Deck 11: Costs and Profit Maximization Under Competition

Question 1

Figure: World Market for Maple Syrup Refer to the figure. If you are one of literally thousands of maple syrup producers and you wanted to increase your maple syrup production from 100 gallons to 110 gallons, what price would you charge?

A) $100
B) $110
C) $96
D) $10

Answer 1

C

Question 2

In a highly competitive industry, demand for a firm's product is:

A) perfectly elastic.
B) slightly elastic.
C) unit elastic.
D) perfectly inelastic.

Answer 2

A

Question 3

Firms in competitive industries:
I. can only charge a price equal to the market price.
II. cannot charge any more than the market price.
III. will earn less profit if they charge less than the market price.

A) I only
B) I and III only
C) II only
D) I, II, and III

Answer 3

D

Question 4

An industry is said to be perfectly competitive when:

A) demand in the industry is high.
B) each firm has virtually no influence over the price of its product.
C) there are many buyers and sellers, and each is large relative to the total market.
D) supply in the industry is highly elastic.

Question 5

If a single supplier produces such a small portion of the total market output that changes in its production have no impact on the overall market price,:

A) the firm will eventually be forced out of business.
B) demand for the firm's output is perfectly elastic.
C) the firm's supply curve is perfectly inelastic.
D) the market supply curve is horizontal.

Question 6

In the small town of Wellsville, there is only one grocery store. Given that everyone needs food, we would expect that this grocery store:

A) is a monopoly and hence highly profitable.
B) charges exorbitant prices.
C) prices competitively.
D) faces a perfectly inelastic demand.

Question 7

When there are many buyers and sellers of a good and the product sold is identical across firms,:

A) the demand curve for each firm's output is somewhat elastic.
B) the industry demand curve is somewhat elastic.
C) the demand curve for each firm's output is perfectly inelastic.
D) the industry demand curve is perfectly inelastic

Question 8

Economists call the time after all exit or entry has occurred:

A) the short run.
B) the medium run.
C) the long run.
D) the marginal run.

Question 9

Firms in a perfectly competitive industry maximize profits by:

A) eliminating the competition.
B) producing a higher quality good and setting a price higher than the competition.
C) setting a price equal to the market price.
D) setting a price less than the market price and undercutting the competition.

Question 10

A market is considered perfectly competitive if:
I. there is a lot of product differentiation among sellers.
II. there are many sellers, each small relative to the total market.
III. the product sold is similar across sellers.
IV. there are only a few buyers.

A) I and II only
B) I, II, and III only
C) II and III only
D) II, III, and IV only

Question 11

In Texas, what does the term nodding donkey mean?

A) a donkey that is well-fed
B) an oil pump
C) a ranger
D) a cowboy

Question 12

A perfectly competitive industry exists under which of the following conditions?
I. The product sold is similar across firms.
II. There are many sellers, each small relative to the total market.
III. There are many sellers, each with total assets less than $2 million.
IV. The threat of competition exists from potential sellers that have not yet entered the market.

A) I and II only
B) I, II, and III only
C) I, III, and IV only
D) I, II, and IV only

Question 13

The short run is defined as:

A) the period before any changes in a firm's output can be made.
B) less than six months.
C) less than one year.
D) the period before entry or exit can occur.

Question 14

At a ski resort located over one hour from the nearest large town, there is only one grocery store and it charges prices more than 200% percent above the typical retail prices. In the long run, we would expect that:

A) another store will open that will charge equally high prices since competition is low.
B) the store will continue to earn high profits even in the long run since the size of the market is small.
C) demand will decrease since people will not want to pay the high prices.
D) another store will open that will charge lower prices.

Question 15

Which of the following best illustrates a product sold in a perfectly competitive market?

A) soft drinks
B) jeans
C) eggs
D) televisions

Question 16

When there are many buyers and sellers of a good and the product sold is identical across firms,:

A) the demand curve for each firm's output is perfectly elastic.
B) the industry demand curve is perfectly elastic.
C) the demand curve for each firm's output is perfectly inelastic.
D) the industry demand curve is perfectly inelastic.

Question 17

When competitive firms do not have influence over the price of their product, all of the following are true EXCEPT which condition?

A) The product they produce is similar across sellers.
B) The product appeals more strongly to some consumers than others.
C) There are many potential sellers.
D) There are many buyers and sellers, each small relative to the total market.

Question 18

Which of the following is NOT a key decision that a firm must make?

A) what price to set
B) what quantity to produce
C) where to produce
D) when to enter and exit an industry

Question 19

If a single supplier produces a good with many good substitutes, then:

A) it will have little control over the market price.
B) the demand curve for its output will be downward sloping.
C) the price it chooses to set must be less than the market price in order to sell additional output.
D) the market demand will be perfectly elastic.

Question 20

To maximize profits, a firm in a highly competitive industry should set its price:

A) higher than the market price.
B) lower than the market price.
C) at the market price.
D) it depends: sometimes at the market price but sometimes higher or lower.

Question 21

Figure: Profit Maximizing Output Use the figure. The profit-maximizing output for this firm is:

A)40.
B)3.
C)6.
D)9.

Question 22

The marginal revenue (MR) for a firm is a constant $45, and the firm's marginal cost (MC) is given by MC = 1.5Q (where Q is quantity of output). What is the firm's profit-maximizing level of output?

A) 67.5
B) 30
C) 45
D) 15

Question 23

Fewer potential sellers make a firm-level demand curve ______ in the ______.

A) flatter; short run
B) flatter; long run
C) steeper; short run
D) steeper; long run

Question 24

Which of the following statements is TRUE? Economists normally assume that the goal of the firm is to:
I. sell as much of their product as possible.
II. set the price of their product as high as possible.
III. maximize profit.

A) I and II only
B) II and III only
C) I and III only
D) III only

Question 25

When a firm expands output from 10 to 11 units and total revenue increases from $100 to $110, marginal revenue of the eleventh unit is:

A) $110.
B) $11.
C) $10.
D) $210.

Question 26

Use the following to answer questions: Table: Barrels of Oil
(Table: Barrels of Oil) Refer to the table. The profit-maximizing level of output is ________ barrels of oil.

A) 1
B) 3
C) 5
D) 7

Question 27

Use the following to answer questions: Table: Barrels of Oil
(Table: Barrels of Oil) Refer to the table. The change in profit from producing the second barrel of oil is ________, and the marginal cost from producing the seventh barrel of oil is ________.

A) $140; $140
B) $100; $20
C) $60; $140
D) $140; $20

Question 28

In the long run, demand is ______ the short run.

A) more elastic than in
B) less elastic than in
C) equally elastic as in
D) indeterminately different in elasticity as compared with

Question 29

If Homer operates a small bakery and sells donuts for $4/dozen, he should:

A) sell an additional dozen donuts as long as the marginal cost of producing an additional dozen donuts is less than $4.
B) sell an additional dozen donuts as long as the total cost of producing an additional dozen donuts is less than $4.
C) only sell more donuts if his total revenue is greater than his total cost.
D) sell an additional dozen donuts so long as the fixed cost of production is greater than $4.

Question 30

Which of the following best describes a competitive industry?

A) Its firms sell similar products and have little control over their prices; there are many buyers and sellers and each is relatively small compared with the overall market.
B) Its firms sell similar products and have direct control over their prices; there are many buyers and sellers and each is relatively small compared with the overall market.
C) Its firms have little control over the price of their product; the demand curve for each firm's product is downward sloping; there are many firms.
D) Its firms sell differentiated products and there are few potential sellers. They have little control over the price of their product; there are many relatively small buyers.

Question 31

A market becomes more competitive as there are ______ buyers and ______ sellers.

A) fewer; fewer
B) fewer; more
C) more; fewer
D) more; more

Question 32

In competitive markets, the demand curve faced by the individual firm is:

A) equal to the market demand curve.
B) perfectly elastic.
C) perfectly inelastic.
D) downward sloping.

Question 33

More potential sellers ______ the elasticity of ______ firm-level demand.

A) increase; short-run
B) decrease; short-run
C) increase; long-run
D) decrease; long-run

Question 34

A market becomes more competitive as the product becomes ______ homogeneous and there are ______ potential sellers.

A) more and more; more
B) less and less; more
C) more and more; fewer
D) less and less; fewer

Question 35

A flat firm-level demand curve means:

A) full market pricing power.
B) limited market pricing power.
C) no market pricing power.
D) seasonal market pricing power.

Question 36

Marginal cost is:

A) the change in total cost from producing one more unit of output.
B) total cost divided by the change in total output.
C) the change in total output divided by the change in total cost.
D) average cost times output.

Question 37

The total amount of money that a firm receives from sales of its output is called:

A) gross profit.
B) net profit.
C) total revenue.
D) net revenue.

Question 38

The demand curve for oil from OPEC is:

A) flat.
B) vertical.
C) upward-sloping.
D) downward-sloping.

Question 39

According to the text, the demand curve for oil from a particular stripper well is:

A) flat.
B) vertical.
C) upward-sloping.
D) downward-sloping.

Question 40

In a perfectly competitive market, firm level demand is:

A) flat.
B) vertical.
C) positively sloped.
D) negatively sloped.

Question 41

Price times quantity minus total cost equals:

A) total revenue.
B) fixed costs.
C) marginal revenue.
D) profit.

Question 42

Damien produces 400 gallons of milk a day in a very competitive industry. The market price for a gallon of milk is $2. Damien's marginal revenue per gallon of milk is:

A) $200.
B) $800.
C) $2.
D) $0.

Question 43

Use the following to answer questions: Table: Competitive Firm
(Table: Competitive Firm) The marginal cost of the fifth unit of output is:

A) $70.
B) $90.
C) $450.
D) $300.

Question 44

To maximize profit, firms should keep producing as long as marginal revenue is:

A) greater than marginal cost.
B) equal to marginal cost.
C) less than marginal cost.
D) greater than total cost.

Question 45

Use the following to answer questions: Table: Barrels of Oil 2
(Table: Barrels of Oil 2) Refer to the table. What is the marginal cost of producing the seventh barrel of oil?

A) 36
B) 50
C) 90
D) 126

Question 46

Figure: Elastic Demand If the total cost of producing 11 units of output in this figure is $16, the firm's economic profit at 11 units of output is:

A) $8.
B) -$8.
C) $72.
D) $104.

Question 47

Profit is defined as:

A) net revenue minus depreciation.
B) average revenue minus average total cost.
C) marginal revenue minus marginal cost.
D) total revenue minus total cost.

Question 48

Use the following to answer questions: Table: Competitive Firm
(Table: Competitive Firm) The marginal revenue for the fifth unit of output is:

A) $70.
B) $90.
C) $450.
D) $20.

Question 49

Use the following to answer questions: Table: Competitive Firm
(Table: Competitive Firm) Refer to the table. The fixed cost for this firm is:

A) $80.
B) $90.
C) $50.
D) $100.

Question 50

The amount of money that the firm pays for its inputs is called:

A) marginal cost.
B) total cost.
C) variable cost.
D) fixed cost.

Question 51

Total profit for a given quantity of output can be calculated as:

A) Total Revenue - Total Costs.
B) Marginal Revenue - Marginal Cost.
C) Total Revenue - Marginal Revenue.
D) Marginal Profit + Marginal Revenue.

Question 52

Use the following to answer questions: Table: Barrels of Oil 2
(Table: Barrels of Oil 2) Refer to the table. How many barrels of oil should the company produce to maximize profit?

A) 6
B) 7
C) 8
D) 9

Question 53

Use the following to answer questions: Table: Competitive Firm
(Table: Competitive Firm) Refer to the table. The profit maximizing output for this firm is:

A)5.
B)6.
C)7.
D) 8.

Question 54

Use the following to answer questions: Table: Competitive Firm
(Table: Competitive Firm) Refer to the table. For the seventh unit of output, total profit is:

A) $630.
B) $90.
C) $160.
D) $470.

Question 55

As the price of a good fluctuates, a profit-maximizing firm will expand or contract production along its:

A) average cost curve.
B) average product curve.
C) marginal cost curve.
D) marginal product curve.

Question 56

Use the following to answer questions: Table: Barrels of Oil 2
(Table: Barrels of Oil 2) Refer to the table. The maximum profit available to the company is:

A) $184.
B) $210.
C) $224.
D) $266.

Question 57

Use the following to answer questions: Table: Competitive Firm
(Table: Competitive Firm) Refer to the table. The market price for the product is:

A) $90.
B) $80.
C) $100.
D) A dollar amount, but it cannot be determined from the information in the table.

Question 58

Use the following to answer questions: Table: Barrels of Oil 2
(Table: Barrels of Oil 2) Refer to the table. What is the marginal revenue of producing the fifth barrel of oil?

A) 61
B) 50
C) 200
D) 250

Question 59

For a small firm in an extremely competitive industry, marginal revenue is always equal to price because:

A) the firm has no ability to influence the market price.
B) each firm has large economies of scale.
C) each firm has large fixed costs.
D) if consumers increase their demand for the product, producer surplus falls.

Question 60

To maximize profit, a firm in a competitive market increases output until:

A) P = TC.
B) P = AR.
C) P = MC.
D) P = AC.

Question 61

Economic profit differs from accounting profits because of its inclusion of:

A) explicit costs.
B) incidental costs.
C) potential costs.
D) implicit costs.

Question 62

Price equals marginal revenue for a competitive firm because:

A) total revenue is constant.
B) marginal cost is constant.
C) the production of marginal units affects the value of other units.
D) the price does not change when the firm changes output.

Question 63

If marginal revenue is less than marginal cost, a firm should:

A) hold output steady.
B) increase output.
C) decrease output.
D) lower its price.

Question 64

Tom opens a sandwich shop; which of the following is NOT an economic cost (total cost) of running his business?

A) his forgone earnings as a book editor, his next best opportunity for employment
B) the interest income he could have earned on the money he invested in his business from savings
C) the wages that he pays his workers
D) the expenses for his own lunch every day

Question 65

To maximize profits, firms produce the level of output that:

A) equates total revenue and total cost.
B) equates marginal revenue with marginal cost.
C) minimizes costs.
D) maximizes revenues.

Question 66

Which of the following is an example of an implicit cost of production?

A) cost of raw materials
B) cost of labor
C) opportunity cost
D) fixed costs

Question 67

When opportunity cost is positive, economic profit ______ accounting profit.

A) is greater than
B) is less than
C) equals
D) eliminates

Question 68

Which of the following statements is TRUE?

A) Accounting profit is usually smaller than economic profit.
B) Unlike implicit costs, explicit costs require monetary outlays.
C) Knowledge about explicit costs is more useful for making business decisions than knowledge about implicit costs.
D) Implicit costs equal explicit costs for for-profit firms.

Question 69

Total cost incorporates:

A) implicit and explicit cost.
B) implicit cost only.
C) explicit cost only.
D) neither explicit nor implicit cost.

Question 70

Marcie quit her job as a preschool teacher, which paid an annual salary of $28,000, and became a street food vendor. She used $8,000 out of her savings account that paid a 4% annual interest rate to buy a street cart to sell food. In her first year of operations, she spent $10,000 on food and supplies (napkins, cups, plates, etc.) and earned total revenue of $45,000. Marcie's accounting profit is ______ and economic profit is ______.

A) $28,000; $20,000
B) $35,000; -$1,000
C) $27,000; $17,000
D) $35,000; $6,680

Question 71

The change in total revenue from selling an additional unit is called:

A) average revenue.
B) marginal revenue.
C) marginal cost.
D) variable cost.

Question 72

In their calculation of profit, accountants typically do not take into account:

A) variable costs.
B) fixed costs.
C) opportunity costs.
D) explicit costs.

Question 73

In late November of 2010, a share of Microsoft sold for about $25 and a share of McDonald's sold for about $80. In late June of 2011, Microsoft shares were about $26 and McDonald's shares were about $85. If these two companies were the only choices available, what is your economic profit if you invest $400 in Microsoft?

A) -$25
B) -$9
C) $9
D) $16

Question 74

Stock market investors should ultimately focus on a company's:

A) economic profit.
B) accounting profit.
C) total revenue.
D) total costs.

Question 75

Why can't marginal cost decrease forever?

A) At some point, firms encounter physical limits of production.
B) Demand is not infinite.
C) Marginal cost can't increase forever either, and there must be symmetry.
D) Marginal cost is always constant.

Question 76

Use the following to answer questions: Table: Profit Maximization 1
(Table: Profit Maximization) The table represents the total revenues and total costs of a local sub shop. Based on the table, what is the marginal revenue generated from producing the second sub?

A) $5
B) $10
C) $15
D) $35

Question 77

Use the following to answer questions: Table: Profit Maximization 1
(Table: Profit Maximization) The table represents the total revenues and total costs of a local sub shop. Based on the table, how many subs should the store produce to maximize profits?

A) 1
B) 2
C) 3
D) 4

Question 78

A firm maximizes profits when:

A) total revenue equals total cost.
B) average revenue equals average cost.
C) marginal revenue equals marginal cost.
D) fixed revenue equals fixed cost.

Question 79

Total cost equals fixed cost ______ variable cost.

A) times
B) minus
C) plus
D) divided by

Question 80

When deciding on the profit maximizing level of output, firms compare ______ of an additional unit of output to the ______.

A) marginal revenue; total cost of production
B) average revenue; total cost of production
C) marginal revenue; marginal cost of producing the additional unit of output
D) average revenue; average cost of producing the additional unit of output