Perfect Competition – Chapter 15 | Test Bank – 9th - Foundations of Microeconomics 9e | Test Bank with Answer Key by Robin Bade by Robin Bade. DOCX document preview.
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Foundations of Microeconomics, 9e (Bade)
Chapter 15 Perfect Competition
15.1 A Firm's Profit-Maximizing Choices
1) A market with a large number of sellers
A) can only be a perfectly competitive market.
B) might be an oligopoly or a perfectly competitive market.
C) might be a monopolistically competitive or a perfectly competitive market.
D) might be a perfectly competitive, monopolistically competitive, oligopoly, or monopoly market.
E) can only be a monopolistically competitive market.
Topic: Market types
Skill: Level 1: Definition
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
2) What is the difference between perfect competition and monopolistic competition?
A) Perfect competition has a large number of small firms while monopolistic competition does not.
B) Perfect competition has barriers to entry while monopolistic competition does not.
C) Perfect competition has no barriers to entry, while monopolistic competition does.
D) In perfect competition, firms produce identical goods, while in monopolistic competition, firms produce slightly different goods.
E) In monopolistic competition, firms produce identical goods, while in perfect competition, firms produce slightly different goods.
Topic: Market types
Skill: Level 1: Definition
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
3) A perfectly competitive firm
A) sells a product that has perfect substitutes.
B) has a perfectly inelastic demand.
C) has a perfectly elastic supply.
D) Answers A and B are correct.
E) Answers A and C are correct.
Topic: Perfect competition, definition
Skill: Level 1: Definition
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
4) In which market structure do firms exist in very large numbers, each firm produces an identical product, and there is freedom of entry and exit?
A) monopoly
B) oligopoly
C) only perfect competition
D) only monopolistic competition
E) both perfect competition and monopolistic competition
Topic: Perfect competition, definition
Skill: Level 1: Definition
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
5) The characteristics that describe a perfectly competitive industry include
A) many firms selling an identical product.
B) one firm selling to many buyers.
C) many firms selling a slightly differentiated product.
D) a few firms selling to many buyers.
E) None of the above answers is correct.
Topic: Perfect competition, definition
Skill: Level 1: Definition
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
6) The ________ market is an example of ________ type of market.
A) corn; a perfectly competitive
B) mattress; a monopoly
C) car insurance; an oligopoly
D) airplane manufacturing; a monopolistically competitive
E) cell phone; a perfectly competitive
Topic: Perfect competition
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Application of knowledge
7) In part, perfect competition arises if
i. each firm's minimum efficient scale is large relative to demand.
ii. each firm produces a good or service identical to those produced by its many competitors.
iii. there are significant barriers to entry.
A) i only
B) ii only
C) i and ii
D) iii only
E) ii and iii
Topic: Perfect competition, definition
Skill: Level 1: Definition
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
8) In which of the following market types do all firms sell products so identical that buyers do NOT care from which firm they buy?
A) perfect competition
B) monopolistic competition
C) oligopoly
D) monopoly
E) perfect competition and monopolistic competition
Topic: Perfect competition, definition
Skill: Level 1: Definition
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
9) Each firm in a perfectly competitive industry
A) produces a good that is slightly different from that of the other firms.
B) produces a good that is identical to that of the other firms.
C) attains economies of scale so that its efficient size is large compared to the market as a whole.
D) has control over at least one unique resource to separate themselves from their competitors.
E) has an important influence on the market price of the good or service being produced.
Topic: Perfect competition, definition
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
10) A market in which many firms sell identical products is
A) a monopoly.
B) an oligopoly.
C) only perfectly competition.
D) only monopolistic competition.
E) both perfect competition and monopolistic competition.
Topic: Perfect competition, definition
Skill: Level 1: Definition
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
11) One requirement for an industry to be perfectly competitive is that in the industry there
A) are a few firms who control the market.
B) are many firms for whom the efficient scale of production is small.
C) is one firm that sells a product with no close substitutes.
D) are many firms selling different products.
E) is a barrier to entry that makes the entry of new firms difficult.
Topic: Perfect competition, definition
Skill: Level 1: Definition
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
12) One requirement for an industry to be perfectly competitive is that
A) there are no restrictions on entry into or exit from the market.
B) there are multiple restrictions on entry into or exit from the market.
C) there are many firms selling different products.
D) sellers and buyers have imperfect information about prices.
E) many firms sell slightly different products.
Topic: Perfect competition, definition
Skill: Level 1: Definition
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
13) One requirement for an industry to be perfectly competitive is that
A) sellers and buyers have imperfect information about prices.
B) established firms have no advantage over new firms.
C) established firms have a significant advantage over new firms.
D) different firms produce widely different products.
E) many firms produce slightly different products.
Topic: Perfect competition, definition
Skill: Level 1: Definition
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
14) A perfectly competitive market arises when
A) the market demand is small relative to the output of a firm.
B) there are many buyers but few sellers.
C) the market demand is very large relative to the output of one seller.
D) a firm has control over a unique resource.
E) each of the many firms produces a slightly different product.
Topic: Perfect competition, definition
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
15) Perfect competition is characterized by all of the following EXCEPT
A) a large number of buyers and sellers.
B) no restrictions on entry into or exit from the industry.
C) considerable advertising by individual firms.
D) buyers and sellers are well informed about prices.
E) firms produce an identical product.
Topic: Perfect competition, definition
Skill: Level 1: Definition
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
16) Which of the following is the best example of a perfectly competitive market?
A) farming
B) diamonds
C) athletic shoes
D) soft drinks
E) electricity distribution
Topic: Perfect competition, definition
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
17) Which of the following market types has the fewest number of firms?
A) perfect competition
B) monopolistic competition
C) oligopoly
D) monopoly
E) perfect competition and monopolistic competition
Topic: Monopoly, definition
Skill: Level 1: Definition
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
18) A monopoly occurs when
A) each of many firms produces a product that is slightly different from that of the other firms.
B) one firm sells a good that has no close substitutes and a barrier blocks entry for other firms.
C) there are many firms producing the same product.
D) a few firms control the market.
E) one firm is larger than the many other firms that make an identical product.
Topic: Monopoly, definition
Skill: Level 1: Definition
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
19) In which market structure does one firm sell a good or service with no close substitutes and there is a barrier blocking the entry of new firms?
A) only monopoly
B) only oligopoly
C) perfect competition
D) monopolistic competition
E) either monopoly or oligopoly
Topic: Monopoly, definition
Skill: Level 1: Definition
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
20) When one firm sells a good or service that has no close substitutes and a barrier blocks the entry of new firms, what type of market is this?
A) perfect competition
B) only monopoly
C) oligopoly
D) only monopolistic competition
E) either monopoly or monopolistic competition
Topic: Monopoly, definition
Skill: Level 1: Definition
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
21) ________ a large number of firms competing by making similar but slightly different products.
A) Monopoly requires
B) Perfect competition requires
C) Monopolistic competition requires
D) Oligopoly requires
E) Both perfect competition and monopolistic competition require
Topic: Monopolistic competition, definition
Skill: Level 1: Definition
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
22) A market is classified as monopolistically competitive when
A) there is a barrier that blocks entry by other firms.
B) a small number of firms compete.
C) many firms produce the same product.
D) many firms produce a slightly differentiated product.
E) there is one firm that sells a good or service with no close substitutes.
Topic: Monopolistic competition, definition
Skill: Level 1: Definition
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
23) In which market structure is there a large number of firms producing slightly differentiated products?
A) monopoly
B) oligopoly
C) only perfect competition
D) only monopolistic competition
E) either perfect competition or monopolistic competition
Topic: Monopolistic competition, definition
Skill: Level 1: Definition
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
24) A market is classified as an oligopoly when
A) a few firms compete.
B) many firms produce a slightly differentiated product.
C) no matter how many firms are in the market, a barrier blocks entry by other new firms.
D) many firms produce the same product.
E) only one firm sells a product with no close substitutes.
Topic: Oligopoly, definition
Skill: Level 1: Definition
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
25) Which of the following market types has only a few competing firms?
A) perfect competition
B) monopolistic competition
C) oligopoly
D) monopoly
E) perfect competition and monopolistic competition
Topic: Oligopoly, definition
Skill: Level 1: Definition
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
26) In which market structure are there a small number of firms competing?
A) only monopoly
B) only oligopoly
C) perfect competition
D) monopolistic competition
E) either monopoly or oligopoly
Topic: Oligopoly, definition
Skill: Level 1: Definition
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
27) A market is ________ when a small number of firms compete.
A) a monopoly
B) perfectly competitive
C) monopolistically competitive
D) an oligopoly
E) either monopolistically competitive or an oligopoly
Topic: Oligopoly, definition
Skill: Level 1: Definition
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
28) The U.S. oil industry has only a few firms in it, so an economists is likely to describe the industry as
A) a monopoly.
B) an oligopoly.
C) perfectly competitive.
D) monopolistically competitive.
E) Both answers C and D can be correct.
Topic: Market types
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Analytical thinking
29) The firm's over-riding objective is to
A) earn a normal profit.
B) maximize normal profit.
C) maximize economic profit.
D) maximize total revenue.
E) avoid an economic loss.
Topic: Firm's goal
Skill: Level 1: Definition
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
30) Normal profit is
A) the same thing as economic profit.
B) the return to entrepreneurship.
C) total revenue minus the total opportunity cost of production.
D) the point of profit when total revenue is maximized.
E) part of the firm's total revenue.
Topic: Normal profit
Skill: Level 1: Definition
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
31) In a perfectly competitive market, the type of decision a firm has to make is different in the short run than in the long run. Which of the following is an example of a perfectly competitive firm's short-run decision?
A) the profit-maximizing level of output
B) how much to spend on advertising and sales promotion
C) what price to charge buyers for the product
D) whether or not to enter or exit an industry
E) whether or not to change its plant size
Topic: Short-run decisions
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
32) To maximize its profit, in the short run a perfectly competitive firm decides
A) what price to charge for its product.
B) what quantity of output to produce.
C) whether to exit the market.
D) whether to increase the size of its plant.
E) how much advertising it should undertake.
Topic: Short-run decisions
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
33) A perfectly competitive firm can
A) sell all of its output at the prevailing market price.
B) set a higher price to customers who are willing to pay more.
C) raise its price in order to increase its total revenue.
D) sell additional output only by lowering its price.
E) usually not sell all the output it produces, but still "over-produces" because there are some periods when it can sell the extra output at very profitable prices.
Topic: Price takers
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
34) In a perfectly competitive market, one farmer's barley is
A) completely different from another farmer's barley.
B) a perfect substitute for another farmer's barley.
C) a monopolized product in that farmer's local market.
D) a monopolized product in the national market.
E) slightly different from another farmer's barley.
Topic: Price takers
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
35) A firm in perfect competition is a price taker because
A) there are no good substitutes for its good.
B) many other firms produce identical products.
C) it is very large.
D) its demand curves are downward sloping.
E) its demand curve is vertical at the profit-maximizing quantity.
Topic: Price takers
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
36) The price charged by a perfectly competitive firm is
A) the same as the market price.
B) different than the price charged by competing firms.
C) lower the more the firm produces.
D) higher the more the firm produces.
E) indeterminate.
Topic: Price takers
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
37) For a perfectly competitive firm, the price of its good is equal to the firm's marginal revenue because
A) information about price changes is hard to come by for small sellers.
B) price and marginal revenue are the same economic concepts.
C) individual perfectly competitive firms cannot influence the market price by changing their output.
D) the firm's total revenue cannot be changed by anything the firms can do.
E) there are only a small number of firms in the market.
Topic: Price takers
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Analytical thinking
38) A large number of sellers all selling an identical product implies which of the following?
A) market chaos
B) the inability of any seller to change the price of the product
C) large losses incurred by all sellers
D) horizontal market supply curves
E) vertical market supply curves
Topic: Price takers
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
39) A firm that is a price taker faces
A) an elastic supply curve.
B) an inelastic supply curve.
C) a perfectly elastic demand curve.
D) a perfectly inelastic demand curve.
E) an elastic but not perfectly elastic demand curve.
Topic: Price takers
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
40) We know that a perfectly competitive firm is a price taker because
A) its MC curve slopes upward.
B) its ATC curve is U-shaped.
C) its demand curve is horizontal.
D) MC and ATC are equal at the profit-maximizing amount of output.
E) it has no supply curve.
Topic: Price takers
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
41) Suppose Pat's Paints is a perfectly competitive firm. If Pat's Paints' marginal revenue equals $5 per can, and Pat decides to sell 100 cans of paint, Pat's total revenue equals
A) $5.
B) $100.
C) $500.
D) $20.
E) Information on the price of a can of paint is needed to answer the question.
Topic: Price takers
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Analytical thinking
42) If a firm in a perfectly competitive market faces an equilibrium price of $5, its marginal revenue
A) will be greater than $5.
B) will be less than $5.
C) maybe either greater or less than $5.
D) will also be $5.
E) will be any amount but $5.
Topic: Price takers
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Analytical thinking
43) If demand for a seller's product is perfectly elastic, which of the following is TRUE?
i. The firm will sell no output if it sets the price its product above the market price.
ii. There are many perfect substitutes for the seller's product.
iii. The firm will sell no output if it sets the price its product below the market price.
A) i only
B) ii only
C) iii only
D) i and ii
E) ii and iii
Topic: Demand
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
44) Cynthia is an Oklahoma wheat farmer. The demand for her wheat is
A) perfectly inelastic.
B) inelastic but not perfectly inelastic.
C) elastic but not perfectly elastic.
D) perfectly elastic.
E) unit elastic.
Topic: Demand
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
45) Because perfectly competitive firms are price takers, each firm faces a demand that is
A) perfectly inelastic.
B) perfectly elastic.
C) highly inelastic but never is it perfectly inelastic.
D) unit elastic.
E) highly elastic but never is it perfectly elastic.
Topic: Demand
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
46) If a perfectly competitive firm raised the price of its product
A) its profits would increase.
B) the quantity of output it sells decreases to zero.
C) rival firms will follow suit and raise their prices also.
D) the firm will be forced to advertise more.
E) its total revenue would rise but its total cost would rise by more.
Topic: Demand
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
47) If the wheat industry is perfectly competitive with a market price of $4 per bushel and Farmer Brown charged $5 per bushel, how many bushels would Farmer Brown sell?
A) some, but fewer than he would at a price of $4
B) more than he would at a price of $4
C) just as many as he would at a price of $4
D) none
E) More information is needed about the prices charged by the other wheat farmers.
Topic: Demand
Skill: Level 4: Applying models
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
48) How does the demand for any one seller's product in perfect competition compare to the market demand for that product?
A) They are identical.
B) The demand for any one seller is proportionally smaller but otherwise identical to the market demand.
C) The demand for any one seller's product is perfectly elastic while the market demand curve is downward sloping.
D) There is no demand for any one seller's competitively sold product.
E) The demand for any one seller's product is not perfectly elastic while the market demand is perfectly elastic.
Topic: Demand
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
49) For the perfectly competitive broccoli producers in California, the market demand curve for broccoli is
A) a horizontal line.
B) downward sloping.
C) nonexistent.
D) upward sloping.
E) the same as the demand curve each firm faces.
Topic: Demand
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
50) The market demand curve in a perfectly competitive market is ________ and the demand curve for a perfectly competitive firm's output is ________.
A) downward sloping; downward sloping
B) downward sloping; horizontal
C) horizontal; downward sloping
D) horizontal; horizontal
E) downward sloping; upward sloping
Topic: Demand
Skill: Level 1: Definition
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
51) Elsie is a perfectly competitive dairy farmer. The market price of milk was $2.40 but just fell to $2.20 a gallon. Elsie
A) can sell as much milk as she wants at $2.20 a gallon.
B) will have to charge some customers $2.40 a gallon to stay in business.
C) will produce the same amount of milk at both prices.
D) can sell more at the lower price because the quantity demanded is higher at lower prices.
E) will be able to charge her initial customers $2.40 a gallon.
Topic: Demand
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
52) For a perfectly competitive palm tree nursery in South Carolina, the total revenue curve is
A) downward sloping.
B) a horizontal line.
C) upward sloping.
D) U-shaped.
E) undefined because the firm is perfectly competitive.
Topic: Total revenue
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
53) If the market price of a product is $14 and all sellers are price takers, then which of the following is correct?
A) Each seller's total revenue line is graphed as an upward-sloping straight line.
B) The demand curve for each seller's product is a downward-sloping straight line.
C) Each seller can earn more total revenue by raising the price he or she charges above $14.
D) The demand curve for each seller's product is a downward-sloping but not necessarily a straight line.
E) Each seller's total revenue is graphed as an upside-down U-shaped curve.
Topic: Total revenue
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
54) Marginal revenue is
A) the change in total revenue from a one-unit increase in the quantity sold.
B) another name for total revenue.
C) the change in total cost from producing an additional unit of output.
D) the economic profit from producing an additional unit of output.
E) less than price for a perfectly competitive firm.
Topic: Marginal revenue
Skill: Level 1: Definition
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
55) A firm's marginal revenue is
A) the change in total revenue that results from a one-unit increase in the quantity sold.
B) total revenue minus total cost.
C) the change in total revenue minus the change in total cost.
D) the change in total revenue that results from an increase in the demand for the good or service.
E) less than the market price for a perfectly competitive firm.
Topic: Marginal revenue
Skill: Level 1: Definition
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
56) For a perfectly competitive firm, marginal revenue is
A) less than the price.
B) greater than the price.
C) equal to the price.
D) equal to the change in profit from selling one more unit.
E) undefined because the firm's demand curve is horizontal.
Topic: Marginal revenue
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
57) In perfect competition, marginal revenue
A) increases as more is sold.
B) decreases as more is sold.
C) is equal to the market price.
D) is zero.
E) is always greater than marginal cost.
Topic: Marginal revenue
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
58) For a perfectly competitive firm, the market price of a good is
A) a given which the firm cannot change.
B) determined by the firm in order to maximize its profit.
C) equal to the firm's marginal revenue.
D) Answers A and B are correct.
E) Answers A and C are correct.
Topic: Marginal revenue
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
59) The marginal revenue curve for a perfectly competitive firm is
A) horizontal.
B) vertical.
C) upward sloping.
D) downward sloping.
E) a straight line coming out of the origin with a 45 degree slope.
Topic: Marginal revenue
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
60) In the above, a marginal revenue curve for a perfectly competitive firm is shown in Figure
A) W.
B) X.
C) Y.
D) Z.
E) X and Figure Z.
Topic: Marginal revenue
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Analytical thinking
61) As a perfectly competitive firm produces more and more of a good, its economic profit
A) constantly increases.
B) constantly decreases.
C) first decreases, then increases.
D) first increases, then decreases.
E) does not change.
Topic: Profit maximization
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Analytical thinking
62) As a perfectly competitive firm's output increases, its total revenue ________ and its total cost ________.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
E) does not change; increases
Topic: Profit maximization
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
63) In a perfectly competitive industry, when a firm is producing so that its total revenue equals its total cost, the firm is
A) making an economic profit.
B) incurring an economic loss.
C) making zero economic profit.
D) definitely not maximizing its profit.
E) None of the above answers is correct because the relationship between total revenue and total cost has nothing to do with the firm's profit or loss.
Topic: Profit maximization
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
64) For a syrup producer in central Vermont, profit is maximized at the level of output for which
A) total revenue exceeds total cost by the largest amount.
B) total revenue exceeds total cost by the smallest amount.
C) total revenue is maximized.
D) total ost is minimized.
E) total revenue equals total cost.
Topic: Profit maximization
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Revised
AACSB: Reflective thinking
65) A firm maximizes its profit by producing the amount of output such that
A) marginal revenue equals marginal cost.
B) marginal revenue exceeds marginal cost by some amount.
C) marginal revenue is maximized.
D) marginal cost is minimized.
E) marginal revenue exceeds marginal cost by the maximum amount possible.
Topic: Profit maximization
Skill: Level 1: Definition
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
66) For a perfectly competitive firm, profit maximization occurs when output is such that
A) total revenue (TR) is maximized.
B) total cost (TC) is minimized.
C) marginal revenue (MR) = marginal cost (MC).
D) average total cost (ATC) is minimized.
E) total revenue (TR) equals total cost (TC).
Topic: Profit maximization
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
67) A perfectly competitive firm will maximize profit when the quantity produced is such that the
A) firm's total revenue is equal to total cost.
B) firm's marginal revenue is equal to the price.
C) firm's marginal revenue is equal to its marginal cost.
D) price exceeds the firm's marginal cost by as much as possible.
E) firm's marginal revenue exceeds its marginal cost by the maximum amount possible.
Topic: Profit maximization
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
68) For a perfectly competitive firm, profit is maximized at the output level where
i. total revenue exceeds total cost by the largest amount.
ii. marginal revenue equals marginal cost.
iii. price equals marginal cost.
A) i only
B) ii only
C) ii and iii
D) i and ii
E) i, ii, and iii
Topic: Profit maximization
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
69) If a perfectly competitive wheat farmer is maximizing its profit and then increases its output, the farmer's
A) total revenue increases, but total cost rises by more so that the farmer's total profit decreases.
B) total revenue decreases and total cost increases, both thereby decreasing the farmer's total profit.
C) total revenue does not change but total cost increases, thereby decreasing the farmer's total profit.
D) marginal revenue increases, but so does marginal cost, so that the farmer's total profit increases.
E) total revenue and total cost both rise, but the effect on the farmer's total profit is uncertain.
Topic: Profit maximization
Skill: Level 4: Applying models
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
70) To increase its profit, a perfectly competitive firm will produce more output when
A) price is greater than average fixed cost.
B) price is greater than marginal cost.
C) marginal cost is less than average total cost.
D) average variable cost is greater than average fixed cost.
E) price is greater than average variable cost.
Topic: Profit maximization
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
71) In a perfectly competitive market, the market price is $23. At the current level of output, a firm has a marginal cost of $28. What should the firm do?
A) produce a larger output to make more profit
B) nothing, it is currently maximizing profit
C) produce less output to make more profit
D) shut down
E) raise the price of its product
Topic: Profit maximization
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
72) A perfectly competitive firm is producing at the quantity where marginal cost is $6 and average total cost is $4. The price of the good is $5. To maximize its profit, this firm should
A) raise its price.
B) lower its price.
C) increase its output.
D) decrease its output.
E) increase the price it charges for its product.
Topic: Profit maximization
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
73) Suppose that a perfectly competitive firm's marginal revenue equals $12 when it sells 10 units of output. If the marginal cost of producing the 10th unit is $14, to maximize its profit the firm should
A) do nothing because it is already maximizing its profit.
B) decrease its production.
C) increase its production.
D) shut down.
E) increase the price it charges for its product.
Topic: Profit maximization
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
74) Shama is producing candles in a perfectly competitive market. When she produces 500 candles, her total cost is $250. If she produces one additional candle, her total cost increases to $260. In order to maximize her profit, she should produce the additional candle
A) if the market price for a candle is $12.
B) only if the market price exceeds $260 for a candle.
C) only if the market price exceeds $250 for a candle.
D) if the market price for a candle exceeds $0.50.
E) if her price exceeds her average total cost.
Topic: Profit maximization
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Analytical thinking
75) Jennifer's Bakery Shop produces baked goods in a perfectly competitive market. If Jennifer decides to produce her 100th batch of cookies, the marginal cost is $120. She can sell this batch of cookies at a market price of $110. To maximize her profit, Jennifer should
A) not produce this additional batch.
B) produce this batch of cookies because they will help lower her average fixed cost.
C) charge $120 for this batch.
D) shut down.
E) produce this batch of cookies because their MR exceeds their MC.
Topic: Profit maximization
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
76) Henry, a perfectly competitive lime grower in Southern California, notices that the market price of limes is greater than his marginal cost. What should Henry do?
A) expand his output to increase profits
B) shut down and incur a loss equal to his total fixed cost
C) advertise his limes to be able to sell more output
D) look for the output level where marginal revenue minus marginal cost is maximized
E) shut down and earn no profit but also incur no loss
Topic: Profit maximization
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
77) Jerry's Jellybean Factory produces 2,000 pounds of jellybeans per month and sells them in a perfectly competitive market. The marginal cost is $3 per pound, the average variable cost is $2 per pound, and the beans sell for $4 per pound. Jerry
A) is maximizing profit.
B) is incurring an economic loss and should shut down.
C) could increase his profit by producing more beans.
D) could increase his profit by producing fewer beans.
E) could increase his profit by raising the price of his beans.
Topic: Profit maximization
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Analytical thinking
78) If a perfectly competitive firm's marginal revenue is greater than its marginal cost, as it increases its output, its profit ________ and the price it can charge for its product ________.
A) increases; does not change
B) decreases; falls
C) increases; falls
D) decreases; rises
E) decreases; does not change
Topic: Profit maximization
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
79) Mark owns a cattle ranch near Hugo, Oklahoma. Mark is currently producing beef at an output level where marginal revenue exceeds marginal cost. In order to maximize his profit, Mark should
A) not change his output.
B) decrease his output.
C) increase his output.
D) shut down his ranch.
E) probably change his output, but more information is needed to determine if he should increase, decrease, or not change it.
Topic: Profit maximization
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
80) During the winter, theme parks in Orlando close earlier than in the summer. The reason the theme parks close early during the winter is because during that season the marginal revenue from staying open later is ________ the marginal cost.
A) greater than
B) less than
C) equal to
D) zero compared to
E) not comparable to
Topic: Profit maximization
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
81) A perfectly competitive firm is earning an economic profit when total fixed costs increase. Assuming the firm does not shut down, in the short run the firm will
A) charge a higher price.
B) produce more output so the extra revenue will cover the increased costs.
C) produce less output to decrease total costs.
D) continue producing the same quantity as before but will make less economic profit.
E) continue producing the same quantity as before and continue making the same economic profit as before.
Topic: Profit maximization
Skill: Level 4: Applying models
Section: Checkpoint 15.1
Status: Old
AACSB: Analytical thinking
82) The above table has the total revenue and total cost schedule for Omar, a perfectly competitive grower of rutabagas. When Omar produces 2 bushels of rutabagas, his total profit equals
A) $0.
B) $20.
C) $28.
D) -$8.
E) $48.
Topic: Profit maximization
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Analytical thinking
83) The above table has the total revenue and total cost schedule for Omar, a perfectly competitive grower of rutabagas. Omar's total profit is maximized when he produces ________ bushels of rutabagas.
A) 3
B) 5
C) 6
D) 8
E) 7
Topic: Profit maximization
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Analytical thinking
84) The above table has the total revenue and total cost schedule for Omar, a perfectly competitive grower of rutabagas. When Omar maximizes his profit, Omar's profit equals
A) $80.
B) $11.
C) $30.
D) $16.
E) $105.
Topic: Profit maximization
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Analytical thinking
85) The above figure illustrates a perfectly competitive firm. Curve A represents the
A) MR curve.
B) ATC curve.
C) MC curve.
D) AVC curve.
E) AFC curve.
Topic: Profit maximization
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
86) The above figure illustrates a perfectly competitive firm. Curve B represents the
A) MR curve.
B) ATC curve.
C) MC curve.
D) AVC curve.
E) AFC curve.
Topic: Profit maximization
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
87) The above figure illustrates a perfectly competitive firm. Curve C represents the
A) MR curve.
B) ATC curve.
C) MC curve.
D) market demand curve.
E) AFC curve.
Topic: Profit maximization
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
88) The above figure illustrates a perfectly competitive firm. If the market price is $40 a unit, to maximize its profit (or minimize its loss) the firm should
A) shut down.
B) produce more than 10 and less than 30 units.
C) produce 30 units.
D) produce more than 30 units and less than 40 units.
E) produce 40 units.
Topic: Profit maximization
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Analytical thinking
89) The above figure illustrates a perfectly competitive firm. If the market price is $10 a unit, to maximize its profit (or minimize its loss) the firm should
A) shut down.
B) produce between 10 and less than 30 units.
C) produce 30 units.
D) produce more than 30 units and less than 40 units.
E) produce 40 units.
Topic: Shut down
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Analytical thinking
90) If a firm shuts down, it
A) makes zero economic profit.
B) incurs an economic loss equal to its total variable cost.
C) incurs an economic loss equal to its total fixed cost.
D) makes a normal profit.
E) might make an economic profit, zero economic profit, or incur an economic loss.
Topic: Shut down
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
91) If a struggling perfectly competitive furniture store in Detroit shuts down, it incurs an economic loss equal to its
A) marginal cost.
B) total fixed cost.
C) total variable cost.
D) average variable cost.
E) average total cost.
Topic: Shut down
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
92) A perfectly competitive firm will shut down when the price is just below the minimum point on the
A) average fixed cost curve.
B) average total cost curve.
C) marginal cost curve.
D) average variable cost curve.
E) marginal revenue curve.
Topic: Shut down
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
93) Under which of the following conditions will a profit-maximizing perfectly competitive firm shut down in the short run?
A) when it is making a normal profit
B) whenever its marginal cost is less than its marginal revenue
C) when the price is less than its minimum average variable cost
D) whenever its total cost is greater than its total revenue
E) when the price is less than its minimum average total cost
Topic: Shut down
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
94) A perfectly competitive firm will continue to operate in the short run when the market price is below its average total cost if the
A) marginal revenue is greater than marginal cost.
B) price is at least equal to the minimum average variable cost.
C) total fixed costs are less than total revenue.
D) marginal cost is minimized.
E) price is also less than the minimum average variable cost.
Topic: Shut down
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
95) If the price is less than a perfectly competitive firm's minimum average variable cost, the firm
A) makes an economic profit.
B) operates and incurs an economic loss equal to total fixed cost.
C) operates and incurs an economic loss equal to average variable cost.
D) shuts down and incurs an economic loss equal to total fixed cost.
E) shuts down and incurs an economic loss equal to average variable cost.
Topic: Shut down
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
96) Which of the following is TRUE if a firm shuts down?
i. The price is less than minimum average variable cost.
ii. The firm is able to avoid an economic loss.
iii. The firm incurs a loss equal to its total variable cost.
A) i only
B) i and ii
C) i and iii
D) iii only
E) ii only
Topic: Shut down
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
97) If the market price is $50 for a unit of a good produced in a perfectly competitive market and the firm's minimum average variable cost is $52, then to maximize its profit (or minimize its loss) the firm should
A) definitely produce the unit.
B) shut down.
C) not produce the unit but remain open.
D) not produce the unit. Whether the firm should shut down or remain open cannot be determined without more information.
E) produce the unit only if the price exceeds the average fixed cost.
Topic: Shut down
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Analytical thinking
98) Suppose a perfectly competitive firm's minimum average variable cost is $3 when it produces 50. If the price is $2 and the firm's marginal cost is $2, the firm should
A) continue to produce, but produce more than 50.
B) continue to produce 50.
C) continue to produce, but produce less than 50.
D) shut down.
E) continue to operate, but to determine the amount of production needs more information than is given.
Topic: Shut down
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Analytical thinking
99) Under what conditions would a perfectly competitive cotton farmer who is incurring an economic loss temporarily stay in business?
A) if the total revenue exceeds the total fixed cost
B) if the total revenue exceeds the total variable cost
C) if the total revenue is positive
D) if the total revenue is increasing
E) if the marginal revenue exceeds the price
Topic: Shut down
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
100) The largest loss a profit-maximizing perfectly competitive firm can incur in the short run equals its
A) average variable cost multiplied by output.
B) total fixed cost.
C) marginal cost multiplied by the number of units produced.
D) average total cost multiplied by the number of units produced.
E) total variable cost.
Topic: Shut down
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
101) The rutabaga market is perfectly competitive and the price of a ton of rutabagas rises. As a result, Rudy, a rutabaga farmer, will
A) decrease his output of rutabagas.
B) not change his output of rutabagas because Rudy's firm is a price taker.
C) increase his output of rutabagas.
D) at first decrease and then increase his output of rutabagas.
E) probably change his output of rutabagas, but more information is needed about the change in the marginal revenue of a ton of rutabagas.
Topic: Firm's short-run supply curve
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
102) A perfectly competitive firm's short-run supply curve is
A) horizontal at the market price.
B) its total cost curve above the AVC.
C) its marginal cost curve below the marginal revenue curve.
D) its marginal cost curve above the AVC curve.
E) its marginal revenue curve below the ATC curve.
Topic: Firm's short-run supply curve
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
103) The firm's supply curve is its
A) marginal cost curve above the average variable cost curve.
B) marginal cost curve below the average variable cost curve.
C) average variable cost curve above the marginal cost curve.
D) average total cost curve above the marginal cost curve.
E) marginal revenue curve above the average total cost curve.
Topic: Firm's short-run supply curve
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
104) Which of the following will increase a perfectly competitive seller's short-run supply and shift the firm's short-run supply curve rightward?
A) an increase in the market price
B) a decrease in average fixed costs
C) a decrease in marginal cost
D) Both answers A and B are correct.
E) Both answers A and C are correct.
Topic: Firm's short-run supply curve
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
105) The four market types are
A) perfect competition, imperfect competition, monopoly, and oligopoly.
B) oligopoly, monopsony, monopoly, and imperfect competition.
C) perfect competition, monopoly, monopolistic competition, and oligopoly.
D) oligopoly, oligopolistic competition, monopoly, and perfect competition.
E) perfect competition, imperfect competition, monopoly, and duopoly.
Topic: Market types
Skill: Level 1: Definition
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
106) A requirement of perfect competition is that
i. many firms sell an identical product to many buyers.
ii. there are no restrictions on entry into (or exit from) the market, and established firms have no advantage over new firms.
iii. sellers and buyers are well informed about prices.
A) i only
B) i and ii
C) iii only
D) i and iii
E) i, ii, and iii
Topic: Perfect competition, definition
Skill: Level 1: Definition
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
107) A perfectly competitive firm is a price taker because
A) many other firms produce the same product.
B) only one firm produces the product.
C) many firms produce a slightly differentiated product.
D) a few firms compete.
E) it faces a vertical demand curve.
Topic: Price takers
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
108) The demand curve faced by a perfectly competitive firm is
A) horizontal.
B) vertical.
C) downward sloping.
D) upward sloping.
E) U-shaped.
Topic: Demand
Skill: Level 1: Definition
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
109) For a perfectly competitive corn grower in Nebraska, the marginal revenue curve is
A) downward sloping.
B) the same as its demand curve.
C) upward sloping.
D) U-shaped.
E) vertical at the profit maximizing quantity of production.
Topic: Marginal revenue
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
110) A perfectly competitive firm maximizes its profit by producing at the point where
A) total revenue equals total cost.
B) marginal revenue is equal to marginal cost.
C) total revenue is equal to marginal revenue.
D) total cost is at its minimum.
E) total revenue is at its maximum.
Topic: Profit maximization
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
111) If the market price is lower than a perfectly competitive firm's average total cost, the firm will
A) immediately shut down.
B) continue to produce if the price exceeds the average fixed cost.
C) continue to produce if the price exceeds the average variable cost.
D) shut down if the price exceeds the average fixed cost.
E) shut down if the price is less than the average fixed cost.
Topic: Shut down
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
112) One part of a perfectly competitive trout farm's supply curve is its
A) marginal cost curve below the shutdown point.
B) entire marginal cost curve.
C) marginal cost curve above the shutdown point.
D) average variable cost curve above the shutdown point.
E) marginal revenue curve above the demand curve.
Topic: Firm's short-run supply curve
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Analytical thinking
113) Use the figure above to answer this question. We know the figure shows ________ market because the ________.
A) a perfectly competitive; marginal revenue curve is horizontal
B) an oligopoly; average total cost is U-shaped
C) a perfectly competitive; average total cost is U-shaped
D) a monopolistically competitive; marginal revenue curve is horizontal
E) a monopoly; marginal cost curve is U-shaped
Topic: Perfect competition
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Application of knowledge
114) Use the figure above to answer this question. If the firm is maximizing profit, it will produce ________ units and make an economic profit of ________.
A) 1,000; $4,000
B) 1,200; $3,600
C) 1,000; $10,000
D) 1,200; $12,000
E) 1,400; $10,000
Topic: Perfect competition
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Application of knowledge
115) Use the figure above to answer this question. If the firm produces ________ units, total cost will equal ________.
A) 1,200; $12,000
B) 1,000; $10,000
C) 1,200; $3,600
D) 1,000; $6,000
E) 1,200; $8,400
Topic: Perfect competition
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Application of knowledge
116) Use the figure above to answer this question. Which of the following is TRUE regarding the firm's its supply decision?
A) We cannot determine the shut down point without more information.
B) The shut down point is 1,000 units.
C) The shut down point is 1,200 units.
D) Shut down occurs if the price falls to $7.
E) The shut down point is greater than 1,400 units as average total cost reaches a maximum.
Topic: Shut down point
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Application of knowledge
15.2 Output, Price, and Profit in the Short Run
1) The market supply in the short run for the perfectly competitive industry is
A) the same as each producer's supply.
B) the sum of the supply schedules of all firms.
C) divided up according to each firm's selling price.
D) set at the maximum price a buyer will pay for one unit.
E) equal to the average of each firm's supply schedule.
Topic: Market supply
Skill: Level 1: Definition
Section: Checkpoint 15.2
Status: Old
AACSB: Reflective thinking
2) If there are 1,000 identical rice farmers who are each willing to supply 200 bushels of rice at $2 per bushel, what price and quantity combination is a point on the market supply curve for rice?
A) $2 and 200 bushels
B) $2 and 200,000 bushels
C) $2,000 and 200,000 bushels
D) $2,000 and 1,000 bushels
E) $2 and 1,000 farmers
Topic: Market supply
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Old
AACSB: Analytical thinking
3) In the short run, a perfectly competitive firm ________ make an economic profit and ________ incur an economic loss.
A) might; will never
B) will never; might
C) might; might
D) will never; will never
E) will definitely; will never
Topic: Short-run equilibrium
Skill: Level 2: Using definitions
Section: Checkpoint 15.2
Status: Old
AACSB: Reflective thinking
4) In the short run, a perfectly competitive firm
A) can make only zero economic profit.
B) can possibly make an economic profit or possibly incur an economic loss.
C) produces the level of output that sets the average total cost equal to the market price.
D) can vary all its inputs.
E) can change only its fixed inputs.
Topic: Short-run equilibrium
Skill: Level 2: Using definitions
Section: Checkpoint 15.2
Status: Old
AACSB: Reflective thinking
5) In the short run, a perfectly competitive firm can experience which of the following?
i. an economic profit
ii. an economic loss but it continues to stay open
iii. an economic loss equal to its total fixed cost when it shuts down
A) only i
B) i and ii
C) i and iii
D) ii and iii
E) i, ii, and iii
Topic: Short-run equilibrium
Skill: Level 2: Using definitions
Section: Checkpoint 15.2
Status: Old
AACSB: Reflective thinking
6) If a perfectly competitive seller is maximizing profit and is making zero economic profit, which of the following will this seller do?
A) go to work in the next-best earning opportunity
B) shut down, with a loss equal to total fixed cost
C) continue at the current output, making zero economic profit
D) increase production in order to make an economic profit
E) remain open but decrease production in order to make an economic profit
Topic: Short-run equilibrium
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Old
AACSB: Reflective thinking
7) If a perfectly competitive firm finds that the price exceeds its ATC, then the firm
A) will raise its price to increase its economic profit.
B) will lower its price to increase its economic profit.
C) is making an economic profit.
D) is incurring an economic loss.
E) is making zero economic profit.
Topic: Economic profit
Skill: Level 2: Using definitions
Section: Checkpoint 15.2
Status: Old
AACSB: Reflective thinking
8) For a perfectly competitive sugar producer in Haiti, a short-run economic profit will occur if the price of each ton of sugar sold is
A) greater than the average total cost of producing sugar.
B) equal to the average total cost of producing sugar.
C) less than the average total cost of producing sugar.
D) rising as more sugar is sold.
E) greater than the marginal revenue of each ton of sugar.
Topic: Economic profit
Skill: Level 2: Using definitions
Section: Checkpoint 15.2
Status: Old
AACSB: Reflective thinking
9) If Henry, a perfectly competitive lime grower in Southern California, can sell his limes at a price greater than his average total cost, Henry will
A) incur an economic loss.
B) incur an accounting loss.
C) have an incentive to shut down.
D) make an economic profit.
E) make zero economic profit.
Topic: Economic profit
Skill: Level 2: Using definitions
Section: Checkpoint 15.2
Status: Old
AACSB: Reflective thinking
10) If a perfectly competitive firm's average total cost is less than the price, then the firm
A) incurs an economic loss.
B) makes an economic profit.
C) makes zero economic profit.
D) makes either zero economic profit or an economic profit depending on whether the marginal revenue is equal to or greater than the price.
E) None of the above answers is correct because the relationship between the price and average total cost has nothing to do with the firm's profit.
Topic: Economic profit
Skill: Level 2: Using definitions
Section: Checkpoint 15.2
Status: Old
AACSB: Reflective thinking
11) If the market price is $50 per unit for a good produced in a perfectly competitive market and the firm's average total cost is $52, then the firm
A) incurs an economic loss of $2 per unit.
B) makes an economic profit of $2 per unit.
C) makes zero economic profit.
D) incurs a total economic loss of $52.
E) More information is needed to determine the firm's economic profit or loss per unit.
Topic: Economic profit
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Old
AACSB: Analytical thinking
12) Peter's Pencils is a perfectly competitive company producing pencils. Suppose Peter is producing 1,000 pencils an hour. If the total cost of 1,000 pencils is $500, the market price per pencil is $2, and the marginal cost is $2, then Peter
A) makes an economic profit because marginal revenue is equal to marginal cost at this output level.
B) should decrease his output to increase his profit.
C) is maximizing his profit and is making an economic profit.
D) should increase his output to increase his profit.
E) is not maximizing his profit but is making zero economic profit anyway.
Topic: Economic profit
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Old
AACSB: Analytical thinking
13) Suppose that marginal revenue for a perfectly competitive firm is $20. When the firm produces 10 units, its marginal cost is $20, its average total cost is $22, and its average variable cost is $17. Then to maximize its profit in the short run, the firm
A) should stay open and incur an economic loss of $20.
B) must increase its output to increase its profit.
C) must decrease its output to increase its profit.
D) should shut down.
E) should not change its production because it is already maximizing its profit and is making an economic profit.
Topic: Economic profit
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Old
AACSB: Analytical thinking
14) A perfectly competitive firm is producing 50 units of output, which it sells at the market price of $23 per unit. The firm's average total cost is $20. What is the firm's total revenue?
A) $23
B) $150
C) $1,000
D) $1,150
E) $20
Topic: Economic profit, total revenue
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Old
AACSB: Analytical thinking
15) A perfectly competitive firm is producing 50 units of output and selling at the market price of $23. The firm's average total cost is $20. What is the firm's total cost?
A) $23
B) $150
C) $1,000
D) $1,150
E) $20
Topic: Economic profit, total cost
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Old
AACSB: Analytical thinking
16) A perfectly competitive firm is producing 50 units of output and selling at the market price of $23. The firm's average total cost is $20. What is the firm's economic profit?
A) $23
B) $150
C) $1,000
D) $1,150
E) $50
Topic: Economic profit
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Old
AACSB: Analytical thinking
17) For a perfectly competitive syrup producer whose average total cost curve does not change, an economic profit could turn into an economic loss if the
A) market demand for syrup decreases.
B) marginal cost curve shifts downward.
C) market demand for syrup does not change.
D) market demand for syrup increases.
E) price of syrup rises.
Topic: Economic loss
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Old
AACSB: Reflective thinking
18) For a perfectly competitive rancher in Wyoming, if the price does not change, an economic profit could turn into an economic loss if the
A) average total cost curve shifts downward.
B) average total cost curve does not change.
C) average total cost curve shifts upward.
D) marginal cost curve shifts downward.
E) average fixed cost decreases.
Topic: Economic loss
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Old
AACSB: Analytical thinking
19) A perfectly competitive firm should shut down in the short-run if price falls below the minimum of
A) marginal cost.
B) marginal revenue.
C) average total cost.
D) fixed costs.
E) average variable costs.
Topic: Economic loss
Skill: Level 1: Definition
Section: Checkpoint 15.2
Status: Old
AACSB: Reflective thinking
20) Computer memory chips are produced on wafers, each wafer having many separate chips that are separated and sold. The above table shows costs for a perfectly competitive producer of computer memory chips. If the market price of a wafer is $2,400 dollars, how many wafers will the firm produce?
A) 0
B) 4 or 5
C) 3 or 4
D) 1 or 2
E) 6
Topic: Profit maximization
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Old
AACSB: Analytical thinking
21) Computer memory chips are produced on wafers, each wafer having many separate chips that are separated and sold. The above table shows costs for a perfectly competitive producer of computer memory chips. If the market price of a wafer is $2,400 dollars, the firm is
A) making zero economic profit.
B) making an economic profit of $12,000 an hour.
C) incurring an economic loss of $2,800 an hour.
D) incurring an economic loss of $2,000 an hour.
E) making an economic profit of $2,400 an hour.
Topic: Economic loss
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Old
AACSB: Analytical thinking
22) Computer memory chips are produced on wafers, each wafer having many separate chips that are separated and sold. The above table shows costs for a perfectly competitive producer of computer memory chips. This firm will produce as long as the market price of a wafer is above
A) $1,300.
B) $1,400.
C) $7,900.
D) $2,800.
E) $9,800.
Topic: Shut down
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Old
AACSB: Analytical thinking
23) The above figure shows a perfectly competitive firm. If the market price is $15, the firm
A) is incurring an economic loss.
B) is making an economic profit.
C) is making zero economic profit.
D) will immediately shut down.
E) might shut down but more information is needed about the AVC.
Topic: Economic profit
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Old
AACSB: Analytical thinking
24) The above figure shows a perfectly competitive firm. If the market price is $10, the firm
A) is incurring an economic loss.
B) is making an economic profit.
C) is making zero economic profit.
D) will immediately shut down.
E) might shut down but more information is needed about the AVC.
Topic: Normal profit
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Old
AACSB: Analytical thinking
25) The above figure shows a perfectly competitive firm. If the market price is $5, the firm
A) is making an economic profit.
B) is making zero economic profit.
C) will immediately shut down.
D) will not shut down.
E) might shut down but more information is needed about the AVC.
Topic: Economic loss
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Old
AACSB: Analytical thinking
26) The above figure shows a perfectly competitive firm. If the market price is more than $20 per unit, the firm
A) will definitely shut down to minimize its losses.
B) will stay open to produce and will make zero economic profit.
C) will stay open to produce and will incur an economic loss.
D) will stay open to produce and will make an economic profit.
E) might shut down but more information is needed about the fixed cost.
Topic: Economic profit
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Old
AACSB: Analytical thinking
27) The above figure shows a perfectly competitive firm. If the market price is $20 per unit, the firm
A) will definitely shut down to minimize its losses.
B) will stay open to produce and will make zero economic profit.
C) will stay open to produce and will incur an economic loss.
D) will stay open to produce and will make an economic profit.
E) might shut down but more information is needed about the fixed cost.
Topic: Normal profit
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Old
AACSB: Analytical thinking
28) The above figure shows a perfectly competitive firm. If the market price is $15 per unit, the firm
A) will definitely shut down to minimize its losses.
B) will stay open to produce and will make zero economic profit.
C) will stay open to produce and will incur an economic loss.
D) will stay open to produce and will make an economic profit.
E) might shut down but more information is needed about the fixed cost.
Topic: Economic loss
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Old
AACSB: Analytical thinking
29) The above figure shows a perfectly competitive firm. If the market price is $5 per unit, the firm
A) will definitely shut down to minimize its losses.
B) will stay open to produce and will make zero economic profit.
C) will stay open to produce and will incur an economic loss.
D) will stay open to produce and will make an economic profit.
E) might shut down but more information is needed about the fixed cost.
Topic: Shut down
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Old
AACSB: Analytical thinking
30) The figure above shows a perfectly competitive firm. If the market price is $40 per unit, then the firm produces ________ units and makes an economic profit that is ________.
A) more than 45; more than $400
B) 40; more than $400
C) 40; less than $400
D) 30; equal to zero
E) 30; more than $250
Topic: Economic profit
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Old
AACSB: Analytical thinking
31) The figure above shows a perfectly competitive firm. If the market price is $20 per unit, then the firm produces ________ units and makes an economic profit that is ________.
A) more than 30; more than $100
B) 30; more than $100
C) 20; less than $400
D) 0; zero
E) 30; zero
Topic: Normal profit
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Old
AACSB: Analytical thinking
32) Bill owns a lawn-care company in Windermere, Florida, whose cost curves are illustrated in the above figure. The market equilibrium price in this perfectly competitive market equals $32 per lawn mowed. At this price, how many lawns will Bill mow per week?
A) more than 10 and less than 30
B) 30
C) 40
D) 50
E) 0
Topic: Profit maximization
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Old
AACSB: Analytical thinking
33) Bill owns a lawn-care company in Windermere, Florida, whose cost curves are illustrated in the above figure. The market equilibrium price in this perfectly competitive market equals $32 per lawn mowed. Bill's average total cost curve is ATC, so his total cost of production equals
A) $0 because Bill shuts down.
B) more than $0 and less than $1,200 per week.
C) more than $1,200 and less than $1,400 per week.
D) more than $1,400 per week and less than $1,800 per week.
E) more than $1,800 per week.
Topic: Economic profit
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Old
AACSB: Analytical thinking
34) Bill owns a lawn-care company in Windermere, Florida, Florida, whose cost curves are illustrated in the above figure. The market equilibrium price in this perfectly competitive market equals $32 per lawn mowed. If Bill's average total cost curve is ATC, his total economic ________ equals ________.
A) loss; $800 per week
B) profit; $1,280 per week
C) profit; $480 per week
D) loss; $1,280 per week
E) profit; $32 per week
Topic: Economic profit
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Old
AACSB: Analytical thinking
35) If the market supply curve and market demand curve for a good intersect at 600,000 units and there are 10,000 identical firms in the market, then each firm is producing
A) 600,000 units.
B) 60,000,000,000 units.
C) 60,000 units.
D) 60 units.
E) 10,000 units.
Topic: Market supply
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Old
AACSB: Analytical thinking
36) In the short run, a perfectly competitive firm
A) must make an economic profit.
B) must incur an economic loss.
C) must make zero economic profit.
D) might make an economic profit, zero economic profit, or incur an economic loss.
E) None of the above answers is correct.
Topic: Short-run equilibrium
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Old
AACSB: Reflective thinking
37) A perfectly competitive firm definitely makes an economic profit in the short run if price is
A) equal to marginal cost.
B) equal to average total cost.
C) greater than average total cost.
D) greater than marginal cost.
E) greater than average variable cost.
Topic: Economic profit
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Old
AACSB: Reflective thinking
38) If a perfectly competitive firm is maximizing its profit and is making an economic profit, which of the following is correct?
i. Price equals marginal revenue.
ii. Marginal revenue equals marginal cost.
iii. Price is greater than average total cost.
A) i only
B) i and ii only
C) ii and iii only
D) i and iii only
E) i, ii, and iii
Topic: Economic profit
Skill: Level 2: Using definitions
Section: Checkpoint 15.2
Status: Old
AACSB: Reflective thinking
39) The market for watermelons in Alabama is perfectly competitive. A watermelon producer making zero economic profit could make an economic profit if the
A) average total cost of selling watermelons does not change.
B) average total cost of selling watermelons rises.
C) average total cost of selling watermelons falls.
D) marginal cost of selling watermelons does not change.
E) marginal cost of selling watermelons rises.
Topic: Economic profit
Skill: Level 2: Using definitions
Section: Checkpoint 15.2
Status: Old
AACSB: Reflective thinking
40) Juan's Software Service Company is in a perfectly competitive market. Juan has total fixed cost of $25,000, average variable cost for 1,000 service calls is $45, and marginal revenue is $75. Juan's makes 1,000 service calls a month. What is his economic profit?
A) $5,000
B) $25,000
C) $45,000
D) $75,000
E) $50,000
Topic: Economic profit
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Old
AACSB: Analytical thinking
41) If a perfectly competitive firm finds that price is less than its ATC, then the firm
A) will raise its price to increase its economic profit.
B) will lower its price to increase its economic profit.
C) is making an economic profit.
D) is incurring an economic loss.
E) is making zero economic profit.
Topic: Economic loss
Skill: Level 2: Using definitions
Section: Checkpoint 15.2
Status: Old
AACSB: Reflective thinking
42) A perfectly competitive furniture-rental firm in Phoenix incurs an economic loss if the average total cost of each rental is
A) greater than the marginal revenue of each rental.
B) less than the marginal revenue of each rental.
C) equal to the marginal revenue of each rental.
D) equal to the price of each rental.
E) greater than the average variable cost of each rental.
Topic: Economic loss
Skill: Level 2: Using definitions
Section: Checkpoint 15.2
Status: Old
AACSB: Reflective thinking
43) Consider a perfectly competitive market experiencing good times. In the short run, the equilibrium price will ________ and firms will earn a(n) ________.
A) increase; economic profit as the new price exceeds average total cost
B) increase; normal profit as the new price exceeds average total cost
C) decrease; economic loss as new firms enter the industry
D) decrease; economic profit as firms exit the industry
E) may increase or decrease; normal profit depending on their costs
Topic: Short-run equilibrium
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Old
AACSB: Analytical thinking
44) Use the figure above to answer this question. Consider a perfectly competitive market experiencing good times. Figure ________ shows a firm maximizing profit in the short run because it produces ________ units and makes an economic profit of ________.
A) A; 100; $2 per unit
B) A; 90; $3 per unit
C) B; 100; $10 per unit
D) C; 100; $3 per unit
E) C; 110; $2 per unit
Topic: Short-run equilibrium
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Revised
AACSB: Analytical thinking
45) Use the figure above to answer this question. Figure ________ shows a short-run equilibrium in good times because the firm makes a(n) ________.
A) A; economic profit
B) A; normal profit
C) B; normal profit
D) B; economic loss
E) C; normal profit
Topic: Short-run equilibrium
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Old
AACSB: Analytical thinking
46) Use the figure above to answer this question. Consider a perfectly competitive firm in a short run equilibrium. Figure ________ shows a firm in bad times because the firm makes a(n) ________.
A) C; economic loss of $3 per unit if the firm decides to operate
B) A; economic loss of $4 so it must close
C) B; economic loss of $3 per unit
D) B; economic profit because the price exceeds average variable cost
E) C; normal profit and can stay open in the long run
Topic: Short-run equilibrium
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Revised
AACSB: Analytical thinking
47) Use the figure above to answer this question. Consider a perfectly competitive firm in a short run equilibrium. Figure ________ shows a firm in bad times because the firm produces ________ units and makes a(n) ________.
A) A; 100; economic loss
B) A; 110; economic loss
C) B; 90; economic profit
D) C; 100; economic loss
E) C; 100; normal profit
Topic: Short-run equilibrium
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Revised
AACSB: Analytical thinking
48) Suppose a perfectly competitive firm is incurring an economic loss. Consequently, the
i. firm's average total cost exceeds the price.
ii. firm's economic loss equals its total fixed cost.
iii. firm cannot maximize profit.
A) i and ii only
B) i only
C) i, ii and iii
D) iii only
E) ii and iii
Topic: Short-run equilibrium
Skill: Level 5: Critical thinking
Section: Checkpoint 15.2
Status: Old
AACSB: Application of knowledge
49) If perfectly competitive firms are entering or exiting a market, it must be TRUE that the market
A) is in the short run.
B) is in the long run.
C) is in the short run only if the firms' economic profits equal $0.
D) is in the long run only if the firms' economic profits are positive.
E) is in a long-run equilibrium because average variable costs are no longer relevant.
Topic: Short-run equilibrium
Skill: Level 5: Critical thinking
Section: Checkpoint 15.2
Status: Old
AACSB: Analytical thinking
15.3 Output, Price, and Profit in the Long Run
1) When new firms enter the perfectly competitive Miami bagel market, the market
A) supply curve shifts leftward.
B) supply curve does not change.
C) demand curve shifts rightward.
D) supply curve shifts rightward.
E) demand curve shifts leftward.
Topic: Entry
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Status: Old
AACSB: Reflective thinking
2) If new firms enter a perfectly competitive industry, the market supply
A) does not change.
B) becomes more price elastic.
C) becomes more price inelastic.
D) increases.
E) decreases because each firm produces less than before the entry.
Topic: Long-run equilibrium, entry
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Status: Old
AACSB: Reflective thinking
3) Alice, Bud, and Celia can produce rubber bands in a perfectly competitive market. If they enter the market, the minimum average total cost for a bundle of rubber bands, for the three of them is $2, $3, and $4, respectively. If the market price is $2.10 per bundle, then
A) all three of them will enter the market.
B) only Alice will enter the market.
C) Alice and Bud will enter the market.
D) Bud and Celia will enter the market.
E) Alice and Celia will enter the market.
Topic: Long-run equilibrium, entry
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Status: Old
AACSB: Reflective thinking
4) Suppose a perfectly competitive market is in long-run equilibrium and then there is a permanent increase in the demand for that product. The new long-run equilibrium will have
A) fewer firms in the market.
B) more firms in the market.
C) the same number of firms in the market.
D) probably a different number of firms, but it is not possible to determine if there will be more or fewer firms.
E) a permanent decrease in supply.
Topic: Long-run equilibrium, entry
Skill: Level 3: Using models
Section: Checkpoint 15.3
Status: Old
AACSB: Analytical thinking
5) When firms in a perfectly competitive market are earning an economic profit, in the long run
A) no new firms will enter the market.
B) new firms will enter the market.
C) firms will exit the market.
D) the long-run average cost curve shifts downward.
E) the initial firms continue to earn an economic profit.
Topic: Long-run equilibrium, entry
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Status: Old
AACSB: Reflective thinking
6) When all firms in a perfectly competitive market are earning ________, we can state that the market is in a ________ equilibrium.
A) a normal profit; long-run
B) an economic profit; long-run
C) a normal profit; short-run
D) an economic profit; short-run
E) A and D are correct.
Topic: Long-run equilibrium
Skill: Level 3: Using models
Section: Checkpoint 15.3
Status: Old
AACSB: Application of knowledge
7) The figure shows a perfectly competitive market that was in a long-run equilibrium on demand curve D0. Due to a permanent change in demand to D1, existing firms will begin to make an economic ________ which will result in ________ the market.
A) loss; new firms entering
B) profit; existing firms exiting
C) profit; new firms entering
D) loss; some existing firms exiting
E) loss; all remaining firms exiting
Topic: Long-run equilibrium, entry and exit
Skill: Level 4: Applying models
Section: Checkpoint 15.3
Status: Old
AACSB: Application of knowledge
8) The graph shows a perfectly competitive market that was in a long-run equilibrium on demand curve D0. Due to a permanent change in demand to D2, the price in the market will ________ causing existing firms to ________ which means that ________ the market.
A) decrease; incur an economic loss; some firms will exit
B) decrease; earn a larger economic profit; new firms will enter
C) increase; earn a smaller economic profit; new firms will enter
D) decrease; earn a smaller economic profit; new firms will enter
E) increase; earn a larger economic profit; some firms will exit
Topic: Long-run equilibrium, entry and exit
Skill: Level 4: Applying models
Section: Checkpoint 15.3
Status: Old
AACSB: Application of knowledge
9) Consider a perfectly competitive market that was in a long-run equilibrium when a permanent increase in demand occurs. Which of the following will occur as a result?
i. The existing firms will start to earn an economic profit.
ii. New firms will be motivated to enter the market.
iii. Some firms that cannot meet the new demand will exit the market.
A) i, ii and iii
B) i and ii only
C) ii and iii only
D) iii only
E) i and iii
Topic: Long-run equilibrium, entry and exit
Skill: Level 4: Applying models
Section: Checkpoint 15.3
Status: Old
AACSB: Application of knowledge
10) If perfectly competitive lawn care firms are making an economic profit, then
A) wages will be bid up until the economic profit are gone.
B) the firms must be superior and will continue to make an economic profit.
C) new firms will enter the industry.
D) they are not equating marginal revenue to marginal cost.
E) government regulation will be imposed to decrease their profit.
Topic: Long-run equilibrium, entry
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Status: Old
AACSB: Reflective thinking
11) If perfectly competitive firms are making an economic profit, then
A) the market must be in long-run equilibrium but cannot be in a short-run equilibrium.
B) some firms will exit the market.
C) new firms will enter the market.
D) the market might be in a long-run equilibrium but not a short-run equilibrium.
E) the market cannot be in either a short-run or a long-run equilibrium.
Topic: Long-run equilibrium, entry
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Status: Old
AACSB: Reflective thinking
12) The corn market is perfectly competitive, with thousands of corn farmers. In the 2010s, the price of corn soared so that new farmers entered the corn market. Initially, entry ________ the economic profit of the initial corn farmers and in the long run the initial corn farmers ________.
A) increased; made an even greater economic profit than initially
B) decreased; made zero economic profit
C) increased; made zero economic profit
D) decreased; incurred an economic loss
E) increased; made an economic profit
Topic: Long-run equilibrium, entry
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Status: Old
AACSB: Reflective thinking
13) If firms in a perfectly competitive industry are earning an economic profit, then in the ________, firms will ________ the industry.
A) short run; enter
B) long run; enter
C) short run; exit
D) long run; exit
E) More information about the firms' costs and the price of the product is needed to determine if firms enter or exit the industry.
Topic: Long-run equilibrium, entry
Skill: Level 3: Using models
Section: Checkpoint 15.3
Status: Old
AACSB: Reflective thinking
14) When new firms enter a perfectly competitive market, the market supply curve shifts ________ and the price ________.
A) rightward; falls
B) rightward; rises
C) leftward; falls
D) leftward; rises
E) rightward; does not change
Topic: Long-run equilibrium, entry
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Status: Old
AACSB: Reflective thinking
15) When firms in a perfectly competitive market incur economic losses, exit by some firms means the market supply will
A) increase.
B) decrease.
C) not change.
D) become vertical.
E) become the same as the individual producers' supplies.
Topic: Exit
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Status: Old
AACSB: Reflective thinking
16) To eliminate losses in a perfectly competitive market, firms exit the industry. This exit results in
A) an increase in market supply.
B) a decrease in market supply.
C) an increase in market demand.
D) a decrease in market demand.
E) a decrease in both the market supply and the market demand.
Topic: Long-run equilibrium, exit
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Status: Old
AACSB: Reflective thinking
17) Suppose a perfectly competitive market is in short-run equilibrium. Firms that are incurring a ________ economic loss ________.
A) persistent; increase their output to increase their profit
B) temporary; exit the industry
C) temporary; decrease their production but definitely stay open
D) persistent; exit the industry and shift the market supply curve leftward
E) persistent; exit the industry and shift the market supply curve rightward
Topic: Long-run equilibrium, exit
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Status: Old
AACSB: Reflective thinking
18) In the long run, existing firms exit a perfectly competitive market
A) only if economic profits are zero.
B) if they make a positive economic profit.
C) if normal profits are greater than zero.
D) only if they incur an economic loss.
E) if they either make a normal profit or if they incur an economic loss.
Topic: Long-run equilibrium, exit
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Status: Old
AACSB: Reflective thinking
19) In the long run, perfectly competitive firms will exit the market if the price is
A) higher than average variable cost.
B) equal to average total cost.
C) less than average total cost.
D) equal to average fixed cost.
E) equal to marginal revenue.
Topic: Long-run equilibrium, exit
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Status: Old
AACSB: Reflective thinking
20) A perfectly competitive market is in equilibrium and then demand decreases. The decrease in demand means the market price will ________ and eventually there will be ________.
A) rise; entry by new firms
B) fall; exit by existing firms
C) fall; entry by new firms
D) rise; exit by existing firms
E) fall; neither entry nor exit because the market is perfectly competitive
Topic: Long-run equilibrium, exit
Skill: Level 3: Using models
Section: Checkpoint 15.3
Status: Old
AACSB: Reflective thinking
21) Catfish farming is a perfectly competitive industry. Catfish farmers suffered tremendous economic losses in the late 2000s. As a result
A) some new catfish farmers entered the market.
B) some catfish farmers exited the market.
C) no catfish farmers entered or exited this market.
D) the supply of catfish increased in 2010.
E) new demanders entered the market after some firms had exited.
Topic: Long-run equilibrium, exit
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Status: Old
AACSB: Reflective thinking
22) Keith is a perfectly competitive carnation grower. The market price is $2 per dozen carnations. Keith's average total cost to grow carnations is $2.50 per dozen. In the long run, Keith will
A) raise his price to more than $2.50 per dozen carnations.
B) raise his price to $2.50 per dozen carnations.
C) exit the industry if the price and his costs do not change.
D) incur an economic loss.
E) continue to make an economic profit.
Topic: Long-run equilibrium, exit
Skill: Level 3: Using models
Section: Checkpoint 15.3
Status: Old
AACSB: Reflective thinking
23) If concerns about mad-cow disease impose economic losses on the perfectly competitive cattle ranchers, exit by the ranchers combined with no further changes in the demand for beef will force the price of beef to
A) decrease.
B) not change.
C) increase.
D) fluctuate, with the trend being lower prices.
E) probably change, but more information about the market supply of beef is needed to answer the question.
Topic: Long-run equilibrium, exit
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Status: Old
AACSB: Analytical thinking
24) Suppose a perfectly competitive market is in a short-run equilibrium. If some firms exit the market, the profit of the remaining firms ________; if some firms enter the market, the profit of each existing firm ________.
A) decreases; is unchanged
B) increases; decreases
C) increases; is unchanged
D) is unchanged; is unchanged
E) decreases; increases
Topic: Long-run equilibrium, entry and exit
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Status: Old
AACSB: Reflective thinking
25) In the long run, perfectly competitive firms produce at the output level that has the minimum
A) marginal cost.
B) average total cost.
C) average variable cost.
D) average fixed cost.
E) total revenue.
Topic: Long-run equilibrium
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Status: Old
AACSB: Reflective thinking
26) In a perfectly competitive industry
i. entry by new firms shifts the market supply curve rightward.
ii. exit by existing firms shifts the market supply curve leftward.
iii. at all times existing firms make only zero economic profit.
A) ii and iii
B) ii only
C) i and iii
D) i and ii
E) i, ii, and iii
Topic: Long-run equilibrium
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Status: Old
AACSB: Reflective thinking
27) If it does not shut down, a perfectly competitive firm produces where marginal cost is equal to the marginal revenue
A) only in the short run.
B) only in the long run.
C) always to maximize its profit.
D) only if it is not possible to produce where price equals average variable cost.
E) only if it is not possible to produce where price is greater than average total cost.
Topic: Long-run equilibrium
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Status: Old
AACSB: Reflective thinking
28) In the long run, a perfectly competitive firm makes
A) a positive economic profit.
B) zero economic profit.
C) negative economic profit, that is, an economic loss.
D) zero accounting profit.
E) either a positive economic profit or a normal profit.
Topic: Long-run equilibrium
Skill: Level 3: Using models
Section: Checkpoint 15.3
Status: Old
AACSB: Reflective thinking
29) In the long run, a perfectly competitive firm will
A) be able to make an economic profit.
B) produce but incur an economic loss.
C) make zero economic profit.
D) not produce and will incur an economic loss equal to its total fixed cost.
E) not produce but not incur an economic loss.
Topic: Long-run equilibrium
Skill: Level 3: Using models
Section: Checkpoint 15.3
Status: Old
AACSB: Reflective thinking
30) In the long run, a perfectly competitive firm
A) can make either an economic profit or a normal profit.
B) incurs an economic loss.
C) makes zero economic profit.
D) can make an economic profit, zero economic profit, or incur an economic loss.
E) makes an economic profit.
Topic: Long-run equilibrium
Skill: Level 3: Using models
Section: Checkpoint 15.3
Status: Old
AACSB: Reflective thinking
31) The cranberry market is perfectly competitive. Reports that consuming cranberries can lead to improved health result in a permanent increase in the demand for cranberries and an immediate upward jump in the price of cranberries. As time passes, the price of cranberries ________ and the initial firms' economic ________.
A) falls; profit will be eliminated
B) rises still higher; loss will be eliminated
C) rises still higher; profit will not change
D) falls; loss will be increased
E) falls; profit will not change
Topic: Long-run equilibrium
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Status: Old
AACSB: Reflective thinking
32) Suppose a perfectly competitive market is in long-run equilibrium with a price of $12. Then there is a permanent increase in demand. As a result, in the short run the market price ________ and in the long run the number of firms ________ and the price is ________ the price was in the short run.
A) rises; does not change; is equal to
B) rises; increases; higher than
C) rises; does not change; lower than
D) falls; decreases; is equal to
E) rises; increases; lower than
Topic: External economies
Skill: Level 3: Using models
Section: Checkpoint 15.3
Status: Old
AACSB: Reflective thinking
33) If perfectly competitive firms are maximizing their profit and are making an economic profit, the market ________ in a short-run equilibrium and ________ in a long-run equilibrium.
A) is; is
B) is; is not
C) is not; is
D) is not; is not
E) is; might be
Topic: Permanent change in demand
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Status: Old
AACSB: Reflective thinking
34) A market is initially in a long-run equilibrium and there is a permanent increase in demand. After the new long-run equilibrium is reached, there
A) are more firms in the market.
B) are fewer firms in the market.
C) are the same number of firms in the market.
D) probably is a different number of firms in the market, but more information is needed to determine if the number of firms rises, falls, or perhaps does not change.
E) is no change in the market.
Topic: Permanent change in demand
Skill: Level 3: Using models
Section: Checkpoint 15.3
Status: Old
AACSB: Reflective thinking
35) A permanent decrease in demand definitely
A) shifts a firm's average total cost curve downward.
B) creates diseconomies for individual firms.
C) lowers the market price.
D) decreases the number of firms in the industry.
E) shifts a firm's average total cost curve upward.
Topic: Permanent change in demand
Skill: Level 3: Using models
Section: Checkpoint 15.3
Status: Old
AACSB: Reflective thinking
36) The rutabaga market is perfectly competitive. Research is published claiming that eating rutabagas leads to gaining weight and so the demand for rutabagas permanently decreases. The permanent decrease in demand results in a
A) lower price, economic losses by rutabaga farmers, and entry into the market.
B) lower price, economic losses by rutabaga farmers, and exit from the market.
C) higher price, economic profits for rutabaga farmers, and entry into the market.
D) higher price, economic losses by rutabaga farmers, and exit from the market.
E) lower price, economic profits for rutabaga farmers, and entry into the market.
Topic: Permanent change in demand
Skill: Level 3: Using models
Section: Checkpoint 15.3
Status: Old
AACSB: Analytical thinking
37) Technological change
A) usually requires an investment in a new plant.
B) is implemented in the short run.
C) almost always increases the costs of production.
D) almost always increases the variable costs of production.
E) cannot help a firm to earn an economic profit in either the short run or the long run.
Topic: Technological change
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Status: Old
AACSB: Reflective thinking
38) When a firm adopts new technology, generally its
A) cost curves shift upward.
B) cost curves shift downward.
C) cost curves are unaffected.
D) supply curve shifts leftward.
E) production permanently decreases.
Topic: Technological change
Skill: Level 3: Using models
Section: Checkpoint 15.3
Status: Old
AACSB: Reflective thinking
39) In a market undergoing technological change, firms that
A) adopt the new technology temporarily incur an economic loss.
B) adopt the new technology temporarily make an economic profit.
C) do not adopt the new technology temporarily make an economic profit.
D) do not adopt the new technology increase their market share.
E) do not adopt the new technology continue to make a normal profit.
Topic: Technological change
Skill: Level 3: Using models
Section: Checkpoint 15.3
Status: Old
AACSB: Reflective thinking
40) If the technology associated with producing fiber-optic cable continues to advance, over time the cost of producing fiber-optic cable will
A) decrease, firms that use the new technology will make an economic profit, and in the long run new firms will enter the market.
B) decrease, firms that use the new technology will incur an economic loss, and in the long run some firms will exit the industry.
C) increase, firms that use the new technology will make an economic profit, and in the long run new firms will enter the market.
D) increase, firms that use the new technology will incur an economic loss, and in the long run some firms will exit the industry.
E) decrease, firms that do not use the new technology will make an economic profit, and in the long run new firms will enter the market.
Topic: Technological change
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Status: Old
AACSB: Reflective thinking
41) Technology reduces the average cost of production, so in the long run
i. perfectly competitive firms produce at a lower average cost.
ii. the market p
rice of the good falls.
iii. firms with older plants either exit the market or adopt the new technology.
A) i only
B) i and ii
C) iii only
D) i and iii
E) i, ii, and iii
Topic: Technological change
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Status: Old
AACSB: Reflective thinking
42) Technological change allows perfectly competitive firms to ________ and leads to ________.
A) lower their costs; lower prices for consumers
B) raise their prices; higher prices for consumers
C) lower their costs; higher prices so the firms can earn economic profits in the long run
D) raise their costs; higher prices and maximum profits in the long run
E) lower their costs; deadweight loss
Topic: Technological change
Skill: Level 5: Critical thinking
Section: Checkpoint 15.3
Status: Old
AACSB: Analytical thinking
43) Suppose the cost of a CD is $20. As online retailers enter the market with new technology, the price of CDs ________, and traditional music stores find that ________.
A) decreases; their AVC exceeds the new lower price and they exit the industry
B) decreases; their ATC curve shifts lower and their profit increases
C) increases; they compete with online retailers at the new higher price
D) increases; their costs have risen due to the new technology
E) decreases; they compete with online retailers with higher profits
Topic: Eye on Record Stores
Skill: Level 5: Critical thinking
Section: Checkpoint 15.3
Status: Old
AACSB: Analytical thinking
44) In the long run, new firms enter a perfectly competitive market when
A) normal profit is greater than zero.
B) economic profit is equal to zero.
C) normal profit is equal to zero.
D) economic profit is greater than zero.
E) the existing firms are weak because they are incurring economic losses.
Topic: Long-run equilibrium, entry
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Status: Old
AACSB: Reflective thinking
45) If perfectly competitive firms are making an economic profit, the economic profit
A) attracts entry by more firms, which lowers the price.
B) can be earned both in the short run and the long run.
C) is less than the normal profit.
D) leads to a decrease in market demand.
E) generally leads to firms exiting as they seek higher profit in other markets.
Topic: Long-run equilibrium, entry
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Status: Old
AACSB: Reflective thinking
46) If perfectly competitive firms are making an economic profit, then
A) the market is in its long-run equilibrium.
B) new firms enter the market and the equilibrium profit of the firms already in the market decreases.
C) new firms enter the market and the equilibrium profit of the firms already in the market increases.
D) firms exit the market and the economic profit of the surviving firms in the market decreases.
E) firms exit the market and the economic profit of the surviving firms in the market increases.
Topic: Long-run equilibrium, entry
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Status: Old
AACSB: Reflective thinking
47) As a result of firms leaving the perfectly competitive frozen yogurt market in the early 2010s, the market
A) supply curve shifted leftward.
B) supply curve did not change.
C) demand curve shifted rightward.
D) supply curve shifted rightward.
E) demand curve shifted leftward.
Topic: Exit
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Status: Old
AACSB: Reflective thinking
48) Firms exit a competitive market when they incur an economic loss. In the long run, this exit means that the economic losses of the surviving firms
A) increase.
B) decrease until they equal zero.
C) decrease until economic profits are earned.
D) do not change.
E) might change but more information is needed about what happens to the price of the good as the firms exit.
Topic: Long-run equilibrium, exit
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Status: Old
AACSB: Reflective thinking
49) If firms in a perfectly competitive market are incurring economic losses, then as time passes firms ________ and the market ________.
A) enter; demand curve shifts leftward
B) enter; supply curve shifts rightward
C) exit; demand curve shifts leftward
D) exit; supply curve shifts rightward
E) exit; supply curve shifts leftward
Topic: Long-run equilibrium, exit
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Status: Old
AACSB: Reflective thinking
50) In the long run, a firm in a perfectly competitive market will
A) make zero economic profit, so that its owners earn a normal profit.
B) make zero normal profit but its owners will make an economic profit.
C) remove all competitors and become a monopolistically competitive firm.
D) incur an economic normal loss but not earn a positive economic profit.
E) remove all competitors and become a monopoly.
Topic: Long-run equilibrium
Skill: Level 1: Definition
Section: Checkpoint 15.3
Status: Old
AACSB: Reflective thinking
51) Technological change brings a ________ to firms that adopt the new technology.
A) permanent economic profit
B) temporary economic profit
C) permanent economic loss
D) temporary economic loss
E) temporary normal profit
Topic: Technological change
Skill: Level 3: Using models
Section: Checkpoint 15.3
Status: Old
AACSB: Reflective thinking
52) Perfect competition ________ an efficient outcome because ________.
A) achieves; total surplus is maximized
B) achieves; marginal benefit equals marginal cost
C) does not achieve; firms do not get to choose their price
D) does not achieve; firms produce goods with perfect substitutes
E) Both A and B are correct.
Topic: Efficient equilibrium
Skill: Level 5: Critical thinking
Section: Checkpoint 15.3
Status: Old
AACSB: Analytical thinking
53) In a perfectly competitive market, a(n) ________ occurs because ________.
A) efficient outcome; total surplus is maximized
B) deadweight loss; firms minimize average minimum cost
C) efficient outcome; the fair rules condition is met
D) deadweight loss; firms must be price takers
E) deadweight loss; total surplus is minimized
Topic: Efficient equilibrium
Skill: Level 5: Critical thinking
Section: Checkpoint 15.3
Status: Old
AACSB: Analytical thinking
54) Perfect competition ________ a fair outcome ________.
A) achieves; because both the fair rules and fair results conditions are met
B) achieves; because total surplus is maximized
C) does not achieve; because entrepreneurs only earn a normal profit
D) does not achieve; because firms must be price takers
E) may achieve; if average total costs are minimized
Topic: Fairness
Skill: Level 5: Critical thinking
Section: Checkpoint 15.3
Status: Old
AACSB: Analytical thinking
15.4 Chapter Figures
The figure above shows a firm's total revenue and total cost curves.
1) Based on the figure above, when the firm maximizes its profit, it produces ________ cans per day.
A) 0
B) more than 0 and less than 5
C) 5 or more but less than 10
D) 10
E) more than 10
Topic: Profit maximization
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Analytical thinking
2) To maximize its profit, the firm in the figure above produces ________ cans per day and ________.
A) 0; incurs an economic loss of less than $20
B) between 3 to 5 cans; earns a normal profit
C) 10; earns an economic profit of $2.90
D) 10; earns an economic profit of $29
E) more than 10; earns an economic profit
Topic: Profit maximization
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Analytical thinking
The figure above shows a firm's marginal revenue and marginal cost curves.
3) Based on the figure above, the price of a can is $8; if the price increased to $12, then the firm would
A) produce zero cans.
B) decrease the amount of cans produces it but not to zero.
C) not change the amount of cans it produces.
D) increase the amount of cans it produces.
E) More information is needed to determine what action the firm will take.
Topic: Profit maximization
Skill: Level 4: Applying models
Section: Checkpoint 15.1
Status: Old
AACSB: Analytical thinking
4) Suppose the firm's marginal cost of producing a can increases by $1 per can. Then, based on the figure above, the firm would
A) produce zero cans.
B) decrease the amount of cans it produces but not to zero cans.
C) not change the amount of cans it produces.
D) increase the amount of cans it produces.
E) More information is needed to determine what action the firm will take.
Topic: Profit maximization
Skill: Level 4: Applying models
Section: Checkpoint 15.1
Status: Old
AACSB: Analytical thinking
The figure above shows the cost curves and marginal revenue curve for a perfectly competitive firm.
5) Based on the figure above, what is the price of a can?
A) $0.
B) $3.00 per can
C) $5.14 per can
D) None of the above prices is correct.
E) More information is needed to determine the price of a can.
Topic: Perfect competition, definition
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Old
AACSB: Analytical thinking
6) Based on the figure above, if the firm produces 7 cans per day, the firm ________ maximizing its profit and is ________.
A) is; incurring an economic loss
B) is; making a normal profit
C) is; making an economic profit
D) is not; incurring an economic loss
E) is not; making a normal profit
Topic: Economic loss
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Old
AACSB: Analytical thinking
7) Suppose the price of a can was $5.14. In this case, to maximize its profit, the firm illustrated in the figure above would
A) increase its production and would make an economic profit.
B) not change its production and would make a normal profit.
C) not change its production and would make an economic profit.
D) increase its production and would incur an economic loss.
E) not change its production and would incur an economic loss.
Topic: Profit maximization
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Old
AACSB: Analytical thinking
8) The firm in the figure above is ________ that is equal to ________.
A) making an economic profit; $5.14 × 7
B) making an economic profit; $3.00 × 7
C) incurring an economic loss; $5.14 × 7
D) incurring an economic loss; ($5.14 - $3.00) × 7
E) making an economic profit; ($5.14 - $3.00) × 7
Topic: Economic loss
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Old
AACSB: Analytical thinking
The figure above shows some of a firm's cost curves and its marginal revenue curve.
9) Based on the figure above, what is the price of a can?
A) $0
B) $8.00 per can
C) $5.10 per can
D) None of the above prices is correct.
E) More information is needed to determine the price of a can.
Topic: Perfect competition, definition
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Old
AACSB: Analytical thinking
10) Based on the figure above, if the firm produces 10 cans per day, the firm ________ maximizing its profit and is ________.
A) is; incurring an economic loss
B) is; making zero economic profit
C) is; making an economic profit
D) is not; incurring an economic loss
E) is not; making zero economic profit
Topic: Economic profit
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Old
AACSB: Analytical thinking
11) Suppose the price of a can was $5.10. In this case, to maximize its profit, the firm illustrated in the figure above would
A) decrease its production and would make an economic profit.
B) not change its production and would make zero economic profit.
C) not change its production and would make an economic profit.
D) decrease its production and would incur an economic loss.
E) not change its production and would incur an economic loss.
Topic: Profit maximization
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Old
AACSB: Analytical thinking
12) The firm in the figure above has a total cost equal to
A) $5.10 × 10.
B) $8.00 × 10.
C) ($5.10 - $8.00) × 10.
D) ($8.00 - $5.10) × 10.
E) None of the above answers is correct because more information is needed.
Topic: Total cost
Skill: Level 4: Applying models
Section: Checkpoint 15.2
Status: Old
AACSB: Analytical thinking
13) The firm in the figure above has a total revenue equal to
A) $5.10 × 10.
B) $8.00 × 10.
C) ($5.10 - $8.00) × 10.
D) ($8.00 - $5.10) × 10.
E) None of the above answers is correct because more information is needed.
Topic: Total revenue
Skill: Level 4: Applying models
Section: Checkpoint 15.2
Status: Old
AACSB: Analytical thinking
14) The firm in the figure above is ________ that is equal to ________.
A) making an economic profit; $8.00 × 10
B) making an economic profit; $5.10 × 10
C) incurring an economic loss; $5.10 × 10
D) incurring an economic loss; ($8.00 - $5.10) × 10
E) making an economic profit; ($8.00 - $5.10) × 10
Topic: Economic profit
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Old
AACSB: Analytical thinking
The above figure shows some a firm's cost curves and its marginal revenue curve.
15) Based on the figure above, what is the price of a can?
A) $0
B) $3.00 per can
C) $5.15 per can
D) None of the above prices is correct.
E) More information is needed to determine the price of a can.
Topic: Perfect competition, definition
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Old
AACSB: Analytical thinking
16) Based on the figure above, if the firm produces 7 cans per day, the firm ________ maximizing its profit and is ________.
A) is; incurring an economic loss
B) is; making zero economic profit
C) is; making an economic profit
D) is not; incurring an economic loss
E) is not; making zero economic profit
Topic: Economic loss
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Old
AACSB: Analytical thinking
17) Suppose the price of a can was $5.14. In this case, to maximize its profit the firm illustrated in the figure above would
A) increase its production and would make an economic profit.
B) not change its production and would make zero economic profit.
C) not change its production and would make an economic profit.
D) increase its production and would incur an economic loss.
E) not change its production and would incur an economic loss.
Topic: Profit maximization
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Old
AACSB: Analytical thinking
18) The price for the shutdown point is
A) $5.14.
B) between $3.01 and $5.13.
C) $3.00.
D) between $0 and $2.99.
E) greater than $5.15.
Topic: Shut down
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Old
AACSB: Analytical thinking
19) The firm in the figure above has a total cost equal to
A) $5.14 × 7.
B) $3.00 × 7.
C) ($5.14 - $3.00) × 7.
D) ($3.00 - $5.14) × 7.
E) None of the above answers is correct because more information is needed.
Topic: Total cost
Skill: Level 4: Applying models
Section: Checkpoint 15.2
Status: Old
AACSB: Analytical thinking
20) The firm in the figure above has a total revenue equal to
A) $5.14 × 7.
B) $3.00 × 7.
C) ($5.14 - $3.00) × 7.
D) ($3.00 - $5.14) × 7.
E) None of the above answers is correct because more information is needed.
Topic: Total revenue
Skill: Level 4: Applying models
Section: Checkpoint 15.2
Status: Old
AACSB: Analytical thinking
21) The firm in the figure above is ________ that is equal to ________.
A) making an economic profit; $5.14 × 7
B) making an economic profit; $3.00 × 7
C) incurring an economic loss; $5.14 × 7
D) incurring an economic loss; ($5.14 - $3.00) × 7
E) making an economic profit; ($5.14 - $3.00) × 7
Topic: Economic loss
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Old
AACSB: Analytical thinking
15.5 Integrative Questions
1) Consider a short-run equilibrium in a perfectly competitive market. Suppose that the firms' average total cost and marginal cost schedules differ. In the short run
A) all firms in the market must be able to make an economic profit.
B) all firms produce equal amounts of output.
C) some firms might incur an economic loss, but still produce output.
D) some firms might make an economic profit and, as a result, shut down.
E) all firms in the market must be able to make either positive or zero economic profit.
Topic: Integrative
Skill: Level 3: Using models
Section: Integrative
Status: Old
AACSB: Reflective thinking
2) The above figure shows three possible average total cost curves. If all firms in a perfectly competitive industry each have an average total cost curve identical to ATC0, each produces 20 units, and the market price of the good is $16 per unit, then
A) the firms make an economic profit of $8 per unit.
B) firms will enter the industry and the number of firms increases.
C) the firms' ATC curves will eventually shift to become the same as ATC1.
D) firms will exit the industry and the number of firms decreases.
E) Both answers A and B are correct.
Topic: Integrative
Skill: Level 4: Applying models
Section: Integrative
Status: Old
AACSB: Analytical thinking
3) The above figure shows three possible average total cost curves. If all firms in a perfectly competitive industry each have an average total cost curve identical to ATC2, each produces 40 units, and the market price of the good is $20 per unit, then
A) the firms incur an economic loss of $12 per unit.
B) firms will enter the industry and the number of firms increases.
C) the firms' ATC curves will eventually shift to become the same as ATC1.
D) firms will exit the industry and the number of firms decreases.
E) Both answers A and D are correct.
Topic: Integrative
Skill: Level 4: Applying models
Section: Integrative
Status: Old
AACSB: Analytical thinking
4) The above figure shows three possible average total cost curves. If all firms in a perfectly competitive industry each have an average total cost curve identical to ATC1, each produce 30 units, and the market price of the good is $16 per unit, then the firms
A) make zero economic profit and firms neither enter nor exit the industry.
B) make zero economic profit and so some firms exit the industry.
C) incur an economic loss and so some firms exit the industry.
D) incur an economic loss and so new firms enter the industry.
E) make an economic profit and new firms enter the industry.
Topic: Integrative
Skill: Level 4: Applying models
Section: Integrative
Status: Old
AACSB: Analytical thinking
5) The above figure shows three possible average total cost curves. If all firms in a perfectly competitive industry each have an average total cost curve identical to ATC1, each produce 30 units, and the market price of the good is $16 per unit, then the firms
A) make zero economic profit and new firms enter the market.
B) make zero economic profit and no firms enter or exit the market.
C) make zero economic profit and some firms exit the market.
D) incur an economic loss and some firms exit the market.
E) make an economic profit and new firms enter the market.
Topic: Integrative
Skill: Level 4: Applying models
Section: Integrative
Status: Old
AACSB: Analytical thinking
6) If firms in a perfectly competitive industry are earning an economic profit and new firms enter the industry, then
A) consumer surplus decreases.
B) the existing firms' economic profit decreases.
C) there must be external benefits to consumption of the good.
D) the new firms must incur an economic loss.
E) Both answers A and B are correct.
Topic: Integrative
Skill: Level 4: Applying models
Section: Integrative
Status: Old
AACSB: Reflective thinking
7) Suppose that each of 8,000 firms in a perfectly competitive industry produces 1,000 units of a good and maximizes profits when the price of the good is $10. If there is a permanent increase in demand, in the short run each firm produces ________ 1,000 units and in the long run the number of firms is ________ 8,000.
A) more than; more than
B) less than; more than
C) less than; less than
D) more than; less than
E) exactly; more than
Topic: Integrative
Skill: Level 3: Using models
Section: Integrative
Status: Old
AACSB: Analytical thinking
8) Suppose that each of 10,000 perfectly competitive firm in an industry produces 1,000 units of a good and earns an economic profit when the price of the good is $10. In the long run, definitely
A) each firm increases its production above 1,000 units.
B) the number of firms is more than 10,000.
C) consumer surplus decreases.
D) producer surplus increases.
E) the number of firms is less than 10,000.
Topic: Integrative
Skill: Level 3: Using models
Section: Integrative
Status: Old
AACSB: Analytical thinking
15.6 Essay: A Firm's Profit-Maximizing Choices
1) Is the number of sellers in the market the only thing that is different in each of the four market types economists study?
Topic: Market types
Skill: Level 1: Definition
Section: Checkpoint 15.1
Status: Old
AACSB: Written and oral communication
2) Why do you never see firms in a perfectly competitive market advertise their product?
Topic: Market types
Skill: Level 5: Critical thinking
Section: Checkpoint 15.1
Status: Old
AACSB: Written and oral communication
3) What are the four types of markets? Give a brief description of each type.
∙ Perfect competition has many firms selling identical products to many buyers, with no barriers to entry or exit.
∙ Monopoly has one firm selling a good with no close substitutes and a barrier that blocks the entry of new firms.
∙ Monopolistic competition has many firms making similar but not identical products with no barriers to entry or exit.
∙ Oligopoly has a small number of generally large firms producing either identical or differentiated products.
Topic: Market types
Skill: Level 1: Definition
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
4) What four conditions define a perfectly competitive market?
a. many firms sell an identical product to many buyers.
b. there are no restrictions on entry into (or exit from) the market.
c. established firms have no advantage over new firms.
d. sellers and buyers are well informed about prices.
Topic: Perfect competition
Skill: Level 1: Definition
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
5) "Perfectly competitive firms have total control over the price they set for their product." Explain why the previous statement is correct or incorrect.
Topic: Price takers
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Written and oral communication
6) Does a perfectly competitive producer have any incentive to lower its price so it is below the current market price? Explain your answer
Topic: Price takers
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Written and oral communication
7) Why are perfectly competitive ranchers in Montana price takers?
Topic: Price takers
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Written and oral communication
8) "A perfectly competitive firm is called a price maker because all the firms together must make the market price." Is the previous statement correct or incorrect? Briefly explain your answer.
Topic: Price takers
Skill: Level 1: Definition
Section: Checkpoint 15.1
Status: Old
AACSB: Written and oral communication
9) If a perfectly competitive firm manufacturing chairs produces 100 more chairs, what happens to the market price of a chair?
Topic: Price takers
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Written and oral communication
10) Pineapple growing is a perfectly competitive industry. How does the market demand curve for pineapples compare to the demand curve for an individual pineapple grower?
Topic: Demand
Skill: Level 1: Definition
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
11) What is the shape of the demand curve faced by the perfectly competitive firm, and why?
Topic: Demand
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Written and oral communication
12) Why does the profit-maximizing level of production occur at the point where marginal revenue equals marginal cost?
Similarly, if a firm produces at a level where marginal cost exceeds marginal revenue, the firm's profit would rise by decreasing output. In this case, the saved costs (the marginal cost) exceed the lost revenue (the marginal revenue). Therefore the firm should decrease production until the point at which marginal cost equals marginal revenue.
Topic: Profit maximization
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Written and oral communication
13) If the market price faced by a perfectly competitive firm increases, in the short run how does the firm respond?
Topic: Firm's short-run supply curve
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Written and oral communication
14) What is a perfectly competitive firm's short-run supply curve?
Topic: Firm's short-run supply curve
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Reflective thinking
15) If the price received by a perfectly competitive firm is less than its average variable cost, what will the firm do in the short run? Why?
Topic: Shut down
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Written and oral communication
16) Will a perfectly competitive firm ever produce in the short run even though it is suffering an economic loss?
Topic: Shut down
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Written and oral communication
17) What must be the case if a perfectly competitive firm's economic loss is less by shutting down rather than by producing and selling some output?
Topic: Shut down
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Written and oral communication
18) Pete is a perfectly competitive rose grower. The above table gives quantities and the price for which Pete can sell his roses.
a. What is Pete's total revenue if he sells 1 dozen roses? 2 dozen roses? 3 dozen roses? 4 dozen roses?
b. What is the marginal revenue of the 2nd dozen roses sold? Of the 3rd dozen? Of the 4th dozen?
a. The total revenue when 1 dozen roses is sold is $12. When Pete sells 2 dozen roses, the total revenue is $24. When 3 dozen roses are sold, the total revenue is $36. And the total revenue when 4 dozen roses are sold is $48.
b. The marginal revenue is always $12 per dozen roses.
Topic: Total revenue, marginal revenue
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Status: Old
AACSB: Analytical thinking
19) Farmer Brown produces corn in a perfectly competitive market. Farmer Brown produces and sells 500 bushels of corn. The market supply and demand curves are illustrated in the above figure.
a. What is Farmer Brown's total revenue?
b. What is Farmer Brown's marginal revenue?
a. Total revenue = price × quantity. The price is determined by the intersection of the demand and supply curves, $6 a bushel. As a result, Farmer Brown's total revenue is $6 × 500 = $3,000.
b. For a perfectly competitive firm, the marginal revenue equals the price, so Farmer Brown's marginal revenue is $6.
Topic: Total revenue, marginal revenue
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Analytical thinking
20) The table below gives Amy's total cost schedule for producing holiday wreaths. Amy is a perfect competitor and can sell each wreath for $9.
a. Complete the table by calculating Amy's total revenue and her profit or loss schedule.
b. When Amy is producing 4 wreaths, what is her total cost? What is her total revenue? What is her economic profit or economic loss?
c. What number of wreaths maximizes Amy's profit?
a. The completed table is above.
b. When Amy is producing 4 wreaths, her total cost is $28, her total revenue is $36, and her economic profit is $8.
c. Amy can produce 6 or 7 wreaths, with a maximum economic profit of $14.
Topic: Profit maximization
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Analytical thinking
21) Jimmy grows corn. His total revenue and total cost are in the above table. What quantity of corn maximizes his profit and what is his profit? What is the marginal revenue and marginal cost at this quantity?
Topic: Profit maximization
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Analytical thinking
22) The above table gives the quantity of output and the total cost for a perfectly competitive firm that can sell all of its output at $9 per unit.
a. Find the profit maximizing level of output for this firm.
b. How much economic profit is the firm making?
a. Total revenue equals price times quantity sold. We can find the total revenue for this firm because the market price is a constant $9. The total revenue schedule is given in the table above. The total profit (or loss) equals total revenue minus total cost. The last column shows that the total profit is largest if either 2 or 3 units are produced.
b. When the firm produces either 2 or 3 units of output, the total economic profit is $6.
Topic: Profit maximization
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Analytical thinking
23) The table below shows the total cost schedule for a perfectly competitive firm. The market price is $250 per unit. Complete the table.
The completed table is above.
Topic: Profit maximization
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Analytical thinking
24) Acme is a perfectly competitive firm. It has the total cost schedule given in the above table. Acme's product sells for $8.00 per unit. What amount of output is the most profitable and what is Acme's economic profit or economic loss?
Topic: Profit maximization
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Analytical thinking
25) Acme is a perfectly competitive firm. It has the cost schedules given in the above table and has a fixed cost of $12.00. The price of Acme's product is $14.20. What is Acme's most profitable amount of output? What is Acme's total economic profit or loss?
Topic: Profit maximization
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Analytical thinking
26) Acme is a perfectly competitive firm. It has the cost schedules given in the above table and has a fixed cost of $12.00. The price of Acme's product is $4.00. What is Acme's most profitable amount of output? What is Acme's total economic profit or loss?
Topic: Profit maximization
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Analytical thinking
27) The above figure illustrates a perfectly competitive wheat farmer.
a. What will be the firm's profit-maximizing price and output?
b. When the farmer produces 25,000 bushels of wheat, the difference between the firm's average total cost and the price is at its maximum. Explain why this amount of wheat either is or is not the profit-maximizing quantity.
a. The firm will maximize its profits by producing where its marginal revenue equals its marginal cost, or 30,000 bushels of wheat. The price will equal the marginal revenue, $3.00 a bushel.
b. At 25,000 bushels, the difference between average cost and price (which is the average revenue) is indeed at the maximum, but choosing 25,000 will maximize the profit per bushel of wheat, not the total profit. The firm is interested in maximizing the total profit not the profit per bushel. At 30,000 bushels of wheat, the total profit is maximized because this is the amount of output where the difference between total revenue and total cost is at a maximum.
Topic: Profit maximization
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Analytical thinking
28) The above diagram shows the cost curves for a perfectly competitive wheat farmer. At what price does the wheat farmer shut down?
Topic: Shut down point
Skill: Level 3: Using models
Section: Checkpoint 15.1
Status: Old
AACSB: Analytical thinking
15.7 Essay: Output, Price, and Profit in the Short Run
1) Can a perfectly competitive firm make an economic profit in the short run? Can it incur an economic loss?
Topic: Economic profit, economic loss
Skill: Level 2: Using definitions
Section: Checkpoint 15.2
Status: Old
AACSB: Reflective thinking
2) If the market price is less than a perfectly competitive firm's average total cost, what sort of profit or loss is the firm earning?
Topic: Economic loss
Skill: Level 3: Using models
Section: Checkpoint 15.2
Status: Old
AACSB: Reflective thinking
3) What is the relationship between the price, P, and the average total cost, ATC, for a firm in perfect competition that makes an economic profit? That makes zero economic profit? That incurs an economic loss?
Topic: Economic profit, economic loss
Skill: Level 2: Using definitions
Section: Checkpoint 15.2
Status: Old
AACSB: Written and oral communication
4) John keeps beehives and sells 100 quarts of honey per month. The honey market is perfectly competitive, and the price of a quart of honey is $10. John has an average variable cost of $5 and an average fixed cost of $3. At 100 quarts per month, John's marginal cost is $10.
a. Is John maximizing his profit? If not, what should John do?
b. Calculate John's total revenue, total cost, and total economic profit or economic loss when he produces 100 quarts of honey.
a. Yes, John is maximizing his profit because marginal revenue (price) equals marginal cost.
b. Total revenue equals price times quantity = $10 × 100 = $1,000. Total cost equals average total cost times quantity = ($5 + $3) × 100 = $800. Economic profit equals total revenue minus total cost = $1,000 - $800 = $200.
Topic: Economic profit
Skill: Level 4: Applying models
Section: Checkpoint 15.2
Status: Old
AACSB: Analytical thinking
5) The above diagram shows the cost curves for a perfectly competitive wheat farmer. At what price(s) does the wheat farmer earn an economic profit? Earn a normal profit? Incur an economic loss? How many bushels of wheat does the farmer produce if the price is $3 per bushel? If the price is $0.50 per bushel?
If the price is $3 per bushel, the farmer produces 30,000 bushels of wheat per year. If the price is $0.50 per bushel, the farmer has shut down because the price is less than the minimum average variable cost and so the farmer produces 0 bushels per year.
Topic: Economic profit
Skill: Level 4: Applying models
Section: Checkpoint 15.2
Status: Old
AACSB: Analytical thinking
15.8 Essay: Output, Price, and Profit in the Long Run
1) "For a perfectly competitive market, an economic profit attracts new firms. But when these firms enter the market, the price falls and the economic profit is eliminated." Are the previous statements correct or incorrect? What is the long-run profit or loss outcome for firms in a perfectly competitive market?
Topic: Entry
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Status: Old
AACSB: Reflective thinking
2) In the long run, perfectly competitive firms cannot make an economic profit. Why?
Topic: Long-run equilibrium, entry
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Status: Old
AACSB: Reflective thinking
3) The U-pick berry market is perfectly competitive. Suppose that all U-pick blueberry farms have the same cost curves and all are making an economic profit. What happens as time passes? What is the long-run equilibrium outcome?
Topic: Long-run equilibrium, entry
Skill: Level 3: Using models
Section: Checkpoint 15.3
Status: Old
AACSB: Written and oral communication
4) When will new firms enter a perfectly competitive market? When does entry stop?
Topic: Long-run equilibrium, entry
Skill: Level 3: Using models
Section: Checkpoint 15.3
Status: Old
AACSB: Written and oral communication
5) Describe how economic losses are eliminated in a perfectly competitive industry.
Topic: Long-run equilibrium, exit
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Status: Old
AACSB: Written and oral communication
6) Pumpkin growing is a perfectly competitive industry. Suppose that pumpkin growers are all incurring an economic loss. What happens as time passes? What is the long-run equilibrium outcome?
Topic: Long-run equilibrium, exit
Skill: Level 4: Applying models
Section: Checkpoint 15.3
Status: Old
AACSB: Written and oral communication
7) Suppose a farmer raising beef is making a normal profit. Then, because of a scare about mad cow disease, the demand for beef decreases drastically. What happens to the profits of the beef farmer in the short run and in the long run?
Topic: Long-run equilibrium, exit
Skill: Level 3: Using models
Section: Checkpoint 15.3
Status: Old
AACSB: Written and oral communication
8) How does a decrease in the demand for wheat ultimately lead to normal profits for wheat growers in the long run?
Topic: Long-run equilibrium, exit
Skill: Level 3: Using models
Section: Checkpoint 15.3
Status: Old
AACSB: Written and oral communication
9) Entry by competitive firms decreases the market price, while exit by competitive firms increases the market price. Explain why firms enter or exit an industry and why these price changes occur.
Topic: Long-run equilibrium, entry and exit
Skill: Level 3: Using models
Section: Checkpoint 15.3
Status: Old
AACSB: Written and oral communication
10) In the long run, a perfectly competitive firm makes zero economic profit. What incentive does the firm have to stay in business if it is making zero economic profit?
Topic: Long-run equilibrium
Skill: Level 3: Using models
Section: Checkpoint 15.3
Status: Old
AACSB: Written and oral communication
11) With regard to its profits and losses, how is the short run different from the long run for a perfectly competitive firm?
Topic: Long-run equilibrium
Skill: Level 3: Using models
Section: Checkpoint 15.3
Status: Old
AACSB: Written and oral communication
12) During the middle of the 2010s, the price of gasoline soared and there was a movement to switch to fuels made from a mixture of gasoline and ethanol. Ethanol can be made from corn. The price of corn skyrocketed and then, after a couple of years, the price decreased. What might have led to these price changes in the corn market?
In the long run, unable to prevent the flow of information to prospective corn farmers, the word got out that economic profit was possible in this arena. Over time, more farmers switched to growing corn, so more corn farmers entered the market, which led to a large increase in the supply of corn. As supply increased, the price of corn dropped.
Thus the higher price was the short-run result of an increase in demand. The falling price reflected the adjustment to the long-run equilibrium, as new corn farmers entered the market.
Topic: Long-run equilibrium
Skill: Level 5: Critical thinking
Section: Checkpoint 15.3
Status: Old
AACSB: Written and oral communication
13) The above figure shows the cost curves of a profit-maximizing perfectly competitive firm. If the price equals $7,
a. how much will the firm produce?
b. how much is the firm's average total, average variable, and marginal costs?
c. how much is the firm's total, total variable, and total fixed costs?
d. how much is the firm's total revenue and economic profit?
e. what will happen in this market in the long run?
a. The firm will produce 40 units of output because that is where the marginal revenue equals the marginal cost.
b. The firm's average total cost equals $4, its average variable cost equals $3, and its marginal cost equals $7.
c. The firm's total cost is $160 (= $4 × 40), its total variable cost is $120 (= $3 × 40), and its total fixed cost is $40 (= $160 - $120).
d. The firm's total revenue is $280 (= $7 × 40) and its economic profit is $120 (= $280 - $160).
e. In the long run, firms will enter the market in response to the economic profit. The market supply curve will shift rightward, the price will fall, and the economic profit will be eliminated.
Topic: Long-run equilibrium, entry
Skill: Level 3: Using models
Section: Checkpoint 15.3
Status: Old
AACSB: Analytical thinking
14) American restaurants receive their supply of baby back-ribs from American farms and from farms in Denmark. In the figures above, the left diagram shows the perfectly competitive market for baby back ribs in the United States. The right figure shows the situation at Premium Standard Farm in Kansas, one of the many U.S. farms supplying these ribs.
Now assume that the United States imposes a ban on European meat in response to the foot-and-mouth disease that has infected livestock in Europe. (Which the United States did a few years ago.) In particular, suppose that the U.S. ban decreases the supply by 40 tons a year. Using the figure on the left, show the impact of this ban on the baby back rib market. Using the figure on the right, show the impact on Premium Standard Farm in Kansas.
The ban on European meat decreases the supply of baby back ribs and shifts the supply curve leftward, as shown by the shift from S1 to S2. The price rises to $4 a pound. As the figure on the right shows, the MR curve for the Premium Standard Farm will shift upward, from MR1 to MR2. As a result, the farm increases its production to 40,000 pounds of ribs. Because the price exceeds the average total cost, the Premium Standard Farm makes an economic profit.
Topic: Long-run equilibrium, exit
Skill: Level 3: Using models
Section: Checkpoint 15.3
Status: Old
AACSB: Analytical thinking
15) Suppose the bobby pin industry is perfectly competitive. The price of a packet of bobby pins is $2.00. Pins and Needles, Inc. is a firm in this industry and is producing 1,000 packets of bobby pins per day at the point where the MC = MR. The average cost of production at this output level is $1.50 per packet.
a. What is the marginal cost of the 1,000th packet?
b. Is this firm making an economic profit, zero economic profit, or an economic loss? How much?
c. Is the firm in long-run equilibrium? Why or why not?
a. The price per packet is $2, which is also the Pins and Needles' marginal revenue. The marginal cost of the 1,000th packet is equal to marginal revenue, so for Pins and Needles the marginal cost is $2 per packet.
b. The firm is making a $0.50 economic profit per unit (which equals the price minus the average total cost). Because Pins and Needles produces 1,000 packets, its total economic profit is $500.
c. The firm is making an economic profit, so it is not in long-run equilibrium. In the long run, a perfectly competitive firm cannot make an economic profit. The only outcome possible in the long run is zero economic profit.
Topic: Long-run equilibrium
Skill: Level 4: Applying models
Section: Checkpoint 15.3
Status: Old
AACSB: Analytical thinking
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Connected Book
Foundations of Microeconomics 9e | Test Bank with Answer Key by Robin Bade
By Robin Bade