econ exam

When a competitive market experiences an increase in demand that increases production costs for existing firms and potential new entrants, which of the following is most likely to arise? a. The long-run market supply curve will be upward sloping. b. The condition of free entry into the market will be violated. c. Producer profits will fall in the long run. d. The long-run market supply curve will be horizontal as new firms enter and drive the price downward.

a. The long-run market supply curve will be upward sloping.

In a competitive market, no single producer can influence the market price because a. many other sellers are offering a product that is essentially identical. b. consumers have more influence over the market price than producers do. c. government intervention prevents firms from influencing price. d. producers agree not to change the price.

a. many other sellers are offering a product that is essentially identical.

Profit-maximizing firms in a competitive market produce an output level where a. marginal cost equals marginal revenue. b. marginal cost equals average total cost. c. marginal revenue is increasing. d. price is less than marginal revenue.

a. marginal cost equals marginal revenue.

A competitive firm has been selling its output for $20 per unit and has been maximizing its profit, which is positive. Then, the price falls to $18, and the firm makes whatever adjustments are necessary to maximize its profit at the now-lower price. Once the firm has adjusted, its a. quantity of output is lower than it was previously. b. average total cost is lower than it was previously. c. marginal cost is higher than it was previously. d. All of the above are correct.

a. quantity of output is lower than it was previously.

Scenario 14-3Suppose a certain competitive firm is producing Q=500 units of output. The marginal cost of the 500th unit is $17, and the average total cost of producing 500 units is $12. The firm sells its output for $20. Refer to Scenario 14-3. At Q=500, the firm's profits equal a. $1,000. b. $4,000. c. $7,000. d. $10,000.

b. $4,000.

Suppose a firm in a competitive market produces and sells 8 units of output and has a marginal revenue of $8. What would be the firm's marginal revenue if it instead produced and sold 4 units of output? a. $2 b. $8 c. $32 d. $64

b. $8

Suppose a competitive market is comprised of firms that face identical cost curves. The firms experience an increase in demand that results in positive profits for the firms. Which of the following events are then most likely to occur? (i) New firms will enter the market. (ii) In the short run, price will rise; in the long run, price will rise further. (iii) In the long run, all firms will be producing at their efficient scale. a. (i) and (ii) only b. (i) and (iii) only c. (ii) and (iii) only d. (i), (ii) and (iii)

b. (i) and (iii) only

Which of the following statements best reflects a price-taking firm? a. Price-taking firms maximize profits by charging a price above marginal cost. b. If the firm were to charge more than the going price, it would sell none of its goods. c. The firm can sell only a limited amount of output at the market price before the market price will fall. d. The firm has an incentive to charge less than the market price to earn higher revenue.

b. If the firm were to charge more than the going price, it would sell none of its goods.

For a particular competitive firm, the minimum value of average variable cost (AVC) is $12 and is reached when 200 units of output are produced. For the same firm, the minimum value of average total cost (ATC) is $15 and is reached when 230 units of output are produced. Which of the following statements is correct? a. In the short run, the firm will shut down if the price of its product is $14. b. In the long run, the firm will shut down if the price of its product is $11. c. For this firm, the minimum value of variable cost (VC) is $2,400. d. If the firm's fixed cost (FC) amounts to $500, then the firm cannot earn a positive profit unless the price of its product exceeds $16.

b. In the long run, the firm will shut down if the price of its product is $11.

A corporation has been steadily losing money on one of its product lines, plastic flamingo lawn ornaments. The firm produces plastic flamingos in a factory that cost $20 million to build 10 years ago. The firm is now considering an offer to buy that factory for $15 million. Which of the following statements about the decision to sell or not to sell is correct? a. The firm should turn down the purchase offer because the factory cost more than $15 million to build. b. The $20 million spent on the factory is a sunk cost; that cost should not affect the decision. c. The $20 million spent on the factory is an implicit cost, which should be included in the decision. d. The firm should sell the factory only if it can reduce its costs elsewhere by $5 million.

b. The $20 million spent on the factory is a sunk cost; that cost should not affect the decision.

Which of the following statements is not correct? a. In a long-run equilibrium, marginal firms make zero economic profit. b. To maximize profit, firms should produce at a level of output where price equals average variable cost. c. The amount of gold in the world is limited. Therefore, the gold jewelry market probably has a long-run supply curve that is upward sloping. d. Long-run supply curves are typically more elastic than short-run supply curves.

b. To maximize profit, firms should produce at a level of output where price equals average variable cost.

Free entry means that a. a firm's marginal cost is zero. b. no legal barriers prevent a firm from entering an industry. c. a firm has no fixed costs in the short run. d. the government pays any entry costs for individual firms.

b. no legal barriers prevent a firm from entering an industry.

A sunk cost is one that a. changes as the level of output changes in the short run. b. was paid in the past and will not change regardless of the present decision. c. should determine the rational course of action in the future. d. has the most impact on profit-making decisions.

b. was paid in the past and will not change regardless of the present decision.

When a profit-maximizing firm is earning profits, those profits can be identified by a. P × Q. b. (MC - AVC) × Q. c. (P - ATC) × Q. d. (P - AVC) × Q.

c. (P - ATC) × Q.

Cold Duck Airlines flies between Tacoma and Portland. The company leases planes on a year-long contract at a cost that averages $600 per flight. Other costs (fuel, flight attendants, etc.) amount to $550 per flight. Currently, Cold Duck's revenues are $1,000 per flight. All prices and costs are expected to continue at their present levels. If it wants to maximize profit, Cold Duck Airlines should a. drop the flight immediately. b. continue the flight. c. continue flying until the lease expires and then drop the run. d. drop the flight now but renew the lease if conditions improve.

c. continue flying until the lease expires and then drop the run.

Which of the following industries is most likely to exhibit the characteristic of free entry? a. nuclear power b. municipal water and sewer c. dairy farming d. airport security

c. dairy farming

In a competitive market, the actions of any single buyer or seller will a. discourage entry by competitors. b. influence the profits of other firms in the market. c. have a negligible impact on the market price. d. None of the above is correct.

c. have a negligible impact on the market price.

The term shutdown a. and the term exit both refer to short-run decisions that a firm might make. b. and the term exit both refer to long-run decisions that a firm might make. c. refers to a short-run decision that a firm might make, whereas the term exit refers to a long-run decision that a firm might make. d. refers to a long-run decision that a firm might make, whereas the term exit refers to a short-run decision that a firm might make.

c. refers to a short-run decision that a firm might make, whereas the term exit refers to a long-run decision that a firm might make.

When total revenue is less than variable costs, a firm in a competitive market will a. continue to operate as long as average revenue exceeds marginal cost. b. continue to operate as long as average revenue exceeds average fixed cost. c. shut down. d. raise its price.

c. shut down.

The accountants hired by the Brookside Racquet Club have determined total fixed cost to be $75,000, total variable cost to be $130,000, and total revenue to be $145,000. Because of this information, in the short run, the Brookside Racquet Club should a. shut down. b. exit the industry. c. stay open because shutting down would be more expensive. d. stay open because the firm is making an economic profit.

c. stay open because shutting down would be more expensive.

Which of these curves is the competitive firm's short-run supply curve? a. the average variable cost curve above marginal cost b. the average total cost curve above marginal cost c. the marginal cost curve above average variable cost d. the average fixed cost curve

c. the marginal cost curve above average variable cost

Farmer McDonald sells wheat to a broker in Kansas City, Missouri. Because the market for wheat is generally considered to be competitive, Mr. McDonald maximizes his 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. the quantity at which market price is equal to Mr. McDonald's marginal cost of production. d. the quantity at which market price exceeds Mr. McDonald's marginal cost of production by the greatest amount.

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

Scenario 14-4Victor is the recipient of $1 million from a lawsuit. Victor decides to use the money to purchase a small business in Florida. His business operates in a perfectly competitive industry. If Victor would have invested the $1 million in a risk-free bond fund, he could have earned $100,000 each year. After he bought the small business, Victor quit his job as a market analyst with Research, Inc., where he used to earn $75,000 per year. Refer to Scenario 14-4. What is Victor's opportunity costs of operating his new business? a. $25,000 b. $75,000 c. $100,000 d. $175,000

d. $175,000

Scenario 14-4The information below applies to a competitive firm that sells its output for $40 per unit.• When the firm produces and sells 150 units of output, its average total cost is $24.50.• When the firm produces and sells 151 units of output, its average total cost is $24.55. Refer to Scenario 14-4. Suppose the firm is producing 150 units of output and its fixed cost is $975. Then its variable cost amounts to a. $2,360.25. b. $2,500.00. c. $2,612.75. d. $2,700.00.

d. $2,700.00.

Which of the following is not a characteristic of a perfectly competitive market? a. Firms are price takers. b. Goods offered for sale are largely the same. c. There are many sellers in the market. d. A few large firms dominate the market.

d. A few large firms dominate the market.

In a long-run equilibrium, the marginal firm has a. price equal to average total cost. b. total revenue equal to total cost. c. economic profit equal to zero. d. All of the above are correct.

d. All of the above are correct.

Which of the following is not a characteristic of a perfectly competitive market? a. Each firm sells a virtually identical product. b. Each firm chooses an output level that maximizes profits. c. Buyers and sellers are price takers. d. Free entry is limited.

d. Free entry is limited.

Which of the following statements is correct? a. For all firms, marginal revenue equals the price of the good. b. Only for competitive firms does average revenue equal the price of the good. c. Marginal revenue can be calculated as total revenue divided by the quantity sold. d. Only for competitive firms does average revenue equal marginal revenue.

d. Only for competitive firms does average revenue equal marginal revenue.

When a profit-maximizing firm's fixed costs are considered sunk in the short run, then the firm a. can set price above marginal cost. b. must set price below average total cost. c. will never show losses. d. can safely ignore fixed costs when deciding how much output to produce.

d. can safely ignore fixed costs when deciding how much output to produce.

In a competitive market with identical firms, a. an increase in demand in the short run will result in a new price above the minimum of average total cost, allowing firms to earn a positive economic profit in both the short run and the long run. b. firms cannot earn positive economic profit in either the short run or long run. c. firms can earn positive economic profit in the long run if the long-run market supply curve is upward sloping. d. free entry and exit into the market requires that firms earn zero economic profit in the long run even though they may be able to earn positive economic profit in the short run.

d. free entry and exit into the market requires that firms earn zero economic profit in the long run even though they may be able to earn positive economic profit in the short run.

A profit-maximizing firm in a competitive market will always make marginal adjustments to production as long as a. average revenue is greater than average total cost. b. average revenue is equal to marginal cost. c. marginal cost is greater than average total cost. d. price is above or below marginal cost.

d. price is above or below marginal cost.

Because the goods offered for sale in a competitive market are largely the same, a. there will be few sellers in the market. b. there will be few buyers in the market. c. only a few buyers will have market power. d. sellers will have little reason to charge less than the going market price.

d. sellers will have little reason to charge less than the going market price.

If the market elasticity of demand for potatoes is -0.3 in a perfectly competitive market, then the individual farmer's elasticity of demand a. will also be -0.3. b. depends on how large a crop the farmer produces. c. will range between -0.3 and -1.0. d. will be infinite.

d. will be infinite.

Consider a firm that operates in a perfectly competitive market. Currently the firm is producing 300 units of output and the price is $20. If marginal cost at 300 units is $22, the firm ​a. could increase profits by reducing output from 300 units. ​b. could increase profits by increasing output from 300 units. ​c. should decide to increase the price above $20. ​d. should shut down, since it must be losing money.

​a. could increase profits by reducing output from 300 units.

Consider a firm that operates in a perfectly competitive market. The firm is producing at its profit maximizing output level. If this is true, then ​a. average revenue is maximized. ​b. the firm must be earning a positive economic profit. ​c. marginal revenue is greater than the market price. ​d. price must be equal to marginal cost.

​d. price must be equal to marginal cost.