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Chapter 14



Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.
 

1. 

When buyers in a competitive market take the selling price as given, they are said to be
a.
market entrants.
b.
monopolists.
c.
free riders.
d.
price takers.
 

2. 

When a firm in a competitive market produces 10 units of output, it has a marginal revenue of $8.00. What would be the firm's total revenue when it produces 6 units of output?
a.
$4.80
b.
$6.00
c.
$48.00
d.
$60.00
 

3. 

As a general rule, when accountants calculate profit they account for explicit costs but usually ignore
a.
certain outlays of money by the firm.
b.
implicit costs.
c.
operating costs.
d.
fixed costs.
 

4. 

Which of the following expressions is correct for a competitive firm?
a.
Profit = Total revenue - Total cost.
b.
Marginal revenue = (Change in total revenue)/(Change in quantity of output).
c.
Average revenue = Total revenue/Quantity of output.
d.
All of the above are correct.
 

5. 

If a competitive firm is (i) selling 1,000 units of its product at a price of $9 per unit and (ii) earning a positive profit, then
a.
its total cost is less than $9,000.
b.
its marginal revenue is less than $9.
c.
its average revenue is greater than $9.
d.
All of the above are correct.
 
 
The graph below depicts the cost structure for a firm in a competitive market. Use the graph to answer the following questions.

Figure 14-2
chapter14_files/i0070000.jpg
 

6. 

Refer to Figure 14-2. When price rises from P3 to P4, the firm finds that
a.
fixed costs are lower at a production level of Q4.
b.
it can earn a positive profit by increasing production to Q4.
c.
profit is maximized at a production level of Q3.
d.
average revenue exceeds marginal revenue at a production level of Q4.
 

7. 

When a perfectly competitive firm makes a decision to shut down, it is most likely that
a.
marginal cost is above average variable cost.
b.
marginal cost is above average total cost.
c.
price is below the minimum of average variable cost.
d.
fixed costs exceed variable costs.
 
 
The figure below depicts the cost structure of a firm in a competitive market. Use the figure to answer the following questions.

Figure 14-5
chapter14_files/i0100000.jpg
 

8. 

Refer to Figure 14-5. Firms would be encouraged to enter this market for all prices that exceed
a.
P1.
b.
P2.
c.
P3.
d.
None of the above are correct.
 

9. 

A 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
 

10. 

For any given price, a firm in a competitive market will maximize profit by selecting the level of output at which price intersects the
a.
average total cost curve.
b.
average variable cost curve.
c.
marginal cost curve.
d.
marginal revenue curve.
 

11. 

To begin, a competitive firm is selling its output for $20 per unit and it is maximizing its profit, which is positive. Now, the price rises to $25 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 quantity of output is higher than it was previously.
b.
The firm's average total cost is higher than it was previously.
c.
The firm's average revenue is higher than it was previously.
d.
All of the above are correct.
 

12. 

The complete description of a competitive firm's supply curve is as follows: The competitive firm's short-run supply curve is that portion of the
a.
average variable cost curve that lies above marginal cost.
b.
average total cost curve that lies above marginal cost.
c.
marginal cost curve that lies above average variable cost.
d.
marginal cost curve that lies above average total cost.
 
 
In the figure below, panel (a) depicts the linear marginal cost of a firm in a competitive market and panel (b) depicts the linear market supply curve for a market with a fixed number of identical firms. Use the figure to answer the following questions.

Figure 14-7
chapter14_files/i0160000.jpg
 

13. 

Refer to Figure 14-7. If at a market price of $1.75, 52,500 units of output are supplied to this market, how many identical firms are participating in this market?
a.
75
b.
100
c.
250
d.
300
 

14. 

When all firms and potential firms in a market have the same cost curves, the long-run equilibrium of a competitive market with free entry and exit will be characterized by firms
a.
earning small levels of economic profit.
b.
facing the prospect of future losses.
c.
operating at efficient scale.
d.
that band together to raise market prices.
 

15. 

When calculating economic profit, total costs include
a.
opportunity costs.
b.
fixed costs.
c.
variable costs.
d.
All of the above are correct.
 

16. 

When firms are neither entering nor exiting a perfectly competitive market,
a.
total cost must equal total revenue.
b.
economic profits must be zero.
c.
average revenue must equal average total cost.
d.
All of the above are correct.
 
 
Use the figures below to answer the following questions.

Figure 14-9
chapter14_files/i0210000.jpg
 

17. 

Refer to Figure 14-9. Assume that the market starts in equilibrium at point A in panel (b). An increase in demand from Demand0 to Demand1 will result in
a.
a new market equilibrium at point D.
b.
an eventual increase in the number of firms in the market and a new long-run equilibrium at point C.
c.
rising prices and falling profits for existing firms in the market.
d.
falling prices and falling profits for existing firms in the market.
 

18. 

Refer to Figure 14-9. If the market starts in equilibrium at point C in panel (b), a decrease in demand will ultimately lead to
a.
more firms in the industry, but lower levels of production for each firm.
b.
fewer firms in the market.
c.
a new long-run equilibrium at point D in panel (b).
d.
None of the above are correct.
 

19. 

When firms in a perfectly competitive market face the same costs, in the long run they must be operating
a.
under diseconomies of scale.
b.
with small, but positive, levels of profit.
c.
at their efficient scale.
d.
All of the above are correct.
 

20. 

The market for craft art used in home decoration is a very competitive market. In this market, costs vary since some people work faster than others and have more artistic talent in producing craft art. In this competitive market, we would expect to observe
a.
firms that are generally unresponsive to change in demand.
b.
little exit and entry.
c.
a short-run supply curve more elastic than the market's long-run supply curve.
d.
an upward sloping long-run supply curve.
 

True/False
Indicate whether the sentence or statement is true or false.
 

21. 

A firm will shut down in the short run if revenue is not sufficient to cover its variable costs of production.
 

22. 

A firm in a competitive market will maximize profit when the level of production is such that marginal cost equals price.
 

Short Answer
 

23. 

List and describe the characteristics of a perfectly competitive market.
 

24. 

Explain how a firm in a competitive market identifies the profit-maximizing level of production. When should the firm raise production, and when should the firm lower production?
 

25. 

Give two reasons why the long-run industry supply curve may slope upward. Use an example to demonstrate your reasons.
 



 
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