chapter 6 econ 104

Refer to the graph. This perfectly competitive firm earns zero economic profit at a price of $8. $20. $30. $46.

$30. Explanation If the market price is $30, the firm will produce 19 units. At this level of output, price is equal to average total cost and so the firm would earn zero economic profit.

If Pepsi and Coca-Cola are the only two soft drink producers, they could be considered a duopoly. a monopoly. an oligopoly. perfectly competitive firms.

a duopoly. Explanation In real life, there are many small soft drink producers, however Pepsi and Coca-Cola remain dominant with significant market share. This represents a duopoly and so would a market structure with these two large firms as the only producers.

In a perfectly competitive market where firms are earning economic loss, which of the following is likely as the industry moves toward long-run equilibrium? a lower price and fewer firms a higher price and fewer firms a lower price and more firms a higher price and more firms

a higher price and fewer firms Explanation If perfectly competitive firms are earning economic losses, then there is an alternative that would yield a higher benefit than remaining in the market. In the long run, they would eventually leave the market for these better alternatives which would reduce the market supply. As market supply falls, prices should rise and there will be fewer firms.

In a perfectly competitive market where firms are earning economic loss, which of the following is likely as the industry moves toward long-run equilibrium? a lower price and fewer firms a higher price and fewer firms a lower price and more firms a higher price and more firms

a higher price and fewer firms Explanation If perfectly competitive firms are earning economic losses, then there is an alternative that would yield a higher benefit than remaining in the market. In the long run, they would eventually leave the market for these better alternatives which would reduce the market supply. As market supply falls, prices should rise and there will be fewer firms.

A perfectly competitive producer tries to maximize profits by operating at an output where marginal cost equals price. price minus average total cost is greatest. marginal revenue is greater than marginal cost. the profit per unit is greatest.

marginal cost equals price. Explanation The firm will expand output if the next unit produced has a marginal cost lower than the current price. However, as output expands, diminishing returns imply that marginal costs will rise. The firm will maximize profits then when the marginal cost and price are the same for the last unit produced as any units produced beyond that point would incur an economic loss.

The law of diminishing returns helps to explain why marginal cost increases, in the short run, as more output is produced. the demand curve for a competitive firm is perfectly elastic. the total cost curve diminishes as long as output increases. marginal cost decreases as more output is produced.

marginal cost increases, in the short run, as more output is produced. Explanation Since the marginal output from a factor input decreases as more of the factor is utilized while the cost of the factor input is constant, the marginal costs of each additional unit produced will be increasing.

Which of the following is NOT considered a barrier to entry? marginal cost pricing control of scarce resources patents price controls

marginal cost pricing Explanation Marginal cost pricing is simply a pricing strategy and represents the lowest possible price that will be charged in a market. Firms pricing at marginal cost do not prevent other firms from coming in and doing the same.

Refer to the figure. If price is $6, this perfectly competitive firm is Multiple Choice earning an economic profit. unable to sell any output. maximizing efficiency. earning an economic loss.

maximizing efficiency. Explanation At a market price of $6, the firm will optimally produce 38 units. At this level of production, price is equal to average total cost and so the firm is maximizing efficiency as it produces at minimum cost.

Over the long run, a perfectly competitive market equilibrium, price equals the _______ and economic profit is _______. minimum of average variable cost; greater than zero minimum of average total cost; zero maximum of marginal cost; zero minimum of fixed cost; greater than zero

minimum of average total cost; zero Explanation Profit can be rewritten as: Profit = (Price − Average Total Cost) × Quantity. With competitive long-run equilibrium, economic profits are zero since the market price is tangent to the average total cost curve at its minimum point and there will no longer be an incentive for firms to come and go in the market.

Which of the following is NOT true for a competitive firm? the marginal cost curve is the short-run supply curve the marginal cost curve is horizontal at the equilibrium price the marginal cost curve shifts downward when productivity increases the marginal cost curve shifts upward when wages increase

the marginal cost curve is horizontal at the equilibrium price Explanation For a competitive firm the marginal revenue curve is horizontal at the equilibrium price, not the marginal cost curve.

If the level of productivity increases, then the marginal cost curve shifts upward. market price increases. the marginal cost curve shifts downward. the firm will supply less output.

the marginal cost curve shifts downward. Explanation When productivity increases production at any level, then each additional input added becomes more efficient and the marginal cost to produce at any level decreases. Therefore the marginal cost (supply) curve shifts downward.

When firms exit a market, all of the following occurs except the market supply shifts to the left. profits increase for firms that remain in the market. the equilibrium price level rises. the market demand curve shifts to the right.

the market demand curve shifts to the right. Explanation As firms exit a market, the market supply curve shifts to the left and this causes the market price to rise and equilibrium quantity to fall.

Refer to the graph. If the market price is $20 for this perfectly competitive firm the firm should produce 19 units. there will be economic losses. there will be economic profits. the firm will expand production.

there will be economic losses. Explanation If the market price is $20, the firm would optimally produce 15 units, however this would not be enough to make a profit as at that quantity the firm would have average costs higher than prices.

Refer to the graph. If the market price is $46 for this perfectly competitive firm the firm should produce 19 units. there will be economic losses. there will be economic profits. economic profits equal zero.

there will be economic profits. Explanation If the market price is $46, the firm would produce 24 units. At this level of production, price would exceed average total cost and so the firm would earn a positive economic profit.

If a perfectly competitive firm produces and sells more output, its _______ will definitely increase. total profit total revenue average total cost marginal revenue

total revenue Explanation As the firm expands output, both total revenue and total cost will increase. The relative size of each will determine whether total profit also increases.

Refer to the figure. If price is $4, the profit-maximizing rate of output for this perfectly competitive firm is 43 units. 38 units. 32 units. 25 units.

32 units. Explanation At a market price of $4 the marginal cost would equal the price at an output of 32 units. While this is optimal, the firm would still be earning a negative economic profit.

Based on the NEWSWIRE article, "Catfish Farmers Quitting", what should happen to the equilibrium price and quantity of catfish over time? Equilibrium price and quantity should both go up. Equilibrium price should go up, and equilibrium quantity should go down. Equilibrium price should go down, and equilibrium quantity should go up. Equilibrium price and quantity should both go down.

Equilibrium price should go up, and equilibrium quantity should go down. Explanation Since the market for catfish is still shrinking, the economic profit must still be less than zero, so more firms are expected to exit the market. As they do so, market supply decreases and this forces prices up, but production down.

Which of the following is an example of monopolistic competition? One large firm supplies the entire market. One firm supplies 60 percent of output to the market and there are three other rival firms. Many firms supply similar products, each with some consumers who show significant brand loyalty. Two firms supply the entire market.

Many firms supply similar products, each with some consumers who show significant brand loyalty. Explanation Monopolistic competitive industries tend to use advertising, brand names, and trademarks to distinguish themselves from the competition because there are many firms selling similar, but differentiated products.

Which of the following is an example of perfect competition? One large firm supplies the entire product to the market. Two firms supply the entire market and compete with each other for customers. Many small firms all produce the same good. Many firms supply similar products, but each has significant brand loyalty.

Many small firms all produce the same good. Explanation In a competitive market, the type of product sold is viewed as identical by consumers.

Which of the following is NOT characteristic of a perfectly competitive market? firms are price takers a significant degree of brand loyalty for each firm low barriers to entry many firms

a significant degree of brand loyalty for each firm Explanation Brand loyalty is a characteristic of a monopolistically competitive market structure. This allows firms some price making power, which firms in perfect competition do not have. Both monopolistic competition and perfect competition share the traits of low barriers to entry and many firms competing.

The segment of the firm's marginal cost curve that is above the average total cost is its supply curve. rising is equal to rising marginal physical product. above the market price is equal to per unit profit. above the average variable cost is its supply curve.

above the average variable cost is its supply curve. Explanation The marginal cost curve is the short-run supply curve for a competitive firm. However, the firm only produces units if they are profitable and average variable cost determines per unit profitability.

If price is greater than marginal cost, a competitive firm should increase output because additional units of output will cause marginal costs to fall. add to the firm's profits (or reduce losses). add to the firm's fixed costs. cause price to rise.

add to the firm's profits (or reduce losses). Explanation If the additional revenue is greater than the additional cost, the profit will increase or the loss will decrease as a result of expanding output.

Which of the following does NOT characterize a perfectly competitive market? many firms advertising by individual firms low barriers to entry zero economic profit in the long run

advertising by individual firms Explanation A key characteristic of a perfectly competitive market is a standardized product and so there is little need to advertise as it would not benefit any one firm—consumers would not be influenced in any way.

For a firm operating in a perfectly competitive industry an improvement in technology will reduce marginal cost. an improvement in technology will shift the firm and industry supply curve to the left. controlling the market price is easily achievable. both an improvement in technology will reduce marginal cost and shift both the firm and industry supply curve to the left.

an improvement in technology will reduce marginal cost. Explanation A technological improvement will reduce marginal cost and shift the supply curves to the right.

A rightward shift in market supply curve could be caused by an improvement in technology. an increase in the market price. an increase in wages. the expectation that the market price will fall in the future.

an improvement in technology. Explanation An improvement in technology would increase the efficiency of the firms in the industry and shift the marginal cost curve to the right.

In the long run, a perfectly competitive market with economic losses will experience an increase in equilibrium price as firms exit. an increase in equilibrium quantity as firms exit. the entry of firms until economic profits are zero. no change in equilibrium price or quantity.

an increase in equilibrium price as firms exit. Explanation In a perfectly competitive market if economic profit is less than zero, some firms will exit the industry and this will cause the market supply curve to shift to the left and cause the market price to increase for all firms that are able to remain.

If there are only four companies that produce tennis balls, the market could be considered a duopoly. a monopoly. an oligopoly. perfectly competitive.

an oligopoly. Explanation An oligopoly is composed of firms with a significant amount of market share. Generally, these firms represent a sizable proportion of the market, however that may not always be the case. When there is a smaller number of firms, it is more likely that each firm strategically interacts with the others and this represents a defining characteristic of oligopoly.

If a perfectly competitive firm wanted to maximize its total revenues, it would produce the output where marginal cost equals price. as much output as it is capable of producing. the output where the average total cost curve is at a minimum. the output where the marginal cost curve is at a minimum.

as much output as it is capable of producing. Explanation If a firm operated at maximum output, its profit would likely be small or negative because its marginal costs exceeded the market price. The profit per unit of output would decline and so then would its profit.

Which of the following is considered a barrier to entry? price taking standardized products brand loyalty economic profit

brand loyalty Explanation Brand loyalty is created by product differentiation which means that a new firm may have to spend a lot of money on advertising. This also represents a barrier as new firms will have to establish their own brand to compete with brand loyalty that consumers have for existing firms.

Which of the following would be considered a short-run production decision for a competitive firm? deciding whether to build an additional factory or not choosing a rate of output using the existing plant and equipment changing the scale of operations deciding what price to charge for its product

choosing a rate of output using the existing plant and equipment Explanation In the short run, only the rate of output can be varied since fixed input factors cannot be changed.

Which of the following is the best example of a perfectly competitive market? the automobile industry the soft drink industry dairy farming fast-food restaurants

dairy farming Explanation Dairy farming is an industry with many firms producing a standardized product.

In the perfectly competitive catfish market, the market demand curve is flat (horizontal). the same as the demand curve faced by the firm. vertical. downward-sloping.

downward-sloping. Explanation Even though each individual firm in the catfish market faces a horizontal demand curve, the market demand curve is still downward-sloping as the market itself still observes the law of demand.

Refer to the figure. If price is $8, this perfectly competitive firm is earning an economic profit. in long-run equilibrium. maximizing efficiency. unable to sell any output.

earning an economic profit. Explanation At a market price of $8, the firm would produce 43 units of output. At this level of production, price exceeds average total cost and so the firm would be earning positive economic profit.

If price equals average total cost AND marginal cost then producers will want to increase output. new firms will enter the market. economic profits would be zero. the firm would be operating at a loss.

economic profits would be zero. Explanation In a perfectly competitive market, firms will operate where price equals marginal cost. If this also happens at a level of production where price, marginal cost, and average total cost are equal to one another, then economic profits will be zero.

A profit-maximizing competitive firm wants to _____ the rate of output when price _____ marginal cost. expand; exceeds reduce; exceeds expand; is less than reduce; equals

expand; exceeds Explanation If price is greater than marginal cost, an increase in output will add more additional revenue than additional cost.

Suppose a perfectly competitive firm wants to increase its level of output profitably. To do this, the firm needs to find a way to lower its marginal cost. should raise its price to sell any additional output. should lower its price to sell any additional output. will not be able to sell the additional output at any price because of the many other competitive firms that exist.

find a way to lower its marginal cost. Explanation Since the firm is a price taker, all additional output must be sold at the current market price. Because the firm cannot influence price, the only way it can increase output is to lower its marginal cost so that additional units can be profitably made and sold.

Ceteris paribus, if the cost of insecticide decreases for tomato farmers, tomato farmers should do which of the following to maximize profits? increase price produce the same level of output since price has not changed increase output decrease output

increase output Explanation A decrease in a variable cost would shift the marginal cost curve downward, which would mean that the curve would intersect marginal revenue at a higher production rate.

If the market price is $50, marginal cost equals $45, and average total cost equals $40, the firm should increase output. decrease output. not change output. accept a loss in the short run.

increase output. Explanation When the price exceeds marginal cost, then the firm needs to produce more output because the next unit produced could bring in more revenue than it cost to produce.

For a competitive firm, the marginal cost curve is the short-run supply curve at all viable production levels. shifts to the upward when new firms enter the market. shifts upward when wages decrease. is the short-run demand curve.

is the short-run supply curve at all viable production levels. Explanation In the short run, a competitive firm will operate at a point where marginal cost equals price and so the marginal cost curve represents the short-run supply curve as it shows how quantity supplied would change with price.

An individual wheat farmer has no market power because it can differentiate its wheat. it can alter the market price. its output is a large portion of the entire market. it must accept the equilibrium market price.

it must accept the equilibrium market price. Explanation Since a wheat farmer's output relative to the total market is small, it must accept the market price. If it does try to change its price, it runs the risk of losing all its customers.

Which of the following market structures has the highest barriers to entry? perfect competition monopoly monopolistic competition oligopoly

monopoly Explanation While oligopolies have high barriers to entry, the highest barriers are with monopolies as they are able to keep out any firm that can legitimately compete with them.

If perfectly competitive firms earn economic profit in the short run, then we would expect that in the long run new firms will enter the market. existing firms will leave the market. supply will decrease. demand will decrease.

new firms will enter the market. Explanation If economic profits are above normal profits, then firms will enter the industry as economic profit signals whether a prospective firm could be doing better in the market than the benefit of their next-best alternative.

Refer to the graph. If the market price is $30 for this perfectly competitive firm the firm should produce 24 units. no entry or exit will occur. the firm should produce 15 units. economic profits will be greater than zero.

no entry or exit will occur. Explanation If the market price is $30, the price it tangent to the low point on the average total cost curve and economic profit would equal zero. This means that prospective firms would be doing as well outside of the market as they could inside the market and so there is no need for entry or exit.

If firms in a competitive industry were earning short-run economic profits one would expect the market demand curve to shift to the right. one would expect the market supply curve to shift to the right. one would expect nothing to change. this circumstance would represent an impossibility because competition always keeps profit at zero in a competitive industry.

one would expect the market supply curve to shift to the right. Explanation Profits will attract new firms and shift the supply curve to the right.

In which of the following industries is the firm referred to as a price taker? monopolistic competition monopoly perfect competition oligopoly

perfect competition Explanation Since a perfectly competitive firm's output is small relative to the total market, it must accept the market price. If it does try to change its price, it runs the risk of losing all its customers.

Over the long run, a perfectly competitive market equilibrium price equals the minimum of average total cost. price equals the maximum of average total cost. marginal cost equals the maximum of total revenue. marginal cost equals the minimum of total revenue

price equals the minimum of average total cost. Explanation When an industry is in long-run competitive equilibrium, economic profits are equal to zero which means that the market price will tangent to the average total cost curve at its minimum. This position represents zero economic profit because profit can be rewritten as: Profit = (Price − Average Total Cost) × Quantity. So, if price equals average total costs at a given quantity, profits must be zero.

Economic profits disappear when Multiple Choice price is greater than marginal costs. price falls to the level of minimum average total cost. price is greater than average variable cost. firms exit an industry.

price falls to the level of minimum average total cost. Explanation Profit can be rewritten as: Profit = (Price − Average Total Cost) × Quantity. So, if price equals average total costs at a given quantity, profits must be zero. This will occur at the intersection of price, the minimum of average variable cost, and marginal cost.

Profit per unit equals price minus average total cost. average revenue divided by average total cost. total revenue minus total cost. total revenue minus variable cost divided by quantity.

price minus average total cost. Explanation Since for a competitive firm price is equal to marginal revenue and also average revenue, profit per unit will be the difference between the average revenue and average cost at that level of production.

A horizontal demand curve for a firm indicates that the firm has no market power. the Law of Demand does not apply in the market. price equals average total cost. the firm is a monopoly.

the firm has no market power. Explanation Since a horizontal demand curve means that demand is perfectly elastic, this would correspond to a firm with no market power. The implication is that if the firm were to try and unilaterally raise price, it would immediately lose all customers to rival firms.

In a competitive market with economic profits, equilibrium price will rise as new firms enter the market. price will fall as new firms enter the market. quantity will fall as new firms enter the market. quantity will remain the same as new firms enter the market.

price will fall as new firms enter the market. Explanation If economic profits are above normal profits, then firms will enter the industry. This will cause the industry supply to increase (shift right). Market price will fall and this will reduce profits for each firm until all firms earn normal profits.

Competition in markets results in economic losses in the long run. differentiated products. prices being as close to marginal cost as possible. an undesirable allocation of resources.

prices being as close to marginal cost as possible. Explanation In a competitive market, profit will be zero in the long run due to firms entering and exiting. This pushes prices as close to marginal costs as possible.

If marginal cost equals price, then _____ is at a maximum. total cost profit total revenue marginal cost

profit Explanation Once marginal cost equals price, then any additional output will decrease profit.

When a new firm enters a perfectly competitive market, it pushes the equilibrium price upward. reduces the profits of existing firms. shifts the market supply curve to the left. shifts the market demand curve to the left.

reduces the profits of existing firms. Explanation A positive economic profit causes more firms to enter the industry which shifts the supply curve to increase (shift right), which lowers the market price and ultimately the profits of firms.

A perfectly competitive firm currently sells 30,000 cartons of eggs at $1.25 each. If the firm wants to sell one more carton of eggs, the firm should raise its price above $1.25. cannot sell an additional carton at any price because there are other egg farmers in the market. must sell the carton for less than $1.25. should price the carton at $1.25.

should price the carton at $1.25. Explanation Although the firm could sell the extra carton at a price lower than the market price, the profit maximizing competitive firm will price the additional carton at the market price.

The market supply curve is calculated by summing the marginal cost curves of all firms at each price. averaging the individual supply curves. summing the prices from individual supply curves. averaging the individual marginal cost curves below average total cost.

summing the marginal cost curves of all firms at each price. Explanation Since the marginal cost curves represent each firm's individual supply curve, the sum of the curves at each price will equal the market supply curve.

The ability and willingness to sell specific quantities of a good at alternative prices in a given period of time, ceteris paribus, defines demand. equilibrium price. supply. economic profit.

supply. Explanation Supply is a schedule that shows the amounts of goods or services that prospective sellers will offer at different prices at a given period of time.

Market supply in a competitive market is determined by income. the number of buyers. the cost of factor inputs. consumer preferences.

the cost of factor inputs. Explanation If the cost of factor inputs increases, the individual firm's supply curves will shift downward and since the sum of the curves equals market supply, this will shift the market supply curve to the left (representing a decrease in supply).