Question 1

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

Accepted Answer

A)  firms are price takers 
B)  there are many sellers in the market 
C)  goods offered for sale are largely the same 
D)  firms have difficulty entering the market 
A)  firms are price takers 
B)  there are many sellers in the market 
C)  goods offered for sale are largely the same 
D)  firms have difficulty entering the market D

Question 2

A profit-maximising firm's short-run shut down criterion is:

Accepted Answer

A)  average revenue > marginal cost 
B)  price  average fixed cost 
A)  average revenue > marginal cost 
B)  price  average fixed cost B

Question 3

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 this firm will shut down in the short run, or choose to remain in the market. Explain your answer.

Accepted Answer

The loss and revenue are identified on the individual firm graph. Total cost is equal to the sum of the losses and revenue. The decision about whether this firm shuts down or remains in the market depends upon the position of average variable cost. If average variable cost is below P₀ at output level Q₀, the firm will remain in the market. If average variable cost is above P₀ at output level Q₀, the firm will exit the market.

Question 4

Table 14-2
The price of each David Butterfly a butterfly farmer in Greytown sells is:
  
-Refer to Table 14-2. Price equals average revenue over the range of:

Accepted Answer

A)  one to three 
B)  three to six 
C)  six to nine 
D)  over the whole range of output 
A)  one to three 
B)  three to six 
C)  six to nine 
D)  over the whole range of output

Question 5

When a firm has market power, it can:

Accepted Answer

A)  sell as much as it wants at any market price 
B)  control the number of firms that will operate in an industry 
C)  influence the market price of the good it sells 
D)  choose to disregard government regulation 
A)  sell as much as it wants at any market price 
B)  control the number of firms that will operate in an industry 
C)  influence the market price of the good it sells 
D)  choose to disregard government regulation

Question 6

If all incumbent firms and all potential firms have the same cost curves and the market is characterised by free entry and exit, the long-run:

Accepted Answer

A)  supply curve for the market must slope downward 
B)  market supply curve must slope upward 
C)  supply curve for the market is horizontal and equal to the minimum of long-run average cost for each firm 
D)  market supply curve is equal to the sum of marginal cost 
A)  supply curve for the market must slope downward 
B)  market supply curve must slope upward 
C)  supply curve for the market is horizontal and equal to the minimum of long-run average cost for each firm 
D)  market supply curve is equal to the sum of marginal cost

Question 7

The long run supply curve for a perfectly competitive firm is the segment of the marginal cost curve that lies above the average total cost curve.

Accepted Answer

A) True 
 B)False

Question 8

When a profit-maximising firm in a competitive market has zero economic profit, accounting profit:

Accepted Answer

A)  is positive 
B)  is negative (accounting losses) 
C)  is also zero 
D)  could be positive, negative or zero 
A)  is positive 
B)  is negative (accounting losses) 
C)  is also zero 
D)  could be positive, negative or zero

Question 9

A rice farmer sells rice to an Australian grain broker. Suppose that the market for rice is competitive. This means that the farmer will maximise profit by choosing:

Accepted Answer

A)  to produce the quantity at which average fixed cost is minimised 
B)  to sell its wheat at a price where marginal cost is equal to average total cost 
C)  the quantity at which market price is equal to the farm's marginal cost of production 
D)  the quantity where average revenue is equal to the farm's average variable cost 
A)  to produce the quantity at which average fixed cost is minimised 
B)  to sell its wheat at a price where marginal cost is equal to average total cost 
C)  the quantity at which market price is equal to the farm's marginal cost of production 
D)  the quantity where average revenue is equal to the farm's average variable cost

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

The irrelevance of sunk costs is best described by which of the following business decisions?

Accepted Answer

A)  forestry companies continue to sell logs even though they are reporting large losses 
B)  forestry companies sell up and exit the market when they report losses 
C)  new forestry companies enter the market and earn profits selling logs 
D)  all of the above 
A)  forestry companies continue to sell logs even though they are reporting large losses 
B)  forestry companies sell up and exit the market when they report losses 
C)  new forestry companies enter the market and earn profits selling logs 
D)  all of the above

Question 13

If a firm in a competitive market increases production and its marginal revenue remains greater than its marginal cost, raising production will:

Accepted Answer

A)  be profitable 
B)  cause the firm to incur losses 
C)  leave profit unchanged 
D)  It is impossible to tell from the information provided 
A)  be profitable 
B)  cause the firm to incur losses 
C)  leave profit unchanged 
D)  It is impossible to tell from the information provided

Question 14

Graph 14-9
  
-Refer to Graph 14-9. When the market is in long-run equilibrium at point A in panel (b), the firm represented in panel (a) will:

Accepted Answer

A)  exit the market 
B)  be at zero-profit equilibrium 
C)  earn negative accounting profit 
D)  do all of the above 
A)  exit the market 
B)  be at zero-profit equilibrium 
C)  earn negative accounting profit 
D)  do all of the above

Question 15

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 profit or loss can be represented by which area?

Accepted Answer

A)  (P3 - P1) *  Q2; loss 
B)  P1 * Q3; profit 
C)  ($\Delta$P2 - P1) *  Q1; loss 
D)  we can't determine it because we don't know the fixed costs 
A)  (P3 - P1) *  Q2; loss 
B)  P1 * Q3; profit 
C)  ($\Delta$P2 - P1) *  Q1; loss 
D)  we can't determine it because we don't know the fixed costs

Question 16

A profit-maximising firm should always increase the level of production if marginal cost exceeds marginal revenue

Accepted Answer

A) True 
 B)False

Question 17

When firms already in a competitive market are profitable, an incentive exists for:

Accepted Answer

A)  existing firms to increase production 
B)  new firms to seek government subsidies that would allow them to enter the market 
C)  existing firms to raise prices 
D)  new firms to enter the market 
A)  existing firms to increase production 
B)  new firms to seek government subsidies that would allow them to enter the market 
C)  existing firms to raise prices 
D)  new firms to enter the market

Question 18

Lee had invested $100 000 in a risk-free unit trust, on which she earned $10 000 each year. She used that money to buy a prawn farm. She also quit her job as a salesperson to devote all of her time to her prawn business. Her salary as a salesperson was $25 000 per year.
-According to the information provided, what are Lee's opportunity costs of operating her new business?

Accepted Answer

A)  $10 000 
B)  $25 000 
C)  $35 000 
D)  $50 000 
A)  $10 000 
B)  $25 000 
C)  $35 000 
D)  $50 000

Question 19

Discuss the process that induces firms to operate at efficient scale in the long run in a competitive market with free entry and exit.

Accepted Answer

If all firms in a competitive industry f

Question 20

Table 14-1
This table shows the revenue and costs of a parrot farmer.
  
-Refer to Table 14-1. The maximum profit available to this farmer's firm is:

Accepted Answer

A)  $21 
B)  $36 
C)  $45 
D)  $56 
A)  $21 
B)  $36 
C)  $45 
D)  $56

Exam 14: Firms in Competitive Markets

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

A profit-maximising firm's short-run shut down criterion is:

Table 14-2 The price of each David Butterfly a butterfly farmer in Greytown sells is: -Refer to Table 14-2. Price equals average revenue over the range of:

When a firm has market power, it can:

If all incumbent firms and all potential firms have the same cost curves and the market is characterised by free entry and exit, the long-run:

The long run supply curve for a perfectly competitive firm is the segment of the marginal cost curve that lies above the average total cost curve.

When a profit-maximising firm in a competitive market has zero economic profit, accounting profit:

A rice farmer sells rice to an Australian grain broker. Suppose that the market for rice is competitive. This means that the farmer will maximise profit by choosing:

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

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

The irrelevance of sunk costs is best described by which of the following business decisions?

If a firm in a competitive market increases production and its marginal revenue remains greater than its marginal cost, raising production will:

Graph 14-9 -Refer to Graph 14-9. When the market is in long-run equilibrium at point A in panel (b), the firm represented in panel (a) will:

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 profit or loss can be represented by which area?

A profit-maximising firm should always increase the level of production if marginal cost exceeds marginal revenue

When firms already in a competitive market are profitable, an incentive exists for:

Discuss the process that induces firms to operate at efficient scale in the long run in a competitive market with free entry and exit.

Table 14-1 This table shows the revenue and costs of a parrot farmer. -Refer to Table 14-1. The maximum profit available to this farmer's firm is:

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

Business Strategy

Competition Policy

Monopolistic Competition

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

Five Debates Over Macroeconomic Policy

Filters

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 profit or loss can be represented by which area?