Question 1

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 2

Suppose a competitive market is comprised of firms that face identical cost curves. The firms experience an increase in demand that results in positive profits for the firms. Which of the following events are then most likely to occur?

Accepted Answer

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

Question 3

Figure 14-6
Suppose a firm operating in a competitive market has the following cost curves:  
-Refer to Figure 14-6. When market price is P3, a profit-maximizing firm's total costs

Accepted Answer

A)  can be represented by the area P2 × Q2. 
B)  can be represented by the area P3 × Q2. 
C)  can be represented by the area (P3-P2) × Q3. 
D)  are zero. 
A)  can be represented by the area P2 × Q2. 
B)  can be represented by the area P3 × Q2. 
C)  can be represented by the area (P3-P2) × Q3. 
D)  are zero.

Question 4

When a competitive market experiences an increase in demand that increases production costs for existing firms and potential new entrants, which of the following is most likely to arise?

Accepted Answer

A)  The long-run market supply curve will be upward sloping. 
B)  The condition of free entry into the market will be violated. 
C)  Producer profits will fall in the long run. 
D)  The long-run market supply curve will be horizontal as new firms enter and drive the price downward. 
A)  The long-run market supply curve will be upward sloping. 
B)  The condition of free entry into the market will be violated. 
C)  Producer profits will fall in the long run. 
D)  The long-run market supply curve will be horizontal as new firms enter and drive the price downward.

Question 5

At the profit-maximizing level of output,

Accepted Answer

A)  marginal revenue equals average total cost. 
B)  marginal revenue equals average variable cost. 
C)  marginal revenue equals marginal cost. 
D)  average revenue equals average total cost. 
A)  marginal revenue equals average total cost. 
B)  marginal revenue equals average variable cost. 
C)  marginal revenue equals marginal cost. 
D)  average revenue equals average total cost.

Question 6

Suppose that some firms in a competitive industry are earning zero economic profits, while others are experiencing losses. All else equal, in the long run, we would expect the number of firms in the industry to

Accepted Answer

A)  increase. 
B)  decrease. 
C)  remain the same. 
D)  We do not have enough information with which to answer this question. 
A)  increase. 
B)  decrease. 
C)  remain the same. 
D)  We do not have enough information with which to answer this question.

Question 7

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 8

At its current level of production a profit-maximizing firm in a competitive market receives $12.50 for each unit it produces and faces an average total cost of $10. At the market price of $12.50 per unit, the firm's marginal cost curve crosses the marginal revenue curve at an output level of 1,000 units. What is the firm's current profit? What is likely to occur in this market and why?

Accepted Answer

Profit can be calculated as (P

Question 9

Mrs. Smith operates a business in a competitive market. The current market price is $8.10. At her profit- maximizing level of production, the average variable cost is $8.00, and the average total cost is $8.25. Mrs. Smith should

Accepted Answer

A)  shut down her business in the short run but continue to operate in the long run. 
B)  continue to operate in the short run but shut down in the long run. 
C)  continue to operate in both the short run and long run. 
D)  shut down in both the short run and long run. 
A)  shut down her business in the short run but continue to operate in the long run. 
B)  continue to operate in the short run but shut down in the long run. 
C)  continue to operate in both the short run and long run. 
D)  shut down in both the short run and long run.

Question 10

If a firm in a perfectly competitive market triples the quantity of output sold, then total revenue will

Accepted Answer

A)  more than triple. 
B)  less than triple. 
C)  exactly triple. 
D)  Any of the above may be true depending on the firm's labor productivity. 
A)  more than triple. 
B)  less than triple. 
C)  exactly triple. 
D)  Any of the above may be true depending on the firm's labor productivity.

Question 11

Suppose a firm in a competitive market produces and sells 8 units of output and has a marginal revenue of $8. What would be the firm's marginal revenue if it instead produced and sold 4 units of output?

Accepted Answer

A)  $2 
B)  $8 
C)  $32 
D)  $64 
A)  $2 
B)  $8 
C)  $32 
D)  $64

Question 12

In the short-run, a firm's supply curve is equal to the

Accepted Answer

A)  marginal cost curve above its average variable cost curve. 
B)  marginal cost curve above its average total cost curve. 
C)  average variable cost curve above its marginal cost curve. 
D)  average total cost curve above its marginal cost curve. 
A)  marginal cost curve above its average variable cost curve. 
B)  marginal cost curve above its average total cost curve. 
C)  average variable cost curve above its marginal cost curve. 
D)  average total cost curve above its marginal cost curve.

Question 13

In the long run, a firm will exit a competitive industry if

Accepted Answer

A)  total revenue exceeds total cost. 
B)  the price exceeds average total cost. 
C)  average total cost exceeds the price. 
D)  Both a and b are correct. 
A)  total revenue exceeds total cost. 
B)  the price exceeds average total cost. 
C)  average total cost exceeds the price. 
D)  Both a and b are correct.

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

Scenario 14-4
Victor is the recipient of $1 million from a lawsuit. Victor decides to use the money to purchase a small business in Florida. His business operates in a perfectly competitive industry. If Victor would have invested the $1 million in a risk-free bond fund, he could have earned $100,000 each year. After he bought the small business, Victor quit his job as a market analyst with Research, Inc., where he used to earn $75,000 per year.
-Refer to Scenario 14-4. At the end of the first year of operating his new business, Victor's accountant reported an accounting profit of $150,000. What was Victor's economic profit?

Accepted Answer

A)  -$150,000 
B)  -$50,000 
C)  -$25,000 
D)  $25,000 
A)  -$150,000 
B)  -$50,000 
C)  -$25,000 
D)  $25,000

Question 16

List and describe the characteristics of a perfectly competitive market.

Accepted Answer

There are many buyers and sell

Question 17

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's marginal cost is $11, it should

Accepted Answer

A)  increase production to maximize profit. 
B)  increase the price of the product to maximize profit. 
C)  advertise to attract additional buyers to maximize profit. 
D)  reduce production to increase profit. 
A)  increase production to maximize profit. 
B)  increase the price of the product to maximize profit. 
C)  advertise to attract additional buyers to maximize profit. 
D)  reduce production to increase profit.

Question 18

Figure 14-5
Suppose a firm operating in a competitive market has the following cost curves:  
-Refer to Figure 14-5. Firms would be encouraged to enter this market for all prices that exceed

Accepted Answer

A)  P1. 
B)  P2. 
C)  P3. 
D)  P4. 
A)  P1. 
B)  P2. 
C)  P3. 
D)  P4.

Question 19

Total profit for a firm is calculated as

Accepted Answer

A)  marginal revenue minus average total cost. 
B)  average revenue minus average total cost. 
C)  marginal revenue minus marginal cost. 
D)  (price minus average cost) times quantity of output. 
A)  marginal revenue minus average total cost. 
B)  average revenue minus average total cost. 
C)  marginal revenue minus marginal cost. 
D)  (price minus average cost) times quantity of output.

Question 20

Because nothing can be done about sunk costs, they are irrelevant to decisions about business strategy.

Accepted Answer

A) True 
 B)False

Exam 14: Firms in Competitive Markets

Competitive firms that earn a loss in the short run should

Suppose a competitive market is comprised of firms that face identical cost curves. The firms experience an increase in demand that results in positive profits for the firms. Which of the following events are then most likely to occur?

Figure 14-6 Suppose a firm operating in a competitive market has the following cost curves: -Refer to Figure 14-6. When market price is P3, a profit-maximizing firm's total costs

When a competitive market experiences an increase in demand that increases production costs for existing firms and potential new entrants, which of the following is most likely to arise?

At the profit-maximizing level of output,

Suppose that some firms in a competitive industry are earning zero economic profits, while others are experiencing losses. All else equal, in the long run, we would expect the number of firms in the industry to

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

Mrs. Smith operates a business in a competitive market. The current market price is $8.10. At her profit- maximizing level of production, the average variable cost is $8.00, and the average total cost is $8.25. Mrs. Smith should

If a firm in a perfectly competitive market triples the quantity of output sold, then total revenue will

Suppose a firm in a competitive market produces and sells 8 units of output and has a marginal revenue of $8. What would be the firm's marginal revenue if it instead produced and sold 4 units of output?

In the short-run, a firm's supply curve is equal to the

In the long run, a firm will exit a competitive industry if

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

List and describe the characteristics of a perfectly competitive market.

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's marginal cost is $11, it should

Figure 14-5 Suppose a firm operating in a competitive market has the following cost curves: -Refer to Figure 14-5. Firms would be encouraged to enter this market for all prices that exceed

Total profit for a firm is calculated as

Because nothing can be done about sunk costs, they are irrelevant to decisions about business strategy.

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

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

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

Six Debates Over Macroeconomic Policy

Filters