Deck 8: Competitive Firms and Markets

Question 1

If a firm operates in a perfectly competitive market,then it will most likely

A)advertise its product on television.
B)settle for whatever price is offered.
C)have a difficult time obtaining information about the market price.
D)have an easy time keeping other firms out of the market.

Answer 1

settle for whatever price is offered.

Question 2

A special license is required to operate a taxi in many cities.The number of licenses is restricted.More drivers want licenses than are issued.This describes a non-perfectly competitive market because

A)taxi services are very different.
B)firms cannot freely enter and exit the market.
C)transaction costs are high.
D)the government generates revenue from the licenses.

Answer 2

firms cannot freely enter and exit the market.

Question 3

There are 10 identical internet service providers (ISPs)in a city serving a market demand with an elasticity of -1.5.The elasticity of supply for each firm is 3.0.The elasticity of demand faced by an individual ISP is

A)-42.
B)-15.
C)-1.5.
D)-27.

Answer 3

-42.

Question 4

If a firm happened to be the only seller of a particular product,it might behave as a price taker as long as

A)buyers have full information about the firm's price.
B)the transaction costs of doing business with this firm are low.
C)there are many buyers.
D)there is free entry and exit.

Question 5

In a perfectly competitive market,

A)firms can freely enter and exit.
B)firms sell a differentiated product.
C)transaction costs are high.
D)All of the above.

Question 6

Firms that exhibit price-taking behavior

A)wait for other firms to set price,take it as given,and charge a higher price.
B)have outputs that are too small to influence market price and thus take it as given.
C)take pricing behavior into their own hands.
D)are independently capable of setting price.

Question 7

If a firm operates in a perfectly competitive market,then

A)all firms will advertise.
B)no firms will advertise.
C)the market leader will advertise.
D)new firms will advertise.

Question 8

If consumers view the output of any firm in a market to be identical to the output of any other firm in the market,the demand curve for the output of any given firm

A)will be identical to the market demand curve.
B)will be horizontal.
C)will be vertical.
D)cannot be determined from the information given.

Question 9

As the number of firms in an industry increases,the residual demand curve becomes

A)more elastic.
B)less elastic.
C)larger.
D)vertical.

Question 10

Many car owners and car dealers describe their different cars for sale in the local newspapers and list their asking price.Many people shopping for a used car consider the different choices listed in the paper.The market for used cars could be described as

A)relatively competitive.
B)perfectly competitive.
C)non-competitive.
D)having high transaction costs.

Question 11

In a competitive market,if buyers did not know all the prices charged by the many firms,

A)all firms still face horizontal demand curves.
B)firms sell a differentiated product.
C)demand curves can be downward sloping for some or all firms.
D)the number of firms will most likely decrease.

Question 12

Many car owners and car dealers describe their different cars for sale in the local newspapers and list their asking price.Many people shopping for a used car consider the different choices listed in the paper.The absence of which condition prohibits this market from being described as perfectly competitive?

A)Buyers and sellers know the prices.
B)Firms freely enter and exit.
C)Transaction costs are low.
D)Consumers believe all firms sell identical products.

Question 13

Economists define a market to be competitive when the firms

A)spend large amounts of money on advertising to lure customers away from the competition.
B)watch each other's behavior closely.
C)are price takers.
D)All of the above.

Question 14

In the absence of any government regulation on price,if a firm has no power to set price on its own,one can safely conclude

A)the demand curve for the firm's product is horizontal.
B)there aren't many firms in the industry.
C)the market is in long-run equilibrium.
D)the firms in this industry are not profitable.

Question 15

A horizontal demand curve for a firm implies that

A)the firm is a monopoly.
B)the market the firm is operating in is not competitive.
C)the firm is selling in a competitive market.
D)the products of that firm are very different from other firms' products.

Question 16

The perfectly competitive model makes a lot of fairly unrealistic assumptions.Why do economics text books still talk a lot about this model?

A)Many markets are close to being perfectly competitive.
B)It is an important model to use as a benchmark to compare other markets structures to.
C)Perfectly competitive markets maximize societal welfare.
D)All of the above.

Question 17

The "Got Milk?" advertising campaign is a good example of

A)advertising in a competitive market.
B)how advertising in a competitive market does not pay off for a single firm.
C)interest groups financed by the industry advertise for the whole industry.
D)All of the above.

Question 18

A market's structure is described by

A)the number of firms in the market.
B)the ease with which firms can enter and exit the market.
C)the ability of firms to differentiate their product.
D)All of the above.

Question 19

The residual demand curve is

A)the market demand minus the supply of other firms.
B)the remaining demand after the market clears.
C)the market demand minus the supply of one firm.
D)the long-run demand for a market.

Question 20

If all conditions for a perfectly competitive market are met,

A)firms face sunk cost when entering the market.
B)firms demand curves are horizontal.
C)the market demand curve is horizontal.
D)the firms' demand curves are downward sloping.

Question 21

If a profit-maximizing firm finds that,at its current level of production,MR < MC,it will

A)decrease output.
B)increase output.
C)shut down.
D)operate at a loss.

Question 22

Explain why individual firms in competitive markets face more elastic demand curves than the market as a whole.

Question 23

Suppose the fixed cost of Christmas trees business is $7,000 and sunk.The variable cost for each tree is $20.According to the forecast,the market price for Christmas trees is $25 each and the owner could sell 1000 trees at most each year.The owner

A)should shut down the business.
B)should keep operating.
C)should sell less.
D)None of the above.

Question 24

A small business owner earns $50,000 in revenue annually.The explicit annual costs equal $30,000.The owner could work for someone else and earn $25,000 annually.The owner's business profit is ________ and the economic profit is ________.

A)$20,000,$5,000
B)$20,000,-$5,000
C)$25,000,-$5,000
D)$45,000,-$5,000

Question 25

A lawyer running his own business earns $18,000 in revenue monthly.He pays $8,000 as explicit costs including staff salary and utilities.He owns the office space so no rent is paid..The lawyer could work for other legal firms and earn $10,000 per month.His business profit is ________ and his economic profit is ________.

A)$10,000,$10,000
B)$28,000,$10,000
C)$10,000,$0
D)$8,000,$0

Question 26

If marginal revenue equals marginal cost,the firm is maximizing profits as long as

A)the resulting profits are positive.
B)marginal cost exceeds marginal revenue for greater levels of output.
C)the average cost curve lies above the demand curve.
D)All of the above are required.

Question 27

The demand curve an individual competitive firm faces is known as its

A)excess demand curve.
B)market demand curve.
C)residual demand curve.
D)leftover demand curve.

Question 28

The above figure shows the cost curves for a competitive firm.If the firm is to earn economic profit,price must exceed

A)$0.
B)$5.
C)$10.
D)$11.

Question 29

If a competitive firm maximizes short-run profits by producing some quantity of output,which of the following must be TRUE at that level of output?

A)p = MC.
B)MR = MC.
C)p ≥ AVC.
D)All of the above.

Question 30

If a profit-maximizing firm finds that,at its current level of production,MR > MC,it will

A)earn greater profits than if MR = MC.
B)increase output.
C)decrease output.
D)shut down.

Question 31

Gift shops in a small town sell identical mugs to tourists.However,tourists don't have enough time to check out the prices one by one and don't have brochures listing prices of mugs.We can conclude

A)the market for mugs is perfectly competitive.
B)buyers have full information.
C)sellers are price takers.
D)the market is not perfectly competitive.

Question 32

The above figure shows the cost curves for a competitive firm.If the market price is $15 per unit,the firm will earn profits of

A)$0.
B)$4.
C)$40.
D)$160.

Question 33

If a firm makes zero economic profit,then the firm

A)has total revenues greater than its economic costs.
B)must shut down.
C)can be earning positive business profit.
D)must have no fixed costs.

Question 34

The above figure shows the cost curves for a competitive firm.The firm will incur economic losses if the price is less than

A)$0.
B)$5.
C)$10.
D)$11.

Question 35

If a firm makes zero economic profit,then the firm

A)has no incentive to stay in the industry.
B)is better of exiting the industry.
C)is indifferent between staying and exiting the industry.
D)will shut down.

Question 36

If transaction costs are high,then it is more likely a firm's demand curve is downward sloping.

Question 37

A market is perfectly competitive even if firms have the ability to set their own price as long as the price difference reflects differences in the product.

Question 38

If a firm is operating at an output level where losses are minimized,the firm

A)has no incentive to stay in the industry.
B)is better of exiting the industry.
C)is maximizing profits.
D)will shut down.

Question 39

If a competitive firm maximizes short-run profits by producing some quantity of output,which of the following must be TRUE at that level of output?

A)p > MC.
B)MR > MC.
C)p ≥ AVC.
D)All of the above.

Question 40

A small business owner earns $60,000 in revenue annually.The explicit annual costs equal $40,000.The owner could work for someone else and earn $25,000 annually.The owner's business profit is ________ and the economic profit is ________.

A)$20,000,$5,000
B)$20,000,-$5,000
C)$25,000,-$5,000
D)$45,000,-$5,000

Question 41

The competitive firm's supply curve is equal to

A)its marginal cost curve.
B)the portion of its marginal cost curve that lies above AC.
C)the portion of its marginal cost curve that lies above AVC.
D)the portion of its marginal cost curve that lies above AFC.

Question 42

The above figure shows the cost curves for a competitive firm.If the firm is to operate in the short run,price must exceed

A)$0.
B)$5.
C)$10.
D)$11.

Question 43

Lelu runs a firm that sells multipasses to intergalactic cruises.Her short-run cost function is given by
C(q)= q² + 25q + 144
a.If the market price is $75/pass,how many units will Lelu produce?
b.At what price will Lelu earn zero profits?
c.If the price is below the level you found in b. ,will Lelu shut down? If so,explain.If not,below what price will she shut down?

Question 44

Suppose the estimated fixed cost of Christmas trees business is $7,000 and not sunk.The estimated variable cost for each tree is $20.According to the forecast,the market price for Christmas trees is $25 each and the owner could sell 1000 trees at most each year.In the long run,the owner

A)should shut down.
B)should keep operating.
C)should sell less.
D)None of the above.

Question 45

Suppose the Christmas trees market is perfectly competitive.An owner is currently earning a profit of $1,000,the cost of producing and selling an additional Christmas tree is $25,the current market price is $20.The owner

A)should sell more trees.
B)should not sell more trees.
C)should advertise in the market to promote his sales.
D)is not maximizing his profits.

Question 46

A firm will shut down in the short run if

A)total fixed costs are too high.
B)total revenue from operating would not cover all costs.
C)total revenue from operating would not cover variable costs.
D)total revenue from operating would not cover fixed costs.

Question 47

If a firm doesn't make an economic profit,it will shut down.

Question 48

A firm that only employs labor (L)has the following production function:
f(L)= 20L - L²
Let the price of output be normalized to one and the price of labor (relative to output price)is w.
a.Write out the profit function for this firm as a function of labor,L.
b.What is the necessary first-order condition for the firm to maximize profit when L > 0?
c.Compute the profit maximizing amount of labor as a function of the wage.What is the effect of an increase in wage on the firm's optimal employment level? Use calculus to solve this.

Question 49

Explain why shutting down and going out-of-business are different concepts.

Question 50

An increase in the cost of an input will result in

A)a leftward shift in the firm's supply curve.
B)an upward shift of the firm's marginal cost curve.
C)a leftward shift of the market supply curve.
D)All of the above.

Question 51

Suppose the Christmas trees market is perfectly competitive.A business owner is currently suffering from a loss of $1,000,the cost of producing and selling an additional Christmas tree is $20,and the current market price is $25.The owner

A)should sell more trees.
B)should shut down his business now.
C)should advertise in the market.
D)is already minimizing his loss.

Question 52

The above figure shows the cost curves for a typical firm in a competitive market.Note that if p = 10,then MC = p at both q = 5 and q = 60.Can they both yield maximum profit? Explain.

Question 53

Even though fixed costs do not affect the output decision,an increase in fixed costs results in a wider range of prices for which the firm operates at a loss.

Question 54

The above figure shows the cost curves for a competitive firm.If the profit-maximizing level of output is 40,price is equal to

A)$0.
B)$15.
C)$10.
D)$11.

Question 55

Suppose there are 20 competitive firms in a market.The supply curve of each firm is q = 2p.The market demand is Q = 200 - 2p.What is the residual demand curve facing a typical firm?

Question 56

A firm should always shut down if its revenue is

A)declining.
B)less than its average fixed costs.
C)less than its total costs.
D)less than its avoidable costs.

Question 57

Suppose a firm has the following total cost function: TC = 100 + 4q².What is the minimum price necessary for the firm to earn profit? Below what price will the firm shut down in the short run?

Question 58

If a firm is a price taker,then its marginal revenue will always equal

A)price.
B)total cost.
C)zero.
D)one.

Question 59

If a firm sets marginal revenue equal to marginal cost,it will make an economic profit.

Question 60

If a competitive firm finds that it maximizes short-run profits by shutting down,which of the following must be TRUE?

A)p < AVC for all levels of output.
B)p < AVC only for the level of output at which p = MC.
C)p < AVC only if the firm has no fixed costs.
D)The firm will earn zero profit.

Question 61

If a competitive firm has to pay a lump sum tax,it will produce less.

Question 62

If a competitive firm is in short-run equilibrium,then

A)profits equal zero.
B)it will not operate at a loss.
C)an increase in its fixed cost will have no effect on profit.
D)an increase in its fixed cost will have no effect on output as long as revenue can cover its variable cost.

Question 63

Suppose TC = 10 + (0.1 ∗ q²).If there are 100 identical firms in the market,the market supply curve is

A)Q = 1000 ∗ p.
B)Q = 500 ∗ p.
C)Q = 100 ∗ p.
D)Q = 10.

Question 64

Suppose TC = 10 + (0.1 ∗ q²).If p = 10,the firm's profits will be

A)240.
B)250.
C)260.
D)-10 because the firm will shut down.

Question 65

There are currently N identical firms in a market.If it is a perfectly competitive market,the short-run market supply curve at any given price is

A)N times the supply of an individual firm.
B)N - 1 times the supply of an individual firm.
C)N plus the supply of an individual firm.
D)It cannot be determined from the information provided.

Question 66

Suppose that once a well is dug,water flows out of it continuously without any additional effort.Customers collect their water and pay a per gallon fee when they leave the site of the well.In the short run,the competitive firm in this market

A)has no variable costs.
B)has no fixed costs.
C)will shut down.
D)can produce water at no cost.

Question 67

When the production of a good involves several inputs,an increase in the cost of one input will usually cause total costs to

A)rise more than in proportion.
B)rise less than in proportion.
C)remain unchanged.
D)rise by the exact amount of the input price increase.

Question 68

If a competitive firm cannot earn profit at any level of output during a given short-run period,then which of the following is LEAST likely to occur?

A)It will shut down in the short run and wait until the price increases sufficiently.
B)It will exit the industry in the long run.
C)It will operate at a loss in the short run.
D)It will minimize its loss by decreasing output so that price exceeds marginal cost.

Question 69

If a firm cannot earn profits in the short run,it will shut down.

Question 70

If a competitive firm is in short-run equilibrium,then

A)profits equal zero.
B)economic profits will be positive.
C)economic profits will be negative.
D)All of the above are possible in the short run.

Question 71

If the market price in a competitive market is below the minimum of average variable cost,the firm will shut down.

Question 72

The above figure shows the cost curves for a typical firm in a market and three possible market supply curves.If there are 100 identical firms,the market supply curve is best represented by

A)curve A.
B)curve B.
C)curve C.
D)either curve A or B,but definitely not C.

Question 73

The above figure shows the short run cost curves for a typical firm in a competitive market.If price = 4,then the firm

A)is earning positive profits.
B)should produce 35 units.
C)should shut down.
D)None of above.

Question 74

The above figure shows the cost curves for a typical firm in a competitive market.If price = 8.5,then

A)the firm will produce 10 units.
B)the firm will produce 55 units.
C)the firm will earn positive profits.
D)None of above.

Question 75

The above figure shows the cost curves for a typical firm in a competitive market.If p = 10,then

A)the firm will maximize its profit by producing 5 units.
B)the firm will maximize its profit by producing 60 units.
C)producing 5 or 60 units will yield equal profits.
D)Not enough information.

Question 76

If a firm is currently in short-run equilibrium earning a profit,what impact will a lump-sum tax have on its production decision?

A)The firm will decrease output to earn a higher profit.
B)The firm will increase output but earn a lower profit.
C)The firm will not change output but earn a lower profit.
D)The firm will not change output and earn a higher profit.

Question 77

In deciding whether to operate in the short run,the firm must be concerned with the relationship between price of the output and

A)total cost.
B)average variable cost.
C)total fixed cost.
D)the number of buyers.

Question 78

Suppose that once a well is dug,water flows out of it continuously without any additional effort.Customers collect their water and pay a per gallon fee when they leave the site of the well.In the short run,the competitive firm in this market

A)will not shut down because variable costs are zero.
B)has no fixed costs.
C)faces diminishing marginal returns.
D)can act as a price setter.

Question 79

The above figure shows the short run cost curves for a typical firm in a competitive market.If price = 8,then the firm

A)is earning positive profits.
B)should produce 50 units.
C)should shut down.
D)None of above.

Question 80

When the production of a good involves several inputs and inputs are used in fixed proportions,an increase in the cost of one input will usually cause total costs to

A)rise more than in proportion.
B)rise less than in proportion.
C)remain unchanged.
D)rise by the exact amount of the input price increase.