question
1. A restaurant that has market power can
a. minimize costs more efficiently than its competitors.
b. influence the market price for the meals it sells.
c. reduce its marketing budget more than its competitors.
d. ignore profit-maximizing strategies when setting the price for its meals.
a. minimize costs more efficiently than its competitors.
b. influence the market price for the meals it sells.
c. reduce its marketing budget more than its competitors.
d. ignore profit-maximizing strategies when setting the price for its meals.
answer
b. influence the market price for the meals it sells.
question
2. Which of the following is NOT a characteristic of a competitive market?
a. Buyers and sellers are price takers.
b. Each firm sells a virtually identical product.
c. Entry is limited.
d. Each firm chooses an output level that maximizes profits.
a. Buyers and sellers are price takers.
b. Each firm sells a virtually identical product.
c. Entry is limited.
d. Each firm chooses an output level that maximizes profits.
answer
c. Entry is limited.
question
Free entry means that
a. the government pays any entry costs for individual firms.
b. government-funded research lowers the costs of patents and other barriers to entry.
c. a firm's marginal cost is zero.
d. no legal barriers prevent a firm from entering an industry.
a. the government pays any entry costs for individual firms.
b. government-funded research lowers the costs of patents and other barriers to entry.
c. a firm's marginal cost is zero.
d. no legal barriers prevent a firm from entering an industry.
answer
d. no legal barriers prevent a firm from entering an industry.
question
4. Land of Many Lakes (LML) sells butter to a broker in Albert Lea, Minnesota. Because the market for butter is generally considered to be competitive, LML
a. can choose the price at which it sells its butter but not the quantity of butter that it produces.
b. can choose quantity of butter that it produces but not the price at which it sells its butter.
c. can choose both the price at which it sells its butter and the quantity of butter that it produces.
d. cannot choose either the price at which it sells it butter or the quantity of butter that it produces
a. can choose the price at which it sells its butter but not the quantity of butter that it produces.
b. can choose quantity of butter that it produces but not the price at which it sells its butter.
c. can choose both the price at which it sells its butter and the quantity of butter that it produces.
d. cannot choose either the price at which it sells it butter or the quantity of butter that it produces
answer
b. can choose quantity of butter that it produces but not the price at which it sells its butter.
question
5. If Bradley's Butcher Shop sells its product in a competitive market, then
a. the price of that product depends on the quantity of the product that Bradley's Butcher Shop produces and sells because the firm's demand curve is downward sloping.
b. Bradley's Butcher Shop's total cost must be a constant multiple of its quantity of output.
c. Bradley's Butcher Shop's total revenue must be proportional to its quantity of output.
d. Bradley's Butcher Shop's total revenue must be equal to its average revenue.
a. the price of that product depends on the quantity of the product that Bradley's Butcher Shop produces and sells because the firm's demand curve is downward sloping.
b. Bradley's Butcher Shop's total cost must be a constant multiple of its quantity of output.
c. Bradley's Butcher Shop's total revenue must be proportional to its quantity of output.
d. Bradley's Butcher Shop's total revenue must be equal to its average revenue.
answer
c. Bradley's Butcher Shop's total revenue must be proportional to its quantity of output.
question
6. Which of the following statements is correct?
a. For all firms, marginal revenue equals the price of the good.
b. Only for competitive firms does average revenue equal the price of the good.
c. Marginal revenue can be calculated as total revenue divided by the quantity sold.
d. Only for competitive firms does average revenue equal marginal revenue.
a. For all firms, marginal revenue equals the price of the good.
b. Only for competitive firms does average revenue equal the price of the good.
c. Marginal revenue can be calculated as total revenue divided by the quantity sold.
d. Only for competitive firms does average revenue equal marginal revenue.
answer
d. Only for competitive firms does average revenue equal marginal revenue.
question
7. Suppose a firm in a competitive market earned $1,000 in total revenue and had a marginal revenue of $10 for the last unit produced and sold. What is the average revenue per unit, and how many units were sold?
a. $5 and 50 units
b. $5 and 100 units
c. $10 and 50 units
d. $10 and 100 units
a. $5 and 50 units
b. $5 and 100 units
c. $10 and 50 units
d. $10 and 100 units
answer
d. $10 and 100 units
question
8. When a certain competitive firm produces and sells 100 units of output, marginal revenue is $80. When the same firm produces and sells 200 units of output, what is average revenue?
a. $40
b. $80
c. $160
d. This cannot be determined from the given information.
a. $40
b. $80
c. $160
d. This cannot be determined from the given information.
answer
b. $80
question
9. Which of the following statements regarding a competitive firm is correct?
a. Because demand is downward sloping, if a firm increases its level of output, the firm will have to charge a lower price to sell the additional output.
b. If a firm raises its price, the firm may be able to increase its total revenue even though it will sell fewer units.
c. By lowering its price below the market price, the firm will benefit from selling more units at the lower price than it could have sold by charging the market price.
d. For all firms, average revenue equals the price of the good.
a. Because demand is downward sloping, if a firm increases its level of output, the firm will have to charge a lower price to sell the additional output.
b. If a firm raises its price, the firm may be able to increase its total revenue even though it will sell fewer units.
c. By lowering its price below the market price, the firm will benefit from selling more units at the lower price than it could have sold by charging the market price.
d. For all firms, average revenue equals the price of the good.
answer
d. For all firms, average revenue equals the price of the good.
question
10. Suppose that a firm operating in perfectly competitive market sells 200 units of output at a price of $3 each. Which of the following statements is correct?
(i) Marginal revenue equals $3.
(ii) Average revenue equals $600.
(iii) Average revenue exceeds marginal revenue, but we don't know by how much.
a. (i) only
b. (iii) only
c. (i) and (ii) only
d. (i), (ii), and (iii)
(i) Marginal revenue equals $3.
(ii) Average revenue equals $600.
(iii) Average revenue exceeds marginal revenue, but we don't know by how much.
a. (i) only
b. (iii) only
c. (i) and (ii) only
d. (i), (ii), and (iii)
answer
a. (i) only
question
11. If a competitive firm is currently producing a level of output at which marginal revenue exceeds marginal cost, then
a. a one-unit increase in output will increase the firm's profit. b. a one-unit decrease in output will increase the firm's profit.
c. total revenue exceeds total cost.
d. total cost exceeds total revenue.
a. a one-unit increase in output will increase the firm's profit. b. a one-unit decrease in output will increase the firm's profit.
c. total revenue exceeds total cost.
d. total cost exceeds total revenue.
answer
a. a one-unit increase in output will increase the firm's profit.
question
12. A certain competitive firm sells its output for $20 per unit. The 50th unit of output that the firm produces has a marginal cost of $22. Production of the 50th unit of output does not necessarily
a. increase the firm's total revenue by $20.
b. increase the firm's total cost by $22.
c. decrease the firm's profit by $2.
d. increase the firm's average variable cost by $0.44.
a. increase the firm's total revenue by $20.
b. increase the firm's total cost by $22.
c. decrease the firm's profit by $2.
d. increase the firm's average variable cost by $0.44.
answer
d. increase the firm's average variable cost by $0.44.
question
13. For a certain firm, the 100th unit of output that the firm produces has a marginal revenue of $11 and a marginal cost of $10. It follows that the
a. production of the 100th unit of output increases the firm's profit by $1.
b. production of the 100th unit of output increases the firm's average total cost by $1.
c. firm's profit-maximizing level of output is less than 100 units.
d. production of the 101st unit of output must increase the firm's profit by more than $1.
a. production of the 100th unit of output increases the firm's profit by $1.
b. production of the 100th unit of output increases the firm's average total cost by $1.
c. firm's profit-maximizing level of output is less than 100 units.
d. production of the 101st unit of output must increase the firm's profit by more than $1.
answer
a. production of the 100th unit of output increases the firm's profit by $1.
question
14. Kate is a professional opera singer who gives voice lessons. The vocal-music industry is competitive. Kate hires a business consultant to analyze her financial records. The consultant recommends that Kate give fewer voice lessons. The consultant must have concluded that Kate's
a. total revenues exceed her total accounting costs.
b. marginal revenue exceeds her total cost.
c. marginal revenue exceeds her marginal cost.
d. marginal cost exceeds her marginal revenue.
a. total revenues exceed her total accounting costs.
b. marginal revenue exceeds her total cost.
c. marginal revenue exceeds her marginal cost.
d. marginal cost exceeds her marginal revenue.
answer
d. marginal cost exceeds her marginal revenue.
question
15. Robin owns a horse stables and riding academy and gives riding lessons for children at "pony camp." Her business operates in a competitive industry. Robin gives riding lessons to 20 children per month. Her monthly total revenue is $4,000. The marginal cost of pony camp is $200 per child. In order to maximize profits, Robin should
a. give riding lessons to more than 20 children per month.
b. give riding lessons to fewer than 20 children per month. c. continue to give riding lessons to 20 children per month. d. We do not have enough information to answer the question.
a. give riding lessons to more than 20 children per month.
b. give riding lessons to fewer than 20 children per month. c. continue to give riding lessons to 20 children per month. d. We do not have enough information to answer the question.
answer
c. continue to give riding lessons to 20 children per month.
question
16. Mrs. Smith operates a business in a competitive market. The current market price is $8.50. At her profit- maximizing level of production, the average variable cost is $8.00, and the average total cost is $8.25. Mrs. Smith should
a. shut down her business in the short run but continue to operate in the long run.
b. continue to operate in the short run but shut down in the long run.
c. continue to operate in both the short run and long run.
d. shut down in both the short run and long run.
a. shut down her business in the short run but continue to operate in the long run.
b. continue to operate in the short run but shut down in the long run.
c. continue to operate in both the short run and long run.
d. shut down in both the short run and long run.
answer
c. continue to operate in both the short run and long run.
question
17. The accountants hired by the Brookside Racquet Club have determined total fixed cost to be $75,000, total variable cost to be $130,000, and total revenue to be $125,000. Because of this information, in the short run, the Brookside Racquet Club should
a. shut down because staying open would be more expensive.
b. lower their prices to increase their profits.
c. stay open because shutting down would be more expensive.
d. stay open because the firm is making an economic profit.
a. shut down because staying open would be more expensive.
b. lower their prices to increase their profits.
c. stay open because shutting down would be more expensive.
d. stay open because the firm is making an economic profit.
answer
a. shut down because staying open would be more expensive.
question
18. For a firm, marginal revenue minus marginal cost is equal to
a. profit.
b. average total cost.
c. change in profit.
d. change in average revenue.
a. profit.
b. average total cost.
c. change in profit.
d. change in average revenue.
answer
c. change in profit.
question
19. Which of the following expressions is correct for a competitive firm?
a. profit = (quantity of output) x (price - average total cost)
b. marginal revenue = (change in total revenue)/(quantity of output)
c. average total cost = total variable cost/quantity of output
d. average revenue = (marginal revenue) x (quantity of output)
a. profit = (quantity of output) x (price - average total cost)
b. marginal revenue = (change in total revenue)/(quantity of output)
c. average total cost = total variable cost/quantity of output
d. average revenue = (marginal revenue) x (quantity of output)
answer
a. profit = (quantity of output) x (price - average total cost)
question
20. The short-run supply curve for a firm in a perfectly competitive market is
a. horizontal.
b. likely to slope downward.
c. determined by forces external to the firm.
d. the portion of its marginal cost curve that lies above its average variable cost.
a. horizontal.
b. likely to slope downward.
c. determined by forces external to the firm.
d. the portion of its marginal cost curve that lies above its average variable cost.
answer
d. the portion of its marginal cost curve that lies above its average variable cost.
question
21. When price exceeds average variable cost in the short run, a competitive firm's marginal cost curve is regarded as its supply curve because
a. the position of the marginal cost curve determines the price for which the firm should sell its product.
b. among the various cost curves, the marginal cost curve is the only one that slopes upward.
c. the marginal cost curve determines the quantity of output the firm is willing to supply at any price.
d. the firm is aware that marginal revenue must exceed marginal cost in order for profit to be
maximized.
a. the position of the marginal cost curve determines the price for which the firm should sell its product.
b. among the various cost curves, the marginal cost curve is the only one that slopes upward.
c. the marginal cost curve determines the quantity of output the firm is willing to supply at any price.
d. the firm is aware that marginal revenue must exceed marginal cost in order for profit to be
maximized.
answer
c. the marginal cost curve determines the quantity of output the firm is willing to supply at any price.
question
22. Suppose a profit-maximizing firm in a competitive market produces rubber bands. When the market price for rubber bands falls below the minimum of its average total cost, but still lies above the minimum of average variable cost, in the short run the firm will
a. experience losses but will continue to produce rubber bands.
b. shut down.
c. earn both economic and accounting profits. d. raise the price of its product.
a. experience losses but will continue to produce rubber bands.
b. shut down.
c. earn both economic and accounting profits. d. raise the price of its product.
answer
a. experience losses but will continue to produce rubber
question
23. Which of the following statements best reflects the production decision of a profit-maximizing firm in a competitive market when price falls below the minimum of average variable cost?
a. The firm will continue to produce to attempt to pay fixed costs.
b. The firm will immediately stop production to minimize its losses.
c. The firm will stop production as soon as it is able to pay its sunk costs.
d. The firm will continue to produce in the short run but will likely exit the market in the long run.
a. The firm will continue to produce to attempt to pay fixed costs.
b. The firm will immediately stop production to minimize its losses.
c. The firm will stop production as soon as it is able to pay its sunk costs.
d. The firm will continue to produce in the short run but will likely exit the market in the long run.
answer
b. The firm will immediately stop production to minimize its losses.
question
24. Which of the following statements is correct regarding a firm's decision-making?
a. The decision to shut down and the decision to exit are both short-run decisions.
b. The decision to shut down and the decision to exit are both long-run decisions.
c. The decision to shut down is a short-run decision, whereas the decision to exit is a long-run decision.
d. The decision to exit is a short-run decision, whereas the decision to shut down is a long-run decision.
a. The decision to shut down and the decision to exit are both short-run decisions.
b. The decision to shut down and the decision to exit are both long-run decisions.
c. The decision to shut down is a short-run decision, whereas the decision to exit is a long-run decision.
d. The decision to exit is a short-run decision, whereas the decision to shut down is a long-run decision.
answer
c. The decision to shut down is a short-run decision, whereas the decision to exit is a long-run decision.
question
25. For a particular competitive firm, the minimum value of average variable cost (AVC) is $12 and is reached when 200 units of output are produced. For the same firm, the minimum value of average total cost (ATC) is $15 and is reached when 230 units of output are produced. Which of the following statements is correct?
a. In the short run, the firm will shut down if the price of its product is $11.
b. In the long run, the firm will shut down if the price of its product is $14.
c. If the price of its product is $12, then the firm's loss if it produces 200 units of output is the same
as its loss if it shuts down.
d. All of the above are correct.
a. In the short run, the firm will shut down if the price of its product is $11.
b. In the long run, the firm will shut down if the price of its product is $14.
c. If the price of its product is $12, then the firm's loss if it produces 200 units of output is the same
as its loss if it shuts down.
d. All of the above are correct.
answer
d. All of the above are correct.
question
A sunk cost is one that
a. changes as the level of output changes in the short run.
b. was paid in the past and will not change regardless of the present decision.
c. should determine the rational course of action in the future.
d. has the most impact on profit-making decisions.
a. changes as the level of output changes in the short run.
b. was paid in the past and will not change regardless of the present decision.
c. should determine the rational course of action in the future.
d. has the most impact on profit-making decisions.
answer
b. was paid in the past and will not change regardless of the present decision.
question
27. In the long run, a firm will enter a competitive industry if
a. total revenue exceeds total cost.
b. the price exceeds average total cost.
c. the firm can earn economic profits.
d. All of the above are correct.
a. total revenue exceeds total cost.
b. the price exceeds average total cost.
c. the firm can earn economic profits.
d. All of the above are correct.
answer
d. All of the above are correct.
question
28. In a market with 1,000 identical firms, the short-run market supply is the
a. marginal cost curve above average variable cost for a typical firm in the market.
b. quantity supplied by the typical firm in the market at each price.
c. sum of the prices charged by each of the 1,000 individual firms at each quantity.
d. sum of the quantities supplied by each of the 1,000 individual firms at each price.
a. marginal cost curve above average variable cost for a typical firm in the market.
b. quantity supplied by the typical firm in the market at each price.
c. sum of the prices charged by each of the 1,000 individual firms at each quantity.
d. sum of the quantities supplied by each of the 1,000 individual firms at each price.
answer
d. sum of the quantities supplied by each of the 1,000 individual firms at each price.
question
29. In the short run for a particular market, there are 300 firms. Each firm has a marginal cost of $30 when it produces 200 units of output. One point on the market supply curve is
a. quantity = 300; price = $30.
b. quantity = 600,000; price = $90,000.
c. quantity = 100,000; price = $30.
d. quantity = 600,000; price = $30.
a. quantity = 300; price = $30.
b. quantity = 600,000; price = $90,000.
c. quantity = 100,000; price = $30.
d. quantity = 600,000; price = $30.
answer
d. quantity = 600,000; price = $30.
question
30. In a competitive market with identical firms,
b. an increase in demand in the short run will result in a new price above the minimum of average total cost, allowing firms to earn a positive economic profit in both the short run and the long run.
c. firms cannot earn positive economic profit in either the short run or long run.
d. firms can earn positive economic profit in the long run if the long-run market supply curve is upward sloping.
e. free entry and exit into the market requires that firms earn zero economic profit in the long run even though they may be able to earn positive economic profit in the short run.
b. an increase in demand in the short run will result in a new price above the minimum of average total cost, allowing firms to earn a positive economic profit in both the short run and the long run.
c. firms cannot earn positive economic profit in either the short run or long run.
d. firms can earn positive economic profit in the long run if the long-run market supply curve is upward sloping.
e. free entry and exit into the market requires that firms earn zero economic profit in the long run even though they may be able to earn positive economic profit in the short run.
answer
d. firms can earn positive economic profit in the long run if the long-run market supply curve is upward sloping.
question
31. Suppose a competitive market is comprised of firms that face identical cost curves. The firms experience an increase in demand that results in positive profits for the firms. Which of the following events are then most likely to occur?
(i) New firms will enter the market.
(ii) In the short run, price will rise; in the long run, price will rise further.
(iii) In the long run, all firms will be producing at their efficient scale.
a. (i) and (ii) only
b. (i) and (iii) only
c. (ii) and (iii) only
d. (i), (ii) and (iii)
(i) New firms will enter the market.
(ii) In the short run, price will rise; in the long run, price will rise further.
(iii) In the long run, all firms will be producing at their efficient scale.
a. (i) and (ii) only
b. (i) and (iii) only
c. (ii) and (iii) only
d. (i), (ii) and (iii)
answer
b. (i) and (iii) only
question
32. Roger owns a small health store that sells vitamins in a perfectly competitive market. If vitamins sell for $12 per bottle and the average total cost per bottle is $12.50 at the profit-maximizing output level, then in the long run
a. more firms will enter the market.
b. some firms will exit from the market.
c. the equilibrium price per bottle will fall.
d. average total costs will fall.
a. more firms will enter the market.
b. some firms will exit from the market.
c. the equilibrium price per bottle will fall.
d. average total costs will fall.
answer
b. some firms will exit from the market.
question
33. The textile industry is composed of a large number of small firms. In recent years, these firms have suffered economic losses, and many sellers have left the industry. Economic theory suggests that these conditions will
a. shift the demand curve outward so that price will rise to the level of production cost.
b. cause the remaining firms to collude so that they can produce more efficiently.
c. cause the market supply to decline and the price of textiles to rise.
d. cause firms in the textile industry to suffer long-run economic losses.
a. shift the demand curve outward so that price will rise to the level of production cost.
b. cause the remaining firms to collude so that they can produce more efficiently.
c. cause the market supply to decline and the price of textiles to rise.
d. cause firms in the textile industry to suffer long-run economic losses.
answer
c. cause the market supply to decline and the price of textiles to rise.
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