Chapter 9 Problem Sets

To make a decision about introducing a new product, what is the relevant cost? $10 million has been spent to date on research and development. The results of the research and development can be sold to another company for $12 million. Additional labor and other costs necessary to complete the project equal $7 million. $ 7 million $ 9 million $ 17 million $ 19 million $ 31 million

$19 million

To make a decision about introducing a new product, what is the relevant cost? $10 million has been spent to date on research and development. The results of the research and development can be sold to another company for $12 million. Additional labor and other costs necessary to complete the project equal $7 million. Remember sunk costs. $ 7 million $ 9 million $ 17 million $ 19 million $ 31 million

$19 million

The perfectly competitive market price of a box of paper clips is $1.49 per box of 100. Chloe sells 50 boxes of paper clips at her store. Her total revenue for selling boxes of paper clips is. Her marginal revenue for selling the 50th box of paper clips is . $1.49; $74.50 $1.49; $1.49 $74.50; $74.50 $74.50; $1.49

$74.50; $1.49

The perfectly competitive market price of bananas is $0.79 per pound. Marcy sells 100 pounds of bananas. Her total revenue for selling bananas is . Her marginal revenue for selling the 100th pound of bananas is . $79.00; $79.00 $79.00; $0.79 $0.79; $79.00 $0.79; $0.79

$79.00; $0.79

Which of the following best represents the order (from lowest to highest) of likely price levels of firms in each of the market structures? 1. perfect competition/monopolistic competition 2. oligopoly/monopoly 1. perfect competition 2. monopolistic competition 3. oligopoly 4. monopoly 1. perfect competition/oligopoly 2. monopolistic competition 3. monopoly 1. perfect competition 2. monopolistic competition 3. Monopoly 4. oligopoly

1. perfect competition 2. monopolistic competition 3. oligopoly 4. monopoly

The following table represents the supply and demand for a perfectly competitive market. What is the marginal revenue for a firm in the market? (You need to know what is the price of equilibrium first) TABLE Market Price-Market Demand-Market Supply 35-7000-4000 40-6750-4500 45-6500-5000 50-6250-5500 55-6000-6000 60-5750-6500

55

Which of the following is not true regarding a firm in perfect competition? The firm's marginal revenue function is equal to the market price. The market demand and supply curves determine the market price. The demand curve for a single firm's product is horizontal. A single firm can influence the demand for its product by advertising.

A single firm can influence the demand for its product by advertising. Explanation: Advertising would simply increase the cost of the firm, but not change the price. With identical products, the firm acts as a price-taker and cannot control the price it charges for its output.

The following table shows the cost of production for a perfectly competitive firm. If the market price is $6.80 per unit, what is the economic profits at the profit-maximizing level of output? TABLE output-average variable cost-average total cost-marginal cost 300-6.67-10.8 - 4.8 400-6.2-9.3 -6.8 500-6.32-8.8 -8.8 600-6.73-8.8 -12 700-7.49-9.26 Economic profits = -$1,800 Economic profits = -$1,000 Economic profits = 0 Economic profits = $1,920

Economic profits = -$1,000

The following table below shows the cost of production for a perfectly competitive firm. The market price is $12.00 per unit. If the firm produces at its profit-maximizing level of output, what are its short-run economic profits? TABLE output-average variable cost-average total cost-marginal cost 300-6.67-10.8 - 4.8 400-6.2-9.3 -6.8 500-6.32-8.8 -8.8 600-6.73-8.8 -12 700-7.49-9.26 Economic profits = -$1,800 Economic profits = -$1,000 Economic profits = 0 Economic profits = $1,920

Economic profits=$1920

The following table below shows the cost of production for a perfectly competitive firm. If the market price is $8.80 per unit, what is the profit-maximizing level of output? TABLE output-average variable cost-average total cost-marginal cost 300-6.67-10.8 - 4.8 400-6.2-9.3 -6.8 500-6.32-8.8 -8.8 600-6.73-8.8 -12 700-7.49-9.26 Output = 300 Output = 400 Output = 500 Output = 600

Output=600

Consider the effect on costs of an increase in wages in an economy. What is the increase likely to do? Increase short-run average costs, but not increase long-run average costs. Increase short-run average costs and long-run average costs. Incrse long-run average costs, but not increase short-run average costs. Increase neither short-run or long-run average costs, businesses will use less labor and more capital.

Increase short-run average costs and long-run average costs. Explanation: Higher wages will simply make production more expensive, both in the short run and long run.

The clothing and attire retail market has seen an increased number of firms entering the industry. Thus, there is a lot of competition in markets for many types of clothing. What is the result of this high amount of competition? Individual buyers and sellers cannot affect the market price. Firms have a lot of flexibility in pricing their products. One individual firm can determine the market price. Some firms must necessarily leave since the prices will be too low.

Individual buyers and sellers cannot affect the market price. Explanation: With a large number of competing firms, none of them will be large enough in the market to control the price.

Which of the following is NOT true regarding perfectly competitive markets? It is difficult or impossible for a firm to enter and compete in the market All firms in the market are price takers Homogenous goods are sold by the firms The market contains many buyers and sellers

It is difficult or impossible for a firm to enter and compete in the market Explanation: Perfect competition assumes free entry, meaning anyone can come in and compete without serious impediments or barriers.

Which of the following set of characteristics applies to a firm in a perfectly competitive market? One firm that is the only producer of a product and has substantial control over the market price. Many firms with identical products and no control over the market price. A few firms with either identical or differentiated products and significant control over market price. Many firms with differentiated products and some control over the market price.

Many firms with identical products and no control over the market price

A perfectly competitive firm that chooses to produce will maximize profits at the output level where which of the following is true? Average cost is equal to marginal revenue Marginal cost is total revenue Marginal cost is equal to marginal revenue Average total cost is equal to average revenue

Marginal cost is equal to marginal revenue Explanation: This is the output decision rule for a firm that maximizes profit. Keep expanding production if MC < MR, and then stop at the output level where MC = MR. Doing so will maximize your profit. If you keep producing past this point, you'll start lowering profit since you'll be producing at a point where the MC is greater than the price. Remember that we assume a constant price but upward-sloping MC function. Also remember that in perfect competition, P = MR for a single firm.

An effective price ceiling in a competitive industry will mean that which of the following is true? Marginal cost is greater than marginal revenue. Marginal revenue is greater than marginal cost. Marginal cost is equal to marginal revenue. One cannot tell because the price ceiling prohibits the competitive firms from producing at a profit-maximizing rate of output.

Marginal cost is equal to marginal revenue. Explanation This one is a little tricky. Although the price ceiling will keep price below equilibrium and cause a shortage in the market, the new lower price will still be given to each individual firm. In perfect competition, price = marginal revenue. At this price, the firm will still operate in a profit maximizing way, choosing the output level where marginal revenue equals marginal cost. (That output level will be lower compared to the unrestricted market with no price controls).

In a perfectly competitive market, a single firm that sets its price a small amount above the market price will do which of the following? Make lower profits than other firms, but the exact amount less depends on the elasticity of demand for the product Have lower revenues but receive zero economic profits Not sell any units at all Earn profits higher than other firms as long as the other firms continued to charge the market price

Not sell any units at all Explanation: With products being perfect substitutes (homogenous goods), the price must be the same since the goods are the same. If one person tries to sell at a higher price, he'll sell zero since buyers can buy the same identical good at a lower price from another seller.

The following table shows the cost of production for a perfectly competitive firm. If the market price is $6.80 per unit, what is the profit-maximizing level of output? TABLE output-average variable cost-average total cost-marginal cost 300-6.67-10.8 - 4.8 400-6.2-9.3 -6.8 500-6.32-8.8 -8.8 600-6.73-8.8 -12 700-7.49-9.26 Output = 300 Output = 400 Output = 500 Output = 600

Output=500

Which of the following is true for a single firm in a perfectly competitive industry? P = ATC MR = AVC P = MR P > MR

P=MR Explanation: The price is not going to the change due to the behavior of a single firm. Thus, not matter how much or little the firm sells, the marginal revenue received from any additional output being sold is just equal to the market price.

Consider the following table. The market described in the table below is perfectly competitive. The demand curve for any firm in the market is: Market Price-Market Quantity Demanded-Market Quantity Supplied ($ per unit)-(thousands of units)-(thousands of units) 5.50-12000-9500 6.00-11750-10500 6.50-11500-11500 7.00-11250-12500 7.50-11000-13500 8.00-10750-14500 The same as the market demand curve described in the table. Perfectly flat (horizontal) for a price of $6.00 per unit. Perfectly vertical at a quantity of 11,500,000 units. Whatever each firm decides it to be.

Perfectly flat (horizontal) for a price of $6.00 per unit.

Given all the characteristics of perfect competition, which of the following is the main factor that affects consumers' decisions on which firm to purchase a good from? Opinions of friends Quality of the good Price Reputation of the firm

Price Explanation: We assume the final product is identical, so the other factors don't matter. We only examine the price, and it must also equalize across firms in perfect competition.

In the short run, perfectly competitive firms will produce where _____________? Marginal revenue is less than price Price equals marginal cost Price equals average cost Average cost is a minimum

Price equals marginal cost Explanation: Remember that in all market structures, the profit maximizing rule for a firm is to choose the output level where marginal revenue equals marginal cost. However, in perfect competition, price equals marginal revenue. Thus, a perfectly competitive firm can be said to produce the output where price = marginal cost.

If a perfectly competitive industry is in long-run equilibrium, then which of the following is true? Price equals minimum average cost. Price equals minimum marginal cost Accounting profits for all firms are zero Economic profits for all firms are positive

Price equals minimum average cost. Explanation: If price is above minimum ATC, firms are earning positive economic profits, and more firms will enter. If price is below minimum ATC, firms are earning negative economic profits, and more firms will leave the industry. The long-run equilibrium is when "all the dust has settled" and firms no longer have any incentive to enter or leave the industry. Profits are normalized here, and firms can't do any better by leaving the industry or entering it.

A perfectly competitive firm is experiencing the following short-run price and costs: P = $0.80, ATC = $2.20, AVC = $1.30, MC = $0.80. What short-run decision should this firm make? Keep output the same Increase the price it is selling at Increase the output it is producing Shut down production

Shut down production Explanation: The firm is attempting to produce at the optimal output level where price is equal to marginal cost. However, at this level of output, AVC > P. This means that the firm cannot even cover its variable expenses by selling output. In fact, the more it produces, the greater its losses! It is better to shut down and not produce any output at all.

Consider a market where competitive producers are making trucks and SUVs with basically the same resources. The demand for trucks increases. What is likely to happen in the market for SUVs? The equilibrium quantity will increase; the equilibrium price will increase. The equilibrium quantity will decrease; the equilibrium price will decrease. The equilibrium quantity will increase; the equilibrium price will decrease. The equilibrium quantity will decrease; the equilibrium price will increase. Nothing will likely change in the SUV market.

The equilibrium quantity will decrease; the equilibrium price will increase.

Regarding perfect competition, what does it mean when the goods sold by the firms in a market are homogeneous? Firms can produce the same good with different inputs and different costs. The good sold by one firm is a perfect substitute of the good sold by another firm in the same market. The firms in the market are the same size. The goods sold by one firm are complements of the goods sold by another firm in another market.

The good sold by one firm is a perfect substitute of the good sold by another firm in the same market. Explanation: Homogenous means identical. An example is wheat. After it's cut and dried, it's all the same wheat, so one farmer can't command a different price for his wheat.

A market price is greater than marginal cost in a perfectly competitive market. What will allocative efficiency be at that level of production? The market will produce too much for allocative efficiency. The market will produce too little for allocative efficiency. The market will be allocatively efficient. The market will not be allocatively efficient, but one cannot tell whether it is producing too much or too little.

The market will produce too little for allocative efficiency

Why are perfectly competitive markets considered economically efficient? There is only a small amount of deadweight loss The opportunity cost of society for making the good is equal to society's value of the good. Consumers enjoy the goods produced in these markets most Firms always have low and identical costs

The opportunity cost of society for making the good is equal to society's value of the good. Explanation: This means we've produced "just the right amount" of the good. Not too much, not too little. There is zero deadweight loss, and we've allocated the correct amount of resources to production of the good.

In the long run, a perfectly competitive firm maximizing profit will produce where: price is greater than the average cost. price is less than the average cost. price is greater than the marginal cost. price is less than the marginal cost. average cost is at a minimum.

average cost is at a minimum

Assume a decreasing-cost industry in a competitive market. What are the long term effects of the following change? An increase in the demand for the good will ______________ the equilibrium price and ______________ equilibrium quantity in the goods' market. increase; increase increase; decrease decrease; not change decrease; increase

decrease; increase Explanation: A tricky one! In the short run, we get a higher price and higher quantity due to the demand shift. However, firms will begin to enter in the long run due to higher profits. But as they enter, firm costs go down. Thus, this entry causes prices to fall, but costs go down as well! The long run equilibrium will be at a lower price level than the original equilibrium. The quantity will be higher due to more firms producing.

Assume a constant-cost industry in a competitive market. What are the short-term effects of the following change? A decrease in variable costs in the short run will ______________ the equilibrium price and ______________ equilibrium quantity in the goods' market. not change; not change increase; decrease decrease; increase not change; increase

decrease; increase Explanation: With lower variable and marginal costs, firms will produce more, thus lowering the price with the higher supply.

Assume a constant-cost industry in a competitive market. What are the long-term effects of the following change? A decrease in variable costs in the long run will cause the equilibrium price to ______________ and the equilibrium quantity in the market to ______________. not change; not change increase; decrease decrease; increase by more than in the short run decrease; increase less than in the short run

decrease; increase by more than in the short run Explanation: Keep in mind this is a long-run question! Also keep in mind here that we are talking about a cost change rather than a demand shift. This is why the price does not go back to the original level in the long run - the costs are still lower, so the price will still be lower. The quantity increases more in the long run because the lower costs mean higher profits, so more firms enter, increasing the quantity further.

In a perfectly competitive industry, the industry demand curve is __________. upward sloping downward sloping horizontal vertical

downward sloping Explanation: The industry demand is a normal market demand showing that at higher prices consumers will purchase fewer units and at lower prices consumers will purchase more.

A perfectly competitive market is producing a level of production where price is equal to the marginal cost. There are economic profits being earned. What will happen to the firm and the market in the long run? Market production will ______________; firm production will ______________. increase; increase decrease; decrease increase; decrease decrease; increase None of these answers is correct.

increase; decrease

Assume a constant-cost industry in a competitive market. What are the long-term effects of the following change? An increase in fixed costs will ______________ the equilibrium price and ______________ the market equilibrium quantity. not change; not change increase; decrease decrease; increase not change; increase

increase; decrease Explanation: Remember that in the long run, price will settle at the minimum of the ATC function. With higher fixed costs, total costs go up. Firms will be making losses and some will leave, shifting the supply curve to the left. This will increase the price and decrease the quantity in the market.

Following a decrease in demand, the perfectly competitive industry has adjusted to a short run equilibrium. As the firm moves back to a long-run equilibrium, the price will ______________ and the typical firm's production will ______________. increase; decrease decrease; decrease increase; increase decrease; increase one cannot tell.

increase; increase

Assume an increasing-cost industry in a competitive market. What are the long term effects of the following change? An increase in the demand for the good will ______________ the equilibrium price and ______________ equilibrium quantity in the goods' market. increase; increase increase; decrease decrease; not change not change; increase

increase; increase Explanation: In the short run, we get a higher price and higher quantity due to the demand shift. However, firms will begin to enter in the long run due to higher profits. But as they enter, firm costs go up. Thus, this entry causes prices to fall, but costs to go up. The long run equilibrium will be at a higher price level than the original equilibrium. The quantity will be higher due to more firms producing.

Assume a constant-cost industry in a competitive market. What are the short-term effects of the following change? An increase in the demand for the good will ______________ the equilibrium price and ______________ equilibrium quantity in the goods' market. increase; increase increase; decrease decrease; not change increase; not change

increase; increase Explanation: This is just a simple demand shift result, covered in earlier chapters.

Assume the price of coffee increases. If the market for tea is perfectly competitive and a constant cost industry, what will happen to the tea market in the long run? Output will ______________; prices will ______________; and economic profits will ______________Indicate whether increase, decrease, cannot tell, or no change as before the price shift is correct for each blank space. increase; not change; not change decrease; increase; increase increase; not change; decrease decrease; decrease; not change

increase; not change; not change Explanation: Coffee and tea are substitutes. Thus, if coffee is higher priced, people will buy more tea. The increase in tea demand leads to higher output. Prices will rise in the short run, but then fall again in the long run as more firms enter and compete.

Which of the following best represents the long-run changes (from the very beginning to the end) in prices and quantities in a perfectly competitive, constant cost industry?If demand in the market increases, the market price will ______________ increase decrease not change one cannot tell.

not change

Assume a constant-cost industry in a competitive market. What are the long-term effects of the following change? An increase in the demand for the good will ______________ the equilibrium price and ______________ equilibrium quantity in the goods' market. increase; increase increase; decrease decrease; not change not change; increase

not change; increase Explanation: In the long run, firms will enter the market to earn economic profits and prices will come back down to the original amount.

Assume a constant-cost industry in a competitive market. What are the short-term effects of the following change? An increase in fixed costs will ______________ the equilibrium price and ______________ equilibrium quantity in the market. not change; not change increase; increase decrease; increase not change; increase

not change; not change Explanation: The change in fixed costs does not affect the marginal costs and variable costs, so there is not a change on output choices (and therefore no change in the price of the good).

In the short run, a perfectly competitive firm that is maximizing profits will produce where, average costs are at a minimum. marginal costs are at a minimum. price is equal to marginal cost. price is equal to average cost.

price is equal to marginal cost

In the short run, a perfectly competitive firm that is maximizing profits will produce where, average costs are at a minimum. marginal costs are at a minimum. price is equal to marginal cost. price is equal to average cost.

price is equal to marginal cost.

A firm producing where price equals marginal cost that has variable costs equaling $60 million; fixed costs equaling $40 million; and revenues equaling $50 million should: shut down now and start up again in the long run. shut down now and leave the industry in the long run. continue to produce, but leave the industry in the long run. continue to produce, until something else changes. none of the above, as the firm cannot be producing where price equals marginal cost.

shut down now and leave the industry in the long run

For a firm in a perfectly competitive market, average revenue equals ________. the market price average total cost fixed cost price divided by quantity

the market price Explanation: TR = P*Q. Dividing both sides by Q, we get AR (average revenue) is equal to price. In other words, at any level of output, the average revenue per unit is just equal to the market price. This makes sense, since all units were sold at the market price to begin with.

For a firm in a perfectly competitive industry, the demand curve for its own product is _________. vertical downward sloping the same as the marginal cost curve the same as the market price

the same as the market price Explanation: The demand for a firm's own product is a perfectly elastic demand function equal to the price of the good. It must sell its output at the going market price.

In the theory of firm behavior, we assume that firms attempt to maximize _________. total revenue marginal revenue the number of customers total economic profits

total economic profits Explanation: Remember that profit means firms consider revenues and costs. High revenues won't do much good for a firm if the costs are even higher.

If all firms in a perfectly competitive industry are required to adopt antipollution devices, the long-run results would be that the firms would be earning ______________ and the industry will be producing ______________ amounts of output. economic losses; greater zero economic profits; greater economic losses; smaller zero economic profits; smaller economic profits; greater

zero economic profits; smaller Explanation: Costs would go up, and the market would adjust back to long run equilibrium with zero economic profits. However, with higher prices, output is reduced.