC: Perfect competition MSC: Interpretive 65. In a long-run equilibrium, the marginal firm has a. price equal to minimum marginal cost. b. total revenue equal to total cost. c. accounting profit equal to zero. d. All of the above are correct. ANS: B PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Interpretive 2 REF: TOP: 14-3 Zero-profit condition 2 REF: TOP: 14-3 Zero-profit condition 66. 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 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive 67. 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: C PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 81 68. 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 is determined by a. the minimum point on the firms' average variable cost curve. b. the minimum point on the firms' average total cost curve. c. the portion of the marginal cost curve below average variable cost. d. a firm’s level of sunk costs. ANS: B PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive 69. If all firms have the same costs of production, then in long-run equilibrium, a. price exceeds average total cost for all firms. b. price exceeds marginal cost for all firms. c. some firms may earn positive economic profits. d. all firms have zero economic profits and just cover their opportunity costs. ANS: D PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive 70. Suppose that firms in a competitive industry are earning positive economic profits. All else equal, in the long run, we would expect the number of firms in the industry to a. increase. b. decrease. c. remain the same. d. We do not have enough information with which to answer this question. ANS: A PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive 71. Suppose that some firms in a competitive industry are earning zero economic profits, while others are experiencing losses. All else equal, in the long run, we would expect the number of firms in the industry to a. increase. b. decrease. c. remain the same. d. We do not have enough information with which to answer this question. ANS: B PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 82 ❖ Chapter 14/Firms in Competitive Markets Figure 14-13 Suppose a firm in a competitive industry has the following cost curves: 10 Price MC 9 ATC 8 AVC 7 6 P1 5 P2 4 P3 3 2 P4 1 1 2 3 4 5 6 7 8 Quantity 72. Refer to Figure 14-13. If the price is P1 in the short run, what will happen in the long run? a. Nothing. The price is consistent with zero economic profits, so there is no incentive for firms to enter or exit the industry. b. Individual firms will earn positive economic profits in the short run, which will entice other firms to enter the industry. c. Individual firms will earn negative economic profits in the short run, which will cause some firms to exit the industry. d. Because the price is below the firm’s average variable costs, the firms will shut down. ANS: B PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive 73. Refer to Figure 14-13. If the price is P2 in the short run, what will happen in the long run? a. Nothing. The price is consistent with zero economic profits, so there is no incentive for firms to enter or exit the industry. b. Individual firms will earn positive economic profits in the short run, which will entice other firms to enter the industry. c. Individual firms will earn negative economic profits in the short run, which will cause some firms to exit the industry. d. Because the price is below the firm’s average variable costs, the firms will shut down. ANS: A PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive 74. Refer to Figure 14-13. If the price is P3 in the short run, what will happen in the long run? a. Nothing. The price is consistent with zero economic profits, so there is no incentive for firms to enter or exit the industry. b. Individual firms will earn positive economic profits in the short run, which will entice other firms to enter the industry. c. Individual firms will earn negative economic profits in the short run, which will cause some firms to exit the industry. d. Because the price is below the firm’s average variable costs, the firms will shut down. ANS: C PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 83 75. 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 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 76. 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: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Analytical 77. A competitive market is in long-run equilibrium. If demand increases, we can be certain that price will a. rise in the short run. Some firms will enter the industry. Price will then rise to reach the new longrun equilibrium. b. rise in the short run. Some firms will enter the industry. Price will then fall to reach the new longrun 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 rise in the short run because firms will enter to maintain the price. ANS: B PTS: 1 DIF: 3 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Analytical 78. In the transition from the short run to the long run, the number of firms in a competitive industry is a. fixed. b. increasing at a constant rate. c. decreasing. d. able to adjust to market conditions. ANS: D PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive 79. The long-run supply curve for a competitive industry a. may be horizontal if entry into the industry lowers average total cost. b. may be upward-sloping if higher-cost firms enter the industry. c. will be horizontal if there is free entry into the industry. d. will be upward-sloping if there are barriers to entry into the industry. ANS: B PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 84 ❖ Chapter 14/Firms in Competitive Markets 80. The long-run supply curve for a competitive industry may be upward sloping if a. there are barriers to entry. b. firms that enter the industry are able to do so at lower average total costs than the existing firms in the industry. c. some resources are available only in limited quantities. d. accounting profits are positive. ANS: C PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive 81. 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 market supply curve a. is horizontal and equal to the minimum of long-run marginal cost for each firm. b. must slope downward. c. must slope upward. d. is horizontal and equal to the minimum of long-run average cost for each firm. ANS: D PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive 82. 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 but positive economic profits. b. facing the prospect of future losses. c. operating at the efficient scale. d. that work together to raise market prices. ANS: C PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive 83. 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 do not have sufficient information to determine the shape of the long-run market supply curve. ANS: A PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive 84. 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 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 85 85. When a competitive market experiences an increase in demand that increases production costs for existing firms and potential new entrants, 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 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive 86. 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: NAT: Analytic LOC: Perfect competition TOP: MSC: Interpretive 14-3 Long-run supply curve 87. 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 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive 88. 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 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive 89. 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 will rise. d. long-run supply is constant. ANS: C PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive 90. 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 enter the industry. ANS: C PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Analytical © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 86 ❖ Chapter 14/Firms in Competitive Markets 91. The long-run market supply curve in a competitive market will a. always be horizontal. b. be the portion of the MC that lies above the minimum of AVC for the marginal firm. c. typically be more elastic than the short-run supply curve. d. be above the competitive firm's efficient scale. ANS: C PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive 92. In the long run the market supply a. must always be horizontal. b. could be upward sloping if the cost of production falls as new firms enter the market. c. could be upward sloping if the cost of production rises as new firms enter the market. d. could be upward sloping if technological improvements lower the cost of producing in the market. ANS: C PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive 93. Suppose that a competitive market is initially in equilibrium. Then demand increases. If some resources used in production are not available in sufficient quantities for entering firms, a. the long-run market supply curve will be upward sloping. b. the long-run market supply curve will be perfectly elastic. c. in the long run firms will suffer economic losses, leading them to exit the industry. d. the number of firms will decrease, and the market will become a monopoly. ANS: A PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive 94. Suppose that a competitive market is initially in equilibrium. Then demand increases. If entering firms face the same costs as existing firms and sufficient resources are available for entering firms, a. the long-run market supply curve will be upward sloping. b. the long-run market supply curve will be perfectly elastic. c. in the long run firms will suffer economic losses, leading them to exit the industry. d. the number of firms will decrease, and the market will become a monopoly. ANS: B PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 87 Figure 14-14 Price (a) Price MC (b) S0 S1 ATC B P2 P2 P1 P1 P0 P0 A C D D1 D0 Q1 Q2 Quantity QA QBQD QC Quantity 95. Refer to Figure 14-14. 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 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Analytical 96. Refer to Figure 14-14. Assume that the market starts in equilibrium at point A in panel (b). An increase in demand from D0 to D1 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 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Analytical 97. Refer to Figure 14-14. Assume that the market starts in equilibrium at point A in panel (b) and that panel (a) illustrates the cost curves facing individual firms. Suppose that demand increases from D0 to D1. Which of the following statements is correct? a. Points A, B, and C represent both short-run and long-run equilibria. b. Points A, B, C, and D represent short-run equilibria. c. Points A and B represent long-run equilibria. d. Points A and C represent long-run equilibria. ANS: D PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Analytical © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 88 ❖ Chapter 14/Firms in Competitive Markets 98. Refer to Figure 14-14. Assume that the market starts in equilibrium at point A in panel (b) and that panel (a) illustrates the cost curves facing individual firms. Suppose that demand increases from D0 to D1. Which of the following statements is not correct? a. Point A is a long-run equilibrium point. b. Points A, B, and C are short-run equilibria points. c. Point B is a long-run equilibrium point. d. Point C is a long-run equilibrium point. ANS: C PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Analytical 99. Refer to Figure 14-14. 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 output 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 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Analytical 100. Refer to Figure 14-14. 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 S0 to S1. d. An increase in market demand from D0 to D1. ANS: D PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Analytical CONCLUSION: BEHIND THE SUPPLY CURVE 1. The production decisions of perfectly competitive firms follow one of the Ten Principles of Economics, which states that rational people a. consider sunk costs. b. equate prices to the average costs of production. c. prefer to purchase products from smaller rather than larger firms. d. think at the margin. ANS: D PTS: 1 DIF: 2 REF: 14-4 NAT: Analytic LOC: Perfect competition TOP: Marginal analysis MSC: Definitional 2. If firms are competitive and profit maximizing, the price of a good equals the a. marginal cost of production. b. fixed cost of production. c. total cost of production. d. average total cost of production. ANS: A PTS: 1 DIF: 2 REF: 14-4 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 89 3. Profit maximizing firms in competitive industries with free entry and exit face a price equal to the lowest possible a. marginal cost of production. b. fixed cost of production. c. total cost of production. d. average total cost of production. ANS: D PTS: 1 DIF: 2 REF: 14-4 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive TRUE/FALSE 1. For a firm operating in a perfectly competitive industry, total revenue, marginal revenue, and average revenue are all equal. ANS: F PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Average revenue | Marginal revenue MSC: Interpretive 2. For a firm operating in a perfectly competitive industry, marginal revenue and average revenue are equal. ANS: T PTS: 1 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 PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Average revenue MSC: Interpretive 4. For a firm operating in a competitive market, both marginal revenue and average revenue exceed the market price. ANS: F PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Marginal revenue | Average revenue MSC: Applicative 5. A profit-maximizing firm in a competitive market will increase production when average revenue exceeds marginal cost. ANS: T PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Average revenue MSC: Interpretive 6. A profit-maximizing firm in a competitive market will decrease production when marginal cost exceeds average revenue. ANS: T PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Average revenue MSC: Interpretive 7. Because there are many buyers and sellers in a perfectly competitive market, no one seller can influence the market price. ANS: T PTS: 1 DIF: 1 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Definitional 8. In competitive markets, firms that raise their prices are typically rewarded with larger profits. ANS: F PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 90 ❖ Chapter 14/Firms in Competitive Markets 9. When an individual firm in a competitive market increases its production, it is likely that the market price will fall. ANS: F PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 10. When an individual firm in a competitive market decreases its production, it is likely that the market price will rise. ANS: F PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 11. In a competitive market, firms are unable to differentiate their product from that of other producers. ANS: T PTS: 1 DIF: 1 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 12. 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 PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 13. The two characteristics of a competitive market are 1) many buyers and sellers in the market and 2) the goods offered by the various sellers are highly differentiated. ANS: F PTS: 1 DIF: 1 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Definitional 14. Firms operating in perfectly competitive markets try to maximize profits. ANS: T PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Applicative 15. Because there are many sellers in a competitive market, individual firms are unable to maximize profits. ANS: F PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Applicative 16. 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 PTS: 1 DIF: 1 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Interpretive 17. 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 PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Interpretive 18. Firms operating in perfectly competitive markets produce an output level where marginal revenue equals marginal cost. ANS: T PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Applicative © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 91 19. 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 PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Analytical 20. 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 PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Analytical 21. 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 PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Analytical 22. 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 PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Interpretive 23. When a profit-maximizing firm in a competitive market experiences rising prices, it will respond with an increase in production. ANS: T PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Interpretive 24. 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 PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Interpretive 25. 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 but greater than the firm’s average fixed cost. ANS: F PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Interpretive 26. 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 PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Interpretive 27. 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 PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Interpretive © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 92 ❖ Chapter 14/Firms in Competitive Markets 28. In the short run, a firm should exit the industry if its marginal cost exceeds its marginal revenue. ANS: F PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Interpretive 29. The supply curve of a firm in a competitive market is the average variable cost curve above the minimum of marginal cost. ANS: F PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Interpretive 30. A firm will shut down in the short run if revenue is not sufficient to cover its variable costs of production. ANS: T PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Shut down MSC: Interpretive 31. 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 PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Shut down MSC: Interpretive 32. 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 PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Shut down MSC: Interpretive 33. 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 PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Shut down MSC: Interpretive 34. A firm operating in a competitive market will stay in business in the short run so long as the market price exceeds the firm’s average total cost; otherwise, the firm will shut down. ANS: F PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Shut down MSC: Applicative 35. In the short run, if the market price is below the firm’s average total cost of production, the firm will always shut down. ANS: F PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Shut down MSC: Interpretive 36. The marginal firm in a competitive market will earn zero economic profit in the long run. ANS: T PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive 37. A profit-maximizing firm in a competitive market will earn zero accounting profits in the long run. ANS: F PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 93 38. 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 PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Sunk costs MSC: Interpretive 39. 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 PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Sunk costs MSC: Interpretive 40. 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 fixed costs. ANS: F PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Sunk costs MSC: Interpretive 41. 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 PTS: 1 DIF: 1 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Sunk costs MSC: Interpretive 42. Because nothing can be done about sunk costs, they are irrelevant to decisions about business strategy. ANS: T PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Sunk costs MSC: Interpretive 43. The manager of a firm operating in a competitive market can ignore sunk costs when making business decisions. ANS: T PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Sunk costs MSC: Interpretive 44. 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 PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Interpretive 45. 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 PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Interpretive 46. In the long run, a firm should exit the industry if its total costs exceed its total revenues. ANS: T PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Interpretive 47. A competitive firm’s profit will be increasing as long as marginal revenue is greater than marginal cost. ANS: T PTS: 1 DIF: 1 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Interpretive © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 94 ❖ Chapter 14/Firms in Competitive Markets 48. In making a short-run profit-maximizing production decision, the firm must consider both fixed and variable cost. ANS: F PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Interpretive 49. 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 PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 50. A firm operating in a perfectly competitive market may earn positive, negative, or zero economic profit in the long run. ANS: F PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 51. A firm operating in a perfectly competitive market may earn positive, negative, or zero economic profit in the short run. ANS: T PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 52. 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 PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive 53. 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 PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive 54. A competitive market will typically experience entry and exit until accounting profits are zero. ANS: F PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive 55. 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 PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive 56. 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 PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 95 57. 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 PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive 58. When economic profits are zero in equilibrium, the firm's revenue must be sufficient to cover all opportunity costs. ANS: T PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive 59. The stable, long-run equilibrium in a competitive market occurs when the market price equals the lowest point on a firm’s average total cost curve. ANS: T PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive 60. All competitive firms earn zero economic profit in both the short run and the long run. ANS: F PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Profit | Short run | Long run MSC: Interpretive 61. 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 PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive 62. The short-run supply curve in a competitive market must be more elastic than the long-run supply curve. ANS: F PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive 63. The long-run supply curve in a competitive market is more elastic than the short-run supply curve. ANS: T PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive 64. If some resources used in the production of a good are only available in limited quantities, then the long run market supply curve will be perfectly elastic. ANS: F PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive SHORT ANSWER 1. 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 profitmaximizing 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. PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Price MSC: Definitional © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 96 ❖ Chapter 14/Firms in Competitive Markets 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. PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Definitional 3. 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. PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Analytical 4. 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. PTS: 1 DIF: LOC: Perfect competition MSC: Analytical 2 REF: TOP: 14-2 NAT: Analytic Profit maximization 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. PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Analytical 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. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14/Firms in Competitive Markets ❖ 97 Assuming that this is rational behavior by profit-maximizing "firms," explain what economic factors may 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. PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition 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 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 P 0 at output level Q0 the firm will shut down in the short run. PTS: 1 DIF: LOC: Perfect competition MSC: Analytical 2 REF: TOP: 14-2 NAT: Analytic Profit maximization 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: Profit can be calculated as (P-ATC)xQ. ($12.50-10)x1,000 = $2,500. Firms are likely to enter this market because existing firms are earning economic profits. PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition 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: 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 © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 98 ❖ Chapter 14/Firms in Competitive Markets 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 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Interpretive 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 NAT: Analytic LOC: Perfect competition TOP: Economic profit MSC: Interpretive © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
