Deck 14: Firms in Competitive Markets

Question 1

In a competitive market, marginal revenue will only sometimes equal average revenue.

Answer 1

False

Question 2

The supply curve of a firm in a competitive market is equal to average variable cost, above the minimum of marginal cost.

Answer 2

False

Question 3

The long-run equilibrium in a competitive market characterised by firms with identical costs is generally characterised by firms operating at efficient scale.

Answer 3

True

Question 4

If price is less than marginal cost, then it is optimal for a firm to shut down.

Question 5

To maximise profit, a firm should operate at the minimum of average total cost.

Question 6

If a seller is a price taker, they will be able to sell all the quantity they want at the market price.

Question 7

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

Question 8

In the long run, a competitive market with 1000 identical firms will experience an equilibrium price equal to the minimum of each firm's average total cost.

Question 9

If it is optimal for a firm to exit in the short-run, then it will also be optimal for the firm to exit in the long-run, all else equal.

Question 10

By comparing the marginal revenue and marginal cost from each unit produced, a firm in a competitive market can determine the profit-maximising level of production.

Question 11

The market's short-run supply curve will be steeper than an individual firm's supply curve.

Question 12

The long-run supply curve in a competitive market must be more inelastic than the short-run supply curve.

Question 13

At the end of the process of entry and exit, it is possible that some firms in a competitive market are making positive economic profit.

Question 14

In a competitive market, individual buyers and sellers have little ability to influence price.

Question 15

If, at a given output, the marginal cost curve lies below the marginal revenue curve but above the average total cost curve, then the firm can increase its profit by decreasing output.

Question 16

When a resource used in the production of a good sold in a competitive market is available in only limited quantities, the long-run supply curve is likely to be upward-sloping.

Question 17

When a profit-maximising firm in a competitive market experiences rising prices, it will respond with an increase in production.

Question 18

Assume the market for lawn mowing is competitive. If a firm has no fixed costs and constant marginal costs, then a doubling of output will lead to a doubling of total revenue.

Question 19

It is possible for firms in a competitive market to earn positive accounting profits in the long-run.

Question 20

It is not possible for the marginal firm in a competitive market to make an economic profit in the long-run.

Question 21

Restaurants often remain open for lunch even if they attract few customers because, the variable costs are small relative to the revenue, even if the fixed costs are large.

Question 22

When looking at entering the marketplace, a prospective entrant should not consider fixed costs, as these will become sunk.

Question 23

Table 14-1
This table shows the revenue and costs of a parrot farmer.

Refer to Table 14-1. If the farmer chooses to maximise profit, the appropriate output level is where marginal cost is equal to:

A) $5
B) $10
C) $11
D) $33

Question 24

Table 14-1
This table shows the revenue and costs of a parrot farmer.

Refer to Table 14-1. Average revenue will be equal to marginal cost when the harvest is equal to:

A) one parrot
B) three parrots
C) five parrots
D) 10 parrots

Question 25

Table 14-1
This table shows the revenue and costs of a parrot farmer.

Refer to Table 14-1. The maximum profit available to this farmer's firm is:

A) $0
B) $17
C) $33
D) $45

Question 26

In the long run, when price is less than average total cost for all possible levels of production, a firm in a competitive market will choose to exit (or not enter) the market.

Question 27

Table 14-1
This table shows the revenue and costs of a parrot farmer.

Refer to Table 14-1. If the farmer harvested three parrots then:

A) fixed cost is zero
B) marginal cost is $8
C) marginal revenue is less than average variable cost
D) marginal revenue is less than marginal cost

Question 28

Regardless of the time horizon considered, firms in a competitive market will never earn positive economic profit.

Question 29

In a competitive market, the actions of any single buyer or seller will have a negligible impact on the market price.

Question 30

For a firm in a perfectly competitive market, the price of the good is always equal to:

A) marginal revenue
B) average revenue
C) market price.
D) all of the above

Question 31

Table 14-1
This table shows the revenue and costs of a parrot farmer.

Refer to Table 14-1. If the farmer is harvesting three parrots, the best response would be to:

A) increase production to maximise profit
B) plant more vines for the parrots to feed on
C) maintain its current level of production to maximise profit
D) decrease production to maximise profit

Question 32

When a firm has market power, it can:

A) sell as much as it wants at any market price
B) control the number of firms that will operate in an industry
C) influence the market price of the good it sells
D) choose to disregard government regulation

Question 33

If a firm in a competitive market sells 25 per cent less, then its total revenue will fall by 25 per cent.

Question 34

Sunk costs are relevant to decisions about business strategy, as huge amounts of time have been invested in ensuring that the business is set up for success.

Question 35

If a firm with increasing marginal costs is operating in a competitive market, then average revenue will be:

A) increasing in firm output
B) decreasing in firm output
C) constant regardless of firm output
D) we cannot say without more information

Question 36

When a firm experiences zero-profit equilibrium, the firm's revenue must be sufficient to cover all opportunity costs.

Question 37

Table 14-1
This table shows the revenue and costs of a parrot farmer.

Refer to Table 14-1. If the farmer determines that marginal cost is $14, a harvest of parrots should:

A) increase production to maximise profit
B) decrease production to maximise profit
C) maintain its current level of production to maximise profit
D) stop the farm and exit the industry

Question 38

The long run supply curve for a perfectly competitive firm is the segment of the marginal cost curve that lies above the average total cost curve.

Question 39

A profit-maximising firm should always increase the level of production if marginal cost exceeds marginal revenue.

Question 40

New firms will enter the market when profit-maximising firms in competitive markets are earning profits.

Question 41

A competitive firm's profit can be written as:

A) (Price - Average Total Cost)*Quantity
B) (Price - Average Variable Cost)*Quantity
C) (Price*Quantity) - Marginal Cost
D) (Price*Quantity) - Average Variable Cost

Question 42

Profit-maximising producers in a competitive market in general, produce output at a point where:

A) marginal cost is decreasing
B) total sales are maximised
C) marginal cost is increasing
D) price is less than marginal revenue

Question 43

Graph 14-1
This graph depicts the cost structure for a firm in a competitive market. Use the graph to answer the following question(s).
Refer to Graph 14-1. What price level will leave the profit-maximising firm with zero profits?

A) MC₁
B) MC₂
C) MC₃
D) MC₄

Question 44

In a competitive market, the price line also represents a firm's:

A) marginal revenue curve
B) average revenue curve
C) marginal profit curve
D) both the marginal revenue and average revenue curves

Question 45

Graph 14-2
This graph depicts the cost structure for a firm in a competitive market. Use the graph to answer the following question(s).
Refer to Graph 14-2. When price rises from P₂ to P₃, the firm finds that:

A) marginal revenue exceeds marginal cost at a production level of Q₂
B) if it produces at output level Q₃, it will earn zero profit
C) expanding output to Q₄ would leave the firm with losses
D) all of the above are true

Question 46

Graph 14-1
This graph depicts the cost structure for a firm in a competitive market. Use the graph to answer the following question(s).
Refer to Graph 14-1. When market price is at MC₄, a profit-maximising firm will produce what level of output?

A) Q₁
B) Q₂
C) Q₃
D) Q₄

Question 47

A firm in a competitive market produces and sells 500 door knobs at a price of $10 each. It then chooses to increase its output to 1000 door knobs. After the increase in output, its average revenue will:

A) decrease
B) increase
C) equal $10
D) fall below marginal revenue

Question 48

Graph 14-1
This graph depicts the cost structure for a firm in a competitive market. Use the graph to answer the following question(s).
Refer to Graph 14-1. When marginal revenue is equal to MC₃, the profit-maximising firm will produce what level of output?

A) Q₁
B) Q₂
C) Q₃
D) Q₄

Question 49

The implication of a firm being a price taker is that, if it increases its price then:

A) buyers will purchase from other sellers instead
B) buyers will pay the higher price in the short run
C) other sellers in the market will increase prices as well
D) the firm will need to advertise to sell its goods

Question 50

Graph 14-1
This graph depicts the cost structure for a firm in a competitive market. Use the graph to answer the following question(s).

-Refer to Graph 14-1. When market price is at MC₂, a firm producing output level Q₁ would experience:

A) profits equal to (MC₂ - MC₁) * Q₁
B) zero profits
C) losses equal to (MC₂ - MC₁) * Q₁
D) losses because P < ATC

Question 51

A rice farmer sells rice to an Australian grain broker. Suppose that the market for rice is competitive. This means that the farmer will maximise profit by choosing:

A) to produce the quantity at which average fixed cost is minimised
B) to sell its wheat at a price where marginal cost is equal to average total cost
C) the quantity at which market price is equal to the farm's marginal cost of production
D) the quantity where average revenue is equal to the farm's average variable cost

Question 52

Why would a profit-maximising firm in a competitive market set a price higher than the market price?

A) if this would result in higher profits
B) if the firm's costs had increased
C) if this would increase the firm's market share
D) none of the above

Question 53

Suppose a firm in a competitive market receives $1000 in total revenue and it has a marginal revenue of $20. What is the average revenue, and how many units were sold?

A) $20 and 50
B) $20 and 500
C) $10 and 100
D) $10 and 50

Question 54

The Wheeler Wheat Farm sells wheat to a grain broker. Since the market for wheat is generally considered to be competitive, the Wheeler Farm:

A) does not choose the quantity of wheat to produce
B) does not have any fixed costs of production
C) is not able to earn an accounting profit
D) does not choose the price at which it sells its wheat

Question 55

When firms think at the margin and make incremental adjustments to the level of production, they are naturally led to a level of production where:

A) average variable cost exceeds marginal cost
B) costs are minimised
C) profit is maximised
D) total cost is less than average revenue

Question 56

If a firm in a competitive market increases production and its marginal revenue remains greater than its marginal cost, raising production will:

A) be profitable
B) cause the firm to incur losses
C) leave profit unchanged
D) It is impossible to tell from the information provided

Question 57

Suppose a firm is operating in a competitive market where the price of the good is $12. If, at the current level of output, the firm's average cost is $15, marginal cost is $17, and fixed costs are $10, then the firm will:

A) increase profit by increasing output
B) increase profit by decreasing output
C) maximise profit by keeping output constant
D) we cannot say without more information

Question 58

When marginal revenue equals marginal cost:

A) the firm must be generating economic profits
B) the profit-maximising firm should always increase its level of production
C) the firm must be generating economic losses
D) losses may be minimised, rather than profits being maximised

Question 59

When a firm in a competitive market produces 10 units of output, it has marginal revenue of $8. What is the firm's total revenue when it produces nine units of output?

A) $18
B) $60
C) $72
D) this cannot be determined from the information given

Question 60

If P < AVC, P < ATC, and marginal costs are increasing, then:

A) the firm should produce in the short-run
B) the firm should shut down in the short-run
C) the firm should shut down in the long-run
D) the firm should produce in the long run

Question 61

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

A) average revenue is greater than average total cost
B) price is above or below marginal cost
C) average revenue is equal to marginal cost
D) marginal cost is greater than average total cost

Question 62

In the long run, all of a firm's costs are variable. In this case the exit criterion for a profit-maximising firm is:

A) average revenue > marginal cost
B) price < average total cost
C) price > average total cost
D) average revenue > average fixed cost

Question 63

Suppose a profit-maximising firm in a competitive market is unable to generate enough revenue to pay all of its fixed costs. In the short run it should:

A) shut down and incur the total loss of its fixed cost
B) continue to produce as long as marginal cost is less than average revenue
C) continue to produce as long as revenue is sufficient to pay variable costs
D) continue to produce and lower its price to gain more market share

Question 64

Which of the following statements best reflects the production decision of a profit-maximising firm in a competitive market when price falls below the minimum of average variable cost?

A) the firm will immediately stop production to minimise its losses
B) the firm will continue to produce to attempt to pay fixed costs
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 exit the in the long run

Question 65

A production cost that has already been committed and cannot be recovered is termed a:

A) fixed cost
B) variable cost
C) sunk cost
D) total cost

Question 66

When a firm makes a short-run decision not to produce anything during a specified period of time because of current market conditions, it:

A) shuts down
B) exits
C) is insolvent
D) is bankrupt

Question 67

When a perfectly competitive firm makes a decision to shut down, it is most likely that:

A) price is below the minimum of average variable cost
B) marginal cost is above average variable cost
C) fixed costs exceed variable costs
D) average fixed costs are rising

Question 68

Graph 14-3
This graph depicts the cost structure of a profit-maximising firm in a competitive market. Use the graph to answer the following question(s).
Refer to Graph 14-3. If the firm is in a short-run position where P < AVC, it is most likely to be on what segment of its supply curve?

A) BC
B) CD
C) DE
D) none of the above

Question 69

If a business ignores some of its fixed costs as irrelevant to its production decision, this type of cost is termed:

A) implicit costs
B) explicit costs
C) development costs
D) sunk costs

Question 70

Graph 14-2
This graph depicts the cost structure for a firm in a competitive market. Use the graph to answer the following question(s).
Refer to Graph 14-2. When price rises from P₃ to P₄, the firm finds that:

A) average revenue exceeds marginal revenue at a production level of Q₄
B) fixed costs are lower at a production level of Q₄
C) it can earn profits by increasing production to Q₄
D) profits are maximised at a production level of Q₃

Question 71

Graph 14-2
This graph depicts the cost structure for a firm in a competitive market. Use the graph to answer the following question(s).

-Refer to Graph 14-2. Which of the following statements best reflects the situation faced by the firm when price falls from P₄ to P₂?

A) marginal revenue is lower than marginal cost at the previous level of output, so it decreases production
B) marginal revenue is higher than marginal cost at the previous level of output, so it increases production
C) average total cost is lower than at the previous level of output so it increases production
D) the firm will earn profit equal to (P₄ - P₂) * Q₂

Question 72

If rational, profit-maximising firms (like rational people) think at the margin, then marginal adjustments to production:

A) should always lower cost
B) will increase market share of the firm
C) should always increase profit (or decrease loss)
D) will increase homogeneity in the market

Question 73

Suppose a firm in a competitive market notices that its marginal cost is greater than its price. This means that:

A) there are opportunities to increase profit or reduce losses by increasing production
B) there are opportunities to increase profit or reduce losses by decreasing production
C) marginal cost must be falling
D) the firm should increase its marketing budget

Question 74

The Wheeler Wheat Farm has a long-term lease on 5000 acres of land in New South Wales. The annual lease payment is $250 000. Prior to planting in the spring of 2001, the Wheeler Farm accountant predicted that the Farm would have $135 000 left after paying all of its costs except the annual lease payment. In this case, the Wheeler Wheat Farm should:

A) continue to operate even though it predicts an accounting loss of $115 000
B) shut down and experience an accounting loss of $135 000
C) exit the market and experience an accounting loss of $250 000
D) continue to operate because total revenue exceeds total cost

Question 75

When price is below average variable cost, a firm in a competitive market will:

A) shut down and incur fixed costs
B) shut down and incur both variable and fixed costs
C) continue to operate as long as average revenue exceeds marginal cost
D) continue to operate as long as average revenue exceeds average fixed cost

Question 76

Firms that shut down in the short run are unable to avoid their:

A) fixed costs
B) sunk costs
C) variable costs
D) marginal cost

Question 77

Graph 14-2
This graph depicts the cost structure for a firm in a competitive market. Use the graph to answer the following question(s).
Refer to Graph 14-2. When price falls from P₃ to P₁, the firm finds that:

A) fixed cost is higher at a production level of Q₁ than it is at Q₃
B) it is unwilling to produce any output
C) it should produce Q₁ units of output
D) all of the above are true

Question 78

Graph 14-3
This graph depicts the cost structure of a profit-maximising firm in a competitive market. Use the graph to answer the following question(s).
Refer to Graph 14-3. Which line segment best reflects the short-run supply curve for this firm?

A) ABC
B) BCD
C) CDE
D) DE

Question 79

A profit-maximising firm in a competitive market produces leather wallets. Suppose the market price for leather wallets drops below the minimum of its average total cost. However, the price still lies above the minimum of average variable cost. This means the firm:

A) should manufacture leather handbags instead
B) will not reduce its production of wallets
C) will experience losses, but will continue to produce wallets
D) should raise the price of its product

Question 80

When profit-maximising firms in competitive markets are making losses:

A) there must be a shortage of skilled labour
B) market demand must exceed market supply at the equilibrium price
C) the most inefficient firms will be encouraged to leave the market
D) new firms will enter the market