Question 1

Explain the role of opportunity costs in differentiating between economic profits and accounting profits.

Accepted Answer

Accounting profits do not acco

Question 2

A firm must be participating in a competitive market in order for average revenue to equal price.

Accepted Answer

A) True 
 B)False

Question 3

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 marginal revenue is equal to MC3, the profit-maximising firm will produce what level of output?

Accepted Answer

A)  Q1 
B)  Q2 
C)  Q3 
D)  Q4 
A)  Q1 
B)  Q2 
C)  Q3 
D)  Q4

Question 4

At the current level of output, a profit-maximising firm in a competitive market earns average revenue of $20 and has an average total cost of $17. Suppose that the firm's marginal cost curve is equal to its average total cost curve at an output level of 50 units. How much profit is earned by the firm at its current level of output?

Accepted Answer

A)  more than $150 
B)  exactly $150 
C)  less than $150 
D)  none of the above is necessarily correct 
A)  more than $150 
B)  exactly $150 
C)  less than $150 
D)  none of the above is necessarily correct

Question 5

The reason why hotels in Cairns operated at a loss rather than shut down when tourism declined sharply is:

Accepted Answer

A)  the government offered to subsidise the firms until they were profitable again 
B)  the hotels had sunk costs that could not be recovered if they had closed 
C)  the banks that financed the hotels wrote off the debt rather than insist it got paid back 
D)  tourists donated money to the hotels to keep them in operation 
A)  the government offered to subsidise the firms until they were profitable again 
B)  the hotels had sunk costs that could not be recovered if they had closed 
C)  the banks that financed the hotels wrote off the debt rather than insist it got paid back 
D)  tourists donated money to the hotels to keep them in operation

Question 6

One of the most important determinants of the success of free-market capitalism is:

Accepted Answer

A)  government regulation of market participants 
B)  free entry and exit in markets 
C)  enlightened governments selecting firms that should not be allowed to exit a market 
D)  having a few large firms rather than thousands of small entrepreneurs. 
A)  government regulation of market participants 
B)  free entry and exit in markets 
C)  enlightened governments selecting firms that should not be allowed to exit a market 
D)  having a few large firms rather than thousands of small entrepreneurs.

Question 7

If a business ignores some of its fixed costs as irrelevant to its production decision, this type of cost is termed:

Accepted Answer

A)  implicit costs 
B)  spilt milk 
C)  development costs 
D)  sunk costs 
A)  implicit costs 
B)  spilt milk 
C)  development costs 
D)  sunk costs

Question 8

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 characterised by firms:

Accepted Answer

A)  operating at efficient scale 
B)  earning small levels of profit 
C)  facing the prospect of future losses 
D)  that band together to raise market prices 
A)  operating at efficient scale 
B)  earning small levels of profit 
C)  facing the prospect of future losses 
D)  that band together to raise market prices

Question 9

When a firm experiences zero-profit equilibrium, the firm's revenue must be sufficient to cover all opportunity costs.

Accepted Answer

A) True 
 B)False

Question 10

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.

Accepted Answer

A) True 
 B)False

Question 11

Give two reasons why the long-run industry supply curve may slope upward. Use an example to demonstrate your reasons.

Accepted Answer

Some resources used in production may be

Question 12

In calculating accounting profit, accountants normally do not include:

Accepted Answer

A)  explicit costs of production 
B)  opportunity costs that do not involve an outflow of money 
C)  long-run costs 
D)  sunk costs 
A)  explicit costs of production 
B)  opportunity costs that do not involve an outflow of money 
C)  long-run costs 
D)  sunk costs

Question 13

Total profit for a firm is calculated as:

Accepted Answer

A)  total revenue minus total cost 
B)  marginal revenue minus average cost 
C)  average revenue minus average cost 
D)  marginal revenue minus marginal cost 
A)  total revenue minus total cost 
B)  marginal revenue minus average cost 
C)  average revenue minus average cost 
D)  marginal revenue minus marginal cost

Question 14

The production decisions of perfectly competitive firms follow the principle of economics that states that rational people:

Accepted Answer

A)  consider sunk costs 
B)  think at the margin 
C)  equate prices to the average costs of production 
D)  will eventually leave markets that experience zero profit 
A)  consider sunk costs 
B)  think at the margin 
C)  equate prices to the average costs of production 
D)  will eventually leave markets that experience zero profit

Question 15

If a firm was producing an output that was above the marginal revenue = marginal cost point (MR = MC), explain why a reduction in output (Q) would increase its profit.

Accepted Answer

At any output level higher than MR = MC,

Question 16

A firm in a competitive market produces and sells 500 door knobs at a price of $10 each. It then chooses to increase its output to 1000 door knobs. After the increase in output, its average revenue will:

Accepted Answer

A)  decrease 
B)  increase 
C)  equal $10 
D)  fall below marginal revenue 
A)  decrease 
B)  increase 
C)  equal $10 
D)  fall below marginal revenue

Question 17

A profit-maximising firm in a competitive market is able to sell its product for $9. At its current level of output, the firm's average total cost is $10. Its marginal cost curve crosses the marginal revenue curve at an output level of 10 units. What is the total loss of this firm?

Accepted Answer

A)  more than $10 
B)  exactly $10 
C)  less than $10 
D)  none of the above is necessarily correct 
A)  more than $10 
B)  exactly $10 
C)  less than $10 
D)  none of the above is necessarily correct

Question 18

Which of the following statements are most likely to be true for the air transportation industry? (i) in the short run, the cost of the airplane is sunk
(ii) the opportunity cost of a flight is the variable cost
(iii) as long as total revenue exceeds fixed cost, the airlines should continue operating

Accepted Answer

A)  (i) and (ii) only 
B)  (ii) and (iii) only 
C)  (i) and (iii) only 
D)  (i), (ii) and (iii) 
A)  (i) and (ii) only 
B)  (ii) and (iii) only 
C)  (i) and (iii) only 
D)  (i), (ii) and (iii)

Question 19

Because the goods offered for sale in a competitive market are largely the same:

Accepted Answer

A)  there will be few sellers in the market 
B)  there will be few buyers in the market 
C)  sellers will have little reason to charge less than the going market price 
D)  buyers will have market power 
A)  there will be few sellers in the market 
B)  there will be few buyers in the market 
C)  sellers will have little reason to charge less than the going market price 
D)  buyers will have market power

Question 20

When marginal revenue equals marginal cost:

Accepted Answer

A)  the firm must be generating economic profits 
B)  the profit-maximising firm should always increase its level of production 
C)  the firm must be generating economic losses 
D)  losses may be minimised, rather than profits being maximised 
A)  the firm must be generating economic profits 
B)  the profit-maximising firm should always increase its level of production 
C)  the firm must be generating economic losses 
D)  losses may be minimised, rather than profits being maximised

Exam 14: Firms in Competitive Markets

Explain the role of opportunity costs in differentiating between economic profits and accounting profits.

A firm must be participating in a competitive market in order for average revenue to equal price.

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 marginal revenue is equal to MC3, the profit-maximising firm will produce what level of output?

The reason why hotels in Cairns operated at a loss rather than shut down when tourism declined sharply is:

One of the most important determinants of the success of free-market capitalism is:

If a business ignores some of its fixed costs as irrelevant to its production decision, this type of cost is termed:

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 characterised by firms:

When a firm experiences zero-profit equilibrium, the firm's revenue must be sufficient to cover all opportunity costs.

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.

Give two reasons why the long-run industry supply curve may slope upward. Use an example to demonstrate your reasons.

In calculating accounting profit, accountants normally do not include:

Total profit for a firm is calculated as:

The production decisions of perfectly competitive firms follow the principle of economics that states that rational people:

If a firm was producing an output that was above the marginal revenue = marginal cost point (MR = MC), explain why a reduction in output (Q) would increase its profit.

A firm in a competitive market produces and sells 500 door knobs at a price of $10 each. It then chooses to increase its output to 1000 door knobs. After the increase in output, its average revenue will:

A profit-maximising firm in a competitive market is able to sell its product for $9. At its current level of output, the firm's average total cost is $10. Its marginal cost curve crosses the marginal revenue curve at an output level of 10 units. What is the total loss of this firm?

Because the goods offered for sale in a competitive market are largely the same:

When marginal revenue equals marginal 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

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 14-1 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 marginal revenue is equal to MC₃, the profit-maximising firm will produce what level of output?