Question 1

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 2

When plasma television sets were first introduced, prices were high and few firms were in the market. Later, economic profits attracted new firms, and the price of plasma televisions fell. This example illustrates

Accepted Answer

A)  a decreasing-cost industry. 
B)  that consumers receive this new technology 'free of charge' in the sense that they only have to pay a price for plasma televisions equal to the lowest production cost. 
C)  an industry with a low minimum efficient scale. 
D)  how fickle consumer demands are.

Question 3

-Refer to Table 8-1. If the market price of each camera case is $8 and the firm maximises profit, what is the amount of the firm's profit or loss?

Accepted Answer

A)  $0 (it breaks even) 
B)  loss of $1000 
C)  profit of $440 
D)  loss of $440

Question 4

-Refer to Figure 8-6. Suppose the firm produces 4000 units. What does the shaded area labeled B represent?

Accepted Answer

A)  the firm's economic loss 
B)  total variable cost 
C)  average variable cost 
D)  total fixed cost

Question 5

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 6

Jason, a high-school student, mows lawns for families in his neighbourhood. The going rate is $12 for each lawn-mowing service. Jason would like to charge $20 because he believes he has more experience mowing lawns than the many other teenagers who also offer the same service. If the market for lawn mowing services is perfectly competitive, what would happen if Jason raised his price?

Accepted Answer

A)  He would lose some but not all his customers. 
B)  Initially, his customers might complain but over time they will come to accept the new rate. 
C)  If Jason raises his price he would lose all his customers. 
D)  If Jason raises his price, then all others supplying the same service will also raise their prices.

Question 7

If a firm in a perfectly competitive industry introduces a lower-cost way of producing an existing product, the firm will be able to earn economic profits in the long run.

Accepted Answer

A) True 
 B)False

Question 8

Firms in perfect competition produce the productively efficient output level in the short run and in the long run.

Accepted Answer

A) True 
 B)False

Question 9

Assuming a market price of $4, fill in the columns in the following table. What is the profit-maximising level of production? What are the two ways to determine the profit-maximising level of production?

Accepted Answer

The answer of Assuming a market price of $4, fill...

Question 10

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 11

A perfectly competitive apple farm produces 1000 bushels of apples at a total cost of $36 000. The price of each bushel is $50. Calculate the firm's short-run profit or loss.

Accepted Answer

A)  loss of $14 000 
B)  profit of $14 000 
C)  profit of $50 000 
D)  There is insufficient information to answer the question.

Question 12

Assume the market for organically-grown produce is perfectly competitive. All else equal, as farmers find it less profitable to produce and sell organic produce in this market,

Accepted Answer

A)  the demand curve will shift to the left and the equilibrium price will decrease. 
B)  the supply curve will shift to the left and the equilibrium price will increase. 
C)  the supply curve will shift to the right, the demand curve will shift to the left, and the equilibrium price will decrease. 
D)  the supply curve will shift to the left, the demand curve will shift to the left, and the equilibrium price will increase.

Question 13

-Refer to Figure 8-13. Assume that the medical screening industry is perfectly competitive and that some firms are incurring 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 14

If a firm shuts down it

Accepted Answer

A)  will suffer a loss equal to its fixed costs. 
B)  will produce nothing but must pay its variable costs. 
C)  will produce nothing but must pay its fixed and variable costs. 
D)  will earn enough revenue to cover its variable costs but not all of its fixed costs.

Question 15

-Refer to Figure 8-2. Why is the total revenue curve a ray from the origin?

Accepted Answer

A)  because revenue increases at an increasing rate 
B)  because revenue increases at a decreasing rate 
C)  because the firm can sell its product at a constant price 
D)  because the firm must lower its price to sell more

Question 16

Use the figure above to answer the following questions.
a. How can you determine that the figure represents a graph of a perfectly competitive firm? Be specific; indicate which curve gives you the information and how you use this information to arrive at your conclusion.
b. What is the market price?
c. What is the profit-maximising output?
d. What is total revenue at the profit-maximising output?
e. What is the total cost at the profit-maximising output?
f. What is the profit or loss at the profit-maximising output?
g. What is the firm's total fixed cost?
h. What is the total variable cost?
i. Identify the firm's short-run supply curve.
j. Is the industry in a long-run equilibrium?
k. If it is not in long-run equilibrium, what will happen in this industry to restore long-run equilibrium?
l. In long-run equilibrium, what is the firm's profit maximising quantity?

Accepted Answer

The answer of Use the figure above to answer the...

Question 17

At the profit-maximising level of output for a perfectly competitive firm, price equals marginal cost. Which of the following is also true?

Accepted Answer

A)  The difference between total revenue and total cost is the greatest. 
B)  Total revenue equals total cost. 
C)  Average revenue equals average total cost. 
D)  Marginal profit equals marginal cost.

Question 18

Which of the following is a characteristic of a monopoly?

Accepted Answer

A)  It is easy for new firms to enter the market. 
B)  There is only one seller in the market. 
C)  The product is not unique. 
D)  The firm has no control over price.

Question 19

-Refer to Figure 8-7. At price P3, the firm would produce

Accepted Answer

A)  Q2 units. 
B)  Q3 units. 
C)  Q4 units. 
D)  Q5 units.

Question 20

An industry's long-run supply curve shows

Accepted Answer

A)  the relationship in the long run between market price and quantity supplied. 
B)  how the government determines the price of the product. 
C)  how average productivity is changing. 
D)  greater than normal profit.

Exam 8: Firms in Perfectly Compitive Markets