Question 1

If a firm's fixed cost exceeds its total revenue, the firm should stop production by shutting down temporarily.

Accepted Answer

A) True 
 B)False  False

Question 2

The delivery of first-class mail by the U.S.Postal Service is an example of

Accepted Answer

A)  a monopoly.
B)  perfect competition because consumers have access to other methods of written communication; for example, email and text messaging.
C)  monopolistic competition, because mail delivery is a differentiated product provided by many firms.
D)  an oligopoly because a few other firms provide delivery of letters and packages. A

Question 3

Figure 12-2
 
-Refer to Figure 12-2.Suppose the firm is currently producing Q₂ units.What happens if it expands output to Q₃ units?

Accepted Answer

A)  Its profit increases by the size of the vertical distance df.
B)  It makes less profit.
C)  It incurs a loss.
D)  It will be moving toward its profit maximizing output. B

Question 4

Both individual buyers and sellers in perfect competition

Accepted Answer

A)  can influence the market price by their own individual actions.
B)  can influence the market price by joining with a few of their competitors.
C)  have to take the market price as a given.
D)  have the market price dictated to them by government.

Question 5

Which of the following is not a characteristic of a perfectly competitive market structure?

Accepted Answer

A)  There are a very large number of firms that are small compared to the market.
B)  All firms sell identical products.
C)  There are no restrictions to entry by new firms.
D)  There are restrictions on exit of firms.

Question 6

Article Summary
According to the Department of Agriculture, net farm income will fall from $91.1 billion in 2014 to $58.3 billion in 2015, a 36 percent drop and the largest percentage decline since 1983.Falling prices on corn and soybeans are responsible for a portion of the decline in income, as are lower prices for dairy products, hogs, and chickens.The USDA is, however, predicting lower production costs due to falling prices for energy, seed, fertilizer, and pesticides.
Source: Jesse Newman, "U.S.Farm Income to Fall to Lowest Level in Nine Years," Wall Street Journal, August 25, 2015.
-Refer to the Article Summary above.All else equal, the lower production costs should help offset some of the falling income and

Accepted Answer

A)  keep profits from falling to an even lower level.
B)  keep prices from falling to an even lower level.
C)  reduce the equilibrium quantity of agricultural output.
D)  prevent losses from occurring in the agricultural sector.

Question 7

Figure 12-6
  
Figure 12-6 shows the demand, marginal cost (MC)and average total cost (ATC)curves for Jason's House of Apples.
-Refer to Figure 12-6.Which of the following statements is true?

Accepted Answer

A)  Jason should produce where MC equals $3 (point d) where he will minimize his losses.
B)  Jason should produce where the distance between MC and his demand curve is greatest (point b) .
C)  Jason cannot earn a profit from selling any number of apples.
D)  Jason should produce where MC equals $3 (point d) where he will maximize his profit.

Question 8

The perfectly competitive market structure benefits consumers because

Accepted Answer

A)  firms do not produce goods at the lowest possible price in the long run.
B)  firms are forced by competitive pressure to be as efficient as possible.
C)  firms add a much smaller markup over average cost than firms in any other type of market structure.
D)  firms produce high-quality goods at low prices.

Question 9

A teenaged babysitter is similar to a firm in a perfectly competitive industry in that, for both

Accepted Answer

A)  fixed costs are lower than variable costs.
B)  there are many other suppliers of similar goods or services.
C)  the implicit costs of production exceed the explicit costs of production.
D)  average costs of production do not change when their industry expands.

Question 10

If the market price is $40, the average revenue of selling five units is

Accepted Answer

A)  $8.
B)  $20.
C)  $40.
D)  $200.

Question 11

Max Shreck, an accountant, quit his $80,000-a-year job and bought an existing tattoo parlor from its previous owner, Sylvia Sidney.The lease has five years remaining and requires a monthly payment of $4,000.The lease

Accepted Answer

A)   is a fixed cost of operating the tattoo parlor.
B)   is a variable cost of operating the tattoo parlor.
C)   is an implicit cost of operating the tattoo parlor.
D)  is part of the marginal cost of operating the tattoo parlor.

Question 12

Figure 12-11
 
-Refer to Figure 12-11.Suppose the prevailing price is $20 and the firm is currently producing 1,350 units.In the long-run equilibrium

Accepted Answer

A)  there will be fewer firms in the industry and total industry output decreases.
B)  there will be more firms in the industry and total industry output increases.
C)  there will be fewer firms in the industry but total industry output increases.
D)  there will be more firms in the industry and total industry output remains constant.

Question 13

For a firm in a perfectly competitive market, price is

Accepted Answer

A)  equal to both average revenue and marginal revenue.
B)  equal to average revenue but greater than marginal revenue.
C)  greater than marginal revenue but less than average revenue.
D)  less than both average revenue and marginal revenue.

Question 14

Figure 12-15
 
-Refer to Figure 12-15.Assume that the medical screening industry is perfectly competitive and that some firms are making short-run losses.Suppose the medical screening industry runs an effective advertising campaign which convinces a large number of people that yearly CT scans are critical for good health.Which of the diagrams in the figure best describes what happens in the industry?

Accepted Answer

A)  Panel A
B)  Panel B
C)  Panel C
D)  Panel D

Question 15

Assume that the LCD and plasma television sets industry is perfectly competitive.Suppose a producer develops a successful innovation that enables it to lower its cost of production.What happens in the short run and in the long run?

Accepted Answer

A)  Initially, the firm will be able to increase its profit significantly, but in the long run its profits will still be greater than zero but lower than its short-run profits because other firms would also innovate.
B)  The firm will probably incur losses temporarily because of the high cost of the innovation, but in the long run it will start earning positive profits.
C)  This firm will be able to earn above normal profits indefinitely if it obtains a patent for its innovation.
D)  The firm will be able to increase its economic profits temporarily, but in the long run its economic profits will be eliminated as other firms copy the innovation.

Question 16

A firm would decide to shut down if its production resulted in

Accepted Answer

A)  MR 
B)  ATC > AVC.
C)  AFC > AVC.
D)  MR < AVC.

Question 17

Marginal revenue is

Accepted Answer

A)  total revenue divided by the total quantity of output.
B)  the change in profit divided by the change in the quantity of output.
C)  the change in total revenue divided by the change in total cost.
D)  the change in total revenue divided by the change in the quantity of output.

Question 18

Assume that a perfectly competitive market is in long-run equilibrium.Suppose as a result of a health hazard associated with the industry's product, demand decreases drastically.What is the immediate result of this event?

Accepted Answer

A)  The market price falls and the typical firm suffers an economic loss.
B)  The market supply increases to offset the fall in demand.
C)  The typical firm's average total cost curve shifts downward.
D)  The typical firm's marginal cost curve shifts to the left.

Question 19

Figure 12-7
  
Figure 12-7 illustrates the cost curves of a perfectly competitive firm.
-Refer to Figure 12-7.If the market price is P₁

Accepted Answer

A)  The firm will experience a loss and raise its price to P₂. The firm will then break even.
B)  The firm will break even by producing a quantity of Q₂.
C)  The firm will experience a loss since price is less than ATC.
D)  The firm may make a profit if it can increase the demand for its product.

Question 20

When a perfectly competitive firm finds that its market price is below its minimum average variable cost, it will sell

Accepted Answer

A)  the output where marginal revenue equals marginal cost.
B)  any positive output the entrepreneur decides upon because all of it can be sold.
C)  nothing at all; the firm shuts down.
D)  the output where average total cost equals price.

Exam 12: Firms in Perfectly Competitive Markets