Econ Chapter 14

True/False The short-run supply curve in a competitive market must be more elastic than the long-run supply curve.

f

True/False The supply curve of a firm in a competitive market is the average variable cost curve, above the minimum of marginal cost.

f

Refer to Table 14-3. If the firm finds that its marginal cost is $11, it should a. increase production to maximize profit. b. increase the price of the product to maximize profit. c. advertise to attract additional buyers to maximize profit. d. reduce production to increase profit.

reduce production to increase profit.

Suppose a firm in a competitive market reduces its output by 20 percent. As a result, the price of its output is likely to a. increase. b. remain unchanged. c. decrease by less than 20 percent. d. decrease by more than 20 percent.

remain unchanged.

When price is below average variable cost, a firm in a competitive market will a. shut down and incur fixed costs. b. shut down and incur both variable and fixed costs. c. continue to operate as long as average revenue exceeds marginal cost. d. continue to operate as long as average revenue exceeds average fixed cost.

shut down and incur fixed costs.

As a general rule, profit-maximizing producers in a competitive market produce output at a point where a. marginal cost is increasing. b. marginal cost is decreasing. c. marginal revenue is increasing. d. price is less than marginal revenue.

marginal cost is increasing.

Profit-maximizing firms enter a competitive market when, for existing firms in that market, a. total revenue exceeds fixed costs. b. total revenue exceeds total variable costs. c. average total cost exceeds average revenue. d. price exceeds average total cost.

price exceeds average total cost.

When price is greater than marginal cost for a firm in a competitive market, a. marginal cost must be falling. b. the firm must be minimizing its losses. c. there are opportunities to increase profit by increasing production. d. the firm should decrease output to maximize profit.

there are opportunities to increase profit by increasing production.

The competitive firm's long-run supply curve is that portion of the marginal cost curve that lies above average a. fixed cost. b. variable cost. c. total cost. d. revenue.

total cost.

Suppose a profit-maximizing firm in a competitive market produces rubber bands. When the market price for rubber bands falls below the minimum of its average total cost, but still lies above the minimum of average variable cost, the firm a. will experience losses but will continue to produce rubber bands. b. will shut down. c. will be earning both economic and accounting profits. d. should raise the price of its product.

will experience losses but will continue to produce rubber bands.

The following table presents the total cost of production for various levels of output for a competitive firm: What is the lowest price at which this firm might choose to operate? a. $2.00 b. $3.00 c. $4.00 d. $5.00

$3.00

Refer to Table 14-3. The maximum profit available to this firm is a. $2 b. $3 c. $4 d. $5

$5

Which of the following is NOT a characteristic of a perfectly competitive market? a. Firms are price takers. b. Firms have difficulty entering the market. c. There are many sellers in the market. d. Goods offered for sale are largely the same.

Firms have difficulty entering the market.

Which of the following statements regarding a competitive firm is true? a. Since demand is downward sloping, if a firm increases its level of output, the firm will have to charge a lower price to sell the additional output. b. If a firm raises its price, the firm may be able to increase its total revenue even though it will sell fewer units. c. By lowering its price below the market price, the firm will benefit from being able to sell more units at the lower price than it could have sold by charging the market price. d. For all firms, average revenue equals the price of the good.

For all firms, average revenue equals the price of the good.

Mrs. Smith is operating a firm in a competitive market. The market price is $6.50. At her profit-maximizing level of output, her average total cost of production is $7.00 and her average variable cost of production is $6.00. a. Mrs. Smith is earning a loss and should shutdown in the short run. b. Mrs. Smith is earning a loss but should continue to operate in the short run. c. Mrs. Smith is earning a profit since the price is above the average variable cost. d. Without knowing Mrs. Smith's marginal cost we cannot determine whether she should stay in business or shut down.

Mrs. Smith is earning a loss but should continue to operate in the short run.

Refer to Table 14-3. If this firm chooses to maximize profit it will choose a level of output where marginal revenue is equal to a. 6 b. 7 c. 8 d. 9

9

Suppose a firm operates in the short run at a price above its average total cost of production. In the long run the firm should expect a. new firms to enter the market. b. the market price to fall. c. its profits to fall. d. All of the above

All of the above

A firm will shutdown in the short run if, for all positive levels of output, a. its loss exceeds its fixed costs. b. its total revenue is less than its variable costs. c. the price of its product is less than its average variable cost. d. All of the above are correct.

All of the above are correct.

When firms are said to be price takers, it implies that if a firm raises its price, a. buyers will go elsewhere. b. buyers will pay the higher price in the short run. c. competitors will also raise their prices. d. firms in the industry will exercise market power.

buyers will go elsewhere.

In a perfectly competitive market, the process of entry and exit will end when, for firms in the market, a. price is equal to average variable cost. b. marginal revenue is equal to average variable cost. c. economic profits are zero. d. accounting profits are zero.

economic profits are zero.

True/False A competitive market will typically experience entry and exit until accounting profits are zero.

f

True/False A miniature golf course is a good example of where fixed costs become relevant to the decision of when to open and when to close for the season.

f

True/False In making a short-run profit-maximizing production decision, the firm must consider both fixed and variable cost.

f

True/False A profit-maximizing firm in a competitive market will increase production when price exceeds marginal cost.

t

True/False By comparing the marginal revenue and marginal cost from each unit produced, a firm in a competitive market can determine the profit-maximizing level of production.

t

When a firm has little ability to influence market prices it is said to be in a. a competitive market. b. a strategic market. c. a thin market. d. a power market.

a competitive market.

Refer to Table 14-3. If the firm finds that its marginal cost is $5, it should a. reduce fixed costs by lowering production. b. increase production to maximize profit. c. decrease production to maximize profit. d. maintain its current level of production to maximize profit.

increase production to maximize profit.

When a profit-maximizing firm in a competitive market has zero economic profit, accounting profit a. is negative (accounting losses). b. is positive. c. is also zero. d. could be positive, negative or zero.

is positive.

Carla's Candy Store is maximizing profits by producing 1,000 pounds of candy per day. If Carla's fixed costs unexpectedly increase and the market price remains constant, then the short run profit-maximizing level of output a. is less than 1,000 pounds. b. is still 1,000 pounds. c. is more than 1,000 pounds. d. becomes zero.

is still 1,000 pounds.

In the long run, all of a firm's costs are variable. In this case the exit criterion for a profit-maximizing firm is to a. shutdown if price is less than average total cost. b. shutdown if price is greater than average total cost. c. shutdown if average revenue is greater than average fixed cost. d. shutdown if average revenue is greater than marginal cost.

shutdown if price is less than average total cost.

In a market with 1,000 identical firms, the short-run market supply is the a. marginal cost curve (above average variable cost) for a typical firm in the market. b. quantity supplied by the typical firm in the market. c. sum of the prices charged by each of the 1,000 individual firms. d. sum of the quantities supplied by each of the 1,000 individual firms.

sum of the quantities supplied by each of the 1,000 individual firms.

If all existing firms and all potential firms have the same cost curves, there are no inputs in limited quantities, and the market is characterized by free entry and exit, then the long-run a. market supply curve is equal to the sum of marginal cost. b. supply curve for the market must slope downward. c. market supply curve must slope upward. d. supply curve for the market is horizontal and equal to the minimum of long-run average cost for each firm.

supply curve for the market is horizontal and equal to the minimum of long-run average cost for each firm.

True/False Firms in competitive markets are said to be price takers.

t

True/False When a profit-maximizing firm in a competitive market experiences rising prices, it will respond with an increase in production.

t

A competitive firm's marginal cost curve is regarded as its supply curve because a. the position of the marginal cost curve determines the price for which the firm should sell its product. b. among the various cost curves, the marginal cost curve is the only one that slopes upward. c. the marginal cost curve determines the quantity of output the firm is willing to supply at any price. d. the firm is aware that marginal revenue must exceed marginal cost in order for profit to be maximized.

the marginal cost curve determines the quantity of output the firm is willing to supply at any price.

The short-run supply curve for a firm in a perfectly competitive market is a. horizontal. b. likely to slope downward. c. determined by forces external to the firm. d. the portion of its marginal cost curve that lies above its average variable cost.

the portion of its marginal cost curve that lies above its average variable cost.

The Wheeler Wheat Farm sells wheat to a grain broker in Seattle, Washington. Since the market for wheat is generally considered to be competitive, the Wheeler Wheat Farm maximizes its profit by choosing a. to produce the quantity at which average variable cost is minimized. b. to produce the quantity at which average fixed cost is minimized. c. to sell its wheat at a price where marginal cost is equal to average total cost. d. the quantity at which market price is equal to the farm's marginal cost of production.

the quantity at which market price is equal to the farm's marginal cost of production.