ECON chapter 14 EXAM 2 (2)

Assume a firm in a competitive industry is producing 800 units of output, and it sells each unit for $6. Its average total cost is $4. Its profit is a. -$1,600. b. $1,600. c. $3,200. d. $8,000.

b. $1,600.

Suppose a firm in a competitive market produces and sells 150 units of output and earns $1,800 in total revenue from the sales. If the firm increases its output to 200 units, total revenue will be a. $2,000. b. $2,400. c. $4,200. d. We do not have enough information to answer the question.

b. $2,400.

When a certain competitive firm produces and sells 100 units of output, marginal revenue is $80. When the same firm produces and sells 200 units of output, what is average revenue? a. $40 b. $80 c. $160 d. This cannot be determined from the given information.

b. $80

Mrs. Smith operates a business in a competitive market. The current market price is $8.50. At her profit-maximizing level of production, the average variable cost is $8.00, and the average total cost is $8.25. Mrs. Smith should

continue to operate in both the short run and long run.

The short-run supply curve for a firm in a perfectly competitive market is a. horizontal. b. likely to slope downward. c. determined by forces external to the firm. d. the portion of its marginal cost curve that lies above its average variable cost.

d. the portion of its marginal cost curve that lies above its average variable cost

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. equal to marginal revenue.

Suppose a profit-maximizing firm in a competitive market produces rubber bands. When the market price for rubber bands falls below the minimum of its average total cost, but still lies above the minimum of average variable 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. experience losses but will continue to produce rubber bands.

For a certain firm, the 100th unit of output that the firm produces has a marginal revenue of $11 and a marginal cost of $10. It follows that the a. production of the 100th unit of output increases the firm's profit by $1. b. production of the 100th unit of output increases the firm's average total cost by $1. c. firm's profit-maximizing level of output is less than 100 units. d. production of the 101st unit of output must increase the firm's profit by more than $1

a. production of the 100th unit of output increases the firm's profit by $1.

When a competitive firm doubles the quantity of output it sells, its a. total revenue doubles. b. average revenue doubles. c. marginal revenue doubles. d. profits must increase.

a. total revenue doubles.

Mrs. Smith is operating a firm in a competitive market. The market price is $6.50. At her profit-maximizing level of output, her average total cost of production is $7.00, and her average variable cost of production is $6.00. Which of the following statements about Mrs. Smith's firm is correct? a. Mrs. Smith is earning a loss and should shut down in the short run. b. Mrs. Smith is earning a loss but should continue to operate in the short run. c. Mrs. Smith is earning a profit since the price is above the average variable cost. d. Without knowing Mrs. Smith's marginal cost, we cannot determine whether she should stay in business or shut down.

b. Mrs. Smith is earning a loss but should continue to operate in the short run.

Mrs. Smith operates a business in a competitive market. The current market price is $8.10. At her profit-maximizing level of production, the average variable cost is $8.00, and the average total cost is $8.25. Mrs. Smith should a. shut down her business in the short run but continue to operate in the long run. b. continue to operate in the short run but shut down in the long run. c. continue to operate in both the short run and long run. d. shut down in both the short run and long run.

b. continue to operate in the short run but shut down in the long run.

A firm that shuts down temporarily has to pay a. its variable costs but not its fixed costs. b. its fixed costs but not its variable costs. c. both its variable costs and its fixed costs. d. neither its variable costs nor its fixed costs.

b. its fixed costs but not its variable costs.

In the short run, a firm operating in a competitive industry will shut down if price is a. less than average total cost. b. less than average variable cost. c. greater than average variable cost but less than average total cost. d. greater than marginal cost.

b. less than average variable cost.

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. variable costs.

You purchase a $30, nonrefundable ticket to a play at a local theater. Ten minutes into the show you realize that it is not a very good show and place only a $10 value on seeing the remainder of the show. Alternatively you could leave the theater and go home and watch TV or read a book. You place an $8 value on watching TV and a $12 value on reading a book. a. You should stay and watch the remainder of the show. b. You should go home and watch TV. c. You should go home and read a book. d. You should go home and either watch TV or read a book.

c. You should go home and read a book.

Cold Duck Airlines flies between Tacoma and Portland. The company leases planes on a year-long contract at a cost that averages $600 per flight. Other costs (fuel, flight attendants, etc.) amount to $550 per flight. Currently, Cold Duck's revenues are $1,000 per flight. All prices and costs are expected to continue at their present levels. If it wants to maximize profit, Cold Duck Airlines should a. drop the flight immediately. b. continue the flight. c. continue flying until the lease expires and then drop the run. d. drop the flight now but renew the lease if conditions improve.

c. continue flying until the lease expires and then drop the run.

Robin owns a horse stables and riding academy and gives riding lessons for children at "pony camp." Her business operates in a competitive industry. Robin gives riding lessons to 20 children per month. Her monthly total revenue is $4,000. The marginal cost of pony camp is $200 per child. In order to maximize profits, Robin should a. give riding lessons to more than 20 children per month. b. give riding lessons to fewer than 20 children per month. c. continue to give riding lessons to 20 children per month. d. We do not have enough information to answer the question.

c. continue to give riding lessons to 20 children per month.

Suppose that in a competitive market the equilibrium price is $2.50. What is marginal revenue for the last unit sold by the typical firm in this market? a. less than $2.50 b. more than $2.50 c. exactly $2.50 d. The marginal revenue cannot be determined without knowing the actual quantity sold by the typical firm.

c. exactly $2.50

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. firms' costs of production in that market.

The term shutdown a. and the term exit both refer to short-run decisions that a firm might make. b. and the term exit both refer to long-run decisions that a firm might make. c. refers to a short-run decision that a firm might make, whereas the term exit refers to a long-run decision that a firm might make. d. refers to a long-run decision that a firm might make, whereas the term exit refers to a short-run decision that a firm might make.

c. refers to a short-run decision that a firm might make, whereas the term exit refers to a long-run decision that a firm might make.

The accountants hired by the Brookside Racquet Club have determined total fixed cost to be $75,000, total variable cost to be $130,000, and total revenue to be $145,000. Because of this information, in the short run, the Brookside Racquet Club should a. shut down. b. exit the industry. c. stay open because shutting down would be more expensive. d. stay open because the firm is making an economic profit.

c. stay open because shutting down would be more expensive.

When price exceeds average variable cost in the short run, a competitive firm's marginal cost curve is regarded as its supply curve because a. the position of the marginal cost curve determines the price for which the firm should sell its product. b. among the various cost curves, the marginal cost curve is the only one that slopes upward. c. the marginal cost curve determines the quantity of output the firm is willing to supply at any price. d. the firm is aware that marginal revenue must exceed marginal cost in order for profit to be maximized.

c. the marginal cost curve determines the quantity of output the firm is willing to supply at any price.

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

c. there are opportunities to increase profit by increasing production.

Which of the following statements best expresses a firm's profit-maximizing decision rule? a. If marginal revenue is greater than marginal cost, the firm should increase its output. b. If marginal revenue is less than marginal cost, the firm should decrease its output. c. If marginal revenue equals marginal cost, the firm should continue producing its current level of output. d. All of the above are correct.

d. All of the above are correct.

If a profit-maximizing firm in a competitive market discovers that, at its current level of production, price is greater than marginal cost, it should a. shut down. b. reduce its output but continue operating. c. continue to produce at the current levels. d. increase its output.

d. increase its output.

Kate is a professional opera singer who gives voice lessons. The vocal-music industry is competitive. Kate hires a business consultant to analyze her financial records. The consultant recommends that Kate give fewer voice lessons. The consultant must have concluded that Kate's a. total revenues exceed her total accounting costs. b. marginal revenue exceeds her total cost. c. marginal revenue exceeds her marginal cost. d. marginal cost exceeds her marginal revenue.

d. marginal cost exceeds her marginal revenue.

In the short run for a particular market, there are 300 firms. Each firm has a marginal cost of $30 when it produces 200 units of output. $30 is above every firm's average variable cost. One point on the market supply curve is a. quantity = 300; price = $30. b. quantity = 600,000; price = $90,000. c. quantity = 100,000; price = $30. d. quantity = 60,000; price = $30.

d. quantity = 60,000; price = $30.

Mrs. Smith operates a business in a competitive market. The current market price is $7.50. At her profit-maximizing level of production, the average variable cost is $8.00, and the average total cost is $8.25. Mrs. Smith should a. shut down her business in the short run but continue to operate in the long run. b. continue to operate in the short run but shut down in the long run. c. continue to operate in both the short run and long run. d. shut down in both the short run and long run.

d. shut down in both the short run and long run.

In a market with 1,000 identical firms, the short-run market supply is the a. marginal cost curve above average variable cost for a typical firm in the market. b. quantity supplied by the typical firm in the market at each price. c. sum of the prices charged by each of the 1,000 individual firms at each quantity. d. sum of the quantities supplied by each of the 1,000 individual firms at each price.

d. sum of the quantities supplied by each of the 1,000 individual firms at each price.

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. will be infinite.