Chapter 14 MCQ/T/f/Quick Quiz

When a firm in a competitive market receives $500 in total revenue, it has a marginal revenue of $10. What is the average revenue, and how many units were sold?

$10 and 50 MR = AR = 10 = P TR = P*q 500 = 10*q q = 500/10 = 50

When a perfectly competitive firm increases the quantity it produces and sells by 10 percent, its marginal revenue ________ and its total revenue rises by ________.

stays the same, exactly 10 percent

In the long-run equilibrium of a competitive market with identical firms,

P=MC=ATC

In the short run, the market supply curve for a good is the sum of the quantities supplied by each firm at each price.

True

A profit-maximizing firm in a competitive market is able to sell its product for $9. At its current level of output the firm's average total cost is $11. Its marginal cost curve crosses the marginal revenue curve at an output level of 10 units. What is the firm's profits?

-$20.00 P = $9. ATC = $11.00 Profit = (P - ATC)*q = (9-11)*10 = - $20.00

In the long-run equilibrium of a competitive market with identical firms, what are the relationships among price P, marginal cost MC, and average total cost ATC?

P = MC and P = ATC.

In the short-run equilibrium of a competitive market with identical firms, if new firms are getting ready to enter, what are the relationships among price P, marginal cost MC, and average total cost ATC?

P = MC and P > ATC.

In a market with free entry and exit, profit is driven to zero in the long run. In this long-run equilibrium, all firms produce

at the efficient scale, price equals the minimum of average total cost, and the number of firms adjusts to satisfy the quantity demanded at this price.

In the short run, an increase in demand

raises prices and leads to profits, and a decrease in demand lowers prices and leads to losses.

If marginal cost is greater than marginal revenue,

the firm should decrease its output

If marginal revenue is greater than marginal cost,

the firm should increase its output

A firm maximizes profit when it produces output up to the point where marginal cost equals marginal revenue.

true

If a competitive firm sells three times the amount of output, its total revenue also increases by a factor of three.

true

A competitive firm maximizes profit by choosing the quantity at which

marginal cost equals the price.

What would be the firm's total revenue when it produces 6 units of output and has a marginal revenue of $8.00?

$48.00 q=6, MR = 8 => P = 8 => TR=P*q => 8*6 = $48.00

A competitive firm maximizes profits by choosing the quantity at which (i) MR=MC (ii) P=MC

Both (i) and (ii) are true*

If a profit-maximizing, competitive firm is producing a quantity at which marginal cost is between average variable cost and average total cost, it will

keep producing in the short run but exit the market in the long run.

. Exit refers to a long-run decision to

leave the market.

At the profit-maximizing level of output,

marginal revenue equals marginal cost

A competitive firm's short-run supply curve is its ________ cost curve above its ________ cost curve.

marginal, average-variable

A shutdown refers to a short-run decision

not to produce anything during a specific period of time because of current market conditions.

A perfectly competitive firm

takes its price as given by market conditions.

Suppose Rachael sells 20 wedding cakes per month. Her monthly total revenue is $5,000. The marginal cost of making a wedding cake is $300. In order to maximize profits, Racheal should

Make fewer than 20 wedding cakes per month. 4b is the right answer. Because MR<MC. Note that MC=$300. You need to find MR. Note that MR = P (in perfect comp). So find P from TR=P*q => 5000 = P*20 => P = $250 = MR. MR = 250 and MC= 300. MR<MC. So she is beyond the profit maximizing level of output. So she must cut back production.

Profit Equation

Profit= (P-ATC) * Q

A competitive firm's long-run supply curve is the portion of its marginal-cost curve that lies above its average-variable-cost curve.

This statement is false. It is the portion of the MC curve that lies above its average-total-cost curve.

A competitive firm's short-run supply curve is the portion of its marginal-cost curve that lies above its average-total-cost curve.

This statement is false. It is the portion of the MC curve that lies above its average-variable-cost curve.a. True

If marginal cost exceeds marginal revenue at a firm's current level of output, the firm can increase profit if it increases its level of output.

This statement is false. The firm increases profits if it reduces output.

In the short run, if the price a firm receives for a good is above its average variable costs but below its average total costs of production, the firm will temporarily shut down.

This statement is false. The firm will continue to operate in the short run as long as price exceeds average variable costs.

The only requirement for a market to be perfectly competitive is for the market to have many buyers and sellers.

This statement is false. The goods offered for sale are largely the same and (possibly) firms can freely enter or exit the market.

The short-run market supply curve is more elastic than the long-run market supply curve.

This statement is false. The long-run market supply curve is more elastic than the short-run market supply curve.

In the long run, perfectly competitive firms earn small but positive economic profits.

This statement is false. They earn zero economic profits in the long run.

For a competitive firm, marginal revenue equals the price of the good it sells.

True

If the price of a good rises above the minimum average total cost of production, positive economic profits will cause new firms to enter the market, which drives the price back down to the minimum average total cost of production.

True

In a competitive market, both buyers and sellers are price takers.

True

In the long run, if firms are identical and there is free entry and exit in the market, all firms in the market operate at their efficient scale.

True

In the long run, if the price firms receive for their output is below their average total costs of production, some firms will exit the market.

True

Suppose pretzel stands in New York City are a perfectly competitive market in long-run equilibrium. One day, the city starts imposing a $100 per month tax on each stand. How does this policy affect the number of pretzels consumed in the short run and the long run?

no change in the short run, down in the long run

if firms can freely enter and exit the market, then in the long run,

the number of firms adjusts to drive the market back to the zero-profit equilibrium.