Question 1

Which of the following statements is correct?

Accepted Answer

A)  Economic profit takes into account all costs involved in producing a product. 
B)  Accounting profit is not relevant in preparing the firm's financial statement. 
C)  Economic profit always exceeds accounting profit. 
D)  Accounting profit is the same as economic profit. 
A)  Economic profit takes into account all costs involved in producing a product. 
B)  Accounting profit is not relevant in preparing the firm's financial statement. 
C)  Economic profit always exceeds accounting profit. 
D)  Accounting profit is the same as economic profit.

Question 2

Figure 12-9   Figure 12-9 shows cost and demand curves facing a profit-maximizing, perfectly competitive firm.
-Refer to Figure 12-9. At price P3, the firm would

Accepted Answer

A)  lose an amount equal to its fixed cost. 
B)  lose an amount more than fixed cost. 
C)  lose an amount less than fixed cost. 
D)  break even. 
A)  lose an amount equal to its fixed cost. 
B)  lose an amount more than fixed cost. 
C)  lose an amount less than fixed cost. 
D)  break even.

Question 3

The price a perfectly competitive firm receives for its output

Accepted Answer

A)  is determined by the interaction of the firm and all of the consumers who buy from the firm. 
B)  is determined by the interaction of all sellers and all buyers in the firm's market. 
C)  will not change in response to changes in market demand and supply because the firm is a price taker. 
D)  will be lowered by the firm in order to sell more output. 
A)  is determined by the interaction of the firm and all of the consumers who buy from the firm. 
B)  is determined by the interaction of all sellers and all buyers in the firm's market. 
C)  will not change in response to changes in market demand and supply because the firm is a price taker. 
D)  will be lowered by the firm in order to sell more output.

Question 4

Table 12-4
   Table 12-4 shows the short-run cost data of a perfectly competitive firm. Assume that output can only be increased in batches of 20 units.
-Refer to Table 12-4. If the market price is $45 the firm will produce

Accepted Answer

A)  60 units. 
B)  80 units. 
C)  100 units. 
D)  120 units. 
A)  60 units. 
B)  80 units. 
C)  100 units. 
D)  120 units.

Question 5

What assumptions are necessary for a market to be perfectly competitive? Explain why each of these assumptions is important.

Accepted Answer

The assumptions necessary for a market t

Question 6

Apple introduced its iPhone 3G in July 2008 and within a month sales had topped 3 million units. By April 2009, more than 25,000 apps for the iPhone 3G were available in the iTunes store, an indication that in a competitive market,

Accepted Answer

A)  the ease at which a new firm can enter a competitive market is low. 
B)  the ease at which a new firm can enter a competitive market is high. 
C)  entry into the market is blocked. 
D)  entry into the market is restricted in the short run, but becomes easier in the long run. 
A)  the ease at which a new firm can enter a competitive market is low. 
B)  the ease at which a new firm can enter a competitive market is high. 
C)  entry into the market is blocked. 
D)  entry into the market is restricted in the short run, but becomes easier in the long run.

Question 7

Competition has driven the economic profits in the video rental business to zero. Surya Bacha, who owns a video rental business, would be better off leaving the industry for another alternative.

Accepted Answer

A) True 
 B)False

Question 8

Figure 12-5   Figure 12-5 shows cost and demand curves facing a typical firm in a constant-cost, perfectly competitive industry.
-Refer to Figure 12-5. The firm's manager suggests that the firm's goal should be to maximize average profit. If the firm does this, what is the amount of profit that it will earn?

Accepted Answer

A)  $6,600 
B)  $6,750 
C)  $12,150 
D)  $36,000 
A)  $6,600 
B)  $6,750 
C)  $12,150 
D)  $36,000

Question 9

A firm could continue to operate for years without ever earning a profit as long as it is producing an output where

Accepted Answer

A) MR AVC. C) MR > AVC. D) AFC < AVC. A) MR AVC. C) MR > AVC. D) AFC < AVC.

Question 10

Figure 12-10  
-Refer to Figure 12-10. The firm's short-run supply curve is its

Accepted Answer

A)  marginal cost curve. 
B)  marginal cost curve from b and above. 
C)  marginal cost curve from c and above. 
D)  marginal cost curve from d and above. 
A)  marginal cost curve. 
B)  marginal cost curve from b and above. 
C)  marginal cost curve from c and above. 
D)  marginal cost curve from d and above.

Question 11

If a firm's total variable cost exceeds its total revenue, the firm should stop production by shutting down temporarily.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following describes the difference between the market demand curve for a perfectly competitive industry and the demand curve for a firm in this industry?

Accepted Answer

A)  The market demand curve is a horizontal line; the firm's demand curve is downward sloping. 
B)  The market demand curve is downward sloping; the firm's demand curve is a vertical line. 
C)  The market demand curve can not have a constant slope; the firm's demand curve has a slope equal to zero. 
D)  The market demand curve is downward sloping; the firm's demand curve is a horizontal line. 
A)  The market demand curve is a horizontal line; the firm's demand curve is downward sloping. 
B)  The market demand curve is downward sloping; the firm's demand curve is a vertical line. 
C)  The market demand curve can not have a constant slope; the firm's demand curve has a slope equal to zero. 
D)  The market demand curve is downward sloping; the firm's demand curve is a horizontal line.

Question 13

Figure 12-14  
-Refer to Figure 12-14. Consider a typical firm in a perfectly competitive industry which is incurring short-run losses. Which of the diagrams in the figure shows the effect on the industry as it transitions to a long-run equilibrium?

Accepted Answer

A)  Panel A 
B)  Panel B 
C)  Panel C 
D)  Panel D 
A)  Panel A 
B)  Panel B 
C)  Panel C 
D)  Panel D

Question 14

In August 2008, Ethan Nicholas developed the iShoot app for the Apple iPhone 3G, and within five months had earned $800,000 from this program. By May 2009, Nicholas had dropped the price from $4.99 to $1.99 in an attempt to maintain sales. This example indicates that in a competitive market,

Accepted Answer

A)  earning an economic profit in the long run is extremely easy. 
B)  earning an economic profit in the long run is extremely difficult. 
C)  it is impossible to earn an economic profit in either the short run or the long run. 
D)  economic profits are only earned in the long run. 
A)  earning an economic profit in the long run is extremely easy. 
B)  earning an economic profit in the long run is extremely difficult. 
C)  it is impossible to earn an economic profit in either the short run or the long run. 
D)  economic profits are only earned in the long run.

Question 15

All of the following can be used to compute average profit except

Accepted Answer

A)  marginal profit minus marginal cost. 
B)  total profit divided by quantity. 
C)  average revenue minus average total cost 
D)  price minus average total cost. 
A)  marginal profit minus marginal cost. 
B)  total profit divided by quantity. 
C)  average revenue minus average total cost 
D)  price minus average total cost.

Question 16

The marginal revenue curve for a perfectly competitive firm

Accepted Answer

A)  is downward-sloping. 
B)  is the same as its demand curve. 
C)  is perfectly inelastic. 
D)  is the same as its marginal cost curve. 
A)  is downward-sloping. 
B)  is the same as its demand curve. 
C)  is perfectly inelastic. 
D)  is the same as its marginal cost curve.

Question 17

Figure 12-7   Figure 12-7 illustrates the cost curves of a perfectly competitive firm.
-Refer to Figure 12-7. If the market price is P1

Accepted Answer

A)  The firm will experience a loss and raise its price to P2. The firm will then break even. 
B)  The firm will break even by producing a quantity of Q2. 
C)  The firm will experience a loss since price is less than ATC. 
D)  The firm may make a profit if it can increase the demand for its product. 
A)  The firm will experience a loss and raise its price to P2. The firm will then break even. 
B)  The firm will break even by producing a quantity of Q2. 
C)  The firm will experience a loss since price is less than ATC. 
D)  The firm may make a profit if it can increase the demand for its product.

Question 18

If price = marginal cost at the output produced by a perfectly competitive firm and the firm is earning an economic profit, then

Accepted Answer

A)  marginal revenue is less than price. 
B)  average total cost is at a minimum. 
C)  total revenue equals total cost. 
D)  price exceeds average total cost. 
A)  marginal revenue is less than price. 
B)  average total cost is at a minimum. 
C)  total revenue equals total cost. 
D)  price exceeds average total cost.

Question 19

To maximize profit, a firm will produce the level of output where MR = MC. If a firm actually makes a profit depends on the relationship of price to average total cost. What are the three possible relationships between price and average total cost that determine if a firm will make a profit, experience a loss, or break even?

Accepted Answer

If P > ATC, the firm makes a p

Question 20

Figure 12-19  
-Refer to Figure 12-19. The figure above shows the cost curves of a perfectly competitive firm in the coffee market. Use the graph in Figure 12-19 to answer the following questions. Assume the market price is $3 per pound.
a. What is the lowest price at which the coffee grower will supply output in the short run?
b. In the diagram draw the firm's demand curve (label this "MR" for marginal revenue).
c. What is the firm's profit-maximizing output?
d. Is the firm earning a profit or a loss? Identify the area in the graph that represents the firm's profit or loss.
e. Explain how entry or exit will occur in the market to ensure that firms will break even in the long run.

Accepted Answer

a. $1.50 per pound. This represents the

Exam 12: Firms in Perfectly Competitive Markets

Which of the following statements is correct?

Figure 12-9 Figure 12-9 shows cost and demand curves facing a profit-maximizing, perfectly competitive firm. -Refer to Figure 12-9. At price P3, the firm would

The price a perfectly competitive firm receives for its output

Table 12-4 Table 12-4 shows the short-run cost data of a perfectly competitive firm. Assume that output can only be increased in batches of 20 units. -Refer to Table 12-4. If the market price is $45 the firm will produce

What assumptions are necessary for a market to be perfectly competitive? Explain why each of these assumptions is important.

Apple introduced its iPhone 3G in July 2008 and within a month sales had topped 3 million units. By April 2009, more than 25,000 apps for the iPhone 3G were available in the iTunes store, an indication that in a competitive market,

Competition has driven the economic profits in the video rental business to zero. Surya Bacha, who owns a video rental business, would be better off leaving the industry for another alternative.

A firm could continue to operate for years without ever earning a profit as long as it is producing an output where

Figure 12-10 -Refer to Figure 12-10. The firm's short-run supply curve is its

If a firm's total variable cost exceeds its total revenue, the firm should stop production by shutting down temporarily.

Which of the following describes the difference between the market demand curve for a perfectly competitive industry and the demand curve for a firm in this industry?

Figure 12-14 -Refer to Figure 12-14. Consider a typical firm in a perfectly competitive industry which is incurring short-run losses. Which of the diagrams in the figure shows the effect on the industry as it transitions to a long-run equilibrium?

In August 2008, Ethan Nicholas developed the iShoot app for the Apple iPhone 3G, and within five months had earned $800,000 from this program. By May 2009, Nicholas had dropped the price from $4.99 to $1.99 in an attempt to maintain sales. This example indicates that in a competitive market,

All of the following can be used to compute average profit except

The marginal revenue curve for a perfectly competitive firm

Figure 12-7 Figure 12-7 illustrates the cost curves of a perfectly competitive firm. -Refer to Figure 12-7. If the market price is P1

If price = marginal cost at the output produced by a perfectly competitive firm and the firm is earning an economic profit, then

Economics: Foundations and Models

Trade-Offs, Comparative Advantage, and the Market System

Where Prices Come From: the Interaction of Demand and Supply

Economic Efficiency, Government Price Setting, and Taxes

Externalities, Environmental Policy, and Public Goods

Elasticity: the Responsiveness of Demand and Supply

The Economics of Health Care

Firms, the Stock Market, and Corporate Governance

Comparative Advantage and the Gains From International Trade

Consumer Choice and Behavioral Economics

Technology, Production, and Costs

Monopolistic Competition: the Competitive Model in a More Realistic Setting

Oligopoly: Firms in Less Competitive Markets

Monopoly and Antitrust Policy

Pricing Strategy

The Markets for Labor and Other Factors of Production

Public Choice, Taxes, and the Distribution of Income

Gdp: Measuring Total Production and Income

Unemployment and Inflation

Economic Growth, the Financial System, and Business Cycles

Long-Run Economic Growth: Sources and Policies

Aggregate Expenditure and Output in the Short Run

Aggregate Demand and Aggregate Supply Analysis

Money, Banks, and the Federal Reserve System

Monetary Policy

Fiscal Policy

Inflation, Unemployment, and Federal Reserve Policy

Macroeconomics in an Open Economy

The International Financial System

Filters

Figure 12-9 Figure 12-9 shows cost and demand curves facing a profit-maximizing, perfectly competitive firm. -Refer to Figure 12-9. At price P₃, the firm would

Figure 12-7 Figure 12-7 illustrates the cost curves of a perfectly competitive firm. -Refer to Figure 12-7. If the market price is P₁