Question 1

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.

Accepted Answer

Staying open during the off-season can be profitable if the revenues exceed variable costs, as it means the business is covering its variable expenses and contributing to fixed costs, potentially leading to overall profit maximization.

Question 2

A firm operating in a competitive market will stay in business in the short run so long as the market price exceeds the firm's average total cost; otherwise, the firm will shut down.

Accepted Answer

A firm operating in a competitive market will stay in business in the short run so long as the market price exceeds the firm's average variable cost, not necessarily its average total cost. If the price covers the average variable cost, the firm can cover its variable costs and contribute something towards its fixed costs, even if it's not covering its total costs.

Question 3

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

Accepted Answer

In a competitive market, when prices rise, the profit margins on goods sold increase, incentivizing firms to produce more to take advantage of the higher prices and increase their profits.

Question 4

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.

Accepted Answer

In the short run, a firm will continue to operate if it can cover its average variable costs, even if it's incurring losses because the market price is below its average total cost but above its average variable cost. This is because, in the short run, the firm can still cover its variable costs and some portion of its fixed costs, minimizing losses compared to shutting down immediately.

Question 5

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

Accepted Answer

In the short run, if a firm's total revenue does not cover its variable costs, it will shut down because it cannot cover the costs directly associated with production, leading to a minimization of losses by not operating.

Question 6

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

Accepted Answer

A firm will shut down in the short run if revenue is not sufficient to cover all of its variable costs, not fixed costs. Fixed costs must be paid regardless of production levels in the short run.

Question 7

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.

Accepted Answer

In perfectly competitive markets, firms maximize profits by producing at an output level where marginal revenue (MR) equals marginal cost (MC), and because the price is given and constant for each firm (due to the nature of perfect competition), this condition also means that price equals marginal cost (P=MC) at the profit-maximizing output.

Question 8

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.

Accepted Answer

Exiting an industry refers to a long-term decision where a firm decides to cease operations permanently, while shutting down refers to a short-term decision where a firm stops production temporarily but can resume in the future.

Question 9

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).

Accepted Answer

Producing the 100th unit adds more to revenue ($6) than to costs ($5), indicating that the marginal revenue exceeds the marginal cost at this level of output, suggesting that increasing production could lead to higher profits.

Question 10

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.

Accepted Answer

The answer of A miniature golf course is a good...

Question 11

In the short run, if the market price is below the firm's average total cost of production, the firm will always shut down.

Accepted Answer

In the short run, if the market price is below a firm's average total cost but above its average variable cost, the firm may continue to operate to cover some of its fixed costs, even though it's incurring a loss. Shutting down is only a definite outcome if the price is below the average variable cost, as continuing operations in such a scenario would increase the firm's losses.

Question 12

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.

Accepted Answer

In the short run, a firm in a perfectly competitive market will shut down if the market price falls below its average variable cost because it cannot cover its variable costs, leading to a situation where it minimizes its losses by not producing at all.

Question 13

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 fixed costs.

Accepted Answer

The answer of A popular resort restaurant will maximize profits...

Question 14

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.

Accepted Answer

A firm operating in a perfectly competitive industry will continue to operate in the short run as long as the market price covers its average variable costs, even if it's incurring losses. If the market price is less than the firm's average variable cost, the firm will shut down in the short run because it cannot cover its variable costs.

Question 15

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

Accepted Answer

In the short run, a firm should consider exiting the industry if its total revenue is less than its total variable costs, not just based on marginal cost exceeding marginal revenue.

Question 16

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.

Accepted Answer

In the short run, a firm may decide to produce zero units of output and temporarily cease operations, which is referred to as shutting down. In the long run, if a firm decides to permanently cease operations and leave the market, it is considered exiting the industry. The distinction lies in the time frame and permanence of the decision.

Question 17

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 but greater than the firm's average fixed cost.

Accepted Answer

A firm operating in a perfectly competitive industry will continue to operate in the short run if the market price is greater than the firm's average variable cost, even if it is less than the firm's average total cost, to cover some portion of its fixed costs. If the price is less than the firm's average variable cost, the firm would shut down in the short run.

Question 18

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

Accepted Answer

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

Question 19

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

Accepted Answer

In a competitive market, the marginal firm—the one that is just able to stay in business—will earn zero economic profit in the long run due to the entry and exit of firms, which drives prices to the level of minimum average total cost.

Question 20

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

Accepted Answer

In a competitive market, a profit-maximizing firm will earn zero economic profits in the long run due to free entry and exit, but it can still earn positive accounting profits. Economic profits account for both explicit and implicit costs, including opportunity costs, while accounting profits only consider explicit costs.

Quiz 14: Firms in Competitive Markets