quiz 8

For a firm in a perfectly competitive market, the price of the good is always a. equal to marginal revenue. b. equal to total revenue. c. greater than average revenue. d. equal to the firm's efficient scale of output.

a

If a competitive firm is currently producing a level of output at which marginal revenue exceeds marginal cost, then a. a one-unit increase in output will increase the firm's profit. b. a one-unit decrease in output will increase the firm's profit. c. total revenue exceeds total cost. d. total cost exceeds total revenue.

a

In a perfectly competitive market, a. no one seller can influence the price of the product. b. price exceeds marginal revenue for each unit sold. c. average revenue exceeds marginal revenue for each unit sold. d. All of the above are correct.

a

Laura is a gourmet chef who runs a small catering business in a competitive industry. Laura specializes in making wedding cakes. Laura sells 20 wedding cakes per month. Her monthly total revenue is $5,000. The marginal cost of making a wedding cake is $200. In order to maximize profits, Laura should a. make more than 20 wedding cakes per month. b. make fewer than 20 wedding cakes per month. c. continue to make 20 wedding cakes per month. d. We do not have enough information to answer the question.

a

Suppose a profit-maximizing firm in a competitive market produces rubber bands. When the market price for rubber bands rises above the minimum of its average variable cost, but still lies below the minimum of average total cost, in the short run the firm will a. experience losses but will continue to produce rubber bands. b. shut down. c. earn both economic and accounting profits. d. raise the price of its product.

a

Suppose that firms in a competitive industry are earning positive economic profits. All else equal, in the long run, we would expect the number of firms in the industry to a. increase. b. decrease. c. remain the same. d. We do not have enough information with which to answer this question.

a

When firms are said to be price takers, it implies that if a firm raises its price, a. buyers will go elsewhere. b. buyers will pay the higher price in the short run. c. competitors will also raise their prices. d. firms in the industry will exercise market power.

a

Which of the following expressions is correct for a competitive firm? a. profit = (quantity of output) x (price - average total cost) b. marginal revenue = (change in total revenue)/(quantity of output) c. average total cost = total variable cost/quantity of output d. average revenue = (marginal revenue) x (quantity of output)

a

Which of these types of costs can be ignored when an individual or a firm is making decisions? a. sunk costs b. marginal costs c. variable costs d. opportunity costs

a

Why does a firm in a competitive industry charge the market price? a. If a firm charges less than the market price, it loses potential revenue. b. If a firm charges more than the market price, it loses all its market power. c. The firm can only sell limited number of units of output, so it wants to sell at the market price in order to lower its costs. d. All of the above are correct.

a

A key characteristic of a competitive market is that a. government antitrust laws regulate competition. b. producers sell nearly identical products. c. firms minimize total costs. d. firms have price setting power.

b

Assume a certain firm in a competitive market is producing Q = 1,000 units of output. At Q = 1,000, the firm's marginal cost equals $15 and its average total cost equals $11. The firm sells its output for $12 per unit. At Q = 1,000, the firm's profits equal a. -$200. b. $1,000. c. $3,000. d. $4,000.

b

Comparing marginal revenue to marginal cost (i) reveals the contribution of the last unit of production to total profit. (ii) is helpful in making profit-maximizing production decisions. (iii) tells a firm whether its fixed costs are too high. a. (i) only b. (i) and (ii) only c. (ii) and (iii) only d. (i) and (iii) only

b

If a competitive firm is currently producing a level of output at which marginal cost exceeds marginal revenue, then a. a one-unit increase in output will increase the firm's profit. b. a one-unit decrease in output will increase the firm's profit. c. total revenue exceeds total cost. d. total cost exceeds total revenue.

b

If a firm operating in a competitive industry shuts down in the short run, it can avoid paying a. fixed costs. b. variable costs. c. total costs. d. The firm must pay all its costs, even if it shuts down.

b

Land of Many Lakes (LML) sells butter to a broker in Albert Lea, Minnesota. Because the market for butter is generally considered to be competitive, LML a. can choose the price at which it sells its butter but not the quantity of butter that it produces. b. can choose quantity of butter that it produces but not the price at which it sells its butter. c. can choose both the price at which it sells its butter and the quantity of butter that it produces. d. cannot choose either the price at which it sells it butter or the quantity of butter that it produces.

b

Roger owns a small health store that sells vitamins in a perfectly competitive market. If vitamins sell for $12 per bottle and the average total cost per bottle is $12.50 at the profit-maximizing output level, then in the long run a. more firms will enter the market. b. some firms will exit from the market. c. the equilibrium price per bottle will fall. d. average total costs will fall.

b

Suppose a firm in a competitive market reduces its output by 20 percent. As a result, the price of its output is likely to a. increase. b. remain unchanged. c. decrease by less than 20 percent. d. decrease by more than 20 percent.

b

Which of the following industries is least likely to exhibit the characteristic of free entry? a. selling running apparel b. satellite radio c. yoga studios d. wheat farming

b

A firm has market power if it can a. maximize profits. b. minimize costs. c. influence the market price of the good it sells. d. hire as many workers as it needs at the prevailing wage rate.

c

A market is competitive if (i) firms have the flexibility to price their own product. (ii) each buyer is small compared to the market. (iii) each seller is small compared to the market. a. (i) and (ii) only b. (i) and (iii) only c. (ii) and (iii) only d. (i), (ii), and (iii)

c

Assume a certain firm in a competitive market is producing Q = 1,000 units of output. At Q = 1,000, the firm's marginal cost equals $15 and its average total cost equals $11. The firm sells its output for $12 per unit. To maximize its profit, the firm should a. increase its output. b. continue to produce 1,000 units. c. decrease its output but continue to produce. d. shut down.

c

At the profit-maximizing level of output, a. marginal revenue equals average total cost. b. marginal revenue equals average variable cost. c. marginal revenue equals marginal cost. d. average revenue equals average total cost.

c

For a certain firm, the 100th unit of output that the firm produces has a marginal revenue of $7 and a marginal cost of $10. It follows that the a. production of the 100th unit of output increases the firm's profit by $3. b. production of the 100th unit of output increases the firm's average total cost by $7. c. firm's profit-maximizing level of output is less than 100 units. d. production of the101st unit of output must increase the firm's profit by more than $3.

c

For any competitive market, the supply curve is closely related to the a. preferences of consumers who purchase products in that market. b. income tax rates of consumers in that market. c. firms' costs of production in that market. d. interest rates on government bonds.

c

If a competitive firm is selling 900 units of its product at a price of $10 per unit and earning a positive profit, then a. its total cost is more than $9,000. b. its marginal revenue is less than $10. c. its average total cost is less than $10. d. the firm cannot be a competitive firm because competitive firms cannot earn positive profits.

c

If the market price is $16, this firm will a. produce 4 units of output in the short run and exit in the long run. b. produce 5 units of output in the short run and exit in the long run. c. produce 5 units of output in the short run and face competition from new market entrants in the long run. d. shut down in the short run and exit in the long run.

c

In a competitive market the price is $8. A typical firm in the market has ATC = $6, AVC = $5, and MC = $8. How much economic profit is the firm earning in the short run? a. $0 per unit b. $1 per unit c. $2 per unit d. $3 per unit

c

In a competitive market, the actions of any single buyer or seller will a. discourage entry by competitors. b. influence the profits of other firms in the market. c. have a negligible impact on the market price. d. Both a and b are correct.

c

Susan quit her job as a teacher, which paid her $36,000 per year, in order to start her own catering business. She spent $12,000 of her savings, which had been earning 10 percent interest per year, on equipment for her business. She also borrowed $12,000 from her bank at 10 percent interest, which she also spent on equipment. For the past several months she has spent $1,000 per month on ingredients and other variable costs. Also for the past several months she has earned $4,500 in monthly revenue. In the short run, Susan should a. shut down her business, and in the long run she should exit the industry. b. continue to operate her business, but in the long run she should exit the industry. c. continue to operate her business, but in the long run she will probably face competition from newly entering firms. d. continue to operate her business, and she is also in long-run equilibrium.

c

The textile industry is composed of a large number of small firms. In recent years, these firms have suffered economic losses, and many sellers have left the industry. Economic theory suggests that these conditions will a. shift the demand curve outward so that price will rise to the level of production cost. b. cause the remaining firms to collude so that they can produce more efficiently. c. cause the market supply to decline and the price of textiles to rise. d. cause firms in the textile industry to suffer long-run economic losses.

c

Victor is the recipient of $1 million from a lawsuit. Victor decides to use the money to purchase a small business in Florida. His business operates in a perfectly competitive industry. If Victor would have invested the $1 million in a risk-free bond fund, he could have earned $100,000 each year. After he bought the small business, Victor quit his job as a market analyst with Research, Inc., where he used to earn $75,000 per year At the end of the first year of operating his new business, Victor's accountant reported an accounting profit of $150,000. What was Victor's economic profit? a. -$150,000 b. -$50,000 c. -$25,000 d. $25,000

c

Victor is the recipient of $1 million from a lawsuit. Victor decides to use the money to purchase a small business in Florida. His business operates in a perfectly competitive industry. If Victor would have invested the $1 million in a risk-free bond fund, he could have earned $100,000 each year. After he bought the small business, Victor quit his job as a market analyst with Research, Inc., where he used to earn $75,000 per year How large would Victor's accounting profits need to be to allow him to attain zero economic profit? a. $100,000 b. $125,000 c. $175,000 d. $225,000

c

When a perfectly competitive firm decides to shut down, it is most likely that a. marginal cost is above average variable cost. b. marginal cost is above average total cost. c. price is below the firm's average variable cost. d. fixed costs exceed variable costs.

c

When profit-maximizing firms in competitive markets are earning profits, a. market demand must exceed market supply at the market equilibrium price. b. market supply must exceed market demand at the market equilibrium price. c. new firms will enter the market. d. the most inefficient firms will be encouraged to leave the market.

c

Which of these curves is the competitive firm's short-run supply curve? a. the average variable cost curve above marginal cost b. the average total cost curve above marginal cost c. the marginal cost curve above average variable cost d. the average fixed cost curve

c

A competitive firm would benefit from charging a price below the market price because the firm would achieve (i) higher average revenue. (ii) higher profits. (iii) lower total costs. a. (i) only b. (ii) and (iii) only c. (i), (ii), and (iii) d. None of the above is correct.

d

A firm will shut down in the short run if, for all positive levels of output, a. its losses exceed its fixed costs. b. its total revenue is less than its variable costs. c. the price of its product is less than its average variable cost. d. All of the above are correct.

d

Because the goods offered for sale in a competitive market are largely the same, a. there will be few sellers in the market. b. there will be few buyers in the market. c. only a few buyers will have market power. d. sellers will have little reason to charge less than the going market price.

d

Competitive markets are characterized by a. a small number of buyers and sellers. b. unique products. c. the interdependence of firms. d. free entry and exit by firms.

d

Firms operating in competitive markets produce output levels where marginal revenue equals a. price. b. average revenue. c. total revenue divided by output. d. All of the above are correct.

d

Free entry means that a. the government pays any entry costs for individual firms. b. government-funded research lowers the costs of patents and other barriers to entry. c. a firm's marginal cost is zero. d. no legal barriers prevent a firm from entering an industry.

d

If all firms have the same costs of production, then in long-run equilibrium, a. price exceeds average total cost for all firms. b. price exceeds marginal cost for all firms. c. some firms may earn positive economic profits. d. all firms have zero economic profits and just cover their opportunity costs.

d

If the market elasticity of demand for potatoes is -0.3 in a perfectly competitive market, then the individual farmer's elasticity of demand a. will also be -0.3. b. depends on how large a crop the farmer produces. c. will range between -0.3 and -1.0. d. will be infinite

d

In a long-run equilibrium, the marginal firm has a. price equal to average total cost. b. total revenue equal to total cost. c. economic profit equal to zero. d. All of the above are correct.

d

In the long run, a firm will enter a competitive industry if a. total revenue exceeds total cost. b. the price exceeds average total cost. c. the firm can earn economic profits. d. All of the above are correct.

d

Suppose that a firm operating in perfectly competitive market sells 100 units of output. Its total revenues from the sale are $500. Which of the following statements is correct? (i) Marginal revenue equals $5. (ii) Average revenue equals $5. (iii) Price equals $5. a. (i) only b. (iii) only c. (i) and (ii) only d. (i), (ii), and (iii)

d

Total profit for a firm is calculated as a. marginal revenue minus average total cost. b. average revenue minus average total cost. c. marginal revenue minus marginal cost. d. (price minus average cost) times quantity of output.

d

Victor is the recipient of $1 million from a lawsuit. Victor decides to use the money to purchase a small business in Florida. His business operates in a perfectly competitive industry. If Victor would have invested the $1 million in a risk-free bond fund, he could have earned $100,000 each year. After he bought the small business, Victor quit his job as a market analyst with Research, Inc., where he used to earn $75,000 per year What is Victor's opportunity costs of operating his new business? a. $25,000 b. $75,000 c. $100,000 d. $175,000

d

Which of the following industries is most likely to exhibit the characteristic of free entry? a. electricity b. satellite radio c. mineral mining d. tennis shoes

d

Which of the following is a characteristic of a competitive market? a. There are many buyers but few sellers. b. Firms sell differentiated products. c. There are many barriers to entry. d. Buyers and sellers are price takers.

d

Which of the following statements is correct? a. For all firms, marginal revenue equals the price of the good. b. Only for competitive firms does average revenue equal the price of the good. c. Marginal revenue can be calculated as total revenue divided by the quantity sold. d. Only for competitive firms does average revenue equal marginal revenue.

d