Deck 7: Competition

Question 1

When a firm has chosen to shutdown it has exited the industry.

Answer 1

False

Question 2

As long as profits remain positive,a firm will want to increase the quantity produced.

Answer 2

False

Question 3

The elasticity of supply is positive because prices and quantities are always positive.

Answer 3

False

Question 4

For prices greater than the minimum value of average variable cost,the firm's short-run supply curve coincides with its short-run marginal cost curve.

Question 5

In a long-run competitive equilibrium,both more efficient and less efficient firms earn zero economic profit.

Question 6

For a competitive firm,marginal revenue is constant and equal to the market price.

Question 7

Given two supply curves passing through the same point,the flatter one has the higher elasticity.

Question 8

A competitive firm faces a downward-sloping demand for its product.

Question 9

A competitive firm will exit the industry in the long run if the price of its product falls below its average cost.

Question 10

Higher costs,whether fixed or variable,will cause a leftward shift in the industry's short-run supply curve.

Question 11

A firm that has not shut down in the short run will not shut down in response to a decrease in the marginal costs.

Question 12

A new licensing fee would cause an immediate upward shift in an industry's short-run supply curve.

Question 13

When a competitive firm earns zero profit,the market price is equal to both the firm's average and marginal costs.

Question 14

Industry's supply curves tend to be less elastic than the supply curves of individual firms.

Question 15

In a competitive constant-cost industry,all firms have the same break-even price.

Question 16

A perfectly competitive firm is one that can sell any quantity that it wants at any price it wants.

Question 17

Only variable costs are relevant to a firm's decision to shut down.

Question 18

In a competitive equilibrium,the industry's output is produced at the lowest possible cost because each firm has the goal of minimizing its cost.

Question 19

The number of firms in an industry is fixed in the short run.

Question 20

A firm earns a positive economic profit when the market price exceeds its marginal cost.

Question 21

Which of the following is a good example of a firm that is not likely to be perfectly competitive?

A) Farmer Joe's wheat.
B) Coyote Wile's beef ranch.
C) Captain John's salmon farm.
D) Aviator Alan's nonstop airline service from Seattle to Nome.

Question 22

In the short run

A) firms can enter the industry but no firm can exit.
B) firms can exit the industry but no firm can enter.
C) firms can enter and exit the industry.
D) no firm can enter or exit the industry.

Question 23

There is no reason for a competitive firm to stay in business if it is making zero economic profit.

Question 24

A competitive firm will exit an industry in the long run if the market price falls below the firm's break-even price.

Question 25

A competitive firm's shutdown price is equal to the minimum value of the firm's

A) marginal cost.
B) average cost.
C) average variable cost.
D) fixed and sunk costs.

Question 26

Ultimately,short-run supply curves are upward sloping because of

A) the irrelevance of fixed costs to the firm's decision making.
B) the factor-price effect.
C) diminishing marginal returns to the variable inputs.
D) the equality of demand and marginal revenue for competitive firms.

Question 27

The demand curve faced by a competitive firm is

A) horizontal.
B) downward sloping.
C) upward sloping.
D) nonexistent.

Question 28

A firm will shut down in the short run if its revenues fail to cover its

A) fixed costs.
B) variable costs.
C) total costs.
D) sunk costs.

Question 29

Sunk costs cannot affect a firm's short-run supply,but they can affect its long-run decision to exit the industry.

Question 30

A competitive firm's supply curve is determined by

A) its marginal costs.
B) the market price.
C) the zero-profit condition.
D) its fixed inputs.

Question 31

A technological advance that reduces firms' variable costs will lead to higher profits in the long run of a perfectly competitive industry.

Question 32

If a firm is producing a quantity along the upward sloping portion of its marginal cost curve at which marginal cost exceeds price and is earning positive economic profits,it should

A) continue to produce this quantity.
B) decrease the quantity produced because doing so will increase profit.
C) increase the quantity produced because profits are still positive.
D) wait for the price to increase to its current marginal cost.

Question 33

For a competitive firm with a downward sloping marginal cost curve,the supply curve and the marginal cost curve look exactly the same

Question 34

d. 2.

Question 35

A competitive firm will shut down its operations in the short run when the market price falls below its

A) marginal revenue.
B) marginal cost.
C) average cost.
D) average variable cost.

Question 36

A decrease in firms' variable costs will cause the output of the market to decrease.

Question 37

A government subsidy would allow all firms in a competitive constant-cost industry to earn a positive profit in the long run.

Question 38

The marginal revenue curve of a competitive firm is

A) U-shaped.
B) a ray from the origin.
C) a horizontal line at the market price.
D) downward sloping.

Question 39

Any firm,competitive or not,desiring to maximize profits,will choose its quantity according to the rule,produce that quantity at which

A) marginal revenue = price.
B) marginal revenue = marginal cost.
C) average variable cost is at its minimum.
D) marginal cost is at its minimum.

Question 40

If the market price is currently above the shut-down price,the firm will be making positive profits.

Question 41

A factor-price effect occurs when increases in the industry's output

A) attract new firms to the industry.
B) raise the cost of a variable input.
C) cause new subindustries to be developed.
D) result in lower prices for consumers.

Question 42

An industry's output is produced at the lowest possible cost when

A) firms' marginal costs are equal.
B) firms minimize their average costs.
C) all firms earn the same profit.
D) output is evenly divided among the industry's firms.

Question 43

In the long run,a firm will exit an industry if the market price is less than its

A) break-even price.
B) shutdown price.
C) marginal cost.
D) fixed cost.

Question 44

A competitive firm will exit an industry in the long run when the market price falls below its

A) marginal revenue.
B) marginal cost.
C) average cost.
D) average variable cost.

Question 45

Suppose that the sub sandwich business is a competitive,constant-cost industry.An increase in demand for sub sandwiches,will,in the long-run lead to

A) an increase in price and industry output,but no increase in the output of existing firms.
B) no increase in price,no increase in the output of existing firms but an increase in industry output because of new firms.
C) no increase in price and an increase in industry output as each existing firm produces more.
D) no changes in price,output of existing firms or the number of firms in the industry.

Question 46

A competitive firm's long-run supply curve is

A) horizontal at the firm's break-even price.
B) steeper than its long-run marginal cost curve.
C) identical to its long-run average cost curve.
D) more elastic than its short-run supply curve.

Question 47

When do new firms tend to enter a competitive industry?

A) When the large firms in the industry are earning zero profit.
B) When the smaller firms are leaving the industry.
C) When the new entrants can earn positive profits.
D) When there is an absence of fixed costs in the long run.

Question 48

The competitive firm's long-run supply curve

A) is always perfectly horizontal.
B) includes only that part of the long-run marginal cost curve that lies above long-run average cost.
C) includes only that part of the long-run marginal cost curve that is sloping upwards.
D) is identical to its long-run average cost curve.

Question 49

Farmer Jane grows wheat on land that is bought and paid for.She figures her profit per acre is $60 because she puts $30 of purchased inputs onto each acre,$10 worth of her time into working on each acre,and the harvested wheat sells for $100.Farmer Jane

A) has correctly calculated her economic profit.
B) has forgotten to include the opportunity cost of the land in her calculation of profit.
C) should not have included the value of her time in calculating profits.
D) should not have included any costs in calculating her economic profit.

Question 50

Different firms in a competitive industry will have differing shutdown points when

A) they have different cost curves.
B) they are charging different prices.
C) they entered the industry at different times.
D) they all have identical cost curves.

Question 51

Entry into the information technology industry becomes more attractive the more firms there are because of the increased availability of already trained workers.Given this trend,it appears that information technology is

A) an increasing-cost industry.
B) a constant-cost industry.
C) a decreasing-cost industry.
D) a government subsidized industry.

Question 52

Which of the following could cause an industry to be an increasing-cost industry?

A) The development of subindustries in response to industry growth.
B) The factor-price effect.
C) Identical break-even prices across firms.
D) Substantial economies of scale in production.

Question 53

An industry is likely to be an increasing-cost industry when

A) all firms are identical.
B) it represents a negligible fraction of the total demand for inputs.
C) industry expansion permits the development of supporting subindustries.
D) some firms are more efficient than others.

Question 54

Assume dental care is provided by a competitive industry.A new government regulation requires each dentist to take a costly new exam for certification.What happens to the price of dental care?

A) The price of dental care rises in the short run and rises further in the long run.
B) The regulation will cause higher prices in the short run,but it will have no long-run impact.
C) There is no change in the short run,but dentists will exit and prices will rise in the long run.
D) The exam is a sunk cost,so the price of dental care does not change in either the short run or the long run.

Question 55

Bonzo's success in the Easter Basket business has attracted more characters into the Easter Basket industry.If Easter Basket making is a constant cost industry,Bonzo

A) and the new entrants can all expect to be enjoying his current level of profits.
B) can expect his profits to be driven down to zero as new competitors push the price down.
C) can expect to have to shutdown his operation in the face of new competition.
D) will have to increase his price to make up for the loss of any sales to new competitors.

Question 56

Suppose all firms in an industry are identical.In the long run,entry and exit guarantee that all firms will have zero

A) marginal cost.
B) average cost.
C) economic profit.
D) accounting profit.

Question 57

The annual insurance premiums for Michael's Machine Shop have permanently risen because of a recent series of thefts by employees,but there is no change in the premiums paid by Michael's competitors.If machine shops are a competitive constant-cost industry,then in the long run

A) Michael's profit will fall to zero.
B) Michael's Machine Shop will be driven out of business.
C) the higher fixed costs will have no effect on Michael's pricing and production decisions.
D) the demand for service from Michael's Machine Shop will fall.

Question 58

When will an industry's long-run supply curve be horizontal at firms' break-even price?

A) When expansion of the industry allows new input markets to develop.
B) When some firms are more efficient than others.
C) When specialized skills play a significant role in production.
D) When firms are identical and there is no factor-price effect.

Question 59

The expansion of capital that can occur in the long-run but not,by definition,in the short-run,means that the long-run supply is

A) perfectly horizontal while the short-run supply curve is upward sloping.
B) sloping downwards while the short-run supply curve is upward sloping.
C) less elastic than the short-run supply curve.
D) more elastic than the short-run supply curve.

Question 60

Bonzo is in business for himself making and selling Easter baskets.His daily cost for wicker is $100 and his daily revenue is $120.Bonzo quit his job at the Basket Weaving factory where he earned $15 a day,to enter the Easter basket business.Given this information,we know that his accounting profit

A) is $120 and his economic profit is $105.
B) and economic profit are both $20.
C) is $20 and his economic profit is $5.
D) and economic profit are both $5.

Question 61

In the short run,a competitive firm will

A) Will produce a quantity where AC = MR.
B) Will produce a quantity where AVC = MR.
C) Will produce a quantity where MC = MR.
D) Will shut down if price falls below the minimum of average costs.

Question 62

When can we expect a factor-price effect to occur? How does a factor-price effect alter an industry's short-run and long-run supply curves?

Question 63

Which of the following is not necessarily true in the long for a competitive industry?

A) Firms earn zero profits.
B) Firms set MC = MR.
C) A firm will not produce if the market price is less than their break-even price.
D) The long-run supply curve is more elastic than the short-run supply curve.

Question 64

Which of the following is not true in the long-run?

A) There are no variable costs.
B) There are no fixed costs.
C) Total costs equal variable costs.
D) Identical firms will make zero profits.

Question 65

From this chapter we know that a profit maximizing competitive firm will set its price equal to the market price.Briefly describe why a profit maximizing competitive firm will not set its price above the market price.Also,describe why a profit maximizing competitive firm will not set its price below the market price.

Question 66

Assume glassware is produced by firms in a competitive industry,one of which is Gregor's Glassworks.

Question 67

Which of the following will cause equilibrium output in a market to increase?

A) A decrease in firms' variable costs.
B) An outward shift of the demand curve.
C) Entry of more firms into the market.
D) All of the above.

Question 68

A perfectly competitive market has demand Q = 100 - P and supply Q = P - 10.An individual firm has MC = 10 + 2Q.

Question 69

Consider a perfectly competitive firm with MC = 10 + q.If market demand is Q = 100 - P and the current industry output is 80 units,then the firm will produce

A) zero units.
B) 10 units.
C) 20 units.
D) the answer cannot be determined without knowing what the supply curve is.

Question 70

Suppose bicycles are produced by a competitive constant-cost industry,which is initially in a long-run equilibrium.For each of the following situations,design a supply-demand diagram that shows how market price and quantity will be affected in both the short run and the long run.In your diagrams,show the short-run supply,long-run supply,and demand curves,along with any shifts in these curves.Label the initial long-run equilibrium E₀,the new short-run equilibrium E₁,and the new long-run equilibrium E₂.

Question 71

Consider a competitive constant-cost industry in which each firm's marginal and average costs are given by the formulas MC = 4q and AC = 2q + 50/q ,where q represents the quantity supplied by the firm.

Question 72

Day care is provided by a competitive constant-cost industry at a price of $40 per child per day.The government wants to increase the availability of day care and thus chooses to build and operate 50 new day care centers across the nation.

Question 73

Suppose notebooks are produced by a competitive constant-cost industry.Which of the following must cause Nanna's Notebooks to exit the industry in the long run?

A) Nanna's is notified of a rent increase,but her competitors' rents are unchanged.
B) A fire destroys half of Nanna's inventory.
C) A photographer wins a $10,000 judgment from a lawsuit charging that Nanna's used his photos on notebook covers without permission.
D) The price of cardboard used in notebook production rises.

Question 74

By setting MR = MC,a competitive firm decides to sell 100 units when the market price is $20.The average cost of producing the 100 units is $18 per unit.If the firm has fixed costs of $500,then the firm should

A) shutdown
B) expand production
C) exit the industry
D) increase their price

Question 75

Consider the following:

Question 76

If all firms in a competitive industry experience an increase in marginal costs,then which of the following is most likely to occur in the short run?

A) Firms will enter the market.
B) Existing firms will expand production.
C) Firms will shutdown.
D) Firms will exit the market.