Chapter 7 Review

A profit-maximizing, price-taking firm should cease production whenever: a. the firm is making a loss. b. the firm is earning zero economic profit. c. the price is less than minimum average fixed cost. d. the price is less than minimum average variable cost. e. either a. or b. occur.

d

Firms in perfectly competitive markets: a. are price takers. b. are price makers. c. influence price by varying the quality of output. d. sells heterogeneous products. e. are characterized by both b. and d.

a

Which market structure is characterized by many sellers, easy entry, and homogeneous products? a. Perfect competition b. Monopolistic competition c. Oligopoly d. Monopoly e. None of the above

a

A firm that is a price taker: a. competes with other producers who produce differentiated products. b. must be a relatively large producer compared to other firms in the market. c. can exert a major influence on the overall market. d. will lose all sales if it prices its product in excess of the market equilibrium price. e. None of the above

d

Which of the following is a characteristic of perfect competition? a. Zero barriers to entry b. Homogeneous products c. Many sellers d. Many buyers e. All the above

e

Which of the following is a characteristic of perfect competition? a. Substantial barriers to entry b. Differentiated products c. Few sellers d Significant market powers by firms e. None of the above

e

Assume that the equilibrium price in a perfectly competitive industry is $4.25. If a firm in this industry produced and sold 10 units with an average total cost of $5.00, what would be the result would be: a. a profit of $0.75 b. a profit of $7.50 c. a loss of $0.75 d. a loss of $7.50 e. a loss of $75.00

d

During a period when new entrants are being attracted to an industry, we would expect that: a. economic profits are positive. b. economic profits are falling. c. economic profits are rising. d. both a. and b. are true. e. both a. and c. are true

d

In short run equilibrium in a perfectly competitive industry whose firms are earning economic profits, a firm: a. has no incentive to change its output. b. has no incentive to change its plant size. c. has no incentive to expand its factory. d. has no incentive to leave the industry. e. has no incentive to do any of the above.

d

If the market demand curve in a perfectly competitive industry shifts left, the demand curve for each existing firm will: a. shift up. b. shift down. c. shift right. d. shift left. e. do both b. and d.

b

Marginal revenue for a perfectly competitive firm equals: a. the addition to total cost from producing one more unit of output. b. average revenue at all levels of output. c. marginal cost at all levels of output. d. average total cost at all levels of output. e. None of the above

b

The demand curve facing a perfectly competitive firm is: a. perfectly inelastic. b. perfectly elastic. c. unit elastic. d. downward sloping. e. upward sloping.

b

The shape of the long-run industry supply curve in a perfectly competitive industry is largely determined by: a. the shape of the short-run industry supply curve. b. the price of inputs as the industry expands. c. the price elasticity of market demand. d. the shape of the average fixed cost curve. e. None of the above

b

When economic profits are positive in a perfectly competitive industry, a. we would expect the market supply curve to shift to the left as a result. b. we would expect the market supply curve to shift to the right as a result. c. we would not expect any change in the market supply curve to result. d. we would expect that the market demand curve to shift right as a result e. None of the above

b

I'm losing money, but since my fixed costs are so high, I simply cannot afford to shut down." If the firm were attempting to maximize profit, this decision may be: a. correct if price is less than average variable cost. b. incorrect because a firm experiencing economic losses should never continue to operate. c. correct if the firm is covering all of its variable costs and expects the price of its product to rise in the near future. d. incorrect since a firm should shut down whenever price falls below average total cost in the short run. e. None of the above

c

Which of the following most closely resembles a perfectly competitive market? a. The airline industry b. The soft drink industry c. The wheat market d. Long-distance telephone service e. None of the above

c

A profit maximizing perfectly competitive firm would never operate at an output level where... a. it would not cover all of its variable costs. b. it was not earning a positive economic profit. c. it was not earning a zero economic profit. d. it was not earning an accounting profit. e. None of the above

a

When the marginal cost of a price-taking firm is less than the market price of its product, the firm should: a. expand output (provided that price is not less than average variable cost). b. reduce output (provided that price is not less than average variable cost). c. maintain output (provided that price is not less than average variable cost). d. charge more than the market price. e. None of the above

a

Which of the following is true? a. The objective of the firm is to maximize profits, by producing the amount that maximizes the difference between its total revenues and total cost. b. The objective of the firm is to maximize profits, by producing the amount that maximizes the difference between its average revenue and average total cost. c. The objective of the firm is to maximize profits, by producing the amount that maximizes the difference between its average revenue and average variable cost. d. The objective of the firm is to maximize profits, by producing the amount that maximizes the difference between its marginal revenue and marginal cost. e. None of the above is true.

a

Which one of the following is NOT a characteristic of a perfectly competitive market? a. Firms advertise in order to distinguish their products and increase market share. b. Firms earn zero economic profit in the long run. c. Competing products are virtually identical. d. Firms are price takers. e. There are a large number of buyers and sellers interacting in the market.

a

A perfectly competitive firm cannot make economic profits in the long run because: a. it is a price taker. b. there are no barriers to entry into the industry. c. it faces a perfectly elastic demand curve. d. its advertising costs will rise to eliminate any economic profits. e. None of the above

b

A perfectly competitive firm seeking to maximize its profits would want to maximize the difference between: a. its marginal revenue and its marginal cost. b. its total revenue and its total cost. c. its accounting revenue and its accounting cost. d. its price and its marginal cost. e. None of the above

b

In the short run, if a firm's price is greater than its AVC but less than its ATC, the firm should: a. shut down immediately because it is generating an economic loss. b. shut down temporarily because it is generating an economic loss. c. continue operating because it is generating an economic profit. d. continue operating even though it is generating an economic loss. e. none of the above

d

When price exceeds average variable cost for a firm, it is possible that: a. it is earning an economic profit. b. it is breaking even. c. it is suffering an economic loss. d. any of the above is true. e. None of the above are true

d

Which of the following is true? a. The objective of the firm is to maximize profits, by producing the amount that equates total revenue and total cost. b. The objective of the firm is to maximize profits, by producing the amount that equates average revenue and average total cost. c. The objective of the firm is to maximize profits, by producing the amount that equates average revenue and average variable cost. d. The objective of the firm is to maximize profits, by producing the amount that equates marginal revenue and marginal cost. e. None of the above is true.

d