Question 1

If all existing firms and all potential firms have the same cost curves,there are no inputs in limited quantities,and the market is characterized by free entry and exit,then the long-run

Accepted Answer

A) market supply curve is equal to the sum of marginal cost. 
B) supply curve for the market must slope downward. 
C) market supply curve must slope upward. 
D) supply curve for the market is horizontal and equal to the minimum of long-run average cost for each firm.

Question 2

Mrs.Smith is operating a firm in a competitive market.The market price is $6.50. At her profit-maximizing level of output,her average total cost of production is $7.00 and her average variable cost of production is $6.00.

Accepted Answer

A) Mrs.Smith is earning a loss and should shutdown in the short run. 
B) Mrs.Smith is earning a loss but should continue to operate in the short run. 
C) Mrs.Smith is earning a profit since the price is above the average variable cost. 
D) Without knowing Mrs.Smith's marginal cost we cannot determine whether she should stay in business or shut down.

Question 3

When new firms enter a perfectly competitive market,

Accepted Answer

A) economic profits of existing firms will continue to be zero. 
B) entering firms will earn zero economic profit upon entry into the market. 
C) existing firms may see their costs rise as more firms compete for limited resources. 
D) prices will rise as existing firms raise prices to keep new firms out of the market.

Question 4

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.

Question 5

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

Accepted Answer

The answer of Give two reasons why the long-run industry...

Question 6

In a competitive market with free entry and exit,the process of entry and exit ends when,for the typical firm in the market,

Accepted Answer

A) marginal revenue is equal to long-run average total cost. 
B) total revenue is equal to average total cost. 
C) average revenue exceeds marginal cost. 
D) accounting profit is driven to zero.

Question 7

When a competitive firm triples the amount of output it sells,

Accepted Answer

A) its total revenue triples. 
B) its average revenue triples. 
C) its marginal revenue triples. 
D) its profit must increase.

Question 8

When a perfectly competitive firm decides to shut down,it is most likely that

Accepted Answer

A) marginal cost is above average variable cost. 
B) marginal cost is above average total cost. 
C) price is below the firm's average variable cost. 
D) fixed costs exceed variable costs.

Question 9

Cold Duck Airlines flies between Tacoma and Portland.The company leases planes on a year-long contract at a cost that averages $600 per flight.Other costs (fuel,flight attendants,etc.)amount to $550 per flight.Currently,Cold Duck's revenues are $1,000 per flight.All prices and costs are expected to continue at their present levels.If it wants to maximize profit,Cold Duck Airlines should

Accepted Answer

A) drop the flight immediately. 
B) continue the flight. 
C) continue flying until the lease expires and then drop the run. 
D) drop the flight now but renew the lease if conditions improve.

Question 10

Figure 14-6
In the figure below, panel (a) depicts the linear marginal cost of a firm in a competitive market, and panel (b) depicts the linear market supply curve for a market with a fixed number of identical firms.
 
-Refer to Figure 14-6.If there are 200 identical firms in this market,what level of output will be supplied to the market when price is $1.00?

Accepted Answer

A) 2,000 
B) 5,000 
C) 10,000 
D) 20,000

Question 11

Scenario 14-3
In March of 2000 a study sponsored by the Food Consumer Safety Board found that consumption of irradiated grapefruit increased the health of laboratory rats. As a result of national press coverage of the report, the demand for irradiated grapefruit increased dramatically. Organic farmers were able to switch from organic production of grapefruit to irradiated production with no additional cost. Assume that the grapefruit market satisfies all of the attributes of perfect competition.
-Refer to Scenario 14-3.As a result of the increase in the demand for grapefruit,we would predict that in the short run that the

Accepted Answer

A) production of grapefruit would be at efficient scale. 
B) price of grapefruit would rise. 
C) total cost for existing irradiated grapefruit producers must rise. 
D) number of firms in the market would fall as prices fall and firms exit the market.

Question 12

Suppose you bought a ticket to a football game for $30,and that you place a $35 value on seeing the game.If you lose the ticket,then what is the maximum price you should pay for another ticket?

Accepted Answer

A) $5 
B) $30 
C) $35 
D) $65

Question 13

For any given price,a firm in a competitive market will maximize profit by selecting the level of output at which price intersects the

Accepted Answer

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

Question 14

When new firms have an incentive to enter a competitive market,their entry will

Accepted Answer

A) increase the price of the product. 
B) drive down profits of existing firms in the market. 
C) shift the market supply curve to the left. 
D) increase demand for the product.

Question 15

The firm will make the most profits if it produces the quantity of output at which

Accepted Answer

A) marginal cost equals average cost. 
B) profit per unit is greatest. 
C) marginal revenue equals total revenue. 
D) marginal revenue equals marginal cost.

Question 16

A competitive market will typically experience entry and exit until accounting profits are zero.

Accepted Answer

A) True 
 B)False

Question 17

Table 14-4
The following table presents cost and revenue information for John's Vineyard.
 
-Refer to Table 14-4.What is the marginal cost of the 8th unit?

Accepted Answer

A) $0 
B) $68 
C) $120 
D) $242

Question 18

When a profit-maximizing firm in a competitive market has zero economic profit,accounting profit

Accepted Answer

A) is negative (accounting losses). 
B) is positive. 
C) is also zero. 
D) could be positive, negative or zero.

Question 19

A profit-maximizing firm in a competitive market is currently producing 200 units of output.It has average revenue of $9 and average total cost of $7.It follows that the firm's

Accepted Answer

A) average total cost curve intersects the marginal cost curve at an output level of less than 200 units. 
B) average variable cost curve intersects the marginal cost curve at an output level of less than 200 units. 
C) profit is $400. 
D) All of the above are correct.

Question 20

Table 14-4
The following table presents cost and revenue information for John's Vineyard.
 
-Refer to Table 14-4.What is the marginal cost of the 5th unit?

Accepted Answer

A) $55 
B) $60 
C) $68 
D) $80

Exam 14: Firms in Competitive Markets