Question 1

Which of the following statements best expresses a firm's profit­maximizing decision rule?

Accepted Answer

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. 
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.

Question 2

In the long-run equilibrium of a market with free entry and exit, if all firms have the same cost structure, then

Accepted Answer

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. 
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.

Question 3

Roger owns a small health store that sells vitamins in a perfectly competitive market. If vitamins sell for $12 per bottle and the average total cost per bottle is $12.50 at the profit-maximizing output level, then in the long run

Accepted Answer

A)  more firms will enter the market. 
B)  some firms will exit from the market. 
C)  the equilibrium price per bottle will fall. 
D)  average total costs will fall. 
A)  more firms will enter the market. 
B)  some firms will exit from the market. 
C)  the equilibrium price per bottle will fall. 
D)  average total costs will fall.

Question 4

Table 14-9
Suppose that a firm in a competitive market faces the following revenues and costs:
  
-Refer to Table 14-9. If the firm produces 3 units of output,

Accepted Answer

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. 
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.

Question 5

If a competitive firm is currently producing a level of output at which marginal cost exceeds marginal revenue, then

Accepted Answer

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. 
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.

Question 6

Competitive firms that earn a loss in the short run should

Accepted Answer

A)  shut down if P < AVC. 
B)  raise their price. 
C)  lower their output. 
D)  All of the above are correct. 
A)  shut down if P < AVC. 
B)  raise their price. 
C)  lower their output. 
D)  All of the above are correct.

Question 7

Which of the following industries is most likely to exhibit the characteristic of free entry?

Accepted Answer

A)  electricity 
B)  satellite radio 
C)  mineral mining 
D)  tennis shoes 
A)  electricity 
B)  satellite radio 
C)  mineral mining 
D)  tennis shoes

Question 8

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

Accepted Answer

A)  have a zero economic profit. 
B)  have a negative accounting profit. 
C)  exit the market. 
D)  choose to increase production to increase profit. 
A)  have a zero economic profit. 
B)  have a negative accounting profit. 
C)  exit the market. 
D)  choose to increase production to increase profit.

Question 9

Robin owns a horse stables and riding academy and gives riding lessons for children at "pony camp." Her business operates in a competitive industry. Robin gives riding lessons to 20 children per month. Her monthly total revenue is $4,000. The marginal cost of pony camp is $100 per child. In order to maximize profits, Robin should

Accepted Answer

A)  give riding lessons to more than 20 children per month. 
B)  give riding lessons to fewer than 20 children per month. 
C)  continue to give riding lessons to 20 children per month. 
D)  We do not have enough information to answer the question. 
A)  give riding lessons to more than 20 children per month. 
B)  give riding lessons to fewer than 20 children per month. 
C)  continue to give riding lessons to 20 children per month. 
D)  We do not have enough information to answer the question.

Question 10

Table 14-15
  
-Refer to Table 14-15. What is the lowest price at which this firm would operate in the short run?

Accepted Answer

A)  $3. 
B)  $4. 
C)  $5. 
D)  $6. 
A)  $3. 
B)  $4. 
C)  $5. 
D)  $6.

Question 11

A firm that has little ability to influence market prices operates in a

Accepted Answer

A)  competitive market. 
B)  strategic market. 
C)  thin market. 
D)  power market. 
A)  competitive market. 
B)  strategic market. 
C)  thin market. 
D)  power market.

Question 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.

Accepted Answer

A) True 
 B)False

Question 13

When economists refer to a production cost that has already been committed and cannot be recovered, they use the term

Accepted Answer

A)  implicit cost. 
B)  explicit cost. 
C)  variable cost. 
D)  sunk cost. 
A)  implicit cost. 
B)  explicit cost. 
C)  variable cost. 
D)  sunk cost.

Question 14

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

Accepted Answer

1) Some resource used in production may

Question 15

In a perfectly competitive market, the process of entry and exit will end when firms face

Accepted Answer

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. 
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.

Question 16

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.

Accepted Answer

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

Question 17

Suppose a firm in each of the two markets listed below were to increase its price by 25 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?

Accepted Answer

A)  restaurants and MP3 players 
B)  electricity and natural gas 
C)  corn and satellite radio 
D)  rice and soybeans 
A)  restaurants and MP3 players 
B)  electricity and natural gas 
C)  corn and satellite radio 
D)  rice and soybeans

Question 18

In a competitive market with identical firms,

Accepted Answer

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. 
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.

Question 19

Table 14-11
Suppose that a firm in a competitive market faces the following prices and costs:
  
-Refer to Table 14-11. Marginal revenue equals marginal cost when the firm produces

Accepted Answer

A)  2 units. 
B)  3 units. 
C)  4 units. 
D)  5 units. 
A)  2 units. 
B)  3 units. 
C)  4 units. 
D)  5 units.

Question 20

When fixed costs are ignored because they are irrelevant to a business's production decision, they are called

Accepted Answer

A)  explicit costs. 
B)  implicit costs. 
C)  sunk costs. 
D)  opportunity costs. 
A)  explicit costs. 
B)  implicit costs. 
C)  sunk costs. 
D)  opportunity costs.

Exam 14: Firms in Competitive Markets

Which of the following statements best expresses a firm's profit­maximizing decision rule?

In the long-run equilibrium of a market with free entry and exit, if all firms have the same cost structure, then

Roger owns a small health store that sells vitamins in a perfectly competitive market. If vitamins sell for $12 per bottle and the average total cost per bottle is $12.50 at the profit-maximizing output level, then in the long run

Table 14-9 Suppose that a firm in a competitive market faces the following revenues and costs: -Refer to Table 14-9. If the firm produces 3 units of output,

If a competitive firm is currently producing a level of output at which marginal cost exceeds marginal revenue, then

Competitive firms that earn a loss in the short run should

Which of the following industries is most likely to exhibit the characteristic of free entry?

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

Table 14-15 -Refer to Table 14-15. What is the lowest price at which this firm would operate in the short run?

A firm that has little ability to influence market prices operates in a

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.

When economists refer to a production cost that has already been committed and cannot be recovered, they use the term

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

In a perfectly competitive market, the process of entry and exit will end when firms face

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.

Suppose a firm in each of the two markets listed below were to increase its price by 25 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?

In a competitive market with identical firms,

Table 14-11 Suppose that a firm in a competitive market faces the following prices and costs: -Refer to Table 14-11. Marginal revenue equals marginal cost when the firm produces

When fixed costs are ignored because they are irrelevant to a business's production decision, they are called

Ten Principles of 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

Oligopoly

The Markets for the Factors of Production

Earnings and Discrimination

Income Inequality and Poverty

The Theory of Consumer Choice

Frontiers of Microeconomics

Filters

Which of the following statements best expresses a firm's profitmaximizing decision rule?