chapter 14

question

In a competitive market, no single producer can influence the market price because

answer

many other sellers are offering a product that is essentially identical.

question

Farmer McDonald sells wheat to a broker in Kansas City, Missouri. Because the market for wheat is generally considered to be competitive, Mr. McDonald maximizes his profit by choosing

answer

the quantity at which market price is equal to Mr. McDonald's marginal cost of production.

question

When total revenue is less than variable costs, a firm in a competitive market will

answer

shut down.

question

Suppose a certain competitive firm is producing Q=500 units of output. The marginal cost of the 500th unit is $17, and the average total cost of producing 500 units is $12. The firm sells its output for $20. Refer to Scenario 14-3. At Q=500, the firm's profits equal

answer

$4,000.

question

A profit-maximizing firm in a competitive market will always make marginal adjustments to production as long as

answer

price is above or below marginal cost.

question

The term shutdown

answer

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.

question

Refer to Scenario 14-4. Suppose the firm is producing 150 units of output and its fixed cost is $975. Then its variable cost amounts to

answer

$2,700.00.

question

When a profit-maximizing firm is earning profits, those profits can be identified by

answer

(P - ATC) × Q.

question

Refer to Table 14-15. What is the lowest price at which this firm would operate in the short run?

answer

$3.

question

Consider a firm that operates in a perfectly competitive market. The firm is producing at its profit maximizing output level. If this is true, then

answer

price must be equal to marginal cost.

question

Refer to Figure 14-13. If the price is $6 in the short run, what will happen in the long run?

answer

Individual firms will earn positive economic profits in the short run, which will entice other firms to enter the industry.

question

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

answer

stay open because shutting down would be more expensive.

question

A corporation has been steadily losing money on one of its product lines, plastic flamingo lawn ornaments. The firm produces plastic flamingos in a factory that cost $20 million to build 10 years ago. The firm is now considering an offer to buy that factory for $15 million. Which of the following statements about the decision to sell or not to sell is correct?

answer

The $20 million spent on the factory is a sunk cost; that cost should not affect the decision.

question

Refer to Table 14-6. What is the average revenue when 4 units are sold?

answer

$120

question

Refer to Figure 14-3. If the market price is $10, what is the firm's total revenue?

answer

$35

question

If the market elasticity of demand for potatoes is -0.3 in a perfectly competitive market, then the individual farmer's elasticity of demand

answer

will be infinite.

question

For a particular competitive firm, the minimum value of average variable cost (AVC) is $12 and is reached when 200 units of output are produced. For the same firm, the minimum value of average total cost (ATC) is $15 and is reached when 230 units of output are produced. Which of the following statements is correct?

answer

In the long run, the firm will shut down if the price of its product is $11.

question

Refer to Scenario 14-4. What is Victor's opportunity costs of operating his new business?

answer

$175,000

question

Which of these curves is the competitive firm's short-run supply curve?

answer

the marginal cost curve above average variable cost

question

In a competitive market with identical firms,

answer

free entry and exit into the market requires that firms earn zero economic profit in the long run even though they may be able to earn positive economic profit in the short run.

question

Which of the following statements is not correct?

answer

To maximize profit, firms should produce at a level of output where price equals average variable cost.

question

Suppose a competitive market is comprised of firms that face identical cost curves. The firms experience an increase in demand that results in positive profits for the firms. Which of the following events are then most likely to occur?
(i)
New firms will enter the market.
(ii)
In the short run, price will rise; in the long run, price will rise further.
(iii)
In the long run, all firms will be producing at their efficient scale

answer

(i) and (iii) only

question

Which of the following is a point on the long-run supply curve?

answer

P=$6, Q=1,000.

question

In a long-run equilibrium, the marginal firm has

answer

-price equal to average total cost.
-total revenue equal to total cost.
-economic profit equal to zero.

question

Suppose a firm in a competitive market produces and sells 8 units of output and has a marginal revenue of $8. What would be the firm's marginal revenue if it instead produced and sold 4 units of output?

answer

question

How many units should a firm in this market produce to maximize profit?

answer

2 units

question

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

answer

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

question

Because the goods offered for sale in a competitive market are largely the same,

answer

sellers will have little reason to charge less than the going market price.

question

When a profit-maximizing firm's fixed costs are considered sunk in the short run, then the firm

answer

can safely ignore fixed costs when deciding how much output to produce.

question

When a competitive market experiences an increase in demand that increases production costs for existing firms and potential new entrants, which of the following is most likely to arise?

answer

The long-run market supply curve will be upward sloping.

question

Which of the following statements is correct?

answer

Only for competitive firms does average revenue equal marginal revenue.

question

Refer to Figure 14-10. If there are 700 identical firms in this market, what is the value of Q2?

answer

420,000

question

Consider a firm that operates in a perfectly competitive market. Currently the firm is producing 300 units of output and the price is $20. If marginal cost at 300 units is $22, the firm

answer

could increase profits by reducing output from 300 units.

question

A competitive firm has been selling its output for $20 per unit and has been maximizing its profit, which is positive. Then, the price falls to $18, and the firm makes whatever adjustments are necessary to maximize its profit at the now-lower price. Once the firm has adjusted, its

answer

quantity of output is lower than it was previously.

question

A sunk cost is one that

answer

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

question

Profit-maximizing firms in a competitive market produce an output level where

answer

marginal cost equals marginal revenue.

question

Which of the following industries is most likely to exhibit the characteristic of free entry?

answer

dairy farming

question

In a competitive market, the actions of any single buyer or seller will

answer

have a negligible impact on the market price.

1 of 38

question

In a competitive market, no single producer can influence the market price because

answer

many other sellers are offering a product that is essentially identical.

question

Farmer McDonald sells wheat to a broker in Kansas City, Missouri. Because the market for wheat is generally considered to be competitive, Mr. McDonald maximizes his profit by choosing

answer

the quantity at which market price is equal to Mr. McDonald's marginal cost of production.

question

When total revenue is less than variable costs, a firm in a competitive market will

answer

shut down.

question

answer

$4,000.

question

A profit-maximizing firm in a competitive market will always make marginal adjustments to production as long as

answer

price is above or below marginal cost.

question

The term shutdown

answer

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.

question

Refer to Scenario 14-4. Suppose the firm is producing 150 units of output and its fixed cost is $975. Then its variable cost amounts to

answer

$2,700.00.

question

When a profit-maximizing firm is earning profits, those profits can be identified by

answer

(P - ATC) × Q.

question

Refer to Table 14-15. What is the lowest price at which this firm would operate in the short run?

answer

$3.

question

Consider a firm that operates in a perfectly competitive market. The firm is producing at its profit maximizing output level. If this is true, then

answer

price must be equal to marginal cost.

question

Refer to Figure 14-13. If the price is $6 in the short run, what will happen in the long run?

answer

Individual firms will earn positive economic profits in the short run, which will entice other firms to enter the industry.

question

answer

stay open because shutting down would be more expensive.

question

answer

The $20 million spent on the factory is a sunk cost; that cost should not affect the decision.

question

Refer to Table 14-6. What is the average revenue when 4 units are sold?

answer

$120

question

Refer to Figure 14-3. If the market price is $10, what is the firm's total revenue?

answer

$35

question

If the market elasticity of demand for potatoes is -0.3 in a perfectly competitive market, then the individual farmer's elasticity of demand

answer

will be infinite.

question

answer

In the long run, the firm will shut down if the price of its product is $11.

question

Refer to Scenario 14-4. What is Victor's opportunity costs of operating his new business?

answer

$175,000

question

Which of these curves is the competitive firm's short-run supply curve?

answer

the marginal cost curve above average variable cost

question

In a competitive market with identical firms,

answer

free entry and exit into the market requires that firms earn zero economic profit in the long run even though they may be able to earn positive economic profit in the short run.

question

Which of the following statements is not correct?

answer

To maximize profit, firms should produce at a level of output where price equals average variable cost.

question

answer

(i) and (iii) only

question

Which of the following is a point on the long-run supply curve?

answer

P=$6, Q=1,000.

question

In a long-run equilibrium, the marginal firm has

answer

-price equal to average total cost.
-total revenue equal to total cost.
-economic profit equal to zero.

question

answer

question

How many units should a firm in this market produce to maximize profit?

answer

2 units

question

answer

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

question

Because the goods offered for sale in a competitive market are largely the same,

answer

sellers will have little reason to charge less than the going market price.

question

When a profit-maximizing firm's fixed costs are considered sunk in the short run, then the firm

answer

can safely ignore fixed costs when deciding how much output to produce.

question

When a competitive market experiences an increase in demand that increases production costs for existing firms and potential new entrants, which of the following is most likely to arise?

answer

The long-run market supply curve will be upward sloping.

question

Which of the following statements is correct?

answer

Only for competitive firms does average revenue equal marginal revenue.

question

Refer to Figure 14-10. If there are 700 identical firms in this market, what is the value of Q2?

answer

420,000

question

Consider a firm that operates in a perfectly competitive market. Currently the firm is producing 300 units of output and the price is $20. If marginal cost at 300 units is $22, the firm

answer

could increase profits by reducing output from 300 units.

question

answer

quantity of output is lower than it was previously.

question

A sunk cost is one that

answer

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

question

Profit-maximizing firms in a competitive market produce an output level where

answer

marginal cost equals marginal revenue.

question

Which of the following industries is most likely to exhibit the characteristic of free entry?

answer

dairy farming

question

In a competitive market, the actions of any single buyer or seller will

answer

have a negligible impact on the market price.

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chapter 14

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