Question 1

If a firm with increasing marginal costs is operating in a competitive market, then average revenue will be:

Accepted Answer

A) increasing in firm output 
B) decreasing in firm output 
C) constant regardless of firm output 
D) we cannot say without more information 
A) increasing in firm output 
B) decreasing in firm output 
C) constant regardless of firm output 
D) we cannot say without more information

Question 2

A production cost that has already been committed and cannot be recovered is termed a:

Accepted Answer

A) development cost 
B) variable cost 
C) sunk cost 
D) mothball cost 
A) development cost 
B) variable cost 
C) sunk cost 
D) mothball cost

Question 3

According to the information provided, what would Lee's accounting profits need to be to allow her to reach the zero economic profit equilibrium?

Accepted Answer

A) $15,000 
B) $35,000 
C) $50,000 
D) $70,000 
A) $15,000 
B) $35,000 
C) $50,000 
D) $70,000

Question 4

Jess, an aspiring small business owner, is looking at starting up a home business growing organic kale, turning it into Kale Chips, and selling it at the local market.The market for Kale Chips is served by many small suppliers, however, she believes the current suppliers may be earning excess profits.She calculates the cost structure of her business, which she believes to be identical to all the other Kale Chip suppliers operating in her area.Unfortunately, her housemate has spilt red wine all over the worksheet and only the following could be recovered:
   
Suppose the current price of Kale Chips is $8.With the information supplied, should Jess enter into the Kale Chip industry? Why or why not? What will be the long-run competitive equilibrium price for Kale Chips? Could Jess earn a profit at this long-run price?

Accepted Answer

The completed table is reproduced below:

Question 5

In the long run, a competitive market with 1000 identical firms will experience an equilibrium price equal to the minimum of each firm's average total cost.

Accepted Answer

A) True 
 B)False

Question 6

Whenever a perfectly competitive firm chooses to change its level of output, its marginal revenue:

Accepted Answer

A) is unchanged 
B) increases 
C) decreases 
D) increases if MR  ATC 
A) is unchanged 
B) increases 
C) decreases 
D) increases if MR  ATC

Question 7

According to the information provided, what are Lee's opportunity costs of operating her new business?

Accepted Answer

A) $15 000 
B) $35 000 
C) $50 000 
D) $70 000 
A) $15 000 
B) $35 000 
C) $50 000 
D) $70 000

Question 8

Graph 14-6   This graph depicts the cost structure of a firm in a competitive market.Use the graph to answer the following question(s).
-Refer to Graph 14-6.When market price is P₁, a profit-maximising firm's total revenue can be represented by the area:

Accepted Answer

A) P₃ * Q₂ 
B) P₁ * Q₃ 
C) P₁ * Q₂ 
D) P₂ *Q₂ 
A) P₃ * Q₂ 
B) P₁ * Q₃ 
C) P₁ * Q₂ 
D) P₂ *Q₂

Question 9

Table 14-2
The price of each butterfly that David Butterfly, a butterfly farmer in Greytown, sells is:
 
-Refer to Table 14-2.The price and quantity relationship shows that the market structure most likely facing a butterfly farmer is a:

Accepted Answer

A) trade market 
B) competitive market 
C) developing market 
D) resource market 
A) trade market 
B) competitive market 
C) developing market 
D) resource market

Question 10

If a firm in a competitive market sells 25 per cent less, then its total revenue will fall by 25 per cent.

Accepted Answer

A) True 
 B)False

Question 11

According to the information provided, as a result of the increase in the demand for abalone, we would predict that in the short run:

Accepted Answer

A) production of abalone would be at efficient scale 
B) the cost for existing wild abalone fishers must rise 
C) the price for abalone would rise 
D) all of the above would occur 
A) production of abalone would be at efficient scale 
B) the cost for existing wild abalone fishers must rise 
C) the price for abalone would rise 
D) all of the above would occur

Question 12

Graph 14-1   
This graph depicts the cost structure for a firm in a competitive market.Use the graph to answer the following question(s).
-Refer to Graph 14-1.When market price is at MC2, a firm producing output level Q₁ would experience:

Accepted Answer

A) profits equal to (MC2 - MC1) * Q₁ 
B) zero profits 
C) losses equal to (MC2 - MC1) * Q₁ 
D) losses because P < ATC 
A) profits equal to (MC2 - MC1) * Q₁ 
B) zero profits 
C) losses equal to (MC2 - MC1) * Q₁ 
D) losses because P < ATC

Question 13

Prawns Galore, a prawn harvesting business in Southeast Queensland, has a 30-year loan on its prawn trawling 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 2001 prawn harvesting season, Prawns Galore's accountant predicted that at expected market prices for prawns, Prawns Galore would have a net loss of $75 000 dollars after paying all 2001 expenses (including the annual loan payment).In this case, Prawns Galore should:

Accepted Answer

A) continue to operate even though it predicts a loss of $75 000 
B) not produce and experience a loss of $25 000 
C) not produce and experience a loss of $75 000 
D) continue to operate because expected profits will rise in the future 
A) continue to operate even though it predicts a loss of $75 000 
B) not produce and experience a loss of $25 000 
C) not produce and experience a loss of $75 000 
D) continue to operate because expected profits will rise in the future

Question 14

It is not possible for the marginal firm in a competitive market to make an economic profit in the long-run.

Accepted Answer

A) True 
 B)False

Question 15

Sarah places a $110 value on seeing the Richmond Tigers play in the Grand Final.She purchases a ticket to the game for $60 but when she arrives at the game she discovers that her ticket is missing.A ticket scalper outside the stadium is selling tickets for $76 dollars.If Sarah purchases a ticket from one of the scalpers for $95, she is best demonstrating the principle that:

Accepted Answer

A) the assumption of rational behaviour does not easily apply to the purchase of football game tickets 
B) the price of tickets cannot be explained by economic principles 
C) sunk costs are irrelevant to many personal decisions 
D) rational consumers do not always respond to incentives. 
A) the assumption of rational behaviour does not easily apply to the purchase of football game tickets 
B) the price of tickets cannot be explained by economic principles 
C) sunk costs are irrelevant to many personal decisions 
D) rational consumers do not always respond to incentives.

Question 16

In a competitive market, marginal revenue will only sometimes equal average revenue.

Accepted Answer

A) True 
 B)False

Question 17

If a seller is a price taker, they will be able to sell all the quantity they want at the market price.

Accepted Answer

A) True 
 B)False

Question 18

When looking at entering the marketplace, a prospective entrant should not consider fixed costs, as these will become sunk.

Accepted Answer

A) True 
 B)False

Question 19

Profit-maximising producers in a competitive market in general, produce output at a point where:

Accepted Answer

A) marginal cost is decreasing 
B) total sales are maximised 
C) marginal cost is increasing 
D) price is less than marginal revenue 
A) marginal cost is decreasing 
B) total sales are maximised 
C) marginal cost is increasing 
D) price is less than marginal revenue

Question 20

The costs of investigating new factories can be regarded as a sunk cost.

Accepted Answer

A) True 
 B)False

Exam 14: Firms in Competitive Markets

If a firm with increasing marginal costs is operating in a competitive market, then average revenue will be:

A production cost that has already been committed and cannot be recovered is termed a:

According to the information provided, what would Lee's accounting profits need to be to allow her to reach the zero economic profit equilibrium?

In the long run, a competitive market with 1000 identical firms will experience an equilibrium price equal to the minimum of each firm's average total cost.

Whenever a perfectly competitive firm chooses to change its level of output, its marginal revenue:

According to the information provided, what are Lee's opportunity costs of operating her new business?

Graph 14-6 This graph depicts the cost structure of a firm in a competitive market.Use the graph to answer the following question(s). -Refer to Graph 14-6.When market price is P₁, a profit-maximising firm's total revenue can be represented by the area:

Table 14-2 The price of each butterfly that David Butterfly, a butterfly farmer in Greytown, sells is: -Refer to Table 14-2.The price and quantity relationship shows that the market structure most likely facing a butterfly farmer is a:

If a firm in a competitive market sells 25 per cent less, then its total revenue will fall by 25 per cent.

According to the information provided, as a result of the increase in the demand for abalone, we would predict that in the short run:

Graph 14-1 This graph depicts the cost structure for a firm in a competitive market.Use the graph to answer the following question(s). -Refer to Graph 14-1.When market price is at MC2, a firm producing output level Q₁ would experience:

It is not possible for the marginal firm in a competitive market to make an economic profit in the long-run.

In a competitive market, marginal revenue will only sometimes equal average revenue.

If a seller is a price taker, they will be able to sell all the quantity they want at the market price.

When looking at entering the marketplace, a prospective entrant should not consider fixed costs, as these will become sunk.

Profit-maximising producers in a competitive market in general, produce output at a point where:

The costs of investigating new factories can be regarded as a sunk cost.

Ten Lessons From Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Elasticity and Its Application

Supply, Demand and Government Policies

Consumers, Producers and the Efficiency of Markets

Application: the Costs of Taxation

Application: International Trade

Externalities

Public Goods and Common Resources

The Design of the Tax System

The Costs of Production

Monopoly

Monopolistic Competition

Business Strategy and Oligopoly

Competition Policy

The Markets for the Factors of Production

Earnings, Unions and Discrimination

Income Inequity and Poverty

The Theory of Consumer Choice

Frontiers of Microeconomics

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, Investment and the Financial System

The Natural Rate of Unemployment

The Monetary System

Inflation: Its Causes and Costs

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short-Run Trade-Off Between Inflation and Unemployment

Global Financial Crisis of 2008 and Beyond

Five Debates Over Macroeconomic Policy

Filters

Graph 14-1 This graph depicts the cost structure for a firm in a competitive market.Use the graph to answer the following question(s). -Refer to Graph 14-1.When market price is at MC₂, a firm producing output level Q₁ would experience: