Question 1

Scenario 14-5
A study sponsored by the Food Consumer Safety Board found that consumption of irradiated tomatoes increased the health of laboratory rats. As a result of national press coverage of the report, the demand for irradiated tomatoes increased dramatically. Organic farmers were able to switch from organic production of tomatoes to irradiated production with no additional cost. Assume that the tomato market satisfies all of the assumptions of perfect competition.
-Refer to Scenario 14-5. If the increased production of irradiated tomatoes caused a rise in the marginal transportation costs of moving irradiated tomatoes to market, the

Accepted Answer

In the long run, if marginal transportation costs rise, it increases the cost of supplying tomatoes, leading to an upward sloping supply curve as higher prices are needed to cover increased costs.

Question 2

In a perfectly competitive market, the process of entry and exit will end when

Accepted Answer

In a perfectly competitive market, new firms will enter the market if there are economic profits to be made, and existing firms will exit the market if there are economic losses being made. This process will continue until economic profits are driven down to zero, at which point there is no incentive for firms to enter or exit the market. Therefore, the process of entry and exit will end when economic profits are zero.

Question 3

Suppose that the organic-produce industry is composed of a large number of small firms. In recent years, these firms have suffered economic losses, and many sellers have left the industry. Economic theory suggests that these conditions will

Accepted Answer

When firms leave the industry, market supply declines, which leads to an increase in the price of organic produce. This is because the remaining firms have more market power and can charge higher prices due to the reduced competition. Additionally, since the industry is composed of small firms, there may be no possibility of collusion, and the remaining firms may continue to suffer long-run economic losses even with higher prices.

Question 4

If there is an increase in market demand in a perfectly competitive market, then in the short run prices will

Accepted Answer

In the short run, with an increase in market demand, prices will rise as the quantity supplied is fixed, and hence, the firms selling in the market will be able to sell their output at a higher price due to increased demand. This occurs because new entrants cannot enter the market in the short run to increase the quantity supplied, maintaining the fixed supply, and resulting in a rise in prices.

Question 5

If occupational safety laws were changed so that firms no longer had to take expensive steps to meet regulatory requirements, we would expect that

Accepted Answer

If firms no longer have to spend money on meeting occupational safety laws, their production costs would decrease, resulting in lower prices for consumers. Over time, competitors in the industry would also lower their prices to remain competitive, passing the savings on to consumers in the long run. This would result in a more efficient market, but not necessarily in long-run economic profits for firms.

Question 6

When a profit-maximizing firm in a competitive market has zero economic profit, accounting profit

Accepted Answer

Economic profit is calculated after accounting for both explicit and implicit costs, while accounting profit only considers explicit costs. Therefore, even if economic profit is zero, accounting profit can still be positive, as it does not account for implicit costs.

Question 7

When market conditions in a competitive industry are such that firms cannot cover their total production costs, then

Accepted Answer

In a competitive industry, firms that cannot cover their total production costs will experience losses. As a result, some firms may decide to exit the market, causing prices to rise as the supply decreases. Eventually, the remaining firms will be able to cover their total production costs since the market will adjust to the new equilibrium price. This process is known as the "invisible hand" of the market, and it ensures that resources are allocated efficiently. Therefore, choice (C) is the best answer.

Question 8

In calculating accounting profit, accountants typically don't include

Accepted Answer

Accountants typically do not include opportunity costs that do not involve an outflow of money when calculating accounting profit, as accounting profit focuses on explicit costs and revenues.

Question 9

Which of the following statements is not correct about competitive firms?

Accepted Answer

In the short run, firms may choose to operate at a level of output where price is less than average variable cost, as long as they are able to cover their variable costs and contribute towards their fixed costs.

Question 10

The textile industry is composed of a large number of small firms. In recent years, these firms have suffered economic losses, and many sellers have left the industry. Economic theory suggests that these conditions will

Accepted Answer

With many sellers leaving the industry, the market supply of textiles will decline. As a result, the price of textiles will rise due to increased demand for a limited supply. This means that the remaining firms in the industry may still struggle to make a profit in the long run. Option A is incorrect because the demand curve shifting outward would indicate an increase in demand, which is not suggested by the scenario. Option B is also incorrect because collusion is illegal and would not necessarily lead to increased efficiency. Finally, option D is incorrect because the scenario already states that firms in the textile industry have suffered economic losses, so this is not a prediction but a current reality.

Question 11

Which of the following statements is not correct?

Accepted Answer

To maximize profit, firms should produce at a level of output where price equals marginal cost, not average variable cost.

Question 12

If there is an increase in market demand in a perfectly competitive market, then in the short run

Accepted Answer

In the short run, the increase in market demand will lead to a higher price for the product, allowing firms to earn higher profits. This is because the firm's marginal revenue (which equals the increase in revenue from selling one more unit) will be greater than its marginal cost (the cost of producing one more unit) at the higher market price. Therefore, firms will increase their output to earn more profits until the price reaches the level where marginal revenue equals marginal cost. However, in the long run, new firms will enter the market, increasing the supply and pushing down the price to the minimum average total cost of firms, eliminating the excess profits.

Question 13

Scenario 14-4
Victor is the recipient of $1 million from a lawsuit. Victor decides to use the money to purchase a small business in Florida. His business operates in a perfectly competitive industry. If Victor would have invested the $1 million in a risk-free bond fund, he could have earned $100,000 each year. After he bought the small business, Victor quit his job as a market analyst with Research, Inc., where he used to earn $75,000 per year.
-Refer to Scenario 14-4. What is Victor's opportunity costs of operating his new business?

Accepted Answer

Victor's opportunity cost of operating his new business is equal to the income he could have earned by investing in a risk-free bond fund ($100,000) plus the income he gave up by quitting his job ($75,000), which is a total of $175,000. Therefore, the best choice is D.

Question 14

If the profit-maximizing quantity of production for a competitive firm occurs at a point where the firm's average total cost of production is falling as production increases, then the firm

Accepted Answer

The answer of If the profit-maximizing quantity of production for...

Question 15

Scenario 14-4
Victor is the recipient of $1 million from a lawsuit. Victor decides to use the money to purchase a small business in Florida. His business operates in a perfectly competitive industry. If Victor would have invested the $1 million in a risk-free bond fund, he could have earned $100,000 each year. After he bought the small business, Victor quit his job as a market analyst with Research, Inc., where he used to earn $75,000 per year.
-Refer to Scenario 14-4. How large would Victor's accounting profits need to be to allow him to attain zero economic profit?

Accepted Answer

The answer of Scenario 14-4
Victor is the recipient of $1...

Question 16

In a competitive market with free entry and exit, if all firms have the same cost structure, then

Accepted Answer

The answer of In a competitive market with free entry...

Question 17

Scenario 14-4
Victor is the recipient of $1 million from a lawsuit. Victor decides to use the money to purchase a small business in Florida. His business operates in a perfectly competitive industry. If Victor would have invested the $1 million in a risk-free bond fund, he could have earned $100,000 each year. After he bought the small business, Victor quit his job as a market analyst with Research, Inc., where he used to earn $75,000 per year.
-Refer to Scenario 14-4. At the end of the first year of operating his new business, Victor's accountant reported an accounting profit of $150,000. What was Victor's economic profit?

Accepted Answer

Victor's economic profit is calculated by subtracting both the opportunity cost of the investment ($100,000 from the bond fund) and the opportunity cost of his foregone salary ($75,000) from the accounting profit ($150,000). This results in an economic profit of $150,000 - $100,000 - $75,000 = -$25,000.

Question 18

Scenario 14-5
A study sponsored by the Food Consumer Safety Board found that consumption of irradiated tomatoes increased the health of laboratory rats. As a result of national press coverage of the report, the demand for irradiated tomatoes increased dramatically. Organic farmers were able to switch from organic production of tomatoes to irradiated production with no additional cost. Assume that the tomato market satisfies all of the assumptions of perfect competition.
-Refer to Scenario 14-5. As a result of the increase in the demand for tomatoes, we would predict that in the short run that the

Accepted Answer

An increase in demand for tomatoes will lead to an increase in price in the short run in a perfectly competitive market, as the supply curve is relatively fixed in the short run. This will allow existing producers to earn profits. However, in the long run, the increase in profits will attract new firms to enter the market, causing the supply curve to shift rightward, and the price to return to its original level.

Question 19

In a perfectly competitive market, the process of entry and exit will end when (i)
Accounting profits are zero.
(ii)
Economic profits are zero.
(iii)
Price equals minimum marginal cost.
(iv)
Price equals minimum average total cost.

Accepted Answer

In a perfectly competitive market, entry and exit continue until economic profits are zero, which occurs when price equals minimum average total cost.

Question 20

As a general rule, when accountants calculate profit they account for explicit costs but usually ignore

Accepted Answer

When accountants calculate profit, they usually only account for explicit costs, which are costs directly incurred by the firm such as wages, rent, and materials. They typically ignore implicit costs, which are the opportunity costs of using resources for one purpose instead of another. Implicit costs may include factors such as the value of the owner's time and the forgone opportunity to invest in a different venture.

Quiz 14: Firms in Competitive Markets