Deck 14: Firms in Competitive Markets

Question 1

A firm is currently producing 100 units of output per day. The manager reports to the owner that producing the 100th unit costs the firm $5. The firm can sell the 100th unit for $5. The firm should continue to produce 100 units in order to maximize its profits (or minimize its losses).

Answer 1

True

Question 2

A firm is currently producing 100 units of output per day. The manager reports to the owner that producing the 100th unit costs the firm $5. The firm can sell the 100th unit for $4.75. The firm should continue to produce 100 units in order to maximize its profits (or minimize its losses).

Answer 2

False

Question 3

A profit-maximizing firm in a competitive market will decrease production when marginal cost exceeds average revenue.

Answer 3

True

Question 4

For a firm operating in a competitive market, both marginal revenue and average revenue exceed the market price.

Question 5

Firms in a competitive market are said to be price takers because there are many sellers in the market, and the goods offered by the firms are very similar if not identical.

Question 6

The two characteristics of a competitive market are 1) many buyers and sellers in the market and 2) the goods offered by the various sellers are highly differentiated.

Question 7

Because there are many buyers and sellers in a perfectly competitive market, no one seller can influence the market price.

Question 8

A profit-maximizing firm in a competitive market will increase production when average revenue exceeds marginal cost.

Question 9

Firms operating in perfectly competitive markets try to maximize profits.

Question 10

For a firm operating in a perfectly competitive industry, marginal revenue and average revenue are equal.

Question 11

When an individual firm in a competitive market increases its production, it is likely that the market price will fall.

Question 12

A firm's incentive to compare marginal revenue and marginal cost is an application of the principle that rational people think at the margin.

Question 13

Because there are many sellers in a competitive market, individual firms are unable to maximize profits.

Question 14

If a firm notices that its average revenue equals the current market price, that firm must be participating in a competitive market.

Question 15

When an individual firm in a competitive market decreases its production, it is likely that the market price will rise.

Question 16

For a firm operating in a perfectly competitive industry, total revenue, marginal revenue, and average revenue are all equal.

Question 17

By comparing the marginal revenue and marginal cost from each unit produced, a firm in a competitive market can determine the profit-maximizing level of production.

Question 18

In competitive markets, firms that raise their prices are typically rewarded with larger profits.

Question 19

In a competitive market, firms are unable to differentiate their product from that of other producers.

Question 20

Firms operating in perfectly competitive markets produce an output level where marginal revenue equals marginal cost.

Question 21

A profit-maximizing firm in a competitive market will earn zero accounting profits in the long run.

Question 22

Suppose a firm is considering producing zero units of output. We call this shutting down in the short run and exiting an industry in the long run.

Question 23

In the short run, if the market price is below the firm's average total cost of production, the firm will always shut down.

Question 24

All firms maximize profits by producing an output level where marginal revenue equals marginal cost; for firms operating in perfectly competitive industries, maximizing profits also means producing an output level where price equals marginal cost.

Question 25

A firm will shut down in the short run if revenue is not sufficient to cover its variable costs of production.

Question 26

A firm operating in a perfectly competitive industry will continue to operate in the short run but earn losses if the market price is less than that firm's average total cost but greater than the firm's average variable cost.

Question 27

Suppose a firm is considering producing zero units of output. We call this exiting an industry in the short run and shutting down in the long run.

Question 28

When a profit-maximizing firm in a competitive market experiences rising prices, it will respond with an increase in production.

Question 29

A firm is currently producing 100 units of output per day. The manager reports to the owner that producing the 100th unit costs the firm $5. The firm can sell the unit for $6. The firm should produce more than 100 units in order to maximize its profits (or minimize its losses).

Question 30

A firm operating in a competitive market will stay in business in the short run so long as the market price exceeds the firm's average total cost; otherwise, the firm will shut down.

Question 31

A firm operating in a perfectly competitive industry will continue to operate in the short run but earn losses if the market price is less than that firm's average variable cost.

Question 32

A firm operating in a perfectly competitive industry will shut down in the short run but earn losses if the market price is less than that firm's average variable cost.

Question 33

A firm will shut down in the short run if revenue is not sufficient to cover all of its fixed costs of production.

Question 34

The marginal firm in a competitive market will earn zero economic profit in the long run.

Question 35

The supply curve of a firm in a competitive market is the average variable cost curve above the minimum of marginal cost.

Question 36

A popular resort restaurant will maximize profits if it chooses to stay open during the less-crowded "off season" when its total revenues exceed its fixed costs.

Question 37

A miniature golf course is a good example of where fixed costs become relevant to the decision of when to open and when to close for the season.

Question 38

A firm operating in a perfectly competitive industry will continue to operate in the short run but earn losses if the market price is less than that firm's average variable cost but greater than the firm's average fixed cost.

Question 39

In the short run, a firm should exit the industry if its marginal cost exceeds its marginal revenue.

Question 40

A popular resort restaurant will maximize profits if it chooses to stay open during the less-crowded "off season" when its total revenues exceed its variable costs.

Question 41

In the long run, when price is greater than average total cost, some firms in a competitive market will choose to enter the market.

Question 42

A competitive firm's profit will be increasing as long as marginal revenue is greater than marginal cost.

Question 43

When economic profits are zero in equilibrium, the firm's revenue must be sufficient to cover all opportunity costs.

Question 44

A firm operating in a perfectly competitive industry will continue to operate if it earns zero economic profits because it is likely to be earning positive accounting profits.

Question 45

In making a short-run profit-maximizing production decision, the firm must consider both fixed and variable cost.

Question 46

A firm operating in a perfectly competitive market may earn positive, negative, or zero economic profit in the long run.

Question 47

In the long run, a firm should exit the industry if its total costs exceed its total revenues.

Question 48

A competitive market will typically experience entry and exit until accounting profits are zero.

Question 49

The stable, long-run equilibrium in a competitive market occurs when the market price equals the lowest point on a firm's average total cost curve.

Question 50

The manager of a firm operating in a competitive market can ignore sunk costs when making business decisions.

Question 51

All competitive firms earn zero economic profit in both the short run and the long run.

Question 52

The long-run equilibrium in a competitive market characterized by firms with identical costs is generally characterized by firms operating at efficient scale.

Question 53

A firm operating in a perfectly competitive market may earn positive, negative, or zero economic profit in the short run.

Question 54

In the long run, when price is less than average total cost for all possible levels of production, a firm in a competitive market will choose to exit (or not enter) the market.

Question 55

In a long-run equilibrium where firms have identical costs, it is possible that some firms in a competitive market are making a positive economic profit.

Question 56

A firm operating in a perfectly competitive industry will shut down in the short run if its economic profits fall to zero because it is likely to be earning negative accounting profits.

Question 57

A dairy farmer must be able to calculate sunk costs in order to determine how much revenue the farm receives for the typical gallon of milk.

Question 58

A firm operating in a perfectly competitive market earns zero economic profit in the long run but remains in business because the firm's revenues cover the business owners' opportunity costs.

Question 59

In the long run, a competitive market with 1,000 identical firms will experience an equilibrium price equal to the minimum of each firm's average total cost.

Question 60

Because nothing can be done about sunk costs, they are irrelevant to decisions about business strategy.

Question 61

If a firm can influence the market price of the good it sells, then it is said to have __________.

Question 62

If some resources used in the production of a good are only available in limited quantities, then the long run market supply curve will be perfectly elastic.

Question 63

When a firm sells 1 million coat hangers, its total revenue is $2 million. When it sells 2 million coat hangers, its total revenue is $3.5 million. Is this firm a price taker? Explain.

Question 64

​In competitive markets where firms are observed to be exiting the market, the firms that remain will obtain economic profits in the long run.

Question 65

When a resource used in the production of a good sold in a competitive market is available in only limited quantities, the long-run supply curve is likely to be upward sloping.

Question 66

​For firms operating in a perfectly competitive market, price must always be greater than marginal revenue.

Question 67

What does it mean for a buyer or seller to be a price taker?

Question 68

​All firms operating in a perfectly competitive market produce unique goods.

Question 69

​Firms operating in a perfectly competitive market have an incentive to advertise their products since this will increase the demand for their products.

Question 70

The short-run supply curve in a competitive market must be more elastic than the long-run supply curve.

Question 71

​In the long run, if we observe firms in a competitive market earning economic profits, we know that this market is in long-run equilibrium.

Question 72

​A ski resort will choose to remain open in the summer whenever its fixed costs are low enough.

Question 73

A competitive market has two basic characteristics. What are those two characteristics?

Question 74

​A restaurant, which operates in a perfectly competitive market, is evaluating whether it should serve breakfast on a daily basis. It would choose to do this when its revenues cover its variable costs.

Question 75

If a firm observes that the price of its product is above average variable cost, it would choose to continue to produce the good in the short run, even if that firm experiences economic losses.
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Question 76

"The water that comes out of your faucets at home is not supplied by a competitive firm." Explain why this statement is correct.

Question 77

Firms in competitive markets can only earn economic profits in the long run, once the market is in equilibrium.

Question 78

A firm lacks market power if it cannot influence __________.

Question 79

​Whenever firms in a perfectly competitive market produce the output level where marginal revenue equals marginal cost, we know that the firm is earning an economic profit.

Question 80

The long-run supply curve in a competitive market is more elastic than the short-run supply curve.