fUKECON CH.12
Which of the following does not hold true for a perfectly competitive firm in long-run equilibrium?
Marginal cost will be minimized.
A firm will make a profit when
P > ATC.
An individual seller in perfect competition will not sell at a price lower than the market price because
the seller can sell any quantity she wants at the prevailing market price.
If a typical firm in a perfectly competitive industry is incurring losses, then
some firms will exit in the long run, causing market supply to decrease and market price to rise increasing profits for the remaining firms
A perfectly competitive industry achieves allocative efficiency in the long run. What does allocative efficiency mean?
Each firm produces up to the point where the price of the good equals the marginal cost of producing the last unit
Which of the following statements is correct?
Economic profit takes into account all costs involved in producing a product.
In long-run perfectly competitive equilibrium, which of the following is false?
Firms earn economic profit
What is allocative efficiency?
It refers to a situation in which resources are allocated such that the last unit of output produced provides a marginal benefit to consumers equal to the marginal cost of producing it.
Which of the following statements is true?
When an industry reaches a long-run competitive equilibrium, the typical firm in the industry breaks even.
If, as a perfectly competitive industry expands, it can supply larger quantities at the same long-run market price, it is
a constant-cost industry
Which of the following is the best example of a perfectly competitive firm?
a corn farmer in Illinois
The delivery of first-class mail by the U.S. Postal Service is an example of
a monopoly.
What is productive efficiency?
a situation in which resources are allocated such that goods can be produced at their lowest possible average cost
Perfectly competitive firms produce up to the point where the price of the good equals the marginal cost of producing the last unit. This condition is referred to as
allocative efficiency
Which of the following describes a situation in which every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it?
allocative efficiency
Firms that are price takers
are able to sell all their output at the market price
A constant-cost industry is an industry in which
average costs remain constant as the industry expands output.
Both buyers and sellers are price takers in a perfectly competitive market because
each buyer and seller is too small relative to others to independently affect the market price.
If, for a perfectly competitive firm, price exceeds the marginal cost of production, the firm should
increase its output.
Which of the following is the best example of a perfectly competitive industry?
wheat production
Hogrocket, which developed the Tiny Invaders game for the iPhone, found that to maintain sales in a profitable competitive market, the price of a product
will usually fall
Which of the following describes a difference between allocative efficiency and productive efficiency in a perfectly competitive market?
Allocative efficiency is achieved in the short run and the long run. Productive efficiency is achieved only in the long run.
Which of the following arguments could be made as evidence that the market for cage-free eggs is perfectly competitive?
As more farmers began selling cage-free eggs, the increase in supply has driven down prices to the point where they just cover the cost of production.
Which of the following is not true for a firm in perfect competition?
Average revenue is greater than marginal revenue.
In the mid-1990s, cattle ranchers in the United States kept raising cattle even though prices were at a ten-year low and below average total cost. What is the likely explanation for this?
Continuing to operate resulted in smaller losses than would have been incurred by shutting down.
A perfectly competitive market is in long-run equilibrium. At present there are 100 identical firms each producing 5,000 units of output. The prevailing market price is $20. Assume that each firm faces increasing marginal cost. Now suppose there is a sudden increase in demand for the industry's product which causes the price of the good to rise to $24. Which of the following describes the effect of this increase in demand on a typical firm in the industry?
In the short run, the typical firm increases its output and makes an above normal profit
A firm would decide to shut down if its production resulted in
MR < AVC.
A firm could continue to operate for years without ever earning a profit as long as it is producing an output where
MR > AVC
For a perfectly competitive firm, which of the following is not true at profit maximization?
Market price is greater than marginal cost
Letters are used to represent the terms used to answer this question: price (P), quantity of output (Q), total cost (TC) and average total cost (ATC). Which of the following equations is equal to a firm's average profit?
P - ATC
A firm will break even when
P = ATC.
Which of the following offers the best reason why restaurants are not considered to be perfectly competitive firms?
Restaurants do not sell identical products.
Molly Sharp is producing a documentary about the plight of the six-toed ferrets of Sri Lanka. Molly has spent $125,000 of her own money on this project and the documentary is now complete. Molly just found out that no studio is willing to release her documentary and she must now shop it to cable television networks, where she knows she will not be able to recoup her investment. Which of the following statements regarding Molly Sharp's documentary is true?
Since the $125,000 is a sunk cost, she should still try to have her documentary aired on television even though she will not see a profit.
Assume the market for cage-free eggs is perfectly competitive. All else equal, as more farmers choose to produce and sell cage-free eggs, what is likely to happen to the equilibrium price of the eggs and profits of these farmers in the long run?
The equilibrium price is likely to decrease and profits are likely to decrease.
Assume that the medical screening industry is perfectly competitive. Consider a typical firm that is making short-run losses. Suppose the medical screening industry runs an effective advertising campaign which convinces a large number of people that yearly CT scans are critical for good health. How will this affect a typical firm that remains in the industry?
The marginal revenue curve shifts upwards, the firm's output increases along its marginal cost curve, it expands production until it breaks even
Which of the following describes the difference between the market demand curve for a perfectly competitive industry and the demand curve for a firm in this industry?
The market demand curve is downward sloping; the firm's demand curve is a horizontal line.
Which of the following is a characteristic of an oligopolistic market structure?
There are few dominant sellers.
Assume that the tuna fishing industry is perfectly competitive. Which of the following best characterizes the industry if, as demand for tuna increases, fishing boats have to go farther into the ocean to harvest tuna?
an increasing-cost industry
If, as a perfectly competitive industry expands, it can supply larger quantities only at a higher long-run equilibrium price, it is
an increasing-cost industry
A wheat farmer and a firm in a perfectly competitive market are similar in that
both face horizontal demand curves.
What characteristic of a competitive market has made the "long run pretty short" in the market for iPhone applications?
ease of entry
If a firm in a perfectly competitive industry experiences persistent losses, in the long run it should
exit the industry
In the long run, a firm in a perfectly competitive industry will supply output only if its total revenue covers its
explicit costs plus its implicit costs
If a perfectly competitive firm achieves productive efficiency then
it is producing the good it sells at the lowest possible cost
If a firm shuts down in the short run
its loss equals its fixed cost
A perfectly competitive firm produces 3,000 units of a good at a total cost of $36,000. The price of each good is $10. Calculate the firm's short-run profit or loss.
loss of $6,000
A perfectly competitive firm will maximize its profit at the rate of output where the vertical distance between its total revenue curve and total cost curve is the largest. This is the same rate of output where
marginal revenue equals marginal cost
The price of a seller's product in perfect competition is determined by
market demand and market supply.
If total revenue exceeds fixed cost, a firm
may or may not produce in the short run, depending on whether total revenue covers variable cost.
If, in a perfectly competitive industry, the market price facing a firm is above its average total cost at the output where marginal revenue equals marginal cost, then
new firms are attracted to the industry
If a typical firm in a perfectly competitive industry is earning profits, then
new firms will enter in the long run causing market supply to increase, market price to fall, and profits to decrease
At the profit-maximizing level of output for a perfectly competitive firm
price equals marginal cost
Which of the following describes a situation in which a good or service is produced at the lowest possible cost?
productive efficiency
A perfectly competitive apple farm produces 1,000 bushels of apples at a total cost of $36,000. The price of each bushel is $50. Calculate the firm's short-run profit or loss
profit of $14,000
Which of the following is not an option for a perfectly competitive firm that suffers short-run losses?
raising price
If a perfectly competitive firm's total revenue is less than its total variable cost, the firm
should stop production by shutting down temporarily
If in a perfectly competitive industry, the market price facing a firm is below its average total cost but above average variable cost at the output where marginal cost equals marginal revenue
some existing firms will exit the industry
Apple introduced its iPhone 3G in July 2008 and within a month sales had topped 3 million units. By April 2009, more than 25,000 apps for the iPhone 3G were available in the iTunes store, an indication that in a competitive market
the ease at which a new firm can enter a competitive market is high.
A very large number of small sellers who sell identical products imply
the inability of one seller to influence price.
In perfect competition
the market demand curve is downward sloping while demand for an individual seller's product is perfectly elastic.
If the long-run average cost curve is U-shaped, the optimal scale of production from society's viewpoint is
the minimum efficient scale
If productive efficiency characterizes a market
the output is being produced at the lowest possible cost.
The supply curve of a perfectly competitive firm in the short run is
the portion of the firm's marginal cost curve above the minimum point of the average variable cost curve.
Profit is the difference between
total revenue and total cost
Writing in the New York Times on the technology boom of the late 1990s, Michael Lewis argues, "The sad truth, for investors, seems to be that most of the benefits of new technologies are passed right through to consumers free of charge." What does Lewis means by the benefits of new technology being "passed right through to consumers free of charge"?
In the long run, price equals the lowest possible average cost of production. In this sense, consumers receive the new technology "free of charge."
In early 2007, Pioneer and JVC, two Japanese electronics firms, each announced that their profits were going to be lower than expected because they both had to cut prices for LCD and plasma television sets. Which of the following could explain why these firms did not simply raise their prices and increase their profits?
Most likely, intense competition between these two major producers probably pushed prices down. Thereafter, each feared that it would lose its customers to the other if it raised its prices.
A constant-cost, perfectly competitive market is in long-run equilibrium. At present, there are 1,000 firms each producing 400 units of output. The price of the good is $60. Now suppose there is a sudden increase in demand for the industry's product which causes the price of the good to rise to $64. In the new long-run equilibrium, how will the average total cost of producing the good compare to what it was before the price of the good rose?
The average total cost will be the same as it was before the price increase.
Assume that the LCD and plasma television sets industry is perfectly competitive. Suppose a producer develops a successful innovation that enables it to lower its cost of production. What happens in the short run and in the long run?
The firm will be able to increase its economic profits temporarily, but in the long run its economic profits will be eliminated as other firms copy the innovation.
A perfectly competitive firm in a constant-cost industry produces 1,000 units of a good at a total cost of $50,000. The prevailing market price is $48. Assuming that this firm continues to produce in the long run, what happens to output level in the long run?
The firm's output increases.
Assume that a perfectly competitive market is in long-run equilibrium. Suppose as a result of a health hazard associated with the industry's product, demand decreases drastically. What is the immediate result of this event?
The market price falls and the typical firm suffers an economic loss
A perfectly competitive firm in a constant-cost industry produces 3,000 units of a good at a total cost of $36,000. The prevailing market price is $15. What will happen to the number of firms in the industry and to the industry's output in the long run?
The number of firms and the industry's output increase
A perfectly competitive wheat farmer in a constant-cost industry produces 3,000 bushels of wheat at a total cost of $36,000. The prevailing market price is $15. What will happen to the market price of wheat in the long run?
The price falls to $12
A perfectly competitive wheat farmer in a constant-cost industry produces 1,000 bushels of wheat at a total cost of $50,000. The prevailing market price is $48. What will happen to the market price of wheat in the long run?
The price rises above $48
Assume that firms in a perfectly competitive market are earning economic profits. Which of the following statements describes the change in market price and output as a result of the entry of new firms into this market?
The short-run market supply curve shifts to the right, causing price to fall and total market output to increase
In August 2008, Ethan Nicholas developed the iShoot application for the Apple iPhone 3G, and within five months had earned $800,000 from this program. By May 2009, Nicholas had dropped the price from $4.99 to $1.99 in an attempt to maintain sales. This example indicates that in a competitive market
earning an economic profit in the long run is extremely difficult
The perfectly competitive market structure benefits consumers because
firms are forced by competitive pressure to be as efficient as possible
A perfectly competitive industry achieves allocative efficiency because
goods and services are produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it
A perfectly competitive firm faces a demand curve that is
horizontal
The long-run supply curve for a perfectly competitive, constant-cost industry
is horizontal
New York Times writer Michael Lewis wrote that "The sad truth, for investors, seems to be that most of the benefits....are passed through to consumers free of charge." To which of the following did Lewis refer?
new technologies developed in the 1990s
In the long run, a perfectly competitive market will
supply whatever amount consumers demand at a price determined by the minimum point on the typical firm's average total cost curve
When plasma television sets were first introduced prices were high and few firms were in the market. Later, economic profits attracted new firms and the price of plasma televisions fell. This example illustrates
that consumers receive this new technology "free of charge" in the sense that they only have to pay a price for plasma televisions equal to the lowest production cost.
An industry's long-run supply curve shows
the relationship in the long run between market price and quantity supplied
In a perfectly competitive industry, in the long-run equilibrium
the typical firm earns zero profit
A teenaged babysitter is similar to a firm in a perfectly competitive industry in that, for both
there are many other suppliers of similar goods or services
Jason, a high-school student, mows lawns for families in his neighborhood. The going rate is $12 for each lawn-mowing service. Jason would like to charge $20 because he believes he has more experience mowing lawns than the many other teenagers who also offer the same service. If the market for lawn mowing services is perfectly competitive, what would happen if Jason raised his price?
If Jason raises his price he would lose all his customers.
At the profit-maximizing level of output for a perfectly competitive firm, price equals marginal cost. Which of the following is also true?
The difference between total revenue and total cost is the greatest
What is always true at the quantity where a firm's average total cost equals average revenue?
The firm breaks even
Which of the following is a characteristic of a firm in a perfectly competitive market?
The firm can sell as much as it wants without having to lower its price.
If a perfectly competitive firm raises the price it charges to consumers, which of the following is the most likely outcome?
The firm will not sell any output
Suppose the equilibrium price in a perfectly competitive industry is $10 and a firm in the industry charges $12. Which of the following will happen?
The firm will not sell any output
Suppose the equilibrium price in a perfectly competitive industry is $15 and a firm in the industry charges $21. Which of the following will happen?
The firm will not sell any output.
What is the relationship among the following variables for a perfectly competitive firm: the market price, average revenue and marginal revenue?
The market price is equal to both average revenue and marginal revenue.
Which of the following is not a characteristic of a perfectly competitive market structure?
There are restrictions on exit of firms.
Which of the following is a characteristic of a monopoly?
There is only one seller in the market.
Perfect competition is characterized by all of the following except
heavy advertising by individual sellers.
Ben's Peanut Shoppe suffers a short-run loss. Ben will not choose to shut down if
his Shoppe's total revenue exceeds his variable cost.
The demand curve for an individual seller's product in perfect competition is
horizontal.
Market supply is found by
horizontally summing the relevant part of each individual producer's marginal cost curve
When a perfectly competitive firm finds that its market price is below its minimum average variable cost, it will sell
nothing at all; the firm shuts down.
If price = marginal cost at the output produced by a perfectly competitive firm and the firm is earning an economic profit, then
price exceeds average total cost
Assume that price is greater than average variable cost. If a perfectly competitive seller is producing at an output where price is $11 and the marginal cost is $14.54, then to maximize profits the firm should
produce a smaller level of output
In a perfectly competitive market the term "price taker" applies to
sellers and buyers.
To maximize profit, a perfectly competitive firm
should produce the quantity of output that results in the greatest difference between total revenue and total cost.
If, for a given output level, a perfectly competitive firm's price is less than its average variable cost, the firm
should shut down
If total variable cost exceeds total revenue at all output levels, a perfectly competitive firm
should shut down in the short run
If a firm shuts down in the short run it will
suffer a loss equal to its fixed costs.
In analyzing the decision to shut down in the short run we assume that the firm's fixed costs are
sunk costs
Marginal revenue is
the change in total revenue divided by the change in the quantity of output
For a perfectly competitive firm, average revenue is equal to
the market price
In a graph that illustrates a perfectly competitive firm, marginal revenue is
the same as the firm's demand curve
The minimum point on the average variable cost curve is called
the shutdown point
Assume the market for cage-free eggs is perfectly competitive. All else equal, as farmers find it less profitable to produce and sell cage-free eggs in this market
the supply curve will shift to the left and the equilibrium price will increase.
In the short run, a firm that is operating at a loss has two options. These options are
to shut down temporarily or continue to produce.
Producing where marginal revenue equals marginal cost is equivalent to producing where
total profit is maximized
A perfectly competitive firm's short-run supply curve is
upward sloping and is the portion of the marginal cost curve that lies above the average variable cost curve
If a firm shuts down it
will suffer a loss equal to its fixed costs
In a graph with output on the horizontal axis and total revenue on the vertical axis, what is the shape of the total revenue curve for a perfectly competitive seller?
a ray from the origin
Mark Frost grows apples in a perfectly competitive market. If we drew a line in a graph that illustrates Mark's total revenue from selling apples, it would be
a straight, upward-sloping line
A perfectly competitive firm earns a profit when price is
above minimum average total cost.
If, for the last bushel of apples produced and sold by an apple farm marginal revenue exceeds marginal cost, then in producing that bushel the farm
added more to total revenue than it added to total cost
If, for the last unit of a good produced by a perfectly competitive firm, MR > MC, then in producing it, the firm
added more to total revenue than it added to total cost.
A perfectly competitive firm's supply curve is its
marginal cost curve above its minimum average variable cost
All of the following can be used to compute average profit except
marginal profit minus marginal cost
A firm's total profit can be calculated as all of the following except
marginal profit times quantity sold.
For a perfectly competitive firm, at profit maximization
marginal revenue equals marginal cost
If the market price is $25 in a perfectly competitive market, the marginal revenue from selling the fifth unit is
$25
If the market price is $25, the average revenue of selling five units is
$25
If the market price is $40 in a perfectly competitive market, the marginal revenue from selling the fifth unit is
$40
If the market price is $40, the average revenue of selling five units is
$40
Letters are used to represent the terms used to answer this question: price (P), quantity of output (Q), total cost (TC) and average total cost (ATC). Which of the following equations is equal to a firm's profit?
(P × Q) - TC
Which of the following is not a characteristic of a monopolistically competitive market structure?
Each firm must react to actions of other firms.
Which of the following is not an assumption of perfectly competitive markets?
Each firm produces a similar but not identical product.
Firms in perfectly competitive industries are unable to control the prices of the products they sell and earn a profit in the long run. Which of the following is one reason for this?
Firms in these industries sell identical products.
How are sunk costs and fixed costs related?
In the short run they are equal to each other.
Max Shreck, an accountant, quit his $80,000-a-year job and bought an existing tattoo parlor from its previous owner, Sylvia Sidney. The lease has five years remaining and requires a monthly payment of $4,000. Max's explicit cost amounts to $3,000 per month more than his revenue. Should Max continue operating his business?
Max should continue to run the tattoo parlor until his lease runs out
A perfectly competitive firm produces 3,000 units of a good at a total cost of $36,000. The fixed cost of production is $20,000. The price of each good is $10. Should the firm continue to produce in the short run?
Yes, it should continue to produce because it is minimizing its loss
Both individual buyers and sellers in perfect competition
have to take the market price as a given.
Firms in perfect competition are price takers because
each firm is too small relative to the market to be able to influence price
The demand curve for each seller's product in perfect competition is horizontal at the market price because
each seller is too small to affect market price.
For a firm in a perfectly competitive market, price is
equal to both average revenue and marginal revenue
Marty's Bird House suffers a short-run loss. Marty can reduce his loss below the amount of his total fixed costs by continuing to produce if his revenue
exceeds his variable costs
If a firm in a perfectly competitive industry experiences persistent losses, in the long run it shoud
exit the industry
Some markets have many buyers and sellers but fall into the category of monopolistic competition rather than perfect competition. The most common reason for this is
firms in these markets do not sell identical products.
Ted's Pancake Kitchen suffers a short-run loss. When should Ted decide to shut down rather than continue to produce?
if his Kitchen's revenue is less than its variable costs
If a perfectly competitive apple farm's marginal revenue exceeds the marginal cost of the last bushel of apples sold, what should the farm do to maximize its profit?
increase output
Max Shreck, an accountant, quit his $80,000-a-year job and bought an existing tattoo parlor from its previous owner, Sylvia Sidney. The lease has five years remaining and requires a monthly payment of $4,000. The lease
is a fixed cost of operating the tattoo parlor
A perfectly competitive firm has to charge the same price as every other firm in the market. Therefore, the firm
is a price taker
The price a perfectly competitive firm receives for its output
is determined by the interaction of all sellers and all buyers in the firm's market
If a perfectly competitive firm's price is above its average total cost, the firm
is earning a profit.
A perfectly competitive firm's marginal revenue
is equal to price
If a perfectly competitive firm's price is less than its average total cost but greater than its average variable cost, the firm
is incurring a loss
The marginal revenue curve for a perfectly competitive firm
is the same as its demand curve