Deck 6: Background to Supply: Firms in Competitive Markets

Question 1

In the long run, if the price firms receive for their output is below their average total costs of production, some firms will exit the market.

Answer 1

True

Question 2

Which of the following is a variable cost in the short run?

A) rent on the factory
B) wages paid to factory labour
C) interest payments on borrowed financial capital
D) payment on the lease for factory equipment
E) salaries paid to upper management

Answer 2

wages paid to factory labour

Question 3

Nicole owns a small pottery factory. She can make 1 000 pieces of pottery per year and sell them for R100 each. It costs Nicole R20 000 for the raw materials to produce the 1 000 pieces of pottery. She has invested R100 000 in her factory and equipment: R50 000 from her savings and R50 000 borrowed at 10 per cent. (Assume that she could have loaned her money out at 10 per cent, too.) Nicole can work at a competing pottery factory for R40 000 per year. The accounting profit at Nicole's pottery factory is:

A) R30 000.
B) R35 000.
C) R70 000.
D) R75 000.
E) R80 000.

Answer 3

R75 000.

Question 4

In the short run, if the price a firm receives for a good is above its average variable costs but below its average total costs of production, the firm will temporarily shut down.

Question 5

Average total costs are total costs divided by marginal costs.

Question 6

If total revenue is R100, explicit costs are R50, and implicit costs are R30, then accounting profit equals R50.

Question 7

$\begin{array} { | c | c | c | c | c | } \hline \begin{array} { c } \text { Quantity } \\\text { of Output }\end{array} & \text { Fixed Costs } & \begin{array} { c } \text { Variable } \\\text { Costs }\end{array} & \text { Total Costs } & \text { Marginal Costs } \\\hline 0 & \text { R10 } & \text { R0 } & & \\\hline 1 & 10 & 5 & & \\\hline 2 & 10 & 11 & & \\\hline 3 & 10 & 18 & & \\\hline 4 & 10 & 26 & & \\\hline 5 & 10 & 36 & & \\\hline\end{array}$

-Refer to the data above. The average fixed cost of producing four units is:

A) R2.50
B) R5
C) R9
D) R26
E) R40

Question 8

The short-run market supply curve is more elastic than the long-run market supply curve.

Question 9

Economic profit is equal to total revenue minus

A) variable costs.
B) implicit costs.
C) explicit costs.
D) marginal costs.
E) implicit and explicit costs.

Question 10

If a firm continues to employ more workers within the same size factory, it will eventually experience diminishing marginal product.

Question 11

If, as the quantity produced increases, a production function first exhibits increasing marginal product and later diminishing marginal product, the corresponding marginal cost curve will be U-shaped.

Question 12

In the short run, the market supply curve for a good is the sum of the quantities supplied by each firm at each price.

Question 13

If there are implicit costs of production,

A) accounting profit will exceed economic profit.
B) economic profit will always be zero.
C) economic profit will exceed accounting profit.
D) accounting profit will always be zero.
E) economic profit and accounting profit will be equal

Question 14

Refer to the data below. The marginal product of labour as production moves from employing one worker to employing two workers is:
$\begin{array} { c c } \text { Number of Workers } & \text { Output } \\0 & 0 \\1 & 23 \\2 & 40 \\3 & 50\end{array}$

A) 0
B) 10
C) 17
D) 23
E) 40

Question 15

The production process described above exhibits

A) constant marginal product of labour.
B) diminishing marginal product of labour.
C) increasing returns to scale.
D) increasing marginal product of labour.
E) decreasing returns to scale.

Question 16

Wages and salaries paid to workers are an example of implicit costs of production.

Question 17

If a production function exhibits diminishing marginal product, the slope of the corresponding total-cost curve

A) is linear (a straight line).
B) is negative throughout its length
C) becomes steeper as the quantity of output increases.
D) becomes flatter as the quantity of output increases.

Question 18

A firm maximises profit when it produces output up to the point where marginal cost equals marginal revenue.

Question 19

If a production function exhibits diminishing marginal product, its slope

A) is linear (a straight line).
B) becomes steeper as the quantity of the input increases.
C) could be any of these answers.
D) becomes flatter as the quantity of the input increases.

Question 20

Accounting profit is equal to total revenue minus

A) implicit costs.
B) variable costs.
C) the sum of implicit and explicit costs.
D) explicit costs.

Question 21

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

A) All of these answers are characteristics of a competitive market.
B) There are many buyers and sellers in the market.
C) The goods offered for sale are largely the same.
D) Firms generate small but positive economic profits in the long run.
E) Firms can freely enter or exit the market.

Question 22

In the long run, the competitive firm's supply curve is the

A) entire marginal cost curve.
B) upward-sloping portion of the average total cost curve.
C) portion of the marginal cost curve that lies above the average total cost curve.
D) upward-sloping portion of the average variable cost curve.
E) portion of the marginal cost curve that lies above the average variable cost curve.

Question 23

If a competitive firm is producing a level of output where marginal revenue exceeds marginal cost, the firm could increase profits if it

A) decreased production.
B) maintained production at the current level.
C) temporarily shut down.
D) increased production.

Question 24

The long-run market supply curve

A) is always more elastic than the short-run market supply curve.
B) is always perfectly elastic.
C) has the same elasticity as the short-run market supply curve.
D) is always less elastic than the short-run market supply curve.

Question 25

A grocery store should close at night if the

A) variable costs of staying open are less than the total revenue due to staying open.
B) total costs of staying open are less than the total revenue due to staying open.
C) variable costs of staying open are greater than the total revenue due to staying open.
D) total costs of staying open are greater than the total revenue due to staying open.

Question 26

The market price in a perfectly competitive industry in short-run equilibrium is R3 and the minimum average cost for all firms is R2.50. In the long run, we would expect an increase in

A) each firm's output.
B) the number of firms.
C) each firm's profit.
D) each firm's average costs.

Question 27

For a competitive firm, marginal revenue is

A) total revenue divided by the quantity sold.
B) equal to the quantity of the good sold.
C) average revenue divided by the quantity sold.
D) equal to the price of the good sold.

Question 28

Which of the following statements is true?

A) All costs are fixed in the short run.
B) All costs are variable in the long run.
C) All costs are variable in the short run.
D) All costs are fixed in the long run.

Question 29

If, as the quantity produced increases, a production function first exhibits increasing marginal product and later diminishing marginal product, the corresponding marginal cost curve will

A) be flat (horizontal).
B) slope upward.
C) slope downward.
D) be U-shaped.

Question 30

A corporation has been steadily losing money on one of its product lines. The factory used to produce that brand cost R20 million to build 10 years ago. The firm now is considering an offer to buy that factory for R15 million. Which of the following statements about the decision to sell or not to sell is correct?

A) The firm should turn down the purchase offer because the factory cost more than R15 million to build.
B) The R20 million spent on the factory is a sunk cost that should not affect the decision.
C) The R20 million spent on the factory is an implicit cost, which should be included in the decision.
D) The firm should sell the factory only if it can reduce its costs elsewhere by R5 million.

Question 31

The competitive firm maximises profit when it produces output up to the point where

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

Question 32

Gideon's Shoe Repair also produces custom-made shoes. When Gideon produces 12 pairs a week, the marginal cost (MC) of the twelfth pair is R840, and the marginal revenue (MR) of that unit is R700. What would you advise Gideon to do?

A) Shut down.
B) Produce more custom-made shoes.
C) Decrease the price.
D) Produce fewer custom-made shoes.

Question 33

A sunk cost is one that

A) changes as the level of output changes in the short run.
B) was paid in the past and will not change regardless of the present decision.
C) should determine the rational course of action in the future.
D) has the most impact on profit-making decisions.

Question 34

When marginal costs are below average total costs,

A) average fixed costs are rising.
B) average total costs are falling.
C) average total costs are rising.
D) average total costs are minimised.

Question 35

If marginal costs equal average total costs,

A) average total costs are falling.
B) average total costs are rising.
C) average total costs are maximised.
D) average total costs are minimised.

Question 36

In the short run, the competitive firm's supply curve is the

A) upward-sloping portion of the average total cost curve.
B) upward-sloping portion of the average variable cost curve.
C) portion of the marginal cost curve that lies above the average total cost curve.
D) entire marginal cost curve.
E) portion of the marginal cost curve that lies above the average variable cost curve.

Question 37

In the long run, some firms will exit the market if the price of the good offered for sale is less than

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

Question 38

If a competitive firm doubles its output, its total revenue

A) doubles.
B) more than doubles.
C) less than doubles.
D) cannot be determined because the price of the good may rise or fall.

Question 39

Which of the following markets would most closely satisfy the requirements for a competitive market?

A) Electricity.
B) DSTV.
C) Cola.
D) Milk.
E) Economics textbooks.

Question 40

In a perfectly competitive market, the horizontal sum of all the individual firms' supply curves is

A) zero.
B) equal to the industry profits.
C) the market supply curve.
D) a horizontal line.

Question 41

Why would a firm in a perfectly competitive market always choose to set its price equal to the current market price? If a firm sets its price below the current market price, what effect would this have on the market?

Question 42

Describe the difference between average revenue and marginal revenue. Why are both of these revenue measures important to a profit-maximising firm?

Question 43

What are opportunity costs? How do explicit and implicit costs relate to opportunity costs?

Question 44

Give two reasons why the long-run industry supply curve may slope upward. Use an example to demonstrate your reasons.

Question 45

At its current level of production a profit-maximising firm in a competitive market receives R12.50 for each unit it produces and faces an average total cost of R10. At the market price of R12.50 per unit, the firm's marginal cost curve crosses the marginal revenue curve at an output level of 1 000 units. What is the firm's current profit? What is likely to occur in this market and why?

Question 46

In long-run equilibrium in a competitive market, firms are operating at

A) the minimum of their average-total-cost curves.
B) all of these answers are correct.
C) their efficient scale.
D) zero economic profit.
E) the intersection of marginal cost and marginal revenue.

Question 47

When firms in a competitive market have different costs, it is likely that

A) free entry and exit in the market will be violated.
B) the market will no longer be considered competitive.
C) long-run market supply will be downward sloping.
D) some firms will earn positive economic profits in the long run.

Question 48

a) The production function depicts a relationship between which two variables? Also, draw a production function that exhibits diminishing marginal product.
b) How would a production function that exhibits decreasing marginal product affect the shape of the total cost curve? Explain or draw a graph.
c) What effect, if any, does diminishing marginal product have on the shape of the marginal cost curve?

Question 49

Use a graph to demonstrate the circumstances that would prevail in a perfectly competitive market where firms are experiencing economic losses. Identify costs, revenue, and the economic losses on your graph. Using your graph, determine whether an individual firm will shut down in the short run, or choose to remain in the market. Explain your answer.

Question 50

A key difference between accountants and economists is their different treatment of the cost of capital. Does this cause an accountant's estimate of total costs to be higher or lower than an economist's estimate? Explain.

Question 51

Jan van Rooyen owns a hotdog shop. Jan hires an economist who assesses the shape of the hotdog shop's average total cost (ATC) curve as a function of the number of hotdogs produced. The results indicate a U-shaped average total cost curve. Jan's economist explains that ATC is U-shaped for two reasons. The first is the existence of diminishing marginal product, which causes it to rise. What would be the second reason? Assume that the marginal cost curve is linear. (Hint: The second reason relates to average fixed cost)

Question 52

Use a graph to demonstrate the circumstances that would prevail in a competitive market where firms are earning economic profits. Can this scenario be maintained in the long run? Explain your answer.

Question 53

If the long-run market supply curve for a good is perfectly elastic, an increase in the demand for that good will, in the long run, cause

A) an increase in the number of firms in the market but no increase in the price of the good.
B) an increase the price of the good and an increase in the number of firms in the market.
C) an increase the price of the good but no increase in the number of firms in the market.
D) no impact on either the price of the good or the number of firms in the market.

Question 54

A long-run supply curve is flatter than a short-run supply curve because

A) firms can enter and exit a market more easily in the long run than in the short run.
B) long run supply curves are sometimes downward sloping.
C) competitive firms have more control over demand in the long run.
D) firms in a competitive market face identical cost structures.