Question 1

The firm will make the most profits if it produces the quantity of output at which

Accepted Answer

The profit-maximizing output level is where marginal revenue equals marginal cost. This is because at this point the additional revenue that the firm earns from producing one more unit is exactly equal to the additional cost incurred to produce that additional unit. This will maximize the profits of the firm as any other output level will either result in lower profits (if MR<MC) or will not be the most efficient use of resources (if MR>MC).

Question 2

When firms have an incentive to exit a competitive market,their exit will

Accepted Answer

When firms exit a competitive market, it decreases the supply of the product, which allows the remaining firms to increase their market share and profits. This is because the reduced supply leads to an increase in price, which benefits the firms that are still in the market. Therefore, the exit of some firms from the market raises profits for the firms that remain in the market. Option A is incorrect because the exit of firms reduces supply and pushes up prices, so it does not lower market price. Option B is incorrect because the exit of firms reduces competition and could potentially lower costs for the remaining firms. Option D is also incorrect because the exit of firms does not directly impact demand for the product.

Question 3

Table 14-5
 
-Refer to Table 14-5.This table provides information on a firm's output,marginal revenue,and marginal cost for a firm.If the firm is maximizing profit,how much profit is it earning?

Accepted Answer

Without the actual data from Table 14-5, it is impossible to determine the firm's profit. The profit-maximizing condition is where marginal revenue equals marginal cost, but the actual profit also depends on total revenue and total cost, which are not provided.

Question 4

Carla's Candy Store is maximizing profits by producing 1,000 pounds of candy per day.If Carla's fixed costs unexpectedly increase and the market price remains constant,then the short run profit-maximizing level of output

Accepted Answer

The answer of Carla's Candy Store is maximizing profits by...

Question 5

-If the figure in panel (a)reflects the long-run equilibrium of a profit-maximizing firm in a competitive market,the figure in panel (b)most likely reflects

Accepted Answer

In a competitive market, free entry and exit of firms ensure that in the long run, firms earn zero economic profit, leading to a single market price where the firm's average total cost equals the market price.

Question 6

A corporation has been steadily losing money on one of its product lines.The factory used to produce that product cost $20 million to build 10 years ago.The firm is now considering an offer to buy that factory for $15 million.Which of the following statements about the decision to sell or not to sell is correct?

Accepted Answer

The sunk cost of $20 million should not be taken into account in the decision to sell the factory. The relevant cost is the offer of $15 million to buy the factory. The decision to sell should be based on whether or not the $15 million offer is greater than the expected future cash flows from the product line if the factory is retained.

Question 7

Figure 14-6
In the figure below, panel (a) depicts the linear marginal cost of a firm in a competitive market, and panel (b) depicts the linear market supply curve for a market with a fixed number of identical firms.
 
-Refer to Figure 14-6.If there are 200 identical firms in this market,what level of output will be supplied to the market when price is $1.00?

Accepted Answer

The answer of Figure 14-6
In the figure below, panel (a)...

Question 8

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 9

A sunk cost is one that

Accepted Answer

A sunk cost is a cost that has already been incurred and cannot be recovered, regardless of any present or future decisions. It should not play a role in current decision-making as it is no longer relevant to future costs or benefits.

Question 10

Raiman's Shoe Repair also produces custom-made shoes.When Mr.Raiman produces 12 pairs a week,the marginal cost of the twelfth pair is $84,and the MR of that unit is $70.What would you advise Mr.Raiman to do?

Accepted Answer

The marginal cost of producing the twelfth pair of shoes is higher than the marginal revenue obtained from selling that pair. This indicates that the business is experiencing diminishing returns and it would be optimal to produce fewer custom-made shoes to maximize profit.

Question 11

Table 14-5
 
-Refer to Table 14-5.This table provides information on a firm's output,marginal revenue,and marginal cost.If the firm is currently producing 14 units,what would you advise them to do?

Accepted Answer

The firm should increase quantity to 16 units if marginal revenue is greater than marginal cost at 14 units, as this would increase profit.

Question 12

In a competitive market with free entry and exit,the process of entry and exit ends when,for the typical firm in the market,

Accepted Answer

In a competitive market with free entry and exit, new firms will enter the market as long as they can earn economic profits. This will increase the supply in the market, decrease the price, and lower the profits of existing firms. The process of entry and exit will continue until price equals long-run average total cost, which is equivalent to the condition where marginal revenue equals long-run marginal cost for the typical firm. Therefore, choice A is the correct answer.

Question 13

Joe's Garage operates in a perfectly competitive market.At the point where marginal cost equals marginal revenue,ATC = $20,AVC = $15,and the price per unit is $10.In this situation,

Accepted Answer

Since the price of $10 is below the average variable cost of $15, Joe's Garage is not covering its variable costs and is incurring losses. Therefore, it should shut down immediately in the short run to minimize its losses. Continuing to operate would only increase the losses.

Question 14

In a market with 1,000 identical firms,the short-run market supply is the

Accepted Answer

In a market with 1,000 identical firms, the short-run market supply is the sum of the quantities supplied by each of the 1,000 individual firms. This is because each firm faces the same market price and produces the same product, so the total quantity supplied by all firms in the market determines the market supply. The other options (A, B, and C) do not accurately reflect the concept of short-run market supply in this scenario.

Question 15

When existing firms in a competitive market are profitable,an incentive exists for

Accepted Answer

When existing firms in a competitive market are profitable, It creates an attractive profit opportunity for new firms to enter the market. The potential profitability of the market encourages new firms to compete against existing firms. Hence, new firms will enter the market, even without government subsidies. The other options are not necessarily true in a competitive market. Existing firms may keep prices stable or even lower them to compete with new entrants, and they may not increase production if the demand in the market is not high enough.

Question 16

Cold Duck Airlines flies between Tacoma and Portland.The company leases planes on a year-long contract at a cost that averages $600 per flight.Other costs (fuel,flight attendants,etc.)amount to $550 per flight.Currently,Cold Duck's revenues are $1,000 per flight.All prices and costs are expected to continue at their present levels.If it wants to maximize profit,Cold Duck Airlines should

Accepted Answer

The answer of Cold Duck Airlines flies between Tacoma and...

Question 17

Refer to Figure 14-6.When 100 identical firms participate in this market,at what price will 15,000 units be supplied to this market?

Accepted Answer

At the quantity of 15,000, the market demand curve intersects the marginal cost curve at a price of $1.50. This is the price at which 100 identical firms will supply 15,000 units to the market.

Question 18

When new firms have an incentive to enter a competitive market,their entry will

Accepted Answer

When new firms enter a competitive market, it increases the supply of the product, which can lead to an excess supply and drive down prices. This, in turn, reduces the profits of existing firms in the market. Therefore, choice B is correct. Choices A, C, and D are not correct as they do not accurately represent the impact of new firms entering a competitive market.

Question 19

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

Accepted Answer

In a perfectly competitive market, firms will enter when economic profits are positive and exit when economic profits are negative. This is because in the long run, there are no barriers to entry or exit, so new firms will enter the market if they see an opportunity for profit, and existing firms will exit if they are making losses. The process of entry and exit will continue until economic profits are zero, at which point there is no incentive for new firms to enter and existing firms have no reason to exit. Therefore, choice C, economic profits are zero, is the best answer. Choices A and B relate to the short-run decision of whether to shut down or operate, while choice D only relates to accounting profits, which may not reflect a firm's true economic performance.

Question 20

Refer to Figure 14-6.If at a market price of $1.75,52,500 units of output are supplied to this market,how many identical firms are participating in this market?

Accepted Answer

The answer of Refer to Figure 14-6.If at a market...

Quiz 14: Firms in Competitive Markets