Question 1

In the long run,a profit-maximizing firm will choose to exit a market when

Accepted Answer

A profit-maximizing firm will choose to exit a market when total revenue is less than total cost. If the firm is not earning enough revenue to cover its costs of production in the long run, it will not be profitable and will eventually exit the market. Sunk costs are not relevant in the long run decision making process, and the relationship between average fixed cost, variable costs, and marginal cost/marginal revenue are important in short run decision making, but not relevant in the long run.

Question 2

When economists refer to a production cost that has already been committed and cannot be recovered,they use the term

Accepted Answer

The term for a production cost that has already been committed and cannot be recovered is a sunk cost. Implicit cost refers to the opportunity cost of using resources that a firm already owns to produce its own goods and services, explicit cost is a cost that is actually incurred and requires a monetary payment, and variable cost is a cost that changes with the level of output.

Question 3

In the long run,a firm will enter a competitive industry if

Accepted Answer

The answer of In the long run,a firm will enter...

Question 4

A sunk cost is one that

Accepted Answer

A sunk cost is a cost that has already been paid and cannot be recovered, meaning it will not change regardless of the present decision. Sunk costs should not play a role in future decision making, as they are not relevant to future costs and revenues.

Question 5

When fixed costs are ignored because they are irrelevant to a business's production decision,they are called

Accepted Answer

Sunk costs are costs that have already been incurred and cannot be recovered, and thus are irrelevant to future business decisions, including production decisions. Fixed costs that are ignored because they are irrelevant to a decision are considered sunk costs.

Question 6

Which of the following represents the firm's short-run condition for shutting down?

Accepted Answer

The answer of Which of the following represents the firm's...

Question 7

Suppose that you value a hat from your favorite university at $20.The university bookstore has the hat on sale for $15.You purchase the hat but lose it on the way home.What should you do? Assume that losing the hat does not alter how you value it.

Accepted Answer

Since you valued the hat at $20, it is worth it to you to spend the $15 to purchase another hat. The fact that you lost the previous one does not change how much you value the hat, and waiting for the price to drop may not be worth the risk of the hat going out of stock.

Question 8

Suppose you value a special watch at $100.You purchase it for $75.On your way home from class one day,you lose the watch.The store is still selling the same watch,but the price has risen to $85.Assume that losing the watch has not altered how you value it.What should you do?

Accepted Answer

Since you value the watch at $100 and are willing to pay up to that value for it, it makes sense to purchase it again at the current price of $85. It is still worth more to you than what you are paying for it. Waiting for the price to drop again may not be worth the risk of missing out on an item you value.

Question 9

A firm that exits its market has to pay

Accepted Answer

The answer of A firm that exits its market has...

Question 10

In a competitive market the current price is $7,and the typical firm in the market has ATC = $7.50 and AVC = $7.15.

Accepted Answer

In the short run, firms will shut down because they are making losses (P < ATC). In the long run, firms will leave the market because they cannot cover their costs (P < ATC).

Question 11

When a profit-maximizing firm's fixed costs are considered sunk in the short run,then the firm

Accepted Answer

The answer of When a profit-maximizing firm's fixed costs are...

Question 12

You purchase a $30,nonrefundable ticket to a play at a local theater.Ten minutes into the show you realize that it is not a very good show and place only a $10 value on seeing the remainder of the show.Alternatively you could leave the theater and go home and watch TV or read a book.You place an $8 value on watching TV and a $6 value on reading a book.

Accepted Answer

The answer of You purchase a $30,nonrefundable ticket to a...

Question 13

Suppose you bought a ticket to a football game for $30 and that you place a $35 value on seeing the game.If you lose the ticket,then what is the maximum price you should pay for another ticket? Assume that losing the ticket does not alter how you value it.

Accepted Answer

The answer of Suppose you bought a ticket to a...

Question 14

When determining whether to shut down in the short run,a competitive firm should ignore
(i)fixed costs.
(ii)variable costs.
(iii)sunk costs.

Accepted Answer

The answer of When determining whether to shut down in...

Question 15

A firm's marginal cost has a minimum value of $50,its average variable cost has a minimum value of $80,and its average total cost has a minimum value of $90.Then the firm will shut down once the price of its product falls below

Accepted Answer

Since the firm's minimum average variable cost is $80, it must produce and sell goods at a price above $80 to cover its variable costs. However, if the price falls below $80, the firm's revenue will not be sufficient to cover its variable costs, leading to losses. Therefore, the firm will shut down if the price falls below $80.

Question 16

A corporation has been steadily losing money on one of its product lines,plastic flamingo lawn ornaments.The firm produces plastic flamingos in a factory that cost $20 million to build 10 years ago.The firm is now considering an offer to buy that factory for $15 million.Which of the following statements about the decision to sell or not to sell is correct?

Accepted Answer

The $20 million spent on the factory is a sunk cost and should not be considered in the decision to sell or not to sell. Sunk costs are costs that have already been incurred and cannot be recovered, therefore they are irrelevant to future decisions. The relevant costs in this decision are the current value of the factory, which is $15 million, and the ongoing losses incurred by producing plastic flamingos in the factory. If the ongoing losses are greater than the value of the factory, then the firm should sell the factory.

Question 17

You purchase a $30,nonrefundable ticket to a play at a local theater.Ten minutes into the show you realize that it is not a very good show and place only a $10 value on seeing the remainder of the show.Alternatively you could leave the theater and go home and watch TV or read a book.You place an $8 value on watching TV and a $12 value on reading a book.

Accepted Answer

The $30 is a sunk cost and cannot be recovered, so it should not factor into the decision. Based on the values placed on the alternatives, leaving and reading a book ($12 value) is the best choice as it provides the highest value compared to staying ($10 value) or watching TV ($8 value).

Question 18

In the long run,a firm will exit a competitive industry if

Accepted Answer

If the average total cost of producing a good or service exceeds the price at which it can be sold in a competitive market, the firm will not be making a profit. This means that over time, the firm will not be able to cover its costs and will ultimately exit the industry. Option A is incorrect because total revenue exceeding total cost does not necessarily indicate a profit or that the firm is covering its costs. Option B is incorrect because while the price exceeding average total cost may mean that the firm is making a profit, it does not necessarily mean that the firm will not exit the industry in the long run.

Question 19

Which of these types of costs can be ignored when an individual or a firm is making decisions?

Accepted Answer

Sunk costs refer to costs that have already been incurred and cannot be recovered, therefore, they are irrelevant in decision making.

Question 20

Jose's restaurant operates in a perfectly competitive market.At the point where marginal cost equals marginal revenue,ATC = $20,AVC = $15,and the price per unit is $10.In this situation,

Accepted Answer

Since the price per unit ($10) is lower than both the ATC ($20) and AVC ($15), Jose's restaurant is experiencing losses in the short run. Therefore, it would be better for the restaurant to shut down immediately to minimize their losses rather than continue to operate.

Quiz 14: Firms in Competitive Markets.