Deck 14: Firms in Competitive Markets

Question 1

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

Answer 1

False

Question 2

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

Answer 2

False

Question 3

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

Answer 3

False

Question 4

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

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

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 7

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

Question 8

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

Question 9

Firms operating in perfectly competitive markets try to maximize profits.

Question 10

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).

Question 11

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

Question 12

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

Question 13

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 14

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

Question 15

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

Question 16

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).

Question 17

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 18

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

Question 19

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

Question 20

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

Question 21

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 22

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 23

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

Question 24

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

Question 27

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 28

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 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 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 31

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 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 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 34

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 35

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

Question 36

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 37

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 38

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

Question 39

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

Question 40

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

Question 41

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

Question 42

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 43

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 44

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

Question 45

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

Question 46

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

Question 47

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 48

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 49

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

Question 50

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 51

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

Question 52

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 53

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

Question 54

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

Question 55

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 56

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

Question 57

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 58

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

Question 59

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

Question 60

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 61

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 62

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

Question 63

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

Question 64

A firm lacks market power if it cannot influence __________.

Question 65

​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 66

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

Question 67

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

Question 68

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

Question 69

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

Question 70

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

Question 71

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

Question 72

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 73

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 74

​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 75

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

Question 76

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

Question 77

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 78

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

Question 79

​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 80

​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.