Econ Ch. 8
If current output is less than the profit-maximizing, which must be true?
Marginal revenue is greater than marginal cost
Owners & managers
May be different people with different goals, but in the long run firms that do the best are those in which the managers pursue the goals of the owners.
The supply curve for a competitive firm is
its MC curve above the minimum point of the AVC curve.
If a competitive firm's marginal cost curve is U-shaped then
its short run supply curve is the upward-sloping portion of the marginal cost curve that lies above the short run average variable cost curve.
Three hundred firms supply the market for paint. For 50 of the firms, their short-run average variable costs are minimized at $10 and short-run total costs are minimized at $15. For the remaining firms, the short run average variable costs & short run average total costs are minimized at $20 & $25, respectively. If each firm has a U-shaped marginal cost curve then the short-run market supply curve is
kinked at $20
A decreasing-cost industry has a downward-sloping
long-run industry supply curve
A firm maximizes profit by operating at the level of output where
marginal revenue equals marginal cost.
Marginal profit is equal to
marginal revenue minus marginal cost
In the short run, a perfectly competitive firm earning negative economic profit is
on the downward-sloping portion of its ATC curve
A firm never operates
on the downward-sloping portion of its AVC curve
In the short run, a perfectly competitive firm earning positive economic profit is
on the upward-sloping portion of its ATC
In many rural areas, electric generation and distribution utilities were initially set up as cooperatives in which the electricity customers were member-owners. Like most cooperatives, the objective of these firms was to:
operate at zero profit in order to provide low electricity prices for the member owners.
Revenue is equal to:
price times quantity
If a graph of a perfectly competitive firm shows that the MR=MC point occurs where MR is above AVC but below ATC,
the firm is earning negative profit, but will continue to produce where MR = MC in the short run.
An industry analyst observes that in response to a small increase in price, a competitive firm's output sometimes rises a little and sometimes a lot. The best explanation for this finding is that
the firm's marginal cost curve is horizontal for some ranges of output and rises in steps.
Higher input prices result in
upward shifts of MC and reductions in output
The perfectly competitive firm's marginal revenue curve is
vertical
If current output is less than the profit maximizing output, then the next unit produced
will increase revenue more than it increases cost.
In an increasing-cost industry, expansion of output
causes input prices to rise as demand for them grows
If price between AVC and ATC, the best and most practical thing for a perfectly competitive firm to do is
continue operating, but plan to go out of business.
Bette's Breakfast, a perfectly competitive eatery, sells its "Breakfast Special" (the only item on the menu) for $5.00. The costs of waiters, cooks, power, food etc. average out to $3.95 per meal; the costs of the lease, insurance, and other expenses average out to $1.25 per meal. Bette should
continue producing in the short run, but plan to go out of business in the long run.
Producer surplus in a perfectly competitive industry is
the difference between revenue and variable cost.
The amount of output that a firm decides to sell has a no effect on the market price in a competitive industry because
the firm's output is a small fraction of the entire industry's output
If the market price for a competitive firm's output doubles then
the marginal revenue doubles
An industry has 1000 competitive firms, each producing 50 tons of output. At the current market price of $10, half of the firms have a short-run supply curve with a slope of 1; the other half each have a short-run supply curve with supply curve with slope 2. The short-run elasticity market supply is
3/10
Although the long-run equilibrium price of oil is $80 per barrel, some producers have much lower costs because their oil reserves are relatively close to the surface and are easier to extract. If the low-cost producers have a minimum LAC equal to $20 per barrel, then the difference ($60 per barrel) is:
An economic rent due to the scarcity of low-cost oil reserves
Which of the following events does NOT occur when market demand shifts leftward in an increasing-cost industry?
As firms exit, the market rises and attracts other firms to enter the market
Suppose a technological innovation shifts the marginal cost curve downward. Which one of the following cost curves does NOT shift?
Average fixed cost curve
Which of the following is a homogeneous product? Gasoline, Copper, Personal computers, Winter parkas
Gasoline AND Copper
Generally, long-run elasticities of supply are
Greater than short-run elasticities, because firms can make alterations to plant size and input combinations to be more flexible in production
Consider the following statements when answering this question: I. If the cost of producing each unit of output falls $5, then the short run market price falls $5. II. If the cost of producing each unit of output falls $5, then the long-run market price falls $5
I - FALSE II - TRUE
Consider the following statements when answering this question I. In the long run, if a firm wants to remain in a competitive industry, then it needs to own resources that are in limited supply. II. In this competitive market our firm's long run survival depends only on the efficiency of our production process.
I - FALSE II TRUE
Use the following statements to answer this question: I. Under perfect competition, an upward shift in the marginal cost curve (perhaps due to a higher price for a variable input) also shifts the average variable cost curve upward. II. Under perfect competition, an upward shift in the marginal cost curve (perhaps due to a higher price for a variable input) reduces firm output but may increase firm profits.
I is TRUE II is FASLE
Consider the following statements when answering this question I. In the long run equilibrium of a perfectly competitive market, a firm's producer surplus equals the sum of the economic rents earned on its inputs to production. II. In the long run equilibrium of a perfectly competitive market, the amount of economic profit earned can differ across firms, but not the amount of producer surplus.
I. TRUE II. FALSE
Because of the relationship between a perfectly competitive firm's demand curve and its marginal revenue curve, the profit maximization condition for the firm can be written as
P=MC
Several years ago, Alcoa was effectively the sole seller of aluminum because the firm owned nearly all of the aluminum ore reserves in the world. This market was not perfectly competitive because this situation violated the:
Price taking assumption & free entry assumption.
Which of the following is NOT a necessary condition for long-run equilibrium under perfect competition?
Prices are relatively low.
Yachts are produced by a perfectly competitive industry in Dystopia. Industry output (Q) is currently 30,000 yachts per year. The government, in an attempt to raise revenue, places $20,000 tax on each yacht. Demand is highly, but not perfectly elastic. The result of the tax in the long run will bethat
Q falls from 30,000; P rises by less than $20,000.
An increasing-cost industry is so named because of the positive slope of which curve?
The industry's long-run suppyy curve
The textbook for your class was not produced in a perfectly competitive industry because
There are so few firms in the industry that market shares are not small, and firms' decisions have an impact on the market price. Upper-division microeconomics texts are not all alike. It is not costless to enter or exit the textbook industry. ALL THE ABOVE
Short-run supply curves for perfectly competitive firms tend to be upward sloping because:
There is diminishing marginal product for one or more variable inputs & marginal costs increase as output increases.
At the profit maximizing level of output, what is true of total revenue (TR) and total cost (TC) curves?
They must have the same slope
A few sellers may behave if they operate in a perfectly competitive market is the market demand is:
Very elastic
Imposition of an output tax on all firms in a competitive industry will result in
a leftward shift in the market supply curve
A price taker is
a perfectly competitive firm & a firm that cannot influence the market price.
In a constant-cost industry, an increase in demand will be followed by
an increase in supply that will bring price down to the level it was before the demand shift.
In a supply-and-demand graph, producer surplus can be pictured as the
area between the equilibrium price line and supply curve to the left equilibrium
Firms are often use patent rights as:
barrier to exit
An improvement in technology would result in
downward shifts of MC and increases in output.
Economic rents are typically counted as:
economic costs but not accounting costs.
In long-run competitive equilibrium a firm that owns factors of production will have an
economic profit = $0 and accounting profit > $0
In the long run, a firm's producer surplus is equal to the
economic rent it enjoys from its scare inputs.
One practical implication of a kinked market supply curve is that
the market supply elasticity for a price increase may be different than the market supply elasticity for a price decrease at the kink point
When the price faded by a competitive firm was $5, the firm produced nothing in the short run. However, when the price rose to $10, the firm produced 100 tons of output. From this we can infer that
the minimum value of the firm's average variable cost lies between $5 and $10.
^^^ The more elastic is demand for yachts,
the more Q will fall and the less P will rise.
If a competitive firm has a U-shaped marginal cost curve then
the profit maximizing output is found where MC=MR and MC is creasing.
The demand curve facing a perfectly competitive firm is
the same as its average revenue curve and its marginal revenue curve.
Marginal revenue, graphically is
the slope of the total revenue curve at a given point.
When the TR and TC curves have the same slope,
they are the furthest from each other.
What happens in a perfectly competitive industry when economic profit is greater than zero? A) Existing firms may get larger B) New firms may enter the industry. C) Firms may move along their LRAC curves to new ouputs. D) There may be pressure on prices to fall. E) ALL OF THE ABOVE
ALL OF THE ABOVE
Which of the following cases are examples of industries that have potentially increasing costs due to scarce inputs? A) petroleum production B) medical care C) legal services D) all of the above
ALL OF THE ABOVE
The authors note that the goal of maximizing the market value of the firm may be more appropriate than maximizing short-run profits because A)The market value of the firm is based on long-run profits. B)Managers will not focus on increasing short-run profits at the expense of long-run profits. C)This would more closely align the interests of owners & managers. D) ALL OF THE ABOVE
ALL OF THE ABOVE The market value of the firm is based on long-run profits. Managers will not focus on increasing short-run profits at the expense of long-run profits. This would more closely align the interests of owners & managers.
Use the following statements to answer this question: I. Markets that have only a few sellers cannot be highly competitive. II. Markets with many sellers are always perfectly competitive.
BOTH ARE FALSE
Use the following statements to answer this question: I. The firm's decision to produce zero output when the price is less than the average variable cost of production is known as the shutdown rule. II. The firm's supply decision is to generate zero output for all prices below the minimum AVC.
BOTH ARE TRUE.
The "perfect information" assumption of perfect competition includes all of the following except one. Which one? A) consumers know their preferences B) consumers know their income levels. C) consumers know the prices available D) consumers can anticipate price changes. E) firms know their costs, prices, and technology
D) Consumers can anticipate price changes.
Which of the following is a key assumption of a perfectly competitive market?
Each seller has a very small share of the market
Consider the following statements when answering this question I. Increases in the demand for a good, which is produced by a competitive industry, will raise the short-run market price. II. Increases in the demand for a good, which by produced by a competitive industry will raise the long-run market price.
I - TRUE II - FALSE
Suppose the state legislature in your state imposes a state licensing fee of $100 per year to be paid by all firms that file state tax revenue reports. The new business tax:
Increases marginal cost Decreases marginal cost Increases marginal revenue Decreases marginal revenue. NONE OF THE ABOVE
In a constant-cost industry, price always equals
LRMC and minimum LRAC
An association of businesses that are jointly owned & operated by members for mutual benefit is a:
cooperative
Suppose your firm has a U-shaped average variable cost curve and operates in a perfectly competitive market. If you produce where the product price (marginal revenue) equals average variable cost (on the upward sloping portion of the AVC curve), then your output will:
exceed the profit-maximizing level of output.
A firm's producer surplus equals its economic profit when
fixed costs are zero
The long-run supply curve in a constant-cost industry is linear and
horizontal
In the short run, a perfectly competitive firm earning negative economic profit
is on the upward-sloping portion of its AVC
In the short run, a perfectly competitive profit maximizing firm that has not shut down
is operating on the upward-sloping portion of its AVC curve.
At the profit maximizing level of output, marginal profit
is zero
Marginal profit is negative when
output exceeds the profit maximizing level.
The demand curve facing a perfectly competitive firm is
perfectly horizontal
Suppose all firms have constant marginal costs that are the same for each firm in the short run. In this case, the market level supply curve is _____ and producer surplus equals ____-
perfectly inelastic, zero
If a competitive firm's marginal costs always increase with output, then at the profit maximizing output level, producer surplus is
positive because price exceeds average variable costs
The shutdown decision can be restarted in terms of producer surplus by saying that a firm should produce in the short run as long as
producer surplus is positive
If any of the assumptions of perfect competition are violated,
there may still be enough competition in the industry to make the model of perfect competition usable.
If managers do not choose to maximize profit, but pursue some other goal such as revenue maximization for growth,
they are more likely to become takeover targets of profit-maximizing firms.