Assignment Competitive Firm
1. Scenario 14-3
Suppose a certain competitive firm is producing Q=500 units of output. The marginal cost of the 500th unit is $17, and the average total cost of producing 500 units is $12. The firm sells its output for $20.
Refer to Scenario 14-3. At Q=500, the firm’s profits equal (Points : 5)
$1,000.
$4,000.
$7,000.
$10,000.
2. Marcia is a fashion designer who runs a small clothing business in a competitive industry. Marcia specializes in making designer dresses. Marcia sells 10 dresses per month. Her monthly total revenue is $5,000. The marginal cost of making a dress is $600. In order to maximize profits, Marcia should (Points : 5)
make more than 10 dresses per month.
make fewer than 10 dresses per month.
continue to make 10 dresses per month.
We do not have enough information with which to answer the question.
3. Which of the following expressions is correct for a competitive firm? (Points : 5)
profit = (quantity of output) x (price – average total cost)
marginal revenue = (change in total revenue)/(quantity of output)
average total cost = total variable cost/quantity of output
average revenue = (marginal revenue) x (quantity of output)
4. Scenario 14-1
Assume a certain firm in a competitive market is producing Q = 1,000 units of output. At Q = 1,000, the firm’s marginal cost equals $15 and its average total cost equals $11. The firm sells its output for $12 per unit.
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Refer to Scenario 14-1. At Q = 1,000, the firm’s profits equal (Points : 5)
$-5,000.
$2,500.
$5,000.
$10,000.
5. Figure 14-1
Suppose that a firm in a competitive market has the following cost curves:
Refer to Figure 14-1. The firm will earn a positive economic profit in the short run if the market price is (Points : 5)
above $6.30.
less than $6.30 but more than $4.50.
less than $4.50.
exactly $6.30.
6. Comparing marginal revenue to marginal cost
(i) reveals the contribution of the last unit of production to total profit.
(ii) is helpful in making profit-maximizing production decisions.
(iii) tells a firm whether its fixed costs are too high. (Points : 5)
(i) only
(i) and (ii) only
(ii) and (iii) only
(i) and (iii) only
7. Table 14-14
The following table presents cost and revenue information for Bob’s bakery production and sales.
Quantity Total Cost Marginal Cost Price Total Revenue Marginal Revenue
0 $5.00 — $3.25 —
1 $5.50 $3.25
2 $6.50 $3.25
3 $8.00 $3.25
4 $10.00 $3.25
5 $12.50 $3.25
6 $15.50 $3.25
7 $19.00 $3.25
8 $23.00 $3.25
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Refer to Table 14-14. When Bob produces and sells the profit-maximizing quantity, how much profit does he earn? (Points : 5)
$0.25
$2.75
$4.00
$5.25
8. A book store that has market power can (Points : 5)
influence the market price for the books it sells.
minimize costs more efficiently than its competitors.
reduce its advertising budget more so than its competitors.
ignore profit-maximizing strategies when setting the price for its books.
9. Which of the following statements is correct? (Points : 5)
For all firms, marginal revenue equals the price of the good.
Only for competitive firms does average revenue equal the price of the good.
Marginal revenue can be calculated as total revenue divided by the quantity sold.
Only for competitive firms does average revenue equal marginal revenue.
10. Which of the following is not a characteristic of a competitive market? (Points : 5)
Buyers and sellers are price takers.
Each firm sells a virtually identical product.
Entry is limited.
Each firm chooses an output level that maximizes profits.
11. A competitive firm has been selling its output for $10 per unit and has been maximizing its profit. Then, the price rises to $14, and the firm makes whatever adjustments are necessary to maximize its profit at the now-higher price. Once the firm has adjusted, its (Points : 5)
marginal revenue is lower than it was previously.
marginal cost is lower than it was previously.
quantity of output is higher than it was previously.
All of the above are correct.
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12. Figure 14-5
Suppose a firm operating in a competitive market has the following cost curves:
Refer to Figure 14-5. When market price is P7, a profit-maximizing firm’s short-run profits can be represent-ed by the area (Points : 5)
P7 x Q5.
P7 x Q3.
(P7 – P5) x Q3.
We are unable to determine the firm’s profits because the quantity that the firm would produce is not labeled on the graph.
13. A profit-maximizing firm in a competitive market is currently producing 200 units of output. It has average revenue of $9 and average total cost of $7. It follows that the firm’s (Points : 5)
average total cost curve intersects the marginal cost curve at an output level of less than 200 units.
average variable cost curve intersects the marginal cost curve at an output level of less than 200 units.
profit is $400.
All of the above are correct.
14. Shrimp Galore, a shrimp harvesting business in the Pacific Northwest, has a 30-year loan on its shrimp har-vesting boat. The annual loan payment is $25,000 and the boat has a market (salvage) value that exceeds its outstanding loan balance. Prior to the 2010 shrimp harvesting season, Shrimp Galore’s accountant predicted that at expected market prices for shrimp, Shrimp Galore would have a net loss of $75,000 dollars after paying all 2010 expenses (including the annual loan payment). In this case, Shrimp Galore should (Points : 5)
produce nothing and experience a loss of $25,000.
produce nothing and experience a loss of $75,000.
continue to operate because expected profits will rise in the future.
continue to operate even though it predicts a loss of $75,000.
15. 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 (Points : 5)
drop the flight immediately.
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continue the flight.
continue flying until the lease expires and then drop the run.
drop the flight now but renew the lease if conditions improve.
16. A seller in a competitive market (Points : 5)
can sell all he wants at the going price, so he has little reason to charge less.
will lose all his customers to other sellers if he raises his price.
considers the market price to be a “take it or leave it” price.
All of the above are correct.
17. In a competitive market, no single producer can influence the market price because (Points : 5)
many other sellers are offering a product that is essentially identical.
consumers have more influence over the market price than producers do.
government intervention prevents firms from influencing price.
producers agree not to change the price.
18. Table 14-6
The following table presents cost and revenue information for a firm operating in a competitive industry.
COSTS REVENUES
Quantity
Produced Total
Cost Marginal
Cost Quantity
Demanded Price Total
Revenue Marginal
Revenue
0 $100 — 0 $120 —
1 $150 1 $120
2 $202 2 $120
3 $257 3 $120
4 $317 4 $120
5 $385 5 $120
6 $465 6 $120
7 $562 7 $120
8 $682 8 $120
Refer to Table 14-6. What is the average revenue when 4 units are sold? (Points : 5)
$60
$120
$125
$197
19. Profit-maximizing firms in a competitive market produce an output level where (Points : 5)
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marginal cost equals marginal revenue.
marginal cost equals average total cost.
marginal revenue is increasing.
price is less than marginal revenue.
20. Figure 14-6
Suppose a firm operating in a competitive market has the following cost curves:
Refer to Figure 14-6. Firms will shut down in the short run if the market price (Points : 5)
exceeds P3.
is less than P1.
is greater than P1 but less than P3.
exceeds P2.
21. By comparing marginal revenue and marginal cost, a firm in a competitive market is able to adjust production to the level that achieves its objective, which we assume to be (Points : 5)
maximizing total revenue.
maximizing profit.
minimizing variable cost.
minimizing average total cost.
22. The competitive firm’s short-run supply curve is that portion of the (Points : 5)
average variable cost curve that lies above marginal cost.
average total cost curve that lies above marginal cost.
marginal cost curve that lies above average variable cost.
marginal cost curve that lies above average total cost.
23. In a perfectly competitive market, (Points : 5)
no one seller can influence the price of the product.
price exceeds marginal revenue for each unit sold.
average revenue exceeds marginal revenue for each unit sold.
All of the above are correct.
24. Table 14-4
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Quantity Total Revenue
0 $0
1 $15
2 $30
3 $45
4 $60
Refer to Table 14-4. For a firm operating in a competitive market, the price is (Points : 5)
$45.
$30.
$15.
$0.
25. Winona’s Fudge Shoppe is maximizing profits by producing 1,000 pounds of fudge per day. If Winona’s fixed costs unexpectedly increase and the market price remains constant, then the short run profit-maximizing level of output (Points : 5)
is less than 1,000 pounds.
is still 1,000 pounds.
is more than 1,000 pounds.
becomes zero.
26. Table 14-14
The following table presents cost and revenue information for Bob’s bakery production and sales.
Quantity Total Cost Marginal Cost Price Total Revenue Marginal Revenue
0 $5.00 — $3.25 —
1 $5.50 $3.25
2 $6.50 $3.25
3 $8.00 $3.25
4 $10.00 $3.25
5 $12.50 $3.25
6 $15.50 $3.25
7 $19.00 $3.25
8 $23.00 $3.25
Refer to Table 14-14. Suppose that due to a decrease in the market demand for bread the market price of bread drops to $2.75 per loaf. At this new price, what is Bob’s profit-maximizing quantity? (Points : 5)
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5 units
6 units
7 units
8 units
27. Mrs. Smith operates a business in a competitive market. The current market price is $7.50. At her profit-maximizing level of production, the average variable cost is $8.00, and the average total cost is $8.25. Mrs. Smith should (Points : 5)
shut down her business in the short run but continue to operate in the long run.
continue to operate in the short run but shut down in the long run.
continue to operate in both the short run and long run.
shut down in both the short run and long run.
28. Scenario 14-1
Assume a certain firm in a competitive market is producing Q = 1,000 units of output. At Q = 1,000, the firm’s marginal cost equals $15 and its average total cost equals $11. The firm sells its output for $12 per unit.
Refer to Scenario 14-1. At Q = 999, the firm’s profits equal (Points : 5)
$993.
$997.
$1,003.
$1,007.
29. Which of the following statements regarding a competitive market is not correct? (Points : 5)
There are many buyers and many sellers in the market.
Because of firm location or product differences, some firms can charge a higher price than other firms and still maintain their sales volume.
Price and average revenue are equal.
Price and marginal revenue are equal.
30. Whenever a perfectly competitive firm chooses to change its level of output, its marginal revenue (Points : 5)
increases if MR < ATC and decreases if MR > ATC.
does not change.
increases.
decreases.
31. Figure 14-3
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Suppose a firm operating in a competitive market has the following cost curves:
Refer to Figure 14-3. If the market price is $10, what is the firm’s total cost? (Points : 5)
$15
$30
$35
$50
32. Figure 14-2
Suppose a firm operating in a competitive market has the following cost curves:
Refer to Figure 14-2. If the market price is P1, in the short run the firm will earn (Points : 5)
positive economic profits.
negative economic profits but will try to remain open.
negative economic profits and will shut down.
zero economic profits.
33. For a competitive firm, (Points : 5)
total revenue equals average revenue.
total revenue equals marginal revenue.
total cost equals marginal revenue.
average revenue equals marginal revenue.
34. Table 14-4
Quantity Total Revenue
0 $0
1 $15
2 $30
3 $45
4 $60
Refer to Table 14-4. For a firm operating in a competitive market, the average revenue is (Points : 5)
$45.
$30.
$15.
$0.
35. Figure 14-5
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Suppose a firm operating in a competitive market has the following cost curves:
Refer to Figure 14-5. In the short run,if the market price is higher than P4 but less than P6, individual firms in a competitive industry will earn (Points : 5)
positive profits.
zero profits.
losses but will remain in business.
losses and will shut down.
36. Table 14-3
Quantity Total Revenue
0 $0
1 $7
2 $14
3 $21
4 $28
Refer to Table 14-3. For a firm operating in a competitive market, the price is (Points : 5)
$0.
$7.
$14
$21
37. Table 14-3
Quantity Total Revenue
0 $0
1 $7
2 $14
3 $21
4 $28
Refer to Table 14-3. For a firm operating in a competitive market, the marginal revenue is (Points : 5)
$0.
$7.
$14
$21.
38. Table 14-2
The table represents a demand curve faced by a firm in a competitive market.
Price Quantity
$4 0
$4 1
$4 2
$4 3
$4 4
$4 5
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Refer to Table 14-2. For a firm operating in a competitive market, the average revenue from selling 3 units is (Points : 5)
$12.
$4.
$3.
$1.25.
39. Table 14-10
Suppose that a firm in a competitive market faces the following revenues and costs:
Quantity Total Revenue Total Cost
0 $0 $3
1 $7 $5
2 $14 $9
3 $21 $15
4 $28 $23
5 $35 $33
6 $42 $45
7 $49 $59
Refer to Table 14-10. At which level of output in the table is average variable cost equal to $6? (Points : 5)
2 units
3 units
4 units
5 units
40. Table 14-5
Quantity Total Revenue
12 $132
13 $143
14 $154
15 $165
16 $176
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Refer to Table 14-5. The average revenue when 14 units are produced and sold is (Points : 5)
$9.
$11.
$13.
$15.
41. Table 14-13
Diana’s Dress Emporium
COSTS REVENUES
Quantity
Produced Total
Cost Marginal
Cost Quantity
Demanded Price Total
Revenue Marginal
Revenue
0 $100 — 0 $120 —
1 $150 1 $120
2 $202 2 $120
3 $257 3 $120
4 $317 4 $120
5 $385 5 $120
6 $465 6 $120
7 $562 7 $120
8 $682 8 $120
Refer to Table 14-13. What is the marginal cost of the 8th unit? (Points : 5)
$0
$100
$120
$140
42. Figure 14-6
Suppose a firm operating in a competitive market has the following cost curves:
Refer to Figure 14-6. Firms will earn positive profits in the short run if the market price (Points : 5)
is less than P1.
is greater than P1 but less than P3.
equals P3.
exceeds P3.
43. Marcia is a fashion designer who runs a small clothing business in a competitive industry. Marcia specializes in making designer dresses. Marcia sells 10 dresses per month. Her monthly total revenue is $5,000. The marginal cost of making a dress is $400. In order to maximize profits, Marcia should (Points : 5)
make more than 10 dresses per month.
make fewer than 10 dresses per month.
continue to make 10 dresses per month.
We do not have enough information with which to answer the question.
44. Which of the following statements is correct regarding a firm’s decision-making? (Points : 5)
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The decision to shut down and the decision to exit are both short-run decisions.
The decision to shut down and the decision to exit are both long-run decisions.
The decision to shut down is a short-run decision, whereas the decision to exit is a long-run decision.
The decision to exit is a short-run decision, whereas the decision to shut down is a long-run decision.
45. Table 14-6
The following table presents cost and revenue information for a firm operating in a competitive industry.
COSTS REVENUES
Quantity
Produced Total
Cost Marginal
Cost Quantity
Demanded Price Total
Revenue Marginal
Revenue
0 $100 — 0 $120 —
1 $150 1 $120
2 $202 2 $120
3 $257 3 $120
4 $317 4 $120
5 $385 5 $120
6 $465 6 $120
7 $562 7 $120
8 $682 8 $120
Refer to Table 14-6. What is the total revenue from selling 4 units? (Points : 5)
$120
$257
$317
$480
46. When fixed costs are ignored because they are irrelevant to a business’s production decision, they are called (Points : 5)
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explicit costs.
implicit costs.
sunk costs.
opportunity costs.
47. A firm that exits its market has to pay (Points : 5)
its variable costs but not its fixed costs.
its fixed costs but not its variable costs.
both its variable costs and its fixed costs.
neither its variable costs nor its fixed costs.
48. Table 14-9
Suppose that a firm in a competitive market faces the following revenues and costs:
Quantity Total Revenue Total Cost
0 $0 $10
1 $9 $14
2 $18 $19
3 $27 $25
4 $36 $32
5 $45 $40
6 $54 $49
7 $63 $59
8 $72 $70
9 $81 $82
Refer to Table 14-9. In order to maximize profit, the firm will produce a level of output where marginal reve-nue is equal to (Points : 5)
$6.
$7.
$8.
$9.
49. Table 14-14
The following table presents cost and revenue information for Bob’s bakery production and sales.
Quantity Total Cost Marginal Cost Price Total Revenue Marginal Revenue
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0 $5.00 — $3.25 —
1 $5.50 $3.25
2 $6.50 $3.25
3 $8.00 $3.25
4 $10.00 $3.25
5 $12.50 $3.25
6 $15.50 $3.25
7 $19.00 $3.25
8 $23.00 $3.25
Refer to Table 14-14. What is Bob’s total fixed cost? (Points : 5)
$0
$3
$5
$9
50. When a restaurant stays open for lunch service even though few customers patronize the restaurant for lunch, which of the following principles is (are) best demonstrated?
(i) Fixed costs are sunk in the short run.
(ii) In the short run, only fixed costs are important to the decision to stay open for lunch.
(iii) If revenue exceeds variable cost, the restaurant owner is making a smart decision to remain open for lunch. (Points : 5)
(i) and (ii) only
(ii) and (iii) only
(i) and (iii) only
(i), (ii), and (iii)
