AGEC Chapter 8 (LONG) - Assignment Essays

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economics

AGEC Chapter 8 (LONG)

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March 14th, 2023
Home economics AGEC Chapter 8 (LONG)
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
C
Topic: Perfect Competition
Status: Old
question
2) The residual demand curve is
A) the market demand minus the supply of other firms.
B) the remaining demand after the market clears.
C) the market demand minus the supply of one firm.
D) the long-run demand for a market.
answer
A
Topic: Perfect Competition
Status: Old
question
3) As the number of firms in an industry increases, the residual demand curve becomes
A) more elastic.
B) less elastic.
C) larger.
D) vertical.
answer
A
Topic: Perfect Competition
Status: Old
question
4) There are 10 identical internet service providers (ISPs) in a city serving a market demand with an elasticity of -1.5. The elasticity of supply for each firm is 3.0. The elasticity of demand faced by an individual ISP provider is
A) -42.
B) -15.
C) -1.5.
D) -27.
answer
A
Topic: Perfect Competition
Status: Old
question
5) 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
D
Topic: Perfect Competition
Status: Old
question
6) 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
B
Topic: Perfect Competition
Status: Old
question
7) If consumers view the output of any firm in a market to be identical to the output of any other firm in the market, the demand curve for the output of any given firm
A) will be identical to the market demand curve.
B) will be horizontal.
C) will be vertical.
D) cannot be determined from the information given.
answer
B
Topic: Perfect Competition
Status: Old
question
8) A horizontal demand curve for a firm implies that
A) the firm is a monopoly.
B) the market the firm is operating in is not competitive.
C) the firm is selling in a competitive market.
D) the products of that firm are very different from other firms' products.
answer
C
Topic: Perfect Competition
Status: Old
question
9) In the absence of any government regulation on price, if a firm has no power to set price on its own, one can safely conclude
A) the demand curve for the firm's product is horizontal.
B) there aren't many firms in the industry.
C) the market is in long-run equilibrium.
D) the firms in this industry are not profitable.
answer
A
Topic: Perfect Competition
Status: Old
question
10) In a perfectly competitive market,
A) firms can freely enter and exit.
B) firms sell a differentiated product.
C) transaction costs are high.
D) All of the above.
answer
A
Topic: Perfect Competition
Status: Old
question
11) If all conditions for a perfectly competitive market are met,
A) firms face sunk cost when entering the market.
B) firms demand curves are horizontal.
C) the market demand curve is horizontal.
D) the firms' demand curves are downward-sloping.
answer
B
Topic: Perfect Competition
Status: Old
question
12) In a competitive market, if buyers did not know all the prices charged by the many firms,
A) all firms still face horizontal demand curves.
B) firms sell a differentiated product.
C) demand curves can be downward sloping for some or all firms.
D) the number of firms will most likely decrease.
answer
C
Topic: Perfect Competition
Status: Old
question
13) Many car owners and car dealers describe their different cars for sale in the local newspapers and list their asking price. Many people shopping for a used car consider the different choices listed in the paper. The market for used cars could be described as
A) relatively competitive.
B) perfectly competitive.
C) non-competitive.
D) having high transaction costs.
answer
A
Topic: Perfect Competition
Status: Old
question
14) Many car owners and car dealers describe their different cars for sale in the local newspapers and list their asking price. Many people shopping for a used car consider the different choices listed in the paper. The absence of which condition prohibits this market from being described as perfectly competitive?
A) Buyers and sellers know the prices.
B) Firms freely enter and exit.
C) Transaction costs are low.
D) Consumers believe all firms sell identical products.
answer
D
Topic: Perfect Competition
Status: Old
question
15) 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
B
Topic: Perfect Competition
Status: Old
question
16) If a firm operates in a perfectly competitive market, then it will most likely
A) advertise its product on television.
B) settle for whatever price is offered.
C) have a difficult time obtaining information about the market price.
D) have an easy time keeping other firms out of the market.
answer
B
Topic: Perfect Competition
Status: Old
question
17) If a firm operates in a perfectly competitive market, then
A) all firms will advertise.
B) no firms will advertise.
C) the market leader will advertise.
D) new firms will advertise.
answer
B
Topic: Perfect Competition
Status: Old
question
18) The "Got Milk?" advertising campaign is a good example of
A) advertising in a competitive market.
B) how advertising in a competitive market does not pay off for a single firm.
C) interest groups financed by the industry advertise for the whole industry.
D) All of the above.
answer
D
Topic: Perfect Competition
Status: Old
question
19) The perfectly competitive model makes a lot of fairly unrealistic assumptions. Why do economics text books still talk a lot about this model?
A) Many markets are close to being perfectly competitive.
B) It is an important model to use as a benchmark to compare other markets structures to.
C) Perfectly competitive markets maximize societal welfare.
D) All of the above.
answer
D
Topic: Perfect Competition
Status: Old
question
20) If a firm happened to be the only seller of a particular product, it might behave as a price taker as long as
A) buyers have full information about the firm's price.
B) the transaction costs of doing business with this firm are low.
C) there are many buyers.
D) there is free entry and exit.
answer
D
Topic: Perfect Competition
Status: Old
question
21) The demand curve 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
C
Topic: Perfect Competition
Status: Old
question
22) Gift shops in a small town sell identical mugs to tourists. However, tourists don't have enough time to check out the prices one by one and don't have brochures listing prices of mugs. We can conclude
A) the market for mugs is perfectly competitive.
B) buyers have full information.
C) sellers are price takers.
D) the market is not perfectly competitive.
answer
D
Topic: Perfect Competition
Status: New
question
1) If a firm makes zero economic profit, then the firm
A) has no incentive to stay in the industry.
B) is better of exiting the industry.
C) is indifferent between staying and exiting the industry.
D) will shut down.
answer
C
Topic: Profit Maximization
Status: Revised
question
2) 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
C
Topic: Profit Maximization
Status: Old
question
3) A small business owner earns $50,000 in revenue annually. The explicit annual costs equal $30,000. The owner could work for someone else and earn $25,000 annually. The owner's business profit is ________ and the economic profit is ________.
A) $20,000, $5,000
B) $20,000, -$5,000
C) $25,000, -$5,000
D) $45,000, -$5,000
answer
B
Topic: Profit Maximization
Status: Old
question
4) A small business owner earns $60,000 in revenue annually. The explicit annual costs equal $40,000. The owner could work for someone else and earn $25,000 annually. The owner's business profit is ________ and the economic profit is ________.
A) $20,000, $5,000
B) $20,000, -$5,000
C) $25,000, -$5,000
D) $45,000, -$5,000
answer
B
Topic: Profit Maximization
Status: Old
question
5) A lawyer running his own business earns $18,000 in revenue monthly. He pays $8,000 as explicit costs including staff salary and utilities. He owns the office space so no rent is paid.. The lawyer could work for other legal firms and earn $10,000 per month. His business profit is ________ and his economic profit is ________.
A) $10,000, $10,000
B) $28,000, $10,000
C) $10,000, $0
D) $8,000, $0
answer
C
Topic: Profit Maximization
Status: New
question
6) 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
B
Topic: Profit Maximization
Status: Old
question
7) If a firm is operating at an output level where losses are minimized, the firm
A) has no incentive to stay in the industry.
B) is better of exiting the industry.
C) is maximizing profits.
D) will shut down.
answer
C
Topic: Profit Maximization
Status: Old
question
9) The above figure shows the cost curves for a competitive firm. The firm will incur economic losses if the price is less than
A) $0.
B) $5.
C) $10.
D) $11.
answer
C
Topic: Profit Maximization
Status: Old
question
10) The above figure shows the cost curves for a competitive firm. If the market price is $15 per unit, the firm will earn profits of
A) $0.
B) $4.
C) $40.
D) $160.
answer
D
Topic: Profit Maximization
Status: Old
question
11) 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
D
Topic: Profit Maximization
Status: Old
question
12) 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
C
Topic: Profit Maximization
Status: Old
question
13) 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
B
Topic: Profit Maximization
Status: Old
question
14) 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
A
Topic: Profit Maximization
Status: Old
question
15) Suppose the fixed cost of Christmas trees business is $7,000 and sunk. The variable cost for each tree is $20. According to the forecast, the market price for Christmas trees is $25 each and the owner could sell 1000 trees at most each year. The owner
A) should shut down the business.
B) should keep operating.
C) should sell less.
D) None of the above.
answer
B
Topic: Profit Maximization
Status: New
question
16) Suppose the estimated fixed cost of Christmas trees business is $7,000 and not sunk. The estimated variable cost for each tree is $20. According to the forecast, the market price for Christmas trees is $25 each and the owner could sell 1000 trees at most each year. In the long run, the owner
A) should shut down.
B) should keep operating.
C) should sell less.
D) None of the above.
answer
A
Topic: Profit Maximization
Status: New
question
17) Suppose the Christmas trees market is perfectly competitive. A business owner is currently suffering from a loss of $1,000, the cost of producing and selling an additional Christmas tree is $20, and the current market price is $25. The owner
A) should sell more trees.
B) should shut down his business now.
C) should advertise in the market.
D) is already minimizing his loss.
answer
A
Topic: Profit Maximization
Status: New
question
18) Suppose the Christmas trees market is perfectly competitive. An owner is currently earning a profit of $1,000, the cost of producing and selling an additional Christmas tree is $25, the current market price is $20. The owner
A) should sell more trees.
B) should not sell more trees.
C) should advertise in the market to promote his sales.
D) is not maximizing his profits.
answer
B
Topic: Profit Maximization
Status: New
question
1) 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
D
Topic: Competition in the Short Run
Status: Old
question
2) 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
A
Topic: Competition in the Short Run
Status: Old
question
3) The above figure shows the cost curves for a competitive firm. If the firm is to operate in the short run, price must exceed
A) $0.
B) $5.
C) $10.
D) $11.
answer
Answer: B
Topic: Competition in the Short Run
Status: Old
question
4) The above figure shows the cost curves for a competitive firm. If the profit-maximizing level of output is 40 price is equal to
A) $0.
B) $15.
C) $10.
D) $11.
answer
B
Topic: Competition in the Short Run
Status: Old
question
5) 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
C
Topic: Competition in the Short Run
Status: Old

6) 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: C
Topic: Competition in the Short Run
Status: Old
question
7) If a firm is a price taker, then its marginal revenue will always equal
A) price.
B) total cost.
C) zero.
D) one.
answer
A
Topic: Competition in the Short Run
Status: Old
question
8) An increase in the cost of an input will result in
A) a leftward shift in the firm's supply curve.
B) an upward shift of the firm's marginal cost curve.
C) a leftward shift of the market supply curve.
D) All of the above.
answer
D
Topic: Competition in the Short Run
Status: Old
question
9) When the production of a good involves several inputs, an increase in the cost of one input will usually cause total costs to
A) rise more than in proportion.
B) rise less than in proportion.
C) remain unchanged.
D) rise by the exact amount of the input price increase.
answer
B
Topic: Competition in the Short Run
Status: Old
question
10) When the production of a good involves several inputs and inputs are used in fixed proportions, an increase in the cost of one input will usually cause total costs to
A) rise more than in proportion.
B) rise less than in proportion.
C) remain unchanged.
D) rise by the exact amount of the input price increase.
answer
D
Topic: Competition in the Short Run
Status: Old

11) If a competitive firm is in short-run equilibrium, then
A) profits equal zero.
B) it will not operate at a loss.
C) an increase in its fixed cost will have no effect on profit.
D) an increase in its fixed cost will have no effect on output as long as revenue can cover its variable cost.
Answer: D
Topic: Competition in the Short Run
Status: Revised
question
12) If a competitive firm is in short-run equilibrium, then
A) 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
D
Topic: Competition in the Short Run
Status: Old
question
13) 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
A
Topic: Competition in the Short Run
Status: Old
question
14) 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
B
Topic: Competition in the Short Run
Status: Old

15) The above figure shows the cost curves for a typical firm in a market and three possible market supply curves. If there are 100 identical firms, the market supply curve is best represented by
A) curve A.
B) curve B.
C) curve C.
D) either curve A or B, but definitely not C.
Answer: C
Topic: Competition in the Short Run
Status: Old
question
16) If a firm is currently in short-run equilibrium earning a profit, what impact will a lump-sum tax have on its production decision?
A) The firm will decrease output to earn a higher profit.
B) The firm will increase output but earn a lower profit.
C) The firm will not change output but earn a lower profit.
D) The firm will not change output and earn a higher profit.
answer
C
Topic: Competition in the Short Run
Status: Old
question
17) Suppose that once a well is dug, water flows out of it continuously without any additional effort. Customers collect their water and pay a per gallon fee when they leave the site of the well. In the short run, the competitive firm in this market
A) will not shut down because variable costs are zero.
B) has no fixed costs.
C) faces diminishing marginal returns.
D) can act as a price setter.
answer
A
Topic: Competition in the Short Run
Status: Old
question
18) Suppose that once a well is dug, water flows out of it continuously without any additional effort. Customers collect their water and pay a per gallon fee when they leave the site of the well. In the short run, the competitive firm in this market
A) has no variable costs.
B) has no fixed costs.
C) will shut down.
D) can produce water at no cost.
answer
A
Topic: Competition in the Short Run
Status: Old
question
19) If a competitive firm cannot earn profit at any level of output during a given short-run period, then which of the following is LEAST likely to occur?
A) It will shut down in the short run and wait until the price increases sufficiently.
B) It will exit the industry in the long run.
C) It will operate at a loss in the short run.
D) It will minimize its loss by decreasing output so that price exceeds marginal cost.
answer
D
Topic: Competition in the Short Run
Status: Old
question
20) 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
B
Topic: Competition in the Short Run
Status: Old
question
21) There are currently N identical firms in a market. If it is a perfectly competitive market, the short-run market supply curve at any given price is
A) N times the supply of an individual firm.
B) N - 1 times the supply of an individual firm.
C) N plus the supply of an individual firm.
D) It cannot be determined from the information provided.
answer
A
Topic: Competition in the Short Run
Status: Old

22) The above figure shows the cost curves for a typical firm in a competitive market. If p = 10, then
A) the firm will maximize its profit by producing 5 units.
B) the firm will maximize its profit by producing 60 units.
C) producing 5 or 60 units will yield equal profits.
D) Not enough information.
Answer: B
Topic: Short-Run Competitive Profit Maximization
Status: New
question
23) The above figure shows the cost curves for a typical firm in a competitive market. If price = 8.5, then
A) the firm will produce 10 units.
B) the firm will produce 55 units.
C) the firm will earn positive profits.
D) None of above.
answer
B
Topic: Short-Run Competitive Profit Maximization
Status: New
question
24) The above figure shows the short run cost curves for a typical firm in a competitive market. If price = 8, then the firm
A) is earning positive profits.
B) should produce 50 units.
C) should shut down.
D) None of above.
answer
B
Topic: Short-Run Competitive Profit Maximization
Status: New
question
25) The above figure shows the short run cost curves for a typical firm in a competitive market. If price = 4, then the firm
A) is earning positive profits.
B) should produce 35 units.
C) should shut down.
D) None of above.
answer
C
Topic: Short-Run Competitive Profit Maximization
Status: New
question
36) Suppose there are 1000 identical wheat farmers. For each, TC = 10 + q2. Derive the market supply curve.
answer
For each MC = 2q and AVC = q. Thus MC > AVC for all levels of output. The firm sets p = 2q or q = 0.5p. Since there are 1000 firms each producing q, market supply equals Q = 500p.
Topic: Competition in the Short Run
Status: Old
question
37) Suppose there are 1000 identical wheat farmers. For each, TC = 10 + q2. Market demand is Q = 600,000 - 100p. Derive the short-run equilibrium Q, q, and p. Does the typical firm earn a short-run profit?
answer
The firm's supply is q = 0.5p; market supply is Q = 500p. Market equilibrium can be found as 500p = 600,000 - 100p, or 600p = 600,000, so p = 1,000 and Q = 500,000. q = 0.5p = 500. Profit = (500 ∗ 1,000) - (10 + 250,000) = 249,990. Each firm earns a profit.
Topic: Competition in the Short Run
Status: Old
question
38) Consider a competitive firm with the short-run cost function
C(q) = 20 + 6q + 5q2
The firm faces a market price of p for its output.
a. Derive the firm's profit maximizing condition. Is the sufficient second order condition satisfied?
b. Suppose a specific tax of t (t < p) is levied on only this firm in the industry. What is the profit maximizing level of output as a function of p and t? (Assume the price is high enough that the firm does not shut down)
c. How does the output change as the tax increases? Use calculus to determine the relevant comparative static.
d. How does the firm's profit chance as the tax increases? Again, use calculus to determine the relevant comparative static. Show that profit decreases as t increases.
answer
a. Profit maximization occurs where p = MC:
p = 6 + 10q
dMC/dq = 10 > 0, so the sufficient second order condition is satisfied.
b. A tax will lower the price to p-t, so
p - t = 6 + 10q
Solve for q* = (p - t - 6)/10
Note that we are assuming p - t > 6 (or the firm will shut down).
c. dq*/dt = -1/10.
d. First compute the profit function
π = (p - t)q - C(q) = (p - t)(p - t - 6)/10 - 20 - 3(p - t - 6)/5 - (p - t - 6)2/20
Then compute dπ/dt = -(p - t - 6)/10 - (p - t)/10 + 3/5 + (p - t - 6)/10
This simplifies to
dπ/dt = -(p - t - 6)/10 < 0
Topic: Competition in the Short Run
Status: Old
39) Suppose that there are 80 firms in a market, each with the following cost function:
C(q) = 100 + 4q2
a. Derive the short-run market supply curve.
b. Suppose the market demand is
QD = 1280 - 30p
Find the equilibrium market quantity and price.
c. How much output will each firm produce? How much profit is each firm making?
Answer:
a. Each firm sets p = MC to determine their output:
p = 8q
So each firm's supply function is:
qi = p/8
There are 80 firms and QS = Nqi so the market supply is
QS = 10p
b. Equilibrium price occurs where QS = QD, so
1280 - 30p = 10p
p = 32, Q = 320
c. At p=32, the output of a firm is determined by p = MC, so
32 = 8q q = 4
(Or find by taking Q*/N = 320/80 = 4)
Profit (per firm) is:
= 32(4) - 100 - 4(4)2 = -36
Firms are making losses of $32 each.
Topic: Competition in the Short Run
Status: Old
question
8.4 Competition in the Long Run
answer
...
question
1) Markets with hit-and-run entry and exit experience
A) barriers to entry.
B) firms entering whenever they can make a profit and exiting when they cannot make a profit.
C) steady long-run economic profit.
D) a very steady number of firms.
answer
B
Topic: Competition in the Long Run
Status: Old
question
2) 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
D
Topic: Competition in the Long Run
Status: Old
question
3) 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
D
Topic: Competition in the Long Run
Status: Old
question
4) Long-run market supply curves are upward sloping if
A) firms are identical.
B) the number of firms is restricted in the long run.
C) input prices fall as the industry expands.
D) All of the above.
answer
B
Topic: Competition in the Long Run
Status: Old
question
5) Long-run market supply curves are downward sloping if
A) firms are identical.
B) the number of firms is restricted in the long run.
C) input prices fall as the industry expands.
D) All of the above.
answer
C
Topic: Competition in the Long Run
Status: Old
question
6) If firms in a competitive market are not identical, then the long-run market supply curve will be
A) horizontal.
B) upward sloping.
C) downward sloping.
D) undetermined.
answer
B
Topic: Competition in the Long Run
Status: Old
question
7) If firms in a competitive market are not identical, then an increase in cost will
A) shift marginal cost to the right.
B) push the most inefficient firms out of the market.
C) push the most efficient firms out of the market.
D) Need more information.
answer
B
Topic: Competition in the Long Run
Status: Old
question
8) Suppose that for each firm in the competitive market for potatoes, long-run average cost is minimized at 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 20¢ per pound.
C) each consumer will purchase $100 worth of potatoes.
D) the long-run price will be set just above 20¢ per pound.
answer
B
Topic: Competition in the Long Run
Status: Old
question
9) Suppose that for each firm in the competitive market for potatoes, long-run average cost is minimized at 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 many firms will this industry sustain in the long run?
A) 0
B) 100
C) 50,000
D) There is not enough information to answer.
answer
B
Topic: Competition in the Long Run
Status: Old
question
10) Suppose that for each firm in the competitive market for potatoes, long-run average cost is minimized at 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
C
Topic: Competition in the Long Run
Status: Old
question
11) Suppose that for each firm in the competitive market for potatoes, long-run average cost is minimized at 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 many pounds of potatoes will be consumed in total?
A) 0
B) 500
C) 10,000
D) 50,000
answer
D
Topic: Competition in the Long Run
Status: Old
For the following, please answer "True" or "False" and explain why.
question
12) If firms in a competitive market are identical, the long-run market supply curve is horizontal.
answer
False. The horizontal long-run supply curve also requires that factor prices do not increase with industry expansion and that the number of firms is not restricted.
Topic: Competition in the Long Run
Status: Old
question
13) The long-run supply curve in a competitive market is upward sloping.
answer
False. The shape of the long-run supply curve will depend on how similar the firms are and on the relationship between factor prices and total industry output.
Topic: Competition in the Long Run
Status: Old
question
14) If the shut down rule, p < AVC, is the same in the short run and the long run, explain why the shut down prices may be different.
answer
In the long run all costs are variable. In the long run the average variable cost is usually higher than in the short run.
Topic: Competition in the Long Run
Status: Old
question
15) The above figure shows the long-run cost curves for a typical firm in a competitive market. If the number of firms is unrestricted and input costs are constant, derive the long-run market supply curve.
answer
The long-run market supply curve is horizontal at a price of $10 per unit.
Topic: Competition in the Long Run
Status: Old
16) All the supply of peppermint oil is produced from mint plants grown in one county by several competitive growers (the number of growers is not limited). The quality of land in the county varies greatly. Would you expect the long-run market supply curve to slope upward, downward, or remain constant? Why?
Answer: The long-run market supply curve will slope up because the growers have different costs. Those growers with poor-quality land have a higher average cost of production. The horizontal sum of the individual supply curves will slope up.
Topic: Competition in the Long Run
Status: Old
question
17) Suppose an industry has no fixed costs. Draw two graphs side by side for the industry. In the left graph draw a U-shaped average cost curve and the corresponding marginal cost curve. In the right graph, draw a downward-sloping market demand curve. Also in the right graph, draw a short-run supply curve that would generate positive profit, and the long-run supply curve that would result.
answer
See the above figure.
Topic: Competition in the Long Run
Status: Old
question
18) Suppose all firms in a competitive market are currently in both short-run and long-run equilibrium. What impact will a lump sum tax have on each firm in the short run? in the long run?
answer
In the short run, the lump sum tax represents a fixed cost. The firm's output decision is unchanged, but its profits decrease. In the long run, the tax raises the LRAC of each firm, but not MC. Minimum AC is higher, so price is higher. With a higher price, each firm produces a greater quantity, but the higher price means less quantity is demanded in total. Thus the number of firms will decrease.
Topic: Competition in the Long Run
Status: Old
question
19) Suppose market demand is Q = 1000 - 4p. If all firms have LRAC = 50 - 5q + q2, how many identical firms will there be when this industry is in long-run equilibrium?
answer
The long-run market supply curve is horizontal at the minimum LRAC. LRAC is minimized when -5 + 2q = 0 or q = 2.5. At this level of output, LRMC = LRAC = 43.75. At this price, 825 units are demanded. If each firm produces 2.5 units in the long run, then 330 firms will be in this market.
Topic: Competition in the Long Run
Status: Old
question
20) All firms in a competitive industry have the following long-run total cost curve:
C(q) = q3 - 10q2 + 36q
where q is the output of the firm.
a. Compute the long run equilibrium price. What does the long-run supply curve look like if this is a constant cost industry? Explain.
b. Suppose the market demand is given by Q = 111 - p. Determine the long-run equilibrium number of firms in the industry.
answer
a. Long run equilibrium is determined by (1) the minimum of the AC curves, and (2) the demand equation.
The AC is at a minimum where AC = MC:
Q = 5, AC = MC = 11
Therefore, the long run price will be $11 and each firm will produce 5 units.
question
b. The market quantity (from demand) is 100 and so 20 firms will exist in this market. The long run supply curve is flat at $11 because the price will always equal this due to free entry and exit of firms.
Topic: Competition in the Long Run
Status: Old
answer
...
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
C
Topic: Perfect Competition
Status: Old
question
2) The residual demand curve is
A) the market demand minus the supply of other firms.
B) the remaining demand after the market clears.
C) the market demand minus the supply of one firm.
D) the long-run demand for a market.
answer
A
Topic: Perfect Competition
Status: Old
question
3) As the number of firms in an industry increases, the residual demand curve becomes
A) more elastic.
B) less elastic.
C) larger.
D) vertical.
answer
A
Topic: Perfect Competition
Status: Old
question
4) There are 10 identical internet service providers (ISPs) in a city serving a market demand with an elasticity of -1.5. The elasticity of supply for each firm is 3.0. The elasticity of demand faced by an individual ISP provider is
A) -42.
B) -15.
C) -1.5.
D) -27.
answer
A
Topic: Perfect Competition
Status: Old
question
5) 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
D
Topic: Perfect Competition
Status: Old
question
6) 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
B
Topic: Perfect Competition
Status: Old
question
7) If consumers view the output of any firm in a market to be identical to the output of any other firm in the market, the demand curve for the output of any given firm
A) will be identical to the market demand curve.
B) will be horizontal.
C) will be vertical.
D) cannot be determined from the information given.
answer
B
Topic: Perfect Competition
Status: Old
question
8) A horizontal demand curve for a firm implies that
A) the firm is a monopoly.
B) the market the firm is operating in is not competitive.
C) the firm is selling in a competitive market.
D) the products of that firm are very different from other firms' products.
answer
C
Topic: Perfect Competition
Status: Old
question
9) In the absence of any government regulation on price, if a firm has no power to set price on its own, one can safely conclude
A) the demand curve for the firm's product is horizontal.
B) there aren't many firms in the industry.
C) the market is in long-run equilibrium.
D) the firms in this industry are not profitable.
answer
A
Topic: Perfect Competition
Status: Old
question
10) In a perfectly competitive market,
A) firms can freely enter and exit.
B) firms sell a differentiated product.
C) transaction costs are high.
D) All of the above.
answer
A
Topic: Perfect Competition
Status: Old
question
11) If all conditions for a perfectly competitive market are met,
A) firms face sunk cost when entering the market.
B) firms demand curves are horizontal.
C) the market demand curve is horizontal.
D) the firms' demand curves are downward-sloping.
answer
B
Topic: Perfect Competition
Status: Old
question
12) In a competitive market, if buyers did not know all the prices charged by the many firms,
A) all firms still face horizontal demand curves.
B) firms sell a differentiated product.
C) demand curves can be downward sloping for some or all firms.
D) the number of firms will most likely decrease.
answer
C
Topic: Perfect Competition
Status: Old
question
13) Many car owners and car dealers describe their different cars for sale in the local newspapers and list their asking price. Many people shopping for a used car consider the different choices listed in the paper. The market for used cars could be described as
A) relatively competitive.
B) perfectly competitive.
C) non-competitive.
D) having high transaction costs.
answer
A
Topic: Perfect Competition
Status: Old
question
14) Many car owners and car dealers describe their different cars for sale in the local newspapers and list their asking price. Many people shopping for a used car consider the different choices listed in the paper. The absence of which condition prohibits this market from being described as perfectly competitive?
A) Buyers and sellers know the prices.
B) Firms freely enter and exit.
C) Transaction costs are low.
D) Consumers believe all firms sell identical products.
answer
D
Topic: Perfect Competition
Status: Old
question
15) 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
B
Topic: Perfect Competition
Status: Old
question
16) If a firm operates in a perfectly competitive market, then it will most likely
A) advertise its product on television.
B) settle for whatever price is offered.
C) have a difficult time obtaining information about the market price.
D) have an easy time keeping other firms out of the market.
answer
B
Topic: Perfect Competition
Status: Old
question
17) If a firm operates in a perfectly competitive market, then
A) all firms will advertise.
B) no firms will advertise.
C) the market leader will advertise.
D) new firms will advertise.
answer
B
Topic: Perfect Competition
Status: Old
question
18) The "Got Milk?" advertising campaign is a good example of
A) advertising in a competitive market.
B) how advertising in a competitive market does not pay off for a single firm.
C) interest groups financed by the industry advertise for the whole industry.
D) All of the above.
answer
D
Topic: Perfect Competition
Status: Old
question
19) The perfectly competitive model makes a lot of fairly unrealistic assumptions. Why do economics text books still talk a lot about this model?
A) Many markets are close to being perfectly competitive.
B) It is an important model to use as a benchmark to compare other markets structures to.
C) Perfectly competitive markets maximize societal welfare.
D) All of the above.
answer
D
Topic: Perfect Competition
Status: Old
question
20) If a firm happened to be the only seller of a particular product, it might behave as a price taker as long as
A) buyers have full information about the firm's price.
B) the transaction costs of doing business with this firm are low.
C) there are many buyers.
D) there is free entry and exit.
answer
D
Topic: Perfect Competition
Status: Old
question
21) The demand curve 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
C
Topic: Perfect Competition
Status: Old
question
22) Gift shops in a small town sell identical mugs to tourists. However, tourists don't have enough time to check out the prices one by one and don't have brochures listing prices of mugs. We can conclude
A) the market for mugs is perfectly competitive.
B) buyers have full information.
C) sellers are price takers.
D) the market is not perfectly competitive.
answer
D
Topic: Perfect Competition
Status: New
question
For the following, please answer "True" or "False" and explain why.
23) A market is perfectly competitive even if firms have the ability to set their own price as long as the price difference reflects differences in the product.
answer
False. If the market is perfectly competitive, there are no differences in the product.
Topic: Perfect Competition
Status: Old
question
24) If transaction costs are high, then it is more likely a firm's demand curve is downward sloping.
answer
True. Transaction costs increase the costs for consumers to find a new firm. Thus high transaction costs allow a firm to charge more than others.
Topic: Perfect Competition
Status: Old
question
25) Explain why individual firms in competitive markets face more elastic demand curves than the market as a whole.
answer
In a competitive market, if an individual firm increases its price it will lose all of its customers, as consumers simply buy from another firm. However, if the price of the good increases for all firms some consumers will not continue to buy the good, but for many prices some consumers will continue to purchase the good.
Topic: Perfect Competition
Status: Old
question
1) If a firm makes zero economic profit, then the firm
A) has no incentive to stay in the industry.
B) is better of exiting the industry.
C) is indifferent between staying and exiting the industry.
D) will shut down.
answer
C
Topic: Profit Maximization
Status: Revised
question
2) 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
C
Topic: Profit Maximization
Status: Old
question
3) A small business owner earns $50,000 in revenue annually. The explicit annual costs equal $30,000. The owner could work for someone else and earn $25,000 annually. The owner's business profit is ________ and the economic profit is ________.
A) $20,000, $5,000
B) $20,000, -$5,000
C) $25,000, -$5,000
D) $45,000, -$5,000
answer
B
Topic: Profit Maximization
Status: Old
question
4) A small business owner earns $60,000 in revenue annually. The explicit annual costs equal $40,000. The owner could work for someone else and earn $25,000 annually. The owner's business profit is ________ and the economic profit is ________.
A) $20,000, $5,000
B) $20,000, -$5,000
C) $25,000, -$5,000
D) $45,000, -$5,000
answer
B
Topic: Profit Maximization
Status: Old
question
5) A lawyer running his own business earns $18,000 in revenue monthly. He pays $8,000 as explicit costs including staff salary and utilities. He owns the office space so no rent is paid.. The lawyer could work for other legal firms and earn $10,000 per month. His business profit is ________ and his economic profit is ________.
A) $10,000, $10,000
B) $28,000, $10,000
C) $10,000, $0
D) $8,000, $0
answer
C
Topic: Profit Maximization
Status: New
question
6) 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
B
Topic: Profit Maximization
Status: Old
question
7) If a firm is operating at an output level where losses are minimized, the firm
A) has no incentive to stay in the industry.
B) is better of exiting the industry.
C) is maximizing profits.
D) will shut down.
answer
C
Topic: Profit Maximization
Status: Old

8) The above figure shows the cost curves for a competitive firm. If the firm is to earn economic profit, price must exceed
A) $0.
B) $5.
C) $10.
D) $11.
Answer: C
Topic: Profit Maximization
Status: Old
question
9) The above figure shows the cost curves for a competitive firm. The firm will incur economic losses if the price is less than
A) $0.
B) $5.
C) $10.
D) $11.
answer
C
Topic: Profit Maximization
Status: Old
question
10) The above figure shows the cost curves for a competitive firm. If the market price is $15 per unit, the firm will earn profits of
A) $0.
B) $4.
C) $40.
D) $160.
answer
D
Topic: Profit Maximization
Status: Old
question
11) 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
D
Topic: Profit Maximization
Status: Old
question
12) 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
C
Topic: Profit Maximization
Status: Old
question
13) 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
B
Topic: Profit Maximization
Status: Old
question
14) 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
A
Topic: Profit Maximization
Status: Old
question
15) Suppose the fixed cost of Christmas trees business is $7,000 and sunk. The variable cost for each tree is $20. According to the forecast, the market price for Christmas trees is $25 each and the owner could sell 1000 trees at most each year. The owner
A) should shut down the business.
B) should keep operating.
C) should sell less.
D) None of the above.
answer
B
Topic: Profit Maximization
Status: New
question
16) Suppose the estimated fixed cost of Christmas trees business is $7,000 and not sunk. The estimated variable cost for each tree is $20. According to the forecast, the market price for Christmas trees is $25 each and the owner could sell 1000 trees at most each year. In the long run, the owner
A) should shut down.
B) should keep operating.
C) should sell less.
D) None of the above.
answer
A
Topic: Profit Maximization
Status: New
question
17) Suppose the Christmas trees market is perfectly competitive. A business owner is currently suffering from a loss of $1,000, the cost of producing and selling an additional Christmas tree is $20, and the current market price is $25. The owner
A) should sell more trees.
B) should shut down his business now.
C) should advertise in the market.
D) is already minimizing his loss.
answer
A
Topic: Profit Maximization
Status: New
question
18) Suppose the Christmas trees market is perfectly competitive. An owner is currently earning a profit of $1,000, the cost of producing and selling an additional Christmas tree is $25, the current market price is $20. The owner
A) should sell more trees.
B) should not sell more trees.
C) should advertise in the market to promote his sales.
D) is not maximizing his profits.
answer
B
Topic: Profit Maximization
Status: New
question
For the following, please answer "True" or "False" and explain why.
19) Even though fixed costs do not affect the output decision, an increase in fixed costs results in a wider range of prices for which the firm operates at a loss.
answer
True. An increase in fixed costs will shift AC upward but leave AVC unchanged. The gap between AVC and AC represents prices at which the firm will operate at a loss.
Topic: Profit Maximization
Status: Old
question
20) If a firm sets marginal revenue equal to marginal cost, it will make an economic profit.
answer
False. When a firm sets MR=MC it maximizes profits but the profit-maximizing level of output might still be negative (the smallest loss possible).
Topic: Profit Maximization
Status: Old
question
21) If a firm doesn't make an economic profit, it will shut down.
answer
False. The firm compares its losses from operating with its losses when shutting down and will shut down if the latter loss is less.
Topic: Profit Maximization
Status: Old
question
22) Suppose there are 20 competitive firms in a market. The supply curve of each firm is q = 2p. The market demand is Q = 200 - 2p. What is the residual demand curve facing a typical firm?
answer
The residual demand curve is equal to the market demand curve minus the supply of all the other firms. The supply of the other 19 firms is 38p. The residual demand is 200 - 40p.
Topic: Profit Maximization
Status: Old
question
23) Explain why shutting down and going out-of-business are different concepts.
answer
Shutting down means that the firm seizes production with the option of starting up production any time in the future. Going out-of-business is equal to exiting the industry. This involves reducing the amount of (the fixed input) capital to zero, which is not possible in the short run.
Topic: Profit Maximization
Status: Old
question
24) Suppose a firm has the following total cost function: TC = 100 + 4q2. What is the minimum price necessary for the firm to earn profit? Below what price will the firm shut down in the short run?
answer
AC = 100/q + 4q. This is minimized when dAC/dq = 0, or -100/q2 + 4 = 0. Solving yields q = 5 and AC = 40. Thus a price greater than $40 is required for the firm to earn profit. AVC = 4q and MC = 8q. Since AVC is below MC for all levels of output, AVC will be less than price for all levels of output. The firm will not shut down in the short run.
Topic: Profit Maximization
Status: Old
question
25) The above figure shows the cost curves for a typical firm in a competitive market. Note that if p = 10, then MC = p at both q = 5 and q = 60. Can they both yield maximum profit? Explain.
answer
No, at q = 5, p = MC, but this is not profit maximization; it is profit minimization. Profits expand as output increases since MR > MC for higher levels of output. At q = 60, an increase or decrease in output causes profits to fall, so this is the profit-maximizing q. Thus one way of wording the "second order condition" for profit maximization is that MC must cut the demand curve from below.
Topic: Profit Maximization
Status: Old
question
26) Lelu runs a firm that sells multipasses to intergalactic cruises. Her short-run cost function is given by
C(q) = q2 + 25q + 144
a. If the market price is $75/pass, how many units will Lelu produce?
b. At what price will Lelu earn zero profits?
c. If the price is below the level you found in b., will Lelu shut down? If so, explain. If not, below what price will she shut down?
answer
a. Profit = 75q - C(q) = 75q - q2 - 25q - 144
MAx profit --> dProfit/dq = 0
75 - 2q - 25 = 0
q = 25
b. Profit = 0 when p = AC = MC
2q + 25 = q + 25 + 144/q
Then q = 12. AC(12) = MC(12) = 49. So profit equals zero when p = $49.
c. No, Lelu will shut down when the price is below the minimum of the AVC (where AVC = MC)
AVC = q + 25
Minimum occurs when q = 0 and so the shut down price is p = $25.
Topic: Profit Maximization
Status: Old
question
27) A firm that only employs labor (L) has the following production function:
f(L) = 20L - L2
Let the price of output be normalized to one and the price of labor (relative to output price) is w.
a. Write out the profit function for this firm as a function of labor, L.
b. What is the necessary first-order condition for the firm to maximize profit when L > 0?
c. Compute the profit maximizing amount of labor as a function of the wage. What is the effect of an increase in wage on the firm's optimal employment level? Use calculus to solve this.
answer
a. Profit is
π = pf(L) - wL = 20L - L2 - wL
b. The FOC is
dπ/dL = 20 - 2L - w = 0
c. Solving for L
L*(w) = 10 - w/2
The comparative static is
dL*/dw = -1/2.
An increase in wage will decrease the level of employment by half the rate of change of wage.
Topic: Profit Maximization
Status: Old
8.3 Competition in the Short Run
question
1) 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
D
Topic: Competition in the Short Run
Status: Old
question
2) 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
A
Topic: Competition in the Short Run
Status: Old
question
3) The above figure shows the cost curves for a competitive firm. If the firm is to operate in the short run, price must exceed
A) $0.
B) $5.
C) $10.
D) $11.
answer
B
Topic: Competition in the Short Run
Status: Old
question
4) The above figure shows the cost curves for a competitive firm. If the profit-maximizing level of output is 40 price is equal to
A) $0.
B) $15.
C) $10.
D) $11.
answer
B
Topic: Competition in the Short Run
Status: Old
question
5) 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
C
Topic: Competition in the Short Run
Status: Old
question
6) 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
C
Topic: Competition in the Short Run
Status: Old
question
7) If a firm is a price taker, then its marginal revenue will always equal
A) price.
B) total cost.
C) zero.
D) one.
answer
A
Topic: Competition in the Short Run
Status: Old
question
8) An increase in the cost of an input will result in
A) a leftward shift in the firm's supply curve.
B) an upward shift of the firm's marginal cost curve.
C) a leftward shift of the market supply curve.
D) All of the above.
answer
D
Topic: Competition in the Short Run
Status: Old
question
9) When the production of a good involves several inputs, an increase in the cost of one input will usually cause total costs to
A) rise more than in proportion.
B) rise less than in proportion.
C) remain unchanged.
D) rise by the exact amount of the input price increase.
answer
B
Topic: Competition in the Short Run
Status: Old
question
10) When the production of a good involves several inputs and inputs are used in fixed proportions, an increase in the cost of one input will usually cause total costs to
A) rise more than in proportion.
B) rise less than in proportion.
C) remain unchanged.
D) rise by the exact amount of the input price increase.
answer
D
Topic: Competition in the Short Run
Status: Old
question
11) If a competitive firm is in short-run equilibrium, then
A) profits equal zero.
B) it will not operate at a loss.
C) an increase in its fixed cost will have no effect on profit.
D) an increase in its fixed cost will have no effect on output as long as revenue can cover its variable cost.
answer
D
Topic: Competition in the Short Run
Status: Revised
question
12) If a competitive firm is in short-run equilibrium, then
A) 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
D
Topic: Competition in the Short Run
Status: Old
question
13) 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
A
Topic: Competition in the Short Run
Status: Old
question
14) 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
B
Topic: Competition in the Short Run
Status: Old
question
15) The above figure shows the cost curves for a typical firm in a market and three possible market supply curves. If there are 100 identical firms, the market supply curve is best represented by
A) curve A.
B) curve B.
C) curve C.
D) either curve A or B, but definitely not C.
answer
C
Topic: Competition in the Short Run
Status: Old
question
16) If a firm is currently in short-run equilibrium earning a profit, what impact will a lump-sum tax have on its production decision?
A) The firm will decrease output to earn a higher profit.
B) The firm will increase output but earn a lower profit.
C) The firm will not change output but earn a lower profit.
D) The firm will not change output and earn a higher profit.
answer
C
Topic: Competition in the Short Run
Status: Old
question
17) Suppose that once a well is dug, water flows out of it continuously without any additional effort. Customers collect their water and pay a per gallon fee when they leave the site of the well. In the short run, the competitive firm in this market
A) will not shut down because variable costs are zero.
B) has no fixed costs.
C) faces diminishing marginal returns.
D) can act as a price setter.
answer
A
Topic: Competition in the Short Run
Status: Old
question
18) Suppose that once a well is dug, water flows out of it continuously without any additional effort. Customers collect their water and pay a per gallon fee when they leave the site of the well. In the short run, the competitive firm in this market
A) has no variable costs.
B) has no fixed costs.
C) will shut down.
D) can produce water at no cost.
answer
A
Topic: Competition in the Short Run
Status: Old
question
19) If a competitive firm cannot earn profit at any level of output during a given short-run period, then which of the following is LEAST likely to occur?
A) It will shut down in the short run and wait until the price increases sufficiently.
B) It will exit the industry in the long run.
C) It will operate at a loss in the short run.
D) It will minimize its loss by decreasing output so that price exceeds marginal cost.
answer
D
Topic: Competition in the Short Run
Status: Old
question
20) 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
B
Topic: Competition in the Short Run
Status: Old
question
21) There are currently N identical firms in a market. If it is a perfectly competitive market, the short-run market supply curve at any given price is
A) N times the supply of an individual firm.
B) N - 1 times the supply of an individual firm.
C) N plus the supply of an individual firm.
D) It cannot be determined from the information provided.
answer
A
Topic: Competition in the Short Run
Status: Old
question
22) The above figure shows the cost curves for a typical firm in a competitive market. If p = 10, then
A) the firm will maximize its profit by producing 5 units.
B) the firm will maximize its profit by producing 60 units.
C) producing 5 or 60 units will yield equal profits.
D) Not enough information.
answer
B
Topic: Short-Run Competitive Profit Maximization
Status: New
question
23) The above figure shows the cost curves for a typical firm in a competitive market. If price = 8.5, then
A) the firm will produce 10 units.
B) the firm will produce 55 units.
C) the firm will earn positive profits.
D) None of above.
answer
B
Topic: Short-Run Competitive Profit Maximization
Status: New
question
24) The above figure shows the short run cost curves for a typical firm in a competitive market. If price = 8, then the firm
A) is earning positive profits.
B) should produce 50 units.
C) should shut down.
D) None of above.
answer
B
Topic: Short-Run Competitive Profit Maximization
Status: New
question
25) The above figure shows the short run cost curves for a typical firm in a competitive market. If price = 4, then the firm
A) is earning positive profits.
B) should produce 35 units.
C) should shut down.
D) None of above.
answer
C
Topic: Short-Run Competitive Profit Maximization
Status: New
question
For the following, please answer "True" or "False" and explain why.
26) If a firm cannot earn profits in the short run, it will shut down.
answer
False. A firm will operate at a loss if the loss incurred from production is less than the loss incurred from shutting down. Even if the firm shuts down, it still must pay its fixed costs because, in the short-run, going out of business is not an option.
Topic: Competition in the Short Run
Status: Old
question
27) If the market price in a competitive market is below the minimum of average variable cost, the firm will shut-down.
answer
True. At this price, total fixed costs are smaller than the operating loss. It pays for the firm to shut down.
Topic: Competition in the Short Run
Status: Old
question
28) If a competitive firm has to pay a lump sum tax, it will produce less.
answer
False. A lump sum tax is not related to the amount of output produced. It will increase fixed cost and thus lower profit. However, marginal cost will not be affected, and the profit-maximizing quantity will stay the same.
Topic: Competition in the Short Run
Status: Old
question
29) A competitive firm's supply curve is identical to its marginal cost curve.
answer
False. The statement is only partly correct. The supply curve is only that portion that lies above AVC.
Topic: Competition in the Short Run
Status: Old
30) If a firm in a competitive market is currently producing a quantity where price exceeds the marginal cost, the firm should lower its price.
Answer: False. A competitive firm does not vary price. Rather, if p>MC, the firm should increase output until p = MC.
Topic: Competition in the Short Run
Status: Old

31) The above figure shows the cost curves for a typical firm in a competitive market. From the graph, estimate the firm's profits when price equals $10 per unit.
Answer: When price = 10, p = MC when q = 60. TR = 600. The AC is just above 8.5, say 8.6. This yields
TC = 516. The firm's profit is estimated to be around $84.
Topic: Competition in the Short Run
Status: Old
question
32) The above figure shows the cost curves for a typical firm in a competitive market. If there are 200 identical firms, estimate the market quantity supplied when p = 4, 8, and 10.
answer
When p = 4, p < AVC so no firms will produce. At p = 8, each firm produces 50 units at a loss. At p = 10, each firm produces 60 units. The market quantity supplied at each price is:
question
Topic: Competition in the Short Run
Status: Old
33) If a firm operates at a loss, the loss is equal to TC - TR. If the firm shuts down instead, its loss is equal to FC. Given this, show that price must exceed AVC for the firm to operate at a loss and not shut down.
answer
The firm operates at a loss if TC - TR < FC. Adding TR - FC to both sides yields VC < TR. Dividing by q yields AVC < p. That is, the firm will operate at a loss as long as AVC < p.
Topic: Competition in the Short Run
Status: Old
question
34) Suppose a firm has the following total cost function TC = 100 + 2 q2. If price equals $20, what is the firm's output decision? What are its short-run profits?
answer
MC = 4q. To maximize profit, set 20 = 4q, or q = 5. Profit = TR - TC = (20 ∗ 5) - (100 + 50) = -50. Since FC = 100, the firm will produce 5 units and operate at a loss of 50 rather than shutting down and incurring a loss of 100.
Topic: Competition in the Short Run
Status: Old
question
35) Draw a graph that shows how the short-run shut-down price changes when an input price increases.
answer
See the above figure.
Topic: Competition in the Short Run
Status: Old
question
36) Suppose there are 1000 identical wheat farmers. For each, TC = 10 + q2. Derive the market supply curve.
answer
For each MC = 2q and AVC = q. Thus MC > AVC for all levels of output. The firm sets p = 2q or q = 0.5p. Since there are 1000 firms each producing q, market supply equals Q = 500p.
Topic: Competition in the Short Run
Status: Old
question
37) Suppose there are 1000 identical wheat farmers. For each, TC = 10 + q2. Market demand is Q = 600,000 - 100p. Derive the short-run equilibrium Q, q, and p. Does the typical firm earn a short-run profit?
answer
The firm's supply is q = 0.5p; market supply is Q = 500p. Market equilibrium can be found as 500p = 600,000 - 100p, or 600p = 600,000, so p = 1,000 and Q = 500,000. q = 0.5p = 500. Profit = (500 ∗ 1,000) - (10 + 250,000) = 249,990. Each firm earns a profit.
Topic: Competition in the Short Run
Status: Old
question
38) Consider a competitive firm with the short-run cost function
C(q) = 20 + 6q + 5q2
The firm faces a market price of p for its output.
a. Derive the firm's profit maximizing condition. Is the sufficient second order condition satisfied?
b. Suppose a specific tax of t (t < p) is levied on only this firm in the industry. What is the profit maximizing level of output as a function of p and t? (Assume the price is high enough that the firm does not shut down)
c. How does the output change as the tax increases? Use calculus to determine the relevant comparative static.
d. How does the firm's profit chance as the tax increases? Again, use calculus to determine the relevant comparative static. Show that profit decreases as t increases.
answer
a. Profit maximization occurs where p = MC:
p = 6 + 10q
dMC/dq = 10 > 0, so the sufficient second order condition is satisfied.
b. A tax will lower the price to p-t, so
p - t = 6 + 10q
Solve for q* = (p - t - 6)/10
Note that we are assuming p - t > 6 (or the firm will shut down).
c. dq*/dt = -1/10.
d. First compute the profit function
π = (p - t)q - C(q) = (p - t)(p - t - 6)/10 - 20 - 3(p - t - 6)/5 - (p - t - 6)2/20
Then compute dπ/dt = -(p - t - 6)/10 - (p - t)/10 + 3/5 + (p - t - 6)/10
This simplifies to
dπ/dt = -(p - t - 6)/10 < 0
Topic: Competition in the Short Run
Status: Old
39) Suppose that there are 80 firms in a market, each with the following cost function:
C(q) = 100 + 4q2
a. Derive the short-run market supply curve.
b. Suppose the market demand is
QD = 1280 - 30p
Find the equilibrium market quantity and price.
c. How much output will each firm produce? How much profit is each firm making?
Answer:
a. Each firm sets p = MC to determine their output:
p = 8q
So each firm's supply function is:
qi = p/8
There are 80 firms and QS = Nqi so the market supply is
QS = 10p
b. Equilibrium price occurs where QS = QD, so
1280 - 30p = 10p
p = 32, Q = 320
c. At p=32, the output of a firm is determined by p = MC, so
32 = 8q q = 4
(Or find by taking Q*/N = 320/80 = 4)
Profit (per firm) is:
= 32(4) - 100 - 4(4)2 = -36
Firms are making losses of $32 each.
Topic: Competition in the Short Run
Status: Old
question
8.4 Competition in the Long Run
answer
...
question
1) Markets with hit-and-run entry and exit experience
A) barriers to entry.
B) firms entering whenever they can make a profit and exiting when they cannot make a profit.
C) steady long-run economic profit.
D) a very steady number of firms.
answer
B
Topic: Competition in the Long Run
Status: Old
question
2) 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
D
Topic: Competition in the Long Run
Status: Old
question
3) 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
D
Topic: Competition in the Long Run
Status: Old
question
4) Long-run market supply curves are upward sloping if
A) firms are identical.
B) the number of firms is restricted in the long run.
C) input prices fall as the industry expands.
D) All of the above.
answer
B
Topic: Competition in the Long Run
Status: Old
question
5) Long-run market supply curves are downward sloping if
A) firms are identical.
B) the number of firms is restricted in the long run.
C) input prices fall as the industry expands.
D) All of the above.
answer
C
Topic: Competition in the Long Run
Status: Old
question
6) If firms in a competitive market are not identical, then the long-run market supply curve will be
A) horizontal.
B) upward sloping.
C) downward sloping.
D) undetermined.
answer
B
Topic: Competition in the Long Run
Status: Old
question
7) If firms in a competitive market are not identical, then an increase in cost will
A) shift marginal cost to the right.
B) push the most inefficient firms out of the market.
C) push the most efficient firms out of the market.
D) Need more information.
answer
B
Topic: Competition in the Long Run
Status: Old
question
8) Suppose that for each firm in the competitive market for potatoes, long-run average cost is minimized at 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 20¢ per pound.
C) each consumer will purchase $100 worth of potatoes.
D) the long-run price will be set just above 20¢ per pound.
answer
B
Topic: Competition in the Long Run
Status: Old
question
9) Suppose that for each firm in the competitive market for potatoes, long-run average cost is minimized at 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 many firms will this industry sustain in the long run?
A) 0
B) 100
C) 50,000
D) There is not enough information to answer.
answer
B
Topic: Competition in the Long Run
Status: Old
question
10) Suppose that for each firm in the competitive market for potatoes, long-run average cost is minimized at 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
C
Topic: Competition in the Long Run
Status: Old
question
11) Suppose that for each firm in the competitive market for potatoes, long-run average cost is minimized at 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 many pounds of potatoes will be consumed in total?
A) 0
B) 500
C) 10,000
D) 50,000
answer
D
Topic: Competition in the Long Run
Status: Old
For the following, please answer "True" or "False" and explain why.
question
12) If firms in a competitive market are identical, the long-run market supply curve is horizontal.
answer
False. The horizontal long-run supply curve also requires that factor prices do not increase with industry expansion and that the number of firms is not restricted.
Topic: Competition in the Long Run
Status: Old
question
13) The long-run supply curve in a competitive market is upward sloping.
answer
False. The shape of the long-run supply curve will depend on how similar the firms are and on the relationship between factor prices and total industry output.
Topic: Competition in the Long Run
Status: Old
question
14) If the shut down rule, p < AVC, is the same in the short run and the long run, explain why the shut down prices may be different.
answer
In the long run all costs are variable. In the long run the average variable cost is usually higher than in the short run.
Topic: Competition in the Long Run
Status: Old
question
15) The above figure shows the long-run cost curves for a typical firm in a competitive market. If the number of firms is unrestricted and input costs are constant, derive the long-run market supply curve.
answer
The long-run market supply curve is horizontal at a price of $10 per unit.
Topic: Competition in the Long Run
Status: Old
question
16) All the supply of peppermint oil is produced from mint plants grown in one county by several competitive growers (the number of growers is not limited). The quality of land in the county varies greatly. Would you expect the long-run market supply curve to slope upward, downward, or remain constant? Why?
answer
The long-run market supply curve will slope up because the growers have different costs. Those growers with poor-quality land have a higher average cost of production. The horizontal sum of the individual supply curves will slope up.
Topic: Competition in the Long Run
Status: Old
question
17) Suppose an industry has no fixed costs. Draw two graphs side by side for the industry. In the left graph draw a U-shaped average cost curve and the corresponding marginal cost curve. In the right graph, draw a downward-sloping market demand curve. Also in the right graph, draw a short-run supply curve that would generate positive profit, and the long-run supply curve that would result.
answer
See the above figure.
Topic: Competition in the Long Run
Status: Old
question
18) Suppose all firms in a competitive market are currently in both short-run and long-run equilibrium. What impact will a lump sum tax have on each firm in the short run? in the long run?
answer
In the short run, the lump sum tax represents a fixed cost. The firm's output decision is unchanged, but its profits decrease. In the long run, the tax raises the LRAC of each firm, but not MC. Minimum AC is higher, so price is higher. With a higher price, each firm produces a greater quantity, but the higher price means less quantity is demanded in total. Thus the number of firms will decrease.
Topic: Competition in the Long Run
Status: Old
question
19) Suppose market demand is Q = 1000 - 4p. If all firms have LRAC = 50 - 5q + q2, how many identical firms will there be when this industry is in long-run equilibrium?
answer
The long-run market supply curve is horizontal at the minimum LRAC. LRAC is minimized when -5 + 2q = 0 or q = 2.5. At this level of output, LRMC = LRAC = 43.75. At this price, 825 units are demanded. If each firm produces 2.5 units in the long run, then 330 firms will be in this market.
Topic: Competition in the Long Run
Status: Old
question
20) All firms in a competitive industry have the following long-run total cost curve:
C(q) = q3 - 10q2 + 36q
where q is the output of the firm.
a. Compute the long run equilibrium price. What does the long-run supply curve look like if this is a constant cost industry? Explain.
b. Suppose the market demand is given by Q = 111 - p. Determine the long-run equilibrium number of firms in the industry.
answer
a. Long run equilibrium is determined by (1) the minimum of the AC curves, and (2) the demand equation.
The AC is at a minimum where AC = MC:
Q = 5, AC = MC = 11
Therefore, the long run price will be $11 and each firm will produce 5 units.
question
b. The market quantity (from demand) is 100 and so 20 firms will exist in this market. The long run supply curve is flat at $11 because the price will always equal this due to free entry and exit of firms.
Topic: Competition in the Long Run
Status: Old
answer
...
question
21) Firms in the sandbox industry have the long-run cost curve
C(q) = F + 6q + 5q2
Where F is a positive constant. The sandbox industry has a market demand of p = 90 - 2q
a. Suppose F = 20. What is the competitive equilibrium price, quantity and number of firms?
b. Suppose F is actually an accreditation fee established by the sandbox sellers association. A firm that avoids this fee will not be able to operate in the industry, and is therefore mandatory. How does the equilibrium price and number of firms vary with F? You do not have to use calculus, but explain whether each increases or decreases with F. How does the profit of each firm vary with F?
answer
a. Find the minimum AC point:
AC = 20/q + 6 + 5q
MC = 6 + 10q
AC = MC q = 2, AC(2) = $26
So the long run price will be $26, and each firm will produce two units of output. The market quantity will be 26 = 90 - 2Q Q = 32. That means there are 32/2 = 16 firms.
b. Repeat above using F in place of 20:
q = (F/5)1/2
p = 6 + 10(F/5)1/2
The market quantity is
Q = 42 - 5 (F/5)1/2
The number of firms:
N = Q/q = 42(F/5)-1/2 - 5
dp/dF = .5(F/5)-1/2(1/5) = 0.1(F/5)-1/2 > 0
dN/dF = -(21/5)(F/5)-3/2 < 0
As F increases, the AC increases, raising the break-even price. The market quantity will decrease. The MC is unchanged, so each firm produces more output. The number of firms must decrease as Q has decreased and q has increased. Profit is zero in the long run, independent of F.
Topic: Competition in the Long Run
Status: Old
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
C
Topic: Perfect Competition
Status: Old
question
2) The residual demand curve is
A) the market demand minus the supply of other firms.
B) the remaining demand after the market clears.
C) the market demand minus the supply of one firm.
D) the long-run demand for a market.
answer
A
Topic: Perfect Competition
Status: Old
question
3) As the number of firms in an industry increases, the residual demand curve becomes
A) more elastic.
B) less elastic.
C) larger.
D) vertical.
answer
A
Topic: Perfect Competition
Status: Old
question
4) There are 10 identical internet service providers (ISPs) in a city serving a market demand with an elasticity of -1.5. The elasticity of supply for each firm is 3.0. The elasticity of demand faced by an individual ISP provider is
A) -42.
B) -15.
C) -1.5.
D) -27.
answer
A
Topic: Perfect Competition
Status: Old
question
5) 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
D
Topic: Perfect Competition
Status: Old
question
6) 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
B
Topic: Perfect Competition
Status: Old
question
7) If consumers view the output of any firm in a market to be identical to the output of any other firm in the market, the demand curve for the output of any given firm
A) will be identical to the market demand curve.
B) will be horizontal.
C) will be vertical.
D) cannot be determined from the information given.
answer
B
Topic: Perfect Competition
Status: Old
question
8) A horizontal demand curve for a firm implies that
A) the firm is a monopoly.
B) the market the firm is operating in is not competitive.
C) the firm is selling in a competitive market.
D) the products of that firm are very different from other firms' products.
answer
C
Topic: Perfect Competition
Status: Old
question
9) In the absence of any government regulation on price, if a firm has no power to set price on its own, one can safely conclude
A) the demand curve for the firm's product is horizontal.
B) there aren't many firms in the industry.
C) the market is in long-run equilibrium.
D) the firms in this industry are not profitable.
answer
A
Topic: Perfect Competition
Status: Old
question
10) In a perfectly competitive market,
A) firms can freely enter and exit.
B) firms sell a differentiated product.
C) transaction costs are high.
D) All of the above.
answer
A
Topic: Perfect Competition
Status: Old
question
11) If all conditions for a perfectly competitive market are met,
A) firms face sunk cost when entering the market.
B) firms demand curves are horizontal.
C) the market demand curve is horizontal.
D) the firms' demand curves are downward-sloping.
answer
B
Topic: Perfect Competition
Status: Old
question
12) In a competitive market, if buyers did not know all the prices charged by the many firms,
A) all firms still face horizontal demand curves.
B) firms sell a differentiated product.
C) demand curves can be downward sloping for some or all firms.
D) the number of firms will most likely decrease.
answer
C
Topic: Perfect Competition
Status: Old
question
13) Many car owners and car dealers describe their different cars for sale in the local newspapers and list their asking price. Many people shopping for a used car consider the different choices listed in the paper. The market for used cars could be described as
A) relatively competitive.
B) perfectly competitive.
C) non-competitive.
D) having high transaction costs.
answer
A
Topic: Perfect Competition
Status: Old
question
14) Many car owners and car dealers describe their different cars for sale in the local newspapers and list their asking price. Many people shopping for a used car consider the different choices listed in the paper. The absence of which condition prohibits this market from being described as perfectly competitive?
A) Buyers and sellers know the prices.
B) Firms freely enter and exit.
C) Transaction costs are low.
D) Consumers believe all firms sell identical products.
answer
D
Topic: Perfect Competition
Status: Old
question
15) 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
B
Topic: Perfect Competition
Status: Old
question
16) If a firm operates in a perfectly competitive market, then it will most likely
A) advertise its product on television.
B) settle for whatever price is offered.
C) have a difficult time obtaining information about the market price.
D) have an easy time keeping other firms out of the market.
answer
B
Topic: Perfect Competition
Status: Old
question
17) If a firm operates in a perfectly competitive market, then
A) all firms will advertise.
B) no firms will advertise.
C) the market leader will advertise.
D) new firms will advertise.
answer
B
Topic: Perfect Competition
Status: Old
question
18) The "Got Milk?" advertising campaign is a good example of
A) advertising in a competitive market.
B) how advertising in a competitive market does not pay off for a single firm.
C) interest groups financed by the industry advertise for the whole industry.
D) All of the above.
answer
D
Topic: Perfect Competition
Status: Old
question
19) The perfectly competitive model makes a lot of fairly unrealistic assumptions. Why do economics text books still talk a lot about this model?
A) Many markets are close to being perfectly competitive.
B) It is an important model to use as a benchmark to compare other markets structures to.
C) Perfectly competitive markets maximize societal welfare.
D) All of the above.
answer
D
Topic: Perfect Competition
Status: Old
question
20) If a firm happened to be the only seller of a particular product, it might behave as a price taker as long as
A) buyers have full information about the firm's price.
B) the transaction costs of doing business with this firm are low.
C) there are many buyers.
D) there is free entry and exit.
answer
D
Topic: Perfect Competition
Status: Old
question
21) The demand curve 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
C
Topic: Perfect Competition
Status: Old
question
22) Gift shops in a small town sell identical mugs to tourists. However, tourists don't have enough time to check out the prices one by one and don't have brochures listing prices of mugs. We can conclude
A) the market for mugs is perfectly competitive.
B) buyers have full information.
C) sellers are price takers.
D) the market is not perfectly competitive.
answer
D
Topic: Perfect Competition
Status: New
question
For the following, please answer "True" or "False" and explain why.
23) A market is perfectly competitive even if firms have the ability to set their own price as long as the price difference reflects differences in the product.
answer
False. If the market is perfectly competitive, there are no differences in the product.
Topic: Perfect Competition
Status: Old
question
24) If transaction costs are high, then it is more likely a firm's demand curve is downward sloping.
answer
True. Transaction costs increase the costs for consumers to find a new firm. Thus high transaction costs allow a firm to charge more than others.
Topic: Perfect Competition
Status: Old
question
25) Explain why individual firms in competitive markets face more elastic demand curves than the market as a whole.
answer
In a competitive market, if an individual firm increases its price it will lose all of its customers, as consumers simply buy from another firm. However, if the price of the good increases for all firms some consumers will not continue to buy the good, but for many prices some consumers will continue to purchase the good.
Topic: Perfect Competition
Status: Old
question
1) If a firm makes zero economic profit, then the firm
A) has no incentive to stay in the industry.
B) is better of exiting the industry.
C) is indifferent between staying and exiting the industry.
D) will shut down.
answer
C
Topic: Profit Maximization
Status: Revised
question
2) 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
C
Topic: Profit Maximization
Status: Old
question
3) A small business owner earns $50,000 in revenue annually. The explicit annual costs equal $30,000. The owner could work for someone else and earn $25,000 annually. The owner's business profit is ________ and the economic profit is ________.
A) $20,000, $5,000
B) $20,000, -$5,000
C) $25,000, -$5,000
D) $45,000, -$5,000
answer
B
Topic: Profit Maximization
Status: Old
question
4) A small business owner earns $60,000 in revenue annually. The explicit annual costs equal $40,000. The owner could work for someone else and earn $25,000 annually. The owner's business profit is ________ and the economic profit is ________.
A) $20,000, $5,000
B) $20,000, -$5,000
C) $25,000, -$5,000
D) $45,000, -$5,000
answer
B
Topic: Profit Maximization
Status: Old
question
5) A lawyer running his own business earns $18,000 in revenue monthly. He pays $8,000 as explicit costs including staff salary and utilities. He owns the office space so no rent is paid.. The lawyer could work for other legal firms and earn $10,000 per month. His business profit is ________ and his economic profit is ________.
A) $10,000, $10,000
B) $28,000, $10,000
C) $10,000, $0
D) $8,000, $0
answer
C
Topic: Profit Maximization
Status: New
question
6) 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
B
Topic: Profit Maximization
Status: Old
question
7) If a firm is operating at an output level where losses are minimized, the firm
A) has no incentive to stay in the industry.
B) is better of exiting the industry.
C) is maximizing profits.
D) will shut down.
answer
C
Topic: Profit Maximization
Status: Old

8) The above figure shows the cost curves for a competitive firm. If the firm is to earn economic profit, price must exceed
A) $0.
B) $5.
C) $10.
D) $11.
Answer: C
Topic: Profit Maximization
Status: Old
question
9) The above figure shows the cost curves for a competitive firm. The firm will incur economic losses if the price is less than
A) $0.
B) $5.
C) $10.
D) $11.
answer
C
Topic: Profit Maximization
Status: Old
question
10) The above figure shows the cost curves for a competitive firm. If the market price is $15 per unit, the firm will earn profits of
A) $0.
B) $4.
C) $40.
D) $160.
answer
D
Topic: Profit Maximization
Status: Old
question
11) 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
D
Topic: Profit Maximization
Status: Old
question
12) 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
C
Topic: Profit Maximization
Status: Old
question
13) 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
B
Topic: Profit Maximization
Status: Old
question
14) 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
A
Topic: Profit Maximization
Status: Old
question
15) Suppose the fixed cost of Christmas trees business is $7,000 and sunk. The variable cost for each tree is $20. According to the forecast, the market price for Christmas trees is $25 each and the owner could sell 1000 trees at most each year. The owner
A) should shut down the business.
B) should keep operating.
C) should sell less.
D) None of the above.
answer
B
Topic: Profit Maximization
Status: New
question
16) Suppose the estimated fixed cost of Christmas trees business is $7,000 and not sunk. The estimated variable cost for each tree is $20. According to the forecast, the market price for Christmas trees is $25 each and the owner could sell 1000 trees at most each year. In the long run, the owner
A) should shut down.
B) should keep operating.
C) should sell less.
D) None of the above.
answer
A
Topic: Profit Maximization
Status: New
question
17) Suppose the Christmas trees market is perfectly competitive. A business owner is currently suffering from a loss of $1,000, the cost of producing and selling an additional Christmas tree is $20, and the current market price is $25. The owner
A) should sell more trees.
B) should shut down his business now.
C) should advertise in the market.
D) is already minimizing his loss.
answer
A
Topic: Profit Maximization
Status: New
question
18) Suppose the Christmas trees market is perfectly competitive. An owner is currently earning a profit of $1,000, the cost of producing and selling an additional Christmas tree is $25, the current market price is $20. The owner
A) should sell more trees.
B) should not sell more trees.
C) should advertise in the market to promote his sales.
D) is not maximizing his profits.
answer
B
Topic: Profit Maximization
Status: New
question
For the following, please answer "True" or "False" and explain why.
19) Even though fixed costs do not affect the output decision, an increase in fixed costs results in a wider range of prices for which the firm operates at a loss.
answer
True. An increase in fixed costs will shift AC upward but leave AVC unchanged. The gap between AVC and AC represents prices at which the firm will operate at a loss.
Topic: Profit Maximization
Status: Old
question
20) If a firm sets marginal revenue equal to marginal cost, it will make an economic profit.
answer
False. When a firm sets MR=MC it maximizes profits but the profit-maximizing level of output might still be negative (the smallest loss possible).
Topic: Profit Maximization
Status: Old
question
21) If a firm doesn't make an economic profit, it will shut down.
answer
False. The firm compares its losses from operating with its losses when shutting down and will shut down if the latter loss is less.
Topic: Profit Maximization
Status: Old
question
22) Suppose there are 20 competitive firms in a market. The supply curve of each firm is q = 2p. The market demand is Q = 200 - 2p. What is the residual demand curve facing a typical firm?
answer
The residual demand curve is equal to the market demand curve minus the supply of all the other firms. The supply of the other 19 firms is 38p. The residual demand is 200 - 40p.
Topic: Profit Maximization
Status: Old
question
23) Explain why shutting down and going out-of-business are different concepts.
answer
Shutting down means that the firm seizes production with the option of starting up production any time in the future. Going out-of-business is equal to exiting the industry. This involves reducing the amount of (the fixed input) capital to zero, which is not possible in the short run.
Topic: Profit Maximization
Status: Old
question
24) Suppose a firm has the following total cost function: TC = 100 + 4q2. What is the minimum price necessary for the firm to earn profit? Below what price will the firm shut down in the short run?
answer
AC = 100/q + 4q. This is minimized when dAC/dq = 0, or -100/q2 + 4 = 0. Solving yields q = 5 and AC = 40. Thus a price greater than $40 is required for the firm to earn profit. AVC = 4q and MC = 8q. Since AVC is below MC for all levels of output, AVC will be less than price for all levels of output. The firm will not shut down in the short run.
Topic: Profit Maximization
Status: Old
question
25) The above figure shows the cost curves for a typical firm in a competitive market. Note that if p = 10, then MC = p at both q = 5 and q = 60. Can they both yield maximum profit? Explain.
answer
No, at q = 5, p = MC, but this is not profit maximization; it is profit minimization. Profits expand as output increases since MR > MC for higher levels of output. At q = 60, an increase or decrease in output causes profits to fall, so this is the profit-maximizing q. Thus one way of wording the "second order condition" for profit maximization is that MC must cut the demand curve from below.
Topic: Profit Maximization
Status: Old
question
26) Lelu runs a firm that sells multipasses to intergalactic cruises. Her short-run cost function is given by
C(q) = q2 + 25q + 144
a. If the market price is $75/pass, how many units will Lelu produce?
b. At what price will Lelu earn zero profits?
c. If the price is below the level you found in b., will Lelu shut down? If so, explain. If not, below what price will she shut down?
answer
a. Profit = 75q - C(q) = 75q - q2 - 25q - 144
MAx profit --> dProfit/dq = 0
75 - 2q - 25 = 0
q = 25
b. Profit = 0 when p = AC = MC
2q + 25 = q + 25 + 144/q
Then q = 12. AC(12) = MC(12) = 49. So profit equals zero when p = $49.
c. No, Lelu will shut down when the price is below the minimum of the AVC (where AVC = MC)
AVC = q + 25
Minimum occurs when q = 0 and so the shut down price is p = $25.
Topic: Profit Maximization
Status: Old
question
27) A firm that only employs labor (L) has the following production function:
f(L) = 20L - L2
Let the price of output be normalized to one and the price of labor (relative to output price) is w.
a. Write out the profit function for this firm as a function of labor, L.
b. What is the necessary first-order condition for the firm to maximize profit when L > 0?
c. Compute the profit maximizing amount of labor as a function of the wage. What is the effect of an increase in wage on the firm's optimal employment level? Use calculus to solve this.
answer
a. Profit is
π = pf(L) - wL = 20L - L2 - wL
b. The FOC is
dπ/dL = 20 - 2L - w = 0
c. Solving for L
L*(w) = 10 - w/2
The comparative static is
dL*/dw = -1/2.
An increase in wage will decrease the level of employment by half the rate of change of wage.
Topic: Profit Maximization
Status: Old
8.3 Competition in the Short Run
question
1) 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
D
Topic: Competition in the Short Run
Status: Old
question
2) 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
A
Topic: Competition in the Short Run
Status: Old
question
3) The above figure shows the cost curves for a competitive firm. If the firm is to operate in the short run, price must exceed
A) $0.
B) $5.
C) $10.
D) $11.
answer
B
Topic: Competition in the Short Run
Status: Old
question
4) The above figure shows the cost curves for a competitive firm. If the profit-maximizing level of output is 40 price is equal to
A) $0.
B) $15.
C) $10.
D) $11.
answer
B
Topic: Competition in the Short Run
Status: Old
question
5) 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
C
Topic: Competition in the Short Run
Status: Old
question
6) 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
C
Topic: Competition in the Short Run
Status: Old
question
7) If a firm is a price taker, then its marginal revenue will always equal
A) price.
B) total cost.
C) zero.
D) one.
answer
A
Topic: Competition in the Short Run
Status: Old
question
8) An increase in the cost of an input will result in
A) a leftward shift in the firm's supply curve.
B) an upward shift of the firm's marginal cost curve.
C) a leftward shift of the market supply curve.
D) All of the above.
answer
D
Topic: Competition in the Short Run
Status: Old
question
9) When the production of a good involves several inputs, an increase in the cost of one input will usually cause total costs to
A) rise more than in proportion.
B) rise less than in proportion.
C) remain unchanged.
D) rise by the exact amount of the input price increase.
answer
B
Topic: Competition in the Short Run
Status: Old
question
10) When the production of a good involves several inputs and inputs are used in fixed proportions, an increase in the cost of one input will usually cause total costs to
A) rise more than in proportion.
B) rise less than in proportion.
C) remain unchanged.
D) rise by the exact amount of the input price increase.
answer
D
Topic: Competition in the Short Run
Status: Old
question
11) If a competitive firm is in short-run equilibrium, then
A) profits equal zero.
B) it will not operate at a loss.
C) an increase in its fixed cost will have no effect on profit.
D) an increase in its fixed cost will have no effect on output as long as revenue can cover its variable cost.
answer
D
Topic: Competition in the Short Run
Status: Revised
question
12) If a competitive firm is in short-run equilibrium, then
A) 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
D
Topic: Competition in the Short Run
Status: Old
question
13) 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
A
Topic: Competition in the Short Run
Status: Old
question
14) 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
B
Topic: Competition in the Short Run
Status: Old
question
15) The above figure shows the cost curves for a typical firm in a market and three possible market supply curves. If there are 100 identical firms, the market supply curve is best represented by
A) curve A.
B) curve B.
C) curve C.
D) either curve A or B, but definitely not C.
answer
C
Topic: Competition in the Short Run
Status: Old
question
16) If a firm is currently in short-run equilibrium earning a profit, what impact will a lump-sum tax have on its production decision?
A) The firm will decrease output to earn a higher profit.
B) The firm will increase output but earn a lower profit.
C) The firm will not change output but earn a lower profit.
D) The firm will not change output and earn a higher profit.
answer
C
Topic: Competition in the Short Run
Status: Old
question
17) Suppose that once a well is dug, water flows out of it continuously without any additional effort. Customers collect their water and pay a per gallon fee when they leave the site of the well. In the short run, the competitive firm in this market
A) will not shut down because variable costs are zero.
B) has no fixed costs.
C) faces diminishing marginal returns.
D) can act as a price setter.
answer
A
Topic: Competition in the Short Run
Status: Old
question
18) Suppose that once a well is dug, water flows out of it continuously without any additional effort. Customers collect their water and pay a per gallon fee when they leave the site of the well. In the short run, the competitive firm in this market
A) has no variable costs.
B) has no fixed costs.
C) will shut down.
D) can produce water at no cost.
answer
A
Topic: Competition in the Short Run
Status: Old
question
19) If a competitive firm cannot earn profit at any level of output during a given short-run period, then which of the following is LEAST likely to occur?
A) It will shut down in the short run and wait until the price increases sufficiently.
B) It will exit the industry in the long run.
C) It will operate at a loss in the short run.
D) It will minimize its loss by decreasing output so that price exceeds marginal cost.
answer
D
Topic: Competition in the Short Run
Status: Old
question
20) 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
B
Topic: Competition in the Short Run
Status: Old
question
21) There are currently N identical firms in a market. If it is a perfectly competitive market, the short-run market supply curve at any given price is
A) N times the supply of an individual firm.
B) N - 1 times the supply of an individual firm.
C) N plus the supply of an individual firm.
D) It cannot be determined from the information provided.
answer
A
Topic: Competition in the Short Run
Status: Old
question
22) The above figure shows the cost curves for a typical firm in a competitive market. If p = 10, then
A) the firm will maximize its profit by producing 5 units.
B) the firm will maximize its profit by producing 60 units.
C) producing 5 or 60 units will yield equal profits.
D) Not enough information.
answer
B
Topic: Short-Run Competitive Profit Maximization
Status: New
question
23) The above figure shows the cost curves for a typical firm in a competitive market. If price = 8.5, then
A) the firm will produce 10 units.
B) the firm will produce 55 units.
C) the firm will earn positive profits.
D) None of above.
answer
B
Topic: Short-Run Competitive Profit Maximization
Status: New
question
24) The above figure shows the short run cost curves for a typical firm in a competitive market. If price = 8, then the firm
A) is earning positive profits.
B) should produce 50 units.
C) should shut down.
D) None of above.
answer
B
Topic: Short-Run Competitive Profit Maximization
Status: New
question
25) The above figure shows the short run cost curves for a typical firm in a competitive market. If price = 4, then the firm
A) is earning positive profits.
B) should produce 35 units.
C) should shut down.
D) None of above.
answer
C
Topic: Short-Run Competitive Profit Maximization
Status: New
question
For the following, please answer "True" or "False" and explain why.
26) If a firm cannot earn profits in the short run, it will shut down.
answer
False. A firm will operate at a loss if the loss incurred from production is less than the loss incurred from shutting down. Even if the firm shuts down, it still must pay its fixed costs because, in the short-run, going out of business is not an option.
Topic: Competition in the Short Run
Status: Old
question
27) If the market price in a competitive market is below the minimum of average variable cost, the firm will shut-down.
answer
True. At this price, total fixed costs are smaller than the operating loss. It pays for the firm to shut down.
Topic: Competition in the Short Run
Status: Old
question
28) If a competitive firm has to pay a lump sum tax, it will produce less.
answer
False. A lump sum tax is not related to the amount of output produced. It will increase fixed cost and thus lower profit. However, marginal cost will not be affected, and the profit-maximizing quantity will stay the same.
Topic: Competition in the Short Run
Status: Old
question
29) A competitive firm's supply curve is identical to its marginal cost curve.
answer
False. The statement is only partly correct. The supply curve is only that portion that lies above AVC.
Topic: Competition in the Short Run
Status: Old
30) If a firm in a competitive market is currently producing a quantity where price exceeds the marginal cost, the firm should lower its price.
Answer: False. A competitive firm does not vary price. Rather, if p>MC, the firm should increase output until p = MC.
Topic: Competition in the Short Run
Status: Old

31) The above figure shows the cost curves for a typical firm in a competitive market. From the graph, estimate the firm's profits when price equals $10 per unit.
Answer: When price = 10, p = MC when q = 60. TR = 600. The AC is just above 8.5, say 8.6. This yields
TC = 516. The firm's profit is estimated to be around $84.
Topic: Competition in the Short Run
Status: Old
question
32) The above figure shows the cost curves for a typical firm in a competitive market. If there are 200 identical firms, estimate the market quantity supplied when p = 4, 8, and 10.
answer
When p = 4, p < AVC so no firms will produce. At p = 8, each firm produces 50 units at a loss. At p = 10, each firm produces 60 units. The market quantity supplied at each price is:
question
Topic: Competition in the Short Run
Status: Old
33) If a firm operates at a loss, the loss is equal to TC - TR. If the firm shuts down instead, its loss is equal to FC. Given this, show that price must exceed AVC for the firm to operate at a loss and not shut down.
answer
The firm operates at a loss if TC - TR < FC. Adding TR - FC to both sides yields VC < TR. Dividing by q yields AVC < p. That is, the firm will operate at a loss as long as AVC < p.
Topic: Competition in the Short Run
Status: Old
question
34) Suppose a firm has the following total cost function TC = 100 + 2 q2. If price equals $20, what is the firm's output decision? What are its short-run profits?
answer
MC = 4q. To maximize profit, set 20 = 4q, or q = 5. Profit = TR - TC = (20 ∗ 5) - (100 + 50) = -50. Since FC = 100, the firm will produce 5 units and operate at a loss of 50 rather than shutting down and incurring a loss of 100.
Topic: Competition in the Short Run
Status: Old
question
35) Draw a graph that shows how the short-run shut-down price changes when an input price increases.
answer
See the above figure.
Topic: Competition in the Short Run
Status: Old
question
36) Suppose there are 1000 identical wheat farmers. For each, TC = 10 + q2. Derive the market supply curve.
answer
For each MC = 2q and AVC = q. Thus MC > AVC for all levels of output. The firm sets p = 2q or q = 0.5p. Since there are 1000 firms each producing q, market supply equals Q = 500p.
Topic: Competition in the Short Run
Status: Old
question
37) Suppose there are 1000 identical wheat farmers. For each, TC = 10 + q2. Market demand is Q = 600,000 - 100p. Derive the short-run equilibrium Q, q, and p. Does the typical firm earn a short-run profit?
answer
The firm's supply is q = 0.5p; market supply is Q = 500p. Market equilibrium can be found as 500p = 600,000 - 100p, or 600p = 600,000, so p = 1,000 and Q = 500,000. q = 0.5p = 500. Profit = (500 ∗ 1,000) - (10 + 250,000) = 249,990. Each firm earns a profit.
Topic: Competition in the Short Run
Status: Old
question
38) Consider a competitive firm with the short-run cost function
C(q) = 20 + 6q + 5q2
The firm faces a market price of p for its output.
a. Derive the firm's profit maximizing condition. Is the sufficient second order condition satisfied?
b. Suppose a specific tax of t (t < p) is levied on only this firm in the industry. What is the profit maximizing level of output as a function of p and t? (Assume the price is high enough that the firm does not shut down)
c. How does the output change as the tax increases? Use calculus to determine the relevant comparative static.
d. How does the firm's profit chance as the tax increases? Again, use calculus to determine the relevant comparative static. Show that profit decreases as t increases.
answer
a. Profit maximization occurs where p = MC:
p = 6 + 10q
dMC/dq = 10 > 0, so the sufficient second order condition is satisfied.
b. A tax will lower the price to p-t, so
p - t = 6 + 10q
Solve for q* = (p - t - 6)/10
Note that we are assuming p - t > 6 (or the firm will shut down).
c. dq*/dt = -1/10.
d. First compute the profit function
π = (p - t)q - C(q) = (p - t)(p - t - 6)/10 - 20 - 3(p - t - 6)/5 - (p - t - 6)2/20
Then compute dπ/dt = -(p - t - 6)/10 - (p - t)/10 + 3/5 + (p - t - 6)/10
This simplifies to
dπ/dt = -(p - t - 6)/10 < 0
Topic: Competition in the Short Run
Status: Old
39) Suppose that there are 80 firms in a market, each with the following cost function:
C(q) = 100 + 4q2
a. Derive the short-run market supply curve.
b. Suppose the market demand is
QD = 1280 - 30p
Find the equilibrium market quantity and price.
c. How much output will each firm produce? How much profit is each firm making?
Answer:
a. Each firm sets p = MC to determine their output:
p = 8q
So each firm's supply function is:
qi = p/8
There are 80 firms and QS = Nqi so the market supply is
QS = 10p
b. Equilibrium price occurs where QS = QD, so
1280 - 30p = 10p
p = 32, Q = 320
c. At p=32, the output of a firm is determined by p = MC, so
32 = 8q q = 4
(Or find by taking Q*/N = 320/80 = 4)
Profit (per firm) is:
= 32(4) - 100 - 4(4)2 = -36
Firms are making losses of $32 each.
Topic: Competition in the Short Run
Status: Old
question
8.4 Competition in the Long Run
answer
...
question
1) Markets with hit-and-run entry and exit experience
A) barriers to entry.
B) firms entering whenever they can make a profit and exiting when they cannot make a profit.
C) steady long-run economic profit.
D) a very steady number of firms.
answer
B
Topic: Competition in the Long Run
Status: Old
question
2) 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
D
Topic: Competition in the Long Run
Status: Old
question
3) 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
D
Topic: Competition in the Long Run
Status: Old
question
4) Long-run market supply curves are upward sloping if
A) firms are identical.
B) the number of firms is restricted in the long run.
C) input prices fall as the industry expands.
D) All of the above.
answer
B
Topic: Competition in the Long Run
Status: Old
question
5) Long-run market supply curves are downward sloping if
A) firms are identical.
B) the number of firms is restricted in the long run.
C) input prices fall as the industry expands.
D) All of the above.
answer
C
Topic: Competition in the Long Run
Status: Old
question
6) If firms in a competitive market are not identical, then the long-run market supply curve will be
A) horizontal.
B) upward sloping.
C) downward sloping.
D) undetermined.
answer
B
Topic: Competition in the Long Run
Status: Old
question
7) If firms in a competitive market are not identical, then an increase in cost will
A) shift marginal cost to the right.
B) push the most inefficient firms out of the market.
C) push the most efficient firms out of the market.
D) Need more information.
answer
B
Topic: Competition in the Long Run
Status: Old
question
8) Suppose that for each firm in the competitive market for potatoes, long-run average cost is minimized at 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 20¢ per pound.
C) each consumer will purchase $100 worth of potatoes.
D) the long-run price will be set just above 20¢ per pound.
answer
B
Topic: Competition in the Long Run
Status: Old
question
9) Suppose that for each firm in the competitive market for potatoes, long-run average cost is minimized at 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 many firms will this industry sustain in the long run?
A) 0
B) 100
C) 50,000
D) There is not enough information to answer.
answer
B
Topic: Competition in the Long Run
Status: Old
question
10) Suppose that for each firm in the competitive market for potatoes, long-run average cost is minimized at 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
C
Topic: Competition in the Long Run
Status: Old
question
11) Suppose that for each firm in the competitive market for potatoes, long-run average cost is minimized at 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 many pounds of potatoes will be consumed in total?
A) 0
B) 500
C) 10,000
D) 50,000
answer
D
Topic: Competition in the Long Run
Status: Old
For the following, please answer "True" or "False" and explain why.
question
12) If firms in a competitive market are identical, the long-run market supply curve is horizontal.
answer
False. The horizontal long-run supply curve also requires that factor prices do not increase with industry expansion and that the number of firms is not restricted.
Topic: Competition in the Long Run
Status: Old
question
13) The long-run supply curve in a competitive market is upward sloping.
answer
False. The shape of the long-run supply curve will depend on how similar the firms are and on the relationship between factor prices and total industry output.
Topic: Competition in the Long Run
Status: Old
question
14) If the shut down rule, p < AVC, is the same in the short run and the long run, explain why the shut down prices may be different.
answer
In the long run all costs are variable. In the long run the average variable cost is usually higher than in the short run.
Topic: Competition in the Long Run
Status: Old
question
15) The above figure shows the long-run cost curves for a typical firm in a competitive market. If the number of firms is unrestricted and input costs are constant, derive the long-run market supply curve.
answer
The long-run market supply curve is horizontal at a price of $10 per unit.
Topic: Competition in the Long Run
Status: Old
question
16) All the supply of peppermint oil is produced from mint plants grown in one county by several competitive growers (the number of growers is not limited). The quality of land in the county varies greatly. Would you expect the long-run market supply curve to slope upward, downward, or remain constant? Why?
answer
The long-run market supply curve will slope up because the growers have different costs. Those growers with poor-quality land have a higher average cost of production. The horizontal sum of the individual supply curves will slope up.
Topic: Competition in the Long Run
Status: Old
question
17) Suppose an industry has no fixed costs. Draw two graphs side by side for the industry. In the left graph draw a U-shaped average cost curve and the corresponding marginal cost curve. In the right graph, draw a downward-sloping market demand curve. Also in the right graph, draw a short-run supply curve that would generate positive profit, and the long-run supply curve that would result.
answer
See the above figure.
Topic: Competition in the Long Run
Status: Old
question
18) Suppose all firms in a competitive market are currently in both short-run and long-run equilibrium. What impact will a lump sum tax have on each firm in the short run? in the long run?
answer
In the short run, the lump sum tax represents a fixed cost. The firm's output decision is unchanged, but its profits decrease. In the long run, the tax raises the LRAC of each firm, but not MC. Minimum AC is higher, so price is higher. With a higher price, each firm produces a greater quantity, but the higher price means less quantity is demanded in total. Thus the number of firms will decrease.
Topic: Competition in the Long Run
Status: Old
question
19) Suppose market demand is Q = 1000 - 4p. If all firms have LRAC = 50 - 5q + q2, how many identical firms will there be when this industry is in long-run equilibrium?
answer
The long-run market supply curve is horizontal at the minimum LRAC. LRAC is minimized when -5 + 2q = 0 or q = 2.5. At this level of output, LRMC = LRAC = 43.75. At this price, 825 units are demanded. If each firm produces 2.5 units in the long run, then 330 firms will be in this market.
Topic: Competition in the Long Run
Status: Old
question
20) All firms in a competitive industry have the following long-run total cost curve:
C(q) = q3 - 10q2 + 36q
where q is the output of the firm.
a. Compute the long run equilibrium price. What does the long-run supply curve look like if this is a constant cost industry? Explain.
b. Suppose the market demand is given by Q = 111 - p. Determine the long-run equilibrium number of firms in the industry.
answer
a. Long run equilibrium is determined by (1) the minimum of the AC curves, and (2) the demand equation.
The AC is at a minimum where AC = MC:
Q = 5, AC = MC = 11
Therefore, the long run price will be $11 and each firm will produce 5 units.
question
b. The market quantity (from demand) is 100 and so 20 firms will exist in this market. The long run supply curve is flat at $11 because the price will always equal this due to free entry and exit of firms.
Topic: Competition in the Long Run
Status: Old
answer
...
question
21) Firms in the sandbox industry have the long-run cost curve
C(q) = F + 6q + 5q2
Where F is a positive constant. The sandbox industry has a market demand of p = 90 - 2q
a. Suppose F = 20. What is the competitive equilibrium price, quantity and number of firms?
b. Suppose F is actually an accreditation fee established by the sandbox sellers association. A firm that avoids this fee will not be able to operate in the industry, and is therefore mandatory. How does the equilibrium price and number of firms vary with F? You do not have to use calculus, but explain whether each increases or decreases with F. How does the profit of each firm vary with F?
answer
a. Find the minimum AC point:
AC = 20/q + 6 + 5q
MC = 6 + 10q
AC = MC q = 2, AC(2) = $26
So the long run price will be $26, and each firm will produce two units of output. The market quantity will be 26 = 90 - 2Q Q = 32. That means there are 32/2 = 16 firms.
b. Repeat above using F in place of 20:
q = (F/5)1/2
p = 6 + 10(F/5)1/2
The market quantity is
Q = 42 - 5 (F/5)1/2
The number of firms:
N = Q/q = 42(F/5)-1/2 - 5
dp/dF = .5(F/5)-1/2(1/5) = 0.1(F/5)-1/2 > 0
dN/dF = -(21/5)(F/5)-3/2 < 0
As F increases, the AC increases, raising the break-even price. The market quantity will decrease. The MC is unchanged, so each firm produces more output. The number of firms must decrease as Q has decreased and q has increased. Profit is zero in the long run, independent of F.
Topic: Competition in the Long Run
Status: Old
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
C
Topic: Perfect Competition
Status: Old
question
2) The residual demand curve is
A) the market demand minus the supply of other firms.
B) the remaining demand after the market clears.
C) the market demand minus the supply of one firm.
D) the long-run demand for a market.
answer
A
Topic: Perfect Competition
Status: Old
question
3) As the number of firms in an industry increases, the residual demand curve becomes
A) more elastic.
B) less elastic.
C) larger.
D) vertical.
answer
A
Topic: Perfect Competition
Status: Old
question
4) There are 10 identical internet service providers (ISPs) in a city serving a market demand with an elasticity of -1.5. The elasticity of supply for each firm is 3.0. The elasticity of demand faced by an individual ISP provider is
A) -42.
B) -15.
C) -1.5.
D) -27.
answer
A
Topic: Perfect Competition
Status: Old
question
5) 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
D
Topic: Perfect Competition
Status: Old
question
6) 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
B
Topic: Perfect Competition
Status: Old
question
7) If consumers view the output of any firm in a market to be identical to the output of any other firm in the market, the demand curve for the output of any given firm
A) will be identical to the market demand curve.
B) will be horizontal.
C) will be vertical.
D) cannot be determined from the information given.
answer
B
Topic: Perfect Competition
Status: Old
question
8) A horizontal demand curve for a firm implies that
A) the firm is a monopoly.
B) the market the firm is operating in is not competitive.
C) the firm is selling in a competitive market.
D) the products of that firm are very different from other firms' products.
answer
C
Topic: Perfect Competition
Status: Old
question
9) In the absence of any government regulation on price, if a firm has no power to set price on its own, one can safely conclude
A) the demand curve for the firm's product is horizontal.
B) there aren't many firms in the industry.
C) the market is in long-run equilibrium.
D) the firms in this industry are not profitable.
answer
A
Topic: Perfect Competition
Status: Old
question
10) In a perfectly competitive market,
A) firms can freely enter and exit.
B) firms sell a differentiated product.
C) transaction costs are high.
D) All of the above.
answer
A
Topic: Perfect Competition
Status: Old
question
11) If all conditions for a perfectly competitive market are met,
A) firms face sunk cost when entering the market.
B) firms demand curves are horizontal.
C) the market demand curve is horizontal.
D) the firms' demand curves are downward-sloping.
answer
B
Topic: Perfect Competition
Status: Old
question
12) In a competitive market, if buyers did not know all the prices charged by the many firms,
A) all firms still face horizontal demand curves.
B) firms sell a differentiated product.
C) demand curves can be downward sloping for some or all firms.
D) the number of firms will most likely decrease.
answer
C
Topic: Perfect Competition
Status: Old
question
13) Many car owners and car dealers describe their different cars for sale in the local newspapers and list their asking price. Many people shopping for a used car consider the different choices listed in the paper. The market for used cars could be described as
A) relatively competitive.
B) perfectly competitive.
C) non-competitive.
D) having high transaction costs.
answer
A
Topic: Perfect Competition
Status: Old
question
14) Many car owners and car dealers describe their different cars for sale in the local newspapers and list their asking price. Many people shopping for a used car consider the different choices listed in the paper. The absence of which condition prohibits this market from being described as perfectly competitive?
A) Buyers and sellers know the prices.
B) Firms freely enter and exit.
C) Transaction costs are low.
D) Consumers believe all firms sell identical products.
answer
D
Topic: Perfect Competition
Status: Old
question
15) 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
B
Topic: Perfect Competition
Status: Old
question
16) If a firm operates in a perfectly competitive market, then it will most likely
A) advertise its product on television.
B) settle for whatever price is offered.
C) have a difficult time obtaining information about the market price.
D) have an easy time keeping other firms out of the market.
answer
B
Topic: Perfect Competition
Status: Old
question
17) If a firm operates in a perfectly competitive market, then
A) all firms will advertise.
B) no firms will advertise.
C) the market leader will advertise.
D) new firms will advertise.
answer
B
Topic: Perfect Competition
Status: Old
question
18) The "Got Milk?" advertising campaign is a good example of
A) advertising in a competitive market.
B) how advertising in a competitive market does not pay off for a single firm.
C) interest groups financed by the industry advertise for the whole industry.
D) All of the above.
answer
D
Topic: Perfect Competition
Status: Old
question
19) The perfectly competitive model makes a lot of fairly unrealistic assumptions. Why do economics text books still talk a lot about this model?
A) Many markets are close to being perfectly competitive.
B) It is an important model to use as a benchmark to compare other markets structures to.
C) Perfectly competitive markets maximize societal welfare.
D) All of the above.
answer
D
Topic: Perfect Competition
Status: Old
question
20) If a firm happened to be the only seller of a particular product, it might behave as a price taker as long as
A) buyers have full information about the firm's price.
B) the transaction costs of doing business with this firm are low.
C) there are many buyers.
D) there is free entry and exit.
answer
D
Topic: Perfect Competition
Status: Old
question
21) The demand curve 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
C
Topic: Perfect Competition
Status: Old
question
22) Gift shops in a small town sell identical mugs to tourists. However, tourists don't have enough time to check out the prices one by one and don't have brochures listing prices of mugs. We can conclude
A) the market for mugs is perfectly competitive.
B) buyers have full information.
C) sellers are price takers.
D) the market is not perfectly competitive.
answer
D
Topic: Perfect Competition
Status: New
question
For the following, please answer "True" or "False" and explain why.
23) A market is perfectly competitive even if firms have the ability to set their own price as long as the price difference reflects differences in the product.
answer
False. If the market is perfectly competitive, there are no differences in the product.
Topic: Perfect Competition
Status: Old
question
24) If transaction costs are high, then it is more likely a firm's demand curve is downward sloping.
answer
True. Transaction costs increase the costs for consumers to find a new firm. Thus high transaction costs allow a firm to charge more than others.
Topic: Perfect Competition
Status: Old
question
25) Explain why individual firms in competitive markets face more elastic demand curves than the market as a whole.
answer
In a competitive market, if an individual firm increases its price it will lose all of its customers, as consumers simply buy from another firm. However, if the price of the good increases for all firms some consumers will not continue to buy the good, but for many prices some consumers will continue to purchase the good.
Topic: Perfect Competition
Status: Old
question
1) If a firm makes zero economic profit, then the firm
A) has no incentive to stay in the industry.
B) is better of exiting the industry.
C) is indifferent between staying and exiting the industry.
D) will shut down.
answer
C
Topic: Profit Maximization
Status: Revised
question
2) 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
C
Topic: Profit Maximization
Status: Old
question
3) A small business owner earns $50,000 in revenue annually. The explicit annual costs equal $30,000. The owner could work for someone else and earn $25,000 annually. The owner's business profit is ________ and the economic profit is ________.
A) $20,000, $5,000
B) $20,000, -$5,000
C) $25,000, -$5,000
D) $45,000, -$5,000
answer
B
Topic: Profit Maximization
Status: Old
question
4) A small business owner earns $60,000 in revenue annually. The explicit annual costs equal $40,000. The owner could work for someone else and earn $25,000 annually. The owner's business profit is ________ and the economic profit is ________.
A) $20,000, $5,000
B) $20,000, -$5,000
C) $25,000, -$5,000
D) $45,000, -$5,000
answer
B
Topic: Profit Maximization
Status: Old
question
5) A lawyer running his own business earns $18,000 in revenue monthly. He pays $8,000 as explicit costs including staff salary and utilities. He owns the office space so no rent is paid.. The lawyer could work for other legal firms and earn $10,000 per month. His business profit is ________ and his economic profit is ________.
A) $10,000, $10,000
B) $28,000, $10,000
C) $10,000, $0
D) $8,000, $0
answer
C
Topic: Profit Maximization
Status: New
question
6) 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
B
Topic: Profit Maximization
Status: Old
question
7) If a firm is operating at an output level where losses are minimized, the firm
A) has no incentive to stay in the industry.
B) is better of exiting the industry.
C) is maximizing profits.
D) will shut down.
answer
C
Topic: Profit Maximization
Status: Old
question
8) The above figure shows the cost curves for a competitive firm. If the firm is to earn economic profit, price must exceed
A) $0.
B) $5.
C) $10.
D) $11.
answer
C
Topic: Profit Maximization
Status: Old
question
9) The above figure shows the cost curves for a competitive firm. The firm will incur economic losses if the price is less than
A) $0.
B) $5.
C) $10.
D) $11.
answer
C
Topic: Profit Maximization
Status: Old
question
10) The above figure shows the cost curves for a competitive firm. If the market price is $15 per unit, the firm will earn profits of
A) $0.
B) $4.
C) $40.
D) $160.
answer
D
Topic: Profit Maximization
Status: Old
question
11) 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
D
Topic: Profit Maximization
Status: Old
question
12) 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
C
Topic: Profit Maximization
Status: Old
question
13) 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
B
Topic: Profit Maximization
Status: Old
question
14) 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
A
Topic: Profit Maximization
Status: Old
question
15) Suppose the fixed cost of Christmas trees business is $7,000 and sunk. The variable cost for each tree is $20. According to the forecast, the market price for Christmas trees is $25 each and the owner could sell 1000 trees at most each year. The owner
A) should shut down the business.
B) should keep operating.
C) should sell less.
D) None of the above.
answer
B
Topic: Profit Maximization
Status: New
question
16) Suppose the estimated fixed cost of Christmas trees business is $7,000 and not sunk. The estimated variable cost for each tree is $20. According to the forecast, the market price for Christmas trees is $25 each and the owner could sell 1000 trees at most each year. In the long run, the owner
A) should shut down.
B) should keep operating.
C) should sell less.
D) None of the above.
answer
A
Topic: Profit Maximization
Status: New
question
17) Suppose the Christmas trees market is perfectly competitive. A business owner is currently suffering from a loss of $1,000, the cost of producing and selling an additional Christmas tree is $20, and the current market price is $25. The owner
A) should sell more trees.
B) should shut down his business now.
C) should advertise in the market.
D) is already minimizing his loss.
answer
A
Topic: Profit Maximization
Status: New
question
18) Suppose the Christmas trees market is perfectly competitive. An owner is currently earning a profit of $1,000, the cost of producing and selling an additional Christmas tree is $25, the current market price is $20. The owner
A) should sell more trees.
B) should not sell more trees.
C) should advertise in the market to promote his sales.
D) is not maximizing his profits.
answer
B
Topic: Profit Maximization
Status: New
question
For the following, please answer "True" or "False" and explain why.
19) Even though fixed costs do not affect the output decision, an increase in fixed costs results in a wider range of prices for which the firm operates at a loss.
answer
True. An increase in fixed costs will shift AC upward but leave AVC unchanged. The gap between AVC and AC represents prices at which the firm will operate at a loss.
Topic: Profit Maximization
Status: Old
question
20) If a firm sets marginal revenue equal to marginal cost, it will make an economic profit.
answer
False. When a firm sets MR=MC it maximizes profits but the profit-maximizing level of output might still be negative (the smallest loss possible).
Topic: Profit Maximization
Status: Old
question
21) If a firm doesn't make an economic profit, it will shut down.
answer
False. The firm compares its losses from operating with its losses when shutting down and will shut down if the latter loss is less.
Topic: Profit Maximization
Status: Old
question
22) Suppose there are 20 competitive firms in a market. The supply curve of each firm is q = 2p. The market demand is Q = 200 - 2p. What is the residual demand curve facing a typical firm?
answer
The residual demand curve is equal to the market demand curve minus the supply of all the other firms. The supply of the other 19 firms is 38p. The residual demand is 200 - 40p.
Topic: Profit Maximization
Status: Old
question
23) Explain why shutting down and going out-of-business are different concepts.
answer
Shutting down means that the firm seizes production with the option of starting up production any time in the future. Going out-of-business is equal to exiting the industry. This involves reducing the amount of (the fixed input) capital to zero, which is not possible in the short run.
Topic: Profit Maximization
Status: Old
question
24) Suppose a firm has the following total cost function: TC = 100 + 4q2. What is the minimum price necessary for the firm to earn profit? Below what price will the firm shut down in the short run?
answer
AC = 100/q + 4q. This is minimized when dAC/dq = 0, or -100/q2 + 4 = 0. Solving yields q = 5 and AC = 40. Thus a price greater than $40 is required for the firm to earn profit. AVC = 4q and MC = 8q. Since AVC is below MC for all levels of output, AVC will be less than price for all levels of output. The firm will not shut down in the short run.
Topic: Profit Maximization
Status: Old
question
25) The above figure shows the cost curves for a typical firm in a competitive market. Note that if p = 10, then MC = p at both q = 5 and q = 60. Can they both yield maximum profit? Explain.
answer
No, at q = 5, p = MC, but this is not profit maximization; it is profit minimization. Profits expand as output increases since MR > MC for higher levels of output. At q = 60, an increase or decrease in output causes profits to fall, so this is the profit-maximizing q. Thus one way of wording the "second order condition" for profit maximization is that MC must cut the demand curve from below.
Topic: Profit Maximization
Status: Old
question
26) Lelu runs a firm that sells multipasses to intergalactic cruises. Her short-run cost function is given by
C(q) = q2 + 25q + 144
a. If the market price is $75/pass, how many units will Lelu produce?
b. At what price will Lelu earn zero profits?
c. If the price is below the level you found in b., will Lelu shut down? If so, explain. If not, below what price will she shut down?
answer
a. Profit = 75q - C(q) = 75q - q2 - 25q - 144
MAx profit --> dProfit/dq = 0
75 - 2q - 25 = 0
q = 25
b. Profit = 0 when p = AC = MC
2q + 25 = q + 25 + 144/q
Then q = 12. AC(12) = MC(12) = 49. So profit equals zero when p = $49.
c. No, Lelu will shut down when the price is below the minimum of the AVC (where AVC = MC)
AVC = q + 25
Minimum occurs when q = 0 and so the shut down price is p = $25.
Topic: Profit Maximization
Status: Old
question
27) A firm that only employs labor (L) has the following production function:
f(L) = 20L - L2
Let the price of output be normalized to one and the price of labor (relative to output price) is w.
a. Write out the profit function for this firm as a function of labor, L.
b. What is the necessary first-order condition for the firm to maximize profit when L > 0?
c. Compute the profit maximizing amount of labor as a function of the wage. What is the effect of an increase in wage on the firm's optimal employment level? Use calculus to solve this.
answer
a. Profit is
π = pf(L) - wL = 20L - L2 - wL
b. The FOC is
dπ/dL = 20 - 2L - w = 0
c. Solving for L
L*(w) = 10 - w/2
The comparative static is
dL*/dw = -1/2.
An increase in wage will decrease the level of employment by half the rate of change of wage.
Topic: Profit Maximization
Status: Old
8.3 Competition in the Short Run
question
1) 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
D
Topic: Competition in the Short Run
Status: Old
question
2) 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
A
Topic: Competition in the Short Run
Status: Old
question
3) The above figure shows the cost curves for a competitive firm. If the firm is to operate in the short run, price must exceed
A) $0.
B) $5.
C) $10.
D) $11.
answer
B
Topic: Competition in the Short Run
Status: Old
question
4) The above figure shows the cost curves for a competitive firm. If the profit-maximizing level of output is 40 price is equal to
A) $0.
B) $15.
C) $10.
D) $11.
answer
B
Topic: Competition in the Short Run
Status: Old
question
5) 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
C
Topic: Competition in the Short Run
Status: Old
question
6) 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
C
Topic: Competition in the Short Run
Status: Old
question
7) If a firm is a price taker, then its marginal revenue will always equal
A) price.
B) total cost.
C) zero.
D) one.
answer
A
Topic: Competition in the Short Run
Status: Old
question
8) An increase in the cost of an input will result in
A) a leftward shift in the firm's supply curve.
B) an upward shift of the firm's marginal cost curve.
C) a leftward shift of the market supply curve.
D) All of the above.
answer
D
Topic: Competition in the Short Run
Status: Old
question
9) When the production of a good involves several inputs, an increase in the cost of one input will usually cause total costs to
A) rise more than in proportion.
B) rise less than in proportion.
C) remain unchanged.
D) rise by the exact amount of the input price increase.
answer
B
Topic: Competition in the Short Run
Status: Old
question
10) When the production of a good involves several inputs and inputs are used in fixed proportions, an increase in the cost of one input will usually cause total costs to
A) rise more than in proportion.
B) rise less than in proportion.
C) remain unchanged.
D) rise by the exact amount of the input price increase.
answer
D
Topic: Competition in the Short Run
Status: Old
question
11) If a competitive firm is in short-run equilibrium, then
A) profits equal zero.
B) it will not operate at a loss.
C) an increase in its fixed cost will have no effect on profit.
D) an increase in its fixed cost will have no effect on output as long as revenue can cover its variable cost.
answer
D
Topic: Competition in the Short Run
Status: Revised
question
12) If a competitive firm is in short-run equilibrium, then
A) 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
D
Topic: Competition in the Short Run
Status: Old
question
13) 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
A
Topic: Competition in the Short Run
Status: Old
question
14) 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
B
Topic: Competition in the Short Run
Status: Old
question
15) The above figure shows the cost curves for a typical firm in a market and three possible market supply curves. If there are 100 identical firms, the market supply curve is best represented by
A) curve A.
B) curve B.
C) curve C.
D) either curve A or B, but definitely not C.
answer
C
Topic: Competition in the Short Run
Status: Old
question
16) If a firm is currently in short-run equilibrium earning a profit, what impact will a lump-sum tax have on its production decision?
A) The firm will decrease output to earn a higher profit.
B) The firm will increase output but earn a lower profit.
C) The firm will not change output but earn a lower profit.
D) The firm will not change output and earn a higher profit.
answer
C
Topic: Competition in the Short Run
Status: Old
question
17) Suppose that once a well is dug, water flows out of it continuously without any additional effort. Customers collect their water and pay a per gallon fee when they leave the site of the well. In the short run, the competitive firm in this market
A) will not shut down because variable costs are zero.
B) has no fixed costs.
C) faces diminishing marginal returns.
D) can act as a price setter.
answer
A
Topic: Competition in the Short Run
Status: Old
question
18) Suppose that once a well is dug, water flows out of it continuously without any additional effort. Customers collect their water and pay a per gallon fee when they leave the site of the well. In the short run, the competitive firm in this market
A) has no variable costs.
B) has no fixed costs.
C) will shut down.
D) can produce water at no cost.
answer
A
Topic: Competition in the Short Run
Status: Old
question
19) If a competitive firm cannot earn profit at any level of output during a given short-run period, then which of the following is LEAST likely to occur?
A) It will shut down in the short run and wait until the price increases sufficiently.
B) It will exit the industry in the long run.
C) It will operate at a loss in the short run.
D) It will minimize its loss by decreasing output so that price exceeds marginal cost.
answer
D
Topic: Competition in the Short Run
Status: Old
question
20) 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
B
Topic: Competition in the Short Run
Status: Old
question
21) There are currently N identical firms in a market. If it is a perfectly competitive market, the short-run market supply curve at any given price is
A) N times the supply of an individual firm.
B) N - 1 times the supply of an individual firm.
C) N plus the supply of an individual firm.
D) It cannot be determined from the information provided.
answer
A
Topic: Competition in the Short Run
Status: Old
question
22) The above figure shows the cost curves for a typical firm in a competitive market. If p = 10, then
A) the firm will maximize its profit by producing 5 units.
B) the firm will maximize its profit by producing 60 units.
C) producing 5 or 60 units will yield equal profits.
D) Not enough information.
answer
B
Topic: Short-Run Competitive Profit Maximization
Status: New
question
23) The above figure shows the cost curves for a typical firm in a competitive market. If price = 8.5, then
A) the firm will produce 10 units.
B) the firm will produce 55 units.
C) the firm will earn positive profits.
D) None of above.
answer
B
Topic: Short-Run Competitive Profit Maximization
Status: New
question
24) The above figure shows the short run cost curves for a typical firm in a competitive market. If price = 8, then the firm
A) is earning positive profits.
B) should produce 50 units.
C) should shut down.
D) None of above.
answer
B
Topic: Short-Run Competitive Profit Maximization
Status: New
question
25) The above figure shows the short run cost curves for a typical firm in a competitive market. If price = 4, then the firm
A) is earning positive profits.
B) should produce 35 units.
C) should shut down.
D) None of above.
answer
C
Topic: Short-Run Competitive Profit Maximization
Status: New
question
For the following, please answer "True" or "False" and explain why.
26) If a firm cannot earn profits in the short run, it will shut down.
answer
False. A firm will operate at a loss if the loss incurred from production is less than the loss incurred from shutting down. Even if the firm shuts down, it still must pay its fixed costs because, in the short-run, going out of business is not an option.
Topic: Competition in the Short Run
Status: Old
question
27) If the market price in a competitive market is below the minimum of average variable cost, the firm will shut-down.
answer
True. At this price, total fixed costs are smaller than the operating loss. It pays for the firm to shut down.
Topic: Competition in the Short Run
Status: Old
question
28) If a competitive firm has to pay a lump sum tax, it will produce less.
answer
False. A lump sum tax is not related to the amount of output produced. It will increase fixed cost and thus lower profit. However, marginal cost will not be affected, and the profit-maximizing quantity will stay the same.
Topic: Competition in the Short Run
Status: Old
question
29) A competitive firm's supply curve is identical to its marginal cost curve.
answer
False. The statement is only partly correct. The supply curve is only that portion that lies above AVC.
Topic: Competition in the Short Run
Status: Old
30) If a firm in a competitive market is currently producing a quantity where price exceeds the marginal cost, the firm should lower its price.
Answer: False. A competitive firm does not vary price. Rather, if p>MC, the firm should increase output until p = MC.
Topic: Competition in the Short Run
Status: Old

31) The above figure shows the cost curves for a typical firm in a competitive market. From the graph, estimate the firm's profits when price equals $10 per unit.
Answer: When price = 10, p = MC when q = 60. TR = 600. The AC is just above 8.5, say 8.6. This yields
TC = 516. The firm's profit is estimated to be around $84.
Topic: Competition in the Short Run
Status: Old
question
32) The above figure shows the cost curves for a typical firm in a competitive market. If there are 200 identical firms, estimate the market quantity supplied when p = 4, 8, and 10.
answer
When p = 4, p < AVC so no firms will produce. At p = 8, each firm produces 50 units at a loss. At p = 10, each firm produces 60 units. The market quantity supplied at each price is:
question
Topic: Competition in the Short Run
Status: Old
33) If a firm operates at a loss, the loss is equal to TC - TR. If the firm shuts down instead, its loss is equal to FC. Given this, show that price must exceed AVC for the firm to operate at a loss and not shut down.
answer
The firm operates at a loss if TC - TR < FC. Adding TR - FC to both sides yields VC < TR. Dividing by q yields AVC < p. That is, the firm will operate at a loss as long as AVC < p.
Topic: Competition in the Short Run
Status: Old
question
34) Suppose a firm has the following total cost function TC = 100 + 2 q2. If price equals $20, what is the firm's output decision? What are its short-run profits?
answer
MC = 4q. To maximize profit, set 20 = 4q, or q = 5. Profit = TR - TC = (20 ∗ 5) - (100 + 50) = -50. Since FC = 100, the firm will produce 5 units and operate at a loss of 50 rather than shutting down and incurring a loss of 100.
Topic: Competition in the Short Run
Status: Old
question
35) Draw a graph that shows how the short-run shut-down price changes when an input price increases.
answer
See the above figure.
Topic: Competition in the Short Run
Status: Old
question
36) Suppose there are 1000 identical wheat farmers. For each, TC = 10 + q2. Derive the market supply curve.
answer
For each MC = 2q and AVC = q. Thus MC > AVC for all levels of output. The firm sets p = 2q or q = 0.5p. Since there are 1000 firms each producing q, market supply equals Q = 500p.
Topic: Competition in the Short Run
Status: Old
question
37) Suppose there are 1000 identical wheat farmers. For each, TC = 10 + q2. Market demand is Q = 600,000 - 100p. Derive the short-run equilibrium Q, q, and p. Does the typical firm earn a short-run profit?
answer
The firm's supply is q = 0.5p; market supply is Q = 500p. Market equilibrium can be found as 500p = 600,000 - 100p, or 600p = 600,000, so p = 1,000 and Q = 500,000. q = 0.5p = 500. Profit = (500 ∗ 1,000) - (10 + 250,000) = 249,990. Each firm earns a profit.
Topic: Competition in the Short Run
Status: Old
question
38) Consider a competitive firm with the short-run cost function
C(q) = 20 + 6q + 5q2
The firm faces a market price of p for its output.
a. Derive the firm's profit maximizing condition. Is the sufficient second order condition satisfied?
b. Suppose a specific tax of t (t < p) is levied on only this firm in the industry. What is the profit maximizing level of output as a function of p and t? (Assume the price is high enough that the firm does not shut down)
c. How does the output change as the tax increases? Use calculus to determine the relevant comparative static.
d. How does the firm's profit chance as the tax increases? Again, use calculus to determine the relevant comparative static. Show that profit decreases as t increases.
answer
a. Profit maximization occurs where p = MC:
p = 6 + 10q
dMC/dq = 10 > 0, so the sufficient second order condition is satisfied.
b. A tax will lower the price to p-t, so
p - t = 6 + 10q
Solve for q* = (p - t - 6)/10
Note that we are assuming p - t > 6 (or the firm will shut down).
c. dq*/dt = -1/10.
d. First compute the profit function
π = (p - t)q - C(q) = (p - t)(p - t - 6)/10 - 20 - 3(p - t - 6)/5 - (p - t - 6)2/20
Then compute dπ/dt = -(p - t - 6)/10 - (p - t)/10 + 3/5 + (p - t - 6)/10
This simplifies to
dπ/dt = -(p - t - 6)/10 < 0
Topic: Competition in the Short Run
Status: Old
39) Suppose that there are 80 firms in a market, each with the following cost function:
C(q) = 100 + 4q2
a. Derive the short-run market supply curve.
b. Suppose the market demand is
QD = 1280 - 30p
Find the equilibrium market quantity and price.
c. How much output will each firm produce? How much profit is each firm making?
Answer:
a. Each firm sets p = MC to determine their output:
p = 8q
So each firm's supply function is:
qi = p/8
There are 80 firms and QS = Nqi so the market supply is
QS = 10p
b. Equilibrium price occurs where QS = QD, so
1280 - 30p = 10p
p = 32, Q = 320
c. At p=32, the output of a firm is determined by p = MC, so
32 = 8q q = 4
(Or find by taking Q*/N = 320/80 = 4)
Profit (per firm) is:
= 32(4) - 100 - 4(4)2 = -36
Firms are making losses of $32 each.
Topic: Competition in the Short Run
Status: Old
question
8.4 Competition in the Long Run
answer
...
question
1) Markets with hit-and-run entry and exit experience
A) barriers to entry.
B) firms entering whenever they can make a profit and exiting when they cannot make a profit.
C) steady long-run economic profit.
D) a very steady number of firms.
answer
B
Topic: Competition in the Long Run
Status: Old
question
2) 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
D
Topic: Competition in the Long Run
Status: Old
question
3) 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
D
Topic: Competition in the Long Run
Status: Old
question
4) Long-run market supply curves are upward sloping if
A) firms are identical.
B) the number of firms is restricted in the long run.
C) input prices fall as the industry expands.
D) All of the above.
answer
B
Topic: Competition in the Long Run
Status: Old
question
5) Long-run market supply curves are downward sloping if
A) firms are identical.
B) the number of firms is restricted in the long run.
C) input prices fall as the industry expands.
D) All of the above.
answer
C
Topic: Competition in the Long Run
Status: Old
question
6) If firms in a competitive market are not identical, then the long-run market supply curve will be
A) horizontal.
B) upward sloping.
C) downward sloping.
D) undetermined.
answer
B
Topic: Competition in the Long Run
Status: Old
question
7) If firms in a competitive market are not identical, then an increase in cost will
A) shift marginal cost to the right.
B) push the most inefficient firms out of the market.
C) push the most efficient firms out of the market.
D) Need more information.
answer
B
Topic: Competition in the Long Run
Status: Old
question
8) Suppose that for each firm in the competitive market for potatoes, long-run average cost is minimized at 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 20¢ per pound.
C) each consumer will purchase $100 worth of potatoes.
D) the long-run price will be set just above 20¢ per pound.
answer
B
Topic: Competition in the Long Run
Status: Old
question
9) Suppose that for each firm in the competitive market for potatoes, long-run average cost is minimized at 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 many firms will this industry sustain in the long run?
A) 0
B) 100
C) 50,000
D) There is not enough information to answer.
answer
B
Topic: Competition in the Long Run
Status: Old
question
10) Suppose that for each firm in the competitive market for potatoes, long-run average cost is minimized at 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
C
Topic: Competition in the Long Run
Status: Old
question
11) Suppose that for each firm in the competitive market for potatoes, long-run average cost is minimized at 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 many pounds of potatoes will be consumed in total?
A) 0
B) 500
C) 10,000
D) 50,000
answer
D
Topic: Competition in the Long Run
Status: Old
For the following, please answer "True" or "False" and explain why.
question
12) If firms in a competitive market are identical, the long-run market supply curve is horizontal.
answer
False. The horizontal long-run supply curve also requires that factor prices do not increase with industry expansion and that the number of firms is not restricted.
Topic: Competition in the Long Run
Status: Old
question
13) The long-run supply curve in a competitive market is upward sloping.
answer
False. The shape of the long-run supply curve will depend on how similar the firms are and on the relationship between factor prices and total industry output.
Topic: Competition in the Long Run
Status: Old
question
14) If the shut down rule, p < AVC, is the same in the short run and the long run, explain why the shut down prices may be different.
answer
In the long run all costs are variable. In the long run the average variable cost is usually higher than in the short run.
Topic: Competition in the Long Run
Status: Old
question
15) The above figure shows the long-run cost curves for a typical firm in a competitive market. If the number of firms is unrestricted and input costs are constant, derive the long-run market supply curve.
answer
The long-run market supply curve is horizontal at a price of $10 per unit.
Topic: Competition in the Long Run
Status: Old
question
16) All the supply of peppermint oil is produced from mint plants grown in one county by several competitive growers (the number of growers is not limited). The quality of land in the county varies greatly. Would you expect the long-run market supply curve to slope upward, downward, or remain constant? Why?
answer
The long-run market supply curve will slope up because the growers have different costs. Those growers with poor-quality land have a higher average cost of production. The horizontal sum of the individual supply curves will slope up.
Topic: Competition in the Long Run
Status: Old
question
17) Suppose an industry has no fixed costs. Draw two graphs side by side for the industry. In the left graph draw a U-shaped average cost curve and the corresponding marginal cost curve. In the right graph, draw a downward-sloping market demand curve. Also in the right graph, draw a short-run supply curve that would generate positive profit, and the long-run supply curve that would result.
answer
See the above figure.
Topic: Competition in the Long Run
Status: Old
question
18) Suppose all firms in a competitive market are currently in both short-run and long-run equilibrium. What impact will a lump sum tax have on each firm in the short run? in the long run?
answer
In the short run, the lump sum tax represents a fixed cost. The firm's output decision is unchanged, but its profits decrease. In the long run, the tax raises the LRAC of each firm, but not MC. Minimum AC is higher, so price is higher. With a higher price, each firm produces a greater quantity, but the higher price means less quantity is demanded in total. Thus the number of firms will decrease.
Topic: Competition in the Long Run
Status: Old
question
19) Suppose market demand is Q = 1000 - 4p. If all firms have LRAC = 50 - 5q + q2, how many identical firms will there be when this industry is in long-run equilibrium?
answer
The long-run market supply curve is horizontal at the minimum LRAC. LRAC is minimized when -5 + 2q = 0 or q = 2.5. At this level of output, LRMC = LRAC = 43.75. At this price, 825 units are demanded. If each firm produces 2.5 units in the long run, then 330 firms will be in this market.
Topic: Competition in the Long Run
Status: Old
question
20) All firms in a competitive industry have the following long-run total cost curve:
C(q) = q3 - 10q2 + 36q
where q is the output of the firm.
a. Compute the long run equilibrium price. What does the long-run supply curve look like if this is a constant cost industry? Explain.
b. Suppose the market demand is given by Q = 111 - p. Determine the long-run equilibrium number of firms in the industry.
answer
a. Long run equilibrium is determined by (1) the minimum of the AC curves, and (2) the demand equation.
The AC is at a minimum where AC = MC:
Q = 5, AC = MC = 11
Therefore, the long run price will be $11 and each firm will produce 5 units.
question
b. The market quantity (from demand) is 100 and so 20 firms will exist in this market. The long run supply curve is flat at $11 because the price will always equal this due to free entry and exit of firms.
Topic: Competition in the Long Run
Status: Old
answer
...
question
21) Firms in the sandbox industry have the long-run cost curve
C(q) = F + 6q + 5q2
Where F is a positive constant. The sandbox industry has a market demand of p = 90 - 2q
a. Suppose F = 20. What is the competitive equilibrium price, quantity and number of firms?
b. Suppose F is actually an accreditation fee established by the sandbox sellers association. A firm that avoids this fee will not be able to operate in the industry, and is therefore mandatory. How does the equilibrium price and number of firms vary with F? You do not have to use calculus, but explain whether each increases or decreases with F. How does the profit of each firm vary with F?
answer
a. Find the minimum AC point:
AC = 20/q + 6 + 5q
MC = 6 + 10q
AC = MC q = 2, AC(2) = $26
So the long run price will be $26, and each firm will produce two units of output. The market quantity will be 26 = 90 - 2Q Q = 32. That means there are 32/2 = 16 firms.
b. Repeat above using F in place of 20:
q = (F/5)1/2
p = 6 + 10(F/5)1/2
The market quantity is
Q = 42 - 5 (F/5)1/2
The number of firms:
N = Q/q = 42(F/5)-1/2 - 5
dp/dF = .5(F/5)-1/2(1/5) = 0.1(F/5)-1/2 > 0
dN/dF = -(21/5)(F/5)-3/2 < 0
As F increases, the AC increases, raising the break-even price. The market quantity will decrease. The MC is unchanged, so each firm produces more output. The number of firms must decrease as Q has decreased and q has increased. Profit is zero in the long run, independent of F.
Topic: Competition in the Long Run
Status: Old
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
C
Topic: Perfect Competition
Status: Old
question
2) The residual demand curve is
A) the market demand minus the supply of other firms.
B) the remaining demand after the market clears.
C) the market demand minus the supply of one firm.
D) the long-run demand for a market.
answer
A
Topic: Perfect Competition
Status: Old
question
3) As the number of firms in an industry increases, the residual demand curve becomes
A) more elastic.
B) less elastic.
C) larger.
D) vertical.
answer
A
Topic: Perfect Competition
Status: Old
question
4) There are 10 identical internet service providers (ISPs) in a city serving a market demand with an elasticity of -1.5. The elasticity of supply for each firm is 3.0. The elasticity of demand faced by an individual ISP provider is
A) -42.
B) -15.
C) -1.5.
D) -27.
answer
A
Topic: Perfect Competition
Status: Old
question
5) 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
D
Topic: Perfect Competition
Status: Old
question
6) 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
B
Topic: Perfect Competition
Status: Old
question
7) If consumers view the output of any firm in a market to be identical to the output of any other firm in the market, the demand curve for the output of any given firm
A) will be identical to the market demand curve.
B) will be horizontal.
C) will be vertical.
D) cannot be determined from the information given.
answer
B
Topic: Perfect Competition
Status: Old
question
8) A horizontal demand curve for a firm implies that
A) the firm is a monopoly.
B) the market the firm is operating in is not competitive.
C) the firm is selling in a competitive market.
D) the products of that firm are very different from other firms' products.
answer
C
Topic: Perfect Competition
Status: Old
question
9) In the absence of any government regulation on price, if a firm has no power to set price on its own, one can safely conclude
A) the demand curve for the firm's product is horizontal.
B) there aren't many firms in the industry.
C) the market is in long-run equilibrium.
D) the firms in this industry are not profitable.
answer
A
Topic: Perfect Competition
Status: Old
question
10) In a perfectly competitive market,
A) firms can freely enter and exit.
B) firms sell a differentiated product.
C) transaction costs are high.
D) All of the above.
answer
A
Topic: Perfect Competition
Status: Old
question
11) If all conditions for a perfectly competitive market are met,
A) firms face sunk cost when entering the market.
B) firms demand curves are horizontal.
C) the market demand curve is horizontal.
D) the firms' demand curves are downward-sloping.
answer
B
Topic: Perfect Competition
Status: Old
question
12) In a competitive market, if buyers did not know all the prices charged by the many firms,
A) all firms still face horizontal demand curves.
B) firms sell a differentiated product.
C) demand curves can be downward sloping for some or all firms.
D) the number of firms will most likely decrease.
answer
C
Topic: Perfect Competition
Status: Old
question
13) Many car owners and car dealers describe their different cars for sale in the local newspapers and list their asking price. Many people shopping for a used car consider the different choices listed in the paper. The market for used cars could be described as
A) relatively competitive.
B) perfectly competitive.
C) non-competitive.
D) having high transaction costs.
answer
A
Topic: Perfect Competition
Status: Old
question
14) Many car owners and car dealers describe their different cars for sale in the local newspapers and list their asking price. Many people shopping for a used car consider the different choices listed in the paper. The absence of which condition prohibits this market from being described as perfectly competitive?
A) Buyers and sellers know the prices.
B) Firms freely enter and exit.
C) Transaction costs are low.
D) Consumers believe all firms sell identical products.
answer
D
Topic: Perfect Competition
Status: Old
question
15) 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
B
Topic: Perfect Competition
Status: Old
question
16) If a firm operates in a perfectly competitive market, then it will most likely
A) advertise its product on television.
B) settle for whatever price is offered.
C) have a difficult time obtaining information about the market price.
D) have an easy time keeping other firms out of the market.
answer
B
Topic: Perfect Competition
Status: Old
question
17) If a firm operates in a perfectly competitive market, then
A) all firms will advertise.
B) no firms will advertise.
C) the market leader will advertise.
D) new firms will advertise.
answer
B
Topic: Perfect Competition
Status: Old
question
18) The "Got Milk?" advertising campaign is a good example of
A) advertising in a competitive market.
B) how advertising in a competitive market does not pay off for a single firm.
C) interest groups financed by the industry advertise for the whole industry.
D) All of the above.
answer
D
Topic: Perfect Competition
Status: Old
question
19) The perfectly competitive model makes a lot of fairly unrealistic assumptions. Why do economics text books still talk a lot about this model?
A) Many markets are close to being perfectly competitive.
B) It is an important model to use as a benchmark to compare other markets structures to.
C) Perfectly competitive markets maximize societal welfare.
D) All of the above.
answer
D
Topic: Perfect Competition
Status: Old
question
20) If a firm happened to be the only seller of a particular product, it might behave as a price taker as long as
A) buyers have full information about the firm's price.
B) the transaction costs of doing business with this firm are low.
C) there are many buyers.
D) there is free entry and exit.
answer
D
Topic: Perfect Competition
Status: Old
question
21) The demand curve 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
C
Topic: Perfect Competition
Status: Old
question
22) Gift shops in a small town sell identical mugs to tourists. However, tourists don't have enough time to check out the prices one by one and don't have brochures listing prices of mugs. We can conclude
A) the market for mugs is perfectly competitive.
B) buyers have full information.
C) sellers are price takers.
D) the market is not perfectly competitive.
answer
D
Topic: Perfect Competition
Status: New
question
For the following, please answer "True" or "False" and explain why.
23) A market is perfectly competitive even if firms have the ability to set their own price as long as the price difference reflects differences in the product.
answer
False. If the market is perfectly competitive, there are no differences in the product.
Topic: Perfect Competition
Status: Old
question
24) If transaction costs are high, then it is more likely a firm's demand curve is downward sloping.
answer
True. Transaction costs increase the costs for consumers to find a new firm. Thus high transaction costs allow a firm to charge more than others.
Topic: Perfect Competition
Status: Old
question
25) Explain why individual firms in competitive markets face more elastic demand curves than the market as a whole.
answer
In a competitive market, if an individual firm increases its price it will lose all of its customers, as consumers simply buy from another firm. However, if the price of the good increases for all firms some consumers will not continue to buy the good, but for many prices some consumers will continue to purchase the good.
Topic: Perfect Competition
Status: Old
question
1) If a firm makes zero economic profit, then the firm
A) has no incentive to stay in the industry.
B) is better of exiting the industry.
C) is indifferent between staying and exiting the industry.
D) will shut down.
answer
C
Topic: Profit Maximization
Status: Revised
question
2) 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
C
Topic: Profit Maximization
Status: Old
question
3) A small business owner earns $50,000 in revenue annually. The explicit annual costs equal $30,000. The owner could work for someone else and earn $25,000 annually. The owner's business profit is ________ and the economic profit is ________.
A) $20,000, $5,000
B) $20,000, -$5,000
C) $25,000, -$5,000
D) $45,000, -$5,000
answer
B
Topic: Profit Maximization
Status: Old
question
4) A small business owner earns $60,000 in revenue annually. The explicit annual costs equal $40,000. The owner could work for someone else and earn $25,000 annually. The owner's business profit is ________ and the economic profit is ________.
A) $20,000, $5,000
B) $20,000, -$5,000
C) $25,000, -$5,000
D) $45,000, -$5,000
answer
B
Topic: Profit Maximization
Status: Old
question
5) A lawyer running his own business earns $18,000 in revenue monthly. He pays $8,000 as explicit costs including staff salary and utilities. He owns the office space so no rent is paid.. The lawyer could work for other legal firms and earn $10,000 per month. His business profit is ________ and his economic profit is ________.
A) $10,000, $10,000
B) $28,000, $10,000
C) $10,000, $0
D) $8,000, $0
answer
C
Topic: Profit Maximization
Status: New
question
6) 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
B
Topic: Profit Maximization
Status: Old
question
7) If a firm is operating at an output level where losses are minimized, the firm
A) has no incentive to stay in the industry.
B) is better of exiting the industry.
C) is maximizing profits.
D) will shut down.
answer
C
Topic: Profit Maximization
Status: Old
question
8) The above figure shows the cost curves for a competitive firm. If the firm is to earn economic profit, price must exceed
A) $0.
B) $5.
C) $10.
D) $11.
answer
C
Topic: Profit Maximization
Status: Old
question
9) The above figure shows the cost curves for a competitive firm. The firm will incur economic losses if the price is less than
A) $0.
B) $5.
C) $10.
D) $11.
answer
C
Topic: Profit Maximization
Status: Old
question
10) The above figure shows the cost curves for a competitive firm. If the market price is $15 per unit, the firm will earn profits of
A) $0.
B) $4.
C) $40.
D) $160.
answer
D
Topic: Profit Maximization
Status: Old
question
11) 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
D
Topic: Profit Maximization
Status: Old
question
12) 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
C
Topic: Profit Maximization
Status: Old
question
13) 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
B
Topic: Profit Maximization
Status: Old
question
14) 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
A
Topic: Profit Maximization
Status: Old
question
15) Suppose the fixed cost of Christmas trees business is $7,000 and sunk. The variable cost for each tree is $20. According to the forecast, the market price for Christmas trees is $25 each and the owner could sell 1000 trees at most each year. The owner
A) should shut down the business.
B) should keep operating.
C) should sell less.
D) None of the above.
answer
B
Topic: Profit Maximization
Status: New
question
16) Suppose the estimated fixed cost of Christmas trees business is $7,000 and not sunk. The estimated variable cost for each tree is $20. According to the forecast, the market price for Christmas trees is $25 each and the owner could sell 1000 trees at most each year. In the long run, the owner
A) should shut down.
B) should keep operating.
C) should sell less.
D) None of the above.
answer
A
Topic: Profit Maximization
Status: New
question
17) Suppose the Christmas trees market is perfectly competitive. A business owner is currently suffering from a loss of $1,000, the cost of producing and selling an additional Christmas tree is $20, and the current market price is $25. The owner
A) should sell more trees.
B) should shut down his business now.
C) should advertise in the market.
D) is already minimizing his loss.
answer
A
Topic: Profit Maximization
Status: New
question
18) Suppose the Christmas trees market is perfectly competitive. An owner is currently earning a profit of $1,000, the cost of producing and selling an additional Christmas tree is $25, the current market price is $20. The owner
A) should sell more trees.
B) should not sell more trees.
C) should advertise in the market to promote his sales.
D) is not maximizing his profits.
answer
B
Topic: Profit Maximization
Status: New
question
For the following, please answer "True" or "False" and explain why.
19) Even though fixed costs do not affect the output decision, an increase in fixed costs results in a wider range of prices for which the firm operates at a loss.
answer
True. An increase in fixed costs will shift AC upward but leave AVC unchanged. The gap between AVC and AC represents prices at which the firm will operate at a loss.
Topic: Profit Maximization
Status: Old
question
20) If a firm sets marginal revenue equal to marginal cost, it will make an economic profit.
answer
False. When a firm sets MR=MC it maximizes profits but the profit-maximizing level of output might still be negative (the smallest loss possible).
Topic: Profit Maximization
Status: Old
question
21) If a firm doesn't make an economic profit, it will shut down.
answer
False. The firm compares its losses from operating with its losses when shutting down and will shut down if the latter loss is less.
Topic: Profit Maximization
Status: Old
question
22) Suppose there are 20 competitive firms in a market. The supply curve of each firm is q = 2p. The market demand is Q = 200 - 2p. What is the residual demand curve facing a typical firm?
answer
The residual demand curve is equal to the market demand curve minus the supply of all the other firms. The supply of the other 19 firms is 38p. The residual demand is 200 - 40p.
Topic: Profit Maximization
Status: Old
question
23) Explain why shutting down and going out-of-business are different concepts.
answer
Shutting down means that the firm seizes production with the option of starting up production any time in the future. Going out-of-business is equal to exiting the industry. This involves reducing the amount of (the fixed input) capital to zero, which is not possible in the short run.
Topic: Profit Maximization
Status: Old
question
24) Suppose a firm has the following total cost function: TC = 100 + 4q2. What is the minimum price necessary for the firm to earn profit? Below what price will the firm shut down in the short run?
answer
AC = 100/q + 4q. This is minimized when dAC/dq = 0, or -100/q2 + 4 = 0. Solving yields q = 5 and AC = 40. Thus a price greater than $40 is required for the firm to earn profit. AVC = 4q and MC = 8q. Since AVC is below MC for all levels of output, AVC will be less than price for all levels of output. The firm will not shut down in the short run.
Topic: Profit Maximization
Status: Old
question
25) The above figure shows the cost curves for a typical firm in a competitive market. Note that if p = 10, then MC = p at both q = 5 and q = 60. Can they both yield maximum profit? Explain.
answer
No, at q = 5, p = MC, but this is not profit maximization; it is profit minimization. Profits expand as output increases since MR > MC for higher levels of output. At q = 60, an increase or decrease in output causes profits to fall, so this is the profit-maximizing q. Thus one way of wording the "second order condition" for profit maximization is that MC must cut the demand curve from below.
Topic: Profit Maximization
Status: Old
question
26) Lelu runs a firm that sells multipasses to intergalactic cruises. Her short-run cost function is given by
C(q) = q2 + 25q + 144
a. If the market price is $75/pass, how many units will Lelu produce?
b. At what price will Lelu earn zero profits?
c. If the price is below the level you found in b., will Lelu shut down? If so, explain. If not, below what price will she shut down?
answer
a. Profit = 75q - C(q) = 75q - q2 - 25q - 144
MAx profit --> dProfit/dq = 0
75 - 2q - 25 = 0
q = 25
b. Profit = 0 when p = AC = MC
2q + 25 = q + 25 + 144/q
Then q = 12. AC(12) = MC(12) = 49. So profit equals zero when p = $49.
c. No, Lelu will shut down when the price is below the minimum of the AVC (where AVC = MC)
AVC = q + 25
Minimum occurs when q = 0 and so the shut down price is p = $25.
Topic: Profit Maximization
Status: Old
question
27) A firm that only employs labor (L) has the following production function:
f(L) = 20L - L2
Let the price of output be normalized to one and the price of labor (relative to output price) is w.
a. Write out the profit function for this firm as a function of labor, L.
b. What is the necessary first-order condition for the firm to maximize profit when L > 0?
c. Compute the profit maximizing amount of labor as a function of the wage. What is the effect of an increase in wage on the firm's optimal employment level? Use calculus to solve this.
answer
a. Profit is
π = pf(L) - wL = 20L - L2 - wL
b. The FOC is
dπ/dL = 20 - 2L - w = 0
c. Solving for L
L*(w) = 10 - w/2
The comparative static is
dL*/dw = -1/2.
An increase in wage will decrease the level of employment by half the rate of change of wage.
Topic: Profit Maximization
Status: Old
8.3 Competition in the Short Run
question
1) 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
D
Topic: Competition in the Short Run
Status: Old
question
2) 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
A
Topic: Competition in the Short Run
Status: Old
question
3) The above figure shows the cost curves for a competitive firm. If the firm is to operate in the short run, price must exceed
A) $0.
B) $5.
C) $10.
D) $11.
answer
B
Topic: Competition in the Short Run
Status: Old
question
4) The above figure shows the cost curves for a competitive firm. If the profit-maximizing level of output is 40 price is equal to
A) $0.
B) $15.
C) $10.
D) $11.
answer
B
Topic: Competition in the Short Run
Status: Old
question
5) 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
C
Topic: Competition in the Short Run
Status: Old
question
6) 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
C
Topic: Competition in the Short Run
Status: Old
question
7) If a firm is a price taker, then its marginal revenue will always equal
A) price.
B) total cost.
C) zero.
D) one.
answer
A
Topic: Competition in the Short Run
Status: Old
question
8) An increase in the cost of an input will result in
A) a leftward shift in the firm's supply curve.
B) an upward shift of the firm's marginal cost curve.
C) a leftward shift of the market supply curve.
D) All of the above.
answer
D
Topic: Competition in the Short Run
Status: Old
question
9) When the production of a good involves several inputs, an increase in the cost of one input will usually cause total costs to
A) rise more than in proportion.
B) rise less than in proportion.
C) remain unchanged.
D) rise by the exact amount of the input price increase.
answer
B
Topic: Competition in the Short Run
Status: Old
question
10) When the production of a good involves several inputs and inputs are used in fixed proportions, an increase in the cost of one input will usually cause total costs to
A) rise more than in proportion.
B) rise less than in proportion.
C) remain unchanged.
D) rise by the exact amount of the input price increase.
answer
D
Topic: Competition in the Short Run
Status: Old
question
11) If a competitive firm is in short-run equilibrium, then
A) profits equal zero.
B) it will not operate at a loss.
C) an increase in its fixed cost will have no effect on profit.
D) an increase in its fixed cost will have no effect on output as long as revenue can cover its variable cost.
answer
D
Topic: Competition in the Short Run
Status: Revised
question
12) If a competitive firm is in short-run equilibrium, then
A) 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
D
Topic: Competition in the Short Run
Status: Old
question
13) 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
A
Topic: Competition in the Short Run
Status: Old
question
14) 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
B
Topic: Competition in the Short Run
Status: Old
question
15) The above figure shows the cost curves for a typical firm in a market and three possible market supply curves. If there are 100 identical firms, the market supply curve is best represented by
A) curve A.
B) curve B.
C) curve C.
D) either curve A or B, but definitely not C.
answer
C
Topic: Competition in the Short Run
Status: Old
question
16) If a firm is currently in short-run equilibrium earning a profit, what impact will a lump-sum tax have on its production decision?
A) The firm will decrease output to earn a higher profit.
B) The firm will increase output but earn a lower profit.
C) The firm will not change output but earn a lower profit.
D) The firm will not change output and earn a higher profit.
answer
C
Topic: Competition in the Short Run
Status: Old
question
17) Suppose that once a well is dug, water flows out of it continuously without any additional effort. Customers collect their water and pay a per gallon fee when they leave the site of the well. In the short run, the competitive firm in this market
A) will not shut down because variable costs are zero.
B) has no fixed costs.
C) faces diminishing marginal returns.
D) can act as a price setter.
answer
A
Topic: Competition in the Short Run
Status: Old
question
18) Suppose that once a well is dug, water flows out of it continuously without any additional effort. Customers collect their water and pay a per gallon fee when they leave the site of the well. In the short run, the competitive firm in this market
A) has no variable costs.
B) has no fixed costs.
C) will shut down.
D) can produce water at no cost.
answer
A
Topic: Competition in the Short Run
Status: Old
question
19) If a competitive firm cannot earn profit at any level of output during a given short-run period, then which of the following is LEAST likely to occur?
A) It will shut down in the short run and wait until the price increases sufficiently.
B) It will exit the industry in the long run.
C) It will operate at a loss in the short run.
D) It will minimize its loss by decreasing output so that price exceeds marginal cost.
answer
D
Topic: Competition in the Short Run
Status: Old
question
20) 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
B
Topic: Competition in the Short Run
Status: Old
question
21) There are currently N identical firms in a market. If it is a perfectly competitive market, the short-run market supply curve at any given price is
A) N times the supply of an individual firm.
B) N - 1 times the supply of an individual firm.
C) N plus the supply of an individual firm.
D) It cannot be determined from the information provided.
answer
A
Topic: Competition in the Short Run
Status: Old
question
22) The above figure shows the cost curves for a typical firm in a competitive market. If p = 10, then
A) the firm will maximize its profit by producing 5 units.
B) the firm will maximize its profit by producing 60 units.
C) producing 5 or 60 units will yield equal profits.
D) Not enough information.
answer
B
Topic: Short-Run Competitive Profit Maximization
Status: New
question
23) The above figure shows the cost curves for a typical firm in a competitive market. If price = 8.5, then
A) the firm will produce 10 units.
B) the firm will produce 55 units.
C) the firm will earn positive profits.
D) None of above.
answer
B
Topic: Short-Run Competitive Profit Maximization
Status: New
question
24) The above figure shows the short run cost curves for a typical firm in a competitive market. If price = 8, then the firm
A) is earning positive profits.
B) should produce 50 units.
C) should shut down.
D) None of above.
answer
B
Topic: Short-Run Competitive Profit Maximization
Status: New
question
25) The above figure shows the short run cost curves for a typical firm in a competitive market. If price = 4, then the firm
A) is earning positive profits.
B) should produce 35 units.
C) should shut down.
D) None of above.
answer
C
Topic: Short-Run Competitive Profit Maximization
Status: New
question
For the following, please answer "True" or "False" and explain why.
26) If a firm cannot earn profits in the short run, it will shut down.
answer
False. A firm will operate at a loss if the loss incurred from production is less than the loss incurred from shutting down. Even if the firm shuts down, it still must pay its fixed costs because, in the short-run, going out of business is not an option.
Topic: Competition in the Short Run
Status: Old
question
27) If the market price in a competitive market is below the minimum of average variable cost, the firm will shut-down.
answer
True. At this price, total fixed costs are smaller than the operating loss. It pays for the firm to shut down.
Topic: Competition in the Short Run
Status: Old
question
28) If a competitive firm has to pay a lump sum tax, it will produce less.
answer
False. A lump sum tax is not related to the amount of output produced. It will increase fixed cost and thus lower profit. However, marginal cost will not be affected, and the profit-maximizing quantity will stay the same.
Topic: Competition in the Short Run
Status: Old
question
29) A competitive firm's supply curve is identical to its marginal cost curve.
answer
False. The statement is only partly correct. The supply curve is only that portion that lies above AVC.
Topic: Competition in the Short Run
Status: Old
30) If a firm in a competitive market is currently producing a quantity where price exceeds the marginal cost, the firm should lower its price.
Answer: False. A competitive firm does not vary price. Rather, if p>MC, the firm should increase output until p = MC.
Topic: Competition in the Short Run
Status: Old

31) The above figure shows the cost curves for a typical firm in a competitive market. From the graph, estimate the firm's profits when price equals $10 per unit.
Answer: When price = 10, p = MC when q = 60. TR = 600. The AC is just above 8.5, say 8.6. This yields
TC = 516. The firm's profit is estimated to be around $84.
Topic: Competition in the Short Run
Status: Old
question
32) The above figure shows the cost curves for a typical firm in a competitive market. If there are 200 identical firms, estimate the market quantity supplied when p = 4, 8, and 10.
answer
When p = 4, p < AVC so no firms will produce. At p = 8, each firm produces 50 units at a loss. At p = 10, each firm produces 60 units. The market quantity supplied at each price is:
question
Topic: Competition in the Short Run
Status: Old
33) If a firm operates at a loss, the loss is equal to TC - TR. If the firm shuts down instead, its loss is equal to FC. Given this, show that price must exceed AVC for the firm to operate at a loss and not shut down.
answer
The firm operates at a loss if TC - TR < FC. Adding TR - FC to both sides yields VC < TR. Dividing by q yields AVC < p. That is, the firm will operate at a loss as long as AVC < p.
Topic: Competition in the Short Run
Status: Old
question
34) Suppose a firm has the following total cost function TC = 100 + 2 q2. If price equals $20, what is the firm's output decision? What are its short-run profits?
answer
MC = 4q. To maximize profit, set 20 = 4q, or q = 5. Profit = TR - TC = (20 ∗ 5) - (100 + 50) = -50. Since FC = 100, the firm will produce 5 units and operate at a loss of 50 rather than shutting down and incurring a loss of 100.
Topic: Competition in the Short Run
Status: Old
question
35) Draw a graph that shows how the short-run shut-down price changes when an input price increases.
answer
See the above figure.
Topic: Competition in the Short Run
Status: Old
question
36) Suppose there are 1000 identical wheat farmers. For each, TC = 10 + q2. Derive the market supply curve.
answer
For each MC = 2q and AVC = q. Thus MC > AVC for all levels of output. The firm sets p = 2q or q = 0.5p. Since there are 1000 firms each producing q, market supply equals Q = 500p.
Topic: Competition in the Short Run
Status: Old
question
37) Suppose there are 1000 identical wheat farmers. For each, TC = 10 + q2. Market demand is Q = 600,000 - 100p. Derive the short-run equilibrium Q, q, and p. Does the typical firm earn a short-run profit?
answer
The firm's supply is q = 0.5p; market supply is Q = 500p. Market equilibrium can be found as 500p = 600,000 - 100p, or 600p = 600,000, so p = 1,000 and Q = 500,000. q = 0.5p = 500. Profit = (500 ∗ 1,000) - (10 + 250,000) = 249,990. Each firm earns a profit.
Topic: Competition in the Short Run
Status: Old
question
38) Consider a competitive firm with the short-run cost function
C(q) = 20 + 6q + 5q2
The firm faces a market price of p for its output.
a. Derive the firm's profit maximizing condition. Is the sufficient second order condition satisfied?
b. Suppose a specific tax of t (t < p) is levied on only this firm in the industry. What is the profit maximizing level of output as a function of p and t? (Assume the price is high enough that the firm does not shut down)
c. How does the output change as the tax increases? Use calculus to determine the relevant comparative static.
d. How does the firm's profit chance as the tax increases? Again, use calculus to determine the relevant comparative static. Show that profit decreases as t increases.
answer
a. Profit maximization occurs where p = MC:
p = 6 + 10q
dMC/dq = 10 > 0, so the sufficient second order condition is satisfied.
b. A tax will lower the price to p-t, so
p - t = 6 + 10q
Solve for q* = (p - t - 6)/10
Note that we are assuming p - t > 6 (or the firm will shut down).
c. dq*/dt = -1/10.
d. First compute the profit function
π = (p - t)q - C(q) = (p - t)(p - t - 6)/10 - 20 - 3(p - t - 6)/5 - (p - t - 6)2/20
Then compute dπ/dt = -(p - t - 6)/10 - (p - t)/10 + 3/5 + (p - t - 6)/10
This simplifies to
dπ/dt = -(p - t - 6)/10 < 0
Topic: Competition in the Short Run
Status: Old
39) Suppose that there are 80 firms in a market, each with the following cost function:
C(q) = 100 + 4q2
a. Derive the short-run market supply curve.
b. Suppose the market demand is
QD = 1280 - 30p
Find the equilibrium market quantity and price.
c. How much output will each firm produce? How much profit is each firm making?
Answer:
a. Each firm sets p = MC to determine their output:
p = 8q
So each firm's supply function is:
qi = p/8
There are 80 firms and QS = Nqi so the market supply is
QS = 10p
b. Equilibrium price occurs where QS = QD, so
1280 - 30p = 10p
p = 32, Q = 320
c. At p=32, the output of a firm is determined by p = MC, so
32 = 8q q = 4
(Or find by taking Q*/N = 320/80 = 4)
Profit (per firm) is:
= 32(4) - 100 - 4(4)2 = -36
Firms are making losses of $32 each.
Topic: Competition in the Short Run
Status: Old
question
8.4 Competition in the Long Run
answer
...
question
1) Markets with hit-and-run entry and exit experience
A) barriers to entry.
B) firms entering whenever they can make a profit and exiting when they cannot make a profit.
C) steady long-run economic profit.
D) a very steady number of firms.
answer
B
Topic: Competition in the Long Run
Status: Old
question
2) 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
D
Topic: Competition in the Long Run
Status: Old
question
3) 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
D
Topic: Competition in the Long Run
Status: Old
question
4) Long-run market supply curves are upward sloping if
A) firms are identical.
B) the number of firms is restricted in the long run.
C) input prices fall as the industry expands.
D) All of the above.
answer
B
Topic: Competition in the Long Run
Status: Old
question
5) Long-run market supply curves are downward sloping if
A) firms are identical.
B) the number of firms is restricted in the long run.
C) input prices fall as the industry expands.
D) All of the above.
answer
C
Topic: Competition in the Long Run
Status: Old
question
6) If firms in a competitive market are not identical, then the long-run market supply curve will be
A) horizontal.
B) upward sloping.
C) downward sloping.
D) undetermined.
answer
B
Topic: Competition in the Long Run
Status: Old
question
7) If firms in a competitive market are not identical, then an increase in cost will
A) shift marginal cost to the right.
B) push the most inefficient firms out of the market.
C) push the most efficient firms out of the market.
D) Need more information.
answer
B
Topic: Competition in the Long Run
Status: Old
question
8) Suppose that for each firm in the competitive market for potatoes, long-run average cost is minimized at 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 20¢ per pound.
C) each consumer will purchase $100 worth of potatoes.
D) the long-run price will be set just above 20¢ per pound.
answer
B
Topic: Competition in the Long Run
Status: Old
question
9) Suppose that for each firm in the competitive market for potatoes, long-run average cost is minimized at 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 many firms will this industry sustain in the long run?
A) 0
B) 100
C) 50,000
D) There is not enough information to answer.
answer
B
Topic: Competition in the Long Run
Status: Old
question
10) Suppose that for each firm in the competitive market for potatoes, long-run average cost is minimized at 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
C
Topic: Competition in the Long Run
Status: Old
question
11) Suppose that for each firm in the competitive market for potatoes, long-run average cost is minimized at 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 many pounds of potatoes will be consumed in total?
A) 0
B) 500
C) 10,000
D) 50,000
answer
D
Topic: Competition in the Long Run
Status: Old
For the following, please answer "True" or "False" and explain why.
question
12) If firms in a competitive market are identical, the long-run market supply curve is horizontal.
answer
False. The horizontal long-run supply curve also requires that factor prices do not increase with industry expansion and that the number of firms is not restricted.
Topic: Competition in the Long Run
Status: Old
question
13) The long-run supply curve in a competitive market is upward sloping.
answer
False. The shape of the long-run supply curve will depend on how similar the firms are and on the relationship between factor prices and total industry output.
Topic: Competition in the Long Run
Status: Old
question
14) If the shut down rule, p < AVC, is the same in the short run and the long run, explain why the shut down prices may be different.
answer
In the long run all costs are variable. In the long run the average variable cost is usually higher than in the short run.
Topic: Competition in the Long Run
Status: Old
question
15) The above figure shows the long-run cost curves for a typical firm in a competitive market. If the number of firms is unrestricted and input costs are constant, derive the long-run market supply curve.
answer
The long-run market supply curve is horizontal at a price of $10 per unit.
Topic: Competition in the Long Run
Status: Old
question
16) All the supply of peppermint oil is produced from mint plants grown in one county by several competitive growers (the number of growers is not limited). The quality of land in the county varies greatly. Would you expect the long-run market supply curve to slope upward, downward, or remain constant? Why?
answer
The long-run market supply curve will slope up because the growers have different costs. Those growers with poor-quality land have a higher average cost of production. The horizontal sum of the individual supply curves will slope up.
Topic: Competition in the Long Run
Status: Old
question
17) Suppose an industry has no fixed costs. Draw two graphs side by side for the industry. In the left graph draw a U-shaped average cost curve and the corresponding marginal cost curve. In the right graph, draw a downward-sloping market demand curve. Also in the right graph, draw a short-run supply curve that would generate positive profit, and the long-run supply curve that would result.
answer
See the above figure.
Topic: Competition in the Long Run
Status: Old
question
18) Suppose all firms in a competitive market are currently in both short-run and long-run equilibrium. What impact will a lump sum tax have on each firm in the short run? in the long run?
answer
In the short run, the lump sum tax represents a fixed cost. The firm's output decision is unchanged, but its profits decrease. In the long run, the tax raises the LRAC of each firm, but not MC. Minimum AC is higher, so price is higher. With a higher price, each firm produces a greater quantity, but the higher price means less quantity is demanded in total. Thus the number of firms will decrease.
Topic: Competition in the Long Run
Status: Old
question
19) Suppose market demand is Q = 1000 - 4p. If all firms have LRAC = 50 - 5q + q2, how many identical firms will there be when this industry is in long-run equilibrium?
answer
The long-run market supply curve is horizontal at the minimum LRAC. LRAC is minimized when -5 + 2q = 0 or q = 2.5. At this level of output, LRMC = LRAC = 43.75. At this price, 825 units are demanded. If each firm produces 2.5 units in the long run, then 330 firms will be in this market.
Topic: Competition in the Long Run
Status: Old
question
21) Firms in the sandbox industry have the long-run cost curve
C(q) = F + 6q + 5q2
Where F is a positive constant. The sandbox industry has a market demand of p = 90 - 2q
a. Suppose F = 20. What is the competitive equilibrium price, quantity and number of firms?
b. Suppose F is actually an accreditation fee established by the sandbox sellers association. A firm that avoids this fee will not be able to operate in the industry, and is therefore mandatory. How does the equilibrium price and number of firms vary with F? You do not have to use calculus, but explain whether each increases or decreases with F. How does the profit of each firm vary with F?
answer
a. Find the minimum AC point:
AC = 20/q + 6 + 5q
MC = 6 + 10q
AC = MC q = 2, AC(2) = $26
So the long run price will be $26, and each firm will produce two units of output. The market quantity will be 26 = 90 - 2Q Q = 32. That means there are 32/2 = 16 firms.
b. Repeat above using F in place of 20:
q = (F/5)1/2
p = 6 + 10(F/5)1/2
The market quantity is
Q = 42 - 5 (F/5)1/2
The number of firms:
N = Q/q = 42(F/5)-1/2 - 5
dp/dF = .5(F/5)-1/2(1/5) = 0.1(F/5)-1/2 > 0
dN/dF = -(21/5)(F/5)-3/2 < 0
As F increases, the AC increases, raising the break-even price. The market quantity will decrease. The MC is unchanged, so each firm produces more output. The number of firms must decrease as Q has decreased and q has increased. Profit is zero in the long run, independent of F.
Topic: Competition in the Long Run
Status: Old
question
8) The above figure shows the cost curves for a competitive firm. If the firm is to earn economic profit, price must exceed
A) $0.
B) $5.
C) $10.
D) $11.
answer
Answer: C
Topic: Profit Maximization
Status: Old
1 of 525
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
C
Topic: Perfect Competition
Status: Old
question
2) The residual demand curve is
A) the market demand minus the supply of other firms.
B) the remaining demand after the market clears.
C) the market demand minus the supply of one firm.
D) the long-run demand for a market.
answer
A
Topic: Perfect Competition
Status: Old
question
3) As the number of firms in an industry increases, the residual demand curve becomes
A) more elastic.
B) less elastic.
C) larger.
D) vertical.
answer
A
Topic: Perfect Competition
Status: Old
question
4) There are 10 identical internet service providers (ISPs) in a city serving a market demand with an elasticity of -1.5. The elasticity of supply for each firm is 3.0. The elasticity of demand faced by an individual ISP provider is
A) -42.
B) -15.
C) -1.5.
D) -27.
answer
A
Topic: Perfect Competition
Status: Old
question
5) 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
D
Topic: Perfect Competition
Status: Old
question
6) 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
B
Topic: Perfect Competition
Status: Old
question
7) If consumers view the output of any firm in a market to be identical to the output of any other firm in the market, the demand curve for the output of any given firm
A) will be identical to the market demand curve.
B) will be horizontal.
C) will be vertical.
D) cannot be determined from the information given.
answer
B
Topic: Perfect Competition
Status: Old
question
8) A horizontal demand curve for a firm implies that
A) the firm is a monopoly.
B) the market the firm is operating in is not competitive.
C) the firm is selling in a competitive market.
D) the products of that firm are very different from other firms' products.
answer
C
Topic: Perfect Competition
Status: Old
question
9) In the absence of any government regulation on price, if a firm has no power to set price on its own, one can safely conclude
A) the demand curve for the firm's product is horizontal.
B) there aren't many firms in the industry.
C) the market is in long-run equilibrium.
D) the firms in this industry are not profitable.
answer
A
Topic: Perfect Competition
Status: Old
question
10) In a perfectly competitive market,
A) firms can freely enter and exit.
B) firms sell a differentiated product.
C) transaction costs are high.
D) All of the above.
answer
A
Topic: Perfect Competition
Status: Old
question
11) If all conditions for a perfectly competitive market are met,
A) firms face sunk cost when entering the market.
B) firms demand curves are horizontal.
C) the market demand curve is horizontal.
D) the firms' demand curves are downward-sloping.
answer
B
Topic: Perfect Competition
Status: Old
question
12) In a competitive market, if buyers did not know all the prices charged by the many firms,
A) all firms still face horizontal demand curves.
B) firms sell a differentiated product.
C) demand curves can be downward sloping for some or all firms.
D) the number of firms will most likely decrease.
answer
C
Topic: Perfect Competition
Status: Old
question
13) Many car owners and car dealers describe their different cars for sale in the local newspapers and list their asking price. Many people shopping for a used car consider the different choices listed in the paper. The market for used cars could be described as
A) relatively competitive.
B) perfectly competitive.
C) non-competitive.
D) having high transaction costs.
answer
A
Topic: Perfect Competition
Status: Old
question
14) Many car owners and car dealers describe their different cars for sale in the local newspapers and list their asking price. Many people shopping for a used car consider the different choices listed in the paper. The absence of which condition prohibits this market from being described as perfectly competitive?
A) Buyers and sellers know the prices.
B) Firms freely enter and exit.
C) Transaction costs are low.
D) Consumers believe all firms sell identical products.
answer
D
Topic: Perfect Competition
Status: Old
question
15) 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
B
Topic: Perfect Competition
Status: Old
question
16) If a firm operates in a perfectly competitive market, then it will most likely
A) advertise its product on television.
B) settle for whatever price is offered.
C) have a difficult time obtaining information about the market price.
D) have an easy time keeping other firms out of the market.
answer
B
Topic: Perfect Competition
Status: Old
question
17) If a firm operates in a perfectly competitive market, then
A) all firms will advertise.
B) no firms will advertise.
C) the market leader will advertise.
D) new firms will advertise.
answer
B
Topic: Perfect Competition
Status: Old
question
18) The "Got Milk?" advertising campaign is a good example of
A) advertising in a competitive market.
B) how advertising in a competitive market does not pay off for a single firm.
C) interest groups financed by the industry advertise for the whole industry.
D) All of the above.
answer
D
Topic: Perfect Competition
Status: Old
question
19) The perfectly competitive model makes a lot of fairly unrealistic assumptions. Why do economics text books still talk a lot about this model?
A) Many markets are close to being perfectly competitive.
B) It is an important model to use as a benchmark to compare other markets structures to.
C) Perfectly competitive markets maximize societal welfare.
D) All of the above.
answer
D
Topic: Perfect Competition
Status: Old
question
20) If a firm happened to be the only seller of a particular product, it might behave as a price taker as long as
A) buyers have full information about the firm's price.
B) the transaction costs of doing business with this firm are low.
C) there are many buyers.
D) there is free entry and exit.
answer
D
Topic: Perfect Competition
Status: Old
question
21) The demand curve 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
C
Topic: Perfect Competition
Status: Old
question
22) Gift shops in a small town sell identical mugs to tourists. However, tourists don't have enough time to check out the prices one by one and don't have brochures listing prices of mugs. We can conclude
A) the market for mugs is perfectly competitive.
B) buyers have full information.
C) sellers are price takers.
D) the market is not perfectly competitive.
answer
D
Topic: Perfect Competition
Status: New
question
1) If a firm makes zero economic profit, then the firm
A) has no incentive to stay in the industry.
B) is better of exiting the industry.
C) is indifferent between staying and exiting the industry.
D) will shut down.
answer
C
Topic: Profit Maximization
Status: Revised
question
2) 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
C
Topic: Profit Maximization
Status: Old
question
3) A small business owner earns $50,000 in revenue annually. The explicit annual costs equal $30,000. The owner could work for someone else and earn $25,000 annually. The owner's business profit is ________ and the economic profit is ________.
A) $20,000, $5,000
B) $20,000, -$5,000
C) $25,000, -$5,000
D) $45,000, -$5,000
answer
B
Topic: Profit Maximization
Status: Old
question
4) A small business owner earns $60,000 in revenue annually. The explicit annual costs equal $40,000. The owner could work for someone else and earn $25,000 annually. The owner's business profit is ________ and the economic profit is ________.
A) $20,000, $5,000
B) $20,000, -$5,000
C) $25,000, -$5,000
D) $45,000, -$5,000
answer
B
Topic: Profit Maximization
Status: Old
question
5) A lawyer running his own business earns $18,000 in revenue monthly. He pays $8,000 as explicit costs including staff salary and utilities. He owns the office space so no rent is paid.. The lawyer could work for other legal firms and earn $10,000 per month. His business profit is ________ and his economic profit is ________.
A) $10,000, $10,000
B) $28,000, $10,000
C) $10,000, $0
D) $8,000, $0
answer
C
Topic: Profit Maximization
Status: New
question
6) 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
B
Topic: Profit Maximization
Status: Old
question
7) If a firm is operating at an output level where losses are minimized, the firm
A) has no incentive to stay in the industry.
B) is better of exiting the industry.
C) is maximizing profits.
D) will shut down.
answer
C
Topic: Profit Maximization
Status: Old
question
9) The above figure shows the cost curves for a competitive firm. The firm will incur economic losses if the price is less than
A) $0.
B) $5.
C) $10.
D) $11.
answer
C
Topic: Profit Maximization
Status: Old
question
10) The above figure shows the cost curves for a competitive firm. If the market price is $15 per unit, the firm will earn profits of
A) $0.
B) $4.
C) $40.
D) $160.
answer
D
Topic: Profit Maximization
Status: Old
question
11) 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
D
Topic: Profit Maximization
Status: Old
question
12) 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
C
Topic: Profit Maximization
Status: Old
question
13) 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
B
Topic: Profit Maximization
Status: Old
question
14) 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
A
Topic: Profit Maximization
Status: Old
question
15) Suppose the fixed cost of Christmas trees business is $7,000 and sunk. The variable cost for each tree is $20. According to the forecast, the market price for Christmas trees is $25 each and the owner could sell 1000 trees at most each year. The owner
A) should shut down the business.
B) should keep operating.
C) should sell less.
D) None of the above.
answer
B
Topic: Profit Maximization
Status: New
question
16) Suppose the estimated fixed cost of Christmas trees business is $7,000 and not sunk. The estimated variable cost for each tree is $20. According to the forecast, the market price for Christmas trees is $25 each and the owner could sell 1000 trees at most each year. In the long run, the owner
A) should shut down.
B) should keep operating.
C) should sell less.
D) None of the above.
answer
A
Topic: Profit Maximization
Status: New
question
17) Suppose the Christmas trees market is perfectly competitive. A business owner is currently suffering from a loss of $1,000, the cost of producing and selling an additional Christmas tree is $20, and the current market price is $25. The owner
A) should sell more trees.
B) should shut down his business now.
C) should advertise in the market.
D) is already minimizing his loss.
answer
A
Topic: Profit Maximization
Status: New
question
18) Suppose the Christmas trees market is perfectly competitive. An owner is currently earning a profit of $1,000, the cost of producing and selling an additional Christmas tree is $25, the current market price is $20. The owner
A) should sell more trees.
B) should not sell more trees.
C) should advertise in the market to promote his sales.
D) is not maximizing his profits.
answer
B
Topic: Profit Maximization
Status: New
question
1) 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
D
Topic: Competition in the Short Run
Status: Old
question
2) 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
A
Topic: Competition in the Short Run
Status: Old
question
3) The above figure shows the cost curves for a competitive firm. If the firm is to operate in the short run, price must exceed
A) $0.
B) $5.
C) $10.
D) $11.
answer
Answer: B
Topic: Competition in the Short Run
Status: Old
question
4) The above figure shows the cost curves for a competitive firm. If the profit-maximizing level of output is 40 price is equal to
A) $0.
B) $15.
C) $10.
D) $11.
answer
B
Topic: Competition in the Short Run
Status: Old
question
5) 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
C
Topic: Competition in the Short Run
Status: Old

6) 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: C
Topic: Competition in the Short Run
Status: Old
question
7) If a firm is a price taker, then its marginal revenue will always equal
A) price.
B) total cost.
C) zero.
D) one.
answer
A
Topic: Competition in the Short Run
Status: Old
question
8) An increase in the cost of an input will result in
A) a leftward shift in the firm's supply curve.
B) an upward shift of the firm's marginal cost curve.
C) a leftward shift of the market supply curve.
D) All of the above.
answer
D
Topic: Competition in the Short Run
Status: Old
question
9) When the production of a good involves several inputs, an increase in the cost of one input will usually cause total costs to
A) rise more than in proportion.
B) rise less than in proportion.
C) remain unchanged.
D) rise by the exact amount of the input price increase.
answer
B
Topic: Competition in the Short Run
Status: Old
question
10) When the production of a good involves several inputs and inputs are used in fixed proportions, an increase in the cost of one input will usually cause total costs to
A) rise more than in proportion.
B) rise less than in proportion.
C) remain unchanged.
D) rise by the exact amount of the input price increase.
answer
D
Topic: Competition in the Short Run
Status: Old

11) If a competitive firm is in short-run equilibrium, then
A) profits equal zero.
B) it will not operate at a loss.
C) an increase in its fixed cost will have no effect on profit.
D) an increase in its fixed cost will have no effect on output as long as revenue can cover its variable cost.
Answer: D
Topic: Competition in the Short Run
Status: Revised
question
12) If a competitive firm is in short-run equilibrium, then
A) 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
D
Topic: Competition in the Short Run
Status: Old
question
13) 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
A
Topic: Competition in the Short Run
Status: Old
question
14) 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
B
Topic: Competition in the Short Run
Status: Old

15) The above figure shows the cost curves for a typical firm in a market and three possible market supply curves. If there are 100 identical firms, the market supply curve is best represented by
A) curve A.
B) curve B.
C) curve C.
D) either curve A or B, but definitely not C.
Answer: C
Topic: Competition in the Short Run
Status: Old
question
16) If a firm is currently in short-run equilibrium earning a profit, what impact will a lump-sum tax have on its production decision?
A) The firm will decrease output to earn a higher profit.
B) The firm will increase output but earn a lower profit.
C) The firm will not change output but earn a lower profit.
D) The firm will not change output and earn a higher profit.
answer
C
Topic: Competition in the Short Run
Status: Old
question
17) Suppose that once a well is dug, water flows out of it continuously without any additional effort. Customers collect their water and pay a per gallon fee when they leave the site of the well. In the short run, the competitive firm in this market
A) will not shut down because variable costs are zero.
B) has no fixed costs.
C) faces diminishing marginal returns.
D) can act as a price setter.
answer
A
Topic: Competition in the Short Run
Status: Old
question
18) Suppose that once a well is dug, water flows out of it continuously without any additional effort. Customers collect their water and pay a per gallon fee when they leave the site of the well. In the short run, the competitive firm in this market
A) has no variable costs.
B) has no fixed costs.
C) will shut down.
D) can produce water at no cost.
answer
A
Topic: Competition in the Short Run
Status: Old
question
19) If a competitive firm cannot earn profit at any level of output during a given short-run period, then which of the following is LEAST likely to occur?
A) It will shut down in the short run and wait until the price increases sufficiently.
B) It will exit the industry in the long run.
C) It will operate at a loss in the short run.
D) It will minimize its loss by decreasing output so that price exceeds marginal cost.
answer
D
Topic: Competition in the Short Run
Status: Old
question
20) 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
B
Topic: Competition in the Short Run
Status: Old
question
21) There are currently N identical firms in a market. If it is a perfectly competitive market, the short-run market supply curve at any given price is
A) N times the supply of an individual firm.
B) N - 1 times the supply of an individual firm.
C) N plus the supply of an individual firm.
D) It cannot be determined from the information provided.
answer
A
Topic: Competition in the Short Run
Status: Old

22) The above figure shows the cost curves for a typical firm in a competitive market. If p = 10, then
A) the firm will maximize its profit by producing 5 units.
B) the firm will maximize its profit by producing 60 units.
C) producing 5 or 60 units will yield equal profits.
D) Not enough information.
Answer: B
Topic: Short-Run Competitive Profit Maximization
Status: New
question
23) The above figure shows the cost curves for a typical firm in a competitive market. If price = 8.5, then
A) the firm will produce 10 units.
B) the firm will produce 55 units.
C) the firm will earn positive profits.
D) None of above.
answer
B
Topic: Short-Run Competitive Profit Maximization
Status: New
question
24) The above figure shows the short run cost curves for a typical firm in a competitive market. If price = 8, then the firm
A) is earning positive profits.
B) should produce 50 units.
C) should shut down.
D) None of above.
answer
B
Topic: Short-Run Competitive Profit Maximization
Status: New
question
25) The above figure shows the short run cost curves for a typical firm in a competitive market. If price = 4, then the firm
A) is earning positive profits.
B) should produce 35 units.
C) should shut down.
D) None of above.
answer
C
Topic: Short-Run Competitive Profit Maximization
Status: New
question
36) Suppose there are 1000 identical wheat farmers. For each, TC = 10 + q2. Derive the market supply curve.
answer
For each MC = 2q and AVC = q. Thus MC > AVC for all levels of output. The firm sets p = 2q or q = 0.5p. Since there are 1000 firms each producing q, market supply equals Q = 500p.
Topic: Competition in the Short Run
Status: Old
question
37) Suppose there are 1000 identical wheat farmers. For each, TC = 10 + q2. Market demand is Q = 600,000 - 100p. Derive the short-run equilibrium Q, q, and p. Does the typical firm earn a short-run profit?
answer
The firm's supply is q = 0.5p; market supply is Q = 500p. Market equilibrium can be found as 500p = 600,000 - 100p, or 600p = 600,000, so p = 1,000 and Q = 500,000. q = 0.5p = 500. Profit = (500 ∗ 1,000) - (10 + 250,000) = 249,990. Each firm earns a profit.
Topic: Competition in the Short Run
Status: Old
question
38) Consider a competitive firm with the short-run cost function
C(q) = 20 + 6q + 5q2
The firm faces a market price of p for its output.
a. Derive the firm's profit maximizing condition. Is the sufficient second order condition satisfied?
b. Suppose a specific tax of t (t < p) is levied on only this firm in the industry. What is the profit maximizing level of output as a function of p and t? (Assume the price is high enough that the firm does not shut down)
c. How does the output change as the tax increases? Use calculus to determine the relevant comparative static.
d. How does the firm's profit chance as the tax increases? Again, use calculus to determine the relevant comparative static. Show that profit decreases as t increases.
answer
a. Profit maximization occurs where p = MC:
p = 6 + 10q
dMC/dq = 10 > 0, so the sufficient second order condition is satisfied.
b. A tax will lower the price to p-t, so
p - t = 6 + 10q
Solve for q* = (p - t - 6)/10
Note that we are assuming p - t > 6 (or the firm will shut down).
c. dq*/dt = -1/10.
d. First compute the profit function
π = (p - t)q - C(q) = (p - t)(p - t - 6)/10 - 20 - 3(p - t - 6)/5 - (p - t - 6)2/20
Then compute dπ/dt = -(p - t - 6)/10 - (p - t)/10 + 3/5 + (p - t - 6)/10
This simplifies to
dπ/dt = -(p - t - 6)/10 < 0
Topic: Competition in the Short Run
Status: Old
39) Suppose that there are 80 firms in a market, each with the following cost function:
C(q) = 100 + 4q2
a. Derive the short-run market supply curve.
b. Suppose the market demand is
QD = 1280 - 30p
Find the equilibrium market quantity and price.
c. How much output will each firm produce? How much profit is each firm making?
Answer:
a. Each firm sets p = MC to determine their output:
p = 8q
So each firm's supply function is:
qi = p/8
There are 80 firms and QS = Nqi so the market supply is
QS = 10p
b. Equilibrium price occurs where QS = QD, so
1280 - 30p = 10p
p = 32, Q = 320
c. At p=32, the output of a firm is determined by p = MC, so
32 = 8q q = 4
(Or find by taking Q*/N = 320/80 = 4)
Profit (per firm) is:
= 32(4) - 100 - 4(4)2 = -36
Firms are making losses of $32 each.
Topic: Competition in the Short Run
Status: Old
question
8.4 Competition in the Long Run
answer
...
question
1) Markets with hit-and-run entry and exit experience
A) barriers to entry.
B) firms entering whenever they can make a profit and exiting when they cannot make a profit.
C) steady long-run economic profit.
D) a very steady number of firms.
answer
B
Topic: Competition in the Long Run
Status: Old
question
2) 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
D
Topic: Competition in the Long Run
Status: Old
question
3) 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
D
Topic: Competition in the Long Run
Status: Old
question
4) Long-run market supply curves are upward sloping if
A) firms are identical.
B) the number of firms is restricted in the long run.
C) input prices fall as the industry expands.
D) All of the above.
answer
B
Topic: Competition in the Long Run
Status: Old
question
5) Long-run market supply curves are downward sloping if
A) firms are identical.
B) the number of firms is restricted in the long run.
C) input prices fall as the industry expands.
D) All of the above.
answer
C
Topic: Competition in the Long Run
Status: Old
question
6) If firms in a competitive market are not identical, then the long-run market supply curve will be
A) horizontal.
B) upward sloping.
C) downward sloping.
D) undetermined.
answer
B
Topic: Competition in the Long Run
Status: Old
question
7) If firms in a competitive market are not identical, then an increase in cost will
A) shift marginal cost to the right.
B) push the most inefficient firms out of the market.
C) push the most efficient firms out of the market.
D) Need more information.
answer
B
Topic: Competition in the Long Run
Status: Old
question
8) Suppose that for each firm in the competitive market for potatoes, long-run average cost is minimized at 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 20¢ per pound.
C) each consumer will purchase $100 worth of potatoes.
D) the long-run price will be set just above 20¢ per pound.
answer
B
Topic: Competition in the Long Run
Status: Old
question
9) Suppose that for each firm in the competitive market for potatoes, long-run average cost is minimized at 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 many firms will this industry sustain in the long run?
A) 0
B) 100
C) 50,000
D) There is not enough information to answer.
answer
B
Topic: Competition in the Long Run
Status: Old
question
10) Suppose that for each firm in the competitive market for potatoes, long-run average cost is minimized at 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
C
Topic: Competition in the Long Run
Status: Old
question
11) Suppose that for each firm in the competitive market for potatoes, long-run average cost is minimized at 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 many pounds of potatoes will be consumed in total?
A) 0
B) 500
C) 10,000
D) 50,000
answer
D
Topic: Competition in the Long Run
Status: Old
For the following, please answer "True" or "False" and explain why.
question
12) If firms in a competitive market are identical, the long-run market supply curve is horizontal.
answer
False. The horizontal long-run supply curve also requires that factor prices do not increase with industry expansion and that the number of firms is not restricted.
Topic: Competition in the Long Run
Status: Old
question
13) The long-run supply curve in a competitive market is upward sloping.
answer
False. The shape of the long-run supply curve will depend on how similar the firms are and on the relationship between factor prices and total industry output.
Topic: Competition in the Long Run
Status: Old
question
14) If the shut down rule, p < AVC, is the same in the short run and the long run, explain why the shut down prices may be different.
answer
In the long run all costs are variable. In the long run the average variable cost is usually higher than in the short run.
Topic: Competition in the Long Run
Status: Old
question
15) The above figure shows the long-run cost curves for a typical firm in a competitive market. If the number of firms is unrestricted and input costs are constant, derive the long-run market supply curve.
answer
The long-run market supply curve is horizontal at a price of $10 per unit.
Topic: Competition in the Long Run
Status: Old
16) All the supply of peppermint oil is produced from mint plants grown in one county by several competitive growers (the number of growers is not limited). The quality of land in the county varies greatly. Would you expect the long-run market supply curve to slope upward, downward, or remain constant? Why?
Answer: The long-run market supply curve will slope up because the growers have different costs. Those growers with poor-quality land have a higher average cost of production. The horizontal sum of the individual supply curves will slope up.
Topic: Competition in the Long Run
Status: Old
question
17) Suppose an industry has no fixed costs. Draw two graphs side by side for the industry. In the left graph draw a U-shaped average cost curve and the corresponding marginal cost curve. In the right graph, draw a downward-sloping market demand curve. Also in the right graph, draw a short-run supply curve that would generate positive profit, and the long-run supply curve that would result.
answer
See the above figure.
Topic: Competition in the Long Run
Status: Old
question
18) Suppose all firms in a competitive market are currently in both short-run and long-run equilibrium. What impact will a lump sum tax have on each firm in the short run? in the long run?
answer
In the short run, the lump sum tax represents a fixed cost. The firm's output decision is unchanged, but its profits decrease. In the long run, the tax raises the LRAC of each firm, but not MC. Minimum AC is higher, so price is higher. With a higher price, each firm produces a greater quantity, but the higher price means less quantity is demanded in total. Thus the number of firms will decrease.
Topic: Competition in the Long Run
Status: Old
question
19) Suppose market demand is Q = 1000 - 4p. If all firms have LRAC = 50 - 5q + q2, how many identical firms will there be when this industry is in long-run equilibrium?
answer
The long-run market supply curve is horizontal at the minimum LRAC. LRAC is minimized when -5 + 2q = 0 or q = 2.5. At this level of output, LRMC = LRAC = 43.75. At this price, 825 units are demanded. If each firm produces 2.5 units in the long run, then 330 firms will be in this market.
Topic: Competition in the Long Run
Status: Old
question
20) All firms in a competitive industry have the following long-run total cost curve:
C(q) = q3 - 10q2 + 36q
where q is the output of the firm.
a. Compute the long run equilibrium price. What does the long-run supply curve look like if this is a constant cost industry? Explain.
b. Suppose the market demand is given by Q = 111 - p. Determine the long-run equilibrium number of firms in the industry.
answer
a. Long run equilibrium is determined by (1) the minimum of the AC curves, and (2) the demand equation.
The AC is at a minimum where AC = MC:
Q = 5, AC = MC = 11
Therefore, the long run price will be $11 and each firm will produce 5 units.
question
b. The market quantity (from demand) is 100 and so 20 firms will exist in this market. The long run supply curve is flat at $11 because the price will always equal this due to free entry and exit of firms.
Topic: Competition in the Long Run
Status: Old
answer
...
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
C
Topic: Perfect Competition
Status: Old
question
2) The residual demand curve is
A) the market demand minus the supply of other firms.
B) the remaining demand after the market clears.
C) the market demand minus the supply of one firm.
D) the long-run demand for a market.
answer
A
Topic: Perfect Competition
Status: Old
question
3) As the number of firms in an industry increases, the residual demand curve becomes
A) more elastic.
B) less elastic.
C) larger.
D) vertical.
answer
A
Topic: Perfect Competition
Status: Old
question
4) There are 10 identical internet service providers (ISPs) in a city serving a market demand with an elasticity of -1.5. The elasticity of supply for each firm is 3.0. The elasticity of demand faced by an individual ISP provider is
A) -42.
B) -15.
C) -1.5.
D) -27.
answer
A
Topic: Perfect Competition
Status: Old
question
5) 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
D
Topic: Perfect Competition
Status: Old
question
6) 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
B
Topic: Perfect Competition
Status: Old
question
7) If consumers view the output of any firm in a market to be identical to the output of any other firm in the market, the demand curve for the output of any given firm
A) will be identical to the market demand curve.
B) will be horizontal.
C) will be vertical.
D) cannot be determined from the information given.
answer
B
Topic: Perfect Competition
Status: Old
question
8) A horizontal demand curve for a firm implies that
A) the firm is a monopoly.
B) the market the firm is operating in is not competitive.
C) the firm is selling in a competitive market.
D) the products of that firm are very different from other firms' products.
answer
C
Topic: Perfect Competition
Status: Old
question
9) In the absence of any government regulation on price, if a firm has no power to set price on its own, one can safely conclude
A) the demand curve for the firm's product is horizontal.
B) there aren't many firms in the industry.
C) the market is in long-run equilibrium.
D) the firms in this industry are not profitable.
answer
A
Topic: Perfect Competition
Status: Old
question
10) In a perfectly competitive market,
A) firms can freely enter and exit.
B) firms sell a differentiated product.
C) transaction costs are high.
D) All of the above.
answer
A
Topic: Perfect Competition
Status: Old
question
11) If all conditions for a perfectly competitive market are met,
A) firms face sunk cost when entering the market.
B) firms demand curves are horizontal.
C) the market demand curve is horizontal.
D) the firms' demand curves are downward-sloping.
answer
B
Topic: Perfect Competition
Status: Old
question
12) In a competitive market, if buyers did not know all the prices charged by the many firms,
A) all firms still face horizontal demand curves.
B) firms sell a differentiated product.
C) demand curves can be downward sloping for some or all firms.
D) the number of firms will most likely decrease.
answer
C
Topic: Perfect Competition
Status: Old
question
13) Many car owners and car dealers describe their different cars for sale in the local newspapers and list their asking price. Many people shopping for a used car consider the different choices listed in the paper. The market for used cars could be described as
A) relatively competitive.
B) perfectly competitive.
C) non-competitive.
D) having high transaction costs.
answer
A
Topic: Perfect Competition
Status: Old
question
14) Many car owners and car dealers describe their different cars for sale in the local newspapers and list their asking price. Many people shopping for a used car consider the different choices listed in the paper. The absence of which condition prohibits this market from being described as perfectly competitive?
A) Buyers and sellers know the prices.
B) Firms freely enter and exit.
C) Transaction costs are low.
D) Consumers believe all firms sell identical products.
answer
D
Topic: Perfect Competition
Status: Old
question
15) 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
B
Topic: Perfect Competition
Status: Old
question
16) If a firm operates in a perfectly competitive market, then it will most likely
A) advertise its product on television.
B) settle for whatever price is offered.
C) have a difficult time obtaining information about the market price.
D) have an easy time keeping other firms out of the market.
answer
B
Topic: Perfect Competition
Status: Old
question
17) If a firm operates in a perfectly competitive market, then
A) all firms will advertise.
B) no firms will advertise.
C) the market leader will advertise.
D) new firms will advertise.
answer
B
Topic: Perfect Competition
Status: Old
question
18) The "Got Milk?" advertising campaign is a good example of
A) advertising in a competitive market.
B) how advertising in a competitive market does not pay off for a single firm.
C) interest groups financed by the industry advertise for the whole industry.
D) All of the above.
answer
D
Topic: Perfect Competition
Status: Old
question
19) The perfectly competitive model makes a lot of fairly unrealistic assumptions. Why do economics text books still talk a lot about this model?
A) Many markets are close to being perfectly competitive.
B) It is an important model to use as a benchmark to compare other markets structures to.
C) Perfectly competitive markets maximize societal welfare.
D) All of the above.
answer
D
Topic: Perfect Competition
Status: Old
question
20) If a firm happened to be the only seller of a particular product, it might behave as a price taker as long as
A) buyers have full information about the firm's price.
B) the transaction costs of doing business with this firm are low.
C) there are many buyers.
D) there is free entry and exit.
answer
D
Topic: Perfect Competition
Status: Old
question
21) The demand curve 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
C
Topic: Perfect Competition
Status: Old
question
22) Gift shops in a small town sell identical mugs to tourists. However, tourists don't have enough time to check out the prices one by one and don't have brochures listing prices of mugs. We can conclude
A) the market for mugs is perfectly competitive.
B) buyers have full information.
C) sellers are price takers.
D) the market is not perfectly competitive.
answer
D
Topic: Perfect Competition
Status: New
question
For the following, please answer "True" or "False" and explain why.
23) A market is perfectly competitive even if firms have the ability to set their own price as long as the price difference reflects differences in the product.
answer
False. If the market is perfectly competitive, there are no differences in the product.
Topic: Perfect Competition
Status: Old
question
24) If transaction costs are high, then it is more likely a firm's demand curve is downward sloping.
answer
True. Transaction costs increase the costs for consumers to find a new firm. Thus high transaction costs allow a firm to charge more than others.
Topic: Perfect Competition
Status: Old
question
25) Explain why individual firms in competitive markets face more elastic demand curves than the market as a whole.
answer
In a competitive market, if an individual firm increases its price it will lose all of its customers, as consumers simply buy from another firm. However, if the price of the good increases for all firms some consumers will not continue to buy the good, but for many prices some consumers will continue to purchase the good.
Topic: Perfect Competition
Status: Old
question
1) If a firm makes zero economic profit, then the firm
A) has no incentive to stay in the industry.
B) is better of exiting the industry.
C) is indifferent between staying and exiting the industry.
D) will shut down.
answer
C
Topic: Profit Maximization
Status: Revised
question
2) 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
C
Topic: Profit Maximization
Status: Old
question
3) A small business owner earns $50,000 in revenue annually. The explicit annual costs equal $30,000. The owner could work for someone else and earn $25,000 annually. The owner's business profit is ________ and the economic profit is ________.
A) $20,000, $5,000
B) $20,000, -$5,000
C) $25,000, -$5,000
D) $45,000, -$5,000
answer
B
Topic: Profit Maximization
Status: Old
question
4) A small business owner earns $60,000 in revenue annually. The explicit annual costs equal $40,000. The owner could work for someone else and earn $25,000 annually. The owner's business profit is ________ and the economic profit is ________.
A) $20,000, $5,000
B) $20,000, -$5,000
C) $25,000, -$5,000
D) $45,000, -$5,000
answer
B
Topic: Profit Maximization
Status: Old
question
5) A lawyer running his own business earns $18,000 in revenue monthly. He pays $8,000 as explicit costs including staff salary and utilities. He owns the office space so no rent is paid.. The lawyer could work for other legal firms and earn $10,000 per month. His business profit is ________ and his economic profit is ________.
A) $10,000, $10,000
B) $28,000, $10,000
C) $10,000, $0
D) $8,000, $0
answer
C
Topic: Profit Maximization
Status: New
question
6) 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
B
Topic: Profit Maximization
Status: Old
question
7) If a firm is operating at an output level where losses are minimized, the firm
A) has no incentive to stay in the industry.
B) is better of exiting the industry.
C) is maximizing profits.
D) will shut down.
answer
C
Topic: Profit Maximization
Status: Old

8) The above figure shows the cost curves for a competitive firm. If the firm is to earn economic profit, price must exceed
A) $0.
B) $5.
C) $10.
D) $11.
Answer: C
Topic: Profit Maximization
Status: Old
question
9) The above figure shows the cost curves for a competitive firm. The firm will incur economic losses if the price is less than
A) $0.
B) $5.
C) $10.
D) $11.
answer
C
Topic: Profit Maximization
Status: Old
question
10) The above figure shows the cost curves for a competitive firm. If the market price is $15 per unit, the firm will earn profits of
A) $0.
B) $4.
C) $40.
D) $160.
answer
D
Topic: Profit Maximization
Status: Old
question
11) 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
D
Topic: Profit Maximization
Status: Old
question
12) 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
C
Topic: Profit Maximization
Status: Old
question
13) 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
B
Topic: Profit Maximization
Status: Old
question
14) 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
A
Topic: Profit Maximization
Status: Old
question
15) Suppose the fixed cost of Christmas trees business is $7,000 and sunk. The variable cost for each tree is $20. According to the forecast, the market price for Christmas trees is $25 each and the owner could sell 1000 trees at most each year. The owner
A) should shut down the business.
B) should keep operating.
C) should sell less.
D) None of the above.
answer
B
Topic: Profit Maximization
Status: New
question
16) Suppose the estimated fixed cost of Christmas trees business is $7,000 and not sunk. The estimated variable cost for each tree is $20. According to the forecast, the market price for Christmas trees is $25 each and the owner could sell 1000 trees at most each year. In the long run, the owner
A) should shut down.
B) should keep operating.
C) should sell less.
D) None of the above.
answer
A
Topic: Profit Maximization
Status: New
question
17) Suppose the Christmas trees market is perfectly competitive. A business owner is currently suffering from a loss of $1,000, the cost of producing and selling an additional Christmas tree is $20, and the current market price is $25. The owner
A) should sell more trees.
B) should shut down his business now.
C) should advertise in the market.
D) is already minimizing his loss.
answer
A
Topic: Profit Maximization
Status: New
question
18) Suppose the Christmas trees market is perfectly competitive. An owner is currently earning a profit of $1,000, the cost of producing and selling an additional Christmas tree is $25, the current market price is $20. The owner
A) should sell more trees.
B) should not sell more trees.
C) should advertise in the market to promote his sales.
D) is not maximizing his profits.
answer
B
Topic: Profit Maximization
Status: New
question
For the following, please answer "True" or "False" and explain why.
19) Even though fixed costs do not affect the output decision, an increase in fixed costs results in a wider range of prices for which the firm operates at a loss.
answer
True. An increase in fixed costs will shift AC upward but leave AVC unchanged. The gap between AVC and AC represents prices at which the firm will operate at a loss.
Topic: Profit Maximization
Status: Old
question
20) If a firm sets marginal revenue equal to marginal cost, it will make an economic profit.
answer
False. When a firm sets MR=MC it maximizes profits but the profit-maximizing level of output might still be negative (the smallest loss possible).
Topic: Profit Maximization
Status: Old
question
21) If a firm doesn't make an economic profit, it will shut down.
answer
False. The firm compares its losses from operating with its losses when shutting down and will shut down if the latter loss is less.
Topic: Profit Maximization
Status: Old
question
22) Suppose there are 20 competitive firms in a market. The supply curve of each firm is q = 2p. The market demand is Q = 200 - 2p. What is the residual demand curve facing a typical firm?
answer
The residual demand curve is equal to the market demand curve minus the supply of all the other firms. The supply of the other 19 firms is 38p. The residual demand is 200 - 40p.
Topic: Profit Maximization
Status: Old
question
23) Explain why shutting down and going out-of-business are different concepts.
answer
Shutting down means that the firm seizes production with the option of starting up production any time in the future. Going out-of-business is equal to exiting the industry. This involves reducing the amount of (the fixed input) capital to zero, which is not possible in the short run.
Topic: Profit Maximization
Status: Old
question
24) Suppose a firm has the following total cost function: TC = 100 + 4q2. What is the minimum price necessary for the firm to earn profit? Below what price will the firm shut down in the short run?
answer
AC = 100/q + 4q. This is minimized when dAC/dq = 0, or -100/q2 + 4 = 0. Solving yields q = 5 and AC = 40. Thus a price greater than $40 is required for the firm to earn profit. AVC = 4q and MC = 8q. Since AVC is below MC for all levels of output, AVC will be less than price for all levels of output. The firm will not shut down in the short run.
Topic: Profit Maximization
Status: Old
question
25) The above figure shows the cost curves for a typical firm in a competitive market. Note that if p = 10, then MC = p at both q = 5 and q = 60. Can they both yield maximum profit? Explain.
answer
No, at q = 5, p = MC, but this is not profit maximization; it is profit minimization. Profits expand as output increases since MR > MC for higher levels of output. At q = 60, an increase or decrease in output causes profits to fall, so this is the profit-maximizing q. Thus one way of wording the "second order condition" for profit maximization is that MC must cut the demand curve from below.
Topic: Profit Maximization
Status: Old
question
26) Lelu runs a firm that sells multipasses to intergalactic cruises. Her short-run cost function is given by
C(q) = q2 + 25q + 144
a. If the market price is $75/pass, how many units will Lelu produce?
b. At what price will Lelu earn zero profits?
c. If the price is below the level you found in b., will Lelu shut down? If so, explain. If not, below what price will she shut down?
answer
a. Profit = 75q - C(q) = 75q - q2 - 25q - 144
MAx profit --> dProfit/dq = 0
75 - 2q - 25 = 0
q = 25
b. Profit = 0 when p = AC = MC
2q + 25 = q + 25 + 144/q
Then q = 12. AC(12) = MC(12) = 49. So profit equals zero when p = $49.
c. No, Lelu will shut down when the price is below the minimum of the AVC (where AVC = MC)
AVC = q + 25
Minimum occurs when q = 0 and so the shut down price is p = $25.
Topic: Profit Maximization
Status: Old
question
27) A firm that only employs labor (L) has the following production function:
f(L) = 20L - L2
Let the price of output be normalized to one and the price of labor (relative to output price) is w.
a. Write out the profit function for this firm as a function of labor, L.
b. What is the necessary first-order condition for the firm to maximize profit when L > 0?
c. Compute the profit maximizing amount of labor as a function of the wage. What is the effect of an increase in wage on the firm's optimal employment level? Use calculus to solve this.
answer
a. Profit is
π = pf(L) - wL = 20L - L2 - wL
b. The FOC is
dπ/dL = 20 - 2L - w = 0
c. Solving for L
L*(w) = 10 - w/2
The comparative static is
dL*/dw = -1/2.
An increase in wage will decrease the level of employment by half the rate of change of wage.
Topic: Profit Maximization
Status: Old
8.3 Competition in the Short Run
question
1) 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
D
Topic: Competition in the Short Run
Status: Old
question
2) 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
A
Topic: Competition in the Short Run
Status: Old
question
3) The above figure shows the cost curves for a competitive firm. If the firm is to operate in the short run, price must exceed
A) $0.
B) $5.
C) $10.
D) $11.
answer
B
Topic: Competition in the Short Run
Status: Old
question
4) The above figure shows the cost curves for a competitive firm. If the profit-maximizing level of output is 40 price is equal to
A) $0.
B) $15.
C) $10.
D) $11.
answer
B
Topic: Competition in the Short Run
Status: Old
question
5) 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
C
Topic: Competition in the Short Run
Status: Old
question
6) 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
C
Topic: Competition in the Short Run
Status: Old
question
7) If a firm is a price taker, then its marginal revenue will always equal
A) price.
B) total cost.
C) zero.
D) one.
answer
A
Topic: Competition in the Short Run
Status: Old
question
8) An increase in the cost of an input will result in
A) a leftward shift in the firm's supply curve.
B) an upward shift of the firm's marginal cost curve.
C) a leftward shift of the market supply curve.
D) All of the above.
answer
D
Topic: Competition in the Short Run
Status: Old
question
9) When the production of a good involves several inputs, an increase in the cost of one input will usually cause total costs to
A) rise more than in proportion.
B) rise less than in proportion.
C) remain unchanged.
D) rise by the exact amount of the input price increase.
answer
B
Topic: Competition in the Short Run
Status: Old
question
10) When the production of a good involves several inputs and inputs are used in fixed proportions, an increase in the cost of one input will usually cause total costs to
A) rise more than in proportion.
B) rise less than in proportion.
C) remain unchanged.
D) rise by the exact amount of the input price increase.
answer
D
Topic: Competition in the Short Run
Status: Old
question
11) If a competitive firm is in short-run equilibrium, then
A) profits equal zero.
B) it will not operate at a loss.
C) an increase in its fixed cost will have no effect on profit.
D) an increase in its fixed cost will have no effect on output as long as revenue can cover its variable cost.
answer
D
Topic: Competition in the Short Run
Status: Revised
question
12) If a competitive firm is in short-run equilibrium, then
A) 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
D
Topic: Competition in the Short Run
Status: Old
question
13) 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
A
Topic: Competition in the Short Run
Status: Old
question
14) 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
B
Topic: Competition in the Short Run
Status: Old
question
15) The above figure shows the cost curves for a typical firm in a market and three possible market supply curves. If there are 100 identical firms, the market supply curve is best represented by
A) curve A.
B) curve B.
C) curve C.
D) either curve A or B, but definitely not C.
answer
C
Topic: Competition in the Short Run
Status: Old
question
16) If a firm is currently in short-run equilibrium earning a profit, what impact will a lump-sum tax have on its production decision?
A) The firm will decrease output to earn a higher profit.
B) The firm will increase output but earn a lower profit.
C) The firm will not change output but earn a lower profit.
D) The firm will not change output and earn a higher profit.
answer
C
Topic: Competition in the Short Run
Status: Old
question
17) Suppose that once a well is dug, water flows out of it continuously without any additional effort. Customers collect their water and pay a per gallon fee when they leave the site of the well. In the short run, the competitive firm in this market
A) will not shut down because variable costs are zero.
B) has no fixed costs.
C) faces diminishing marginal returns.
D) can act as a price setter.
answer
A
Topic: Competition in the Short Run
Status: Old
question
18) Suppose that once a well is dug, water flows out of it continuously without any additional effort. Customers collect their water and pay a per gallon fee when they leave the site of the well. In the short run, the competitive firm in this market
A) has no variable costs.
B) has no fixed costs.
C) will shut down.
D) can produce water at no cost.
answer
A
Topic: Competition in the Short Run
Status: Old
question
19) If a competitive firm cannot earn profit at any level of output during a given short-run period, then which of the following is LEAST likely to occur?
A) It will shut down in the short run and wait until the price increases sufficiently.
B) It will exit the industry in the long run.
C) It will operate at a loss in the short run.
D) It will minimize its loss by decreasing output so that price exceeds marginal cost.
answer
D
Topic: Competition in the Short Run
Status: Old
question
20) 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
B
Topic: Competition in the Short Run
Status: Old
question
21) There are currently N identical firms in a market. If it is a perfectly competitive market, the short-run market supply curve at any given price is
A) N times the supply of an individual firm.
B) N - 1 times the supply of an individual firm.
C) N plus the supply of an individual firm.
D) It cannot be determined from the information provided.
answer
A
Topic: Competition in the Short Run
Status: Old
question
22) The above figure shows the cost curves for a typical firm in a competitive market. If p = 10, then
A) the firm will maximize its profit by producing 5 units.
B) the firm will maximize its profit by producing 60 units.
C) producing 5 or 60 units will yield equal profits.
D) Not enough information.
answer
B
Topic: Short-Run Competitive Profit Maximization
Status: New
question
23) The above figure shows the cost curves for a typical firm in a competitive market. If price = 8.5, then
A) the firm will produce 10 units.
B) the firm will produce 55 units.
C) the firm will earn positive profits.
D) None of above.
answer
B
Topic: Short-Run Competitive Profit Maximization
Status: New
question
24) The above figure shows the short run cost curves for a typical firm in a competitive market. If price = 8, then the firm
A) is earning positive profits.
B) should produce 50 units.
C) should shut down.
D) None of above.
answer
B
Topic: Short-Run Competitive Profit Maximization
Status: New
question
25) The above figure shows the short run cost curves for a typical firm in a competitive market. If price = 4, then the firm
A) is earning positive profits.
B) should produce 35 units.
C) should shut down.
D) None of above.
answer
C
Topic: Short-Run Competitive Profit Maximization
Status: New
question
For the following, please answer "True" or "False" and explain why.
26) If a firm cannot earn profits in the short run, it will shut down.
answer
False. A firm will operate at a loss if the loss incurred from production is less than the loss incurred from shutting down. Even if the firm shuts down, it still must pay its fixed costs because, in the short-run, going out of business is not an option.
Topic: Competition in the Short Run
Status: Old
question
27) If the market price in a competitive market is below the minimum of average variable cost, the firm will shut-down.
answer
True. At this price, total fixed costs are smaller than the operating loss. It pays for the firm to shut down.
Topic: Competition in the Short Run
Status: Old
question
28) If a competitive firm has to pay a lump sum tax, it will produce less.
answer
False. A lump sum tax is not related to the amount of output produced. It will increase fixed cost and thus lower profit. However, marginal cost will not be affected, and the profit-maximizing quantity will stay the same.
Topic: Competition in the Short Run
Status: Old
question
29) A competitive firm's supply curve is identical to its marginal cost curve.
answer
False. The statement is only partly correct. The supply curve is only that portion that lies above AVC.
Topic: Competition in the Short Run
Status: Old
30) If a firm in a competitive market is currently producing a quantity where price exceeds the marginal cost, the firm should lower its price.
Answer: False. A competitive firm does not vary price. Rather, if p>MC, the firm should increase output until p = MC.
Topic: Competition in the Short Run
Status: Old

31) The above figure shows the cost curves for a typical firm in a competitive market. From the graph, estimate the firm's profits when price equals $10 per unit.
Answer: When price = 10, p = MC when q = 60. TR = 600. The AC is just above 8.5, say 8.6. This yields
TC = 516. The firm's profit is estimated to be around $84.
Topic: Competition in the Short Run
Status: Old
question
32) The above figure shows the cost curves for a typical firm in a competitive market. If there are 200 identical firms, estimate the market quantity supplied when p = 4, 8, and 10.
answer
When p = 4, p < AVC so no firms will produce. At p = 8, each firm produces 50 units at a loss. At p = 10, each firm produces 60 units. The market quantity supplied at each price is:
question
Topic: Competition in the Short Run
Status: Old
33) If a firm operates at a loss, the loss is equal to TC - TR. If the firm shuts down instead, its loss is equal to FC. Given this, show that price must exceed AVC for the firm to operate at a loss and not shut down.
answer
The firm operates at a loss if TC - TR < FC. Adding TR - FC to both sides yields VC < TR. Dividing by q yields AVC < p. That is, the firm will operate at a loss as long as AVC < p.
Topic: Competition in the Short Run
Status: Old
question
34) Suppose a firm has the following total cost function TC = 100 + 2 q2. If price equals $20, what is the firm's output decision? What are its short-run profits?
answer
MC = 4q. To maximize profit, set 20 = 4q, or q = 5. Profit = TR - TC = (20 ∗ 5) - (100 + 50) = -50. Since FC = 100, the firm will produce 5 units and operate at a loss of 50 rather than shutting down and incurring a loss of 100.
Topic: Competition in the Short Run
Status: Old
question
35) Draw a graph that shows how the short-run shut-down price changes when an input price increases.
answer
See the above figure.
Topic: Competition in the Short Run
Status: Old
question
36) Suppose there are 1000 identical wheat farmers. For each, TC = 10 + q2. Derive the market supply curve.
answer
For each MC = 2q and AVC = q. Thus MC > AVC for all levels of output. The firm sets p = 2q or q = 0.5p. Since there are 1000 firms each producing q, market supply equals Q = 500p.
Topic: Competition in the Short Run
Status: Old
question
37) Suppose there are 1000 identical wheat farmers. For each, TC = 10 + q2. Market demand is Q = 600,000 - 100p. Derive the short-run equilibrium Q, q, and p. Does the typical firm earn a short-run profit?
answer
The firm's supply is q = 0.5p; market supply is Q = 500p. Market equilibrium can be found as 500p = 600,000 - 100p, or 600p = 600,000, so p = 1,000 and Q = 500,000. q = 0.5p = 500. Profit = (500 ∗ 1,000) - (10 + 250,000) = 249,990. Each firm earns a profit.
Topic: Competition in the Short Run
Status: Old
question
38) Consider a competitive firm with the short-run cost function
C(q) = 20 + 6q + 5q2
The firm faces a market price of p for its output.
a. Derive the firm's profit maximizing condition. Is the sufficient second order condition satisfied?
b. Suppose a specific tax of t (t < p) is levied on only this firm in the industry. What is the profit maximizing level of output as a function of p and t? (Assume the price is high enough that the firm does not shut down)
c. How does the output change as the tax increases? Use calculus to determine the relevant comparative static.
d. How does the firm's profit chance as the tax increases? Again, use calculus to determine the relevant comparative static. Show that profit decreases as t increases.
answer
a. Profit maximization occurs where p = MC:
p = 6 + 10q
dMC/dq = 10 > 0, so the sufficient second order condition is satisfied.
b. A tax will lower the price to p-t, so
p - t = 6 + 10q
Solve for q* = (p - t - 6)/10
Note that we are assuming p - t > 6 (or the firm will shut down).
c. dq*/dt = -1/10.
d. First compute the profit function
π = (p - t)q - C(q) = (p - t)(p - t - 6)/10 - 20 - 3(p - t - 6)/5 - (p - t - 6)2/20
Then compute dπ/dt = -(p - t - 6)/10 - (p - t)/10 + 3/5 + (p - t - 6)/10
This simplifies to
dπ/dt = -(p - t - 6)/10 < 0
Topic: Competition in the Short Run
Status: Old
39) Suppose that there are 80 firms in a market, each with the following cost function:
C(q) = 100 + 4q2
a. Derive the short-run market supply curve.
b. Suppose the market demand is
QD = 1280 - 30p
Find the equilibrium market quantity and price.
c. How much output will each firm produce? How much profit is each firm making?
Answer:
a. Each firm sets p = MC to determine their output:
p = 8q
So each firm's supply function is:
qi = p/8
There are 80 firms and QS = Nqi so the market supply is
QS = 10p
b. Equilibrium price occurs where QS = QD, so
1280 - 30p = 10p
p = 32, Q = 320
c. At p=32, the output of a firm is determined by p = MC, so
32 = 8q q = 4
(Or find by taking Q*/N = 320/80 = 4)
Profit (per firm) is:
= 32(4) - 100 - 4(4)2 = -36
Firms are making losses of $32 each.
Topic: Competition in the Short Run
Status: Old
question
8.4 Competition in the Long Run
answer
...
question
1) Markets with hit-and-run entry and exit experience
A) barriers to entry.
B) firms entering whenever they can make a profit and exiting when they cannot make a profit.
C) steady long-run economic profit.
D) a very steady number of firms.
answer
B
Topic: Competition in the Long Run
Status: Old
question
2) 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
D
Topic: Competition in the Long Run
Status: Old
question
3) 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
D
Topic: Competition in the Long Run
Status: Old
question
4) Long-run market supply curves are upward sloping if
A) firms are identical.
B) the number of firms is restricted in the long run.
C) input prices fall as the industry expands.
D) All of the above.
answer
B
Topic: Competition in the Long Run
Status: Old
question
5) Long-run market supply curves are downward sloping if
A) firms are identical.
B) the number of firms is restricted in the long run.
C) input prices fall as the industry expands.
D) All of the above.
answer
C
Topic: Competition in the Long Run
Status: Old
question
6) If firms in a competitive market are not identical, then the long-run market supply curve will be
A) horizontal.
B) upward sloping.
C) downward sloping.
D) undetermined.
answer
B
Topic: Competition in the Long Run
Status: Old
question
7) If firms in a competitive market are not identical, then an increase in cost will
A) shift marginal cost to the right.
B) push the most inefficient firms out of the market.
C) push the most efficient firms out of the market.
D) Need more information.
answer
B
Topic: Competition in the Long Run
Status: Old
question
8) Suppose that for each firm in the competitive market for potatoes, long-run average cost is minimized at 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 20¢ per pound.
C) each consumer will purchase $100 worth of potatoes.
D) the long-run price will be set just above 20¢ per pound.
answer
B
Topic: Competition in the Long Run
Status: Old
question
9) Suppose that for each firm in the competitive market for potatoes, long-run average cost is minimized at 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 many firms will this industry sustain in the long run?
A) 0
B) 100
C) 50,000
D) There is not enough information to answer.
answer
B
Topic: Competition in the Long Run
Status: Old
question
10) Suppose that for each firm in the competitive market for potatoes, long-run average cost is minimized at 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
C
Topic: Competition in the Long Run
Status: Old
question
11) Suppose that for each firm in the competitive market for potatoes, long-run average cost is minimized at 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 many pounds of potatoes will be consumed in total?
A) 0
B) 500
C) 10,000
D) 50,000
answer
D
Topic: Competition in the Long Run
Status: Old
For the following, please answer "True" or "False" and explain why.
question
12) If firms in a competitive market are identical, the long-run market supply curve is horizontal.
answer
False. The horizontal long-run supply curve also requires that factor prices do not increase with industry expansion and that the number of firms is not restricted.
Topic: Competition in the Long Run
Status: Old
question
13) The long-run supply curve in a competitive market is upward sloping.
answer
False. The shape of the long-run supply curve will depend on how similar the firms are and on the relationship between factor prices and total industry output.
Topic: Competition in the Long Run
Status: Old
question
14) If the shut down rule, p < AVC, is the same in the short run and the long run, explain why the shut down prices may be different.
answer
In the long run all costs are variable. In the long run the average variable cost is usually higher than in the short run.
Topic: Competition in the Long Run
Status: Old
question
15) The above figure shows the long-run cost curves for a typical firm in a competitive market. If the number of firms is unrestricted and input costs are constant, derive the long-run market supply curve.
answer
The long-run market supply curve is horizontal at a price of $10 per unit.
Topic: Competition in the Long Run
Status: Old
question
16) All the supply of peppermint oil is produced from mint plants grown in one county by several competitive growers (the number of growers is not limited). The quality of land in the county varies greatly. Would you expect the long-run market supply curve to slope upward, downward, or remain constant? Why?
answer
The long-run market supply curve will slope up because the growers have different costs. Those growers with poor-quality land have a higher average cost of production. The horizontal sum of the individual supply curves will slope up.
Topic: Competition in the Long Run
Status: Old
question
17) Suppose an industry has no fixed costs. Draw two graphs side by side for the industry. In the left graph draw a U-shaped average cost curve and the corresponding marginal cost curve. In the right graph, draw a downward-sloping market demand curve. Also in the right graph, draw a short-run supply curve that would generate positive profit, and the long-run supply curve that would result.
answer
See the above figure.
Topic: Competition in the Long Run
Status: Old
question
18) Suppose all firms in a competitive market are currently in both short-run and long-run equilibrium. What impact will a lump sum tax have on each firm in the short run? in the long run?
answer
In the short run, the lump sum tax represents a fixed cost. The firm's output decision is unchanged, but its profits decrease. In the long run, the tax raises the LRAC of each firm, but not MC. Minimum AC is higher, so price is higher. With a higher price, each firm produces a greater quantity, but the higher price means less quantity is demanded in total. Thus the number of firms will decrease.
Topic: Competition in the Long Run
Status: Old
question
19) Suppose market demand is Q = 1000 - 4p. If all firms have LRAC = 50 - 5q + q2, how many identical firms will there be when this industry is in long-run equilibrium?
answer
The long-run market supply curve is horizontal at the minimum LRAC. LRAC is minimized when -5 + 2q = 0 or q = 2.5. At this level of output, LRMC = LRAC = 43.75. At this price, 825 units are demanded. If each firm produces 2.5 units in the long run, then 330 firms will be in this market.
Topic: Competition in the Long Run
Status: Old
question
20) All firms in a competitive industry have the following long-run total cost curve:
C(q) = q3 - 10q2 + 36q
where q is the output of the firm.
a. Compute the long run equilibrium price. What does the long-run supply curve look like if this is a constant cost industry? Explain.
b. Suppose the market demand is given by Q = 111 - p. Determine the long-run equilibrium number of firms in the industry.
answer
a. Long run equilibrium is determined by (1) the minimum of the AC curves, and (2) the demand equation.
The AC is at a minimum where AC = MC:
Q = 5, AC = MC = 11
Therefore, the long run price will be $11 and each firm will produce 5 units.
question
b. The market quantity (from demand) is 100 and so 20 firms will exist in this market. The long run supply curve is flat at $11 because the price will always equal this due to free entry and exit of firms.
Topic: Competition in the Long Run
Status: Old
answer
...
question
21) Firms in the sandbox industry have the long-run cost curve
C(q) = F + 6q + 5q2
Where F is a positive constant. The sandbox industry has a market demand of p = 90 - 2q
a. Suppose F = 20. What is the competitive equilibrium price, quantity and number of firms?
b. Suppose F is actually an accreditation fee established by the sandbox sellers association. A firm that avoids this fee will not be able to operate in the industry, and is therefore mandatory. How does the equilibrium price and number of firms vary with F? You do not have to use calculus, but explain whether each increases or decreases with F. How does the profit of each firm vary with F?
answer
a. Find the minimum AC point:
AC = 20/q + 6 + 5q
MC = 6 + 10q
AC = MC q = 2, AC(2) = $26
So the long run price will be $26, and each firm will produce two units of output. The market quantity will be 26 = 90 - 2Q Q = 32. That means there are 32/2 = 16 firms.
b. Repeat above using F in place of 20:
q = (F/5)1/2
p = 6 + 10(F/5)1/2
The market quantity is
Q = 42 - 5 (F/5)1/2
The number of firms:
N = Q/q = 42(F/5)-1/2 - 5
dp/dF = .5(F/5)-1/2(1/5) = 0.1(F/5)-1/2 > 0
dN/dF = -(21/5)(F/5)-3/2 < 0
As F increases, the AC increases, raising the break-even price. The market quantity will decrease. The MC is unchanged, so each firm produces more output. The number of firms must decrease as Q has decreased and q has increased. Profit is zero in the long run, independent of F.
Topic: Competition in the Long Run
Status: Old
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
C
Topic: Perfect Competition
Status: Old
question
2) The residual demand curve is
A) the market demand minus the supply of other firms.
B) the remaining demand after the market clears.
C) the market demand minus the supply of one firm.
D) the long-run demand for a market.
answer
A
Topic: Perfect Competition
Status: Old
question
3) As the number of firms in an industry increases, the residual demand curve becomes
A) more elastic.
B) less elastic.
C) larger.
D) vertical.
answer
A
Topic: Perfect Competition
Status: Old
question
4) There are 10 identical internet service providers (ISPs) in a city serving a market demand with an elasticity of -1.5. The elasticity of supply for each firm is 3.0. The elasticity of demand faced by an individual ISP provider is
A) -42.
B) -15.
C) -1.5.
D) -27.
answer
A
Topic: Perfect Competition
Status: Old
question
5) 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
D
Topic: Perfect Competition
Status: Old
question
6) 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
B
Topic: Perfect Competition
Status: Old
question
7) If consumers view the output of any firm in a market to be identical to the output of any other firm in the market, the demand curve for the output of any given firm
A) will be identical to the market demand curve.
B) will be horizontal.
C) will be vertical.
D) cannot be determined from the information given.
answer
B
Topic: Perfect Competition
Status: Old
question
8) A horizontal demand curve for a firm implies that
A) the firm is a monopoly.
B) the market the firm is operating in is not competitive.
C) the firm is selling in a competitive market.
D) the products of that firm are very different from other firms' products.
answer
C
Topic: Perfect Competition
Status: Old
question
9) In the absence of any government regulation on price, if a firm has no power to set price on its own, one can safely conclude
A) the demand curve for the firm's product is horizontal.
B) there aren't many firms in the industry.
C) the market is in long-run equilibrium.
D) the firms in this industry are not profitable.
answer
A
Topic: Perfect Competition
Status: Old
question
10) In a perfectly competitive market,
A) firms can freely enter and exit.
B) firms sell a differentiated product.
C) transaction costs are high.
D) All of the above.
answer
A
Topic: Perfect Competition
Status: Old
question
11) If all conditions for a perfectly competitive market are met,
A) firms face sunk cost when entering the market.
B) firms demand curves are horizontal.
C) the market demand curve is horizontal.
D) the firms' demand curves are downward-sloping.
answer
B
Topic: Perfect Competition
Status: Old
question
12) In a competitive market, if buyers did not know all the prices charged by the many firms,
A) all firms still face horizontal demand curves.
B) firms sell a differentiated product.
C) demand curves can be downward sloping for some or all firms.
D) the number of firms will most likely decrease.
answer
C
Topic: Perfect Competition
Status: Old
question
13) Many car owners and car dealers describe their different cars for sale in the local newspapers and list their asking price. Many people shopping for a used car consider the different choices listed in the paper. The market for used cars could be described as
A) relatively competitive.
B) perfectly competitive.
C) non-competitive.
D) having high transaction costs.
answer
A
Topic: Perfect Competition
Status: Old
question
14) Many car owners and car dealers describe their different cars for sale in the local newspapers and list their asking price. Many people shopping for a used car consider the different choices listed in the paper. The absence of which condition prohibits this market from being described as perfectly competitive?
A) Buyers and sellers know the prices.
B) Firms freely enter and exit.
C) Transaction costs are low.
D) Consumers believe all firms sell identical products.
answer
D
Topic: Perfect Competition
Status: Old
question
15) 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
B
Topic: Perfect Competition
Status: Old
question
16) If a firm operates in a perfectly competitive market, then it will most likely
A) advertise its product on television.
B) settle for whatever price is offered.
C) have a difficult time obtaining information about the market price.
D) have an easy time keeping other firms out of the market.
answer
B
Topic: Perfect Competition
Status: Old
question
17) If a firm operates in a perfectly competitive market, then
A) all firms will advertise.
B) no firms will advertise.
C) the market leader will advertise.
D) new firms will advertise.
answer
B
Topic: Perfect Competition
Status: Old
question
18) The "Got Milk?" advertising campaign is a good example of
A) advertising in a competitive market.
B) how advertising in a competitive market does not pay off for a single firm.
C) interest groups financed by the industry advertise for the whole industry.
D) All of the above.
answer
D
Topic: Perfect Competition
Status: Old
question
19) The perfectly competitive model makes a lot of fairly unrealistic assumptions. Why do economics text books still talk a lot about this model?
A) Many markets are close to being perfectly competitive.
B) It is an important model to use as a benchmark to compare other markets structures to.
C) Perfectly competitive markets maximize societal welfare.
D) All of the above.
answer
D
Topic: Perfect Competition
Status: Old
question
20) If a firm happened to be the only seller of a particular product, it might behave as a price taker as long as
A) buyers have full information about the firm's price.
B) the transaction costs of doing business with this firm are low.
C) there are many buyers.
D) there is free entry and exit.
answer
D
Topic: Perfect Competition
Status: Old
question
21) The demand curve 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
C
Topic: Perfect Competition
Status: Old
question
22) Gift shops in a small town sell identical mugs to tourists. However, tourists don't have enough time to check out the prices one by one and don't have brochures listing prices of mugs. We can conclude
A) the market for mugs is perfectly competitive.
B) buyers have full information.
C) sellers are price takers.
D) the market is not perfectly competitive.
answer
D
Topic: Perfect Competition
Status: New
question
For the following, please answer "True" or "False" and explain why.
23) A market is perfectly competitive even if firms have the ability to set their own price as long as the price difference reflects differences in the product.
answer
False. If the market is perfectly competitive, there are no differences in the product.
Topic: Perfect Competition
Status: Old
question
24) If transaction costs are high, then it is more likely a firm's demand curve is downward sloping.
answer
True. Transaction costs increase the costs for consumers to find a new firm. Thus high transaction costs allow a firm to charge more than others.
Topic: Perfect Competition
Status: Old
question
25) Explain why individual firms in competitive markets face more elastic demand curves than the market as a whole.
answer
In a competitive market, if an individual firm increases its price it will lose all of its customers, as consumers simply buy from another firm. However, if the price of the good increases for all firms some consumers will not continue to buy the good, but for many prices some consumers will continue to purchase the good.
Topic: Perfect Competition
Status: Old
question
1) If a firm makes zero economic profit, then the firm
A) has no incentive to stay in the industry.
B) is better of exiting the industry.
C) is indifferent between staying and exiting the industry.
D) will shut down.
answer
C
Topic: Profit Maximization
Status: Revised
question
2) 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
C
Topic: Profit Maximization
Status: Old
question
3) A small business owner earns $50,000 in revenue annually. The explicit annual costs equal $30,000. The owner could work for someone else and earn $25,000 annually. The owner's business profit is ________ and the economic profit is ________.
A) $20,000, $5,000
B) $20,000, -$5,000
C) $25,000, -$5,000
D) $45,000, -$5,000
answer
B
Topic: Profit Maximization
Status: Old
question
4) A small business owner earns $60,000 in revenue annually. The explicit annual costs equal $40,000. The owner could work for someone else and earn $25,000 annually. The owner's business profit is ________ and the economic profit is ________.
A) $20,000, $5,000
B) $20,000, -$5,000
C) $25,000, -$5,000
D) $45,000, -$5,000
answer
B
Topic: Profit Maximization
Status: Old
question
5) A lawyer running his own business earns $18,000 in revenue monthly. He pays $8,000 as explicit costs including staff salary and utilities. He owns the office space so no rent is paid.. The lawyer could work for other legal firms and earn $10,000 per month. His business profit is ________ and his economic profit is ________.
A) $10,000, $10,000
B) $28,000, $10,000
C) $10,000, $0
D) $8,000, $0
answer
C
Topic: Profit Maximization
Status: New
question
6) 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
B
Topic: Profit Maximization
Status: Old
question
7) If a firm is operating at an output level where losses are minimized, the firm
A) has no incentive to stay in the industry.
B) is better of exiting the industry.
C) is maximizing profits.
D) will shut down.
answer
C
Topic: Profit Maximization
Status: Old

8) The above figure shows the cost curves for a competitive firm. If the firm is to earn economic profit, price must exceed
A) $0.
B) $5.
C) $10.
D) $11.
Answer: C
Topic: Profit Maximization
Status: Old
question
9) The above figure shows the cost curves for a competitive firm. The firm will incur economic losses if the price is less than
A) $0.
B) $5.
C) $10.
D) $11.
answer
C
Topic: Profit Maximization
Status: Old
question
10) The above figure shows the cost curves for a competitive firm. If the market price is $15 per unit, the firm will earn profits of
A) $0.
B) $4.
C) $40.
D) $160.
answer
D
Topic: Profit Maximization
Status: Old
question
11) 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
D
Topic: Profit Maximization
Status: Old
question
12) 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
C
Topic: Profit Maximization
Status: Old
question
13) 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
B
Topic: Profit Maximization
Status: Old
question
14) 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
A
Topic: Profit Maximization
Status: Old
question
15) Suppose the fixed cost of Christmas trees business is $7,000 and sunk. The variable cost for each tree is $20. According to the forecast, the market price for Christmas trees is $25 each and the owner could sell 1000 trees at most each year. The owner
A) should shut down the business.
B) should keep operating.
C) should sell less.
D) None of the above.
answer
B
Topic: Profit Maximization
Status: New
question
16) Suppose the estimated fixed cost of Christmas trees business is $7,000 and not sunk. The estimated variable cost for each tree is $20. According to the forecast, the market price for Christmas trees is $25 each and the owner could sell 1000 trees at most each year. In the long run, the owner
A) should shut down.
B) should keep operating.
C) should sell less.
D) None of the above.
answer
A
Topic: Profit Maximization
Status: New
question
17) Suppose the Christmas trees market is perfectly competitive. A business owner is currently suffering from a loss of $1,000, the cost of producing and selling an additional Christmas tree is $20, and the current market price is $25. The owner
A) should sell more trees.
B) should shut down his business now.
C) should advertise in the market.
D) is already minimizing his loss.
answer
A
Topic: Profit Maximization
Status: New
question
18) Suppose the Christmas trees market is perfectly competitive. An owner is currently earning a profit of $1,000, the cost of producing and selling an additional Christmas tree is $25, the current market price is $20. The owner
A) should sell more trees.
B) should not sell more trees.
C) should advertise in the market to promote his sales.
D) is not maximizing his profits.
answer
B
Topic: Profit Maximization
Status: New
question
For the following, please answer "True" or "False" and explain why.
19) Even though fixed costs do not affect the output decision, an increase in fixed costs results in a wider range of prices for which the firm operates at a loss.
answer
True. An increase in fixed costs will shift AC upward but leave AVC unchanged. The gap between AVC and AC represents prices at which the firm will operate at a loss.
Topic: Profit Maximization
Status: Old
question
20) If a firm sets marginal revenue equal to marginal cost, it will make an economic profit.
answer
False. When a firm sets MR=MC it maximizes profits but the profit-maximizing level of output might still be negative (the smallest loss possible).
Topic: Profit Maximization
Status: Old
question
21) If a firm doesn't make an economic profit, it will shut down.
answer
False. The firm compares its losses from operating with its losses when shutting down and will shut down if the latter loss is less.
Topic: Profit Maximization
Status: Old
question
22) Suppose there are 20 competitive firms in a market. The supply curve of each firm is q = 2p. The market demand is Q = 200 - 2p. What is the residual demand curve facing a typical firm?
answer
The residual demand curve is equal to the market demand curve minus the supply of all the other firms. The supply of the other 19 firms is 38p. The residual demand is 200 - 40p.
Topic: Profit Maximization
Status: Old
question
23) Explain why shutting down and going out-of-business are different concepts.
answer
Shutting down means that the firm seizes production with the option of starting up production any time in the future. Going out-of-business is equal to exiting the industry. This involves reducing the amount of (the fixed input) capital to zero, which is not possible in the short run.
Topic: Profit Maximization
Status: Old
question
24) Suppose a firm has the following total cost function: TC = 100 + 4q2. What is the minimum price necessary for the firm to earn profit? Below what price will the firm shut down in the short run?
answer
AC = 100/q + 4q. This is minimized when dAC/dq = 0, or -100/q2 + 4 = 0. Solving yields q = 5 and AC = 40. Thus a price greater than $40 is required for the firm to earn profit. AVC = 4q and MC = 8q. Since AVC is below MC for all levels of output, AVC will be less than price for all levels of output. The firm will not shut down in the short run.
Topic: Profit Maximization
Status: Old
question
25) The above figure shows the cost curves for a typical firm in a competitive market. Note that if p = 10, then MC = p at both q = 5 and q = 60. Can they both yield maximum profit? Explain.
answer
No, at q = 5, p = MC, but this is not profit maximization; it is profit minimization. Profits expand as output increases since MR > MC for higher levels of output. At q = 60, an increase or decrease in output causes profits to fall, so this is the profit-maximizing q. Thus one way of wording the "second order condition" for profit maximization is that MC must cut the demand curve from below.
Topic: Profit Maximization
Status: Old
question
26) Lelu runs a firm that sells multipasses to intergalactic cruises. Her short-run cost function is given by
C(q) = q2 + 25q + 144
a. If the market price is $75/pass, how many units will Lelu produce?
b. At what price will Lelu earn zero profits?
c. If the price is below the level you found in b., will Lelu shut down? If so, explain. If not, below what price will she shut down?
answer
a. Profit = 75q - C(q) = 75q - q2 - 25q - 144
MAx profit --> dProfit/dq = 0
75 - 2q - 25 = 0
q = 25
b. Profit = 0 when p = AC = MC
2q + 25 = q + 25 + 144/q
Then q = 12. AC(12) = MC(12) = 49. So profit equals zero when p = $49.
c. No, Lelu will shut down when the price is below the minimum of the AVC (where AVC = MC)
AVC = q + 25
Minimum occurs when q = 0 and so the shut down price is p = $25.
Topic: Profit Maximization
Status: Old
question
27) A firm that only employs labor (L) has the following production function:
f(L) = 20L - L2
Let the price of output be normalized to one and the price of labor (relative to output price) is w.
a. Write out the profit function for this firm as a function of labor, L.
b. What is the necessary first-order condition for the firm to maximize profit when L > 0?
c. Compute the profit maximizing amount of labor as a function of the wage. What is the effect of an increase in wage on the firm's optimal employment level? Use calculus to solve this.
answer
a. Profit is
π = pf(L) - wL = 20L - L2 - wL
b. The FOC is
dπ/dL = 20 - 2L - w = 0
c. Solving for L
L*(w) = 10 - w/2
The comparative static is
dL*/dw = -1/2.
An increase in wage will decrease the level of employment by half the rate of change of wage.
Topic: Profit Maximization
Status: Old
8.3 Competition in the Short Run
question
1) 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
D
Topic: Competition in the Short Run
Status: Old
question
2) 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
A
Topic: Competition in the Short Run
Status: Old
question
3) The above figure shows the cost curves for a competitive firm. If the firm is to operate in the short run, price must exceed
A) $0.
B) $5.
C) $10.
D) $11.
answer
B
Topic: Competition in the Short Run
Status: Old
question
4) The above figure shows the cost curves for a competitive firm. If the profit-maximizing level of output is 40 price is equal to
A) $0.
B) $15.
C) $10.
D) $11.
answer
B
Topic: Competition in the Short Run
Status: Old
question
5) 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
C
Topic: Competition in the Short Run
Status: Old
question
6) 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
C
Topic: Competition in the Short Run
Status: Old
question
7) If a firm is a price taker, then its marginal revenue will always equal
A) price.
B) total cost.
C) zero.
D) one.
answer
A
Topic: Competition in the Short Run
Status: Old
question
8) An increase in the cost of an input will result in
A) a leftward shift in the firm's supply curve.
B) an upward shift of the firm's marginal cost curve.
C) a leftward shift of the market supply curve.
D) All of the above.
answer
D
Topic: Competition in the Short Run
Status: Old
question
9) When the production of a good involves several inputs, an increase in the cost of one input will usually cause total costs to
A) rise more than in proportion.
B) rise less than in proportion.
C) remain unchanged.
D) rise by the exact amount of the input price increase.
answer
B
Topic: Competition in the Short Run
Status: Old
question
10) When the production of a good involves several inputs and inputs are used in fixed proportions, an increase in the cost of one input will usually cause total costs to
A) rise more than in proportion.
B) rise less than in proportion.
C) remain unchanged.
D) rise by the exact amount of the input price increase.
answer
D
Topic: Competition in the Short Run
Status: Old
question
11) If a competitive firm is in short-run equilibrium, then
A) profits equal zero.
B) it will not operate at a loss.
C) an increase in its fixed cost will have no effect on profit.
D) an increase in its fixed cost will have no effect on output as long as revenue can cover its variable cost.
answer
D
Topic: Competition in the Short Run
Status: Revised
question
12) If a competitive firm is in short-run equilibrium, then
A) 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
D
Topic: Competition in the Short Run
Status: Old
question
13) 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
A
Topic: Competition in the Short Run
Status: Old
question
14) 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
B
Topic: Competition in the Short Run
Status: Old
question
15) The above figure shows the cost curves for a typical firm in a market and three possible market supply curves. If there are 100 identical firms, the market supply curve is best represented by
A) curve A.
B) curve B.
C) curve C.
D) either curve A or B, but definitely not C.
answer
C
Topic: Competition in the Short Run
Status: Old
question
16) If a firm is currently in short-run equilibrium earning a profit, what impact will a lump-sum tax have on its production decision?
A) The firm will decrease output to earn a higher profit.
B) The firm will increase output but earn a lower profit.
C) The firm will not change output but earn a lower profit.
D) The firm will not change output and earn a higher profit.
answer
C
Topic: Competition in the Short Run
Status: Old
question
17) Suppose that once a well is dug, water flows out of it continuously without any additional effort. Customers collect their water and pay a per gallon fee when they leave the site of the well. In the short run, the competitive firm in this market
A) will not shut down because variable costs are zero.
B) has no fixed costs.
C) faces diminishing marginal returns.
D) can act as a price setter.
answer
A
Topic: Competition in the Short Run
Status: Old