Question 1

When firms in a competitive market have different costs, it is likely that

Accepted Answer

A) free entry and exit in the market will be violated. 
B) the market will no longer be considered competitive. 
C) long-run market supply will be downward sloping. 
D) some firms will earn positive economic profits in the long run.

Question 2

In the short run, there are 500 identical firms in a competitive market. The firms do not use any resources that are available in limited quantities, and each of them has the following cost structure:  Which of the following is a point on the long-run supply curve?

Accepted Answer

A) P=$10, Q=500. 
B) P=$6, Q=1,000. 
C) P=$5, Q=500. 
D) P=$5, Q=1,500.

Question 3

In the short run for a particular market, there are 300 firms. Each firm has a marginal cost of $30 when it produces 200 units of output. $30 is above every firm's average variable cost. One point on the market supply curve is

Accepted Answer

A) quantity = 300; price = $30. 
B) quantity = 600,000; price = $90,000. 
C) quantity = 100,000; price = $30. 
D) quantity = 60,000; price = $30.

Question 4

The production decisions of perfectly competitive firms follow one of the Ten Principles of Economics, which states that rational people

Accepted Answer

A) consider sunk costs. 
B) equate prices to the average costs of production. 
C) prefer to purchase products from smaller rather than larger firms. 
D) think at the margin.

Question 5

If a firm observes that the price of its product is above average variable cost, it would choose to continue to produce the good in the short run, even if that firm experiences economic losses.
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Accepted Answer

A) True 
 B)False

Question 6

A competitive firm currently produces and sells 7,500 units of output at a price of $2.50 per unit. The firm's average fixed cost is $0.75 and its average total cost is $2.80. In the short run, should the firm continue to operate?

Accepted Answer

The answer of A competitive firm currently produces and sells...

Question 7

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

Accepted Answer

A) selling running apparel 
B) satellite radio 
C) yoga studios 
D) wheat farming

Question 8

Figure 14-7 
-Refer to Figure 14-7. Suppose the price of the good is $175. If the firm produces and sells 515 units of output, its total revenue is

Accepted Answer

A) $100,525. 
B) $90,125. 
C) $84,500. 
D) $75,250.

Question 9

In the long run, a competitive market with 1,000 identical firms will experience an equilibrium price equal to the minimum of each firm's average total cost.

Accepted Answer

A) True 
 B)False

Question 10

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

Question 11

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

Question 12

A competitive firm currently produces and sells 500 units of output. Its total revenue is $6,000; the marginal cost of producing the 500^th unit of output is $14.50; and the average total cost of producing the 500^th unit of output is $9.50. Is the firm maximizing its profit, or should it increase or decrease output in order to increase its profit?

Accepted Answer

The answer of A competitive firm currently produces and sells...

Question 13

In a competitive market the current price is $5. 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 any remaining economic profits. 
D) The firm will earn zero profits in both the short run and long run.

Question 14

Table 14-14
The following table presents cost and revenue information for Bob's bakery production and sales. 
-Refer to Table 14-14. Suppose that due to a decrease in the market demand for bread the market price of bread drops to $2.75. At this new price, if Bob produces and sells the profit-maximizing quantity, how much profit will he earn?

Accepted Answer

A) $0.25 
B) $1.25 
C) $2.25 
D) The firm will lose $6.25.

Question 15

What does it mean for a buyer or seller to be a price taker?

Accepted Answer

The answer of What does it mean for a buyer...

Question 16

A competitive market begins in a situation of long-run equilibrium. Then, there is a decrease in demand. Describe the process that eventually leads to a new long-run equilibrium.

Accepted Answer

The answer of A competitive market begins in a situation...

Question 17

Entry into a market by new firms will increase the

Accepted Answer

A) supply of the good. 
B) profits of existing firms. 
C) price of the good. 
D) marginal cost of producing the good.

Question 18

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 $250 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.

Question 19

"The water that comes out of your faucets at home is not supplied by a competitive firm." Explain why this statement is correct.

Accepted Answer

The answer of "The water that comes out of your...

Question 20

For a firm in a perfectly competitive market, the price of the good is always

Accepted Answer

A) equal to marginal revenue. 
B) equal to total revenue. 
C) greater than average revenue. 
D) equal to the firm's efficient scale of output.

Exam 14: Firms in Competitive Markets