Deck 9: B: Price Takers and the Competitive Process

Question 1

In some industries, like insurance, both small and very large firms coexist and compete quite effectively in the market. This indicates that the long-run average total cost curve in these industries

A)is "U" shaped.
B)is downward sloping over all levels of output.
C)exhibits constant returns to scale over a wide range of output.
D)exhibits diseconomies of scale beginning at a low rate of output.

Answer 1

C

Question 2

In a competitive price taker market, a firm's short-run supply curve is its

A)average total cost curve above its average variable cost curve.
B)marginal cost curve above its average variable cost curve.
C)marginal cost curve above its average fixed cost curve.
D)entire marginal cost curve.

Answer 2

B

Question 3

Amy runs a business in a market where all firms are price takers. Bill suggests that she lower her price to attract even more business. Should Amy follow Bill's suggestion, or should she even consider raising her price?

Answer 3

If Amy lowers her price, this will reduce her total revenue. Since she can sell all of her product at the market price, there is no reason to sell at a lower price. Because of the nature of this market structure, she would lose all her business at a higher price, as her customers went to her competitors to purchase identical products. There is a reason for calling Amy a price taker.

Question 4

"I'm losing money, but having invested so much in equipment, I simply cannot afford to shut down." If the firm were attempting to maximize profit, this decision may be

A)correct if the firm is covering its fixed costs.
B)incorrect because a firm experiencing economic losses should never continue to operate.
C)correct if the firm is covering its variable costs and expects the price of its product to rise in the near future.
D)incorrect since the firm's fixed costs are sunk costs.

Question 5

When a firm is operating in a price-taker market, marginal revenue is

A)equal to price.
B)always less than price.
C)equal to zero when the market is in long-run equilibrium.
D)equal to the change in output divided by the change in total revenue.

Question 6

Regarding costs of production, can a firm ever be at a point that is not on the marginal cost curve? Explain.

Question 7

Tom, a math major, examines Jane's economics class notes and observes that when price-taking firms earn economic profit, they do not seem to produce a quantity that minimizes their costs. Is he correct? Is there significance to this observation?

Question 8

Which of the following products would most closely fit the competitive price-taker model?

A)stereo systems-there are many reputable brands.
B)beer-it has many consumers.
C)eggs-there are many producers of this relatively homogeneous product.
D)automobiles-there are substantial economies of scale in production.

Question 9

In some industries, like insurance, both small and very large firms coexist and compete quite effectively in the market. This indicates that the long-run average total cost curve in these industries

A)is "U" shaped.
B)is downward sloping over all levels of output.
C)exhibits constant returns to scale over a wide range of output.
D)exhibits diseconomies of scale beginning at a low rate of output.

Question 10

If the model of price-taking firms is so unrealistic and restrictive, why study it?

Question 11

The competitive market process tends to promote economic prosperity because it

A)keeps the prices of goods higher than their production costs.
B)creates inefficiencies, which causes people to economize.
C)directs self-interested action toward the production of goods that are highly valued relative to their cost.
D)sends signals to the government about which goods to produce.

Question 12

Why is it considered "ideal" for price to just equal marginal cost?

Question 13

When an economist states that a firm is earning zero economic profit, this statement implies that the firm

A)will be forced out of business unless market conditions change.
B)is doing as well as it could in any other line of business.
C)is earning a zero rate of return on its assets.
D)could earn a higher rate of return in other industries.

Question 14

The short-run market supply curve in a price-taker industry equals the horizontal sum of the individual firm's

A)MC curves above AVC.
B)AVC curves above marginal revenue.
C)MC curves above ATC.
D)MC curves between AVC and ATC.

Question 15

When a competitive price-taker market is in long-run equilibrium

A)the firms in the market will earn zero economic profit.
B)the average total cost of the firms in the market will be minimized.
C)every unit of the relevant good that is valued more than its opportunity costs will be produced and sold.
D)all of the above are correct.

Question 16

In a competitive market, profit can be considered a reward to businesses that

A)produce a good that consumers value more highly than its component resources.
B)reduce the value of resources used as inputs in production.
C)prohibit rival firms from entering the market and competing.
D)control costs, rather than following the wishes of consumers when deciding what products to produce.

Question 17

When the demand for a product falls, why do costs of production go down in an increasing cost industry?

Question 18

The competitive price-taker model is usually used to illustrate the competitive process. If firms cannot choose their price, where is the competition?

Question 19

Suppose wheat farmers are price takers. If wheat farmers are currently making economic profits, over time we would expect that

A)existing wheat farmers would plant more acres of wheat.
B)farmers growing other crops would switch some of their land from these crops to the growing of wheat.
C)the wheat farmers will continue to earn economic profits because they would be driven out of business without such profit.
D)both a and b are correct.

Question 20

Competitive price-taker markets are characterized by

A)low entry barriers and a large number of firms selling a homogeneous product.
B)intense rivalry among firms selling differentiated products.
C)quality competition among firms and a wide variety of products.
D)advertising.

Question 21

Even if a firm is optimistic about the future, why should it shut down if it cannot cover its variable cost? If it does shut down, are there ramifications not mentioned in the textbook?

Question 22

If the demand for pizza falls, pizza suppliers will suffer economic losses, and some firms will leave the industry. Why is this considered good? Shouldn't we feel sorry for these business owners?

Question 23

If a technological advance lowers a firm's production costs, why do prices typically fall? Shouldn't the firm maintain the same price and earn economic profit?