Chapter 7- Practice Question

Marginal revenue is equal to: a. the change in P x Q due to a one unit change in output. b. price, but only if the firm is a price searcher. c. the change in quantity divided by the change in price. d. the change in price divided by the change in output.

the change in P x Q due to a one unit change in output.

As the case study in the text illustrates, individual firms in the potato industry have a great deal of market power. True False

False

The characteristic of ease of entry and exit ensures that perfectly competitive firms will be able to earn positive economic profits over the long run. True False

False

The elasticity of demand for a particular perfectly competitive firm's output is positively related to the number of firms supplying the market. True False

False

Widgets R Us, which is a price-taking firm, is currently producing 250 units of output. The market price is $3 per unit, the marginal cost of the 250th unit is $2.75, average total cost is $3.50 per unit, and average variable cost is $2.50 per unit. What advice should you give Widgets R Us? a. Increase output to reduce losses. b. Shut down to minimize losses. c. Decrease output to 200 units. d. Continue to produce 250 units in the short run.

Increase output to reduce losses.

A perfectly competitive firm will minimize its losses by shutting down when: Correct! P < AVC at the profit-maximizing level of output. P < ATC at the profit-maximizing level of output. P < TFC at the profit-maximizing level of output. P < MC at the profit-maximizing level of output.

P < AVC at the profit-maximizing level of output.

Assume a perfectly competitive firm is producing a level of output at which MR < MC. What will happen as the firm moves to its profit-maximizing equilibrium? a. Marginal revenue will rise. b. Marginal cost will rise. c. Marginal cost will fall. d. Marginal revenue will fall.

Marginal cost will fall.

When a perfectly competitive market has fully adjusted to demand and supply conditions, all of the following are true except: a. P = MC. b. P = the minimum of LRAC. c. P = the minimum of AVC. d. P = the minimum of SRATC.

P = the minimum of AVC.

Perfectly competitive firms are said to be "small." Which of the following best describes this smallness? a. The individual firm faces a downward-sloping demand curve. b. The individual firm is unable to affect market price through its output decisions. c. The individual firm must have fewer than 10 employees. d. The individual firm has assets of less than $2 million.

The individual firm is unable to affect market price through its output decisions.

Assume a perfectly competitive firm is producing 500 units of output, P = $7, ATC of the 500th unit is $6, marginal cost of the 500th unit = $7, and AVC of the 500th unit = $5. Based on this information, the firm is: a. earning an economic profit of $500. b. earning an economic profit of $1,000. c. incurring a loss of $500. d. incurring a loss of $1,000.

a. earning an economic profit of $500.

Assume there is a decrease in the market demand for a good sold by price-taking firms that are initially producing the profit-maximizing level of output. For the individual firm, this would result in: a. a decrease in both price and the profit-maximizing quantity of output. b. a decrease in price and increase in the profit-maximizing quantity of output. c. an increase in price and decrease in the profit-maximizing quantity of output. d. an increase in both price and the profit-maximizing quantity of output.

a decrease in both price and the profit-maximizing quantity of output

The demand curve faced by the individual perfectly competitive firm is: a horizontal. b downward sloping. c upward sloping. d vertical.

a horizontal.

Which of the following statements is definitely true when price is less than average total cost for a firm producing the profit-maximizing level of output in the short run? a. The firm is incurring an economic loss. b. The firm will be earning negative total revenue. c. The firm is running a loss in an accounting sense, so that total revenue is less than total explicit costs. d. The firm will minimize its losses by shutting down.

a. The firm is incurring an economic loss.

Assume the firms in a perfectly competitive industry are initially in long-run equilibrium and the cost of labor increases. In the short run, this will cause firms in the industry to: a. reduce output and incur a loss. b. increase output and earn a positive economic profit. c. increase output and incur a loss. d. reduce output and earn a positive economic profit.

a. reduce output and incur a loss.

When price is less than average variable cost at the profit-maximizing level of output, a firm should: a. shutdown, because it cannot even cover all of its variable costs let alone its fixed costs if it stays in business. b. continue to produce the level of output at which marginal revenue equals marginal cost if it is operating in the short run. c. continue to produce the level of output at which marginal revenue equals marginal cost if it is operating in the long run. d. shutdown, because it will lose nothing in that case.

a. shutdown, because it cannot even cover all of its variable costs let alone its fixed costs if it stays in business

Assume there is an increase in the number of consumers in the market for a good sold by perfectly competitive firms that are initially producing the profit-maximizing level of output. For the individual firm, this would result in: a. an increase in both price and the profit-maximizing quantity of output. b. a decrease in price and increase in the profit-maximizing quantity of output. c. an increase in price and decrease in profit-maximizing quantity of output. d. a decrease in both price and the profit-maximizing quantity of output.

an increase in both price and the profit-maximizing quantity of output.

Industry X, which is perfectly competitive, is in long-run equilibrium. Assume a new law is passed that requires employers in industry X to provide health insurance to previously uninsured employees. As a result of this new requirement we would expect to observe: a. an increase in price and total output in industry X. b. an increase in price and a decrease in total output in industry X. c. a decrease in price and total output in industry X. d. a decrease in price and an increase in total output in industry X.

an increase in price and a decrease in total output in industry X.

By shutting down when price is less than average variable cost at the profit-maximizing level of output, a perfectly competitive firm will limit its losses to its: a total variable costs. b total fixed costs. c marginal costs. d total costs.

b total fixed costs.

Which of the following is not a characteristic of perfect competition? a. Outputs of the firms are perfect substitutes for one another. b. Firms face downward-sloping demand functions. c. Large number of firms in the industry. d. No barriers to entry or exit.

b. Firms face downward-sloping demand functions.

Assume a perfectly competitive firm is producing a level of output at which MR < MC. What should the firm do to maximize its profits? a. The firm should increase output. b. The firm should decrease output. c. The firm should do nothing — it wants to maximize the difference between MR and MC in order to maximize its profits. d. The firm should increase price.

b. The firm should decrease output.

If a market is perfectly competitive and is in long-run equilibrium, which of the following conditions does not hold? a. Economic profit equals zero. b. There is an incentive for additional firms to enter the market because existing firms are earning revenues in excess of the explicit costs of production. c. Price is equal to the minimum long-run average cost of production. d. The value of the last unit of output produced is equal to the value of the resources used to produce it.

b. There is an incentive for additional firms to enter the market because existing firms are earning revenues in excess of the explicit costs of production.

Assume that as the firms in a perfectly competitive industry expand output, the prices of productive inputs increase. All else constant, this would cause the individual firms' marginal cost curves to ________ and the market supply curve to become ________. a. shift up; flatter b. shift up; steeper c. shift down; flatter d. shift down; steeper

b. shift up; steeper

By continuing to operate when the price is greater than average variable cost but less than average total cost, a firm limits its losses to: a. $0. b. the difference between its total fixed cost and the amount by which total revenue exceeds total variable costs. c. its total fixed costs. d. its total variable costs.

b. the difference between its total fixed cost and the amount by which total revenue exceeds total variable costs.

Which of the following statements regarding a price-taking firm is correct? a Demand = marginal revenue > average revenue. b Demand = average revenue > marginal revenue. c Demand = price = average revenue = marginal revenue. d Demand = price > average revenue > marg

c Demand = price = average revenue = marginal revenue.

As described in the text, which of the following statements best describes the strategy of many potato growers since 2005? a Growers have restricted supply so much that there is now a severe shortage of potatoes in the United States. b Growers have continued to compete vigorously with each other, causing prices and profits to decrease. c Growers have worked together to reduce supply and stabilize demand. As a result, equilibrium price has been propped up and allowed farmers to earn what they consider a decent profit. d because efforts by potato growers to restrict supply are illegal in the United States, they have focused exclusively on increasing demand to increase their profits.

c Growers have worked together to reduce supply and stabilize demand. As a result, equilibrium price has been propped up and allowed farmers to earn what they consider a decent profit.

Assume that at the current market price, a perfectly competitive firm's profit-maximizing level of output yields total revenues that are just equal to total costs. Which of the following statements applies to this firm? a The firm should shut down right now. b The firm should increase its explicit costs to reduce its tax burden. c The firm is earning zero economic profit and should continue to operate. d The firm should continue to operate in the short run to minimize losses, but shut down if things don't improve over the long run.

c The firm is earning zero economic profit and should continue to operate.

In the case of the perfectly competitive firm: a marginal revenue is greater than the market price. b marginal revenue is equal to, less than, or greater than market price depending on the level of output. c marginal revenue equals the market price. d marginal revenue is less than the market price.

c marginal revenue equals the market price.

Suppose a perfectly competitive firm, which is initially in long-run equilibrium experiences a decrease in the wages it must pay its employees. In the short run, which of the following will occur? a. ATC and MC will shift up, causing the firm to incur a loss. b. ATC will shift up and MC will shift down, causing the firm to incur a loss. c. ATC and MC will shift down, causing the firm to earn a positive economic profit. d. ATC will shift down and MC will shift up, causing the firm to earn a positive economic profit.

c. ATC and MC will shift down, causing the firm to earn a positive economic profit.

Which of the following statements is correct? a. Economic profit is generally greater than accounting profit. b. Economic profit is the difference between total revenue and implicit costs. c. Economic profit is the difference between total revenue and the full opportunity cost of all the resources used in production. d. Economic profit is the difference between total revenue and explicit costs.

c. Economic profit is the difference between total revenue and the full opportunity cost of all the resources used in production.

All of the following are characteristics of a perfectly competitive market except: a. perfectly elastic demand. b. a large number of sellers. c. barriers to entry. d. a homogeneous product.

c. barriers to entry.

The perfectly competitive firm: a. faces a downward-sloping demand function. b. cannot earn any economic profits because it faces a horizontal demand curve. c. makes its profit-maximizing decision only on the basis of output. d. can influence market price only in a downward direction

c. makes its profit-maximizing decision only on the basis of output.

Assume that goods X and Y are substitutes and are produced in perfectly competitive markets. If there is a decrease in the supply of good X, which of the following will happen in the market for good Y in the long run? a Price will be higher at the new long-run equilibrium as a result of entry into the market. b The firms that were already in the industry will continue to earn positive economic profit. c Firms will exit, causing market price to rise. d Firms will enter, causing market price to fall.

d Firms will enter, causing market price to fall.

When a firm is producing at the profit maximizing level of out put and P > ATC, the firm is: a incurring an economic loss. b earning a profit or incurring a loss depending on the level of total fixed costs. c breaking even. d earning an economic profit.

d earning an economic profit.

When a perfectly competitive firm is in long-run equilibrium: a. the firm is earning zero economic profit. b. the firm is operating at the minimum of its LRAC curve. c. its total revenues equal the sum of its total explicit and implicit costs costs. d. All of the above.

d. All of the above.

When price is greater than average variable cost but less than average total cost at the profit-maximizing level of output, a firm should: a. shutdown to minimize its losses. b. reduce output to the level at which price equals average variable cost to minimize its losses. c. increase output to minimize its losses. d. continue to produce the level of output at which marginal revenue equals marginal cost.

d. continue to produce the level of output at which marginal revenue equals marginal cost.

Assume a perfectly competitive firm is producing 300 units of output, P = $10, ATC of the 300th unit is $8, marginal cost of the 300th unit = $10, and AVC of the 300th unit = $6. Based on this information, the firm is: a. earning an economic profit of $1,200. b. incurring a loss of $1,200. c. incurring a loss of $600. d. earning an economic profit of $600.

d. earning an economic profit of $600.

A perfectly competitive firm will maximize profits (or minimize losses) so long as price (marginal revenue) is: a. greater than marginal cost. b. greater than average total cost. c. greater than average variable cost. d. greater than average fixed cost.

greater than average variable cost.

The perfectly competitive firm's supply curve: is perfectly inelastic at the market price. a. is the firm's marginal cost curve above the minimum b. point on the AVC curve. c. coincides with its perfectly elastic demand curve. d. is the firm's average total cost curve above the shutdown point.

is the firm's marginal cost curve above the minimum point on the AVC curve.

In order to maximize its profits, a price-taking firm should produce the level of output at which: a. marginal revenue = marginal cost. b. total revenue = total cost. c. average revenue = average cost. d. variable revenue = variable cost.

marginal revenue = marginal cost.

The market structure that is most different from the model of perfect competition is: a. monopolistic competition. b. oligopoly. c. monopoly. d. monopsony

monopoly.