Deck 14: Firms in Competitive Markets

Question 1

For a firm operating in a perfectly competitive industry,marginal revenue and average revenue are equal.

Answer 1

True

Question 2

In a competitive market,firms are unable to differentiate their product from that of other producers.

Answer 2

True

Question 3

Because there are many buyers and sellers in a perfectly competitive market,no one seller can influence the market price.

Answer 3

True

Question 4

If a firm notices that its average revenue equals the current market price,that firm must be participating in a competitive market.

Question 5

A dairy farmer must be able to calculate sunk costs in order to determine how much revenue the farm receives for the typical gallon of milk.

Question 6

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 7

A firm is currently producing 100 units of output per day.The manager reports to the owner that producing the 100th unit costs the firm $5.The firm can sell the 100th unit for $5.The firm should continue to produce 100 units in order to maximize its profits (or minimize its losses).

Question 8

When an individual firm in a competitive market increases its production,it is likely that the market price will fall.

Question 9

Firms operating in perfectly competitive markets produce an output level where marginal revenue equals marginal cost.

Question 10

Because nothing can be done about sunk costs,they are irrelevant to decisions about business strategy.

Question 11

A firm is currently producing 100 units of output per day.The manager reports to the owner that producing the 100th unit costs the firm $5.The firm can sell the 100th unit for $4.75.The firm should continue to produce 100 units in order to maximize its profits (or minimize its losses).

Question 12

A profit-maximizing firm in a competitive market will increase production when average revenue exceeds marginal cost.

Question 13

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 14

A popular resort restaurant will maximize profits if it chooses to stay open during the less-crowded "off season" when its total revenues exceed its variable costs.

Question 15

Firms operating in perfectly competitive markets try to maximize profits.

Question 16

Firms in a competitive market are said to be price takers because there are many sellers in the market and the goods offered by the firms are very similar if not identical.

Question 17

For a firm operating in a perfectly competitive industry,total revenue,marginal revenue,and average revenue are all equal.

Question 18

In competitive markets,firms that raise their prices are typically rewarded with larger profits.

Question 19

By comparing the marginal revenue and marginal cost from each unit produced,a firm in a competitive market can determine the profit-maximizing level of production.

Question 20

A firm is currently producing 100 units of output per day.The manager reports to the owner that producing the 100th unit costs the firm $5.The firm can sell the unit for $6.The firm should produce more than 100 units in order to maximize its profits (or minimize its losses).

Question 21

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 22

Suppose a firm is considering producing zero units of output.We call this shutting down in the short run and exiting an industry in the long run.

Question 23

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

Question 24

A profit-maximizing firm in a competitive market will earn zero accounting profits in the long run.

Question 25

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

Question 26

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

Question 27

In the short run,a firm should exit the industry if its marginal cost exceeds its marginal revenue.

Question 28

A firm operating in a perfectly competitive industry will continue to operate in the short run but earn losses if the market price is less than that firm's average total cost but greater than the firm's average variable cost.

Question 29

A firm operating in a perfectly competitive industry will shut down in the short run but earn losses if the market price is less than that firm's average variable cost.

Question 30

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 31

A firm operating in a perfectly competitive industry will continue to operate in the short run but earn losses if the market price is less than that firm's average variable cost.

Question 32

A firm operating in a perfectly competitive industry will continue to operate if it earns zero economic profits because it is likely to be earning positive accounting profits.

Question 33

All firms maximize profits by producing an output level where marginal revenue equals marginal cost;for firms operating in perfectly competitive industries,maximizing profits also means producing an output level where price equals marginal cost.

Question 34

A firm operating in a perfectly competitive industry will shut down in the short run if its economic profits fall to zero because it is likely to be earning negative accounting profits.

Question 35

In the long run,a firm should exit the industry if its total costs exceed its total revenues.

Question 36

In the long run,when price is greater than average total cost,some firms in a competitive market will choose to enter the market.

Question 37

Suppose a firm is considering producing zero units of output.We call this exiting an industry in the short run and shutting down in the long run.

Question 38

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

Question 39

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

Question 40

The marginal firm in a competitive market will earn zero economic profit in the long run.

Question 41

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

Question 42

A firm operating in a perfectly competitive market may earn positive,negative,or zero economic profit in the short run.

Question 43

A firm operating in a perfectly competitive market earns zero economic profit in the long run but remains in business because the firm's revenues cover the business owners' opportunity costs.

Question 44

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

Question 45

In a long-run equilibrium where firms have identical costs,it is possible that some firms in a competitive market are making a positive economic profit.

Question 46

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

Question 47

At its current level of production a profit-maximizing firm in a competitive market receives $12.50 for each unit it produces and faces an average total cost of $10.At the market price of $12.50 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 48

List and describe the characteristics of a perfectly competitive market.

Question 49

Explain how a firm in a competitive market identifies the profit-maximizing level of production.When should the firm raise production,and when should the firm lower production?

Question 50

When economic profits are zero in equilibrium,the firm's revenue must be sufficient to cover all opportunity costs.

Question 51

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

Question 52

A competitive market will typically experience entry and exit until accounting profits are zero.

Question 53

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

Question 54

News reports from the western United States occasionally report incidents of cattle ranchers slaughtering a large number of newborn calves and burying them in mass graves rather than transporting them to markets.Assuming that this is rational behavior by profit-maximizing "firms," explain what economic factors may influence such behavior.

Question 55

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 56

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 57

In the long run,a competitive market with 1,000 identical firms will experience an equilibrium price equal to the minimum of each firm's average total cost.

Question 58

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

Question 59

If identical firms that remain in a competitive market over the long run make zero economic profit,why do these firms choose to remain in the market?

Question 60

A firm operating in a perfectly competitive market may earn positive,negative,or zero economic profit in the long run.

Question 61

Suppose that firms in each of the two markets listed below were to increase their prices by 20 percent.Which pair represents the example where customers would decrease their quantity purchased dramatically in one market and only slightly in the other market due to differences in market structure?

A) corn and soybeans
B) gasoline and restaurants
C) water and cable television
D) spiral notebooks and college textbooks

Question 62

When firms are said to be price takers,it implies that if a firm raises its price,

A) buyers will go elsewhere.
B) buyers will pay the higher price in the short run.
C) competitors will also raise their prices.
D) firms in the industry will exercise market power.

Question 63

For any competitive market,the supply curve is closely related to the

A) preferences of consumers who purchase products in that market.
B) income tax rates of consumers in that market.
C) firms' costs of production in that market.
D) interest rates on government bonds.

Question 64

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

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

Question 65

When a firm has little ability to influence market prices it is said to be in a

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

Question 66

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

A) Firms are price takers.
B) Firms can freely enter the market.
C) Many firms have market power.
D) Goods offered for sale are largely the same.

Question 67

Which of the following industries is most likely to exhibit the characteristic of free entry?

A) nuclear power
B) municipal water and sewer
C) dairy farming
D) airport security

Question 68

Who is a price taker in a competitive market?

A) buyers only
B) sellers only
C) both buyers and sellers
D) neither buyers nor sellers

Question 69

A firm has market power if it can

A) maximize profits.
B) minimize costs.
C) influence the market price of the good it sells.
D) hire as many workers as it needs at the prevailing wage rate.

Question 70

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) only a few buyers will have market power.
D) sellers will have little reason to charge less than the going market price.

Question 71

Competitive markets are characterized by

A) a small number of buyers and sellers.
B) unique products.
C) the interdependence of firms.
D) free entry and exit by firms.

Question 72

A market is competitive if

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

Question 73

Free entry means that

A) the government pays any entry costs for individual firms.
B) no legal barriers prevent a firm from entering an industry.
C) a firm's marginal cost is zero.
D) a firm has no fixed costs in the short run.

Question 74

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

A) have a negligible impact on the market price.
B) have little effect on market equilibrium quantity but will affect market equilibrium price.
C) affect marginal revenue and average revenue but not price.
D) adversely affect the profitability of more than one firm in the market.

Question 75

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

A) Buyers and sellers are price takers.
B) Each firm sells a virtually identical product.
C) Free entry is limited.
D) Each firm chooses an output level that maximizes profits.

Question 76

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 an incentive to charge less than the market price to earn higher revenue.
C) The firm can sell only a limited amount of output at the market price before the market price will fall.
D) Price-taking firms maximize profits by charging a price above marginal cost.

Question 77

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

A) Firms are price takers.
B) Firms have difficulty entering the market.
C) There are many sellers in the market.
D) Goods offered for sale are largely the same.

Question 78

A key characteristic of a competitive market is that

A) government antitrust laws regulate competition.
B) producers sell nearly identical products.
C) firms minimize total costs.
D) firms have price setting power.

Question 79

The analysis of competitive firms sheds light on the decisions that lie behind the

A) demand curve.
B) supply curve.
C) way firms make pricing decisions in the not-for-profit sector of the economy.
D) way financial markets set interest rates.

Question 80

In a perfectly competitive market,

A) no one seller can influence the price of the product.
B) price exceeds marginal revenue for each unit sold.
C) average revenue exceeds marginal revenue for each unit sold.
D) administrative barriers can make it difficult for firms to enter an industry.