CHAPTER 9 MICRO QUIZ
The market for which of the following most closely approximates pure competition? A) feed corn B) breakfast cereal C) MP3 players D) computers
A Competition requires many sellers of identical products. While there may be many sellers of cereal, MP3 players and computers, their products are quite differentiated.
Price-taking behavior is a feature of: A) pure competition B) monopolistic competition C) oligopoly D) monopoly
A In pure competition, there are many relatively small firms, each producing an identical product. Consequently, no single firm has any control over the market price.
For all values above minimum average variable cost, a competitive firm's: A) supply curve is coincident with its marginal cost curve B) supply curve is coincident with its average total cost curve C) demand curve is coincident with its average total cost curve D) demand curve is coincident with its supply curve
A Maximum profits for a competitive firm are realized if the firm produces the output at which price equals marginal cost, provided price exceeds minimum average variable cost.
OUTPUT..........MR.....MC 0..............................-......- 1..........................$22.....$28 2............................22.......20 3............................22.......21 4............................22......25 5............................22......30 Refer to the table. Suppose the firm's goal is maximum profits (or minimum losses.) If this firm's minimum average variable cost is $23, the firm will produce: A) 0 units B) 2 units C) 3 units D) 4 units
A There is no positive output at which this firm can cover its variable costs. It will minimize its losses by producing no output.
Compared to the downward-sloping demand curve for the output of a competitive industry, a single firm operating in that industry faces: A) a perfectly inelastic demand curve B) a perfectly elastic demand curve C) a unit elastic demand curve D) a downward-sloping marginal revenue curve
B A competitive firm is a price-taker: it can sell as much or as little as it chooses at the market price. Demand is perfectly elastic at the level of the market price.
Assume the ZYX Corporation is producing 50 units of output and selling it in a competitive market for $3 per unit. Its average fixed cost is $1 and its average variable cost is $2.50; marginal cost is $2.75. In the short run, this corporation: A) should shut down B) should expand production C) should produce less (but still a positive amount) D) is maximizing profit
B Although the firm is making a loss, it would lose more money by shutting down since price exceeds average variable cost. It could reduce its losses further by expanding output, because price (marginal revenue) exceeds marginal cost.
Q DEM................PRICE 1,000,000..............$6 950,000................7 900,000................8 850,000................9 800,000..............10 Refer to the data. At the equilibrium price, each of the 1,000 identical firms in this industry will produce: A) 85 units of output B) 850 units of output C) 800 units of output D) 8000 units of output
B At a price of $9, quantity supplied equals quantity demand equals 850,000 units in the market. If there are 1,000 identical firms, each must be producing one one-thousandth of the total, or 850 units.
An industry comprised of many firms, each of which is engaged in substantial nonprice competition is an example of: A) pure competition B) monopolistic competition C) oligopoly D) pure monopoly
B Both pure competition and monopolistic competition are characterized by many firms. In pure competition, firms sell identical products so nonprice competition is unnecessary and unproductive. Monopolistically competitive firms sell differentiated products, however, so there will likely be widespread nonprice competition.
Firms in purely competitive markets: A) have unit elastic demand curves B) are "price takers" C) engage in significant advertising D) face significant barriers to entry
B One of the key assumptions regarding competitive markets is that individual firms have no individual control over the market price, selling as much or as little as they desire at that price. Should they set a higher price, consumers will not buy any of their output, opting for that of another competing firm instead.
In the long run, competitive markets achieve: A) allocative efficiency because P = min ATC but not productive efficiency because P > min AVC B) allocative efficiency because P = MC and productive efficiency because P = min ATC C) productive efficiency because P = min ATC but not allocative efficiency because P > MR D) neither productive nor allocative efficiency
B Price equal to minimum average total cost assures productive efficiency: total market output could not be produced at any lower total cost. Allocative efficiency is assured because each item is being produced to the point at which the value of the last unit (its price) is equal to the value of the alternative goods being given up (its marginal cost.)
A competitive firm is currently producing 2000 units per month at a total cost of $12,000. Its fixed costs are $1,000 and its marginal cost is $5. If the market price is $5.60, this firm: A) should shut down B) should increase production C) is making an economic profit, but not an accounting profit D) is maximizing profits
B This firm is currently earning revenue of $11,200: $5.60 times 2000 units. With total costs of $12,000, it is incurring economic losses of $800, $200 less than it would lose by shutting down. However, since price exceeds marginal cost, it could increase its profits by expanding production.
Refer to the diagrams. Suppose the market price is G, which is the basis for the total revenue curve in the panel on the left. Which output level in the right panel corresponds to an output level of 320 in the left panel? A) A B) B C) C D) D
C : The output of 320 in the left panel represents maximum profits, which is achieved if price and marginal cost are equal.
Use the following diagram to answer the next question. At which of the following prices will the firm produce a positive amount but incur a loss? A) P1 B) P2 C) P3 D) P3 and P4
C At a price of P3, the firm will produce a positive amount because price exceeds average variable cost. The firm will lose money because P3 is less than average total cost, but it would lose a greater amount (equal to its fixed cost) if it shut down.
Which of the following is a characteristic of equilibrium in long-run competitive markets? A) Consumer surplus is minimized B) Producer surplus exceeds consumer surplus C) Total consumer and producer surplus is maximized D) The difference between producer surplus and consumer surplus is maximized
C At long-run competitive equilibrium, price equals marginal cost equals minimum average total cost. These equalities ensure maximum total surplus.
Competitive firms maximize: A) total profits by producing where price exceeds average total cost by the greatest amount B) per unit profits by producing where marginal revenue equals marginal cost C) total profits by producing where price equals marginal cost D) market share by producing where price equals average total cost
C In a competitive industry, firms are price takers, so price equals marginal revenue. If price exceeds marginal cost, the firm's total profits will increase by expanding output; likewise, if marginal cost exceeds price, the firm's total profits will increase by curtailing output.
Oscar is one of many farmers growing soybeans in the upper Midwest under purely competitive market conditions. As Oscar perceives it, the demand curve for Oscar's soybeans: A) is downward sloping B) is perfectly inelastic C) coincides with Oscar's marginal revenue curve D) lies above his marginal revenue curve
C Oscar is a price taker in the market for soybeans. He can sell as much or as little as he cares to at the market price, which means his demand curve and marginal revenue curve are horizontal lines at a level equal to market price.
Use the following data to answer the next question. OUTPUT..........MR.....MC 0..............................-......- 1..........................$24.....$28 2............................24.......20 3............................24.......21 4............................24......25 5............................24......30 Refer to the table. Suppose the firm's goal is maximum profits (or minimum losses.) If this firm's minimum average variable cost is $23, the firm will produce: A) 0 units B) 2 units C) 3 units D) 4 units
C Price (equal to marginal revenue) exceeds minimum average variable cost, so the firm should produce rather than shut down. The marginal cost of the third unit is less than price, but the reverse is true for the fourth unit. Consequently, the third unit should be produced, but not the fourth.
Suppose a decrease in product demand occurs in a decreasing-cost industry. Compared to the original equilibrium the new long-run competitive equilibrium will entail: A) a higher price and a higher total output B) a lower price and a lower total output C) a higher price and a lower total output D) a lower price and a higher total output
C The decrease in demand reduces total output. Because this is a decreasing-cost industry, the reduced output causes input prices to rise and firms' cost curves shift up to reflect this. The equilibrium price must rise to cover the higher unit costs.
OUTPUT..........MR.....MC 0..............................-......- 1..........................$24.....$28 2............................24.......20 3............................24.......21 4............................24......25 5............................24......30 Refer to the above data. If the market price is $50 and the firm produces its optimal amount, it will: A) realize a $15 profit B) realize a $80 profit C) realize a $90 profit D) incur a $15 loss
C To find the optimal output level, use the cost data to determine marginal cost. The marginal cost of the sixth unit is $40 and the marginal cost of the seventh unit is $60, so six units is optimal. Total revenue is $50 times 6 units, or $300. Since the total cost of six units is $210, the firm realizes a profit of $90.
Refer to the diagram. This competitive firm's supply curve connects points: A) E and H B) G, K, and L C) M, J, and L D) M, N, and K
D A competitive firm's supply curve corresponds to its marginal cost curve, provided price exceeds average variable cost.
A purely competitive seller's demand curve coincides with all of the following except: A) its marginal revenue curve B) its average revenue curve C) the market price D) the industry demand curve
D An individual seller in a competitive market is a "price taker." Its demand curve graphs as a horizontal line at the level of the market price and this price measures two values to the firm: the amount of revenue received for both the average unit sold and the next unit sold.
Use the following diagram to answer the next question. Which one of the following price-quantity combinations is not on this competitive firm's short-run supply curve? A) P1, 47 B) P2, 44 C) P3, 40 D) P4, 30
D At a price of P4, the firm cannot earn enough revenue to cover its variable costs and will minimize losses by shutting down.
The economic profits of firms in long-run competitive equilibrium are: A) zero if it is a constant cost industry, positive otherwise B) negative C) positive D) zero
D Free entry and exit of firms into competitive industries guarantees that firms will earn zero economic profits in the long run.
Pure competition is characterized by all of the following except: A) a downward-sloping market demand curve B) a perfectly elastic demand curve facing each firm C) equality of marginal revenue and price for each firm in a given market D) positive long-run economic profits
D Freedom of entry and exit will ensure that firms in long-run competitive equilibrium earn zero economic profits.
A purely competitive firm's output is currently such that its marginal cost is $225 and rising. Its marginal revenue is $210. Assuming profit maximization, this firm should: A) cut its price and increase production B) raise its price and cut production C) cut its price and cut production D) leave price unchanged and cut production
D In a competitive market, the firm has no control over market price and price equals marginal revenue. The firm can sell all it chooses at the market price but sells nothing if it charges a price in excess of the market price, so it will not change its price. However, it will increase its profits by reducing output: by producing one less unit it will reduce total cost by $225 while losing only $210 in revenue.
Use the following diagrams to answer the next question. Refer to the above diagrams, which pertain to a purely competitive firm and the industry in which it operates. In the long run we should expect: A) new firms to enter, market demand to rise, and price to fall B) demand to increase, and price to rise C) input prices to fall, supply to increase, and price to fall D) exit of some firms, supply to decrease, and price to rise
D This typical firm is losing money, as the price is below average total cost. In the long run, some firms would exit because they are not covering their opportunity costs. Market supply, which reflects the output decisions of all firms in the market, would decrease, and price will rise until the remaining firms can cover their costs.
Answer the next question on the basis of the following cost data for a competitive firm. OUTPUT......TC 0......................$100 1..........................130 2.........................155 3.........................175 4........................200 5........................230 6........................270 7........................330 8.........................410 Refer to the above data. If the market price is $35 and the firm produces its optimal amount, it will: A) realize a $5 profit B) realize a $50 profit C) incur a $5 loss D) incur a $55 loss
D To find the optimal output level, use the cost data to determine marginal cost. The marginal cost of the fifth unit is $30 and the marginal cost of the sixth unit is $40, so producing five units is optimal. Total revenue is $35 times 5 units, or $175. Since the total cost of five units is $230, the firm incurs a loss of $55. Note that cost is $100 when output is zero, so incurring a $55 loss is better than shutting down and incurring a loss of $100.
Use the following diagram to answer the next question. Refer to the above diagrams, which pertain to a purely competitive firm and the industry in which it operates. True or false: The firm will produce q units and incur an economic loss. A) True B) False
TRUE Because price falls short of average total cost but exceeds minimum average variable cost, the firm will lose less money by producing where price equals marginal cost than by shutting down and losing an amount equal to its fixed costs.
Economic profit per unit is equal to: A) P - ATC B) AR - AVC C) MR - MC D) P - MC
a Economic profit is equal to total revenue minus total economic cost. On a per unit basis, simply divide by output: revenue per unit is equal to product price, and total economic cost per unit is average total cost.
Economists assume that firms seek to maximize: A) accounting profit B) economic profit C) economic profit per unit D) total revenue minus explicit costs
b Economic profit is total revenue minus all opportunity costs, both implicit and explicit. Maximizing economic profit provides the greatest possible net gain to the entrepreneur.