Deck 22: The Competitive Firm

Question 1

Explicit costs

A)Include only payments to entrepreneurship.
B)Are the sum of actual monetary payments made for resources used to produce a good.
C)Include the market value of all resources used to produce a good.

Answer 1

Are the sum of actual monetary payments made for resources used to produce a good.

Question 2

Greater-than-normal profit represents

A)Explicit costs minus implicit costs.
B)Payment for entrepreneurship.
C)Below-average returns to capital.

Answer 2

Payment for entrepreneurship.

Question 3

The best measure of the economic cost of doing your homework is

A)The most valuable opportunity you give up when you do your homework.
B)The amount you would have to pay to get someone else to do it.
C)The economic cost plus the accounting cost of doing the homework.

Answer 3

The most valuable opportunity you give up when you do your homework.

Question 4

All of the following are ways a business can earn economic profits except

A)Discover new products.
B)Maximize implicit costs but not explicit costs.
C)Take above-average risks.

Question 5

Economists assume the principal motivation of producers is

A)Psychological gratification.
B)Social status.
C)Profit.

Question 6

In defining economic costs,economists emphasize

A)Explicit and implicit costs while accountants recognize only implicit costs.
B)Explicit and implicit costs while accountants recognize only explicit costs.
C)Only explicit costs while accountants recognize only implicit costs.

Question 7

Which of the following should not be included when calculating accounting profit?

A)The cost of taxes.
B)The return on inventory investment.
C)The cost of rent.

Question 8

Adam Weed is the owner/operator of a flower shop.Last year he earned $250,000 in total revenue.His explicit costs were $175,000 paid to his employees and suppliers (assume that this amount represents the total opportunity cost of these resources).During the year he received three offers to work for other flower shops with the highest offer being $75,000 per year.Which of the following is true about Adam's accounting and economic profit?

A)Accounting profit = $75,000;economic profit = $0.
B)Accounting profit = $175,000;economic profit = $75,000.
C)Accounting profit = $75,000;economic profit = negative $100,000.

Question 9

Normal profit

A)Covers the full opportunity cost of the resources used by the firm.
B)Is an above-average rate of return.
C)Is the accounting profit earned when economic profits are greater than zero.

Question 10

Suppose the entrepreneur could earn $800 as an employee elsewhere.This means the entrepreneur is earning

A)Breakeven profits.
B)Economic losses.
C)Economic profits.

Question 11

Implicit costs

A)Include only payments to workers and lenders.
B)Represent actual monetary payments made for resources used to produce a good such as oil.
C)Are the costs to produce a good or service for which no direct payment is made.

Question 12

The accounting profit is equal to

A)$925.
B)$1,525.
C)$2,125.

Question 13

Which of the following is the best explanation for why individuals own small businesses?

A)Because they cannot earn a living working for corporate America.
B)To provide a product consumers want.
C)The expectation of profit.

Question 14

Profit

A)Is the difference between total revenue and total cost.
B)Is the difference between variable costs and fixed costs.
C)Is always a number greater than zero.

Question 15

Economic profit is

A)Greater than accounting profit by the amount of implicit cost.
B)Greater than accounting profit by the amount of explicit cost.
C)Less than accounting profit by the amount of implicit cost.

Question 16

Assuming the entrepreneur does not pay herself,the $1,000 she could earn as an employee elsewhere is considered

A)An implicit cost.
B)An explicit cost.
C)A fixed cost.

Question 17

Suppose the entrepreneur could earn $1,000 as an employee elsewhere.This means the accounting profit is

A)$1,525.
B)$925.
C)-$75.

Question 18

Suppose the entrepreneur could earn $1,000 as an employee elsewhere.This means the economic profit is

A)-$925.
B)-$75.
C)-$1,000.

Question 19

Normal profit implies that

A)Economic profit must be positive.
B)Economic profit must be negative.
C)The factors employed are earning as much as they could in the best alternative employment.

Question 20

Accounting costs and economic costs differ because

A)Accounting costs exceed economic costs whenever any factor is not paid an explicit wage.
B)Accounting costs include implicit costs,and economic costs do not.
C)Economic costs include the opportunity costs of all resources used,while accounting costs include actual dollar outlays.

Question 21

Suppose a firm has an annual budget of $200,000 in wages and salaries,$75,000 in materials,$30,000 in new equipment,$20,000 in rented property,and $35,000 in interest costs on capital.The owner/manager does not choose to pay himself,but he could receive income of $90,000 by working elsewhere.The firm earns revenues of $360,000 per year. What is the economic profit for the firm described above?

A)-$90,000.
B)$0.
C)$90,000.

Question 22

Suppose a firm has an annual budget of $200,000 in wages and salaries,$75,000 in materials,$30,000 in new equipment,$20,000 in rented property,and $35,000 in interest costs on capital.The owner/manager does not choose to pay himself,but he could receive income of $90,000 by working elsewhere.The firm earns revenues of $360,000 per year. What are the annual economic costs for the firm described above?

A)$450,000.
B)$120,000.
C)$90,000.

Question 23

Market structure is determined by the

A)Annual revenue,costs,and profits for an industry.
B)Number and relative size of the firms in an industry.
C)Amount of compensation given to the CEOs.

Question 24

The demand curve confronting a competitive firm is

A)Horizontal,as is market demand.
B)Horizontal,while market demand is downward-sloping.
C)Downward-sloping,while market demand is flat.

Question 25

The perfectly competitive market structure includes all of the following except

A)Many firms.
B)Identical products.
C)Large advertising budgets.

Question 26

Suppose a firm has an annual budget of $200,000 in wages and salaries,$75,000 in materials,$30,000 in new equipment,$20,000 in rented property,and $35,000 in interest costs on capital.The owner/manager does not choose to pay himself,but he could receive income of $90,000 by working elsewhere.The firm earns revenues of $360,000 per year. What are the annual implicit costs for the firm described above?

A)$450,000.
B)$160,000.
C)$90,000.

Question 27

Entrepreneurship

A)Always involves greater rewards than risks.
B)Can result in economic losses.
C)Cannot earn an economic profit.

Question 28

Which of the following industries is perfectly competitive?

A)Autos.
B)Cell phone service.
C)Wholesale fresh flowers.

Question 29

The demand curve for each perfectly competitive firm is

A)Downward-sloping.
B)Horizontal.
C)Vertical.

Question 30

A perfectly competitive firm is a price taker because

A)The price of the product is determined by many buyers and sellers.
B)It has market power.
C)Market supply is upward-sloping.

Question 31

If the equilibrium price in a perfectly competitive market for walnuts is $4.99 per pound,then an individual firm in this market can

A)Not sell additional walnuts unless the firm lowers its price.
B)Not sell additional walnuts at any price because the market is at equilibrium.
C)Sell an additional pound of walnuts at $4.99.

Question 32

The demand curve confronting a competitive firm

A)Equals the marginal revenue curve.
B)Is horizontal,as is the market demand curve.
C)Slopes downward,while the market demand curve is horizontal.

Question 33

A monopoly occurs when

A)There is only one producer of a good or service.
B)There is only one buyer of a good or service.
C)Owners take on additional risk and earn huge profits.

Question 34

The market price for T-shirts sold in a perfectly competitive market is determined by

A)The largest firm in the industry.
B)Supply and demand.
C)Government regulation.

Question 35

Competitive firms cannot individually affect market price because

A)There is an infinite demand for their goods.
B)Demand is perfectly inelastic for their goods.
C)Their individual production is insignificant relative to the production of the industry.

Question 36

Lashondra is the owner/operator of an interior design firm.Last year she earned $400,000 in total revenue.Her explicit costs were $200,000 (assume that this amount represents the total opportunity cost of these resources).During the year she received offers to work for other design firms.One offer would have paid her $120,000 per year and the other would have paid her $130,000 per year.Lashondra's economic profit is equal to

A)-$50,000.
B)$70,000.
C)$0.

Question 37

When a producer can control the market price for the good it sells,the producer

A)Is an entrepreneur.
B)Is certain to make a profit.
C)Has market power.

Question 38

Suppose a firm has an annual budget of $200,000 in wages and salaries,$75,000 in materials,$30,000 in new equipment,$20,000 in rented property,and $35,000 in interest costs on capital.The owner/manager does not choose to pay himself,but he could receive income of $90,000 by working elsewhere.The firm earns revenues of $360,000 per year. What is the accounting profit for the firm described above?

A)-$90,000.
B)$0.
C)$90,000.

Question 39

Suppose a firm has an annual budget of $200,000 in wages and salaries,$75,000 in materials,$30,000 in new equipment,$20,000 in rented property,and $35,000 in interest costs on capital.The owner/manager does not choose to pay himself,but he could receive income of $90,000 by working elsewhere.The firm earns revenues of $360,000 per year. To receive a normal profit,the firm described above would have to

A)Experience $10,000 less in cost.
B)Receive $90,000 more in revenue.
C)Receive $10,000 more in revenue.

Question 40

If a firm can change market prices by altering its output,then it

A)Has market power.
B)Faces a horizontal demand curve.
C)Is a price taker.

Question 41

The difference between the total revenue and total cost curves at a given output is equal to

A)Total profit.
B)Profit per unit.
C)Average revenue.

Question 42

In making a production decision,an entrepreneur

A)Decides whether to enter or exit the market.
B)Decides what level of output will maximize profits.
C)Determines plants and equipment.

Question 43

If a perfectly competitive firm wanted to maximize its total revenues,it would produce

A)The output where MC equals price.
B)As much as it is capable of producing.
C)The output where the ATC curve is at a minimum.

Question 44

Which of the following is generally a fixed cost?

A)Property taxes on land used in production.
B)Wages.
C)Profit taxes.

Question 45

Marginal revenue is the change in

A)Total revenue when output is changed.
B)Total revenue when price is changed.
C)Average revenue when output is changed.

Question 46

For the perfectly competitive firm,the marginal revenue is always

A)Increasing.
B)Constant.
C)Equal to average total cost.

Question 47

Refer to the data in Figure 22.1.The shape of the total revenue curve indicates that the price of this good

A)Falls as output rises.
B)Rises as output rises.
C)Stays the same as output rises.

Question 48

A perfectly competitive firm will maximize profits by choosing an output level where

A)Price is greater than marginal cost.
B)Price equals marginal cost.
C)Price equals total cost.

Question 49

A firm's total revenue can be determined by

A)Price times quantity.
B)Profits minus costs.
C)Total costs minus variable costs.

Question 50

When the short-run marginal cost curve is upward-sloping,

A)The average total cost curve is upward-sloping.
B)The average total cost curve is above the marginal cost curve.
C)Diminishing returns occurs with greater output.

Question 51

Which of the following represents the change in total cost that results from a one-unit increase in production?

A)Marginal profit.
B)Total revenue.
C)Marginal cost.

Question 52

Refer to the data in Figure 22.1.The total fixed costs for this firm are approximately

A)$50.
B)$100.
C)$600.

Question 53

If diminishing returns exist,then

A)Each unit produced will cost incrementally less.
B)Each unit produced will cost incrementally more.
C)The total cost curve will be flat.

Question 54

The fact that a perfectly competitive firm's total revenue curve is an upward-sloping straight line implies that

A)The total profit curve is also an upward-sloping straight line.
B)Product price is constant at all levels of output.
C)Product price decreases as output increases,and demand is elastic.

Question 55

Refer to the data in Figure 22.1.The price of this good

A)Is $50 per unit.
B)Is $1 per unit.
C)Is $100 per unit.

Question 56

A production decision involves choosing

A)The amount of plants and equipment and is a short-run decision.
B)The amount of plants and equipment and is a long-run decision.
C)A rate of output and is a short-run decision.

Question 57

Which of the following is a production decision?

A)How much output the firm should produce in the long run.
B)Whether the firm should shut down or produce.
C)Whether the firm should exit or enter the market.

Question 58

If a perfectly competitive firm is producing a rate of output at which MC exceeds price,then the firm

A)Must have an economic loss.
B)Can increase its profit by increasing output.
C)Can increase its profit by decreasing output.

Question 59

For perfectly competitive firms,price

A)Is greater than marginal revenue.
B)Is equal to marginal revenue.
C)Is less than marginal revenue.

Question 60

The short run is the time period

A)Over which an investment decision can be made.
B)Necessary so that profits can be earned from production.
C)In which some costs are fixed.

Question 61

The supply curve is upward-sloping (i.e. ,it takes a higher price to induce greater production)because of

A)Increasing total costs.
B)Increasing fixed costs.
C)Increasing marginal costs.

Question 62

A competitive firm should always continue to operate in the short run as long as

A)P < ATC.
B)P < AVC.
C)MR > AVC.

Question 63

Refer to Figure 22.3 for a perfectly competitive firm.If the market price is $10,

A)The firm should produce 31 units.
B)The firm will shut down in the short run.
C)An economic loss will occur.

Question 64

In making an investment decision,an entrepreneur

A)Treats all costs as variable.
B)Makes a shutdown decision if price is below average variable cost.
C)Must take account of diminishing returns to fixed factors.

Question 65

A catfish farmer will shut down production when

A)He is losing money.
B)Price falls below AVC.
C)Total revenue falls below total costs.

Question 66

If price is greater than marginal cost,a perfectly competitive firm should increase output because

A)Marginal costs are increasing.
B)Additional units of output will add to the firm's profits (or reduce losses).
C)The price it receives for its product is increasing.

Question 67

The long run is

A)A period longer than one year.
B)The period required to produce a unit of the firm's output.
C)A period long enough for all inputs to be variable.

Question 68

Refer to Figure 22.3 for a perfectly competitive firm.At a market price of $23,profit per unit is maximized at an output of

A)13 units.
B)25 units.
C)31 units.

Question 69

If Microsoft is thinking about building a new factory,it is making a

A)Long-run decision that will definitely enhance its profit.
B)Long-run decision that may enhance its profit.
C)Short-run decision that will definitely enhance its profit.

Question 70

When a firm minimizes its losses in the short run,

A)It continues to produce only if price exceeds average variable cost.
B)The firm makes an investment decision.
C)The firm enters or exits from the market.

Question 71

The shutdown point occurs where price equals the minimum of

A)MR.
B)AVC.
C)AFC.

Question 72

Refer to Figure 22.3 for a perfectly competitive firm.This firm should shut down at any price below

A)$4.
B)$10.
C)$15.

Question 73

The decision to start or expand a business is known as the

A)Output decision.
B)Investment decision.
C)Production decision.

Question 74

Profit per unit is equal to

A)TR - TC.
B)P - MR.
C)P - ATC.

Question 75

A change in which of the following will change the optimal rate of output?

A)Payroll taxes.
B)Profit taxes.
C)Property taxes.

Question 76

Suppose the cost of insecticide (a variable input)decreases for broccoli farmers.In order to maximize profits,ceteris paribus,broccoli farmers should

A)Decrease output.
B)Keep output the same since the market price did not change.
C)Increase output.

Question 77

Short-run supply determinants include

A)Technology.
B)Number of buyers.
C)Income.

Question 78

A firm experiencing economic losses will still continue to produce output in the short run as long as

A)Revenues are greater than total fixed cost.
B)MR = MC.
C)Price is above average variable cost.

Question 79

When price exceeds average variable cost but not average total cost,the firm should,in the short run,

A)Shut down.
B)Produce at the rate of output where MR = MC.
C)Minimize per-unit losses by producing at the rate of output where ATC is minimized in the short run.

Question 80

If price is less than marginal cost,a perfectly competitive firm should decrease output because

A)Marginal costs are increasing.
B)Total revenues are decreasing.
C)The firm is producing units that cost more to produce than the firm receives in revenue,thus reducing profits (or increasing losses).