Ch 8

Question 1

Economists define a market to be competitive when the firms
A) spend large amounts of money on advertising to lure customers away from the competition.
B) watch each other’s behavior closely.
C) are price takers.
D) All of the above.

Answer 1

C) are price takers

Question 2

A market’s structure is described by
A) the number of firms in the market.
B) the ease with which firms can enter and exit the market.
C) the ability of firms to differentiate their product.
D) All of the above.

Answer 2

D) All of the above.

Question 3

Firms that exhibit price-taking behavior
A) wait for other firms to set price, take it as given, and charge a higher price.
B) have outputs that are too small to influence market price and thus take it as given.
C) take pricing behavior in their own hands.
D) are independently capable of setting price.

Answer 3

B) have outputs that are too small to influence market price and thus take it as given.

Question 4

A special license is required to operate a taxi in many cities. The number of licenses is restricted. More drivers want licenses than are issued. This describes a non-perfectly competitive market because
A) taxi services are very different.
B) firms cannot freely enter and exit the market.
C) transaction costs are high.
D) the government generates revenue from the licenses.

Answer 4

B) firms cannot freely enter and exit the market

Question 5

If a firm operates in a perfectly competitive market, then it will most likely
A) advertise its product on television.
B) take the price of its product as determined by the market.
C) have a difficult time obtaining information about the market price.
D) have an easy time keeping other firms out of the market.

Answer 5

B) take the price of its product as determined by the market

Question 6

The demand curve that an individual competitive firm faces is known as its
A) excess demand curve.
B) market demand curve.
C) residual demand curve.
D) leftover demand curve.

Answer 6

C) residual demand curve.

Question 7

In a competitive market where the elasticity of the market demand curve is -0.5, there are 100 identical firms, and the elasticity of the supply curve to the other 99 firms is 4. What is the elasticity of the demand curve of the 100th firm?
A) -446
B) -489
C) -50
D) -0.5

Answer 7

A) -446

Question 8

In a competitive market where the elasticity of the market demand curve is -2, the elasticity of the supply curve is 1, and an individual firm faces a residual demand curve with an elasticity of -98. What is the number of firms in this market?
A) 10
B) 20
C) 33
D) Cannot be determined.

Answer 8

C) 33

Question 9

If a firm makes zero economic profit, then the firm
A) has no incentive to stay in the industry.
B) is better off exiting the industry.
C) is indifferent between staying and exiting the industry.
D) will shut down.

Answer 9

C) is indifferent between staying and exiting the industry.

Question 10

If a firm makes zero economic profit, then the firm
A) has total revenues greater than its economic costs.
B) must shut down.
C) can be earning positive business profit.
D) must have no fixed costs.

Answer 10

C) can be earning positive business profit.

Question 11

A small business owner earns $60,000 in revenue annually. The explicit annual costs equal $10,000. The owner could work for someone else and earn $25,000 annually. The owner’s accounting profit is ________ and owner’s economic profit is ________.
A) $20,000; $5,000
B) $50,000; $25,000
C) $25,000; -$5,000
D) $45,000; -$5,000

Answer 11

B) $50,000; $25,000

Question 12

If marginal revenue equals marginal cost, the firm is maximizing profits as long as
A) the resulting profits are positive.
B) marginal cost exceeds marginal revenue for greater levels of output.
C) the average cost curve lies above the demand curve.
D) All of the above are required.

Answer 12

B) marginal cost exceeds marginal revenue for greater levels of output.

Question 13

If a competitive firm maximizes short-run profits by producing some quantity of output, which of the following must be TRUE at that level of output?

Answer 13

D) All of the above.

Question 14

If a competitive firm maximizes short-run profits by producing some quantity of output, which of the following must be TRUE at that level of output?
A) p > MC
B) MR > MC
C) p ≥ AVC
D) All of the above.

Answer 14

C) p ≥ AVC

Question 15

If a profit-maximizing firm finds that, at its current level of production, MR > MC, it will
A) earn greater profits than if MR = MC.
B) increase output.
C) decrease output.
D) shut down.

Answer 15

B) increase output.

Question 16

If a profit-maximizing firm finds that, at its current level of production, MR < MC, it will
A) decrease output.
B) increase output.
C) shut down.
D) operate at a loss.

Answer 16

A) decrease output.

Question 17

Suppose a firm has the following total cost function: TC = 50 + 2q2. What is the minimum price necessary for the firm to earn profit?
A) p = $20
B) p = $30
C) p = $35
D) p = $40

Answer 17

A) p = $20

Question 18

A firm should always shut down if its revenue is
A) declining.
B) less than its average fixed costs.
C) less than its total costs.
D) less than its avoidable costs.

Answer 18

D) less than its avoidable costs.

Question 19

Suppose a competitive firm’s total revenue is $1,000,000 where MR = MC, its explicit variable costs are $900,000, its fixed costs are $90,000 of which $60,000 are sunk in the short run. If its implicit opportunity costs are $50,000, the firm should
A) produce because its economic profit is positive.
B) produce because its economic profit is zero.
C) produce even though its economic profit is negative.
D) shut down.

Answer 19

C) produce even though its economic profit is negative.

Question 20

If a competitive firm finds that it maximizes short-run profits by shutting down, which of the following must be TRUE?
A) p < AVC for all levels of output.
B) p < AVC only for the level of output at which p = MC.
C) p < AVC only if the firm has no fixed costs.
D) The firm will earn zero profit.

Answer 20

A) p < AVC for all levels of output.

Question 21

A firm will shut down in the short run if
A) total fixed costs are too high.
B) total revenue from operating would not cover all costs.
C) total revenue from operating would not cover variable costs.
D) total revenue from operating would not cover fixed costs.

Answer 21

C) total revenue from operating would not cover variable costs.

Question 22

The competitive firm’s supply curve is equal to
A) its marginal cost curve.
B) the portion of its marginal cost curve that lies above AC.
C) the portion of its marginal cost curve that lies above AVC.
D) the portion of its marginal cost curve that lies above AFC.

Answer 22

C) the portion of its marginal cost curve that lies above AVC.

Question 23

If a firm is a price taker, then its marginal revenue will always equal
A) price.
B) total cost.
C) zero.
D) one.

Answer 23

A) price.

Question 24

If a competitive firm is in short-run equilibrium, then
A) economic profits equal zero.
B) economic profits will be positive.
C) economic profits will be negative.
D) All of the above are possible in the short run.

Answer 24

D) All of the above are possible in the short run.

Question 25

Suppose a firm’s costs are F + v ∗ q2 where F and v are positive real numbers and the firm sells its product at the market determined price p. Profits are calculated using
A) p ∗ q - F - v ∗ q2.
B) [p -(F/q + v ∗ q)] ∗ q.
C) [(p ∗ q)/q - (F + v ∗ q)/q] ∗ q.
D) Both A and B.

Answer 25

D) Both A and B.

Question 26

Suppose TC = 10 + (0.1 ∗ q2). If p = 10, the firm’s profit-maximizing level of output is
A) 40.
B) 50.
C) 60.
D) 0, since the firm will shut down.

Answer 26

B) 50.

Question 27

Suppose TC = 10 + (0.1 ∗ q2). If p = 10, the firm’s profits will be
A) 240.
B) 250.
C) 260.
D) -10 because the firm will shut down.

Answer 27

A) 240.

Question 28

Suppose TC = 10 + (0.1 ∗ q2). If there are 100 identical firms in the market, the market supply curve is
A) Q = 1000 ∗ p.
B) Q = 500 ∗ p.
C) Q = 100 ∗ p.
D) Q = 10.

Answer 28

B) Q = 500 ∗ p.

Question 29

In deciding whether to operate in the short run, the firm must be concerned with the relationship between price of the output and
A) total cost.
B) average variable cost.
C) total fixed cost.
D) the number of buyers.

Answer 29

B) average variable cost.

Question 30

In the long run, profits will equal zero in a competitive market because of
A) constant returns to scale.
B) identical products being produced by all firms.
C) the availability of information.
D) free entry and exit.

Answer 30

D) free entry and exit.

Question 31

Assuming a horizontal long-run market supply curve, which of the following statements is (are) TRUE about competitive firms in the long run?
A) p = MC
B) p = AC
C) profit = 0
D) All of the above

Answer 31

D) All of the above.

Question 32

Suppose that for each firm in the competitive market for potatoes, long-run average cost is minimized at $0.20 per pound when 500 pounds are grown. If the long-run supply curve is horizontal, then
A) some firms will enjoy long-run profits because they operate at minimum average cost.
B) the long-run price will be $0.20 per pound.
C) each consumer will purchase $100 worth of potatoes.
D) the long-run price will be set just above $0.20 per pound.

Answer 32

B) the long-run price will be $0.20 per pound.

Question 33

Suppose that for each firm in the competitive market for potatoes, long-run average cost is minimized at $0.20 per pound when 500 pounds are grown. The demand for potatoes is Q = 10,000/p. If the long-run supply curve is horizontal, then how much will consumers spend, in total, on potatoes?
A) $0
B) $500
C) $10,000
D) $50,000

Answer 33

B) $500

Question 34

Under what circumstances will the residual supply curve for a country be upward sloping?
A) when it does not import any of the good from the rest of the world
B) when it imports a small portion of the rest of the world’s supply of the good
C) when it imports a large portion of the rest of the world’s supply of the good
D) Either A or B

Answer 34

B) when it imports a small portion of the rest of the world’s supply of the good