Deck 14: Firms in Competitive Markets

Question 1

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

Answer 1

True

Question 2

A firm will shut down in the short run if revenue is not sufficient to cover its variable costs of production.

Answer 2

True

Question 3

In making a short-run profit-maximising production decision, the firm must consider both fixed and variable cost.

Answer 3

False

Question 4

A firm will exit in the short run if total revenue is less than total costs.

Question 5

A firm's incentive to compare marginal revenue and marginal cost is an application of the principle that rational people think at the margin.

Question 6

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

Question 7

One of the important characteristics of a perfectly competitive market is that there are many buyers and sellers.

Question 8

For a firm in a competitive market, marginal revenue is always equal to average revenue.

Question 9

A profit-maximising firm in a competitive market will not increase production when average revenue exceeds marginal cost.

Question 10

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

Question 11

When individual firms in competitive markets increase their production, it is likely that market price will fall.

Question 12

A firm must be participating in a competitive market in order for average revenue to equal price.

Question 13

To answer the question 'How much revenue does the farm receive for the typical gallon of milk'?, a dairy farmer must be able to calculate sunk cost.

Question 14

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

Question 15

The average total cost becomes downward sloping when it is crossed by the marginal cost curve.

Question 16

If a firm is able to influence the market price of the good it sells, it has market power.

Question 17

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

Question 18

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 19

Firms in competitive markets are said to be price takers.

Question 20

In a competitive market, firms that increase prices experience increases in sales.

Question 21

If a perfectly competitive firm in equilibrium increases output by 25 per cent marginal revenue will fall and marginal costs will rise.

Question 22

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

Question 23

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

Question 24

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 25

All of the following conditions are consistent with a firm's decision to shut down:
TR < VC, TR/Q < VC/Q, and P < MR.
(TR = total revenue, VC = variable cost, Q = level of production, P = price and MR = marginal revenue.)

Question 26

A miniature golf course is a good example of where fixed costs become relevant to the decision of when to open and when to close for the season.

Question 27

In a competitive market, positive accounting profits will encourage entry by more firms until the marginal firm has zero accounting profit.

Question 28

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

Question 29

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 30

For a farmer facing a long-run decision about whether to exit the market or not, the cost of her land is considered to be sunk.

Question 31

Marginal adjustments to production end when firms in competitive markets experience a price equal to marginal revenue.

Question 32

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

Question 33

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

Question 34

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

Question 35

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

Question 36

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 37

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 38

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 39

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 40

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 41

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) seven parrots
B) 12 parrots
C) 15 parrots
D) 20 parrots

Question 42

Which of the following are true of comparing marginal revenue to marginal cost? (i) it reveals the contribution of the last unit of production to total profit
(ii) it is helpful in making profit-maximising production decisions
(iii) it always reveals whether a firm is making an economic profit
(iv) it tells a firm whether its fixed costs are too high

A) (i) and (ii) only
B) (iii) only
C) (ii) and (iii) only
D) (i), (ii), (iii) and (iv)

Question 43

Table 14-2
The price of each David Butterfly a butterfly farmer in Greytown sells is:

Refer to Table 14-2. Price equals average revenue over the range of:

A) one to three
B) three to six
C) six to nine
D) over the whole range of output

Question 44

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

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

Question 45

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 46

Suppose a firm in a perfectly competitive market doubles its sales. This means that the firm's total revenue will:

A) decrease because prices will fall
B) exactly double
C) increase by more than double because prices will rise
D) This cannot be determined without data on the firm's costs

Question 47

When a firm has little ability to influence market prices, it is said to be in what kind of a market?

A) a strategic market
B) a competitive market
C) a power market
D) a thin market

Question 48

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) $21
B) $36
C) $45
D) $56

Question 49

Total profit for a firm is calculated as:

A) total revenue minus total cost
B) marginal revenue minus average cost
C) average revenue minus average cost
D) marginal revenue minus marginal cost

Question 50

Table 14-2
The price of each David Butterfly a butterfly farmer in Greytown sells is:

Refer to Table 14-2. If the firm doubles its output from three to six units, total revenue will:

A) increase by less than $45
B) increase by more than $45
C) increase by exactly $45
D) this cannot be determined without data on the farmer's costs

Question 51

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

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

A) 1 parrot
B) 3 parrots
C) 5 parrots
D) 8 parrots

Question 52

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 $11, 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 and the farmer produce a new product instead

Question 53

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 $14
C) total revenue is less than variable cost
D) marginal revenue is less than marginal cost

Question 54

If marginal cost exceeds marginal revenue:

A) the firm must be experiencing losses
B) the firm may still be earning a profit
C) the firm is most likely to be at a profit-maximising level of output
D) a profit-maximising firm should always increase the level of production

Question 55

A market is competitive if which of the following are true? (i) each buyer is small compared to the market
(ii) a single firm has a significant impact on the market price
(iii) the good offered for sale is largely the same

A) (i) and (ii) only
B) (ii) and (iii) only
C) (i) and (iii) only
D) (i), (ii) and (iii)

Question 56

The costs of investigating new factories can be regarded as a sunk cost

Question 57

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

Refer to Table 14-1. If the farmer finds that its marginal cost is $20, 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 58

In a competitive market, the actions of any single buyer or seller will:

A) cause a noticeable change in overall production and a change in final product price
B) have little effect on overall production but will ultimately change final product price
C) have a negligible impact on the market price
D) adversely affect the profitability of more than one firm in the market

Question 59

Table 14-2
The price of each David Butterfly a butterfly farmer in Greytown sells is:

Refer to Table 14-2. The price and quantity relationship shows that the market structure most likely facing a butterfly farmer is a:

A) trade market
B) competitive market
C) developing market
D) resource market

Question 60

Table 14-2
The price of each David Butterfly a butterfly farmer in Greytown sells is:

Refer to Table 14-2. Marginal revenue is declining over the range:

A) none; marginal revenue is constant over the whole range of output
B) one to three
C) three to six
D) three to nine

Question 61

Because the goods offered for sale in a competitive market are largely the same:

A) there will be few sellers in the market
B) there will be few buyers in the market
C) sellers will have little reason to charge less than the going market price
D) buyers will have market power

Question 62

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 63

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 64

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 65

Which of the following statements best reflects a price-taking firm?

A) if the firm were to charge more than the going price, it would sell none of its goods
B) the firm has no incentive to charge less than the going price
C) the firm can sell as much as it wants at the going price
D) all of the above are true

Question 66

When buyers in a competitive market take the selling price as given, they are said to be:

A) free-riders
B) market entrants
C) price takers
D) monopolists

Question 67

In a competitive market, no single producer can influence the market price because:

A) many other sellers are offering a product that is essentially identical
B) consumers have more influence over the market price than producers do
C) producers agree not to change the price
D) government intervention prevents firms from influencing price

Question 68

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 69

Which of the following is not a characteristic of a perfectly competitive market?

A) firms are price takers
B) there are many sellers in the market
C) goods offered for sale are largely the same
D) firms have difficulty entering the market

Question 70

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 71

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 72

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 73

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 74

Of the following characteristics of competitive markets, which are necessary for firms to be price takers? (i) many sellers
(ii) goods offered for sale are largely the same
(iii) firms can freely enter or exit the market

A) (i) and (ii) only
B) (iii) only
C) (ii) and (iii) only
D) all are necessary

Question 75

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 76

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 77

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 78

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 79

When a firm in a competitive market produces 10 units of output, it has a marginal revenue of $5 what is the firm's total revenue when it produces 9 units of output?

A) $15
B) $45
C) $65
D) this cannot be determined from the information given

Question 80

When you buy a product from a firm in a competitive market, the price you pay for the product is likely to be:

A) equal the marginal revenue of the firm
B) less than the average revenue of the firm
C) much greater than the cost of producing the product
D) all of the above