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TRUE/FALSE 1. For a firm operating in a perfectly competitive industry, total revenue, marginal revenue, and average revenue are all equal. ANS: F DIF: 2 !F: 1"#1 NA$: Analytic %&': (erfect competition $&(: Average revenue ) *arginal revenue *S': Interpretive 2. For a firm operating in a perfectly competitive industry, marginal revenue and average revenue are equal. ANS: $ DIF: 2 !F: 1"#1 NA$: Analytic %&': (erfect competition $&(: Average revenue ) *arginal revenue *S': Interpretive +. If a firm notices t,at its average revenue equals t,e current mar-et price, t,at firm must .e participating in a competitive mar-et. ANS: F DIF: 2 !F: 1"#1 NA$: Analytic %&': (erfect competition $&(: Average revenue *S': Interpretive ". A profit#ma/imi0ing firm in a competitive mar-et 1ill increase production 1,en average revenue e/ceeds marginal cost. ANS: $ DIF: 2 !F: 1"#1 NA$: Analytic %&': (erfect competition $&(: Average revenue *S': Interpretive 2. 3ecause t,ere are many .uyers and sellers in a perfectly competitive mar-et, no one seller can influence t,e mar-et price. ANS: $ DIF: 1 !F: 1"#1 NA$: Analytic %&': (erfect competition $&(: 'ompetitive mar-ets *S': Definitional 4. Firms operating in perfectly competitive mar-ets try to ma/imi0e profits. ANS: $ DIF: 2 !F: 1"#1 NA$: Analytic %&': (erfect competition $&(: (rofit ma/imi0ation *S': Applicative 5. In competitive mar-ets, firms t,at raise t,eir prices are typically re1arded 1it, larger profits. ANS: F DIF: 2 !F: 1"#1 NA$: Analytic %&': (erfect competition $&(: 'ompetitive mar-ets *S': Interpretive 6. 7,en an individual firm in a competitive mar-et increases its production, it is li-ely t,at t,e mar-et price 1ill fall. ANS: F DIF: 2 !F: 1"#1 NA$: Analytic %&': (erfect competition $&(: 'ompetitive mar-ets *S': Interpretive 8. In a competitive mar-et, firms are una.le to differentiate t,eir product from t,at of ot,er producers. ANS: $ DIF: 1 !F: 1"#1 NA$: Analytic %&': (erfect competition $&(: 'ompetitive mar-ets *S': Interpretive
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Firms in a competitive mar-et are said to .e price ta-ers .ecause t,ere are many sellers in t,e mar-et and t,e goods offered .y t,e firms are very similar if not identical. ANS: $ DIF: 2 !F: 1"#1 NA$: Analytic %&': (erfect competition $&(: 'ompetitive mar-ets *S': Interpretive 11. A firm;s incentive to compare marginal revenue and marginal cost is an application of t,e principle t,at rational people t,in- at t,e margin. ANS: $ DIF: 1 !F: 1"#2 NA$: Analytic %&': (erfect competition $&(: (rofit ma/imi0ation *S': Interpretive 12. 3y comparing t,e marginal revenue and marginal cost from eac, unit produced, a firm in a competitive mar-et can determine t,e profit#ma/imi0ing level of production. ANS: $ DIF: 2 !F: 1"#2 NA$: Analytic %&': (erfect competition $&(: (rofit ma/imi0ation *S': Interpretive 1+. Firms operating in perfectly competitive mar-ets produce an output level 1,ere marginal revenue equals marginal cost. ANS: $ DIF: 2 !F: 1"#2 NA$: Analytic %&': (erfect competition $&(: *arginal revenue *S': Applicative 1". A firm is currently producing 1:: units of output per day. $,e manager reports to t,e o1ner t,at producing t,e 1::t, unit costs t,e firm <2. $,e firm can sell t,e 1::t, unit for <".52. $,e firm s,ould continue to produce 1:: units in order to ma/imi0e its profits =or minimi0e its losses>. ANS: F DIF: 2 !F: 1"#2 NA$: Analytic %&': (erfect competition $&(: (rofit ma/imi0ation *S': Analytical 12. A firm is currently producing 1:: units of output per day. $,e manager reports to t,e o1ner t,at producing t,e 1::t, unit costs t,e firm <2. $,e firm can sell t,e 1::t, unit for <2. $,e firm s,ould continue to produce 1:: units in order to ma/imi0e its profits =or minimi0e its losses>. ANS: $ DIF: 2 !F: 1"#2 NA$: Analytic %&': (erfect competition $&(: (rofit ma/imi0ation *S': Analytical 14. A firm is currently producing 1:: units of output per day. $,e manager reports to t,e o1ner t,at producing t,e 1::t, unit costs t,e firm <2. $,e firm can sell t,e unit for <4. $,e firm s,ould produce more t,an 1:: units in order to ma/imi0e its profits =or minimi0e its losses>. ANS: $ DIF: 2 !F: 1"#2 NA$: Analytic %&': (erfect competition $&(: (rofit ma/imi0ation *S': Analytical 15. A dairy farmer must .e a.le to calculate sun- costs in order to determine ,o1 muc, revenue t,e farm receives for t,e typical gallon of mil-. ANS: F DIF: 1 !F: 1"#2 NA$: Analytic %&': (erfect competition $&(: Sun- costs *S': Interpretive 16. 3ecause not,ing can .e done a.out sun- costs, t,ey are irrelevant to decisions a.out .usiness strategy. ANS: $ DIF: 2 !F: 1"#2 NA$: Analytic %&': (erfect competition $&(: Sun- costs *S': Interpretive 18. A miniature golf course is a good e/ample of 1,ere fi/ed costs .ecome relevant to t,e decision of 1,en to open and 1,en to close for t,e season. ANS: F DIF: 2 !F: 1"#2 NA$: Analytic %&': (erfect competition $&(: Sun- costs *S': Interpretive
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All firms ma/imi0e profits .y producing an output level 1,ere marginal revenue equals marginal costA for firms operating in perfectly competitive industries, ma/imi0ing profits also means producing an output level 1,ere price equals marginal cost. ANS: $ DIF: 2 !F: 1"#2 NA$: Analytic %&': (erfect competition $&(: (rofit ma/imi0ation *S': Interpretive 22. A firm operating in a perfectly competitive industry 1ill continue to operate in t,e s,ort run .ut earn losses if t,e mar-et price is less t,an t,at firmBs average total cost .ut greater t,an t,e firmBs average varia.le cost. ANS: $ DIF: 2 !F: 1"#2 NA$: Analytic %&': (erfect competition $&(: Supply curve *S': Interpretive 2+. A firm operating in a perfectly competitive industry 1ill continue to operate in t,e s,ort run .ut earn losses if t,e mar-et price is less t,an t,at firmBs average varia.le cost. ANS: F DIF: 2 !F: 1"#2 NA$: Analytic %&': (erfect competition $&(: Supply curve *S': Interpretive 2". A firm operating in a perfectly competitive industry 1ill s,ut do1n in t,e s,ort run .ut earn losses if t,e mar-et price is less t,an t,at firmBs average varia.le cost. ANS: $ DIF: 2 !F: 1"#2 NA$: Analytic %&': (erfect competition $&(: Supply curve *S': Interpretive 22. In t,e s,ort run, a firm s,ould e/it t,e industry if its marginal cost e/ceeds its marginal revenue. ANS: F DIF: 2 !F: 1"#2 NA$: Analytic %&': (erfect competition $&(: Supply curve *S': Interpretive 24. In ma-ing a s,ort#run profit#ma/imi0ing production decision, t,e firm must consider .ot, fi/ed and varia.le cost. ANS: F DIF: 2 !F: 1"#2 NA$: Analytic %&': (erfect competition $&(: (rofit ma/imi0ation *S': Interpretive 25. A firm 1ill s,ut do1n in t,e s,ort run if revenue is not sufficient to cover its varia.le costs of production. ANS: $ DIF: 2 !F: 1"#2 NA$: Analytic %&': (erfect competition $&(: S,ut do1n *S': Interpretive 26. Suppose a firm is considering producing 0ero units of output. 7e call t,is s,utting do1n in t,e s,ort run and e/iting an industry in t,e long run. ANS: $ DIF: 2 !F: 1"#2 NA$: Analytic %&': (erfect competition $&(: S,ut do1n *S': Interpretive 28. Suppose a firm is considering producing 0ero units of output. 7e call t,is e/iting an industry in t,e s,ort run and s,utting do1n in t,e long run. ANS: F DIF: 2 !F: 1"#2 NA$: Analytic %&': (erfect competition $&(: S,ut do1n *S': Interpretive +:. A firm 1ill s,ut do1n in t,e s,ort run if revenue is not sufficient to cover all of its fi/ed costs of production. ANS: F DIF: 2 !F: 1"#2 NA$: Analytic %&': (erfect competition $&(: S,ut do1n *S': Interpretive
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+1.
$,e supply curve of a firm in a competitive mar-et is t,e average varia.le cost curve a.ove t,e minimum of marginal cost. ANS: F DIF: 2 !F: 1"#2 NA$: Analytic %&': (erfect competition $&(: Supply curve *S': Interpretive +2. 7,en a profit#ma/imi0ing firm in a competitive mar-et e/periences rising prices, it 1ill respond 1it, an increase in production. ANS: $ DIF: 2 !F: 1"#2 NA$: Analytic %&': (erfect competition $&(: (rofit ma/imi0ation *S': Interpretive ++. $,e marginal firm in a competitive mar-et 1ill earn 0ero economic profit in t,e long run. ANS: $ DIF: 2 !F: 1"#2 NA$: Analytic %&': (erfect competition $&(: !conomic profit *S': Interpretive +". A profit#ma/imi0ing firm in a competitive mar-et 1ill earn 0ero accounting profits in t,e long run. ANS: F DIF: 2 !F: 1"#2 NA$: Analytic %&': (erfect competition $&(: Accounting profit *S': Interpretive +2. In t,e long run, 1,en price is less t,an average total cost for all possi.le levels of production, a firm in a competitive mar-et 1ill c,oose to e/it =or not enter> t,e mar-et. ANS: $ DIF: 2 !F: 1"#2 NA$: Analytic %&': (erfect competition $&(: (rofit ma/imi0ation *S': Interpretive +4. In t,e long run, 1,en price is greater t,an average total cost, some firms in a competitive mar-et 1ill c,oose to enter t,e mar-et. ANS: $ DIF: 2 !F: 1"#2 NA$: Analytic %&': (erfect competition $&(: (rofit ma/imi0ation *S': Interpretive +5. In t,e long run, a firm s,ould e/it t,e industry if its total costs e/ceed its total revenues. ANS: $ DIF: 2 !F: 1"#2 NA$: Analytic %&': (erfect competition $&(: (rofit ma/imi0ation *S': Interpretive +6. 7,en a resource used in t,e production of a good sold in a competitive mar-et is availa.le in only limited quantities, t,e long#run supply curve is li-ely to .e up1ard sloping. ANS: $ DIF: 2 !F: 1"#+ NA$: Analytic %&': (erfect competition $&(: Supply curve *S': Interpretive +8. A firm operating in a perfectly competitive industry 1ill continue to operate if it earns 0ero economic profits .ecause it is li-ely to .e earning positive accounting profits. ANS: $ DIF: 2 !F: 1"#+ NA$: Analytic %&': (erfect competition $&(: 'ompetitive mar-ets *S': Interpretive ":. A firm operating in a perfectly competitive industry 1ill s,ut do1n in t,e s,ort run if its economic profits fall to 0ero .ecause it is li-ely to .e earning negative accounting profits. ANS: F DIF: 2 !F: 1"#+ NA$: Analytic %&': (erfect competition $&(: 'ompetitive mar-ets *S': Interpretive
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A firm operating in a perfectly competitive mar-et may earn positive, negative, or 0ero economic profit in t,e long run. ANS: F DIF: 2 !F: 1"#+ NA$: Analytic %&': (erfect competition $&(: %ong#run supply curve *S': Interpretive "2. A firm operating in a perfectly competitive mar-et may earn positive, negative, or 0ero economic profit in t,e s,ort run. ANS: $ DIF: 2 !F: 1"#+ NA$: Analytic %&': (erfect competition $&(: %ong#run supply curve *S': Interpretive "+. A firm operating in a perfectly competitive mar-et earns 0ero economic profit in t,e long run .ut remains in .usiness .ecause t,e firmBs revenues cover t,e .usiness o1nersB opportunity costs. ANS: $ DIF: 2 !F: 1"#+ NA$: Analytic %&': (erfect competition $&(: Cero#profit condition *S': Interpretive "". A competitive mar-et 1ill typically e/perience entry and e/it until accounting profits are 0ero. ANS: F DIF: 2 !F: 1"#+ NA$: Analytic %&': (erfect competition $&(: Cero#profit condition *S': Interpretive "2. $,e long#run equili.rium in a competitive mar-et c,aracteri0ed .y firms 1it, identical costs is generally c,aracteri0ed .y firms operating at efficient scale. ANS: $ DIF: 2 !F: 1"#+ NA$: Analytic %&': (erfect competition $&(: Cero#profit condition *S': Interpretive "4. In t,e long run, a competitive mar-et 1it, 1,::: identical firms 1ill e/perience an equili.rium price equal to t,e minimum of eac, firm;s average total cost. ANS: $ DIF: 2 !F: 1"#+ NA$: Analytic %&': (erfect competition $&(: Cero#profit condition *S': Interpretive "5. In a long#run equili.rium 1,ere firms ,ave identical costs, it is possi.le t,at some firms in a competitive mar-et are ma-ing a positive economic profit. ANS: F DIF: 2 !F: 1"#+ NA$: Analytic %&': (erfect competition $&(: Cero#profit condition *S': Interpretive "6. 7,en economic profits are 0ero in equili.rium, t,e firm;s revenue must .e sufficient to cover all opportunity costs. ANS: $ DIF: 2 !F: 1"#+ NA$: Analytic %&': (erfect competition $&(: Cero#profit condition *S': Interpretive "8. $,e s,ort#run supply curve in a competitive mar-et must .e more elastic t,an t,e long#run supply curve. ANS: F DIF: 2 !F: 1"#+ NA$: Analytic %&': (erfect competition $&(: Supply curve *S': Interpretive 2:. $,e long#run supply curve in a competitive mar-et is more elastic t,an t,e s,ort#run supply curve. ANS: $ DIF: 2 !F: 1"#+ NA$: Analytic %&': (erfect competition $&(: Supply curve *S': Interpretive
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1.
SHORT ANSWER
ANS: Average revenue is total revenue divided .y t,e quantity of output. *arginal revenue is t,e c,ange in total revenue from t,e sale of eac, additional unit of output. *arginal revenue is used to determine t,e profit#ma/imi0ing level of production, and average revenue is used to ,elp determine t,e level of profits. Note t,at for all firms, price equals average revenue .ecause A E=(/F>9FE(. 3ut only for a firm operating in a perfectly competitive industry does price also equal marginal revenue. DIF: $&(: 2 (rice !F: 1"#1 *S': Definitional NA$: Analytic %&': (erfect competition
2. %ist and descri.e t,e c,aracteristics of a perfectly competitive mar-et. ANS: $,ere are many .uyers and sellers in t,e mar-et. $,e goods offered .y t,e various sellers are largely t,e same. Firms can freely enter or e/it t,e mar-et. DIF: $&(: +. 2 !F: 'ompetitive mar-ets 1"#1 NA$: Analytic *S': Definitional %&': (erfect competition
7,y 1ould a firm in a perfectly competitive mar-et al1ays c,oose to set its price equal to t,e current mar-et priceD If a firm set its price .elo1 t,e current mar-et price, 1,at effect 1ould t,is ,ave on t,e mar-etD
ANS: $,e firm could not sell any more of its product at a lo1er price t,an it could sell at t,e mar-et price. As a result, it 1ould needlessly forgo revenue if it set a price .elo1 t,e mar-et price. If t,e firm set a ,ig,er price, it 1ould not sell anyt,ing at all .ecause a competitive mar-et ,as many sellers 1,o 1ould supply t,e product at t,e mar-et price. DIF: $&(: ". 2 !F: (rofit ma/imi0ation 1"#1 NA$: Analytic *S': Analytical %&': (erfect competition
Gse a grap, to demonstrate t,e circumstances t,at 1ould prevail in a competitive mar-et 1,ere firms are earning economic profits. 'an t,is scenario .e maintained in t,e long runD !/plain your ans1er.
ANS: In a competitive mar-et 1,ere firms are earning economic profits, ne1 firms 1ill ,ave an incentive to enter t,e mar-et. $,is entry 1ill e/pand t,e num.er of firms, increase t,e quantity of t,e good supplied, and drive do1n prices and profits. !ntry 1ill cease once firms are producing t,e output level 1,ere price equals t,e minimum of t,e average total cost curve, meaning t,at eac, firm earns 0ero economic profits in t,e long run.
DIF: $&(:
1"#2
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!/plain ,o1 a firm in a competitive mar-et identifies t,e profit#ma/imi0ing level of production. 7,en s,ould t,e firm raise production, and 1,en s,ould t,e firm lo1er productionD
ANS: $,e firm selects t,e level of output at 1,ic, marginal revenue is equal to marginal cost. If * H *', profit 1ill increase if t,e firm increases F. If * I *', profit 1ill increase if t,e firm decreases F. DIF: $&(: 4. 2 !F: (rofit ma/imi0ation 1"#2 NA$: Analytic *S': Analytical %&': (erfect competition
Ne1s reports from t,e 1estern Gnited States occasionally report incidents of cattle ranc,ers slaug,tering a large num.er of ne1.orn calves and .urying t,em in mass graves rat,er t,an transporting t,em to mar-ets. Assuming t,at t,is is rational .e,avior .y profit#ma/imi0ing Jfirms,J e/plain 1,at economic factors may influence suc, .e,avior.
ANS: If t,e selling price is not sufficient to cover t,e varia.le cost of sending t,e calves to mar-et, t,is =potentially emotionally upsetting> .e,avior ma-es economic sense. DIF: $&(: 5. 2 !F: (rofit ma/imi0ation 1"#2 NA$: Analytic *S': Analytical %&': (erfect competition
Gse a grap, to demonstrate t,e circumstances t,at 1ould prevail in a perfectly competitive mar-et 1,ere firms are e/periencing economic losses. Identify costs, revenue, and t,e economic losses on your grap,. Gsing your grap,, determine 1,et,er an individual firm 1ill s,ut do1n in t,e s,ort run, or c,oose to remain in t,e mar-et. !/plain your ans1er.
ANS: $,e losses and revenues are identified on t,e individual firm;s grap,. $otal cost is equal to t,e sum of t,e losses and revenue =.ecause profit9lossE$ #$', so $'E$ Kprofit9loss>. $,e decision a.out 1,et,er t,is firm s,uts do1n or remains in t,e mar-et depends upon t,e position of average varia.le cost. If average varia.le cost is .elo1 ( : at output level F:, t,e firm 1ill remain in t,e mar-et. If average varia.le cost is a.ove (: at output level F: t,e firm 1ill s,ut do1n in t,e s,ort run.
DIF: $&(: 6.
1"#2
At its current level of production a profit#ma/imi0ing firm in a competitive mar-et receives <12.2: for eac, unit it produces and faces an average total cost of <1:. At t,e mar-et price of <12.2: per unit, t,e firm;s marginal cost curve crosses t,e marginal revenue curve at an output level of 1,::: units. 7,at is t,e firm;s current profitD 7,at is li-ely to occur in t,is mar-et and 1,yD
ANS: <2,2::A firms are li-ely to enter t,is mar-et since e/isting firms are earning economic profits. DIF: $&(: 2 (rofit !F: 1"#2 *S': Analytical NA$: Analytic %&': (erfect competition
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ANS: 1> Some resource used in production may .e availa.le only in limited quantities. 2> Firms may ,ave different cost structures. $,e e/ample provided in t,e te/t for t,e first reason is t,e mar-et for farm products. As more people .ecome farmers, t,e price of land is .id up since its supply is limited. As t,e price of farm land is .id up, t,e costs to all farmers in t,e mar-et rise. $,e e/ample used to support t,e second reason is t,e mar-et for painters. Anyone can enter t,e mar-et for painting services, .ut not everyone ,as t,e same costs .ecause some painters 1or- faster t,an ot,ers. DIF: $&(: 1:. + Supply curve !F: 1"#+ NA$: Analytic *S': Interpretive %&': (erfect competition
If identical firms t,at remain in a competitive mar-et over t,e long run ma-e 0ero economic profit, 1,y do t,ese firms c,oose to remain in t,e mar-etD
ANS: 3ecause a normal rate of return on t,eir investment is included as part of t,e opportunity cost of production. DIF: $&(: 2 !F: !conomic profit 1"#+ *S': NA$: Analytic Interpretive %&': (erfect competition
$,e analysis of competitive firms s,eds lig,t on t,e decisions t,at lie .e,ind t,e a. demand curve. .. supply curve. c. 1ay firms ma-e pricing decisions in t,e not#for#profit sector of t,e economy. d. 1ay financial mar-ets set interest rates. 1 !F: $&(: 1"#: NA$: Analytic 'ompetitive mar-et
For any competitive mar-et, t,e supply curve is closely related to t,e a. preferences of consumers 1,o purc,ase products in t,at mar-et. .. income ta/ rates of consumers in t,at mar-et. c. firmsB costs of production in t,at mar-et. d. interest rates on government .onds. 1 !F: $&(: 1"#: NA$: Analytic 'ompetitive mar-et
Suppose t,at firms in eac, of t,e t1o mar-ets listed .elo1 1ere to increase t,eir prices .y 2: percent. 7,ic, pair represents t,e e/ample 1,ere customers 1ould decrease t,eir quantity purc,ased dramatically in one mar-et and only slig,tly in t,e ot,er mar-et due to differences in mar-et structureD a. corn and soy.eans .. gasoline and restaurants c. 1ater and ca.le television d. spiral note.oo-s and college te/t.oo-s
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7,ic, of t,e follo1ing is not a c,aracteristic of a competitive mar-etD a. 3uyers and sellers are price ta-ers. .. !ac, firm sells a virtually identical product. c. Free entry is limited. d. !ac, firm c,ooses an output level t,at ma/imi0es profits. 2 !F: $&(: 1"#1 NA$: Analytic 'ompetitive mar-ets
In a perfectly competitive mar-et, a. no one seller can influence t,e price of t,e product. .. price e/ceeds marginal revenue for eac, unit sold. c. average revenue e/ceeds marginal revenue for eac, unit sold. d. administrative .arriers can ma-e it difficult for firms to enter an industry. 1 !F: $&(: 1"#1 NA$: Analytic 'ompetitive mar-ets
7,o is a price ta-er in a competitive mar-etD a. .uyers only .. sellers only c. .ot, .uyers and sellers d. neit,er .uyers nor sellers 1 !F: $&(: 1"#1 NA$: Analytic 'ompetitive mar-ets
'ompetitive mar-ets are c,aracteri0ed .y a. a small num.er of .uyers and sellers. .. unique products. c. t,e interdependence of firms. d. free entry and e/it .y firms. 1 !F: $&(: 1"#1 NA$: Analytic 'ompetitive mar-ets
ANS: D DIF: %&': (erfect competition *S': Definitional 4. =i> =ii> =iii>
A mar-et is competitive if firms ,ave t,e fle/i.ility to price t,eir o1n product. eac, .uyer is small compared to t,e mar-et. eac, seller is small compared to t,e mar-et.
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a. .. c. d.
7,en a firm ,as little a.ility to influence mar-et prices it is said to .e in a a. competitive mar-et. .. strategic mar-et. c. t,in mar-et. d. po1er mar-et. 1 !F: $&(: 1"#1 NA$: Analytic 'ompetitive mar-ets
In a competitive mar-et, t,e actions of any single .uyer or seller 1ill a. ,ave a negligi.le impact on t,e mar-et price. .. ,ave little effect on mar-et equili.rium quantity .ut 1ill affect mar-et equili.rium price. c. affect marginal revenue and average revenue .ut not price. d. adversely affect t,e profita.ility of more t,an one firm in t,e mar-et. 2 !F: $&(: 1"#1 NA$: Analytic 'ompetitive mar-ets
3ecause t,e goods offered for sale in a competitive mar-et are largely t,e same, a. t,ere 1ill .e fe1 sellers in t,e mar-et. .. t,ere 1ill .e fe1 .uyers in t,e mar-et. c. only a fe1 .uyers 1ill ,ave mar-et po1er. d. sellers 1ill ,ave little reason to c,arge less t,an t,e going mar-et price. 2 !F: $&(: 1"#1 NA$: Analytic 'ompetitive mar-ets
7,ic, of t,e follo1ing is not a c,aracteristic of a perfectly competitive mar-etD a. Firms are price ta-ers. .. Firms ,ave difficulty entering t,e mar-et. c. $,ere are many sellers in t,e mar-et. d. Loods offered for sale are largely t,e same. 2 !F: $&(: 1"#1 NA$: Analytic 'ompetitive mar-ets
7,ic, of t,e follo1ing is not a c,aracteristic of a perfectly competitive mar-etD a. Firms are price ta-ers. .. Firms can freely enter t,e mar-et. c. *any firms ,ave mar-et po1er. d. Loods offered for sale are largely t,e same. 2 !F: $&(: 1"#1 NA$: Analytic 'ompetitive mar-ets
Free entry means t,at a. t,e government pays any entry costs for individual firms. .. no legal .arriers prevent a firm from entering an industry. c. a firm;s marginal cost is 0ero. d. a firm ,as no fi/ed costs in t,e s,ort run.
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7,ic, of t,e follo1ing industries is most li-ely to e/,i.it t,e c,aracteristic of free entryD a. nuclear po1er .. municipal 1ater and se1er c. dairy farming d. airport security 2 !F: $&(: 1"#1 NA$: Analytic 'ompetitive mar-ets
7,en .uyers in a competitive mar-et ta-e t,e selling price as given, t,ey are said to .e a. mar-et entrants. .. monopolists. c. free riders. d. price ta-ers. 1 !F: $&(: 1"#1 NA$: Analytic 'ompetitive mar-ets
7,en firms are said to .e price ta-ers, it implies t,at if a firm raises its price, a. .uyers 1ill go else1,ere. .. .uyers 1ill pay t,e ,ig,er price in t,e s,ort run. c. competitors 1ill also raise t,eir prices. d. firms in t,e industry 1ill e/ercise mar-et po1er. 2 !F: $&(: 1"#1 NA$: Analytic 'ompetitive mar-ets
7,ic, of t,e follo1ing statements .est reflects a price#ta-ing firmD a. If t,e firm 1ere to c,arge more t,an t,e going price, it 1ould sell none of its goods. .. $,e firm ,as an incentive to c,arge less t,an t,e mar-et price to earn ,ig,er revenue. c. $,e firm can sell only a limited amount of output at t,e mar-et price .efore t,e mar-et price 1ill fall. d. (rice#ta-ing firms ma/imi0e profits .y c,arging a price a.ove marginal cost. 2 !F: $&(: 1"#1 NA$: Analytic 'ompetitive mar-ets
7,y does a firm in a competitive industry c,arge t,e mar-et priceD a. If a firm c,arges less t,an t,e mar-et price, it loses potential revenue. .. If a firm c,arges more t,an t,e mar-et price, it loses all its customers to ot,er firms. c. $,e firm can sell as many units of output as it 1ant to at t,e mar-et price. d. All of t,e a.ove are correct. 2 !F: $&(: 1"#1 NA$: Analytic 'ompetitive mar-ets
In a competitive mar-et, no single producer can influence t,e mar-et price .ecause a. many ot,er sellers are offering a product t,at is essentially identical. .. consumers ,ave more influence over t,e mar-et price t,an producers do. c. government intervention prevents firms from influencing price. d. producers agree not to c,ange t,e price. 2 !F: $&(: 1"#1 NA$: Analytic 'ompetitive mar-ets
152
18.
2:. 7,ic, of t,e follo1ing c,aracteristics of competitive mar-ets is necessary for firms to .e price ta-ersD =i> $,ere are many sellers. =ii> Firms can freely enter or e/it t,e mar-et. =iii> Loods offered for sale are largely t,e same. a. .. c. d. =i> and =ii> only =i> and =iii> only =ii> only =i>, =ii>, and =iii> 2 !F: $&(: 1"#1 NA$: Analytic 'ompetitive mar-ets
Suppose a firm in a competitive mar-et reduces its output .y 2: percent. As a result, t,e price of its output is li-ely to a. increase. .. remain unc,anged. c. decrease .y less t,an 2: percent. d. decrease .y more t,an 2: percent. 2 !F: $&(: 1"#1 NA$: Analytic 'ompetitive mar-ets
$,e 7,eeler 7,eat Farm sells 1,eat to a grain .ro-er in Seattle, 7as,ington. Since t,e mar-et for 1,eat is generally considered to .e competitive, t,e 7,eeler Farm does not a. c,oose t,e quantity of 1,eat to produce. .. c,oose t,e price at 1,ic, it sells its 1,eat. c. ,ave any fi/ed costs of production. d. set marginal revenue equal to marginal cost to ma/imi0e profit. 2 !F: $&(: 1"#1 NA$: Analytic 'ompetitive mar-ets
In a competitive mar-et, a. no single .uyer or seller can influence t,e price of t,e product. .. t,ere are only a small num.er of sellers. c. t,e goods offered .y t,e different sellers are unique. d. accounting profit is driven to 0ero as firms freely enter and e/it t,e mar-et. 1 !F: $&(: 1"#1 NA$: Analytic 'ompetitive mar-ets
7,ic, of t,e follo1ing statements regarding a competitive mar-et is not correctD a. $,ere are many .uyers and many sellers in t,e mar-et. .. 3ecause of firm location or product differences, some firms can c,arge a ,ig,er price t,an ot,er firms and still maintain t,eir sales volume. c. (rice and average revenue are equal. d. (rice and marginal revenue are equal.
15+
7,ic, of t,e follo1ing statements regarding a competitive mar-et is not correctD a. $,ere are many .uyers and many sellers in t,e mar-et. .. Firms can freely enter or e/it t,e mar-et. c. (rice equals average revenue. d. (rice e/ceeds marginal revenue. 2 !F: $&(: 1"#1 NA$: Analytic 'ompetitive mar-ets
&ne of t,e defining c,aracteristics of a perfectly competitive mar-et is a. a small num.er of sellers. .. a large num.er of .uyers and a small num.er of sellers. c. a similar product. d. significant advertising .y firms to promote t,eir products. 2 !F: $&(: 1"#1 NA$: Analytic 'ompetitive mar-ets
7,ic, of t,e follo1ing firms is t,e closest to .eing a perfectly competitive firmD a. a ,ot dog vendor in Ne1 Mor.. *icrosoft 'orporation c. Ford *otor 'ompany d. t,e campus .oo-store 1 !F: $&(: 1"#1 NA$: Analytic 'ompetitive mar-ets
Firms t,at operate in perfectly competitive mar-ets try to a. ma/imi0e revenues. .. ma/imi0e profits. c. equate marginal revenue 1it, average total cost. d. 3ot, . and c are correct. 2 !F: $&(: 1"#1 NA$: Analytic 'ompetitive mar-ets
ANS: 3 DIF: %&': (erfect competition *S': Interpretive Table 14-1 &'antit( : 1 2 + " 28. Tota) Reven'e <: <5 <1" <21 <26
Re*er to Ta+)e 14"1, For a firm operating in a competitive mar-et, t,e price is a. <:. .. <5. c. <1". d. <21. 2 !F: $&(: 1"#1 NA$: Analytic 'ompetitive mar-ets
15"
+:.
Re*er to Ta+)e 14"1, For a firm operating in a competitive mar-et, t,e average revenue is a. <21. .. <1". c. <5. d. <:. 2 !F: $&(: 1"#1 NA$: Analytic Average revenue
ANS: ' DIF: %&': (erfect competition *S': Applicative Table 14-2 &'antit( : 1 2 + " 2 4 5 6 8 +2. $ri e <1+ <1+ <1+ <1+ <1+ <1+ <1+ <1+ <1+ <1+
Re*er to Ta+)e 14"-. $,e price and quantity relations,ip in t,e ta.le is most li-ely t,at faced .y a firm in a a. monopoly. .. concentrated mar-et. c. competitive mar-et. d. strategic mar-et. 2 !F: $&(: 1"#1 NA$: Analytic 'ompetitive mar-ets
Re*er to Ta+)e 14"-. &ver 1,ic, range of output is average revenue equal to priceD a. 1 to 2 .. + to 5 c. 2 to 8 d. Average revenue is equal to price over t,e entire range of output. 2 !F: $&(: 1"#1 NA$: Analytic Average revenue
Re*er to Ta+)e 14"-. &ver 1,at range of output is marginal revenue decliningD a. 1 to 4 .. + to 5 c. 5 to 8 d. NoneA marginal revenue is constant over t,e entire range of output. 2 !F: $&(: 1"#1 NA$: Analytic *arginal revenue
152
Firms operating in competitive mar-ets produce output levels 1,ere marginal revenue equals a. price. .. average revenue. c. total revenue divided .y output. d. All of t,e a.ove are correct. 2 !F: $&(: 1"#1 NA$: Analytic *arginal revenue ) Average revenue
For a competitive firm, a. total revenue equals average revenue. .. total revenue equals marginal revenue. c. total cost equals marginal revenue. d. average revenue equals marginal revenue. 1 !F: $&(: 1"#1 NA$: Analytic *arginal revenue ) Average revenue
Suppose t,at a firm operating in perfectly competitive mar-et sells 1:: units of output. Its total revenues from t,e sale are <2::. 7,ic, of t,e follo1ing statements is correctD i> *arginal revenue equals <2. ii> Average revenue equals <2. iii> (rice equals <2. a. .. c. d. i> only iii> only i> and ii> only i>, ii>, and iii> 2 !F: $&(: 1"#1 NA$: Analytic *arginal revenue ) Average revenue
Suppose t,at a firm operating in perfectly competitive mar-et sells 2:: units of output at a price of <+ eac,. 7,ic, of t,e follo1ing statements is correctD i> *arginal revenue equals <+. ii> Average revenue equals <4::. iii> Average revenue e/ceeds marginal revenue, .ut 1e donBt -no1 .y ,o1 muc,. a. .. c. d. i> only iii> only i> and ii> only i>, ii>, and iii> 2 !F: $&(: 1"#1 NA$: Analytic *arginal revenue ) Average revenue
154
":.
Suppose t,at a firm operating in perfectly competitive mar-et sells +:: units of output at a price of <+ eac,. 7,ic, of t,e follo1ing statements is correctD i> *arginal revenue equals <+. ii> Average revenue equals <1::. iii> $otal revenue equals <+::. a. .. c. d. i> only iii> only i> and ii> only i>, ii>, and iii> 2 !F: $&(: 1"#1 NA$: Analytic *arginal revenue ) Average revenue
Suppose t,at a firm operating in perfectly competitive mar-et sells ":: units of output at a price of <" eac,. 7,ic, of t,e follo1ing statements is correctD i> *arginal revenue equals <". ii> Average revenue equals <1::. iii> $otal revenue equals <1,4::. a. .. c. d. i> only iii> only i> and iii> only i>, ii>, and iii> 2 !F: $&(: 1"#1 NA$: Analytic *arginal revenue ) Average revenue
7,ic, of t,e follo1ing statements is correctD a. For all firms, marginal revenue equals t,e price of t,e good. .. &nly for competitive firms does average revenue equal t,e price of t,e good. c. *arginal revenue can .e calculated as total revenue divided .y t,e quantity sold. d. &nly for competitive firms does average revenue equal marginal revenue. + !F: $&(: 1"#1 NA$: Analytic Average revenue ) *arginal revenue
For a firm operating in a competitive industry, 1,ic, of t,e follo1ing statements is not correctD a. (rice equals average revenue. .. (rice equals marginal revenue. c. $otal revenue is constant. d. *arginal revenue is constant. 2 !F: $&(: 1"#1 NA$: Analytic *arginal revenue ) Average revenue
If A3' 'ompany sells its product in a competitive mar-et, t,en a. t,e price of t,at product depends on t,e quantity of t,e product t,at A3' 'ompany produces and sells since A3' 'ompanyBs demand curve is do1n1ard sloping. .. A3' 'ompany;s total revenue must .e proportional to its quantity of output. c. A3' 'ompany;s total cost must .e a multiple of its quantity of output. d. A3' 'ompany;s total revenue must .e equal to its average revenue. 2 !F: $&(: 1"#1 $otal revenue NA$: Analytic
155
For a firm in a perfectly competitive mar-et, t,e price of t,e good is al1ays a. equal to marginal revenue. .. equal to total revenue. c. greater t,an average revenue. d. equal to t,e firmBs efficient scale of output. 1 !F: $&(: 1"#1 NA$: Analytic *arginal revenue
If a firm in a perfectly competitive mar-et triples t,e num.er of units of output sold, t,en total revenue 1ill a. more t,an triple. .. less t,an triple. c. e/actly triple. d. Any of t,e a.ove may .e true depending on t,e firmBs la.or productivity. 2 !F: $&(: 1"#1 $otal revenue NA$: Analytic
7,en a competitive firm dou.les t,e amount of output it sells, its a. total revenue dou.les. .. average revenue dou.les. c. marginal revenue dou.les. d. profits must increase. 2 !F: $&(: 1"#1 $otal revenue NA$: Analytic
Suppose a firm in a competitive mar-et produces and sells 6 units of output and ,as a marginal revenue of <6.::. 7,at 1ould .e t,e firm;s total revenue if it instead produced and sold " units of outputD a. <" .. <6 c. <+2 d. <4" 2 !F: $&(: 1"#1 NA$: Analytic *arginal revenue
Suppose a firm in a competitive mar-et received <1,::: in total revenue and ,ad a marginal revenue of <1: for t,e last unit produced and sold. 7,at is t,e average revenue per unit, and ,o1 many units 1ere soldD a. <2 and 2: units .. <2 and 1:: units c. <1: and 2: units d. <1: and 1:: units 2 !F: $&(: 1"#1 NA$: Analytic Average revenue
156
21.
Suppose t,at in a competitive mar-et t,e equili.rium price is <2.2:. 7,at is marginal revenue for t,e last unit sold .y t,e typical firm in t,is mar-etD a. less t,an <2.2: .. more t,an <2.2: c. e/actly <2.2: d. $,e marginal revenue cannot .e determined 1it,out -no1ing t,e actual quantity sold .y t,e typical firm. 1 !F: $&(: 1"#1 NA$: Analytic *arginal revenue
7,ic, of t,e follo1ing statements regarding a competitive firm is correctD a. Since demand is do1n1ard sloping, if a firm increases its level of output, t,e firm 1ill ,ave to c,arge a lo1er price to sell t,e additional output. .. If a firm raises its price, t,e firm may .e a.le to increase its total revenue even t,oug, it 1ill sell fe1er units. c. 3y lo1ering its price .elo1 t,e mar-et price, t,e firm 1ill .enefit from .eing a.le to sell more units at t,e lo1er price t,an it could ,ave sold .y c,arging t,e mar-et price. d. For all firms, average revenue equals t,e price of t,e good. 2 !F: $&(: 1"#1 NA$: Analytic Average revenue
Table 14-3 $,e follo1ing ta.le presents cost and revenue information for SoperBs (ort Nineyard. COSTS Tota) Cost <1:: <12: <2:2 <225 <+15 <+62 <"42 <242 <462 RE.ENUES Tota) $ri e Reven'e <12: <12: <12: <12: <12: <12: <12: <12: <12:
Mar0ina) Cost ##
Mar0ina) Reven'e ##
Re*er to Ta+)e 14"2. 7,at is t,e total revenue from selling 5 unitsD a. <12: .. <"8: c. <242 d. <6": 2 !F: $&(: 1"#1 $otal revenue NA$: Analytic
158
Re*er to Ta+)e 14"2. 7,at is t,e marginal revenue from selling t,e +rd unitD a. <22 .. <12: c. <1+5 d. <1": 2 !F: $&(: 1"#1 NA$: Analytic *arginal revenue
Re*er to Ta+)e 14"2. 7,at is t,e average revenue 1,en " units are soldD a. <4: .. <12: c. <122 d. <185 2 !F: $&(: 1"#1 NA$: Analytic Average revenue
If t,e mar-et elasticity of demand for potatoes is #:.+ in a perfectly competitive mar-et, t,en t,e individual farmer;s elasticity of demand a. 1ill also .e #:.+. .. depends on ,o1 large a crop t,e farmer produces. c. 1ill range .et1een #:.+ and #1.:. d. 1ill .e infinite. + !F: $&(: 1"#1 !lasticity NA$: Analytic *S': Analytical
Se !- " Firms in Competitive Markets "$ro*it Ma3imi4ation an/ the Competitive Firm5s S'pp)( C'rve
MULT#$LE CHO#CE 1. If a competitive firm is currently producing a level of output at 1,ic, marginal revenue e/ceeds marginal cost, t,en a. a one#unit increase in output 1ill increase t,e firm;s profit. .. a one#unit decrease in output 1ill increase t,e firm;s profit. c. total revenue e/ceeds total cost. d. total cost e/ceeds total revenue. 2 !F: $&(: 1"#2 NA$: Analytic 'ompetitive firms
If a competitive firm is currently producing a level of output at 1,ic, marginal cost e/ceeds marginal revenue, t,en a. a one#unit increase in output 1ill increase t,e firm;s profit. .. a one#unit decrease in output 1ill increase t,e firm;s profit. c. total revenue e/ceeds total cost. d. total cost e/ceeds total revenue.
16:
If a competitive firm is currently producing a level of output at 1,ic, marginal cost e/ceeds marginal revenue, t,en a. average revenue e/ceeds marginal cost. .. t,e firm is earning a positive profit. c. decreasing output 1ould increase t,e firm;s profit. d. All of t,e a.ove are correct. 2 !F: $&(: 1"#2 NA$: Analytic 'ompetitive firms
ANS: ' DIF: %&': (erfect competition *S': Analytical ". =i> =ii> =iii>
'omparing marginal revenue to marginal cost reveals t,e contri.ution of t,e last unit of production to total profit. is ,elpful in ma-ing profit#ma/imi0ing production decisions. tells a firm 1,et,er its fi/ed costs are too ,ig,. a. .. c. d. =i> only =i> and =ii> only =ii> and =iii> only =i> and =iii> only 2 !F: $&(: 1"#2 NA$: Analytic 'ompetitive firms
At t,e profit#ma/imi0ing level of output, a. marginal revenue equals average total cost. .. marginal revenue equals average varia.le cost. c. marginal revenue equals marginal cost. d. average revenue equals average total cost. 2 !F: $&(: 1"#2 NA$: Analytic 'ompetitive firms
$,e intersection of a firm;s marginal revenue and marginal cost curves determines t,e level of output at 1,ic, a. total revenue is equal to varia.le cost. .. total revenue is equal to fi/ed cost. c. total revenue is equal to total cost. d. profit is ma/imi0ed. 2 !F: $&(: 1"#2 NA$: Analytic 'ompetitive firms
For a certain firm, t,e 1::t, unit of output t,at t,e firm produces ,as a marginal revenue of <1: and a marginal cost of <5. It follo1s t,at t,e a. production of t,e 1::t, unit of output increases t,e firm;s profit .y <+. .. production of t,e 1::t, unit of output increases t,e firm;s average total cost .y <5. c. firm;s profit#ma/imi0ing level of output is less t,an 1:: units. d. production of t,e 88t, unit of output must increase t,e firmBs profit .y less t,an <+. 2 !F: $&(: 1"#2 NA$: Analytic 'ompetitive firms
161
A certain competitive firm sells its output for <2: per unit. $,e 2:t, unit of output t,at t,e firm produces ,as a marginal cost of <22. 7,ic, of follo1ing is not necessarily trueD a. (roduction of t,e 2:t, unit of output increases t,e firm;s total revenue .y <2:. .. (roduction of t,e 2:t, unit of output increases t,e firm;s total cost .y <22. c. (roduction of t,e 2:t, unit of output decreases t,e firm;s profit .y <2. d. (roduction of t,e 2:t, unit of output increases t,e firmBs average varia.le cost .y <:."". 2 !F: $&(: 1"#2 NA$: Analytic 'ompetitive firms
$,e 7,eeler 7,eat Farm sells 1,eat to a grain .ro-er in Seattle, 7as,ington. Since t,e mar-et for 1,eat is generally considered to .e competitive, t,e 7,eeler 7,eat Farm ma/imi0es its profit .y c,oosing a. to produce t,e quantity at 1,ic, average varia.le cost is minimi0ed. .. to produce t,e quantity at 1,ic, average fi/ed cost is minimi0ed. c. to sell its 1,eat at a price 1,ere marginal cost is equal to average total cost. d. t,e quantity at 1,ic, mar-et price is equal to t,e farm;s marginal cost of production. 2 !F: $&(: 1"#2 NA$: Analytic 'ompetitive firms
If a competitive firm is =i> selling 1,::: units of its product at a price of <8 per unit and =ii> earning a positive profit, t,en a. its total cost is less t,an <8,:::. .. its marginal revenue is less t,an <8. c. its average revenue is greater t,an <8. d. t,e firm cannot .e a competitive firm since competitive firms can only earn 0ero profit. 2 !F: $&(: 1"#2 NA$: Analytic 'ompetitive firms
',arlene sells cotton candy. $,e cotton candy industry is competitive. ',arlene ,ires a .usiness consultant to analy0e ,er companyBs financial records. $,e consultant recommends t,at ',arlene increase ,er production. $,e consultant must ,ave concluded t,at ',arleneBs a. total revenues e/ceed ,er total accounting costs. .. marginal revenue e/ceeds ,er total cost. c. marginal revenue e/ceeds ,er marginal cost. d. marginal cost e/ceeds ,er marginal revenue. + !F: $&(: 1"#2 NA$: Analytic 'ompetitive firms
',ristop,er is a professional tennis player 1,o gives tennis lessons. $,e industry is competitive. ',ristop,er ,ires a .usiness consultant to analy0e ,is financial records. $,e consultant recommends t,at ',ristop,er give fe1er tennis lessons. $,e consultant must ,ave concluded t,at ',ristop,erBs a. total revenues e/ceed ,is total accounting costs. .. marginal revenue e/ceeds ,is total cost. c. marginal revenue e/ceeds ,is marginal cost. d. marginal cost e/ceeds ,is marginal revenue.
162
%aura is a gourmet c,ef 1,o runs a small catering .usiness in a competitive industry. %aura speciali0es in ma-ing 1edding ca-es. %aura sells 2: 1edding ca-es per mont,. Oer mont,ly total revenue is <2,:::. $,e marginal cost of ma-ing a 1edding ca-e is <+::. In order to ma/imi0e profits, %aura s,ould a. ma-e more t,an 2: 1edding ca-es per mont,. .. ma-e fe1er t,an 2: 1edding ca-es per mont,. c. continue to ma-e 2: 1edding ca-es per mont,. d. 7e do not ,ave enoug, information 1it, 1,ic, to ans1er t,e question. + !F: $&(: 1"#2 NA$: Analytic 'ompetitive firms
%aura is a gourmet c,ef 1,o runs a small catering .usiness in a competitive industry. %aura speciali0es in ma-ing 1edding ca-es. %aura sells 2: 1edding ca-es per mont,. Oer mont,ly total revenue is <2,:::. $,e marginal cost of ma-ing a 1edding ca-e is <2::. In order to ma/imi0e profits, %aura s,ould a. ma-e more t,an 2: 1edding ca-es per mont,. .. ma-e fe1er t,an 2: 1edding ca-es per mont,. c. continue to ma-e 2: 1edding ca-es per mont,. d. 7e do not ,ave enoug, information 1it, 1,ic, to ans1er t,e question. + !F: $&(: 1"#2 NA$: Analytic 'ompetitive firms
A competitive firm ,as .een selling its output for <2: per unit and ,as .een ma/imi0ing its profit, 1,ic, is positive. $,en, t,e price rises to <22, and t,e firm ma-es 1,atever adPustments are necessary to ma/imi0e its profit at t,e no1#,ig,er price. &nce t,e firm ,as adPusted, 1,ic, of t,e follo1ing statements is correctD a. $,e firm;s quantity of output is ,ig,er t,an it 1as previously. .. $,e firm;s average total cost is ,ig,er t,an it 1as previously. c. $,e firm;s marginal revenue is ,ig,er t,an it 1as previously. d. All of t,e a.ove are correct. + !F: $&(: 1"#2 NA$: Analytic 'ompetitive firms
A competitive firm ,as .een selling its output for <1: per unit and ,as .een ma/imi0ing its profit. $,en, t,e price rises to <1", and t,e firm ma-es 1,atever adPustments are necessary to ma/imi0e its profit at t,e no1# ,ig,er price. &nce t,e firm ,as adPusted, 1,ic, of t,e follo1ing statements is correctD a. $,e firm;s marginal revenue is lo1er t,an it 1as previously. .. $,e firm;s marginal cost is lo1er t,an it 1as previously. c. $,e firm;s quantity of output is ,ig,er t,an it 1as previously. d. All of t,e a.ove are correct. 2 !F: $&(: 1"#2 NA$: Analytic 'ompetitive firms
7,en profit#ma/imi0ing firms in competitive mar-ets are earning profits, a. mar-et demand must e/ceed mar-et supply at t,e mar-et equili.rium price. .. mar-et supply must e/ceed mar-et demand at t,e mar-et equili.rium price. c. ne1 firms 1ill enter t,e mar-et. d. t,e most inefficient firms 1ill .e encouraged to leave t,e mar-et. 2 !F: $&(: 1"#2 NA$: Analytic 'ompetitive mar-ets
16+
Re*er to Ta+)e 14"4, A firm operating in a competitive mar-et and facing t,e total costs listed in t,e ta.le 1ill not produce an output level .eyond a. " units. .. 2 units. c. 4 units. d. 5 units. 2 !F: $&(: 1"#2 NA$: Analytic (rofit ma/imi0ation
Re*er to Ta+)e 14"4, $,e firm 1ill produce a quantity greater t,an " .ecause at " units of output, marginal cost a. is less t,an marginal revenue. .. equals marginal revenue. c. is greater t,an marginal revenue. d. is minimi0ed. 2 !F: $&(: 1"#2 NA$: Analytic (rofit ma/imi0ation
Re*er to Ta+)e 14"4, 7,at is t,e firmBs profit#ma/imi0ing strategyD a. produce 1 unit of output .ecause marginal cost is minimi0ed .. produce " units of output .ecause marginal revenue e/ceeds marginal cost c. produce 4 units of output .ecause marginal revenue equals marginal cost d. produce 6 units of output .ecause total revenue is ma/imi0ed 2 !F: $&(: 1"#2 NA$: Analytic (rofit ma/imi0ation
ANS: ' DIF: %&': (erfect competition *S': Applicative Table 14-5 &'antit( : 1 2 + " 2 4 5 6 8 22.
Tota) Reven'e <: <8 <16 <25 <+4 <"2 <2" <4+ <52 <61
Tota) Cost <1: <1" <18 <22 <+2 <": <"8 <28 <5: <62
Re*er to Ta+)e 14"6. At a production level of " units 1,ic, of t,e follo1ing is trueD a. *arginal cost is <". .. $otal revenue is greater t,an varia.le cost. c. *arginal revenue is less t,an marginal cost. d. $,e firm is ma/imi0ing profit.
16"
Re*er to Ta+)e 14"6. At 1,ic, quantity of output is marginal revenue equal to marginal costD a. + .. 4 c. 6 d. 8 2 !F: $&(: 1"#2 NA$: Analytic (rofit ma/imi0ation
Re*er to Ta+)e 14"6. In order to ma/imi0e profit, t,e firm 1ill produce a level of output 1,ere marginal revenue is equal to a. <4. .. <5. c. <6. d. <8. 2 !F: $&(: 1"#2 NA$: Analytic (rofit ma/imi0ation
Re*er to Ta+)e 14"6. In order to ma/imi0e profit, t,e firm 1ill produce a level of output 1,ere marginal cost is equal to a. <4. .. <5. c. <6. d. <8. 2 !F: $&(: 1"#2 NA$: Analytic (rofit ma/imi0ation
Re*er to Ta+)e 14"6. $,e ma/imum profit availa.le to t,is firm is a. <2. .. <+. c. <". d. <2. 1 !F: $&(: 1"#2 (rofit NA$: Analytic *S': Applicative
Re*er to Ta+)e 14"6. If t,e firm finds t,at its marginal cost is <11, it s,ould a. increase production to ma/imi0e profit. .. increase t,e price of t,e product to ma/imi0e profit. c. advertise to attract additional .uyers to ma/imi0e profit. d. reduce production to increase profit. 2 !F: $&(: 1"#2 NA$: Analytic (rofit ma/imi0ation
Re*er to Ta+)e 14"6. If t,e firm finds t,at its marginal cost is <2, it s,ould a. reduce fi/ed costs .y lo1ering production. .. increase production to ma/imi0e profit. c. decrease production to ma/imi0e profit. d. maintain its current level of production to ma/imi0e profit. 2 !F: $&(: 1"#2 NA$: Analytic (rofit ma/imi0ation
162
Re*er to Ta+)e 14"7. 7,at is t,e marginal cost of t,e 2t, unitD a. <22 .. <4: c. <46 d. <6: 2 !F: $&(: 1"#2 *arginal cost NA$: Analytic
Re*er to Ta+)e 14"7. 7,at is t,e marginal cost of t,e 6t, unitD a. <: .. <52.52 c. <12: d. <2:2 2 !F: $&(: 1"#2 *arginal cost NA$: Analytic
Re*er to Ta+)e 14"7. 7,at is t,e total revenue from selling " unitsD a. <6: .. <1+5 c. <+2: d. <"6: 2 !F: $&(: 1"#2 $otal revenue NA$: Analytic
Re*er to Ta+)e 14"7. 7,at is t,e total revenue from selling 5 unitsD a. <6: .. <+62 c. <2": d. <24: 2 !F: $&(: 1"#2 $otal revenue NA$: Analytic
Re*er to Ta+)e 14"7. 7,at is t,e marginal revenue from selling t,e 1st unitD a. <+: .. <2: c. <6: d. <14:
164
Re*er to Ta+)e 14"7. 7,at is t,e marginal revenue from selling t,e 2t, unitD a. <12 .. <46 c. <6: d. <"6: 2 !F: $&(: 1"#2 NA$: Analytic *arginal revenue
Re*er to Ta+)e 14"7. 7,at is t,e average revenue 1,en " units are soldD a. <: .. <46 c. <6: d. <":: 2 !F: $&(: 1"#2 NA$: Analytic Average revenue
Re*er to Ta+)e 14"7. At 1,at quantity does Qo,nBs Nineyard ma/imi0e profitsD a. + .. 4 c. 5 d. 6 + !F: $&(: 1"#2 NA$: Analytic (rofit ma/imi0ation
Re*er to Ta+)e 14"7. 7,at is Qo,nBs Nineyard;s economic profit at its profit#ma/imi0ing output levelD a. <22 .. <52 c. <112 d. <222 + !F: $&(: 1"#2 NA$: Analytic !conomic profit
ANS: ' DIF: %&': (erfect competition *S': Applicative Table 14-7 &'antit( 12 1+ 1" 12 14 15 +6.
Re*er to Ta+)e 14"8. If t,e firm is currently producing 1" units, 1,at 1ould you advise t,e o1nersD a. decrease quantity to 1+ units .. increase quantity to 15 units c. continue to operate at 1" units d. increase quantity to 14 units 1 !F: $&(: 1"#2 NA$: Analytic (rofit ma/imi0ation
165
Table 14-8 $,e follo1ing ta.le presents cost and revenue information for SoperBs (ort Nineyard. COSTS Tota) Cost <1:: <12: <2:2 <225 <+15 <+62 <"42 <242 <462 RE.ENUES Tota) $ri e Reven'e <12: <12: <12: <12: <12: <12: <12: <12: <12:
Mar0ina) Cost ##
Mar0ina) Reven'e ##
Re*er to Ta+)e 14"9. 7,at is t,e marginal cost of t,e 1st unitD a. <2: .. <52 c. <6: d. <12: 2 !F: $&(: 1"#2 *arginal cost NA$: Analytic
Re*er to Ta+)e 14"9. 7,at is t,e marginal cost of t,e 6t, unitD a. <: .. <1:: c. <12: d. <1": 2 !F: $&(: 1"#2 *arginal cost NA$: Analytic
Re*er to Ta+)e 14"9. 7,at is SoperBs (ort NineyardBs economic profit at t,eir profit ma/imi0ing pointD a. <56 .. <2"+ c. <256 d. <+52 2 !F: $&(: 1"#2 NA$: Analytic !conomic profit
Re*er to Ta+)e 14"9. In order to ma/imi0e profits, ,o1 many units s,ould SoperBs (ort NineyardBs produceD a. 2 .. 4 c. 5 d. 6
166
Scenario 14-1 Assume a certain firm is producing F E 1,::: units of output. At F E 1,:::, t,e firm;s marginal cost equals <12 and its average total cost equals <11. $,e firm sells its output for <12 per unit. "". Re*er to S enario 14"1. At F E 1,:::, t,e firm;s profits equal a. <#2::. .. <1,:::. c. <+,:::. d. <",:::. 2 !F: $&(: 1"#2 (rofit NA$: Analytic *S': Applicative
Re*er to S enario 14"1. At F E 888, t,e firm;s total cost amounts to a. <1:,862. .. <1:,88:. c. <1:,882. d. <1:,888. + !F: $&(: 1"#2 $otal cost NA$: Analytic *S': Applicative
Re*er to S enario 14"1. At F E 888, t,e firm;s profits equal a. <88+. .. <885. c. <1,::+. d. <1,::5. + !F: $&(: 1"#2 (rofit NA$: Analytic *S': Applicative
Re*er to S enario 14"1. $o ma/imi0e its profit, t,e firm s,ould a. increase its output. .. continue to produce 1,::: units. c. decrease its output .ut continue to produce. d. s,ut do1n. 2 !F: $&(: 1"#2 NA$: Analytic (rofit ma/imi0ation
Scenario 14-2 Assume a certain firm is producing F E 1,::: units of output. At F E 1,:::, t,e firm;s marginal cost equals <2: and its average total cost equals <22. $,e firm sells its output for <+: per unit. "6. Re*er to S enario 14"-. $o ma/imi0e its profit, t,e firm s,ould a. increase its output. .. continue to produce 1,::: units. c. decrease its output .ut continue to produce. d. s,ut do1n. 2 !F: $&(: 1"#2 NA$: Analytic (rofit ma/imi0ation
Re*er to S enario 14"-. At F E 1,:::, t,e firm;s profits equal a. <#2,:::. .. <2,2::. c. <2,:::. d. <1:,:::.
168
Re*er to S enario 14"-. At F E 888, t,e firm;s total cost amounts to a. <2",85:. .. <2",852. c. <2",86:. d. <22,:22. + !F: $&(: 1"#2 $otal cost NA$: Analytic *S': Applicative
Re*er to S enario 14"-. At F E 888, t,e firm;s profits equal a. <",88:. .. <2,:::. c. <2,:2:. d. <2,:+:. + !F: $&(: 1"#2 (rofit NA$: Analytic *S': Applicative
A firm in a competitive mar-et currently produces and sells 2:: door-no.s for a price of <1: per door-no.. 7,ic, of t,e follo1ing events 1ould decrease t,e firm;s average revenueD a. $,e firm increases its output a.ove 2:: door-no.s. .. $,e firm decreases its output .elo1 2:: door-no.s. c. $,e mar-et price of door-no.s rises a.ove <1:. d. $,e mar-et price of door-no.s falls .elo1 <1:. 2 !F: $&(: 1"#2 NA$: Analytic Average revenue
7,ic, of t,e follo1ing statements .est e/presses a firmBs profit#ma/imi0ing decision ruleD a. If marginal revenue is greater t,an marginal cost, t,e firm s,ould increase its output. .. If marginal revenue is less t,an marginal cost, t,e firm s,ould decrease its output. c. If marginal revenue equals marginal cost, t,e firm s,ould continue producing its current level of output. d. All of t,e a.ove are correct. 2 !F: $&(: 1"#2 NA$: Analytic (rofit ma/imi0ation
7,ic, of t,e follo1ing statements .est e/presses a firmBs profit#ma/imi0ing decision ruleD a. If marginal revenue is greater t,an marginal cost, t,e firm s,ould increase its output. .. If marginal revenue is less t,an marginal cost, t,e firm s,ould s,ut do1n in t,e s,ort run. c. If marginal revenue equals marginal cost, t,e firm s,ould produce e/actly one more unit of output. d. All of t,e a.ove are correct. 2 !F: $&(: 1"#2 NA$: Analytic (rofit ma/imi0ation
If marginal cost e/ceeds marginal revenue, t,e firm a. is most li-ely to .e at a profit#ma/imi0ing level of output. .. s,ould increase t,e level of production to ma/imi0e its profit. c. s,ould reduce its average fi/ed cost in order to lo1er its marginal cost. d. may still .e earning a positive accounting profit. 2 !F: $&(: 1"#2 NA$: Analytic (rofit ma/imi0ation
18:
24.
(rofit#ma/imi0ing firms in a competitive mar-et produce an output level 1,ere a. marginal cost equals marginal revenue. .. marginal cost equals average total cost. c. marginal revenue is increasing. d. price is less t,an marginal revenue. 2 !F: $&(: 1"#2 NA$: Analytic (rofit ma/imi0ation
A profit#ma/imi0ing firm in a competitive mar-et 1ill al1ays ma-e marginal adPustments to production as long as a. average revenue is greater t,an average total cost. .. average revenue is equal to marginal cost. c. marginal cost is greater t,an average total cost. d. price is a.ove or .elo1 marginal cost. 2 !F: $&(: 1"#2 NA$: Analytic (rofit ma/imi0ation
7,en price is greater t,an marginal cost for a firm in a competitive mar-et, a. marginal cost must .e falling. .. t,e firm must .e minimi0ing its losses. c. t,ere are opportunities to increase profit .y increasing production. d. t,e firm s,ould decrease output to ma/imi0e profit. 2 !F: $&(: 1"#2 NA$: Analytic (rofit ma/imi0ation
(rofit#ma/imi0ing firms enter a competitive mar-et 1,en e/isting firms in t,at mar-et ,ave a. total revenues t,at e/ceed fi/ed costs. .. total revenues t,at e/ceed total varia.le costs. c. average total costs t,at e/ceed average revenue. d. average total costs less t,an mar-et price. 2 !F: $&(: 1"#2 NA$: Analytic (rofit ma/imi0ation
If a profit#ma/imi0ing firm in a competitive mar-et discovers t,at, at its current level of production, price is greater t,an marginal cost, it s,ould a. s,ut do1n. .. reduce its output, .ut continue operating. c. -eep output t,e same. d. increase its output. 2 !F: $&(: 1"#2 NA$: Analytic (rofit ma/imi0ation
181
3y comparing marginal revenue and marginal cost, a firm in a competitive mar-et is a.le to adPust production to t,e level t,at ac,ieves its o.Pective, 1,ic, 1e assume to .e a. ma/imi0ing total revenue. .. ma/imi0ing profit. c. minimi0ing varia.le cost. d. minimi0ing average total cost. 2 !F: $&(: 1"#2 NA$: Analytic (rofit ma/imi0ation
A profit#ma/imi0ing firm in a competitive mar-et is currently producing 2:: units of output. It ,as average revenue of <8 and average total cost of <5. It follo1s t,at t,e firm;s a. average total cost curve intersects t,e marginal cost curve at an output level of less t,an 2:: units. .. average varia.le cost curve intersects t,e marginal cost curve at an output level of less t,an 2:: units. c. profit is <"::. d. All of t,e a.ove are correct. + !F: $&(: 1"#2 NA$: Analytic (rofit ma/imi0ation
If a competitive firm is currently producing a level of output at 1,ic, profit is not ma/imi0ed, t,en it must .e true t,at a. marginal revenue e/ceeds marginal cost. .. marginal cost e/ceeds marginal revenue. c. total cost e/ceeds total revenue. d. None of t,e a.ove is correct. 2 !F: $&(: 1"#2 NA$: Analytic (rofit ma/imi0ation
Susan quit ,er Po. as a teac,er, 1,ic, paid ,er <+4,::: per year, in order to start ,er o1n catering .usiness. S,e spent <12,::: of ,er savings, 1,ic, ,ad .een earning 1: percent interest per year, on equipment for ,er .usiness. S,e also .orro1ed <12,::: from ,er .an- at 1: percent interest, 1,ic, s,e also spent on equipment. For t,e past several mont,s s,e ,as spent <1,::: per mont, on ingredients and ot,er varia.le costs. Also for t,e past several mont,s s,e ,as ta-en in <",2:: in mont,ly revenue. a. In t,e s,ort run, Susan s,ould s,ut do1n ,er .usiness, and in t,e long run s,e s,ould e/it t,e industry. .. In t,e s,ort run, Susan s,ould continue to operate ,er .usiness, .ut in t,e long run s,e s,ould e/it t,e industry. c. In t,e s,ort run, Susan s,ould continue to operate ,er .usiness, .ut in t,e long run s,e 1ill pro.a.ly face competition from ne1ly entering firms. d. In t,e s,ort run, Susan s,ould continue to operate ,er .usiness, and s,e is also in long#run equili.rium. + !F: $&(: 1"#2 NA$: Analytic (rofit ma/imi0ation
182
45.
If t,e mar-et price is <14, t,is firm 1ill a. produce four units in t,e s,ort run and e/it in t,e long run. .. produce five units in t,e s,ort run and e/it in t,e long run. c. produce five units in t,e s,ort run and face competition from ne1 mar-et entrants in t,e long run. d. s,ut do1n in t,e s,ort run and e/it in t,e long run. ANS: ' DIF: %&': (erfect competition *S': Applicative 46. + !F: $&(: 1"#2 NA$: Analytic (rofit ma/imi0ation
A firm in a competitive mar-et ,as t,e follo1ing cost structure: O'tp't : 1 2 + " 2 4 5 6 8 Tota) Costs <1: <12 <12 <18 <2" <+: <+5 <"4 <22 <42
If t,e mar-et price is <6, ,o1 many units s,ould t,e firm produce to ma/imi0e profitD a. 2 units .. 4 units c. 5 units d. 6 units ANS: 3 DIF: %&': (erfect competition *S': Analytical 48. 2 !F: $&(: 1"#2 NA$: Analytic (rofit ma/imi0ation
A firm in a competitive mar-et ,as t,e follo1ing cost structure: O'tp't : 1 2 + " 2 ATC ## <1: <6 <5 <6 <1:
18+
If t,e firm;s fi/ed cost of production is <+, and t,e mar-et price is <1:, ,o1 many units s,ould t,e firm produce to ma/imi0e profitD a. 1 unit .. 2 units c. + units d. " units ANS: ' DIF: %&': (erfect competition *S': Analytical 5:. + !F: $&(: 1"#2 NA$: Analytic (rofit ma/imi0ation
'onsider a competitive mar-et 1it, 2: identical firms. Suppose t,e mar-et demand is given .y t,e equation FD E 2:: # 1:( and t,e mar-et supply is given .y t,e equation FS E 1:(. In addition, suppose t,e follo1ing ta.le s,o1s t,e marginal cost of production for various levels of output for firms in t,is mar-et. O'tp't : 1 2 + " 2 Mar0ina) Cost ## <2 <1: <12 <2: <22
Oo1 many units s,ould a firm in t,is mar-et produce to ma/imi0e profitD a. 1 unit .. 2 units c. + units d. " units ANS: 3 DIF: %&': (erfect competition *S': Analytical 51. + !F: $&(: 1"#2 NA$: Analytic (rofit ma/imi0ation
*rs. Smit, operates a .usiness in a competitive mar-et. $,e current mar-et price is <6.2:, and at ,er profit# ma/imi0ing level of production, t,e average varia.le cost is <6.::, and t,e average total cost is <6.22. 7,ic, of t,e follo1ing statements a.out *rs. Smit,Bs firm is correctD a. *rs. Smit, s,ould s,ut do1n ,er .usiness in t,e s,ort run .ut continue to operate in t,e long run.. .. *rs. Smit, s,ould continue to operate in t,e s,ort run .ut s,ut do1n in t,e long run. c. *rs. Smit, s,ould continue to operate in .ot, t,e s,ort run and long run. d. *rs. Smit, s,ould s,ut do1n in .ot, t,e s,ort run and long run. 2 !F: $&(: 1"#2 NA$: Analytic (rofit ma/imi0ation
Suppose a firm operates in t,e s,ort run at a price a.ove its average total cost of production. In t,e long run t,e firm s,ould e/pect a. ne1 firms to enter t,e mar-et. .. t,e mar-et price to fall. c. its profits to fall. d. All of t,e a.ove are correct. 1 !F: $&(: 1"#2 NA$: Analytic (rofit ma/imi0ation
18"
5+.
'old Duc- Airlines flies .et1een $acoma and (ortland. $,e company leases planes on a year#long contract at a cost t,at averages <4:: per flig,t. &t,er costs =fuel, flig,t attendants, etc.> amount to <22: per flig,t. 'urrently, 'old Duc-;s revenues are <1,::: per flig,t. All prices and costs are e/pected to continue at t,eir present levels. If it 1ants to ma/imi0e profit, 'old Duc- Airlines s,ould a. drop t,e flig,t immediately. .. continue t,e flig,t. c. continue flying until t,e lease e/pires and t,en drop t,e run. d. drop t,e flig,t no1 .ut rene1 t,e lease if conditions improve. 2 !F: $&(: 1"#2 NA$: Analytic (rofit ma/imi0ation
aiman;s S,oe epair produces custom#made s,oes. 7,en *r. aiman produces 12 pairs per 1ee-, t,e marginal cost of t,e t1elft, pair is <6", and t,e marginal revenue of t,e t1elft, pair is <5:. 7,at 1ould you advise *r. aiman to doD a. s,ut do1n t,e .usiness .. produce more custom#made s,oes c. decrease t,e price d. produce fe1er custom#made s,oes 2 !F: $&(: 1"#2 NA$: Analytic (rofit ma/imi0ation
'arla;s 'andy Store is ma/imi0ing profits .y producing 1,::: pounds of candy per day. If 'arla;s fi/ed costs une/pectedly increase and t,e mar-et price remains constant, t,en t,e s,ort run profit#ma/imi0ing level of output a. is less t,an 1,::: pounds. .. is still 1,::: pounds. c. is more t,an 1,::: pounds. d. .ecomes 0ero. 2 !F: $&(: 1"#2 NA$: Analytic (rofit ma/imi0ation
$,e firm 1ill ma-e t,e most profits if it produces t,e quantity of output at 1,ic, a. marginal cost equals average cost. .. profit per unit is greatest. c. marginal revenue equals total revenue. d. marginal revenue equals marginal cost. 2 !F: $&(: 1"#2 NA$: Analytic (rofit ma/imi0ation
7,ic, of t,e follo1ing e/pressions is correct for a competitive firmD a. (rofit E =Fuantity of output> / =(rice # Average total cost> .. *arginal revenue E =',ange in total revenue>9=Fuantity of output> c. Average total cost E $otal varia.le cost9Fuantity of output d. Average revenue E =*arginal revenue> / =Fuantity of output>
182
$otal profit for a firm is calculated as a. marginal revenue minus average total cost. .. average revenue minus average total cost. c. marginal revenue minus marginal cost. d. =price minus average cost> times quantity of output. 1 !F: $&(: 1"#2 (rofit NA$: Analytic *S': Definitional
7e can measure t,e profits earned .y a firm in a competitive industry as a. =( # A$'> / F. .. =( # *'> / F. c. * / *'. d. =*' # A$'> / F. 2 !F: $&(: 1"#2 (rofit NA$: Analytic *S': Analytical
7,en a profit#ma/imi0ing firm is earning profits, t,ose profits can .e identified .y a. ( F. .. =*' # AN'> F. c. =( # A$'> F. d. =( # AN'> F. 2 !F: $&(: 1"#2 (rofit NA$: Analytic *S': Interpretive
Assume a firm is producing 6:: units of output, and it sells eac, unit for <4. Its average total cost is <". Its profit is a. <#1,4::. .. <1,4::. c. <+,2::. d. <6,:::. 2 !F: $&(: 1"#2 (rofit NA$: Analytic *S': Applicative
7,ic, of t,e follo1ing could .e used to calculate t,e profit for a firmD a. (rofit E * # *' .. (rofit E * # $' c. (rofit E =( # *'>/F d. (rofit E =( # A$'>/F 2 !F: $&(: 1"#2 (rofit NA$: Analytic *S': Definitional
Suppose t,at a firm is currently ma/imi0ing its s,ort#run profit at an output of 2: units. If t,e current price is <8, t,e marginal cost of t,e 2:t, unit is <8, and t,e average total cost of producing 2: units is <", 1,at is t,e firm;s profitD a. <: .. <2:: c. <22: d. <"2: 2 !F: $&(: 1"#2 (rofit NA$: Analytic *S': Analytical
In a competitive mar-et t,e price is <6. A typical firm in t,e mar-et ,as A$' E <4, AN' E <2, and *' E <6. Oo1 muc, economic profit is t,e firm earning in t,e s,ort runD a. <: per unit .. <1 per unit c. <2 per unit d. <+ per unit
184
'onsider a firm operating in a competitive mar-et. $,e firm is producing ": units of output, ,as an average total cost of production equal to <2, and is earning <2": economic profit in t,e s,ort run. 7,at is t,e current mar-et priceD a. <8 .. <1: c. <11 d. <12 + !F: $&(: 1"#2 (rofit NA$: Analytic *S': Analytical
(1 (2 (+ ("
Quantity
65.
Re*er to Fi0're 14"1, If t,e mar-et price is (1, in t,e s,ort run, t,e perfectly competitive firm 1ill earn a. positive economic profits. .. negative economic profits .ut 1ill try to remain open. c. negative economic profits and 1ill s,ut do1n. d. 0ero economic profits. 2 !F: $&(: 1"#2 S,ut do1n NA$: Analytic *S': Interpretive
Re*er to Fi0're 14"1, If t,e mar-et price is (2, in t,e s,ort run, t,e perfectly competitive firm 1ill earn a. positive economic profits. .. negative economic profits .ut 1ill try to remain open. c. negative economic profits and 1ill s,ut do1n. d. 0ero economic profits. 2 !F: $&(: 1"#2 Supply curve NA$: Analytic
Re*er to Fi0're 14"1, If t,e mar-et price is (+, in t,e s,ort run, t,e perfectly competitive firm 1ill earn a. positive economic profits. .. negative economic profits .ut 1ill try to remain open. c. negative economic profits and 1ill s,ut do1n. d. 0ero economic profits. 2 !F: $&(: 1"#2 Supply curve NA$: Analytic
185
Re*er to Fi0're 14"1, 7,ic, of t,e four prices corresponds to a perfectly competitive firm earning positive economic profits in t,e s,ort runD a. (1 .. (2 c. (+ d. (" 2 !F: $&(: 1"#2 Supply curve NA$: Analytic
Re*er to Fi0're 14"1, 7,ic, of t,e four prices corresponds to a perfectly competitive firm earning 0ero economic profits in t,e s,ort runD a. (1 .. (2 c. (+ d. (" 2 !F: $&(: 1"#2 Supply curve NA$: Analytic
Re*er to Fi0're 14"1, 7,ic, of t,e four prices corresponds to a perfectly competitive firm earning negative economic profits in t,e s,ort run .ut trying to remain openD a. (1 .. (2 c. (+ d. (" 2 !F: $&(: 1"#2 Supply curve NA$: Analytic
Re*er to Fi0're 14"1, 7,ic, of t,e four prices corresponds to a perfectly competitive firm earning negative economic profits in t,e s,ort run and s,utting do1nD a. (1 .. (2 c. (+ d. (" 2 !F: $&(: 1"#2 Supply curve NA$: Analytic
186
18 16 15 14 12 1" 1+ 12 11 1: 8 6 5 4 2 " + 2 1
Figure 14-2
*'
A$'
"
Quantity
82.
Re*er to Fi0're 14"-, If t,e mar-et price is <1:, 1,at is t,e firmBs s,ort#run economic profitD a. <8 .. <12 c. <+: d. <2: + !F: $&(: 1"#2 (rofit NA$: Analytic *S': Analytical
Re*er to Fi0're 14"-, If t,e mar-et price is <1:, 1,at is t,e firmBs total costD a. <12 .. <+: c. <+2 d. <2: + !F: $&(: 1"#2 $otal cost NA$: Analytic *S': Analytical
Re*er to Fi0're 14"-, If t,e mar-et price is <1:, 1,at is t,e firmBs total revenueD a. <12 .. <+: c. <+2 d. <2: + !F: $&(: 1"#2 $otal revenue NA$: Analytic
Re*er to Fi0're 14"-, $,e firm 1ill earn 0ero economic profit if t,e mar-et price is a. <: .. <4 c. <5 d. <1: + !F: $&(: 1"#2 (rofit NA$: Analytic *S': Interpretive
188
*' A$'
(" (+ (2 (1
AN'
F1 F2
F+
F"
F2
Quantity
88.
Re*er to Fi0're 14"2. 7,en price rises from (2 to (+, t,e firm finds t,at a. marginal cost e/ceeds marginal revenue at a production level of F2. .. if it produces at output level F+ it 1ill earn a positive profit. c. e/panding output to F" 1ould leave t,e firm 1it, losses. d. it could increase profits .y lo1ering output from F+ to F2. 2 !F: $&(: 1"#2 Supply curve NA$: Analytic
1::. Re*er to Fi0're 14"2. 7,en price falls from (+ to (1, t,e firm finds t,at it a. decreases its fi/ed costs. .. s,ould produce F1 units of output. c. s,ould produce F+ units of output. d. s,ould s,ut do1n immediately. ANS: D DIF: %&': (erfect competition *S': Analytical 2 !F: $&(: 1"#2 Supply curve NA$: Analytic
1:1. Re*er to Fi0're 14"2. 7,en price rises from (+ to (", t,e firm finds t,at a. fi/ed costs decrease as output increases from F+ to F". .. it can earn a positive profit .y increasing production to F". c. profit is still ma/imi0ed at a production level of F+. d. average revenue e/ceeds marginal revenue at a production level of F". ANS: 3 DIF: %&': (erfect competition *S': Analytical 2 !F: $&(: 1"#2 Supply curve NA$: Analytic
2::
Figure 14-4
Price
*'
A$'
(5 (4 (2 (" (+ (2 (1
AN'
F1
F2
F+
F"
F2
Quantity
1:2. Re*er to Fi0're 14"4. 7,en mar-et price is (5, a profit#ma/imi0ing firm;s s,ort#run profits can .e represented .y t,e area a. (5 F2. .. (5 F+. c. =(5 # (2> F+. d. 7e are una.le to determine t,e firmBs profits .ecause t,e quantity t,at t,e firm 1ould produce is not la.eled on t,e grap,. ANS: ' DIF: %&': (erfect competition 2 !F: $&(: 1"#2 (rofit NA$: Analytic *S': Analytical
1:+. Re*er to Fi0're 14"4. In t,e s,ort run, if t,e mar-et price is ,ig,er t,an (1 .ut less t,an (", individual firms in a competitive industry 1ill earn a. positive profits. .. 0ero profits. c. losses .ut 1ill remain in .usiness. d. losses and 1ill s,ut do1n. ANS: ' DIF: %&': (erfect competition 2 !F: $&(: 1"#2 %osses NA$: Analytic *S': Analytical
1:". Re*er to Fi0're 14"4. In t,e s,ort run,if t,e mar-et price is ,ig,er t,an (" .ut less t,an (4, individual firms in a competitive industry 1ill earn a. positive profits. .. 0ero profits. c. losses .ut 1ill remain in .usiness. d. losses and 1ill s,ut do1n. ANS: A DIF: %&': (erfect competition 2 !F: $&(: 1"#2 (rofit NA$: Analytic *S': Analytical
1:2. Re*er to Fi0're 14"4. In t,e s,ort run, if t,e mar-et price is (", individual firms in a competitive industry 1ill earn a. positive profits. .. 0ero profits. c. losses .ut 1ill remain in .usiness. d. losses and 1ill s,ut do1n.
2:1
1:4. Re*er to Fi0're 14"4. Firms 1ould .e encouraged to enter t,is mar-et for all prices t,at e/ceed a. (1. .. (2. c. (+. d. (". ANS: D DIF: %&': (erfect competition 2 !F: $&(: 1"#2 (rofit NA$: Analytic *S': Analytical
1:5. Re*er to Fi0're 14"4. 7,en mar-et price is (2, a profit#ma/imi0ing firm;s losses can .e represented .y t,e area a. =(" # (2> F2. .. =(2 # (1> =F2#F1>. c. At a mar-et price of (2, t,e firm earns profits, not losses. d. At a mar-et price of (2 t,e firm ,as losses, .ut t,e reference points in t,e figure don;t identify t,e losses. ANS: D DIF: %&': (erfect competition Figure 14-5
Price
!F: $&(:
1"#2 %osses
*' A$'
(2 (" (+ (2 (1
AN'
F1
F2
F+
F"
Quantity
1:6. Re*er to Fi0're 14"6. 7,en mar-et price is (+, a profit#ma/imi0ing firm;s total revenue a. can .e represented .y t,e area (+ F+. .. can .e represented .y t,e area (+ F2. c. can .e represented .y t,e area =(+#(2> F+. d. is 0ero. ANS: 3 DIF: %&': (erfect competition *S': Analytical 2 !F: $&(: 1"#2 $otal revenue NA$: Analytic
1:8. Re*er to Fi0're 14"6. 7,en mar-et price is (+, a profit#ma/imi0ing firm;s profit a. can .e represented .y t,e area (+ F+. .. can .e represented .y t,e area (+ F2. c. can .e represented .y t,e area =(+#(2> F+. d. is 0ero. ANS: D DIF: %&': (erfect competition 2 !F: $&(: 1"#2 (rofit NA$: Analytic *S': Analytical
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11:. Re*er to Fi0're 14"6. 7,en mar-et price is (+, a profit#ma/imi0ing firm;s total costs a. can .e represented .y t,e area (2 F2. .. can .e represented .y t,e area (+ F2. c. can .e represented .y t,e area =(+#(2> F+. d. are 0ero. ANS: 3 DIF: %&': (erfect competition 2 !F: $&(: 1"#2 $otal cost NA$: Analytic *S': Analytical
111. Re*er to Fi0're 14"6. Firms 1ill .e encouraged to enter t,is mar-et for all prices t,at e/ceed a. (1. .. (2. c. (+. d. None of t,e a.ove is correct. ANS: ' DIF: %&': (erfect competition 2 !F: $&(: 1"#2 (rofit NA$: Analytic *S': Analytical
112. Re*er to Fi0're 14"6. Firms 1ill earn positive profits in t,e s,ort run if t,e mar-et price a. is less t,an (1. .. is greater t,an (1 .ut less t,an (+. c. equals (+. d. e/ceeds (+. ANS: D DIF: %&': (erfect competition 2 !F: $&(: 1"#2 (rofit NA$: Analytic *S': Analytical
11+. Re*er to Fi0're 14"6. Firms 1ill .e earn losses in t,e s,ort run .ut 1ill remain in .usiness if t,e mar-et price a. e/ceeds (+. .. is less t,an (1. c. is greater t,an (1 .ut less t,an (+. d. e/ceeds (2. ANS: ' DIF: %&': (erfect competition 2 !F: $&(: 1"#2 %osses NA$: Analytic *S': Analytical
11". Re*er to Fi0're 14"6. Firms 1ill s,ut do1n in t,e s,ort run if t,e mar-et price a. e/ceeds (+. .. is less t,an (1. c. is greater t,an (1 .ut less t,an (+. d. e/ceeds (2. ANS: 3 DIF: %&': (erfect competition 2 !F: $&(: 1"#2 S,ut do1n NA$: Analytic *S': Analytical
112. Suppose a profit#ma/imi0ing firm in a competitive mar-et produces ru..er .ands. 7,en t,e mar-et price for ru..er .ands falls .elo1 t,e minimum of its average total cost, .ut still lies a.ove t,e minimum of average varia.le cost, in t,e s,ort run t,e firm 1ill a. e/perience losses .ut 1ill continue to produce ru..er .ands. .. s,ut do1n. c. earn .ot, economic and accounting profits. d. raise t,e price of its product. ANS: A DIF: %&': (erfect competition 2 !F: $&(: 1"#2 %osses NA$: Analytic *S': Analytical
114. S,rimp Lalore, a s,rimp ,arvesting .usiness in t,e (acific Nort,1est, ,as a +:#year loan on its s,rimp ,arvesting .oat. $,e annual loan payment is <22,::: and t,e .oat ,as a mar-et =salvage> value t,at e/ceeds its outstanding loan .alance. (rior to t,e 2::6 s,rimp ,arvesting season, S,rimp Lalore;s accountant predicted t,at at e/pected mar-et prices for s,rimp, S,rimp Lalore 1ould ,ave a net loss of <52,::: dollars after paying all 2::6 e/penses =including t,e annual loan payment>. In t,is case, S,rimp Lalore s,ould a. produce not,ing and e/perience a loss of <22,:::. .. produce not,ing and e/perience a loss of <52,:::. c. continue to operate .ecause e/pected profits 1ill rise in t,e future. d. continue to operate even t,oug, it predicts a loss of <52,:::.
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115. 7,en a profit#ma/imi0ing competitive firm finds itself minimi0ing losses .ecause it is una.le to earn a positive profit, t,is tas- is accomplis,ed .y producing t,e quantity at 1,ic, price is equal to a. sun- cost. .. average fi/ed cost. c. average varia.le cost. d. marginal cost. ANS: D DIF: %&': (erfect competition 2 !F: $&(: 1"#2 %osses NA$: Analytic *S': Interpretive
116. 7,en a restaurant stays open for lunc, service even t,oug, fe1 customers patroni0e t,e restaurant for lunc,, 1,ic, of t,e follo1ing principles is =are> .est demonstratedD =i> Fi/ed costs are sun- in t,e s,ort run. =ii> In t,e s,ort run, only fi/ed costs are important to t,e decision to stay open for lunc,. =iii> If revenue e/ceeds varia.le cost, t,e restaurant o1ner is ma-ing a smart decision to remain open for lunc,. a. .. c. d. =i> and =ii> only =ii> and =iii> only =i> and =iii> only All are demonstrated. 2 !F: $&(: 1"#2 %osses NA$: Analytic *S': Interpretive
118. A profit#ma/imi0ing firm in a competitive mar-et is a.le to sell its product for <5. At its current level of output, t,e firm;s average total cost is <1:. $,e firmBs marginal cost curve crosses its marginal revenue curve at an output level of 8 units. $,e firm e/periences a a. profit of more t,an <25. .. profit of e/actly <25. c. loss of more t,an <25. d. loss of e/actly <25. ANS: D DIF: %&': (erfect competition + !F: $&(: 1"#2 %osses NA$: Analytic *S': Applicative
12:. Susan quit ,er Po. as a teac,er, 1,ic, paid ,er <+4,::: per year, in order to start ,er o1n catering .usiness. S,e spent <12,::: of ,er savings, 1,ic, ,ad .een earning 1: percent interest per year, on equipment for ,er .usiness. S,e also .orro1ed <12,::: from ,er .an- at 1: percent interest, 1,ic, s,e also spent on equipment. For t,e past several mont,s s,e ,as spent <1,::: per mont, on ingredients and ot,er varia.le costs. Also for t,e past several mont,s s,e ,as ta-en in <+,2:: in mont,ly revenue. a. In t,e s,ort run, Susan s,ould s,ut do1n ,er .usiness, and in t,e long run s,e s,ould e/it t,e industry. .. In t,e s,ort run, Susan s,ould continue to operate ,er .usiness, .ut in t,e long run s,e s,ould e/it t,e industry. c. In t,e s,ort run, Susan s,ould continue to operate ,er .usiness, .ut in t,e long run s,e 1ill pro.a.ly face competition from ne1ly entering firms. d. In t,e s,ort run, Susan s,ould continue to operate ,er .usiness, and s,e is also in long#run equili.rium. ANS: 3 DIF: %&': (erfect competition + !F: $&(: 1"#2 %osses NA$: Analytic *S': Analytical
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121. A firm in a competitive mar-et ,as t,e follo1ing cost structure: O'tp't : 1 2 + " 2 Tota) Cost <2 <1: <12 <12 <2" <":
If t,e mar-et price is <", t,is firm 1ill a. produce t1o units in t,e s,ort run and e/it in t,e long run. .. produce t,ree units in t,e s,ort run and e/it in t,e long run. c. produce four units in t,e s,ort run and e/it in t,e long run. d. s,ut do1n in t,e s,ort run and e/it in t,e long run. ANS: 3 DIF: %&': (erfect competition + !F: $&(: 1"#2 %osses NA$: Analytic *S': Applicative
122. 'ompetitive firms t,at earn a loss in t,e s,ort run s,ould a. s,ut do1n if ( I AN'. .. raise t,eir price. c. lo1er t,eir output. d. All of t,e a.ove are correct. ANS: A DIF: %&': (erfect competition 1 !F: $&(: 1"#2 %osses NA$: Analytic *S': Interpretive
12+. *rs. Smit, is operating a firm in a competitive mar-et. $,e mar-et price is <4.2:. At ,er profit#ma/imi0ing level of output, ,er average total cost of production is <5.::, and ,er average varia.le cost of production is <4.::. 7,ic, of t,e follo1ing statements a.out *rs. Smit,Bs firm is correctD a. *rs. Smit, is earning a loss and s,ould s,ut do1n in t,e s,ort run. .. *rs. Smit, is earning a loss .ut s,ould continue to operate in t,e s,ort run. c. *rs. Smit, is earning a profit since t,e price is a.ove t,e average varia.le cost. d. 7it,out -no1ing *rs. Smit,;s marginal cost, 1e cannot determine 1,et,er s,e s,ould stay in .usiness or s,ut do1n. ANS: 3 DIF: %&': (erfect competition 2 !F: $&(: 1"#2 %osses NA$: Analytic *S': Applicative
12". Suppose you value a special 1atc, at <1::. Mou purc,ase it for <52. &n your 1ay ,ome from class one day, you lose t,e 1atc,. $,e store is still selling t,e same 1atc,, .ut t,e price ,as risen to <62. 7,at s,ould you doD a. (ay t,e <62 to .uy t,e 1atc,. .. 7ait to see if t,e 1atc, goes on sale. If t,e price drops to <52 or less, .uy t,e 1atc,. c. 7ait to see if t,e 1atc, goes on sale. If t,e price drops to <22 or less, .uy t,e 1atc,. d. Do not .uy t,e 1atc,. ANS: A DIF: %&': (erfect competition 2 !F: $&(: 1"#2 Sun- costs NA$: Analytic *S': Interpretive
122. 7,en fi/ed costs are ignored .ecause t,ey are irrelevant to a .usiness;s production decision, t,ey are called a. e/plicit costs. .. implicit costs. c. sun- costs. d. opportunity costs. ANS: ' DIF: %&': (erfect competition 1 !F: $&(: 1"#2 Sun- costs NA$: Analytic *S': Interpretive
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125. 7,ic, of t,ese types of costs can .e ignored 1,en an individual or a firm is ma-ing decisionsD a. sun- costs .. marginal costs c. varia.le costs d. opportunity costs ANS: A DIF: %&': (erfect competition 1 !F: $&(: 1"#2 Sun- costs NA$: Analytic *S': Interpretive
126. Suppose you .oug,t a tic-et to a foot.all game for <+: and t,at you place a <+2 value on seeing t,e game. If you lose t,e tic-et, t,en 1,at is t,e ma/imum price you s,ould pay for anot,er tic-etD a. <2 .. <+: c. <+2 d. <42 ANS: ' DIF: %&': (erfect competition 2 !F: $&(: 1"#2 Sun- costs NA$: Analytic *S': Interpretive
128. Mou purc,ase a <+:, nonrefunda.le tic-et to a play at a local t,eater. $en minutes into t,e s,o1 you reali0e t,at it is not a very good s,o1 and place only a <1: value on seeing t,e remainder of t,e s,o1. Alternatively you could leave t,e t,eater and go ,ome and 1atc, $N or read a .oo-. Mou place an <6 value on 1atc,ing $N and a <4 value on reading a .oo-. a. Mou s,ould leave t,e t,eater since t,e net .enefit from seeing t,e remainder of t,e s,o1 is #<2:, 1,ile going ,ome 1ill earn you at least <6 of satisfaction. .. Mou s,ould stay and 1atc, t,e remainder of t,e s,o1. c. Mou s,ould go ,ome and 1atc, $N. d. Mou s,ould go ,ome and read a .oo-. ANS: 3 DIF: %&': (erfect competition 2 !F: $&(: 1"#2 Sun- costs NA$: Analytic *S': Applicative
1+:. Mou purc,ase a <+:, nonrefunda.le tic-et to a play at a local t,eater. $en minutes into t,e s,o1 you reali0e t,at it is not a very good s,o1 and place only a <1: value on seeing t,e remainder of t,e s,o1. Alternatively you could leave t,e t,eater and go ,ome and 1atc, $N or read a .oo-. Mou place an <6 value on 1atc,ing $N and a <12 value on reading a .oo-. a. Mou s,ould stay and 1atc, t,e remainder of t,e s,o1. .. Mou s,ould go ,ome and 1atc, $N. c. Mou s,ould go ,ome and read a .oo-. d. Mou s,ould go ,ome and eit,er 1atc, $N or read a .oo-. ANS: ' DIF: %&': (erfect competition 2 !F: $&(: 1"#2 Sun- costs NA$: Analytic *S': Applicative
1+1. A sun- cost is one t,at a. c,anges as t,e level of output c,anges in t,e s,ort run. .. 1as paid in t,e past and 1ill not c,ange regardless of t,e present decision. c. s,ould determine t,e rational course of action in t,e future. d. ,as t,e most impact on profit#ma-ing decisions. ANS: 3 DIF: %&': (erfect competition 2 !F: $&(: 1"#2 Sun- costs NA$: Analytic *S': Definitional
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1+2. 7,en economists refer to a production cost t,at ,as already .een committed and cannot .e recovered, t,ey use t,e term a. implicit cost. .. e/plicit cost. c. varia.le cost. d. sun- cost. ANS: D DIF: %&': (erfect competition 1 !F: $&(: 1"#2 Sun- costs NA$: Analytic *S': Definitional
1++. A corporation ,as .een steadily losing money on one of its product lines, 7allyBs 7idgets. $,e firm produces 7allyBs 7idgets in a factory t,at cost <2: million to .uild 1: years ago. $,e firm is no1 considering an offer to .uy t,at factory for <12 million. 7,ic, of t,e follo1ing statements a.out t,e decision to sell or not to sell is correctD a. $,e firm s,ould turn do1n t,e purc,ase offer .ecause t,e factory cost more t,an <12 million to .uild. .. $,e <2: million spent on t,e factory is a sun- costA t,at cost s,ould not affect t,e decision. c. $,e <2: million spent on t,e factory is an implicit cost, 1,ic, s,ould .e included in t,e decision. d. $,e firm s,ould sell t,e factory only if it can reduce its costs else1,ere .y <2 million. ANS: 3 DIF: %&': (erfect competition 2 !F: $&(: 1"#2 Sun- costs NA$: Analytic *S': Analytical
1+". If a firm operating in a competitive industry s,uts do1n in t,e s,ort run, it can avoid paying a. fi/ed costs. .. varia.le costs. c. total costs. d. $,e firm must pay all its costs, even if it s,uts do1n. ANS: 3 DIF: %&': (erfect competition 2 !F: $&(: 1"#2 S,ut do1n NA$: Analytic *S': Interpretive
1+2. 3ill operates a .oat rental .usiness in a competitive industry. Oe o1ns 1: .oats and pays <1,::: per mont, on t,e loan t,at ,e too- out to .uy t,em. Oe rents eac, .oat for <2:: per mont,. $,e varia.le cost for eac, .oat rental is <2:. In t,e off season, 3ill s,ould a. operate ,is .usiness as long as ,e rents at least 5 .oats per mont,. .. operate ,is .usiness as long as ,e rents at least 1 .oat per mont,. c. operate ,is .usiness as long as ,e rents all 1: .oats eac, mont,. d. raise t,e price ,e c,arges per .oat rental. ANS: 3 DIF: %&': (erfect competition + !F: $&(: 1"#2 S,ut do1n NA$: Analytic *S': Interpretive
1+4. 7,en a perfectly competitive firm decides to s,ut do1n, it is most li-ely t,at a. marginal cost is a.ove average varia.le cost. .. marginal cost is a.ove average total cost. c. price is .elo1 t,e firmBs average varia.le cost. d. fi/ed costs e/ceed varia.le costs. ANS: ' DIF: %&': (erfect competition 2 !F: $&(: 1"#2 S,ut do1n NA$: Analytic *S': Interpretive
1+5. 7,en total revenue is less t,an varia.le costs, a firm in a competitive mar-et 1ill a. continue to operate as long as average revenue e/ceeds marginal cost. .. continue to operate as long as average revenue e/ceeds average fi/ed cost. c. s,ut do1n. d. raise its price. ANS: ' DIF: %&': (erfect competition 2 !F: $&(: 1"#2 S,ut do1n NA$: Analytic *S': Analytical
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1+8. 7,ic, of t,e follo1ing statements .est reflects t,e production decision of a profit#ma/imi0ing firm in a competitive mar-et 1,en price falls .elo1 t,e minimum of average varia.le costD a. $,e firm 1ill continue to produce to attempt to pay fi/ed costs. .. $,e firm 1ill immediately stop production to minimi0e its losses. c. $,e firm 1ill stop production as soon as it is a.le to pay its sun- costs. d. $,e firm 1ill continue to produce in t,e s,ort run .ut 1ill li-ely e/it t,e mar-et in t,e long run. ANS: 3 DIF: %&': (erfect competition 2 !F: $&(: 1"#2 S,ut do1n NA$: Analytic *S': Interpretive
1":. A profit#ma/imi0ing firm 1ill s,ut do1n in t,e s,ort run 1,en a. price is less t,an average varia.le cost. .. price is less t,an average total cost. c. average revenue is greater t,an marginal cost. d. average revenue is greater t,an average fi/ed cost. ANS: A DIF: %&': (erfect competition 2 !F: $&(: 1"#2 S,ut do1n NA$: Analytic *S': Interpretive
1"1. In t,e long run, all of a firm;s costs are varia.le. In t,is case t,e e/it criterion for a profit#ma/imi0ing firm is to s,ut do1n if a. price is less t,an average total cost. .. price is greater t,an average total cost. c. average revenue is greater t,an average fi/ed cost. d. average revenue is greater t,an marginal cost. ANS: A DIF: %&': (erfect competition 2 !F: $&(: 1"#2 S,ut do1n NA$: Analytic *S': Interpretive
1"2. 7,ic, of t,e follo1ing statements is correct regarding a firm;s decision#ma-ingD a. $,e decision to s,ut do1n and t,e decision to e/it are .ot, s,ort#run decisions. .. $,e decision to s,ut do1n and t,e decision to e/it are .ot, long#run decisions. c. $,e decision to s,ut do1n is a s,ort#run decision, 1,ereas t,e decision to e/it is a long#run decision. d. $,e decision to e/it is a s,ort#run decision, 1,ereas t,e decision to s,ut do1n is a long#run decision. ANS: ' DIF: %&': (erfect competition 2 !F: $&(: 1"#2 S,ut do1n NA$: Analytic *S': Interpretive
1"+. A firm t,at s,uts do1n temporarily ,as to pay a. its varia.le costs .ut not its fi/ed costs. .. its fi/ed costs .ut not its varia.le costs. c. .ot, its varia.le costs and its fi/ed costs. d. neit,er its varia.le costs nor its fi/ed costs. ANS: 3 DIF: %&': (erfect competition 2 !F: $&(: 1"#2 S,ut do1n NA$: Analytic *S': Interpretive
1"". A firm 1ill s,ut do1n in t,e s,ort run if t,e total revenue t,at it 1ould get from producing and selling its output is less t,an its a. opportunity costs. .. fi/ed costs. c. varia.le costs. d. total costs.
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1"2. A firm 1ill s,ut do1n in t,e s,ort run if, for all positive levels of output, a. its loss e/ceeds its fi/ed costs. .. its total revenue is less t,an its varia.le costs. c. t,e price of its product is less t,an its average varia.le cost. d. All of t,e a.ove are correct. ANS: D DIF: %&': (erfect competition 2 !F: $&(: 1"#2 S,ut do1n NA$: Analytic *S': Interpretive
1"4. A firm;s marginal cost ,as a minimum value of <2, its average varia.le cost ,as a minimum value of <", and its average total cost ,as a minimum value of <2. $,en t,e firm 1ill s,ut do1n if t,e price of its product falls .elo1 a. <2. .. <". c. <2. d. $,ere is not enoug, information given to ans1er t,e question. ANS: 3 DIF: %&': (erfect competition 2 !F: $&(: 1"#2 S,ut do1n NA$: Analytic *S': Analytical
1"5. A firm;s marginal cost ,as a minimum value of <2:, its average varia.le cost ,as a minimum value of <6:, and its average total cost ,as a minimum value of <8:. $,en t,e firm 1ill s,ut do1n if t,e price of its product falls .elo1 a. <8:. .. <6:. c. <2:. d. <":. ANS: 3 DIF: %&': (erfect competition 2 !F: $&(: 1"#2 S,ut do1n NA$: Analytic *S': Analytical
1"6. 7,ic, of t,e follo1ing represents t,e firm;s s,ort#run condition for s,utting do1nD a. s,ut do1n if $ I $' .. s,ut do1n if $ I F' c. s,ut do1n if ( I A$' d. s,ut do1n if $ I N' ANS: D DIF: %&': (erfect competition 2 !F: $&(: 1"#2 S,ut do1n NA$: Analytic *S': Definitional
1"8. 7,en determining 1,et,er to s,ut do1n in t,e s,ort run, a competitive firm s,ould a. ignore fi/ed costs. .. ignore varia.le costs. c. ignore sun- costs. d. 3ot, a and c are correct ANS: D DIF: %&': (erfect competition 2 !F: $&(: 1"#2 S,ut do1n NA$: Analytic *S': Analytical
12:. In a competitive mar-et t,e current price is <5, and t,e typical firm in t,e mar-et ,as A$' E <5.2: and AN' E <5.12. a. In t,e s,ort run firms 1ill s,ut do1n, and in t,e long run firms 1ill leave t,e mar-et. .. In t,e s,ort run firms 1ill continue to operate, .ut in t,e long run firms 1ill leave t,e mar-et. c. Ne1 firms 1ill li-ely enter t,is mar-et to capture any remaining economic profits. d. $,e firm 1ill earn 0ero profits in .ot, t,e s,ort run and long run. ANS: A DIF: %&': (erfect competition 2 !F: $&(: 1"#2 S,ut do1n NA$: Analytic *S': Applicative
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122. In t,e s,ort run, a firm operating in a competitive industry 1ill produce t,e quantity of output 1,ere price equals marginal cost as long as t,e a. price is less t,an average total cost. .. marginal revenue e/ceeds t,e marginal cost. c. price is greater t,an average varia.le cost. d. marginal cost e/ceeds t,e marginal revenue. ANS: ' DIF: %&': (erfect competition *S': Interpretive 2 !F: $&(: 1"#2 Supply curve NA$: Analytic
12+. In t,e s,ort run, a firm operating in a competitive industry 1ill s,ut do1n if price is a. less t,an average total cost. .. less t,an average varia.le cost. c. greater t,an average varia.le cost .ut less t,an average total cost. d. greater t,an marginal cost. ANS: 3 DIF: %&': (erfect competition *S': Interpretive 2 !F: $&(: 1"#2 Supply curve NA$: Analytic
12". $,e s,ort#run supply curve for a firm in a perfectly competitive mar-et is a. ,ori0ontal. .. li-ely to slope do1n1ard. c. determined .y forces e/ternal to t,e firm. d. t,e portion of its marginal cost curve t,at lies a.ove its average varia.le cost. ANS: D DIF: %&': (erfect competition *S': Interpretive 2 !F: $&(: 1"#2 Supply curve NA$: Analytic
122. A competitive firm;s s,ort#run supply curve is part of 1,ic, of t,e follo1ing curvesD a. marginal revenue .. average varia.le cost c. average total cost d. marginal cost ANS: D DIF: %&': (erfect competition *S': Definitional 2 !F: $&(: 1"#2 Supply curve NA$: Analytic
124. 7,ic, of t,ese curves is t,e competitive firm;s s,ort#run supply curveD a. t,e average varia.le cost curve a.ove marginal cost .. t,e average total cost curve a.ove marginal cost c. t,e marginal cost curve a.ove average varia.le cost d. t,e average fi/ed cost curve ANS: ' DIF: %&': (erfect competition *S': Definitional 2 !F: $&(: 1"#2 Supply curve NA$: Analytic
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125. 7,en price e/ceeds average varia.le cost in t,e s,ort run, a competitive firm;s marginal cost curve is regarded as its supply curve .ecause a. t,e position of t,e marginal cost curve determines t,e price for 1,ic, t,e firm s,ould sell its product. .. among t,e various cost curves, t,e marginal cost curve is t,e only one t,at slopes up1ard. c. t,e marginal cost curve determines t,e quantity of output t,e firm is 1illing to supply at any price. d. t,e firm is a1are t,at marginal revenue must e/ceed marginal cost in order for profit to .e ma/imi0ed. ANS: ' DIF: %&': (erfect competition *S': Interpretive 2 !F: $&(: 1"#2 Supply curve NA$: Analytic
126. $,e competitive firm;s s,ort#run supply curve is t,at portion of t,e a. average varia.le cost curve t,at lies a.ove marginal cost. .. average total cost curve t,at lies a.ove marginal cost. c. marginal cost curve t,at lies a.ove average varia.le cost. d. marginal cost curve t,at lies a.ove average total cost. ANS: ' DIF: %&': (erfect competition *S': Definitional 2 !F: $&(: 1"#2 Supply curve NA$: Analytic
128. A firm in a competitive mar-et ,as t,e follo1ing cost structure: O'tp't : 1 2 + " 2 Tota) Costs <1 <4 <8 <1: <15 <24
7,at is t,e lo1est price at 1,ic, t,is firm mig,t c,oose to operateD a. <2 .. <+ c. <" d. <2 ANS: 3 DIF: %&': (erfect competition *S': Analytical + !F: $&(: 1"#2 Supply curve NA$: Analytic
14:. $,e competitive firm;s s,ort#run supply curve is its a. marginal revenue curve, .ut only t,e portion 1,ere marginal revenue e/ceeds marginal cost. .. marginal cost curve. c. marginal cost curve, .ut only t,e portion a.ove t,e minimum of average total cost. d. marginal cost curve, .ut only t,e portion a.ove t,e minimum of average varia.le cost. ANS: D DIF: %&': (erfect competition *S': Interpretive 2 !F: $&(: 1"#2 Supply curve NA$: Analytic
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*' A$'
D '
A Quantity
141. Re*er to Fi0're 14"7. 7,ic, line segment .est reflects t,e s,ort#run supply curve for t,is firmD a. A3'F .. 'D c. DF d. 3'D ANS: A DIF: %&': (erfect competition *S': Interpretive 2 !F: $&(: 1"#2 Supply curve NA$: Analytic
142. Re*er to Fi0're 14"7. If t,e firm is in a s,ort#run position 1,ere ( I AN', it is most li-ely to .e on 1,at segment of its supply curveD a. 3' .. 'D c. DF d. A3 ANS: D DIF: %&': (erfect competition *S': Interpretive 2 !F: $&(: 1"#2 Supply curve NA$: Analytic
14+. In t,e long run, a firm 1ill enter a competitive industry if a. total revenue e/ceeds total cost. .. t,e price e/ceeds average total cost. c. t,e firm can earn economic profits. d. All of t,e a.ove are correct. ANS: D DIF: %&': (erfect competition *S': Interpretive 2 !F: $&(: 1"#2 NA$: Analytic %ong#run supply curve
14". In t,e long run, a firm 1ill e/it a competitive industry if a. total revenue e/ceeds total cost. .. t,e price e/ceeds average total cost. c. average total cost e/ceeds t,e price. d. 3ot, a and . are correct. ANS: ' DIF: %&': (erfect competition *S': Interpretive 2 !F: $&(: 1"#2 NA$: Analytic %ong#run supply curve
212
142. In t,e long run, a profit#ma/imi0ing firm 1ill c,oose to e/it a mar-et 1,en a. average fi/ed cost is falling. .. varia.le costs e/ceed sun- costs. c. marginal cost e/ceeds marginal revenue at t,e current level of production. d. total revenue is less t,an total cost. ANS: D DIF: %&': (erfect competition *S': Analytical 2 !F: $&(: 1"#2 NA$: Analytic %ong#run supply curve
144. A firm t,at e/its its mar-et ,as to pay a. its varia.le costs .ut not its fi/ed costs. .. its fi/ed costs .ut not its varia.le costs. c. .ot, its varia.le costs and its fi/ed costs. d. neit,er its varia.le costs nor its fi/ed costs. ANS: D DIF: %&': (erfect competition *S': Interpretive 2 !F: $&(: 1"#2 NA$: Analytic %ong#run supply curve
145. $,e competitive firm;s long#run supply curve is t,at portion of t,e marginal cost curve t,at lies a.ove average a. fi/ed cost. .. varia.le cost. c. total cost. d. revenue. ANS: ' DIF: %&': (erfect competition *S': Definitional 2 !F: $&(: 1"#2 NA$: Analytic %ong#run supply curve
146. 7,ic, of t,e follo1ing represents t,e firm;s long#run condition for e/iting a mar-etD a. e/it if ( I *' .. e/it if ( I F' c. e/it if ( I A$' d. e/it if * I *' ANS: ' DIF: %&': (erfect competition *S': Definitional Figure 14-7
Price D
!F: $&(:
*'
A$'
3 '
A Quantity
148. Re*er to Fi0're 14"8. 7,ic, line segment .est reflects t,e long#run supply curve for t,is firmD a. A3'D .. 3' c. A3' d. None of t,e a.ove is correct. 7e must -no1 t,e firmBs average varia.le cost.
21+
15:. Re*er to Fi0're 14"8. $,is firm 1ill e/it t,e mar-et for any price on t,e line segment a. A3. .. 3'. c. 'D. d. None of t,e a.ove is correct. ANS: A DIF: %&': (erfect competition *S': Interpretive 2 !F: $&(: 1"#2 NA$: Analytic %ong#run supply curve
Se !2 " Firms in Competitive Markets " The S'pp)( C'rve in a Competitive Market
MULT#$LE CHO#CE 1. $,e s,ort#run mar-et supply curve in a perfectly competitive industry a. s,o1s t,e total quantity supplied .y all firms at eac, possi.le price. .. is perfectly inelastic at t,e mar-et price. c. is perfectly elastic at t,e mar-et price. d. s,o1s t,e variety of prices t,at different firms 1ill c,arge for a given quantity. 1 !F: $&(: 1"#+ Supply curve NA$: Analytic
In t,e s,ort#run, a firm;s supply curve is equal to t,e a. marginal cost curve a.ove its average varia.le cost curve. .. marginal cost curve a.ove its average total cost curve. c. average varia.le cost curve a.ove its marginal cost curve. d. average total cost curve a.ove its marginal cost curve. 1 !F: $&(: 1"#+ Supply curve NA$: Analytic
In a mar-et 1it, 1,::: identical firms, t,e s,ort#run mar-et supply is t,e a. marginal cost curve a.ove average varia.le cost for a typical firm in t,e mar-et. .. quantity supplied .y t,e typical firm in t,e mar-et at eac, price. c. sum of t,e prices c,arged .y eac, of t,e 1,::: individual firms at eac, quantity. d. sum of t,e quantities supplied .y eac, of t,e 1,::: individual firms at eac, price. 2 !F: $&(: 1"#+ NA$: Analytic *ar-et supply
In a perfectly competitive mar-et, t,e ,ori0ontal sum of all t,e individual firms; supply curves is a. 0ero. .. equal to t,e industry profits. c. t,e mar-et supply curve. d. a ,ori0ontal line. 1 !F: $&(: 1"#+ NA$: Analytic *ar-et supply
In a perfectly competitive mar-et, t,e mar-et supply curve is a. t,e marginal cost curve a.ove average total cost for a representative firm. .. t,e ,ori0ontal sum of all t,e individual firms; supply curves. c. t,e vertical sum of all t,e individual firmsB supply curves. d. al1ays a ,ori0ontal line.
21"
7,en e/isting firms in a competitive mar-et are profita.le, an incentive e/ists for a. ne1 firms to see- government su.sidies t,at 1ould allo1 t,em to enter t,e mar-et. .. ne1 firms to enter t,e mar-et, even 1it,out government su.sidies. c. e/isting firms to raise prices. d. e/isting firms to increase production. 2 !F: $&(: 1"#+ NA$: Analytic 'ompetitive mar-ets
$,e assumption of a fi/ed num.er of firms is appropriate for analysis of a. t,e s,ort run .ut not t,e long run. .. t,e long run .ut not t,e s,ort run. c. .ot, t,e s,ort run and t,e long run. d. neit,er t,e s,ort run nor t,e long run. 1 !F: $&(: 1"#+ NA$: Analytic 'ompetitive mar-ets
!ntry into a mar-et .y ne1 firms 1ill increase t,e a. supply of t,e good. .. profits of e/isting firms. c. price of t,e good. d. marginal cost of producing t,e good. 2 !F: $&(: 1"#+ NA$: Analytic 'ompetitive mar-ets
In t,e s,ort run for a particular mar-et, t,ere are 2:: firms. !ac, firm ,as a marginal cost of <+: 1,en it produces 2:: units of output. &ne point on t,e mar-et supply curve is a. quantity E 2::, price E <+:. .. quantity E 2::, price E <+:. c. quantity E 1::,:::, price E <+:. d. quantity E 1::,:::, price E <12,:::. 2 !F: $&(: 1"#+ NA$: Analytic *ar-et supply
In t,e s,ort run, t,ere are 2:: identical firms in a competitive mar-et. $,e firms do not use any resources t,at are availa.le in limited quantities, and eac, of t,em ,as t,e follo1ing cost structure: O'tp't : 1 2 + " 2 Tota) Cost <: <1: <12 <12 <2" <":
$,e long#run supply curve for t,is mar-et is a. positively sloped. .. ,ori0ontal at a price of <+.++. c. ,ori0ontal at a price of <2. d. ,ori0ontal at a price of <5.
212
In t,e s,ort run, a mar-et consists of 1:: identical firms. $,e mar-et price is <6, and t,e total cost to eac, firm of producing various levels of output is given in t,e ta.le .elo1. 7,at 1ill total quantity supplied .e in t,e mar-etD Tota) Costs <1 <5 <1" <22 <+1 <"1
&'antit( : 1 2 + " 2 a. .. c. d. 2:: units +:: units ":: units 2:: units
!F: $&(:
Figure 14-8 In t,e figure .elo1, panel =a> depicts t,e linear marginal cost of a firm in a competitive mar-et, and panel =.> depicts t,e linear mar-et supply curve for a mar-et 1it, a fi/ed num.er of identical firms.
Price
:a; Firm
*' <2.::
Price
:+; Market
*'
<2.::
<1.::
<1.::
1::
2::
Quantity
F1
F2
Quantity
12.
Re*er to Fi0're 14"9. If t,ere are 2:: identical firms in t,is mar-et, 1,at level of output 1ill .e supplied to t,e mar-et 1,en price is <1.::D a. 2,::: .. 2,::: c. 1:,::: d. 2:,::: 2 !F: $&(: 1"#+ Supply curve NA$: Analytic
214
1+.
Re*er to Fi0're 14"9. If t,ere are 4:: identical firms in t,is mar-et, 1,at is t,e value of F1D a. 4,::: .. 12,::: c. 4:,::: d. 12:,::: 2 !F: $&(: 1"#+ Supply curve NA$: Analytic
Re*er to Fi0're 14"9. If t,ere are ":: identical firms in t,is mar-et, 1,at is t,e value of F2D a. ",::: .. 6,::: c. ":,::: d. 6:,::: 2 !F: $&(: 1"#+ Supply curve NA$: Analytic
Re*er to Fi0're 14"9. 7,en 1:: identical firms participate in t,is mar-et, at 1,at price 1ill 12,::: units .e supplied to t,is mar-etD a. <1.:: .. <1.2: c. <2.:: d. $,e price cannot .e determined from t,e information provided. 2 !F: $&(: 1"#+ Supply curve NA$: Analytic
Re*er to Fi0're 14"9. If at a mar-et price of <1.52, 22,2:: units of output are supplied to t,is mar-et, ,o1 many identical firms are participating in t,is mar-etD a. 52 .. 1:: c. 22: d. +:: + !F: $&(: 1"#+ Supply curve NA$: Analytic
7,en ne1 firms ,ave an incentive to enter a competitive mar-et, t,eir entry 1ill a. increase t,e price of t,e product. .. drive do1n profits of e/isting firms in t,e mar-et. c. s,ift t,e mar-et supply curve to t,e left. d. increase demand for t,e product. 2 !F: $&(: 1"#+ NA$: Analytic 'ompetitive mar-ets
215
7,en ne1 firms enter a perfectly competitive mar-et, a. demand increases. .. t,e s,ort#run mar-et supply curve s,ifts rig,t. c. t,e s,ort#run mar-et supply curve s,ifts left. d. e/isting firms 1ill increase prices to -eep t,e ne1 firms from entering. 2 !F: $&(: 1"#+ NA$: Analytic 'ompetitive mar-ets
$,e entry of ne1 firms into a competitive mar-et 1ill a. increase mar-et supply and increase mar-et price. .. increase mar-et supply and decrease mar-et price. c. decrease mar-et supply and increase mar-et price. d. decrease mar-et supply and decrease mar-et price. 2 !F: $&(: 1"#+ NA$: Analytic 'ompetitive mar-ets
$,e e/it of e/isting firms from a competitive mar-et 1ill a. increase mar-et supply and increase mar-et price. .. increase mar-et supply and decrease mar-et price. c. decrease mar-et supply and increase mar-et price. d. decrease mar-et supply and decrease mar-et price. 2 !F: $&(: 1"#+ NA$: Analytic 'ompetitive mar-ets
7,en managers of firms in a competitive mar-et o.serve falling profits, t,ey are li-ely to infer t,at t,e mar-et is c,aracteri0ed .y a. a violation of conventional mar-et forces. .. over#investment. c. t,e entry of ne1 firms. d. too fe1 firms in t,e mar-et. 2 !F: $&(: 1"#+ NA$: Analytic 'ompetitive mar-ets
$ommy;s $ires operates in a perfectly competitive mar-et. If tires sell for <2: eac, and average total cost per tire is <": at t,e profit#ma/imi0ing output level, t,en in t,e long run a. more firms 1ill enter t,e mar-et. .. some firms 1ill e/it from t,e mar-et. c. t,e equili.rium price per tire 1ill rise. d. average total costs 1ill fall. 2 !F: $&(: 1"#+ NA$: Analytic 'ompetitive mar-ets
216
22.
If occupational safety la1s 1ere c,anged so t,at firms no longer ,ad to ta-e e/pensive steps to meet regulatory requirements, 1e 1ould e/pect t,at a. t,e demand for products in t,is industry 1ould increase. .. t,e mar-et price of products in t,is industry 1ould decrease in t,e s,ort run .ut not in t,e long run. c. t,e firms in t,e industry 1ould ma-e a long#run economic profit. d. competition 1ould force producers to pass t,e lo1er production costs on to consumers in t,e long run. 2 !F: $&(: 1"#+ NA$: Analytic 'ompetitive mar-ets
$,e te/tile industry is composed of a large num.er of small firms. In recent years, t,ese firms ,ave suffered economic losses and many sellers ,ave left t,e industry. !conomic t,eory suggests t,at t,ese conditions 1ill a. s,ift t,e demand curve out1ard so t,at price 1ill rise to t,e level of production cost. .. cause t,e remaining firms to collude so t,at t,ey can produce more efficiently. c. cause t,e mar-et supply to decline and t,e price of te/tiles to rise. d. cause firms in t,e te/tile industry to suffer long#run economic losses. 2 !F: $&(: 1"#+ NA$: Analytic 'ompetitive mar-ets
If t,ere is an increase in mar-et demand in a perfectly competitive mar-et, t,en in t,e s,ort run a. t,ere 1ill .e no c,ange in t,e demand curves faced .y individual firms in t,e mar-et. .. t,e demand curves for firms 1ill s,ift do1n1ard. c. t,e demand curves for firms 1ill .ecome more elastic. d. profits 1ill rise. 2 !F: $&(: 1"#+ NA$: Analytic 'ompetitive mar-ets
If t,ere is an increase in mar-et demand in a perfectly competitive mar-et, t,en in t,e s,ort run prices 1ill a. rise. .. remain unc,anged at t,e minimum of average total cost. c. fall. d. remain unc,anged at t,e minimum of marginal cost. 2 !F: $&(: 1"#+ NA$: Analytic 'ompetitive mar-ets
7,ic, of t,e follo1ing statements is not correctD a. In a long#run equili.rium, marginal firms ma-e 0ero economic profit. .. $o ma/imi0e profit, firms s,ould produce at a level of output 1,ere price equals average varia.le cost. c. $,e amount of gold in t,e 1orld is limited. $,erefore, t,e gold Pe1elry mar-et pro.a.ly ,as a long# run supply curve t,at is up1ard sloping. d. %ong#run supply curves are typically more elastic t,an s,ort#run supply curves.
218
7,ic, of t,e follo1ing statements is not correctD a. In a long#run equili.rium, firms must .e operating at t,eir efficient scale. .. In t,e s,ort run, t,e num.er of firms in an industry may .e fi/ed. c. In t,e long run, t,e num.er of firms can adPust to c,anging mar-et conditions. d. In t,e s,ort run, firms must .e operating at a level of output 1,ere price equals average varia.le cost. 2 !F: $&(: 1"#+ NA$: Analytic 'ompetitive mar-ets
7,en a profit#ma/imi0ing firm in a competitive mar-et ,as 0ero economic profit, accounting profit a. is negative. .. is at least 0ero. c. is also 0ero. d. could .e positive, negative or 0ero. 2 !F: $&(: 1"#+ NA$: Analytic !conomic profit
As a general rule, 1,en accountants calculate profit t,ey account for e/plicit costs .ut usually ignore a. certain outlays of money .y t,e firm. .. implicit costs. c. operating costs. d. fi/ed costs. 1 !F: $&(: 1"#+ NA$: Analytic Accounting profit
In calculating accounting profit, accountants typically don;t include a. long#run costs. .. sun- costs. c. e/plicit costs of production. d. opportunity costs t,at do not involve an outflo1 of money. 1 !F: $&(: 1"#+ NA$: Analytic Accounting profit
Scenario 14-3 As part of an estate settlement *ary received <1 million. S,e decided to use t,e money to purc,ase a small .usiness in Any1,ere, GSA. Oer .usiness operates in a perfectly competitive industry. If *ary 1ould ,ave invested t,e <1 million in a ris-#free .ond fund s,e could ,ave made <1::,::: eac, year. S,e also quit ,er Po. 1it, %uc-y.'om Inc. to devote all of ,er time to ,er ne1 .usinessA ,er salary at %uc-y.'om Inc. 1as <52,::: per year. +2. Re*er to S enario 14"2. At t,e end of t,e first year of operating ,er ne1 .usiness, *aryBs accountant reported an accounting profit of <12:,:::. 7,at 1as *aryBs economic profitD a. #<12:,::: .. #<2:,::: c. #<22,::: d. <22,::: 2 !F: $&(: 1"#+ NA$: Analytic !conomic profit
22:
+4.
Re*er to S enario 14"2. Oo1 large 1ould *ary;s accounting profits need to .e to allo1 ,er to attain 0ero economic profitD a. <1::,::: .. <122,::: c. <152,::: d. <222,::: 2 !F: $&(: 1"#+ NA$: Analytic !conomic profit
In a perfectly competitive mar-et, t,e process of entry and e/it 1ill end 1,en a. price equals minimum marginal cost. .. marginal revenue equals marginal cost. c. economic profits are 0ero. d. accounting profits are 0ero. 2 !F: $&(: 1"#+ NA$: Analytic Cero#profit condition
In a competitive mar-et 1it, free entry and e/it, if all firms ,ave t,e same cost structure, t,en a. all firms 1ill operate at t,eir efficient scale in t,e s,ort run. .. all firms 1ill operate at t,eir efficient scale in t,e long run. c. t,e price of t,e product 1ill differ across firms. d. 3ot, a and . are correct. 2 !F: $&(: 1"#+ NA$: Analytic Cero#profit condition
In a perfectly competitive mar-et, t,e process of entry and e/it 1ill end 1,en firms face a. marginal revenue equal to long#run average total cost. .. total revenue equal to average total cost. c. average revenue greater t,an marginal cost. d. accounting profits equal to 0ero. 2 !F: $&(: 1"#+ NA$: Analytic Cero#profit condition
In t,e long run, eac, firm in a competitive industry earns a. 0ero accounting profits. .. 0ero economic profits. c. positive economic profits. d. positive, negative, or 0ero economic profits. 2 !F: $&(: 1"#+ NA$: Analytic Cero#profit condition
221
In t,e long run, assuming t,at t,e o1ner of a firm in a competitive industry ,as positive opportunity costs, s,e a. s,ould e/it t,e industry unless ,er economic profits are positive. .. 1ill earn 0ero accounting profits .ut positive economic profits. c. 1ill earn 0ero economic profits .ut positive accounting profits. d. s,ould ignore opportunity costs .ecause t,ey are a type of sun- cost t,at disappears in t,e long run. 2 !F: $&(: 1"#+ NA$: Analytic Cero#profit condition
In t,e long#run equili.rium of a competitive mar-et, t,e num.er of firms in t,e mar-et adPusts until t,e mar-et demand is satisfied at a price equal to t,e minimum of a. average fi/ed cost for t,e marginal firm. .. marginal cost of t,e marginal firm. c. average total cost of t,e marginal firm. d. average varia.le cost of t,e marginal firm. 2 !F: $&(: 1"#+ NA$: Analytic Cero#profit condition
7,en firms are neit,er entering nor e/iting a perfectly competitive mar-et, a. total revenue must equal total varia.le cost for eac, firm. .. economic profits must .e 0ero. c. price must equal average varia.le cost for eac, firm. d. 3ot, a and c are correct. 2 !F: $&(: 1"#+ NA$: Analytic Cero#profit condition
7,en firms are neit,er entering nor e/iting a perfectly competitive mar-et, a. total revenue must equal total cost for eac, firm. .. economic profits must .e 0ero. c. price must equal t,e minimum of marginal cost for eac, firm. d. 3ot, a and . are correct. 2 !F: $&(: 1"#+ NA$: Analytic Cero#profit condition
7,en firms in a perfectly competitive mar-et face t,e same costs, in t,e long run t,ey must .e operating a. under diseconomies of scale. .. 1it, small, .ut positive, levels of profit. c. at t,eir efficient scale. d. 1,ere price is equal to average fi/ed cost. 2 !F: $&(: 1"#+ NA$: Analytic Cero#profit condition
222
"6.
In a long#run equili.rium, t,e marginal firm ,as a. price equal to average total cost. .. total revenue equal to total cost. c. economic profit equal to 0ero. d. All of t,e a.ove are correct. 2 !F: $&(: 1"#+ NA$: Analytic Cero#profit condition
In a long#run equili.rium, t,e marginal firm ,as a. price equal to minimum marginal cost. .. total revenue equal to total cost. c. accounting profit equal to 0ero. d. All of t,e a.ove are correct. 2 !F: $&(: 1"#+ NA$: Analytic Cero#profit condition
In t,e long#run equili.rium of a mar-et 1it, free entry and e/it, if all firms ,ave t,e same cost structure, t,en a. marginal cost e/ceeds average total cost. .. t,e price of t,e good e/ceeds average total cost. c. average total cost e/ceeds t,e price of t,e good. d. firms are operating at t,eir efficient scale. 2 !F: $&(: 1"#+ NA$: Analytic Cero#profit condition
In t,e long#run equili.rium of a mar-et 1it, free entry and e/it, marginal firms are operating a. at t,e point 1,ere average varia.le cost equals marginal cost. .. at t,e minimum point on t,eir marginal cost curves. c. at t,eir efficient scale. d. 1,ere accounting profit is 0ero. 2 !F: $&(: 1"#+ NA$: Analytic Cero#profit condition
'onsider a competitive mar-et 1it, a large num.er of identical firms. $,e firms in t,is mar-et do not use any resources t,at are availa.le only in limited quantities. In long#run equili.rium, mar-et price is determined .y a. t,e minimum point on t,e firms; average varia.le cost curve. .. t,e minimum point on t,e firms; average total cost curve. c. a firmBs level of sun- costs. d. 3ot, . and c are correct. 2 !F: $&(: 1"#+ NA$: Analytic Cero#profit condition
22+
:a;
*'
Price
:+;
S:
S1
A$' 3 (2 (1 (: (2 A (1 D (: '
D1 D:
F1 F2 Quantity FA F3FD F' Quantity
22.
Re*er to Fi0're 14"<. 7,en t,e mar-et is in long#run equili.rium at point A in panel =.>, t,e firm represented in panel =a> 1ill a. ,ave a 0ero economic profit. .. ,ave a negative accounting profit. c. e/it t,e mar-et. d. c,oose to increase production to increase profit. 2 !F: $&(: 1"#+ NA$: Analytic Cero#profit condition
Re*er to Fi0're 14"<. Assume t,at t,e mar-et starts in equili.rium at point A in panel =.>. An increase in demand from D: to D1 1ill result in a. a ne1 mar-et equili.rium at point D. .. an eventual increase in t,e num.er of firms in t,e mar-et and a ne1 long#run equili.rium at point '. c. rising prices and falling profits for e/isting firms in t,e mar-et. d. falling prices and falling profits for e/isting firms in t,e mar-et. 2 !F: $&(: 1"#+ NA$: Analytic %ong#run supply curve
Re*er to Fi0're 14"<. Assume t,at t,e mar-et starts in equili.rium at point A in panel =.> and t,at panel =a> illustrates t,e cost curves facing individual firms. Suppose t,at demand increases from D: to D1. 7,ic, of t,e follo1ing statements is correctD a. (oints A, 3, and ' represent .ot, s,ort#run and long#run equili.ria points. .. (oints A, 3, ', and D represent s,ort#run equili.ria points. c. (oints A and 3 represent long#run equili.ria points. d. (oints A and ' represent long#run equili.ria points. 2 !F: $&(: 1"#+ NA$: Analytic %ong#run supply curve
22"
26.
Re*er to Fi0're 14"<. If t,e mar-et starts in equili.rium at point ' in panel =.>, a decrease in demand 1ill ultimately lead to a. more firms in t,e industry .ut lo1er levels of output for eac, firm. .. fe1er firms in t,e mar-et. c. a ne1 long#run equili.rium at point D in panel =.>. d. lo1er prices once t,e ne1 long#run equili.rium is reac,ed. 2 !F: $&(: 1"#+ NA$: Analytic %ong#run supply curve
Re*er to Fi0're 14"<. Suppose a firm in a competitive mar-et, li-e t,e one depicted in panel =a>, o.serves mar-et price rising from (1 to (2. 7,ic, of t,e follo1ing could e/plain t,is o.servationD a. $,e entry of ne1 firms into t,e mar-et. .. $,e e/it of e/isting consumers from t,e mar-et. c. An increase in mar-et supply from S: to S1. d. An increase in mar-et demand from D: to D1. 2 !F: $&(: 1"#+ NA$: Analytic %ong#run supply curve
A competitive mar-et is in long#run equili.rium. If demand decreases, 1e can .e certain t,at price 1ill a. fall in t,e s,ort run. All firms 1ill s,ut do1n, and some of t,em 1ill e/it t,e industry. (rice 1ill t,en rise to reac, t,e ne1 long#run equili.rium. .. fall in t,e s,ort run. No firms 1ill s,ut do1n, .ut some of t,em 1ill e/it t,e industry. (rice 1ill t,en rise to reac, t,e ne1 long#run equili.rium. c. fall in t,e s,ort run. All, some, or no firms 1ill s,ut do1n, and some of t,em 1ill e/it t,e industry. (rice 1ill t,en rise to reac, t,e ne1 long#run equili.rium. d. not fall in t,e s,ort run .ecause firms 1ill e/it to maintain t,e price. + !F: $&(: 1"#+ NA$: Analytic %ong#run supply curve
A competitive mar-et is in long#run equili.rium. If demand increases, 1e can .e certain t,at price 1ill a. rise in t,e s,ort run. Some firms 1ill enter t,e industry. (rice 1ill t,en rise to reac, t,e ne1 long# run equili.rium. .. rise in t,e s,ort run. Some firms 1ill enter t,e industry. (rice 1ill t,en fall to reac, t,e ne1 long# run equili.rium. c. fall in t,e s,ort run. All, some, or no firms 1ill s,ut do1n, and some of t,em 1ill e/it t,e industry. (rice 1ill t,en rise to reac, t,e ne1 long#run equili.rium. d. not rise in t,e s,ort run .ecause firms 1ill enter to maintain t,e price. + !F: $&(: 1"#+ NA$: Analytic %ong#run supply curve
222
$,e long#run supply curve for a competitive industry a. may .e ,ori0ontal if entry into t,e industry lo1ers average total cost. .. may .e up1ard#sloping if ,ig,er#cost firms enter t,e industry. c. 1ill .e ,ori0ontal if t,ere is free entry into t,e industry. d. 1ill .e up1ard#sloping if t,ere are .arriers to entry into t,e industry. 2 !F: $&(: 1"#+ NA$: Analytic %ong#run supply curve
$,e long#run supply curve for a competitive industry may .e up1ard sloping if a. t,ere are .arriers to entry. .. firms t,at enter t,e industry are a.le to do so at lo1er average total costs t,an t,e e/isting firms in t,e industry. c. some resources are availa.le only in limited quantities. d. accounting profits are positive. 2 !F: $&(: 1"#+ NA$: Analytic %ong#run supply curve
ANS: ' DIF: %&': (erfect competition *S': Interpretive Figure 14-1!
1: 8 6 5 4 2 " + 2 1 1 2 + " 2 4 5 Price
Quantity
44.
Re*er to Fi0're 14"1!, If t,e price is (1 in t,e s,ort run, 1,at 1ill ,appen in t,e long runD a. Not,ing. $,e price is consistent 1it, 0ero economic profits, so t,ere is no incentive for firms to enter or e/it t,e industry. .. Individual firms 1ill earn positive economic profits in t,e s,ort run, 1,ic, 1ill entice ot,er firms to enter t,e industry. c. Individual firms 1ill earn negative economic profits in t,e s,ort run, 1,ic, 1ill cause some firms to e/it t,e industry. d. 3ecause t,e price is .elo1 t,e firmBs average varia.le costs, t,e firms 1ill s,ut do1n. 2 !F: $&(: 1"#+ NA$: Analytic %ong#run supply curve
224
45.
Re*er to Fi0're 14"1!, If t,e price is (+ in t,e s,ort run, 1,at 1ill ,appen in t,e long runD a. Not,ing. $,e price is consistent 1it, 0ero economic profits, so t,ere is no incentive for firms to enter or e/it t,e industry. .. Individual firms 1ill earn positive economic profits in t,e s,ort run, 1,ic, 1ill entice ot,er firms to enter t,e industry. c. Individual firms 1ill earn negative economic profits in t,e s,ort run, 1,ic, 1ill cause some firms to e/it t,e industry. d. 3ecause t,e price is .elo1 t,e firmBs average varia.le costs, t,e firms 1ill s,ut do1n. 2 !F: $&(: 1"#+ NA$: Analytic %ong#run supply curve
ANS: ' DIF: %&': (erfect competition *S': Interpretive Figure 14-11
Price
:a;
*' A$'
Price
:+;
(1
F1
Quantity
Quantity
48.
Re*er to Fi0're 14"11, If t,e figure in panel =a> reflects t,e long#run equili.rium of a profit#ma/imi0ing firm in a competitive mar-et, t,e figure in panel =.> most li-ely reflects a. perfectly inelastic long#run mar-et supply. .. perfectly elastic long#run mar-et supply. c. t,e entry of firms into t,e industry 1,en some resources used in production are availa.le only in limited quantities. d. t,e fact t,at 0ero profits cannot .e sustained in t,e long run. 2 !F: $&(: 1"#+ Supply curve NA$: Analytic
If all e/isting firms and all potential firms ,ave t,e same cost curves, t,ere are no inputs in limited quantities, and t,e mar-et is c,aracteri0ed .y free entry and e/it, t,en t,e long#run mar-et supply curve a. is ,ori0ontal and equal to t,e minimum of long#run marginal cost for eac, firm. .. must slope do1n1ard. c. must slope up1ard. d. is ,ori0ontal and equal to t,e minimum of long#run average cost for eac, firm.
225
7,en all firms and potential firms in a mar-et ,ave t,e same cost curves, t,e long#run equili.rium of a competitive mar-et 1it, free entry and e/it 1ill .e c,aracteri0ed .y firms a. earning small .ut positive economic profits. .. facing t,e prospect of future losses. c. operating at t,e efficient scale. d. t,at 1or- toget,er to raise mar-et prices. 2 !F: $&(: 1"#+ NA$: Analytic %ong#run supply curve
7,en entry and e/it .e,avior of firms in an industry does not affect a firm;s cost structure, a. t,e long#run mar-et supply curve must .e ,ori0ontal. .. t,e long#run mar-et supply curve must .e up1ard#sloping. c. t,e long#run mar-et supply curve must .e do1n1ard#sloping. d. 1e can;t tell anyt,ing a.out t,e s,ape of t,e long#run mar-et supply curve. 2 !F: $&(: 1"#+ NA$: Analytic %ong#run supply curve
7,en some resources used in production are only availa.le in limited quantities, it is li-ely t,at t,e long#run supply curve in a competitive mar-et is a. do1n1ard sloping. .. up1ard sloping. c. ,ori0ontal. d. vertical. 2 !F: $&(: 1"#+ NA$: Analytic %ong#run supply curve
7,en a competitive mar-et e/periences an increase in demand t,at increases production costs for e/isting firms and potential ne1 entrants, 1,ic, of t,e follo1ing is most li-ely to ariseD a. $,e long#run mar-et supply curve 1ill .e up1ard sloping. .. $,e condition of free entry into t,e mar-et 1ill .e violated. c. (roducer profits 1ill fall in t,e long run. d. $,e long#run mar-et supply curve 1ill .e ,ori0ontal as ne1 firms enter and drive t,e price do1n1ard. 2 !F: $&(: 1"#+ NA$: Analytic %ong#run supply curve
7,en firms in a competitive mar-et ,ave different costs, it is li-ely t,at a. free entry and e/it in t,e mar-et 1ill .e violated. .. t,e mar-et 1ill no longer .e considered competitive. c. long#run mar-et supply 1ill .e do1n1ard sloping. d. some firms 1ill earn positive economic profits in t,e long run. 2 !F: $&(: 1"#+ NA$: Analytic %ong#run supply curve
A long#run supply curve is flatter t,an a s,ort#run supply curve .ecause a. firms can enter and e/it a mar-et more easily in t,e long run t,an in t,e s,ort run. .. long#run supply curves are sometimes do1n1ard sloping. c. competitive firms ,ave more control over demand in t,e long run. d. firms in a competitive mar-et face identical cost structures.
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A mar-et mig,t ,ave an up1ard#sloping long#run supply curve if a. firms ,ave different costs. .. consumers e/ercise mar-et po1er over producers. c. all factors of production are essentially availa.le in unlimited supply. d. t,e entry of ne1 firms into t,e mar-et ,as no effect on t,e cost structure of firms in t,e mar-et. 2 !F: $&(: 1"#+ NA$: Analytic %ong#run supply curve
7,en ne1 entrants into a competitive mar-et ,ave ,ig,er costs t,an e/isting firms, a. accounting profits 1ill .e t,e primary determinant of entry into t,e mar-et. .. sun- costs .ecome an important determinant of t,e s,ort#run entry strategy. c. mar-et price 1ill rise. d. long#run supply is constant. 2 !F: $&(: 1"#+ NA$: Analytic %ong#run supply curve
Suppose a competitive mar-et ,as a ,ori0ontal long#run supply curve and is in long#run equili.rium. If demand decreases, 1e can .e certain t,at in t,e s,ort#run, a. at least some firms 1ill s,ut do1n. .. price 1ill fall .elo1 marginal cost for some firms. c. price 1ill fall .elo1 average total cost for some firms. d. at least some firms 1ill enter t,e industry. 2 !F: $&(: 1"#+ NA$: Analytic %ong#run supply curve
'onsider a competitive mar-et 1it, a large num.er of identical firms. $,e firms in t,is mar-et do not use any resources t,at are availa.le only in limited quantities. In t,is mar-et, an increase in demand 1ill a. increase price in t,e s,ort run .ut not in t,e long run. .. increase price in t,e long run .ut not in t,e s,ort run. c. increase price .ot, in t,e s,ort and t,e long run. d. not affect price in eit,er t,e s,ort or t,e long run. 2 !F: $&(: 1"#+ NA$: Analytic 'ompetitive mar-ets
$,e long#run mar-et supply curve in a competitive mar-et 1ill a. al1ays .e ,ori0ontal. .. .e t,e portion of t,e *' t,at lies a.ove t,e minimum of AN' for t,e marginal firm. c. typically .e more elastic t,an t,e s,ort#run supply curve. d. .e a.ove t,e competitive firm;s efficient scale. 2 !F: $&(: 1"#+ NA$: Analytic %ong#run supply curve
In a competitive mar-et 1it, identical firms, a. an increase in demand in t,e s,ort run 1ill result in a ne1 price a.ove t,e minimum of average total cost, allo1ing firms to earn a positive economic profit in .ot, t,e s,ort run and t,e long run. .. firms cannot earn positive economic profit in eit,er t,e s,ort run or long run. c. firms can earn positive economic profit in t,e long run if t,e long#run mar-et supply curve is up1ard sloping. d. free entry and e/it into t,e mar-et requires t,at firms earn 0ero economic profit in t,e long run even t,oug, t,ey may .e a.le to earn positive economic profit in t,e s,ort run.
228
In t,e long run t,e mar-et supply a. must al1ays .e ,ori0ontal. .. could .e up1ard sloping if t,e cost of production falls as ne1 firms enter t,e mar-et. c. could .e up1ard sloping if t,e cost of production rises as ne1 firms enter t,e mar-et. d. could .e up1ard sloping if tec,nological improvements lo1er t,e cost of producing in t,e mar-et. 2 !F: $&(: 1"#+ NA$: Analytic %ong#run supply curve
Scenario 14-4 A study sponsored .y t,e Food 'onsumer Safety 3oard found t,at consumption of irradiated tomatoes increased t,e ,ealt, of la.oratory rats. As a result of national press coverage of t,e report, t,e demand for irradiated tomatoes increased dramatically. &rganic farmers 1ere a.le to s1itc, from organic production of tomatoes to irradiated production 1it, no additional cost. Assume t,at t,e tomato mar-et satisfies all of t,e assumptions of perfect competition. 6". Re*er to S enario 14"4. As a result of t,e increase in t,e demand for tomatoes, 1e 1ould predict t,at in t,e s,ort run t,at t,e a. production of tomatoes 1ould .e at efficient scale. .. price of tomatoes 1ould rise. c. total cost for e/isting irradiated tomato producers must rise. d. num.er of firms in t,e mar-et 1ould fall as prices fall and firms e/it t,e mar-et. 2 !F: $&(: 1"#+ NA$: Analytic 'ompetitive mar-ets
Re*er to S enario 14"4, If t,e increased production of irradiated tomatoes caused a rise in t,e marginal transportation costs of moving irradiated tomatoes to mar-et, t,e a. s,ort#run mar-et supply curve for irradiated tomatoes 1ould .e affected .ut not t,e long#run mar-et supply. .. long#run mar-et supply curve for irradiated tomatoes 1ould .e perfectly elastic. c. long#run mar-et supply of irradiated tomatoes 1ould .e do1n1ard sloping. d. long#run mar-et supply of irradiated tomatoes 1ould .e up1ard sloping. 2 !F: $&(: 1"#+ Supply curve NA$: Analytic
7,en ne1 firms enter a perfectly competitive mar-et, a. economic profits of e/isting firms 1ill continue to .e 0ero. .. entering firms 1ill earn 0ero economic profit upon entry into t,e mar-et. c. e/isting firms may see t,eir costs rise if more firms compete for limited resources. d. prices 1ill rise as e/isting firms raise prices to -eep ne1 firms out of t,e mar-et. 2 !F: $&(: 1"#+ NA$: Analytic 'ompetitive mar-ets
Suppose a competitive mar-et is comprised of firms t,at face identical cost curves. $,e firms e/perience an increase in demand t,at results in positive profits for t,e firms. 7,ic, of t,e follo1ing events are t,en most li-ely to occurD =i> Ne1 firms 1ill enter t,e mar-et. =ii> In t,e s,ort run, price 1ill riseA in t,e long run, price 1ill rise furt,er. =iii> In t,e long run, all firms 1ill .e producing at t,eir efficient scale.
2+:
a. .. c. d.
(rofit ma/imi0ing firms in competitive industries 1it, free entry and e/it face a price equal to t,e lo1est possi.le a. marginal cost of production. .. fi/ed cost of production. c. total cost of production. d. average total cost of production. 2 !F: $&(: 1"#" NA$: Analytic 'ompetitive mar-ets