Question 1

In a long-run equilibrium where firms have identical costs, it is possible that some firms in a competitive market are making a positive economic profit.

Accepted Answer

A) True 
 B)False

Question 2

Who is a price taker in a competitive market?

Accepted Answer

A)  buyers only 
B)  sellers only 
C)  both buyers and sellers 
D)  neither buyers nor sellers 
A)  buyers only 
B)  sellers only 
C)  both buyers and sellers 
D)  neither buyers nor sellers

Question 3

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

Accepted Answer

A) True 
 B)False

Question 4

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 5

In the long run, assuming that the owner of a firm in a competitive industry has positive opportunity costs, she

Accepted Answer

A)  should exit the industry unless her economic profits are positive. 
B)  will earn zero accounting profits but positive economic profits. 
C)  will earn zero economic profits but positive accounting profits. 
D)  should ignore opportunity costs because they are a type of sunk cost that disappears in the long run. 
A)  should exit the industry unless her economic profits are positive. 
B)  will earn zero accounting profits but positive economic profits. 
C)  will earn zero economic profits but positive accounting profits. 
D)  should ignore opportunity costs because they are a type of sunk cost that disappears in the long run.

Question 6

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 7

A corporation has been steadily losing money on one of its product lines, plastic flamingo lawn ornaments. The firm produces plastic flamingos in a factory that cost $20 million to build 10 years ago. The firm is now considering an offer to buy that factory for $15 million. Which of the following statements about the decision to sell or not to sell is correct?

Accepted Answer

A)  The firm should turn down the purchase offer because the factory cost more than $15 million to build. 
B)  The $20 million spent on the factory is a sunk cost; that cost should not affect the decision. 
C)  The $20 million spent on the factory is an implicit cost, which should be included in the decision. 
D)  The firm should sell the factory only if it can reduce its costs elsewhere by $5 million. 
A)  The firm should turn down the purchase offer because the factory cost more than $15 million to build. 
B)  The $20 million spent on the factory is a sunk cost; that cost should not affect the decision. 
C)  The $20 million spent on the factory is an implicit cost, which should be included in the decision. 
D)  The firm should sell the factory only if it can reduce its costs elsewhere by $5 million.

Question 8

Figure 14-2
Suppose a firm operating in a competitive market has the following cost curves:  
-Refer to Figure 14-2. If the market price is Pa, in the short run the firm will earn

Accepted Answer

A)  positive economic profits. 
B)  negative economic profits but will try to remain open. 
C)  negative economic profits and will shut down. 
D)  zero economic profits. 
A)  positive economic profits. 
B)  negative economic profits but will try to remain open. 
C)  negative economic profits and will shut down. 
D)  zero economic profits.

Question 9

Scenario 14-2
Assume a certain firm is producing Q = 1,000 units of output. At Q = 1,000, the firm's marginal cost equals $20 and its average total cost equals $25. The firm sells its output for $30 per unit.
-Refer to Scenario 14-2. To maximize its profit, the firm should

Accepted Answer

A)  increase its output. 
B)  continue to produce 1,000 units. 
C)  decrease its output but continue to produce. 
D)  shut down. 
A)  increase its output. 
B)  continue to produce 1,000 units. 
C)  decrease its output but continue to produce. 
D)  shut down.

Question 10

A firm's marginal cost has a minimum value of $80, its average variable cost has a minimum value of $90, and its average total cost has a minimum value of $100. Then the firm will shut down in the short run once the price of its product falls below

Accepted Answer

A)  $100. 
B)  $90. 
C)  $80. 
D)  $40. 
A)  $100. 
B)  $90. 
C)  $80. 
D)  $40.

Question 11

Shrimp Galore, a shrimp harvesting business in the Pacific Northwest, has a 30-year loan on its shrimp harvesting 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 2010 shrimp harvesting season, Shrimp Galore's accountant predicted that at expected market prices for shrimp, Shrimp Galore would have a net loss of $75,000 dollars after paying all 2010 expenses including the annual loan payment). In this case, Shrimp Galore should

Accepted Answer

A)  produce nothing and experience a loss of $25,000. 
B)  produce nothing and experience a loss of $75,000. 
C)  continue to operate because expected profits will rise in the future. 
D)  continue to operate even though it predicts a loss of $75,000. 
A)  produce nothing and experience a loss of $25,000. 
B)  produce nothing and experience a loss of $75,000. 
C)  continue to operate because expected profits will rise in the future. 
D)  continue to operate even though it predicts a loss of $75,000.

Question 12

Figure 14-3
Suppose a firm operating in a competitive market has the following cost curves:  
-Refer to Figure 14-3. The firm will earn positive economic profit if the market price is

Accepted Answer

A)  positive. 
B)  $6. 
C)  above $6. 
D)  There is no price at which the firm earns positive economic profits. 
A)  positive. 
B)  $6. 
C)  above $6. 
D)  There is no price at which the firm earns positive economic profits.

Question 13

Suppose that you value a hat from your favorite university at $20. The university bookstore has the hat on sale for $15. You purchase the hat but lose it on the way home. What should you do? Assume that losing the hat does not alter how you value it.

Accepted Answer

A)  Go back to the bookstore and purchase another hat. 
B)  Wait until the cost of the hat falls to $15 or less before purchasing another hat. 
C)  Wait until the cost of the hat falls to $5 or less before purchasing another hat. 
D)  Do not purchase another hat regardless of the price. 
A)  Go back to the bookstore and purchase another hat. 
B)  Wait until the cost of the hat falls to $15 or less before purchasing another hat. 
C)  Wait until the cost of the hat falls to $5 or less before purchasing another hat. 
D)  Do not purchase another hat regardless of the price.

Question 14

Scenario 14-4
The information below applies to a competitive firm that sells its output for $40 per unit.
• When the firm produces and sells 150 units of output, its average total cost is $24.50.
• When the firm produces and sells 151 units of output, its average total cost is $24.55.
-Refer to Scenario 14-4. How does the firm's marginal revenue MR) compare to its marginal cost MC) when it increases its output from 150 units to 151 units?

Accepted Answer

A)  MR exceeds MC by $7.95. 
B)  MR exceeds MC by $11.05. 
C)  MC exceeds MR by $11.05. 
D)  MC exceeds MR by $13.50. 
A)  MR exceeds MC by $7.95. 
B)  MR exceeds MC by $11.05. 
C)  MC exceeds MR by $11.05. 
D)  MC exceeds MR by $13.50.

Question 15

Which of these types of costs can be ignored when an individual or a firm is making decisions?

Accepted Answer

A)  sunk costs 
B)  marginal costs 
C)  variable costs 
D)  opportunity costs 
A)  sunk costs 
B)  marginal costs 
C)  variable costs 
D)  opportunity costs

Question 16

Which of these curves is the competitive firm's short-run supply curve?

Accepted Answer

A)  the average variable cost curve above marginal cost 
B)  the average total cost curve above marginal cost 
C)  the marginal cost curve above average variable cost 
D)  the average fixed cost curve 
A)  the average variable cost curve above marginal cost 
B)  the average total cost curve above marginal cost 
C)  the marginal cost curve above average variable cost 
D)  the average fixed cost curve

Question 17

Table 14-12
 
-Refer to Table 14-12. What is the average revenue when 4 units are sold?

Accepted Answer

A)  $0 
B)  $68 
C)  $80 
D)  $400 
A)  $0 
B)  $68 
C)  $80 
D)  $400

Question 18

In the short run, a firm should exit the industry if its marginal cost exceeds its marginal revenue.

Accepted Answer

A) True 
 B)False

Question 19

In a competitive market the current price is $6. The typical firm in the market has ATC = $5.00 and AVC = $4.50.

Accepted Answer

A)  In the short run firms will shut down, and in the long run firms will leave the market. 
B)  In the short run firms will continue to operate, but in the long run firms will leave the market. 
C)  New firms will likely enter this market to capture some of the economic profits. 
D)  The firm will earn zero profits in both the short run and long run. 
A)  In the short run firms will shut down, and in the long run firms will leave the market. 
B)  In the short run firms will continue to operate, but in the long run firms will leave the market. 
C)  New firms will likely enter this market to capture some of the economic profits. 
D)  The firm will earn zero profits in both the short run and long run.

Question 20

A long-run supply curve is flatter than a short-run supply curve because

Accepted Answer

A)  firms can enter and exit a market more easily in the long run than in the short run. 
B)  long-run supply curves are sometimes downward sloping. 
C)  competitive firms have more control over demand in the long run. 
D)  firms in a competitive market face identical cost structures. 
A)  firms can enter and exit a market more easily in the long run than in the short run. 
B)  long-run supply curves are sometimes downward sloping. 
C)  competitive firms have more control over demand in the long run. 
D)  firms in a competitive market face identical cost structures.

In a long-run equilibrium where firms have identical costs, it is possible that some firms in a competitive market are making a positive economic profit.

Who is a price taker in a competitive market?

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

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

In the long run, assuming that the owner of a firm in a competitive industry has positive opportunity costs, she

Figure 14-2 Suppose a firm operating in a competitive market has the following cost curves: -Refer to Figure 14-2. If the market price is Pa, in the short run the firm will earn

Scenario 14-2 Assume a certain firm is producing Q = 1,000 units of output. At Q = 1,000, the firm's marginal cost equals $20 and its average total cost equals $25. The firm sells its output for $30 per unit. -Refer to Scenario 14-2. To maximize its profit, the firm should

A firm's marginal cost has a minimum value of $80, its average variable cost has a minimum value of $90, and its average total cost has a minimum value of $100. Then the firm will shut down in the short run once the price of its product falls below

Figure 14-3 Suppose a firm operating in a competitive market has the following cost curves: -Refer to Figure 14-3. The firm will earn positive economic profit if the market price is

Suppose that you value a hat from your favorite university at $20. The university bookstore has the hat on sale for $15. You purchase the hat but lose it on the way home. What should you do? Assume that losing the hat does not alter how you value it.

Which of these types of costs can be ignored when an individual or a firm is making decisions?

Which of these curves is the competitive firm's short-run supply curve?

Table 14-12 -Refer to Table 14-12. What is the average revenue when 4 units are sold?

In the short run, a firm should exit the industry if its marginal cost exceeds its marginal revenue.

In a competitive market the current price is $6. The typical firm in the market has ATC = $5.00 and AVC = $4.50.

A long-run supply curve is flatter than a short-run supply curve because

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 Costs of Production

Monopoly

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, Investment, and the Financial System

The Basic Tools of Finance

Unemployment

The Monetary System

Money Growth and Inflation

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

Filters

Exam 13: Firms in Competitive Markets

In a long-run equilibrium where firms have identical costs, it is possible that some firms in a competitive market are making a positive economic profit.

Who is a price taker in a competitive market?

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

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

In the long run, assuming that the owner of a firm in a competitive industry has positive opportunity costs, she

Figure 14-2 Suppose a firm operating in a competitive market has the following cost curves: -Refer to Figure 14-2. If the market price is Pa, in the short run the firm will earn

Scenario 14-2 Assume a certain firm is producing Q = 1,000 units of output. At Q = 1,000, the firm's marginal cost equals $20 and its average total cost equals $25. The firm sells its output for $30 per unit. -Refer to Scenario 14-2. To maximize its profit, the firm should

A firm's marginal cost has a minimum value of $80, its average variable cost has a minimum value of $90, and its average total cost has a minimum value of $100. Then the firm will shut down in the short run once the price of its product falls below

Figure 14-3 Suppose a firm operating in a competitive market has the following cost curves: -Refer to Figure 14-3. The firm will earn positive economic profit if the market price is

Suppose that you value a hat from your favorite university at $20. The university bookstore has the hat on sale for $15. You purchase the hat but lose it on the way home. What should you do? Assume that losing the hat does not alter how you value it.

Which of these types of costs can be ignored when an individual or a firm is making decisions?

Which of these curves is the competitive firm's short-run supply curve?

Table 14-12 -Refer to Table 14-12. What is the average revenue when 4 units are sold?

In the short run, a firm should exit the industry if its marginal cost exceeds its marginal revenue.

In a competitive market the current price is $6. The typical firm in the market has ATC = $5.00 and AVC = $4.50.

A long-run supply curve is flatter than a short-run supply curve because

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 Costs of Production

Monopoly

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, Investment, and the Financial System

The Basic Tools of Finance

Unemployment

The Monetary System

Money Growth and Inflation

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

Filters

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