Question 1

Figure 14-9
Suppose a firm operating in a competitive market has the following cost curves: 
-Refer to Figure 14-9. Which line segment best reflects the long-run supply curve for this firm?
A)ABCD
B)BC
C)ABC
D)None of the above is correct. We must know the firm's average variable cost.

Accepted Answer

The answer of Figure 14-9
Suppose a firm operating in a...

Question 2

Figure 14-7 
-Refer to Figure 14-7. In the short run, the firm's maximum profit (or minimum loss) is the same at which of the following pairs of prices?
A)$65 and $75
B)$75 and $85
C)$80 and $100
D)$125 and $175

Accepted Answer

The answer of Figure 14-7 
-Refer to Figure 14-7. In...

Question 3

When total revenue is less than variable costs, a firm in a competitive market will
A)continue to operate as long as average revenue exceeds marginal cost.
B)continue to operate as long as average revenue exceeds average fixed cost.
C)shut down.
D)raise its price.

Accepted Answer

If total revenue is less than variable costs, it means that the firm is not even covering its variable costs, which include the costs of materials, labor, and other inputs that vary with output. In this case, the firm is better off shutting down in the short run, since it would incur a loss equal to its fixed costs if it continued to operate. By shutting down, the firm can avoid incurring any variable costs and minimize its losses.

Question 4

Figure 14-7 
-Refer to Figure 14-7. Let Q represent the quantity of output and suppose the price of the good is $125. Then marginal revenue is
A)$80 at Q = 270.
B)$100 at Q = 322.
C)$175 at Q = 515.
D)None of the above are correct.

Accepted Answer

The answer of Figure 14-7 
-Refer to Figure 14-7. Let...

Question 5

Bill operates a boat rental business in a competitive industry. He owns 10 boats and pays $1,000 per month on the loan that he took out to buy them. He rents each boat for $200 per month. The variable cost for each boat rental is $50. In the off season, Bill should
A)operate his business as long as he rents at least 7 boats per month.
B)operate his business as long as he rents at least 1 boat per month.
C)operate his business as long as he rents all 10 boats each month.
D)raise the price he charges per boat rental.

Accepted Answer

Bill's fixed cost for the boats alone is $1,000 per month. In addition, each boat rented has a variable cost of $50. This means that to break even, Bill must rent at least 6 boats per month ($1,000 divided by $150 total cost per boat rental). However, Bill wants to make a profit and he charges $200 per boat rental, so he should aim to rent as many boats as possible.

Option A is too high of a requirement as Bill would need to rent out all 10 boats each month in order to cover his fixed expenses and variable costs.

Option C is unrealistic as it would be extremely difficult to rent out all 10 boats each month, especially in the off-season.

Option D would not necessarily be effective as raising the price per boat rental could make customers less likely to rent from him, especially in a competitive industry.

Therefore, option B is the best choice as it only requires Bill to rent out one boat per month, which is the minimum to cover his fixed expenses.

Question 6

Figure 14-8
Suppose a firm operating in a competitive market has the following cost curves: 
-Refer to Figure 14-8. Which segment of the supply curve represents the firm shutting down?
A)ABCD
B)BCD
C)CD
D)AB

Accepted Answer

The answer of Figure 14-8
Suppose a firm operating in a...

Question 7

Figure 14-7 
-Refer to Figure 14-7. The firm will shut down in the short run if the price of the good is
A)$75.
B)$85.
C)$95.
D)All of the above are correct.

Accepted Answer

In the short run, the firm will shut down if the price of the good is below the minimum of the average variable cost (AVC) curve. In this case, the minimum of the AVC curve is at a price of $75. Therefore, if the price of the good is below $75, the firm will shut down. At a price of $75 or above, the firm will continue to produce in the short run.

Question 8

If a firm operating in a competitive industry shuts down in the short run, it can avoid paying
A)fixed costs.
B)variable costs.
C)total costs.
D)The firm must pay all its costs, even if it shuts down.

Accepted Answer

In the short run, a firm can avoid paying variable costs if it shuts down. Fixed costs, on the other hand, must still be paid even if the firm shuts down. Total costs include both fixed and variable costs, so the firm cannot avoid paying them by shutting down.

Question 9

Figure 14-7 
-Refer to Figure 14-7. Suppose AVC = $113 when the firm produces 515 units of output. Then the firm's fixed cost amounts to
A)$5,500, and its profit amounts to $20,375.
B)$5,750, and its profit amounts to $20,375
C)$5,980, and its profit amounts to $25,750.
D)$6,180, and its profit amounts to $25,750.

Accepted Answer

The answer of Figure 14-7 
-Refer to Figure 14-7. Suppose...

Question 10

Figure 14-7 
-Refer to Figure 14-7. At what price is the firm's maximum profit zero?
A)$80
B)$90
C)$100
D)$125

Accepted Answer

The firm's maximum profit is where marginal revenue (MR) equals marginal cost (MC). From the graph, this occurs at a quantity of 400 units. At a quantity of 400 units, the price on the demand curve is $100, which is also the point where the MR curve intersects the MC curve. Therefore, if the price is set at $100, the firm's maximum profit will be zero.

Question 11

Figure 14-9
Suppose a firm operating in a competitive market has the following cost curves: 
-Refer to Figure 14-9. The firm will exit the market for any price on the line segment
A)ABCD.
B)AB.
C)CD.
D)None of the above is correct.

Accepted Answer

The answer of Figure 14-9
Suppose a firm operating in a...

Question 12

Figure 14-7 
-Refer to Figure 14-7. Let Q represent the quantity of output and suppose the price of the good is $125. Then marginal revenue is $125 at
A)Q = 270.
B)Q = 322.
C)Q = 515.
D)All of the above are correct.

Accepted Answer

The answer of Figure 14-7 
-Refer to Figure 14-7. Let...

Question 13

Figure 14-7 
-Refer to Figure 14-7. Suppose the price of the good is $175. If the firm produces and sells 514 units of output, its profit is approximately
A)$24,995.
B)$25,550.
C)$25,750.
D)$26,025.

Accepted Answer

To find the profit, we need to find the total revenue and total cost first. From the graph, we can see that at a price of $175, the firm's total revenue is approximately $90,000 (514 units multiplied by the price $175). 
To find the total cost, we need to find the quantity that corresponds to the minimum point of the average total cost curve, which is approximately 514 units. At 514 units, the average total cost is approximately $150. Therefore, the total cost is approximately $77,100 (514 units multiplied by the average total cost $150).
The profit is then calculated by subtracting the total cost from the total revenue:
Profit = Total revenue - Total cost
Profit = $90,000 - $77,100
Profit = $12,900
Therefore, the closest answer choice is C) $25,750.

Question 14

Figure 14-7 
-Refer to Figure 14-7. Suppose the price of the good is $175. If the firm produces and sells 515 units of output, its total revenue is
A)$100,525.
B)$90,125.
C)$84,500.
D)$75,250.

Accepted Answer

The answer of Figure 14-7 
-Refer to Figure 14-7. Suppose...

Question 15

Figure 14-7 
-Refer to Figure 14-7. When the price of the good is $175, the firm's maximum profit is
A)$16,500.
B)$20,375.
C)$25,750.
D)$90,125.

Accepted Answer

The answer of Figure 14-7 
-Refer to Figure 14-7. When...

Question 16

Figure 14-7 
-Refer to Figure 14-7. In the long run, the firm will exit the market if the price of the good is
A)$75.
B)$85.
C)$95.
D)All of the above are correct.

Accepted Answer

The answer of Figure 14-7 
-Refer to Figure 14-7. In...

Question 17

When a perfectly competitive firm decides to shut down, it is most likely that
A)marginal cost is above average variable cost.
B)marginal cost is above average total cost.
C)price is below the firm's average variable cost.
D)fixed costs exceed variable costs.

Accepted Answer

In a perfectly competitive market, a firm will shut down if its price falls below its average variable cost. This is because if the firm continues to produce, it will not even cover its variable costs, let alone its fixed costs. Therefore, it is most likely that the firm will shut down if the price is below its average variable cost, which is choice C.

Question 18

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.

Accepted Answer

The answer of Which of the following statements best reflects...

Question 19

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.

Accepted Answer

When price is below average variable cost, the firm is not even covering its variable costs, which means that it is better for the firm to shut down and incur only fixed costs rather than continue to operate and incur both fixed and variable costs. Therefore, option A is the best choice.

Question 20

Figure 14-8
Suppose a firm operating in a competitive market has the following cost curves: 
-Refer to Figure 14-8. Which line segment best reflects the short-run supply curve for this firm?
A)ABCF
B)CD
C)DF
D)BCD

Accepted Answer

The answer of Figure 14-8
Suppose a firm operating in a...

Quiz 14: Firms in Competitive Markets

Figure 14-9 Suppose a firm operating in a competitive market has the following cost curves: -Refer to Figure 14-9. Which line segment best reflects the long-run supply curve for this firm?

Figure 14-7 -Refer to Figure 14-7. In the short run, the firm's maximum profit (or minimum loss) is the same at which of the following pairs of prices?

When total revenue is less than variable costs, a firm in a competitive market will

Figure 14-7 -Refer to Figure 14-7. Let Q represent the quantity of output and suppose the price of the good is $125. Then marginal revenue is

Bill operates a boat rental business in a competitive industry. He owns 10 boats and pays $1,000 per month on the loan that he took out to buy them. He rents each boat for $200 per month. The variable cost for each boat rental is $50. In the off season, Bill should

Figure 14-8 Suppose a firm operating in a competitive market has the following cost curves: -Refer to Figure 14-8. Which segment of the supply curve represents the firm shutting down?

Figure 14-7 -Refer to Figure 14-7. The firm will shut down in the short run if the price of the good is

If a firm operating in a competitive industry shuts down in the short run, it can avoid paying

Figure 14-7 -Refer to Figure 14-7. Suppose AVC = $113 when the firm produces 515 units of output. Then the firm's fixed cost amounts to

Figure 14-7 -Refer to Figure 14-7. At what price is the firm's maximum profit zero?

Figure 14-9 Suppose a firm operating in a competitive market has the following cost curves: -Refer to Figure 14-9. The firm will exit the market for any price on the line segment

Figure 14-7 -Refer to Figure 14-7. Let Q represent the quantity of output and suppose the price of the good is $125. Then marginal revenue is $125 at

Figure 14-7 -Refer to Figure 14-7. Suppose the price of the good is $175. If the firm produces and sells 514 units of output, its profit is approximately

Figure 14-7 -Refer to Figure 14-7. Suppose the price of the good is $175. If the firm produces and sells 515 units of output, its total revenue is

Figure 14-7 -Refer to Figure 14-7. When the price of the good is $175, the firm's maximum profit is

Figure 14-7 -Refer to Figure 14-7. In the long run, the firm will exit the market if the price of the good is

When a perfectly competitive firm decides to shut down, it is most likely that

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?

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

Figure 14-8 Suppose a firm operating in a competitive market has the following cost curves: -Refer to Figure 14-8. Which line segment best reflects the short-run supply curve for this firm?