Question 1

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 2

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

With an increase in demand for tomatoes, there will be a corresponding increase in price in the short run as supply can't immediately keep up with the surge in demand. The other options are not necessarily true in the short run in perfect competition.

Question 3

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 4

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

Accepted Answer

In a perfectly competitive market, an increase in demand leads to a temporary shortage of supply, resulting in an increase in prices. This is because firms cannot immediately increase their production in response to the increased demand, as they are already producing at their maximum capacity in the short run. As a result, they can only increase prices to balance the increased demand with limited supply.

Question 5

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

If the marginal transportation costs for irradiated tomatoes increase, it would increase the cost of production for the farmers. In the long run, some farmers might exit the market due to low profits, and the remaining farmers would need to use less efficient methods to bring tomatoes to the market, such as longer transportation routes. Hence, the long-run market supply curve of irradiated tomatoes would be upward sloping.

Question 6

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

Accepted Answer

Accountants typically only consider explicit costs, which are the actual monetary payments made by a firm for resources such as labor, materials, and rent. Implicit costs, which are the opportunity costs of using resources owned by the firm, are often ignored in accounting calculations.

Question 7

When managers of firms in a competitive market observe falling profits, they may infer that the market is experiencing

Accepted Answer

Falling profits may indicate the entry of new firms in the market, increasing competition and reducing profits for existing firms.

Question 8

Which of the following statements is not correct?

Accepted Answer

The answer of Which of the following statements is not...

Question 9

Roger owns a small health store that sells vitamins in a perfectly competitive market. If vitamins sell for $12 per bottle and the average total cost per bottle is $12.50 at the profit-maximizing output level, then in the long run

Accepted Answer

At a price of $12 per bottle and an average total cost of $12.50 per bottle, Roger is making a loss. In the long run, this will cause some firms to exit the market, which will decrease supply and cause the price to rise until it reaches the minimum average total cost.

Question 10

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 had to take expensive steps to meet regulatory requirements, their production costs would decrease, allowing them to lower their prices in the short run to remain competitive. However, in the long run, increased competition would force prices back to their previous level, but the firms would continue to operate with lower costs, resulting in a higher profit margin. Therefore, producers would pass the lower production costs on to consumers in the long run.

Question 11

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 the sum of the earnings he gave up from his job and the earnings he could have received from the risk-free bond fund. Therefore, his opportunity cost is $75,000 (from his job) + $100,000 (from the bond fund) = $175,000. Therefore, the best choice is D.

Question 12

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

The economic losses and exit of sellers will result in a decline in market supply, which will cause the price of textiles to rise. This is because there are fewer firms producing textiles, therefore reducing the quantity supplied in the market. This reduction in supply will cause an increase in the price of textiles.

Question 13

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

The exit of many sellers from the organic-produce industry will reduce market supply. Reduced supply, combined with relatively constant or even increased demand for organic produce, will cause prices to rise. This is due to the basic law of supply and demand. As such, choice C is the correct answer.

Question 14

Roger owns a small health store that sells vitamins in a perfectly competitive market. If vitamins sell for $12 per bottle and the average total cost per bottle is $11.50 at the profit-maximizing output level, then in the long run

Accepted Answer

In a perfectly competitive market, if firms are earning profits, more firms will enter the market due to low barriers to entry. This will increase competition and decrease the price until firms are earning zero economic profits in the long run. Therefore, more firms will enter the market.

Question 15

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

Accepted Answer

In the short run, firms can operate at a level of output where price is less than average variable cost but greater than average total cost, in order to minimize their losses. However, in the long run, firms must be able to cover all costs, including fixed costs, so they must be operating at a level of output where price equals average total cost.

Question 16

Phil sells duck calls in a perfectly competitive market. If duck calls sell for $10 each and average total cost per unit is $11 at the profit-maximizing output level, then in the long run

Accepted Answer

Since the average total cost per unit is greater than the price per unit in the long run, firms will be making losses. As a result, some firms will exit from the market to avoid these losses. This will lead to a decrease in the number of firms in the market, and the surviving firms will enjoy a higher price due to reduced competition.

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. 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 18

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

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

Question 19

Willie's Wading Adventures sells hip waders for fishing and duck hunting in a perfectly competitive market. If hip waders sell for $100 each and average total cost per unit is $95 at the profit-maximizing output level, then in the long run

Accepted Answer

In a perfectly competitive market, firms will continue to enter the market until economic profits are driven to zero. Since Willie's Wading Adventures is currently earning economic profits, more firms will enter the market in the long run, increasing competition and driving prices down. This will decrease profits until they reach zero and the market is in long-run equilibrium.

Question 20

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

Accepted Answer

When a firm has zero economic profit, it means that it is earning just enough revenue to cover its explicit costs. Accounting profit takes into account only explicit costs, while economic profit considers both explicit and implicit costs. Therefore, if a firm has zero economic profit, it is possible for its accounting profit to be at least zero. Accounting profit could be positive if the revenue earned by the firm is enough to cover not only explicit costs but also some portion of its implicit costs, or it could be zero if revenue simply equals explicit costs. It cannot be negative, as negative accounting profit would imply that the firm is not even earning enough revenue to cover its explicit costs.

Quiz 14: Firms in Competitive Markets

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

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

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

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

When managers of firms in a competitive market observe falling profits, they may infer that the market is experiencing

Which of the following statements is not correct?

Roger owns a small health store that sells vitamins in a perfectly competitive market. If vitamins sell for $12 per bottle and the average total cost per bottle is $12.50 at the profit-maximizing output level, then in the long run

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

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

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

Roger owns a small health store that sells vitamins in a perfectly competitive market. If vitamins sell for $12 per bottle and the average total cost per bottle is $11.50 at the profit-maximizing output level, then in the long run

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

Phil sells duck calls in a perfectly competitive market. If duck calls sell for $10 each and average total cost per unit is $11 at the profit-maximizing output level, then in the long run

Willie's Wading Adventures sells hip waders for fishing and duck hunting in a perfectly competitive market. If hip waders sell for $100 each and average total cost per unit is $95 at the profit-maximizing output level, then in the long run

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