Question 1

Scenario 14-5
A study sponsored by the Food Consumer Safety Board found that consumption of irradiated tomatoes increased the health of laboratory rats. As a result of national press coverage of the report, the demand for irradiated tomatoes increased dramatically. Organic farmers were able to switch from organic production of tomatoes to irradiated production with no additional cost. Assume that the tomato market satisfies all of the assumptions of perfect competition.
-Refer to Scenario 14-5. If the increased production of irradiated tomatoes caused a rise in the marginal transportation costs of moving irradiated tomatoes to market, the

Accepted Answer

A)   short-run market supply curve for irradiated tomatoes would be affected but not the long-run market supply.
B)   long-run market supply curve for irradiated tomatoes would be perfectly elastic.
C)   long-run market supply of irradiated tomatoes would be downward sloping.
D)   long-run market supply of irradiated tomatoes would be upward sloping. D

Question 2

Firms that operate in perfectly competitive markets try to

Accepted Answer

A)   maximize revenues.
B)   maximize profits.
C)   equate marginal revenue with average total cost.
D)   All of the above are correct. B

Question 3

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. B

Question 4

Table 14-4
The table represents a demand curve faced by a firm in a competitive market. 
-Refer to Table 14-4. For this firm, the price is

Accepted Answer

A)   $0.
B)   $5.
C)   $10.
D)   $15.

Question 5

Mr. Rogers sells colored pencils. The colored-pencil industry is competitive. Mr. Rogers hires a business consultant to analyze his company's financial records. The consultant recommends that Mr. Rogers increase his production. The consultant must have concluded that Mr. Roger's

Accepted Answer

A)   total revenues equal his total economic costs.
B)   marginal revenue exceeds his total cost.
C)   marginal revenue exceeds his marginal cost.
D)   marginal cost exceeds his marginal revenue.

Question 6

Table 14-7
Suppose that a firm in a competitive market faces the following revenues and costs: 
-Refer to Table 14-7. If the firm is currently producing 14 units, what would you advise the owners?

Accepted Answer

A)   decrease quantity to 13 units
B)   increase quantity to 15 units
C)   continue to operate at 14 units
D)   increase quantity to 16 units

Question 7

A profit-maximizing firm will shut down in the short run when

Accepted Answer

A)   price is less than average variable cost.
B)   price is less than average total cost.
C)   average revenue is greater than marginal cost.
D)   average revenue is greater than average fixed cost.

Question 8

Table 14-5
The table represents a demand curve faced by a firm in a competitive market. 
-Refer to Table 14-5. For this firm, the average revenue when 14 units are produced and sold is

Accepted Answer

A)   $9.
B)   $11.
C)   $13.
D)   $15.

Question 9

For a firm, marginal revenue minus marginal cost is equal to

Accepted Answer

A)   profit.
B)   average total cost.
C)   change in profit.
D)   change in average revenue.

Question 10

Suppose a firm in a competitive market produces and sells 150 units of output and earns $1,800 in total revenue from the sales. If the firm increases its output to 200 units, the average revenue of the 200th unit will be

Accepted Answer

A)   less than $12.
B)   more than $12.
C)   $12.
D)   Any of the above may be correct depending on the price elasticity of demand for the product.

Question 11

Mrs. Smith operates a business in a competitive market. The current market price is $8.50. At her profit- maximizing level of production, the average variable cost is $8.00, and the average total cost is $8.25. Mrs. Smith should

Accepted Answer

A)   shut down her business in the short run but continue to operate in the long run.
B)   continue to operate in the short run but shut down in the long run.
C)   continue to operate in both the short run and long run.
D)   shut down in both the short run and long run.

Question 12

Table 14-6
The following table presents cost and revenue information for a firm operating in a competitive industry. 
-Refer to Table 14-6. What is the marginal revenue from selling the 3rd unit?

Accepted Answer

A)   $55
B)   $120
C)   $137
D)   $140

Question 13

Which of the following statements best reflects a price-taking firm?

Accepted Answer

A)   The firm can sell only a limited amount of output at the market price before the market price will fall.
B)   If the firm were to charge less than the going price, it would maximize its profits and revenues.
C)   If the firm were to charge more than the going price, it would sell none of its goods.
D)   Both b and c are correct.

Question 14

Table 14-9
Suppose that a firm in a competitive market faces the following revenues and costs: 
-Refer to Table 14-9. If the firm's marginal cost is $5, it should

Accepted Answer

A)   reduce fixed costs by lowering production.
B)   increase production to maximize profit.
C)   decrease production to maximize profit.
D)   maintain its current level of production to maximize profit.

Question 15

A dairy farmer must be able to calculate sunk costs in order to determine how much revenue the farm receives for the typical gallon of milk.

Accepted Answer

A) True 
 B)False

Question 16

A corporation has been steadily losing money on one of its product lines, plastic flamingo lawn ornaments. The firm produces plastic flamingos in a factory that 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; that cost 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 17

Table 14-15 
-Refer to Table 14-15. What is the lowest price at which this firm would operate in the short run?

Accepted Answer

A)   $3.
B)   $4.
C)   $5.
D)   $6.

Question 18

In the long run, when price is greater than average total cost, some firms in a competitive market will choose to enter the market.

Accepted Answer

A) True 
 B)False

Question 19

A firm is currently producing 100 units of output per day. The manager reports to the owner that producing the 100th unit costs the firm $5. The firm can sell the 100th unit for $4.75. The firm should continue to produce 100 units in order to maximize its profits (or minimize its losses).

Accepted Answer

A) True 
 B)False

Question 20

Suppose a firm operates in the short run at a price above its average total cost of production. In the long run the firm should expect

Accepted Answer

A)   new firms to enter the market.
B)   the market price to fall.
C)   its profits to fall.
D)   All of the above are correct.

Exam 14: Firms in Competitive Markets

Firms that operate in perfectly competitive markets try to

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

Table 14-4 The table represents a demand curve faced by a firm in a competitive market. -Refer to Table 14-4. For this firm, the price is

Mr. Rogers sells colored pencils. The colored-pencil industry is competitive. Mr. Rogers hires a business consultant to analyze his company's financial records. The consultant recommends that Mr. Rogers increase his production. The consultant must have concluded that Mr. Roger's

Table 14-7 Suppose that a firm in a competitive market faces the following revenues and costs: -Refer to Table 14-7. If the firm is currently producing 14 units, what would you advise the owners?

A profit-maximizing firm will shut down in the short run when

Table 14-5 The table represents a demand curve faced by a firm in a competitive market. -Refer to Table 14-5. For this firm, the average revenue when 14 units are produced and sold is

For a firm, marginal revenue minus marginal cost is equal to

Suppose a firm in a competitive market produces and sells 150 units of output and earns $1,800 in total revenue from the sales. If the firm increases its output to 200 units, the average revenue of the 200th unit will be

Mrs. Smith operates a business in a competitive market. The current market price is $8.50. At her profit- maximizing level of production, the average variable cost is $8.00, and the average total cost is $8.25. Mrs. Smith should

Table 14-6 The following table presents cost and revenue information for a firm operating in a competitive industry. -Refer to Table 14-6. What is the marginal revenue from selling the 3rd unit?

Which of the following statements best reflects a price-taking firm?

Table 14-9 Suppose that a firm in a competitive market faces the following revenues and costs: -Refer to Table 14-9. If the firm's marginal cost is $5, it should

A dairy farmer must be able to calculate sunk costs in order to determine how much revenue the farm receives for the typical gallon of milk.

Table 14-15 -Refer to Table 14-15. What is the lowest price at which this firm would operate in the short run?

In the long run, when price is greater than average total cost, some firms in a competitive market will choose to enter the market.

A firm is currently producing 100 units of output per day. The manager reports to the owner that producing the 100th unit costs the firm $5. The firm can sell the 100th unit for $4.75. The firm should continue to produce 100 units in order to maximize its profits (or minimize its losses).

Suppose a firm operates in the short run at a price above its average total cost of production. In the long run the firm should expect