Microeconomics Ch. 14

Which of the following statements best reflects a price-taking firm? a. If the firm were to charge more than the going price, it would sell none of its goods. b. The firm has an incentive to charge less than the market price to earn higher revenue. c. The firm can sell only a limited amount of output at the market price before the market price will fall. d. Price-taking firms maximize profits by charging a price above marginal cost.

a. If the firm were to charge mare than the going price, it would sell none of its goods.

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 cost = Total variable cost/Quantity of output d. Average revenue = (Marginal revenue) x (Quantity of output)

a. Profit = (Quantity of output) x (Price - Average total cost)

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. buyers will go elsewhere.

Entry into a market by new firms will a. increase the supply of the good. b. increase profits of existing firms. c. increase the price of the good. d. raise the marginal cost of producing the good.

a. increase the supply of the good.

When a competitive firm triples the amount of output it sells, a. its total revenue triples. b. its average revenue triples. c. its marginal revenue triples. d. its profit must increase.

a. its total revenue triples.

In a competitive market, a. no single buyer or seller can influence the price of the product. b. there is a small number of sellers. c. the goods offered by the different sellers are markedly different. d. accounting profit is driven to zero as firms freely enter and exit the market.

a. no single buyer or seller can influence the price of the product.

When price is below average variable cost, a firm in a competitive market will a. shut down and incur fixed costs. b. shut down and incur both variable and fixed costs. c. continue to operate as long as average revenue exceeds marginal cost. d. continue to operate as long as average revenue exceeds average fixed cost.

a. shut down and incur fixed costs.

When calculating marginal cost, what must the firm know? a. Sunk cost b. Variable cost c. Fixed cost d. Price

b. Variable cost

Whenever a perfectly competitive firm chooses to change its level of output, holding the price of the product constant, its marginal revenue a. increases is MR < ATC and decreases if MR > ATC. b. does not change. c. increases. d. decreases.

b. does not change.

Consider a competitive market with a large number of identical firms. The firms in this market do not use any resources that are available only in limited quantities. In long-run equilibrium, market price a. is determined by demand. b. is determined by the minimum point on the firms' average total cost curve. c. is determined by the minimum point on the firms' average variable cost curve. d. depends on how many firms exist in the industry.

b. is determined by the minimum point on the firms' average variable cost curve.

By comparing marginal revenue and marginal cost, a firm n a competitive market is able to adjust production to the level that achieves its objective, which we assume to be a. maximization of total revenue. b. maximization of profit. c. minimization of variable cost. d. minimization of average total cost.

b. maximization of profit.

When marginal revenue equals marginal cost, the firm a. should increase the level of production to maximize its profit. b. may be minimizing its losses, rather than maximizing its profit. c. must be generating positive economic profits. d. must be generating positive accounting profits.

b. may be minimizing its losses, rather than maximizing its profit.

A sunk cost is one that a. changes as the level of output changes in the short run. b. was paid in the past and will not change regardless of the present decision. c. should determine the rational course of action in the future. d. has the most impact on profit-making decisions.

b. was paid in the past and will not change regardless of the present decision.

Which of the following represents the firm's long-run condition for exiting a market? a. Exit if P < MC b. Exit if P < FC c. Exit if P < ATC d. Exit if MR < MC

c. Exit if P < ATC

Mrs. SMith operates a business in a competitive market. The current market price is $8.50, and at her profit- maximizing level of production, the average variable cost is $8.00 and the average total cost is $88.25. a. Mrs. Smith should shut down her business in the short run but continue to operate in the long run. b. Mr.s Smith should continue to operate in the short run but shut down in the long run. c. Mrs. Smith should continue to operate in both the short run and long run. d. Mrs. Smith should shut down in both the short run and long run.

c. Mrs. Smith should continue to operate in both the short run and long run.

A competitive firm has been selling its output for $10 per unit and has been maximizing its profit. Then, the price rises to $14 and the firm makes whatever adjustments are necessary to maximize its profit at the now-higher price. Once the firm has adjusted, which of the following statements is correct? a. The firm's marginal revenue is lower than it was previously. b. The firm's marginal cost is lower than it was previously. c. The firm's quantity of output is higher than it was previously. d. All of the above are correct.

c. The firm's quantity of output is higher than it was previously.

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. new firms will enter the market.

Suppose a competitive market has a horizontal long-run supply curve and is in long-run equilibrium. If demand decreases, we can be certain that in the short-run, a. at least some firms will shut down. b. price will fall below marginal cost for some firms. c. price will fall below average total cost for some firms. d. at least some firms will exit the industry.

c. price will fall below average total cost for some firms.

When total revenue is less than variable costs, a firm in a competitive market will a. continue to operate as long as average revenue exceeds marginal cost. b. continue to operate as long as average revenue exceeds average fixed cost. c. shut down. d. raise its price.

c. shut down.

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

c. some firms will exit the market, causing prices to rise until the remaining firms can cover their production costs.

When fixed costs are ignored because they are irrelevant to a business's production decision, they are called a. explicit costs. b. implicit costs. c. sunk costs. d. opportunity costs.

c. sunk costs.

In a perfectly competitive market, the horizontal sum of all the individual firms' supply curves is a. zero. b. equal to the industry profits. c. the market supply curve. d. a horizontal line.

c. the market supply curve.

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.

The competitive firm's long-run supply curve is that portion of the marginal cost curve that lies above average a. fixed cost. b. variable cost. c. total cost. d. revenue.

c. total cost.

Suppose a firm in a competitive market received $1,000 in total revenue and had a marginal revenue of $10 for the last unit produced and sold. What is the average revenue per unit, and how many units were sold? a. $5 and 50 b. $5 and 100 c. $10 and 50 d. $10 and 100

d. $10 and 100

Suppose you bought a ticket to a football game for $30, and that you place a $35 value on seeing the game. If you lose the ticket, then what is the maximum price you should pay for another ticket? a. $5 b. $30 c. $35 d. $65

d. $65

For a competitive firm, a. Total revenue = Average revenue. b. Total revenue = Marginal revenue. c. Total cost = Marginal revenue. d. Average revenue = Marginal revenue.

d. Average revenue = Marginal revenue.

A competitive firm's short-run supply curve is part of which of the following curves? a. Marginal revenue b. Average variable cost c. Average total cost d. Marginal cost.

d. Marginal cost.

Which of the following could be used to calculate the profit for a firm? a. Profit = MR - MC b. Profit = MR - TC c. Profit = (P - MC)Q d. Profit = (P - AC)Q

d. Profit = (P - AC)Q

The competitive firm's short-run supply curve a. is its marginal revenue curve, but only the portion where marginal revenue exceeds marginal cost. b. is its marginal cost curve. c. is its marginal cost curve, but only the portion above the minimum of average total cost. d. is its marginal cost curve, but only the portion above the minimum of average variable cost.

d. is its marginal cost curve, but only the portion above the minimum of average variable cost.

When a profit-maximizing competitive firm finds itself minimizing losses because it is unable to earn a positive profit, this task is accomplished by producing the quantity at which price is equal to a. sunk cost. b. average fixed cost. c. average variable cost. d. marginal cost.

d. marginal cost.

If marginal cost exceeds marginal revenue, the firm a. is most likely to be at a profit-maximizing level of output. b. should increase the level of production to maximize its profit. c. must be experiencing losses. d. may still be earning a positive accounting profit.

d. may still be earning a positive accounting profit.

Profit-maximizing firms enter a competitive market when, for existing firms in that market, a. total revenue exceeds fixed costs. b. total revenue exceeds total variable costs. c. average total cost exceeds average revenue. d. price exceeds average total cost.

d. price exceeds average total cost.

If there is an increase in market demand in a perfectly competitive market, then in the short run a. there will be no change in the demand curves faced by individual firms in the market. b. the demand curves for firms will shift downward. c. the demand curves for firms will become more elastic. d. profits will rise.

d. profits will rise.

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.

In the long run, a profit-maximizing firm will choose to exit a market when a. average fixed cost is falling. b. variable costs exceed sunk costs. c. marginal sot exceeds marginal revenue at the current level of production. d. total revenue is less than total cost.

d. total revenue is less than total cost.