Chapter 14

As a general rule, profit-maximizing producers in a competitive marker produce output a a point where

marginal cost is increasing.

Profit-maximizing firms enter a competitive market when for existing firms in that market,

price exceeds average total cost.

If the firms finds that its marginal cost is $11, it should

reduce production to increase profit.

Suppose a firm in a competitive market reduces its output by 20 percent. As a result, the price of its output is likely to

remain unchanged.

When price is below average variable cost, a firm in a competitive market will

shut down and incur fixed costs.

In the long run, all of a firm's costs are variable. In this case the exit criterion for a profit-maximizing firm is to

shutdown if price is less than average total cost.

The competitive firm's long-run supply curve is that portion of the marginal cost curve that lies above average

total cost

Suppose a profit-maximizing firm in a competitive market produces rubber bands. When the market price of rubber bands fall below the minimum of its average total cost, but will lies above the minimum of average variable cost, the firm

will experience losses but will continue to produce rubber bands.

What is the lowest price at which this firm might choose to operate?

$3.00

A miniature golf course is a good example of where fixed costs become relevant to the decision of when to open and when to close for the season.

False

In making a short-run profit-maximizing production decision, the firm must consider both fixed and variable cost.

False

The short-run supply curve in a competitive market must be more elastic than the long-un supply curve.

False

The supply curve of a firm in a competitive market is the average variable cost curve, above the minimum marginal cost.

False

Which of the following is NOT a characteristic of a perfectly competitive market?

Firms have difficulty entering the market.

Which of the following statements regarding a competitive firm is true?

For all firms, average revenue equals the price of the good.

Use a graph to demonstrate the circumstances that would prevail in a competitive market where firms are earning economic profits. Can this scenario be maintained in the long run? Carefully explain your answer.

In a competitive market when firms are earning economic profits, new firms will have an incentive to enter the market. This entry will expand the number of firms, increase the quantity of the good supplied, and drive down prices and profits.

Mrs. Smith is operating a firm in a competitive market. The market price is $6.50. At her profit-maximizing level of output, her average total cost of production is $7.00 and her average variable cost of production is $6.00.

Mrs. Smith is earning a lose but should continue to operate in the short run.

A profit-maximizing firm in a competitive market will increase production when price exceeds marginal cost.

True

By comparing the marginal revenue and marginal cost from each unit produced, a firm in a competitive market can determine the profit-maximizing level of production.

True

Firms in competitive markets are said to be price takers.

True

The maximum profit available to this firm is

5

If this firm chooses to maximize profit it will choose a level of output where marginal revenue is equal to

9

A firm will shutdown in the short run if, for all positive levels of output,

All of the above are correct.

When firms are said to be price takers, it implies that if a firm raises its price,

buyers will go elsewhere.

In a perfectly competitive market, the process of entry and exit will end when, for firms in the market,

economic profits are zero.

At its current level of production a profit-maximizing firm in a competitive market receives $12.50 for each unit it produces and faces an average total cost of $10. At the market price of $12.50 per unit, the firm's marginal cost curve crosses the marginal revenue curve at an output level of 1,000 units. What is the firm's current profit? What is likely to occur in this market and why?

$2,500; firms are likely to enter this market since existing firms are earning economic profits.

When a profit-maximizing firm in a competitive market experiences rising prices, it will respond with an increase in production.

True

Suppose a firm operates in the short run at a price above its average total cost of production. In the long run, the firm should expect

All of the above.

A competitive market will typically experience entry and exit until accounting profits are zero.

False

When a firm has little ability to influence market prices it is said to be in

a competitive market

If the firm finds that its marginal cost is $5, it should

increase production to maximize profit.

When a profit-maximizing firm in a competitive market has zero economic profit, accounting profit

is positive.

Carla's Candy Store is maximizing profits by producing 1,000 pounds of candy per day. If Carla's fixed costs unexpectedly increase and the market price remains constant, the the short run profit-maximizing level of output

is still 1,000 pounds.

In a market with 1,000 identical firms, the short-run market supply is the

sum of the quantities supplied by each of the 1,000 individual firms.

If all existing firms and all potential firms have the same cost curves, there are no inputs in limited quantities and the market is characterized by free entry and exit, then the long run

supply curve for the market is horizontal and equal to the minimum of long-run average.

A competitive firm's marginal cost curve is regarded as its supply curve because

the marginal cost curve determines the quantity of output the firm is willing to supply at any price.

The short-run supply curve for a firm in a perfectly competitive market is

the portion of its marginal cost curve that lies above its average variable cost.

The Wheeler Wheat Farm sells wheat to a grain broker in Seattle, Washington. Since the market for wheat is generally considered to be competitive, the Wheeler Wheat Farm maximizes its profit by choosing

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

When price is greater than marginal cost for a firm in a competitive market,

there are opportunities to increase profit by increasing production.