Question 1

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 2

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 is the highest forgone alternative, which is the income he would have earned if he had invested in risk-free bonds. This amount is $100,000 per year. Additionally, he gave up his job at Research, Inc., where he could have earned $75,000 per year. Therefore, his total opportunity cost is $175,000 per year.

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

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 expenses that involve a direct outlay of money, such as wages, rent, and materials. They often ignore implicit costs, which are the opportunity costs of using resources for one purpose instead of their next best alternative, such as the value of a business owner's time or the forgone income from investing in another opportunity.

Question 5

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 only normal profits in the long run. This means that any profits earned in the short run will attract more firms to enter the market, increasing supply and driving down prices until all firms are earning only normal profits. In this case, if Willie's Wading Adventures is earning a profit of $5 per unit ($100 selling price - $95 average total cost), more firms will enter the market to try and earn the same profit. This increase in supply will lead to a decrease in the market price, until all firms are once again earning only normal profits. Therefore, choice A is the best answer.

Question 6

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

To attain zero economic profit, Victor's accounting profits need to equal his opportunity cost, which is the income he would have earned from the risk-free bond fund ($100,000) plus the income he gave up by quitting his job ($75,000). Therefore, his accounting profits need to be $175,000.

Question 7

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

When firms suffer economic losses and leave the industry, this reduces the market supply. With a lower supply of textiles, the price is likely to rise. This is in line with the basic supply and demand model in economics, where a decrease in supply results in a higher equilibrium price.

Question 8

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

Accepted Answer

In the short run, firms may operate at a level of output where price is below average variable cost, but still above average total cost. This means that they are making a loss in the short run but may continue to operate in the hope of covering their fixed costs in the long run.

Question 9

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 due to economic losses, the market supply decreases, and the price of organic produce increases. This is because there are fewer sellers competing to sell their products in the market, which gives the remaining firms more pricing power. As a result, the remaining firms can charge a higher price, which increases their revenue but decrease their output since they will produce less at the higher price. Therefore, option (C) is the correct answer. Option (A) is incorrect because a shift in the demand curve would only occur if there is an increase in demand, which is not the case in this scenario. Option (B) is incorrect because collusion is illegal and could lead to antitrust charges. Finally, option (D) is incorrect because if firms suffer long-run losses, they will eventually exit the market, which would lead to a decrease in market supply and hence increase the price of organic produce.

Question 10

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 11

Which of the following statements is not correct?

Accepted Answer

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

Question 12

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, since there are many firms producing homogeneous products and there are no barriers to entry, firms cannot charge a price higher than the market price. When there is an increase in demand, the market price will increase. Since the firms cannot charge a higher price, they will increase their output to meet the new demand. However, in the short run, firms cannot increase their production capacity, so they will have to increase prices to cover the additional costs of producing more output. Thus, prices will rise in the short run when there is an increase in market demand in a perfectly competitive market.

Question 13

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

Accepted Answer

When managers of firms in a competitive market observe falling profits, it is likely due to the entry of new firms into the market. This increased competition leads to lower profits as firms must lower their prices to remain competitive. This is a natural occurrence in a competitive market and is not a violation of market forces. Over-investment or too few firms in the market may affect profits, but they are not necessarily the cause of falling profits.

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, it indicates that the market is not yet in equilibrium. The entry of new firms will increase the supply of vitamins, which will shift the market supply curve to the right, leading to a lower equilibrium price. This will continue until all firms earn zero economic profit in the long run, which is the definition of a perfectly competitive market.

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. 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 16

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 17

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 is higher than the market price, Phil is experiencing economic losses. In the long run, firms will exit the market since they cannot sustain losses indefinitely. This will decrease the supply of duck calls and increase the price, allowing the remaining firms to earn a normal profit in the long run.

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

The increase in demand for tomatoes would cause the price of tomatoes to rise in the short run due to the inelastic nature of supply in the short run. This would allow existing tomato producers to earn higher profits. However, in the long run, more firms may enter the market and the price may fall back down to the efficient scale. The increase in demand would not necessarily lead to a change in total cost for existing irradiated tomato producers or a decrease in the number of firms in the market.

Question 19

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

Since the average total cost is greater than the price, Roger is experiencing losses. In the long run, some firms will exit the market, reducing the supply of vitamins and causing the price to increase. This will continue until the remaining firms are earning zero economic profit, and the market is in equilibrium. Therefore, option B is the best choice.

Question 20

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 the firm is earning normal profit, which means that the accounting profit is equal to zero. However, accounting profit cannot be negative because it represents the difference between total revenue and explicit cost. Therefore, the best answer is B, which states that accounting profit is at least zero.

Quiz 14: Firms in Competitive Markets