ECON212 Chapter 8 Test Bank

Suppose product price is fixed at $24; MR = MC at Q = 200; AFC = $6; AVC = $16. What do you advise this firm to do? a. Increase output. b. Decrease output. c. Stay at the current output; the firm is losing $200. d. Stay at the current output; the firm is earning a profit of $400.

d

Suppose that in a perfectly competitive market, firms are making economic profits. In the long run, we can expect to see: a. some firms leave. b. the market price rise. c. market supply shift to the left. d. economic profits become zero.

d

The point of maximum profit for a business firm is where: a. P = AC. b. TR = TC. c. MR = AR. d. MR = MC.

d

In Exhibit 8-11, when the price is $2, the profit-maximizing (or loss-minimizing) firm: a. should shut down and produce zero. b. should produce output equal to 4. c. is making an economic profit of $8. d. should try to produce more output.

a

In Exhibit 8-16, if the market price of its product is $50 per unit, then the firm will: a. break even. b. shut down. c. exit the industry. d. earn a positive economic profit.

a

In Exhibit 8-6, if this firm is currently producing 20 units of output, this firm is a. earning a profit of $10. b. earning a profit of $.50. c. losing $10. d. losing $0.50.

a

In a perfectly competitive industry, assume the short-run average total cost increases as the output of the industry expands. In the long run, the industry supply curve will: a. have a positive slope. b. have a negative slope. c. be perfectly horizontal. d. be perfectly vertical.

a

In long-run equilibrium, which of the following is not equal to price for a perfectly competitive firm? a. short-run average variable cost b. long-run average total cost c. short-run marginal cost d. short-run average total cost

a

In the perfectly competitive market, all firms in the market are assumed to be producing: a. identical products. b. differentiated products. c. products that are heavily advertised. d. complementary products.

a

A firm that is a price taker can: a. substantially change the market price of its product by changing its level of production. b. sell all of its output at the market price. c. sell some of its output at a price higher than the market price. d. decide what price to charge for its product.

b

A firm operating in a perfectly competitive market is a price taker because: a. each firm has a significant market share. b. each firm's product is perceived as different. c. setting a price higher than the market price results in zero sales. d. the market demand curve is perfectly elastic.

c

A profit-maximizing firm will continue to expand output: a. as long as the revenues from the production and sale of an additional unit exceeds the average cost of the unit. b. until the average cost of producing the good or service is at a minimum. c. as long as the revenues from the production and sale of an additional unit exceeds the marginal cost of the unit. d. until the marginal cost of producing a good or service is at a minimum.

c

A sandwich shop owner has the following information: P = MR = $4, ATC = $2, AVC = $1, MC = 4, and Q = 500. From this, she can determine: a. her profits are not being maximized. b. she has earned zero economic profits. c. she has earned economic profits of $1,000. d. she has earned economic profits of $1,500.

c

In Exhibit 8-11, when the price rises from $5 to $8, the profit-maximizing (or loss-minimizing) firm goes from making a: a. loss to making a smaller loss. b. loss to making a larger loss. c. loss to making a profit. d. profit to making a loss.

c

In the short run, a firm will stay in business as long as: a. price equals average revenue. b. marginal revenue is greater than or equal to marginal cost. c. price exceeds average variable cost. d. price is less than average variable cost.

c

In the short run, if a perfectly competitive firm is producing at a price below average total cost, its economic profit is: a. positive. b. zero. c. negative. d. normal.

c

The neighborhood ice cream shop finds that when it charges $3 per ice cream cone, its total revenues are $90,000. It has total variable costs of $30,000 and total fixed costs of $40,000. From this we can infer the: a. shop sells 10,000 ice cream cones. b. price is less than average total cost. c. economic profits are $20,000. d. shop will be closed in the long run.

c

Maximizing profit means finding the maximum difference between: a. TR and TC. b. MR and MC. c. price and ATC. d. ATC and MC.

a

The long run is a planning period: a. during which the firm can vary its plant size. b. less than six months. c. less than one year. d. less than five years.

a

Which of the following best describes why a perfectly competitive firm will sometimes continue producing in the short run even if it incurs a loss? a. As long as price exceeds average variable cost, the loss from producing will be smaller than the loss from shutting down, which is equal to the amount of total fixed costs. b. Short-run losses turn into long-run profits when there is entry into the market. c. A perfectly competitive firm should never produce if it incurs a loss because it is unable to influence the market price. d. If price exceeds average total cost, the loss from covering the fixed costs will be smaller than the loss from covering the variable costs.

a

Which of the following best illustrates perfect competition? a. wheat farming b. orange growers setting quotas under the Sunkist cooperative c. General Motors advertising campaign for its cars d. Coca-Cola and Pepsi battling for market share

a

Which of the following is a key characteristic of the long-run competitive equilibrium that distinguishes it from the short-run competitive equilibrium? a. Free entry to reduce short-run profits, or free exit to reduce short-run losses. b. Economic profits are positive, but cannot be negative. c. Marginal revenue is greater than marginal cost. d. Average revenue is less than average cost.

a

As shown in Exhibit 8-12, the price that will yield zero economic profit is: a. OA. b. OB. c. OC. d. OD.

b

As shown in Exhibit 8-18, the perfectly competitive firm is in long-run equilibrium at a price of: a. $100. b. $200. c. $300. d. $400.

b

As shown in Exhibit 8-3, the firm will produce in the short run if the price is at least equal to: a. $1.00 per unit (point A). b. $1.50 per unit (point B). c. $2.00 per unit (point C). d. $4.00 per unit (point D).

b

Assume the short-run average total cost for a perfectly competitive industry decreases as the output of the industry expands. In the long run, the industry supply curve will: a. have a positive slope. b. have a negative slope. c. be perfectly horizontal. d. be perfectly vertical.

b

If a competitive firm is losing money then it should: a. always shut down. b. shut down if its losses are greater than total fixed costs. c. shut down if its total fixed costs are greater than losses. d. raise its price.

b

If a firm increases output when MR > MC, then: a. profit will equal zero. b. profit will increase. c. profit will decrease. d. profit will remain the same.

b

If the price of the firm's product in Exhibit 8-3 is $1.50 per unit, which intersects AVC at point B, the firm should: a. continue to operate because it is earning a positive economic profit. b. stay in operation for the time being even though it is making an economic loss. c. shut down temporarily. d. increase the price.

b

In Exhibit 8-10, MR is the same as which column? a. Q. b. P. c. AVC. d. ATC. e. MC.

b

In Exhibit 8-13, the firm's short-run supply curve is the marginal cost curve above point a. A. b. B. c. C. d. D.

b

In Exhibit 8-16, the firm should shut down in the short run if the market price of its product falls below: a. $20 per unit. b. $30 per unit. c. $50 per unit. d. $80 per unit.

b

In Exhibit 8-18, assume the perfectly competitive firm is in long-run equilibrium and there is an increase in demand. As a result, the firm in the short run will increase output along its: a. short-run average total cost curve B. b. short-run marginal cost curve B. c. long-run average cost curve. d. none of these because the firm shuts down.

b

Jerome, the florist, sold 500 bridesmaid's bouquets in June. He estimates his costs that month were ATC = $10, AVC = $6, and MC = $9. If he sold each bouquet at the constant market price of $9, Jerome: a. made an economic profit of $500. b. made a loss of $500. c. should have shut down in June. d. made a loss of $1,500.

b

Suppose that price is below the minimum average total cost but above the minimum average variable cost. In the short run, a firm that is a price taker would: a. immediately shut down and get out of the industry. b. continue to produce a quantity such that marginal revenue equals marginal cost. c. shut down temporarily, in hopes of restarting in the near future. d. cut price and expand output in hopes of achieving economies of scale

b

Suppose the marginal revenue curve for a perfectly competitive firm intersects the average total cost curve at its minimum point. As the marginal revenue curve moves upward from that point along the marginal cost curve, a. the profit-maximizing quantity decreases. b. the profit-maximizing quantity increases. c. the firm will choose not to produce to minimize its loss. d. the average fixed cost curve will shift upward.

b

The demand for the product of a competitive price-taker firm is: a. perfectly inelastic. b. perfectly elastic. c. greater than zero but less than one. d. dependent on the availability of substitutes for the firm's product.

b

The long-run equilibrium condition for perfect competition is: a. P = AVC = MR = MC. b. P = ATC = MR = MC. c. Q = AVC = MR = MC. d. Q = ATC = MR = MC.

b

Under perfect competition, which of the following are equal at all levels of output? a. price and marginal cost b. price and marginal revenue c. marginal cost and marginal revenue d. marginal cost and short-run average total cost

b

When a product is defined as homogeneous, a. buyers prefer one seller's product to another's. b. buyers are indifferent as to which seller's product they buy. c. sellers are indifferent as to the quantity of the product they sell. d. sellers have an incentive to charge a price higher than the market price.

b

Which of the following correctly explains why sellers in a perfectly competitive market are price takers? a. There are few sellers, and so they have the power to take whatever price they want. b. There are many sellers, and so the market process generates an equilibrium price that cannot be influenced by any one seller. Thus they have no choice but to take the price generated by the market process. c. Sellers in a competitive market have the power to influence price by colluding with one another and using quotas to limit overall market output and thus raise price. d. Individual buyers in a competitive market have the power to influence price, and thus can impose prices and other conditions on powerless sellers.

b

Which of the following offers the best explanation of why "marginal revenue equals marginal cost" is the rule that indicates the profit-maximizing output level? a. If output were reduced from the profit-maximizing level, then the firm would be gaining marginal revenue that exceeds marginal cost, and thus increasing the level of profit. b. If output were increased from the profit-maximizing level, then the firm would be gaining marginal revenue that is less than the marginal cost incurred in producing this additional unit, and thus reducing the level of profit. c. Because the firm colludes with other similar firms to set price equal to marginal cost. d. The marginal revenue is equal to the marginal cost at all levels of output for a perfectly competitive firm.

b

Which of the following statements is true? a. To maximize profits, a firm must maximize total revenue. b. In long-run equilibrium, a competitive firm produces at the point of minimum average total cost. c. In the short-run, a perfectly competitive firm produces where total cost is minimum. d. In the short-run, a perfectly competitive firm will close down whenever price is less than average total cost.

b

As shown in Exhibit 8-3, the price at which the firm earns zero economic profit in the short-run is: a. $1.00 per unit. b. $1.50 per unit. c. $2.00 per unit. d. $4.00 per unit.

c

Consider a firm operating with the following: price = 10; MR = 10; MC = 10; ATC = 10. This firm is: a. making an economic profit of 10. b. an example of monopolistic competition. c. perfectly competitive in long-run equilibrium. d. a monopolist for a product with a relatively inelastic demand.

c

Exhibit 8-1 indicates that this firm is operating in which type of market structure? a. The market structure cannot be determined from the information given. b. monopoly c. perfect competition d. monopolistic competition

c

If a firm is currently equating MR and MC and product price = $24, AVC = $22, and ATC = $26, then in the long run this firm: a. will continue to operate at a loss. b. will earn a positive profit. c. will go out of business. d. should decrease price.

c

If a perfectly competitive firm sells 50 units of output at a market price of $10 per unit, its marginal revenue is: a. more than $10. b. less than $10. c. $10. d. $500.

c

If resource prices rise and the per-unit cost of producing a product increases as the firms in an industry expand output in response to an increase in demand, the long-run market supply curve for the product will: a. be perfectly elastic. b. be perfectly inelastic. c. slope upward to the right. d. be more inelastic than the short-run supply curve for the product.

c

If the expansion of output in an industry leads to unchanged resource prices, the industry is most likely to be a(n): a. decreasing cost industry. b. increasing cost industry. c. constant cost industry. d. industry characterized by economies of scale.

c

If the price of a product is $12, its average total cost is $2 and its average total cost is $15 at the profit-maximizing output level, in the short run the firm: a. should expand output until MR = MC. b. cannot cover total fixed costs. c. experiences a loss. d. must always shut down.

c

In Exhibit 8-10, the maximum possible total profit is: a. $36. b. $24. c. $12. d. $8.

c

In Exhibit 8-15, suppose the market price of mowing lawns falls to $10 per lawn. In this situation, E-Z-Care will: a. permanently exit the industry. b. shut down its operations, at least in the short run. c. continue to mow lawns in the short run despite its economic losses. d. earn a normal profit.

c

In Exhibit 8-15, what market price would cause E-Z-Care to just break even? a. $6 per lawn. b. $8 per lawn. c. $12 per lawn. d. $16 per lawn.

c

In Exhibit 8-2, economic profit for the firm is at a maximum when output per week equals: a. 100 units. b. 200 units. c. 250 units. d. 300 units.

c

In the short run, a firm should shut down its operation if: a. its losses are less than TFC at the MR = MC point. b. its losses equal TFC at the MR = MC point. c. its losses are greater than TFC at the MR = MC point. d. TR is less than TC.

c

In the short run, when the prevailing market price falls below the average variable cost curve, a firm in perfect competition will shut down because: ​ a. ​economic profit is zero. b. ​price is less than marginal revenue. c. ​marginal revenue is insufficient to pay average variable cost. d. ​other firms will enter the market seeking profits.

c

In the short run, why would a firm in a perfectly competitive market shut down production if the prevailing market price falls below the lowest possible average variable cost? a. At that point (economic) profit is zero. b. Below that point average revenue becomes less than marginal revenue. c. Below that point marginal revenue becomes insufficient to pay for avoidable average variable cost. d. Below that point other firms with similar cost will find it profitable to enter the market and take away demand from the existing firms.

c

What is the largest possible loss that is consistent with a firm producing in a perfectly competitive market in long-run competitive equilibrium? a. an amount equal to price minus average variable cost b. an amount equal to total variable c. zero d. an amount equal to total fixed cost

c

Which of the following is a characteristic of a competitive price-taker market? a. Profit maximizing firms in the market will expand output until price equals average variable cost. b. The market demand curve for the product is a horizontal line. c. There are many firms in the market, each producing a small share of total market output. d. The product produced by each of the firms is differentiated.

c

Which of the following is true of a perfectly competitive firm? a. The firm is a price maker. b. If the firm wishes to maximize profits it will produce an output level in which marginal revenue exceeds marginal cost. c. The firm will not earn an economic profit in the long run. d. The firm's short-run supply curve is its MC curve below its AVC curve.

c

Consider a firm with the following cost and revenue information: ATC = $8, AVC = $7, and MR = MC = $6. If the firm produces Q = 60 in the short run, it: a. is minimizing losses. b. makes a total loss of $60. c. should produce more output. d. should shut down.

d

If a firm equates MR and MC, then: a. TR is at a maximum, and TC is at a minimum. b. output is at a maximum. c. both TR and TC are at a maximum. d. profits are at a maximum or losses are at a minimum.

d

If a firm has no ability to influence the market price of its product, it: a. will go out of business due to losses. b. is a price-maker. c. cannot maximize profit. d. has a horizontal individual demand curve.

d

If a firm in a competitive industry is making zero economic profit but still producing, it must be the case that: a. MC = MR > ATC. b. MC = MR < ATC. c. MC = ATC > MR. d. MC = MR = ATC.

d

In Exhibit 8-11, when the price is $5, the firm: a. is making an economic profit of $21. b. should produce output equal to 10. c. is breaking even. d. should produce output equal to 7.

d

In a perfectly competitive market buyers want to buy 20,000 units and sellers want to sell 20,000 units of a product when the price is $50 per unit. ABC Corporation, one seller in this market, a. will sell a fixed number of units regardless of how the price changes. b. faces a downward-sloping demand curve for its product. c. will maximize profit by selling at a price less than $50. d. faces a perfectly elastic demand curve at a price of $50.

d

In the perfectly competitive market, individual firms exert no effect on the market price. Therefore, the firm's marginal revenue is: a. zero. b. an upward-sloping curve. c. a downward-sloping curve. d. the same as the firm's demand curve.

d

In the short run, a firm should shut down its business if price is less than: a. ATC. b. AR. c. MC. d. AVC.

d

The large-number-of-sellers condition of perfect competition is met when a. there are more sellers than buyers in the market. b. there are more than 50 firms in the industry. c. there are more than 100 firms in the industry. d. each firm is so small relative to the total market that no single firm can influence the market price.

d

The market price for wallets is $20. Your technology is such that at your most efficient production point, the average total cost of producing a wallet is $2.50. Your manager runs into your office and shouts, "Boss!!! Average costs are rising!! Average costs are rising!!" To make a profit-maximizing decision, you should: a. ask the manager about the average total cost. b. immediately stop production. c. completely ignore your manager. d. ask the manager about the marginal cost.

d

The profit maximizing or loss minimizing quantity of output for any firm to produce exists at that output level in which: a. total revenue is maximized. b. total cost is minimized. c. marginal cost is minimized. d. marginal revenue equals marginal cost.

d

Which of the following best illustrates a perfectly competitive market? a. jeans b. breakfast cereal c. electric power d. soybeans

d

Which of the following could be a perfectly competitive market? a. the market for licensed electricians b. the market for restaurants with permits to sell alcohol c. the market for patented pharmaceuticals d. the market for tradable stocks

d

A competitive firm maximizes its profits (or minimizes is losses) by producing the quantity where the market price equals the firm's: a. marginal cost. b. average total cost. c. average variable cost. d. average fixed cost.

a

As shown in Exhibit 8-12, the firm will not produce in the short-run if the price is below: a. OA. b. OB. c. OC. d. OD.

a

If a firm is operating at a loss in the short run and finds that its price is greater than average variable cost, then a. it should produce where MR = MC. b. it should produce zero output. c. total revenue is greater than total costs. d. total revenue is less than total variable costs.

a

If a firm shuts down in the short run, it will: a. incur losses equal to its fixed costs. b. have total revenue greater than total fixed costs. c. reduce its losses to zero. d. do this because P > AVC.

a

In Exhibit 8-4, what is this firm's profit-maximizing rate of output? a. 13. b. 14. c. 15. d. 16.

d