Eco Chapter 9*

A profit-maximizing firm will continue to expand output a. as long as the revenues from the production and sale of an additional unit exceeds the average costs of the unit. b. as long as the revenues from the production and sale of an additional unit exceeds the marginal cost of the unit. c. until the marginal cost of producing a good or service is at a minimum. d. until the average cost of producing the good or service is at a minimum.

b

Competition as a dynamic process implies that the individual firms in an industry a. utilize a variety of techniques, such as product, style, and price, to win the dollar votes of consumers. b. cooperate, attempting to establish a price and output structure so each firm can survive and continue to serve the consumer. c. face a perfectly elastic demand curve. d. produce a homogeneous product.

a

If profit-seeking entrepreneurs are going to be successful, they must a. produce a product that the consumers value more than the resources required for its production. b. charge a higher price than their competitors so they can make economic profits in the long run. c. produce the product more cheaply than their rivals regardless of quality. d. maximize the salaries of high-level management so they will be able to attract people who will work hard.

a

The dynamic process of competition a. provides consumers with alternative suppliers and thus a mechanism with which they can discipline sellers. b. was shown by Adam Smith to be a major source of economic inefficiency. c. provides profit-seeking sellers with little incentive to heed consumer preferences. d. will permit business decision makers to earn long-run economic profit unless they are regulated by government officials.

a

The dynamic process of competition a. provides consumers with alternative suppliers and thus a mechanism with which they can discipline sellers. b. will permit business decision makers to earn long-run economic profit unless they are regulated by government officials. c. was shown by Adam Smith to be a major source of economic inefficiency. d. provides profit-seeking sellers with little incentive to heed consumer preferences

a

The intersection of a firm's marginal revenue and marginal cost curves determines the level of output at which a. profit is maximized. b. total revenue is equal to fixed cost. c. total revenue is equal to variable cost. d. total revenue is equal to total cost.

a

When a law is passed that requires businesses to obtain permission from government officials in order to enter a market, this is an example of a. a barrier to entry b. the invisible hand principle. c. antitrust legislation. d. price-control legislation.

a

When firms in a price-taker market are temporarily able to charge prices that exceed their production costs, a. additional firms will be attracted into the market until price falls to the level of per-unit production cost. b. the firms will earn long-run economic profit. c. the firms will earn short-run economic profits that will be offset by long-run economic losses. d. the existing firms must be colluding or rigging the market, otherwise, they would be unable to charge such high prices.

a

When new firms enter a competitive price-taker market, a. existing firms may see their costs rise as more firms compete for limited resources. b. prices will rise as existing firms raise prices to keep new firms out of the market. c. entering firms will earn zero economic profit upon entry into the market. d. economic profits of existing firms will continue to be zero.

a

When new firms have an incentive to enter a competitive price-taker market, their entry will a. drive down profits of existing firms in the market. b. shift the market supply curve to the left. c. increase the price of the product. d. increase demand for the product.

a

Which of the following is a primary difference between price searchers and price takers? a. Price searchers have to cut their price to sell additional output, but price takers do not. b. Price searchers maximize profits, but price takers do not. c. Profit-maximizing price searchers will expand output to the quantity where marginal revenue equals marginal cost, but price takers will not. d. The market demand for goods produced by price searchers is downward sloping, while the market demand for goods produced by price takers is horizontal.

a

Which of the following is the best example of a business firm operating in a competitive price-taker market? a. a Midwest farmer producing beef cattle b. a pizza parlor located in a major metropolitan area c. Wal-Mart, a large retailer that competes in many markets d. a small brewery supplying a local brand of beer e. a Laundromat located a few blocks from a major university

a

Competitive price-taker markets are characterized by a. advertising. b. low entry barriers and a large number of firms selling a homogeneous product. c. quality competition among firms and a wide variety of products. d. intense rivalry among firms selling differentiated products.

b

If a price taker in a competitive market is going to maximize profits, he must a. use the highest valued set of resources to produce his product. b. minimize the per-unit cost of producing the good. c. minimize his fixed costs of production. d. increase the price of his product.

b

If a restaurant in a summer tourist area is highly profitable during the summer months but unable to cover even its variable costs during the winter months, the restaurant should a. operate during all months of the year as long as its profits during the summer exceed its losses during the winter. b. shut down during the winter, but continue operating during the summer as long as the summer profits exceed the losses (fixed costs) during the winter shutdown period. c. go out of business as soon as the summer is over; losses should never be tolerated. d. go out of business immediately, because no firm should continue to operate if it is losing money; doing so is contrary to the idea of profit maximization.

b

If marginal revenue exceeds marginal cost, a price-taker firm should a. lower its price. b. expand output. c. do both a and c. d. reduce output.

b

In a price-taker market, economic losses indicate that a. the situation is normal and firms need to make no adjustments. b. some firms have miscalculated, producing goods that are less valuable than the resources used to make them. c. the firms in the industry are not minimizing their cost; they should expand output in order to fully realize the economies of scale in the industry. d. some firms are using unfair tactics to harm others.

b

In competitive price-taker markets, firms a. can influence the market price by altering their output level. b. can sell all of their output at the market price. c. are large relative to the total market. d. produce differentiated products.

b

In competitive price-taker markets, if one firm raises its price, a. that firm will increase its revenues b. that firm will lose revenues because other firms will not follow c. the market demand curve will shift d. all consumers will be adversely affected e. others will follow

b

Several states require cosmetologists to undertake 1,500 hours or more of training in order to obtain a license to provide hair styling or braiding services. This is an example of a. government action that promotes competition. b. a barrier to entry c. the legal structure that is required for the operation of price-taker markets. d. antitrust legislation.

b

Suppose a restaurant that is highly profitable during the summer months is unable to cover its total cost during the winter months. If it wants to maximize profits, the restaurant should a. go a out of business immediately; losses should never be tolerated. b. continue operating during the winter months if it is able to cover its variable costs. c. shut down during the winter, even if it is able to cover its variable costs during that period. d. lower its prices during the summer months.

b

The dynamic process of competition a. will permit business decision makers to earn long-run economic profit unless they are regulated by government. b. puts the profit motive of sellers to work for buyers. c. conflicts with the interest of consumers when businesses pursue profit rather than the public interest. d. is hindered by the self-interest of business decision makers.

b

The entry of new firms into a competitive market will a. decrease market supply and increase market prices. b. increase market supply and decrease market prices. c. increase market supply and increase market prices. d. decrease market supply and decrease market prices.

b

When competition is present, self-interested business decision makers have a strong incentive to a. ignore the wishes of customers who are also self-interested. b. produce efficiently. c. maximize price in order to maximize profits. d. adopt technological improvements slowly in order to avoid making wrong decisions

b

When consumer demand for a good produced in a price-taker market decreases, a. the market price of the good will rise, causing additional resources to flow into the industry in the long run. b. some firms will shut down in the long run, making their resources available for the production of other goods. c. total market output will generally rise, but each individual firm will reduce its output. d. firms in the industry will continue to produce at the same output levels as before

b

When market conditions in a price-taker market are such that firms cannot cover their production costs, a. the firms will suffer short-run economic losses that will be exactly offset by long-run economic profits. b. some firms will go out of business, causing prices to rise until the remaining firms can cover their production costs. c. the firms will suffer long-run economic losses. d. all firms will go out of business, since consumers will not pay prices that enable firms to cover their production costs.

b

When price is greater than marginal cost for a firm in a competitive market, a. the firm should decrease output to maximize profit. b. there are opportunities to increase profit by increasing production. c. marginal cost must be falling. d. the firm must be minimizing its losses.

b

When profits occur in a competitive market, this indicates that a. producers value the goods more than the resources used to produce them. b. consumers value the goods more than the resources used to produce them. c. consumers value the goods less than the resources used to produce them. d. producers value the goods more than consumers value the goods.

b

When we say that a firm is a price taker, we are indicating that the a. firm will have to take a lower price if it wants to increase the number of units that it sells. b. firm can change output levels without having any significant effect on price. c. firm takes the price established in the market then tries to increase that price through advertising. d. demand curve faced by the firm is perfectly inelastic.

b

Which of the following is the best example of a business firm operating in a competitive price-taker market? a. TGIFriday's, a restaurant chain that operates in numerous locations b. an Indiana hog farmer that raises pigs c. a bookstore located a few blocks from a major university d. Ford Motor company, a major manufacturer of automobiles that operates in numerous markets throughout the world

b

Which of the following products would most closely fit the competitive price-taker model? a. stereo systems-there are many reputable brands. b. eggs-there are many producers of this relatively homogeneous product. c. automobiles-there are substantial economies of scale in production. d. beer-it has many consumers.

b

"I have been making furniture for 27 years. I have never heard of either marginal cost or marginal revenue. Fancy economic theories mean nothing to me. I just know how to do well in business. Whenever I can sell something for more than it cost me to produce it, I make it, and whenever I can't sell it for enough to cover my cost, I don't. That's how I stay in business and earn income for my family. Common sense and watching the market are good enough for me." For producers like this, economic models a. will generally only apply if the person has a college education. b. do not apply because the producers do not understand the terminology. c. accurately describe their behavior and allow predictions to be made as to how they will respond to changes in market conditions. d. indicate nothing about the behavior of such producers.

c

"I'm losing money, but having invested so much in equipment, I simply cannot afford to shut down." If the firm were attempting to maximize profit, this decision may be a. incorrect because a firm experiencing economic losses should never continue to operate. b. correct if the firm is covering its fixed costs. c. correct if the firm is covering its variable costs and expects the price of its product to rise in the near future. d. incorrect since the firm's fixed costs are sunk costs.

c

Competition as a dynamic process implies that individual firms in a market a. seek to utilize a variety of techniques, such as product, style, and convenience of location, to win the dollar vote of consumers, but they never use price to compete. b. cooperate, attempting to establish a price and output structure so each firm can survive and continue to serve the consumer. c. use price competition as well as other forms of competition to gain the dollar votes of consumers. d. produce a homogeneous product.

c

If a decrease in the demand for corn leads to economic losses for corn farmers, a. the suppliers of corn will suffer long-run economic losses. b. the price of corn will remain low in the long run due to the economic losses. c. some existing corn farmers will exit the industry. d. all of the above are correct.

c

If a firm is losing money, this implies that a. consumers do not understand the value of the product. b. this product cannot be produced profitably in the long run. c. the value of the resources used to make the product is being reduced. d. the firm must go out of business immediately.

c

If a firm is losing money, this implies that a. this product cannot be produced profitably in the long run. b. consumers do not understand the value of the product. c. the value of the resources used to make the product is being reduced. d. the firm must go out of business immediately.

c

If a price-taker firm selling in a competitive market offers its product at a higher price than others, it will a. increase its profits. b. maintain its profit base if the demand for the product is inelastic. c. not be able to sell any output. d. be able to expand output

c

If occupational safety laws were changed so that firms no longer had to take expensive steps to meet regulatory requirements, we would expect a. the market price of the products of this industry to decrease in the short run but not in the long run. b. the demand for the products of this industry to increase. c. competition to force producers to pass the lower production costs on to consumers in the long run. d. the firms in the industry to make long-run economic profit.

c

If profit-seeking entrepreneurs are going to be successful, they must a. produce the product more cheaply than their rivals regardless of quality. b. charge a higher price than their competitors so they can make economic profits in the long run. c. produce a product that the consumers value more than the resources required for its production. d. maximize the salaries of high-level management so they will be able to attract people who will work hard

c

In the short run, a perfectly competitive firm will always shut down if total revenue is ____ at all positive output levels. a. greater than fixed cost b. less than total cost c. less than variable cost d. less than total cost but greater than fixed cost e. less than total cost but greater than variable cost

c

Suppose wheat farmers are price takers. If wheat farmers are currently making economic profits, over time we would expect that a. the wheat farmers will continue to earn economic profits because they would be driven out of business without such profit. b. existing wheat farmers would plant more acres of wheat. c. both a and b are correct. d. farmers growing other crops would switch some of their land from these crops to the growing of wheat.

c

The ability of price-taker firms to freely expand or contract their businesses and to enter or exit the market means that a. prices will always be high enough to generate positive economic profit. b. resources that would be more valuable elsewhere will be trapped, unproductively, in a particular industry. c. resources that would be more valuable elsewhere will not be trapped, unproductively, in a particular industry. d. resource owners cannot move their resources to other areas where they would be more highly valued

c

When a firm in a competitive market is earning profits, this indicates that the firm is a. exploiting consumers. b. blocking the entry of competing firms. c. increasing the value of resources. d. reducing overall wealth in the market.

c

When competition is present, self-interested business decision makers have a strong incentive to a. maximize price in order to maximize profits. b. ignore the wishes of customers who are also self-interested. c. produce efficiently. d. adopt technological improvements slowly in order to avoid making wrong decisions

c

Which of the following is a necessary condition for the presence of competition in a market? a. suppliers that offer a homogeneous product b. a price that always equals per-unit production costs c. low barriers to entry into the market d. government regulations that assure firms will make excess profits

c

A firm in a price-taker market a. can exert a major influence on the market price. b. must reduce its price if it wants to sell a larger quantity. c. must be large relative to the total market. d. must take the price that is determined in the market.

d

Competitive price-taker firms respond to changing market conditions by varying their a. advertising campaigns b. information c. price d. output e. market share

d

Historically, most economists have referred to markets where firms are price takers as a. monopoly markets. b. open-door markets. c. price-searcher markets. d. purely competitive markets.

d

If an amusement park that is highly profitable during the summer months is unable to cover its variable costs during the winter months, it should a. lower its prices during the summer months. b. operate during all months of the year as long as its profits during the summer exceed its losses during the winter. c. raise its prices during the winter months. d. operate during the summer but shut down during the winter months.

d

In a competitive market, profit can be considered a reward to businesses that a. reduce the value of resources used as inputs in production. b. prohibit rival firms from entering the market and competing. c. control costs, rather than following the wishes of consumers when deciding what products to produce. d. produce a good that consumers value more highly than its component resources.

d

In the long run, in a price-taker market, the price of a good is determined primarily by the a. number of firms in the industry. b. elasticity of supply. c. decision of buyers in determining how much they are willing to pay for the good. d. average total cost of producing it.

d

Suppose a restaurant that is highly profitable during the summer months is unable to cover its total cost during the winter months. If it wants to maximize profits, the restaurant should a. lower its prices during the summer months. b. shut down during the winter, even if it is able to cover its variable costs during that period. c. go a out of business immediately; losses should never be tolerated. d. continue operating during the winter months if it is able to cover its variable costs.

d

The competitive market process tends to promote economic prosperity because it a. sends signals to the government about which goods to produce. b. creates inefficiencies, which causes people to economize. c. keeps the prices of goods higher than their production costs. d. directs self-interested action toward the production of goods that are highly valued relative to their cost.

d

The dynamic process of competition a. provides profit-seeking sellers with little incentive to heed consumer preferences. b. was shown by Adam Smith to be a major source of economic inefficiency. c. will permit business decision makers to earn long-run economic profit unless they are regulated by government officials. d. provides consumers with alternative suppliers and thus a mechanism with which they can discipline sellers.

d

The exit of existing firms from a competitive market will a. increase market supply and decrease market prices. b. decrease market supply and decrease market prices. c. increase market supply and increase market prices. d. decrease market supply and increase market prices.

d

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 if technology, imports, and other factors remain constant, these conditions will a. cause firms in the textile industry to suffer long-run economic losses. b. cause the remaining firms to collude so they can produce more efficiently. c. shift the market demand curve outward so that price will rise to the level of production cost. d. cause the market supply to decline and the price of textiles to rise.

d

When a firm in a competitive market is earning profits, this indicates that the firm is a. blocking the entry of competing firms. b. exploiting consumers. c. reducing overall wealth in the market. d. increasing the value of resources.

d

When firms have an incentive to exit a competitive price-taker market, their exit will a. lower market price. b. reduce demand for the product. c. necessarily raise the costs of firms that remain in the market. d. raise profits for firms that remain in the market.

d

When the price of a product rises, the increase in quantity supplied will generally be greater in the long run than the short run because a. consumers are less resistant to higher prices in the long run than in the short run because they have fewer options in the long run. b. producers maximize short-run, not long-run, profits. c. consumer income will expand in the long run, causing resource prices to rise, which will induce producers to increase output. d. over time, new firms will enter the industry and old firms will expand their operations in response to the price increase.

d