Ch14 Firms In Competitive Markets Test Questions & Answers - Principles of Microeconomics ANZ Edition Test Bank by Joshua Gans. DOCX document preview.
CHAPTER 14 – Firms in competitive markets
TRUE/FALSE
1. In a competitive market, individual buyers and sellers have little ability to influence price.
DIF: Easy TOP: The meaning of competition
2. If a seller is a price taker, they will be able to sell all the quantity they want at the market price.
DIF: Easy TOP: The meaning of competition
3. In a competitive market, marginal revenue will only sometimes equal average revenue.
DIF: Easy TOP: The revenue of a competitive firm
4. To maximise profit, a firm should operate at the minimum of average total cost.
DIF: Easy TOP: The firm’s short-run decision to shut down
5. Assume the market for lawn mowing is competitive. If a firm has no fixed costs and constant marginal costs, then a doubling of output will lead to a doubling of total revenue.
DIF: Easy TOP: The revenue of a competitive firm
6. If, at a given output, the marginal cost curve lies below the marginal revenue curve but above the average total cost curve, then the firm can increase its profit by decreasing output.
DIF: Easy TOP: The marginal-cost curve and the firm’s supply decision
7. It is not possible for the marginal firm in a competitive market to make an economic profit in the long-run.
DIF: Easy TOP: The long run: Market supply with entry and exit
8. It is possible for firms in a competitive market to earn positive accounting profits in the long-run.
DIF: Easy TOP: The long run: Market supply with entry and exit
9. If it is optimal for a firm to exit in the short-run, then it will also be optimal for the firm to exit in the long-run, all else equal.
DIF: Moderate TOP: The firm’s short-run decision to shut down
10. If price is less than marginal cost, then it is optimal for a firm to shut down.
DIF: Easy TOP: The long run: Market supply with entry and exit
11. The supply curve of a firm in a competitive market is equal to average variable cost, above the minimum of marginal cost.
DIF: Moderate TOP: The supply curve in a competitive market
12. A firm in a competitive market will maximise profit when the level of production is such that marginal cost equals price.
DIF: Easy TOP: The marginal-cost curve and the firm’s supply decision
13. By comparing the marginal revenue and marginal cost from each unit produced, a firm in a competitive market can determine the profit-maximising level of production.
DIF: Easy TOP: The marginal-cost curve and the firm’s supply decision
14. The market’s short-run supply curve will be steeper than an individual firm’s supply curve.
DIF: Difficult TOP: The short run: market supply with a fixed number of firms
15. The long-run equilibrium in a competitive market characterised by firms with identical costs is generally characterised by firms operating at efficient scale.
DIF: Moderate TOP: The long run: Market supply with entry and exit
16. When a resource used in the production of a good sold in a competitive market is available in only limited quantities, the long-run supply curve is likely to be upward-sloping.
DIF: Moderate TOP: Why the long-run supply curve might slope upwards
17. In the long run, a competitive market with 1000 identical firms will experience an equilibrium price equal to the minimum of each firm’s average total cost.
DIF: Easy TOP: Why the long-run supply curve might slope upwards
18. At the end of the process of entry and exit, it is possible that some firms in a competitive market are making positive economic profit.
DIF: Easy TOP: Why the long-run supply curve might slope upwards
19. The long-run supply curve in a competitive market must be more inelastic than the short-run supply curve.
DIF: Moderate TOP: Why the long-run supply curve might slope upwards
20. When a profit-maximising firm in a competitive market experiences rising prices, it will respond with an increase in production.
DIF: Easy TOP: Figure 14.5: Profit as the area between price and average total cost
21. When looking at entering the marketplace, a prospective entrant should not consider fixed costs, as these will become sunk.
DIF: Moderate TOP: The long run: Market supply with entry and exit
22. Sunk costs are relevant to decisions about business strategy, as huge amounts of time have been invested in ensuring that the business is set up for success.
DIF: Easy TOP: The long run: Market supply with entry and exit
23. Regardless of the time horizon considered, firms in a competitive market will never earn positive economic profit.
DIF: Moderate TOP: The short run: market supply with a fixed number of firms
24. In the long run, when price is less than average total cost for all possible levels of production, a firm in a competitive market will choose to exit (or not enter) the market.
DIF: Easy TOP: The long run: Market supply with entry and exit
25. Restaurants often remain open for lunch even if they attract few customers because, the variable costs are small relative to the revenue, even if the fixed costs are large.
DIF: Easy TOP: The firm’s short-run decision to shut down
26. When a firm experiences zero-profit equilibrium, the firm’s revenue must be sufficient to cover all opportunity costs.
DIF: Easy TOP: FYI: Why do competitive firms stay in business if they make zero profit?
27. If a firm in a competitive market sells 25 per cent less, then its total revenue will fall by 25 per cent.
DIF: Moderate TOP: The revenue of a competitive firm
28. A profit-maximising firm should always increase the level of production if marginal cost exceeds marginal revenue.
DIF: Moderate TOP: Measuring profit in our graph for the competitive firm
29. In a competitive market, the actions of any single buyer or seller will have a negligible impact on the market price.
DIF: Moderate TOP: The meaning of competition
30. New firms will enter the market when profit-maximising firms in competitive markets are earning profits.
DIF: Moderate TOP: The long run: Market supply with entry and exit
31. The long run supply curve for a perfectly competitive firm is the segment of the marginal cost curve that lies above the average total cost curve.
DIF: Moderate TOP: The long run: Market supply with entry and exit
MULTIPLE CHOICE
1. When a firm has market power, it can:
A. | sell as much as it wants at any market price |
B. | control the number of firms that will operate in an industry |
C. | influence the market price of the good it sells |
D. | choose to disregard government regulation |
DIF: Easy TOP: The meaning of competition
2. If a firm with increasing marginal costs is operating in a competitive market, then average revenue will be:
A. | increasing in firm output |
B. | decreasing in firm output |
C. | constant regardless of firm output |
D. | we cannot say without more information |
DIF: Easy TOP: The revenue of a competitive firm
Table 14-1
This table shows the revenue and costs of a parrot farmer.
Quantity | Total Revenue ($) | Total Cost ($) |
0 | 0 | 3 |
1 | 10 | 5 |
2 | 20 | 9 |
3 | 30 | 15 |
4 | 40 | 23 |
5 | 50 | 33 |
6 | 60 | 45 |
7 | 70 | 59 |
8 | 80 | 75 |
9 | 90 | 94 |
10 | 100 | 115 |
3. Refer to Table 14-1. If the farmer harvested three parrots then:
A. | fixed cost is zero |
B. | marginal cost is $8 |
C. | marginal revenue is less than average variable cost |
D. | marginal revenue is less than marginal cost |
DIF: Moderate TOP: The revenue of a competitive firm
4. Refer to Table 14-1. Average revenue will be equal to marginal cost when the harvest is equal to:
A. | one parrot |
B. | three parrots |
C. | five parrots |
D. | 10 parrots |
DIF: Difficult TOP: The revenue of a competitive firm
5. Refer to Table 14-1. If the farmer chooses to maximise profit, the appropriate output level is where marginal cost is equal to:
A. | $5 |
B. | $10 |
C. | $11 |
D. | $33 |
DIF: Moderate TOP: The revenue of a competitive firm
6. Refer to Table 14-1. The maximum profit available to this farmer’s firm is:
A. | $0 |
B. | $17 |
C. | $33 |
D. | $45 |
DIF: Moderate TOP: The revenue of a competitive firm
7. Refer to Table 14-1. If the farmer determines that marginal cost is $14, a harvest of parrots should:
A. | increase production to maximise profit |
B. | decrease production to maximise profit |
C. | maintain its current level of production to maximise profit |
D. | stop the farm and exit the industry |
DIF: Difficult TOP: The revenue of a competitive firm
8. Refer to Table 14-1. If the farmer is harvesting three parrots, the best response would be to:
A. | increase production to maximise profit |
B. | plant more vines for the parrots to feed on |
C. | maintain its current level of production to maximise profit |
D. | decrease production to maximise profit |
DIF: Moderate TOP: The revenue of a competitive firm
9. For a firm in a perfectly competitive market, the price of the good is always equal to:
A. | marginal revenue |
B. | average revenue |
C. | market price. |
D. | all of the above |
DIF: Moderate TOP: The revenue of a competitive firm
10. Suppose a firm is operating in a competitive market where the price of the good is $12. If, at the current level of output, the firm’s average cost is $15, marginal cost is $17, and fixed costs are $10, then the firm will:
A. | increase profit by increasing output |
B. | increase profit by decreasing output |
C. | maximise profit by keeping output constant |
D. | we cannot say without more information |
DIF: Easy TOP: The revenue of a competitive firm
11. In a competitive market, the price line also represents a firm’s:
A. | marginal revenue curve |
B. | average revenue curve |
C. | marginal profit curve |
D. | both the marginal revenue and average revenue curves |
DIF: Easy TOP: The marginal-cost curve and a firm’s supply decision
12. When marginal revenue equals marginal cost:
A. | the firm must be generating economic profits |
B. | the profit-maximising firm should always increase its level of production |
C. | the firm must be generating economic losses |
D. | losses may be minimised, rather than profits being maximised |
DIF: Moderate TOP: A simple example of profit maximisation
13. When firms think at the margin and make incremental adjustments to the level of production, they are naturally led to a level of production where:
A. | average variable cost exceeds marginal cost |
B. | costs are minimised |
C. | profit is maximised |
D. | total cost is less than average revenue |
DIF: Moderate TOP: A simple example of profit maximisation
14. Profit-maximising producers in a competitive market in general, produce output at a point where:
A. | marginal cost is decreasing |
B. | total sales are maximised |
C. | marginal cost is increasing |
D. | price is less than marginal revenue |
DIF: Easy TOP: A simple example of profit maximisation
15. The Wheeler Wheat Farm sells wheat to a grain broker. Since the market for wheat is generally considered to be competitive, the Wheeler Farm:
A. | does not choose the quantity of wheat to produce |
B. | does not have any fixed costs of production |
C. | is not able to earn an accounting profit |
D. | does not choose the price at which it sells its wheat |
DIF: Moderate TOP: The meaning of competition
16. A rice farmer sells rice to an Australian grain broker. Suppose that the market for rice is competitive. This means that the farmer will maximise profit by choosing:
A. | to produce the quantity at which average fixed cost is minimised |
B. | to sell its wheat at a price where marginal cost is equal to average total cost |
C. | the quantity at which market price is equal to the farm’s marginal cost of production |
D. | the quantity where average revenue is equal to the farm’s average variable cost |
DIF: Moderate TOP: The revenue of a competitive firm
17. If a firm in a competitive market increases production and its marginal revenue remains greater than its marginal cost, raising production will:
A. | be profitable |
B. | cause the firm to incur losses |
C. | leave profit unchanged |
D. | It is impossible to tell from the information provided |
DIF: Moderate TOP: The revenue of a competitive firm
18. The implication of a firm being a price taker is that, if it increases its price then:
A. | buyers will purchase from other sellers instead |
B. | buyers will pay the higher price in the short run |
C. | other sellers in the market will increase prices as well |
D. | the firm will need to advertise to sell its goods |
DIF: Easy TOP: The meaning of competition
Graph 14-1
This graph depicts the cost structure for a firm in a competitive market. Use the graph to answer the following question(s).
19. Refer to Graph 14-1. When marginal revenue is equal to MC3, the profit-maximising firm will produce what level of output?
A. | Q1 |
B. | Q2 |
C. | Q3 |
D. | Q4 |
DIF: Moderate TOP: The marginal-cost curve and the firm’s supply decision
20. Refer to Graph 14-1. When market price is at MC2, a firm producing output level Q1 would experience:
A. | profits equal to (MC2 – MC1) Q1 |
B. | zero profits |
C. | losses equal to (MC2 – MC1) Q1 |
D. | losses because P < ATC |
DIF: Moderate TOP: The marginal-cost curve and the firm’s supply decision
21. Refer to Graph 14-1. When market price is at MC4, a profit-maximising firm will produce what level of output?
A. | Q1 |
B. | Q2 |
C. | Q3 |
D. | Q4 |
DIF: Moderate TOP: The marginal-cost curve and the firm’s supply decision
22. Refer to Graph 14-1. What price level will leave the profit-maximising firm with zero profits?
A. | MC1 |
B. | MC2 |
C. | MC3 |
D. | MC4 |
DIF: Moderate TOP: The marginal-cost curve and the firm’s supply decision
23. Why would a profit-maximising firm in a competitive market set a price higher than the market price?
A. | if this would result in higher profits |
B. | if the firm’s costs had increased |
C. | if this would increase the firm’s market share |
D. | none of the above |
DIF: Moderate TOP: The meaning of competition
24. When a firm in a competitive market produces 10 units of output, it has marginal revenue of $8. What is the firm’s total revenue when it produces nine units of output?
A. | $18 |
B. | $60 |
C. | $72 |
D. | this cannot be determined from the information given |
DIF: Moderate TOP: The revenue of a competitive firm
25. Suppose a firm in a competitive market receives $1000 in total revenue and it has a marginal revenue of $20. What is the average revenue, and how many units were sold?
A. | $20 and 50 |
B. | $20 and 500 |
C. | $10 and 100 |
D. | $10 and 50 |
DIF: Moderate TOP: The revenue of a competitive firm
26. A firm in a competitive market produces and sells 500 door knobs at a price of $10 each. It then chooses to increase its output to 1000 door knobs. After the increase in output, its average revenue will:
A. | decrease |
B. | increase |
C. | equal $10 |
D. | fall below marginal revenue |
DIF: Moderate TOP: The revenue of a competitive firm
27. If P < AVC, P < ATC, and marginal costs are increasing, then:
A. | the firm should produce in the short-run |
B. | the firm should shut down in the short-run |
C. | the firm should shut down in the long-run |
D. | the firm should produce in the long run |
DIF: Easy TOP: The firm’s short-run decision to shut down
28. A competitive firm’s profit can be written as:
A. | (Price – Average Total Cost)*Quantity |
B. | (Price – Average Variable Cost)*Quantity |
C. | (Price*Quantity) – Marginal Cost |
D. | (Price*Quantity) – Average Variable Cost |
DIF: Easy TOP: Measuring profit in out graph for the competitive firm
Graph 14-2
This graph depicts the cost structure for a firm in a competitive market. Use the graph to answer the following question(s).
29. Refer to Graph 14-2. When price rises from P2 to P3, the firm finds that:
A. | marginal revenue exceeds marginal cost at a production level of Q2 |
B. | if it produces at output level Q3, it will earn zero profit |
C. | expanding output to Q4 would leave the firm with losses |
D. | all of the above are true |
DIF: Difficult TOP: The marginal-cost curve and the firm’s supply decision
30. Refer to Graph 14-2. When price falls from P3 to P1, the firm finds that:
A. | fixed cost is higher at a production level of Q1 than it is at Q3 |
B. | it is unwilling to produce any output |
C. | it should produce Q1 units of output |
D. | all of the above are true |
DIF: Difficult TOP: The marginal-cost curve and the firm’s supply decision
31. Refer to Graph 14-2. When price rises from P3 to P4, the firm finds that:
A. | average revenue exceeds marginal revenue at a production level of Q4 |
B. | fixed costs are lower at a production level of Q4 |
C. | it can earn profits by increasing production to Q4 |
D. | profits are maximised at a production level of Q3 |
DIF: Difficult TOP: The marginal-cost curve and the firm’s supply decision
32. Refer to Graph 14-2. Which of the following statements best reflects the situation faced by the firm when price falls from P4 to P2?
A. | marginal revenue is lower than marginal cost at the previous level of output, so it decreases production |
B. | marginal revenue is higher than marginal cost at the previous level of output, so it increases production |
C. | average total cost is lower than at the previous level of output so it increases production |
D. | the firm will earn profit equal to (P4 – P2) Q2 |
DIF: Difficult TOP: The marginal-cost curve and the firm’s supply decision
33. A profit-maximising firm in a competitive market will always make marginal adjustments to production as long as:
A. | average revenue is greater than average total cost |
B. | price is above or below marginal cost |
C. | average revenue is equal to marginal cost |
D. | marginal cost is greater than average total cost |
DIF: Moderate TOP: The marginal-cost curve and the firm’s supply decision
34. Suppose a firm in a competitive market notices that its marginal cost is greater than its price. This means that:
A. | there are opportunities to increase profit or reduce losses by increasing production |
B. | there are opportunities to increase profit or reduce losses by decreasing production |
C. | marginal cost must be falling |
D. | the firm should increase its marketing budget |
DIF: Easy TOP: The marginal-cost curve and the firm’s supply decision
35. If rational, profit-maximising firms (like rational people) think at the margin, then marginal adjustments to production:
A. | should always lower cost |
B. | will increase market share of the firm |
C. | should always increase profit (or decrease loss) |
D. | will increase homogeneity in the market |
DIF: Moderate TOP: The marginal-cost curve and the firm’s supply decision
36. When a perfectly competitive firm makes a decision to shut down, it is most likely that:
A. | price is below the minimum of average variable cost |
B. | marginal cost is above average variable cost |
C. | fixed costs exceed variable costs |
D. | average fixed costs are rising |
DIF: Easy TOP: The firm’s short-run decision to shut down
37. When a firm makes a short-run decision not to produce anything during a specified period of time because of current market conditions, it:
A. | shuts down |
B. | exits |
C. | is insolvent |
D. | is bankrupt |
DIF: Moderate TOP: The firm’s short-run decision to shut down
38. Firms that shut down in the short run are unable to avoid their:
A. | fixed costs |
B. | sunk costs |
C. | variable costs |
D. | marginal cost |
DIF: Easy TOP: The firm’s short-run decision to shut down
39. When price is below average variable cost, a firm in a competitive market will:
A. | shut down and incur fixed costs |
B. | shut down and incur both variable and fixed costs |
C. | continue to operate as long as average revenue exceeds marginal cost |
D. | continue to operate as long as average revenue exceeds average fixed cost |
DIF: Moderate TOP: The firm’s short-run decision to shut down
Graph 14-3
This graph depicts the cost structure of a profit-maximising firm in a competitive market. Use the graph to answer the following question(s).
40. Refer to Graph 14-3. Which line segment best reflects the short-run supply curve for this firm?
A. | ABC |
B. | BCD |
C. | CDE |
D. | DE |
DIF: Difficult TOP: The firm’s short-run decision to shut down
41. Refer to Graph 14-3. If the firm is in a short-run position where P < AVC, it is most likely to be on what segment of its supply curve?
A. | BC |
B. | CD |
C. | DE |
D. | none of the above |
DIF: Difficult TOP: The supply curve in a competitive market
42. A production cost that has already been committed and cannot be recovered is termed a:
A. | fixed cost |
B. | variable cost |
C. | sunk cost |
D. | total cost |
DIF: Easy TOP: The long run: Market supply with entry and exit
43. A profit-maximising firm in a competitive market produces leather wallets. Suppose the market price for leather wallets drops below the minimum of its average total cost. However, the price still lies above the minimum of average variable cost. This means the firm:
A. | should manufacture leather handbags instead |
B. | will not reduce its production of wallets |
C. | will experience losses, but will continue to produce wallets |
D. | should raise the price of its product |
DIF: Moderate TOP: The firm’s short-run decision to shut down
44. Which of the following statements best reflects the production decision of a profit-maximising firm in a competitive market when price falls below the minimum of average variable cost?
A. | the firm will immediately stop production to minimise its losses |
B. | the firm will continue to produce to attempt to pay fixed costs |
C. | the firm will stop production as soon as it is able to pay its sunk costs |
D. | the firm will continue to produce in the short run, but will exit the in the long run |
DIF: Moderate TOP: The firm’s short-run decision to shut down
45. If a business ignores some of its fixed costs as irrelevant to its production decision, this type of cost is termed:
A. | implicit costs |
B. | explicit costs |
C. | development costs |
D. | sunk costs |
DIF: Easy TOP: FYI: Spilt milk and sunk costs
46. The Wheeler Wheat Farm has a long-term lease on 5000 acres of land in New South Wales. The annual lease payment is $250 000. Prior to planting in the spring of 2001, the Wheeler Farm accountant predicted that the Farm would have $135 000 left after paying all of its costs except the annual lease payment. In this case, the Wheeler Wheat Farm should:
A. | continue to operate even though it predicts an accounting loss of $115 000 |
B. | shut down and experience an accounting loss of $135 000 |
C. | exit the market and experience an accounting loss of $250 000 |
D. | continue to operate because total revenue exceeds total cost |
DIF: Difficult TOP: The firm’s short-run decision to shut down
47. Suppose a profit-maximising firm in a competitive market is unable to generate enough revenue to pay all of its fixed costs. In the short run it should:
A. | shut down and incur the total loss of its fixed cost |
B. | continue to produce as long as marginal cost is less than average revenue |
C. | continue to produce as long as revenue is sufficient to pay variable costs |
D. | continue to produce and lower its price to gain more market share |
DIF: Moderate TOP: The firm’s short-run decision to shut down
48. In the long run, all of a firm’s costs are variable. In this case the exit criterion for a profit-maximising firm is:
A. | average revenue > marginal cost |
B. | price < average total cost |
C. | price > average total cost |
D. | average revenue > average fixed cost |
DIF: Easy TOP: The long run: Market supply with entry and exit
49. When profit-maximising firms in competitive markets are making losses:
A. | there must be a shortage of skilled labour |
B. | market demand must exceed market supply at the equilibrium price |
C. | the most inefficient firms will be encouraged to leave the market |
D. | new firms will enter the market |
DIF: Moderate TOP: Measuring profit in our graph for the competitive firm
50. Profit-maximising firms enter a competitive market when:
A. | total revenue for existing firms in the market exceeds their total fixed costs |
B. | total revenue for existing firms in the market exceeds their total variable costs |
C. | price exceeds average total cost for existing firms in the market |
D. | average revenue is less than average total cost for existing firms in the market |
DIF: Easy TOP: The long run: Market supply with entry and exit
Graph 14-4
The graph depicts the cost structure of a firm in a competitive market. Use the graph to answer the following question(s).
51. Refer to Graph 14-4. When market price is P5, a profit-maximising firm’s profits can be represented by the area:
A. | (P5 – P4) Q3 |
B. | P5 Q3 |
C. | (P5 – P3) Q2 |
D. | when market price is P5 there are no profits |
DIF: Moderate TOP: Measuring profit in our graph for the competitive firm
52. Refer to Graph 14-4. Firms would be encouraged to enter this market for all prices that exceed:
A. | P3 |
B. | P4 |
C. | P5 |
D. | all of the above |
DIF: Difficult TOP: Measuring profit in our graph for the competitive firm
53. Refer to Graph 14-4. When market price is P2, a profit-maximising firm’s losses can be represented by the area:
A. | (P3 – P2) Q2 |
B. | (P2 – P1) Q2 |
C. | at a market price of P2, the firm does not have losses |
D. | at a market price of P2, the firm has losses, but the reference points in the graph don’t identify the losses |
DIF: Moderate TOP: Measuring profit in our graph for the competitive firm
Graph 14-5
This graph depicts the cost structure of a firm in a competitive market. Use the graph to answer the following question(s).
54. Refer to Graph 14-5. When market price is P1, a profit-maximising firm’s total revenue can be represented by the area:
A. | P3 Q2 |
B. | P1 Q3 |
C. | P1 Q2 |
D. | P2 Q2 |
DIF: Moderate TOP: The marginal-cost curve and the firm’s supply decision
55. Refer to Graph 14-5. When market price is P4, a profit-maximising firm’s total cost can be represented by the area:
A. | P4 Q1 |
B. | P2 Q4 |
C. | P4 Q4 |
D. | total costs cannot be determined from the information in the graph |
DIF: Moderate TOP: The marginal-cost curve and the firm’s supply decision
56. Refer to Graph 14-5. When market price is P1, a profit-maximising firm’s total profit or loss can be represented by which area?
A. | (P3 – P1) Q2; loss |
B. | P1 Q3; profit |
C. | (P2 – P1) Q1; loss |
D. | we can’t determine it because we don’t know the fixed costs |
DIF: Difficult TOP: The long run: Market supply with entry and exit
57. A profit-maximising firm that is showing losses (negative profit) most likely faces which of the following conditions?
A. | P < ATC |
B. | P = MC |
C. | P > AVC |
D. | all of the above |
DIF: Moderate TOP: The long run: Market supply with entry and exit
58. If all firms in a market are identical, have upward sloping marginal cost curves, and input prices are perfectly elastic, then the competitive long-run market supply curve will be:
A. | upward sloping |
B. | downward sloping |
C. | horizontal |
D. | we cannot say without more information |
DIF: Moderate TOP: The long run: Market supply with entry and exit
59. When a profit-maximising firm’s fixed costs are considered sunk in the short run, it:
A. | can safely ignore fixed costs when deciding how much to produce |
B. | will never show losses |
C. | can set its price above marginal cost |
D. | maximises profit by choosing an output level where price exceeds marginal cost |
DIF: Moderate TOP: The supply curve in a competitive market
60. A firm’s short-run supply curve is part of which of the following curves?
A. | marginal cost |
B. | average variable cost |
C. | marginal revenue |
D. | average total cost |
DIF: Easy TOP: The supply curve in a competitive market
61. The irrelevance of sunk costs is best described by which of the following business decisions?
A. | forestry companies continue to sell logs even though they are reporting large losses |
B. | forestry companies sell up and exit the market when they report losses |
C. | new forestry companies enter the market and earn profits selling logs |
D. | all of the above |
DIF: Moderate TOP: The firm’s short-run decision to shut down
62. If a profit-maximising firm in a competitive market discovers that at its current level of production, price is less than marginal cost, it should:
A. | exit the industry |
B. | increase its output |
C. | keep output the same |
D. | reduce its output |
DIF: Moderate TOP: The marginal-cost curve and the firm’s supply decision
63. By comparing marginal revenue and marginal cost, a firm in a competitive market is able to adjust production to the level that:
A. | maximises revenue |
B. | minimises total variable cost |
C. | maximises profit |
D. | minimises average total cost |
DIF: Easy TOP: The marginal-cost curve and the firm’s supply decision
64. Sarah places a $110 value on seeing the Richmond Tigers play in the Grand Final. She purchases a ticket to the game for $60, but when she arrives at the game she discovers that her ticket is missing. If Sarah purchases a ticket from a ticket scalper for $95, she is best demonstrating the principle that:
A. | the assumption of rational behaviour does not easily apply to the purchase of football game tickets |
B. | the price of tickets cannot be explained by economic principles |
C. | sunk costs are irrelevant to many personal decisions |
D. | rational consumers do not always respond to incentives. |
DIF: Difficult TOP: The firm’s short-run decision to shut down
65. In a market with 1000 identical firms, the market supply is equal to the:
A. | average number of units supplied by each firm in the market |
B. | sum of the quantities supplied by each of the 1000 individual firms |
C. | marginal cost curve for a representative firm in the market |
D. | product of the quantities supplied by all firms in the market |
DIF: Easy TOP: The long run: Market supply with entry and exit
Graph 14-6
In this graph, panel (a) depicts the linear marginal cost of a firm in a competitive market, and panel (b) depicts the linear market supply curve for a market with a fixed number of identical firms. Use the graph to answer the following question(s).
66. Refer to Graph 14-6. If there are 40 identical firms in this market, what level of output will be supplied to the market when the price is $2.00?
A. | 200 |
B. | 800 |
C. | 8000 |
D. | 20 000 |
DIF: Moderate TOP: The long run: Market supply with entry and exit
67. Refer to Graph 14-6. When 200 identical firms participate in this market, at what price will 25 000 units be supplied to this market?
A. | $1.00 |
B. | $1.25 |
C. | $2.00 |
D. | this cannot be determined from the information provided |
DIF: Difficult TOP: The long run: Market supply with entry and exit
68. Refer to Graph 14-6. If at a market price of $1.50, 18 750 units of output are supplied to this market, how many identical firms are participating in this market?
A. | 125 |
B. | 150 |
C. | 175 |
D. | 200 |
DIF: Difficult TOP: The long run: Market supply with entry and exit
69. When firms already in a competitive market are profitable, an incentive exists for:
A. | existing firms to increase production |
B. | new firms to seek government subsidies that would allow them to enter the market |
C. | existing firms to raise prices |
D. | new firms to enter the market |
DIF: Easy TOP: The long run: Market supply with entry and exit
70. When new firms have an incentive to enter a competitive market, their entry will:
A. | leave market prices unchanged |
B. | drive down profits of existing firms in the market |
C. | leave the quantity of goods supplied in the market unchanged |
D. | do all of the above |
DIF: Easy TOP: The long run: Market supply with entry and exit
71. When firms have an incentive to exit a competitive market, their exit will:
A. | necessarily raise the costs of firms that remain in the market |
B. | raise profits for firms that remain in the market |
C. | lower market price |
D. | do all of the above |
DIF: Easy TOP: Why the long-run supply curve might slope upwards
72. In a perfectly competitive market, the process of entry and exit will end when firms in the market:
A. | are making zero economic profit |
B. | are operating with excess capacity |
C. | capture market power |
D. | experience decreasing marginal revenue |
DIF: Easy TOP: Why the long-run supply curve might slope upwards
73. At the current level of output, a profit-maximising firm in a competitive market earns average revenue of $30 and has an average total cost of $26. Suppose that the firm’s marginal cost curve is equal to its average total cost curve at an output level of 30 units. How much profit is earned by the firm at its current level of output?
A. | more than $120 |
B. | exactly $120 |
C. | less than $120 |
D. | none of the above |
DIF: Difficult TOP: Measuring profit in our graph for the competitive firm
74. A profit-maximising firm in a competitive market is able to sell its product for $6. At its current level of output, the firm’s average total cost is $8. Its marginal cost curve crosses the marginal revenue curve at an output level of 20 units. What is the total loss of this firm?
A. | more than $40 |
B. | exactly $40 |
C. | less than $40 |
D. | none of the above |
DIF: Difficult TOP: Measuring profit in our graph for the competitive firm
Graph 14-7
75. Refer to Graph 14-7. If the figure in panel (a) reflects the long-run equilibrium of a profit-maximising firm in a competitive market, the figure in panel (b) is most likely to reflect long-run market:
A. | demand |
B. | supply |
C. | strategy |
D. | production capacity |
DIF: Difficult TOP: A shift in demand in the short run and long run
76. Refer to Graph 14-7. If the figure in panel (a) reflects the long-run equilibrium of a profit-maximising firm in a competitive market, the figure in panel (b) most likely reflects:
A. | perfectly inelastic long-run market supply |
B. | the product of individual firm supply curves for all firms in the market |
C. | the idea that free entry and exit of firms in the market lead to only one market price in the long run |
D. | zero profits cannot be sustained in the long run |
DIF: Difficult TOP: A shift in demand in the short run and long run
Table 14-2
The market for Whizzly Jigs consists of many identical firms, each with the cost structure below. Suppose the current market price is $2.
Quantity | Fixed costs ($) | Average Variable Costs ($) | Average Total Cost | Marginal Cost
| ||||||
0 | 10 | - | - | |||||||
1 | 10 | 0 | 10 | |||||||
2 | 10 | 0.5 | 5.5 | |||||||
3 | 10 | 1 | 4.33 | |||||||
4 | 10 | 1.5 | 4 | |||||||
5 | 10 | 2 | 4 | |||||||
6 | 10 | 2.5 | 4.16 |
77. Refer to Table 14-2. Suppose the current market price is $2. What is the output of each individual firm?
A. | two units |
B. | three units |
C. | four units |
D. | five units |
DIF: Moderate TOP: The long-run: market supply with entry and exit
78. Refer to Table 14-2. Suppose the current market price is $2. Which of the following is likely to occur?
A. | firms will shut-down in the short-run |
B. | firms will exit in the long-run |
C. | firms will enter in the long-run |
D. | the number of firms in the industry will be stable in both the long- and short-run |
DIF: Moderate TOP: The The long-run: market supply with entry and exit
79. Refer to Table 14-2. With free entry and exit, what will be the long run price of Whizzly Jigs?
A. | $1.50 |
B. | $2.00 |
C. | $4.00 |
D. | $4.33 |
DIF: Moderate TOP: The long-run: market supply with entry and exit
80. Refer to Table 14-2. Suppose the long-run market competitive equilibrium quantity is 1500 Whizzly Jigs. How many firms are operating in the marketplace?
A. | 300 |
B. | 500 |
C. | 750 |
D. | 1500 |
DIF: Difficult TOP: The long-run: market supply with entry and exit
81. When all firms and potential firms in a market have the same cost curves, the long-run equilibrium of a competitive market with free entry and exit will be characterised by firms:
A. | operating at efficient scale |
B. | earning small levels of profit |
C. | facing the prospect of future losses |
D. | that band together to raise market prices |
DIF: Moderate TOP: The long run: Market supply with entry and exit
82. In long-run equilibrium of a competitive market, the number of firms in the markets adjusts so that all of the market demand is satisfied at a price equal to:
A. | maximum marginal cost |
B. | minimum average total cost |
C. | minimum average variable cost |
D. | sunk cost |
DIF: Easy TOP: The long run: Market supply with entry and exit
83. The exit of firms from a competitive market will:
A. | decrease market supply and increase market prices |
B. | increase market supply and increase market prices |
C. | increase market supply and decrease market prices |
D. | decrease market supply and decrease market prices |
DIF: Easy TOP: The long run: Market supply with entry and exit
84. When calculating economic profit, total costs include:
A. | opportunity costs |
B. | fixed costs |
C. | variable costs |
D. | all of the above |
DIF: Easy TOP: FYI: Why do competitive firms stay in business if they make zero profit?
85. The exit of existing firms from a competitive market will:
A. | increase market supply and increase market prices |
B. | increase market supply and decrease market prices |
C. | decrease market supply and decrease market prices |
D. | decrease market supply and increase market prices |
DIF: Easy TOP: FYI: Why do competitive firms stay in business if they make zero profit?
86. The entry and exit decisions of firms in a competitive market are signalled by:
A. | high capital costs |
B. | profits and losses |
C. | low capital costs |
D. | high or low demand for a firm’s product |
DIF: Easy TOP: The long run: Market supply with entry and exit
87. When firms are neither entering nor exiting a perfectly competitive market:
A. | total cost must exceed total revenue |
B. | economic profits must be zero |
C. | banks must be unprepared to forgive bad debts |
D. | regulations to enter the market must be very onerous |
DIF: Easy TOP: FYI: Why do competitive firms stay in business if they make zero profit?
88. When entry and exit behaviour of firms in an industry does not affect a firm’s cost structure:
A. | the long-run market supply curve must be upward-sloping |
B. | the long-run market supply curve must be downward-sloping |
C. | the long-run market supply curve must be horizontal |
D. | we can’t tell anything about the shape of the long-run market supply curve |
DIF: Moderate TOP: The long run: Market supply with entry and exit
89. When a profit-maximising firm in a competitive market has zero economic profit, accounting profit:
A. | is positive |
B. | is negative (accounting losses) |
C. | is also zero |
D. | could be positive, negative or zero |
DIF: Easy TOP: FYI: Why do competitive firms stay in business if they make zero profit?
90. As a general rule, when accountants calculate profit they account for explicit costs but miss:
A. | sunk costs |
B. | goodwill costs |
C. | operating costs |
D. | implicit costs |
DIF: Easy TOP: FYI: Why do competitive firms stay in business if they make zero profit?
91. In calculating accounting profit, accountants normally do not include:
A. | explicit costs of production |
B. | opportunity costs that do not involve an outflow of money |
C. | long-run costs |
D. | sunk costs |
DIF: Easy TOP: FYI: Why do competitive firms stay in business if they make zero profit?
Graph 14-8
92. Refer to Graph 14-8. When the market is in long-run equilibrium at point A in panel (b), the firm represented in panel (a) will:
A. | exit the market |
B. | be at zero-profit equilibrium |
C. | earn negative accounting profit |
D. | do all of the above |
DIF: Difficult TOP: FYI: Why do competitive firms stay in business if they make zero profit?
93. Refer to Graph 14-8. Assume that the market starts in equilibrium at point A in panel (b). An increase in demand from Demand0 to Demand1 will result in:
A. | a new market equilibrium at point D |
B. | rising prices and falling profits for existing firms in the market |
C. | falling prices and falling profits for existing firms in the market |
D. | an eventual increase in the number of firms in the market and a new long-run equilibrium at point C |
DIF: Difficult TOP: A shift in demand in the short run and long run
94. Refer to Graph 14-8. If the market starts in equilibrium at point C in panel (b), a decrease in demand will ultimately lead to:
A. | more firms in the industry, but lower levels of production for each firm |
B. | a new long-run equilibrium at point D in panel (b) |
C. | fewer firms in the market |
D. | none of the above |
DIF: Difficult TOP: A shift in demand in the short run and long run
95. Refer to Graph 14-8. When a firm in a competitive market, like the one depicted in panel (a), observes market price rising from P1 to P2, it is most likely the result of:
A. | an increase in market supply from Supply0 to Supply1 |
B. | an increase in market demand from Demand0 to Demand1 |
C. | entrance of new firms into the market |
D. | the exit of existing firms in the market |
DIF: Difficult TOP: A shift in demand in the short run and long run
96. Refer to Graph 14-8. An increase in market supply from Supply0 to Supply1 is most likely the result of:
A. | existing firms changing their cost structure |
B. | existing firms in the market increasing their level of production beyond Q1 |
C. | the entrance of new firms in the market |
D. | all of the above |
DIF: Difficult TOP: The long run: Market supply with entry and exit
97. When business managers of firms in a competitive market observe falling profits, they are likely to infer that the market is characterised by:
A. | a violation of conventional market forces |
B. | rising prices |
C. | too few firms in the market |
D. | over-investment |
DIF: Moderate TOP: The long run: Market supply with entry and exit
98. When firms in a perfectly competitive market face the same costs, in the long-run they must be operating:
A. | under economies of scale |
B. | at their efficient scale |
C. | with marginal profitability |
D. | under all of the above conditions |
DIF: Moderate TOP: The long run: Market supply with entry and exit
99. When some resources used in production are only available in limited quantities, it is likely that the long-run supply curve in a competitive market is:
A. | upward-sloping |
B. | vertical |
C. | downward-sloping |
D. | horizontal |
DIF: Moderate TOP: Why the long-run supply curve might slope upwards
100. When a competitive market experiences an increase in demand that induces an increase in producer costs, which of the following is most likely to occur?
A. | producer profits must fall in the long run |
B. | the long-run market supply curve will be upward sloping |
C. | the condition of free entry into the market will be violated |
D. | all of the above are likely to occur |
DIF: Moderate TOP: Why the long-run supply curve might slope upwards
101. When firms in a competitive market have different costs, it is likely that:
A. | the market will no longer be considered competitive |
B. | free entry and exit in the market is likely to be violated |
C. | some firms will earn economic profits in the long run |
D. | long-run market supply will be downward-sloping |
DIF: Moderate TOP: Why the long-run supply curve might slope upwards
102. Regardless of the cost structure of firms in a competitive market, in the long run:
A. | firms will experience rising demand for their products |
B. | firms will experience a less competitive market environment |
C. | exit and entry is likely to lead to a horizontal long-run supply curve |
D. | the marginal firm will earn zero economic profit |
DIF: Moderate TOP: FYI: Why do competitive firms stay in business if they make zero profit?
103. A long-run supply curve that is more elastic than a short-run supply curve results from which of the following circumstances?
A. | competitive firms have more control over demand in the long run |
B. | firms in a competitive market face identical cost structures |
C. | firms can enter and exit a market more easily in the long run than in the short run |
D. | long-run supply curves are sometimes downward-sloping |
DIF: Moderate TOP: Why the long-run supply curve might slope upwards
104. The market for arts and crafts used in home decoration is a very competitive market. In this market, costs vary since some people work faster than others and have more artistic talent in producing arts and crafts. In this competitive market, we would expect to observe:
A. | a short-run supply curve more elastic than the market’s long-run supply curve |
B. | an upward-sloping long-run supply curve |
C. | firms that are generally unresponsive to change in demand |
D. | little exit and entry |
DIF: Difficult TOP: Why the long-run supply curve might slope upwards
105 Suppose the long-run supply curve is upward sloping. Which of the following statements is correct?
A. | price will always return to the same short-run equilibrium price |
B. | if input prices are increasing, it is possible for some firms to earn positive economic profits |
C. | if firms face different costs, it is possible for some firms to earn positive economic profits |
D. | in a competitive market no firm can make positive economic profits |
DIF: Moderate TOP: Why the long-run supply curve might slope upwards
106. When new entrants to a competitive market have higher costs than existing firms:
A. | market price must be rising |
B. | accounting profits will be the primary signal for entrance |
C. | sunk costs become an important determinant of short-run entrance strategy |
D. | none of the above are true |
DIF: Moderate TOP: Why the long-run supply curve might slope upwards
107. The production decisions of perfectly competitive firms follow the principle of economics that states that rational people:
A. | consider sunk costs |
B. | think at the margin |
C. | equate prices to the average costs of production |
D. | will eventually leave markets that experience zero profit |
DIF: Moderate TOP: The marginal-cost curve and the firm’s supply decision
SHORT ANSWER
1. From the perspective of a price-taking competitive firm, what is the relationship between price, average revenue and marginal revenue?
DIF: Easy TOP: The revenue of a competitive firm
2. Explain what it means if a firm in a competitive market is labelled as a price-taker.
DIF: Easy TOP: The meaning of competition
3. Use a graph to demonstrate the circumstances that would prevail in a competitive market where firms are earning economic profits. Can this scenario be maintained in the long-run? Carefully explain your answer.
DIF: Moderate TOP: The long run: Market supply with entry and exit
4. If a firm was producing an output that was above the marginal revenue = marginal cost point (MR = MC), explain why a reduction in output (Q) would increase its profit.
DIF: Easy TOP: The marginal-cost curve and the firm’s supply decision
5. Give two reasons why the long-run industry supply curve may slope upward. Use an example to demonstrate your reasons.
DIF: Moderate TOP: FYI: Why do competitive firms stay in business if they make zero profit?
6. There are 500 profit-maximising firms in a competitive market. When market price is $10 per unit, each firm produces exactly 20 units of output. What are the total quantity supplied to the market, the total revenue, average revenue and marginal revenue of each firm?
DIF: Moderate TOP: The revenue of a competitive firm
7. Use a graph to demonstrate the circumstances that would prevail in a perfectly competitive market where firms are experiencing economic losses. Identify costs, revenue and the economic losses on your graph. Using your graph, determine whether this firm will shut down in the short run, or choose to remain in the market. Explain your answer.
DIF: Moderate TOP: Figure 14.5: Profit as the area between price and average total cost
8. When will a firm shut-down temporarily? When do firms exit an industry? Holding all else constant, is it ever the case that a firm will shut down in the short-run, but will find it profitable to stay in the long run?
DIF: Moderate TOP: The firm’s short-run decision to shut down
9. At its current level of production, a profit-maximising firm in a competitive market receives $12.50 for each unit it produces, and faces an average total cost of $10. At the market price of $12.50 per unit, the firm’s marginal cost curve crosses the marginal revenue curve at an output level of 1000 units. What is the firm’s current profit? What is likely to occur in this market and why?
DIF: Moderate TOP: A simple example of profit maximisation
10. Discuss the process that induces firms to operate at efficient scale in the long run in a competitive market with free entry and exit.
DIF: Difficult TOP: Why the long-run supply curve might slope upwards
11. New Zealand possums produce the highest quality fur, due to the large pelts per body size. Demand for New Zealand possums products has risen dramatically. This is partly a result of the conservation benefits of harvesting New Zealand possums. This has made the product seem more environment-friendly than other fur products and boosted sales to concerned consumers.
Assume that the possums market satisfies all of the attributes of a competitive market. Further assume that high grade possum furs are the most expensive input into the possum fur production function.
a. Use a graph of the market for possum fur to demonstrate the effect of its environmentally friendly status on the market equilibrium.
b. Graph the reaction of an individual incumbent firm to the increase in market demand. In your graph, identify the firm’s revenue and cost structures.
c. What would you predict would happen to long-run industry supply if the price of possum fur increased as possum culling increased their production of possum furs? Use a graph to demonstrate the validity of your prediction.
DIF: Difficult TOP: Figure 14.5: Profit as the area between price and average total cost
12. If identical firms that remain in a competitive market over the long run make zero economic profit, why do these firms choose to remain in the market?
DIF: Moderate TOP: FYI: Why do competitive firms stay in business if they make zero profit?