Question 1

Which of the following statements is not correct?

Accepted Answer

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

Question 2

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

Accepted Answer

Accountants typically only account for explicit costs, which are the direct out-of-pocket expenses incurred by a firm, such as rent, wages, and supplies. However, they usually ignore implicit costs, which are the opportunity costs of using the firm's resources in a particular way. Implicit costs could include the value of the owner's time or the foregone profits from pursuing an alternative use of the resources. Thus, the best choice is B, implicit costs.

Question 3

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 4

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

The answer of Scenario 14-5
A study sponsored by the Food...

Question 5

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 Phil is making a loss, some firms will exit from the market in the long run. This will reduce market supply and increase the market price. Eventually, the market price will increase to the point where firms are earning zero economic profit. Therefore, the market is not in long-run equilibrium. Average total cost per unit is not likely to fall since it is already above the price.

Question 6

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, firms will enter the market if profits are positive. With a price of $12 and an average total cost of $11.50, there is a $0.50 profit per bottle. This will attract new firms to enter the market in the long run, increasing competition and driving down prices until profits are zero.

Question 7

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, the market supply decreases, which causes a decrease in competition and an increase in price. Therefore, the remaining firms in the organic-produce industry will likely see an increase in price due to the decrease in market supply.

Question 8

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

Accepted Answer

The entry of new firms into the market will increase competition and can lead to falling profits for existing firms. A and B are not necessarily true, and D is not supported by the information given.

Question 9

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

Accepted Answer

In the short run, firms may operate at any level of output, as long as price is greater than average variable cost. Operating at a level where price equals average variable cost would only allow the firm to cover its variable costs, but not its fixed costs.

Question 10

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 the increase in demand, the equilibrium price of tomatoes would rise in the short run. While production may increase, it may not be enough to meet the high demand, resulting in a price increase. The other choices are not necessarily true in the short 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. 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 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 from the industry results in a decrease in the market supply of textiles, which causes the price of textiles to rise. This is in accordance with the law of supply and demand. The shift in demand curve or collusion among remaining firms is not supported by the given information. The long-run economic losses of firms in the textile industry may or may not occur, and it cannot be inferred from the given information.

Question 13

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

Accepted Answer

When a profit-maximizing firm in a competitive market has zero economic profit, it means that its total revenue is equal to its total cost (including opportunity cost of resources used). This also means that the accounting profit is zero, as it only takes into account explicit costs (such as wages, rent, and material costs) and does not consider opportunity costs. However, accounting profit cannot be negative when economic profit is zero, because then explicit costs would be higher than total revenue, resulting in negative economic profit. Therefore, accounting profit is at least zero when economic profit is zero.

Question 14

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 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

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, the supply is fixed, so an increase in market demand will result in excess demand. Firms will respond by increasing their price to capture the higher demand for their products. Therefore, prices will rise.

Question 17

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 earn zero economic profit in the long run. If Willie's Wading Adventures is earning a profit of $5 per unit, it is likely that other firms will enter the market to also sell hip waders. This increased competition will eventually drive the price down to the point where each firm is earning zero economic profit. Therefore, more firms will enter the market in the long run.

Question 18

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

In the long run, firms in a perfectly competitive market earn zero economic profit. Since Roger's store only earns a profit equal to $0.50 per bottle, it is not earning enough to cover all of its costs and will eventually exit the market. As some firms exit, the supply of vitamins in the market will decrease, causing the equilibrium price per bottle to increase until it reaches a level where firms in the market earn zero economic profit.

Question 19

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 by not investing in the risk-free bond fund ($100,000) and his salary at Research, Inc. ($75,000). Therefore, his opportunity cost is $175,000.

Question 20

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.

Quiz 13: Firms in Competitive Markets