Question 1

If a profit-maximizing firm in a competitive market discovers that,at its current level of production,price is greater than marginal cost,it should

Accepted Answer

A) shut down. 
B) reduce its output, but continue operating. 
C) keep output the same. 
D) increase its output.

Question 2

If the market elasticity of demand for potatoes is -0.3 in a perfectly competitive market,then the individual farmer's elasticity of demand

Accepted Answer

A) will also be -0.3. 
B) depends on how large a crop the farmer produces. 
C) will range between -0.3 and -1.0. 
D) will be infinite.

Question 3

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? (i)	New firms will enter the market.
(ii)	In the short run,price will rise;in the long run,price will rise further.
(iii)	In the long run,all firms will be producing at their efficient scale.

Accepted Answer

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

Question 4

Table 14-5
 
-Refer to Table 14-5.This table provides information on a firm's output,marginal revenue,and marginal cost.If the firm is currently producing 14 units,what would you advise them to do?

Accepted Answer

A) Decrease quantity to 13 units. 
B) Increase quantity to 17 units. 
C) Continue to operate at 14 units. 
D) Increase quantity to 16 units.

Question 5

Marginal adjustments to production end when firms in competitive markets experience a price equal to marginal revenue.

Accepted Answer

A) True 
 B)False

Question 6

In the long run,when price is less than average total cost for all possible levels of production,a firm in a competitive market will choose to exit (or not enter)the market.

Accepted Answer

A) True 
 B)False

Question 7

In the long run,a profit-maximizing firm will choose to exit a market when

Accepted Answer

A) average fixed cost is falling. 
B) variable costs exceed sunk costs. 
C) marginal cost exceeds marginal revenue at the current level of production. 
D) total revenue is less than total cost.

Question 8

The intersection of a firm's marginal revenue and marginal cost curves determines the level of output at which

Accepted Answer

A) total revenue is equal to variable cost. 
B) total revenue is equal to fixed cost. 
C) total revenue is equal to total cost. 
D) profit is maximized.

Question 9

A firm's marginal cost has a minimum value of $2,its average variable cost has a minimum value of $4,and its average total cost has a minimum value of $5.Then the firm will shut down if the price of its product falls below

Accepted Answer

A) $2. 
B) $4. 
C) $5. 
D) There is not enough information given to answer the question.

Question 10

A corporation has been steadily losing money on one of its product lines.The factory used to produce that product 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, and that 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 11

You purchase a $30,nonrefundable ticket to a play at a local theater.Ten minutes into the show you realize that it is not a very good show and place only a $10 value on seeing the remainder of the show.Alternatively you could leave the theater and go home and watch TV or read a book.You place an $8 value on watching TV and a $6 value on reading a book.

Accepted Answer

A) You should leave the theater since the net benefit from seeing the remainder of the show is -$20, while going home will earn you at least $8 of satisfaction. 
B) You should stay and watch the remainder of the show. 
C) You should go home and watch TV. 
D) You should go home and read a book.

Exam 14: Firms in Competitive Markets