Deck 9: Firms in a Competitive Market

Question 1

Total revenue minus total cost equals:

A) marginal revenue.
B) marginal cost.
C) change in profit.
D) profit.
E) quantity.

Answer 1

D

Question 2

In competitive markets:

A) firms set the prices for their products with little concern for the consumer.
B) firms are considered to be price makers.
C) firms are at the mercy of market forces.
D) the individual firms are much stronger than the market forces are.
E) the market forces set the quantity in the market but not the prices.

Answer 2

C

Question 3

Real-life examples of competitive markets:

A) are more common than any other market structure.
B) are usually far short of perfection.
C) include the fast-food industry and soda industry.
D) are difficult to break into as an entrepreneur.
E) do not benefit society.

Answer 3

B

Question 4

Which characteristic of competitive markets is mainly responsible for firms making zero economic profits in the long run?

A) many buyers
B) many sellers
C) similar goods
D) differentiated goods
E) easy entry into and exit from the market

Question 5

In competitive markets:

A) the products sold are different depending on the firm selling the product.
B) buyers can expect to find consistently low prices and wide availability of the good that they want.
C) producers can expect to be able to set the price at the level they choose.
D) it is hard for a seller to enter the market due to barriers to entry.
E) firms will leave the market if they are making economic profits.

Question 6

Marginal revenue is the change in total:

A) cost when the firm produces additional units.
B) revenue when the firm spends more money.
C) revenue divided by the change in total cost.
D) revenue when the firm produces additional units.
E) cost divided by the change in total revenue.

Question 7

The University of California at Irvine (UCI) allows student organizations and private firms to sell items on campus to raise funds for various activities. Many of the organizations sell boba, a Taiwanese tea drink, because boba is popular with students. The market for boba on the UCI campus is very competitive. If legislation is passed to restrict the entry of private firms into the boba market at the UCI campus, the

A) market would become less competitive.
B) market would become more competitive.
C) demand for boba would fall.
D) supply for boba would increase.
E) demand for boba would increase.

Question 8

Which of the following lists the three main characteristics of a competitive market?

A) many buyers and sellers, similar products, easy entry into the market
B) many buyers and few sellers, similar products, easy entry into the market
C) many buyers and sellers, differentiated products, easy entry into the market
D) many buyers and sellers, similar products, barriers to entry into the market
E) many buyers and few sellers, unique products, barriers to entry into the market

Question 9

Which characteristic of competitive markets is mainly responsible for ensuring that prices will be kept low?

A) many buyers
B) many sellers
C) similar goods
D) easy entry into and exit from the market
E) differentiated goods

Question 10

Which is an example of an almost perfectly competitive market?

A) Major League Baseball
B) restaurants
C) cruise liners
D) airlines
E) farmer's market

Question 11

The presence of many buyers and sellers is an important characteristic of competitive markets because it allows:

A) sellers in the market to have influence over the market price.
B) buyers in the market to have influence over the market price.
C) sellers in the market to have influence over the market quantity.
D) buyers in the market to have influence over the market quantity.
E) the price and quantity in the market to be determined by market forces.

Question 12

The market for hot dogs on the streets of New York City can be considered close to a perfectly competitive market. Because there are so many individuals buying and selling hot dogs:

A) there is a shortage of hot dogs.
B) there is a surplus of hot dogs.
C) market forces set the price in the market.
D) firms are able to make large economic profits.
E) firms cannot make positive accounting profits.

Question 13

A firm characterized as a price-taker:

A) has control over the price it pays, or receives, in the market.
B) sets the price for the market.
C) has no control over the price it pays, or receives, in the market.
D) is not a characteristic of a perfectly competitive market.
E) takes the price that is determined from the lowest price consumers are willing to pay for an item.

Question 14

Many economists believe that the market for wheat in the United States is an almost perfectly competitive market. If one firm discovers a technology that makes its wheat taste better and have fewer calories than all other wheat offered in the market, the wheat market would become less competitive because:

A) there would no longer be many buyers and many sellers of wheat.
B) it would no longer be easy to enter and exit the existing wheat market.
C) the products would no longer be similar in the wheat market.
D) the government would want to intervene.
E) individuals would not want to switch products.

Question 15

Because of market forces, firms have __________ when competition is widespread.

A) control over the price that they can charge and they make little or no economic profit
B) control over the price that they can charge and they make positive economic profit
C) little or no control over the price that they can charge and they make negative economic profit
D) little or no control over the price that they can charge and they make little or no economic profit
E) little or no control over the price that they can charge and they make extreme economic profits

Question 16

Firms in every market structure:

A) make long-run economic profits.
B) are in competition with many other firms.
C) leave the market as soon as they experience loss of profits.
D) will attempt to maximize profits.
E) face a horizontal demand curve.

Question 17

In a competitive market, if one firm raises its price relative to the other firms in the market, consumers are willing to go to another firm because:

A) the products are similar, which makes them complements.
B) the products are similar, which makes them substitutes.
C) there are many sellers in the market selling different items.
D) consumer scan get more producer surplus by going to a different firm.
E) consumers can set the price they want to pay.

Question 18

Competitive markets exist when:

A) there are so many buyers and sellers that each has only a small impact on the market price and the market output.
B) there are more buyers than sellers, giving the buyers market power.
C) there are more sellers than buyers, giving the sellers market power.
D) accounting profits become zero because of price wars.
E) prices are so low that everyone who wants the good or service gets the good or service.

Question 19

In competitive markets:

A) firms set the prices for their products with little concern for the consumer.
B) firms control the prices they charge.
C) market forces are much stronger than individual firms are.
D) individual firms are much stronger than the market forces are.
E) market forces set the quantity in the market but not the prices.

Question 20

A farmer's market is close to being a perfectly competitive market. Which characteristic of a perfectly competitive market do most farmer's markets violate?

A) many buyers
B) many sellers
C) free entry into the market
D) free exit from the market
E) similar goods produced

Question 21

Firms will break even if the price they charge is:

A) less than their minimum average total cost (ATC).
B) less than their minimum average variable cost (AVC).
C) greater than their minimum average variable cost (AVC).
D) greater than their minimum average total cost (ATC).
E) equal to their minimum average total cost (ATC).

Question 22

All firms, no matter what type of firm structure they are producing in, make their production decisions based on the point where their:

A) total revenue equals total cost.
B) marginal revenue equals marginal costs.
C) profits are equal to zero.
D) marginal revenue equals price.
E) average total cost is minimized.

Question 23

When talking about economic profits in a perfectly competitive market, the difference between the long run and the short run is that, in the short run, firms:

A) can earn positive economic profits, but in the long run, firms have zero economic profits.
B) can earn negative economic profits, but in the long run, firms have zero economic profits.
C) can earn positive or negative economic profits, but in the long run, firms have negative economic profits.
D) earn negative economic profits, but in the long run, firms have positive economic profits.
E) can earn positive or negative economic profits, but in the long run, firms have zero economic profits.

Question 24

Profits are maximized when producing:

A) 0 (zero) units.
B) 1 unit.
C) 2 units.
D) 3 units.
E) 4 units.

Question 25

If this firm is maximizing profits, total revenue is represented by the area:

A) B × C.
B) A × C.
C) (A ? B) × C.
D) A × B.
E) (A + B) × C.

Question 26

Refer to the accompanying figure. Point _________ corresponds to the profit-maximizing quantity that a competitive firm would produce.

A) A
B) B
C) C
D) D
E) E

Question 27

If the firm is maximizing profits, profit is represented by the area:

A) B × C.
B) A × C.
C) (A ? B) × C.
D) A × B.
E) (A +B ) × C.

Question 28

Assuming that all firms have the same cost structure, the price is:

A) $5.
B) $3.
C) $10.
D) $2.
E) $9.

Question 29

Which of the following conditions will result in the firm making zero economic profits?

A) P > ATC
B) P < ATC
C) P = ATC
D) P = AVC
E) ATC > P > AVC

Question 30

Profit maximization occurs when:

A) a firm expands output until marginal revenue is exceeded by marginal cost.
B) a firm expands output until marginal revenue is equal to marginal cost.
C) the price in the market is equal to the firm's marginal revenue.
D) total costs equal total revenue.
E) a firm sets the price at a point above average total cost.

Question 31

Kathleen owns a photography business in Mobile, Alabama. The market for photography is very competitive. At Kathleen's current production level, her marginal cost is $15 and her marginal revenue is $12. In order to maximize profits, Kathleen should:

A) decrease production.
B) keep production the same.
C) increase the price.
D) decease the price.
E) increase production.

Question 32

Which of the following conditions will result in the firm making an economic profit?

A) P > ATC
B) P < ATC
C) P = ATC
D) P = AVC
E) ATC > P > AVC

Question 33

Chuck Diesel Burger is a food truck in Houston, Texas. Imagine that Chuck Diesel Burger's minimum average total cost (ATC) is $3.75 and that its minimum average variable cost (AVC) is $2.50. Assume there are no barriers to entry into or exit from the food-truck market. Chuck Diesel Burger will make a positive economic profit if the price is equal to:

A) $4.00.
B) $3.75.
C) $3.00.
D) $2.50.
E) $2.00.

Question 34

If a competitive firm can make enough revenue to cover its variable costs, the firm will:

A) always earn a profit.
B) always earn a loss.
C) earn a profit in the long run.
D) choose to remain open.
E) shut down.

Question 35

When marginal revenue equals marginal cost:

A) profits are always equal to zero.
B) firms should increase production.
C) firms should decrease production.
D) firms should shut down.
E) firms are maximizing profits, so they should continue at that production level.

Question 36

If the firm is maximizing profits, total cost is represented by the area:

A) B × C.
B) A × C.
C) (A ? B) × C.
D) A × B.
E) (A + B) × C.

Question 37

Firms will always make a positive economic profit if the price they charge is:

A) less than their minimum average total cost (ATC).
B) less than their minimum average variable cost (AVC).
C) greater than their minimum average variable cost (AVC).
D) greater than their minimum average total cost (ATC).
E) equal to their minimum average total cost (ATC).

Question 38

If the market price is $15 and marginal cost is represented by the equation 2 × Q, where Q is in thousands of units, what is the profit-maximizing quantity?

A) 15,000
B) 8,000
C) 7,000
D) 7,500
E) 30,000

Question 39

Kimberly owns a cupcake shop in Newport Beach, California. The market for cupcakes is very competitive. At Kimberly's current production level, her marginal cost is $25 and her marginal revenue is $29. To maximize profits, Kimberly should:

A) decrease production.
B) keep production the same.
C) increase the price.
D) decease the price.
E) increase production.

Question 40

When profits are maximized, profits are equal to:

A) $5.
B) $3.
C) $2.
D) $10.
E) $9.

Question 41

Refer to the accompanying table. A firm participating in a competitive market with these costs would be indifferent about producing or shutting down if the price is: $\begin{array}{lll}\text { Price }&\text { Average Fixed Cost }&\text { Average Vaxiable Cost }\\\$ 2 & \$ 5 & \$ 6 \\\$ 4 & \$ 3 & \$ 4 \\\$ 6 & \$ 1 & \$ 5 \\\$ 8 & \$0.50 & \$ 7\end{array}$

A) $6.
B) $8.
C) $4.
D) $2.
E) either $6 or $8.

Question 42

Chuck Diesel Burger is a food truck in Houston, Texas. Imagine that Chuck Diesel Burger's minimum average total cost (ATC) is $3.75 and that its minimum average variable cost (AVC) is $2.50. Assume there are no barriers to entry into or exit from the food-truck market. Chuck Diesel Burger will suffer a loss but still produce if the price is equal to:

A) $4.00.
B) $3.75.
C) $3.00.
D) $2.50.
E) $2.00.

Question 43

Jim and Lisa own a dog-grooming business in Champlain, New York, called JL Groomers. There are many buyers and many sellers in the dog-grooming service market. JL Groomers experiences normal cost curves, with the marginal cost (MC) curve crossing average variable cost (AVC) at $14 and average total cost (ATC) at $22. JL Groomers will make positive economic profits if the market price is:

A) $14.
B) between $14 and $22.
C) below $14.
D) $22.
E) above $22.

Question 44

Refer to the accompanying figure. If the price is $8, the firm is making:

A) a loss and will exit the market.
B) a profit and will exit the market.
C) a loss and more firms will enter the market.
D) a profit and more firms will enter the market in the long run.
E) zero profit and the market is at long-run equilibrium.

Question 45

Refer to the accompanying figure. A firm would be making positive profits if the price is:

A) anywhere below $5.
B) below $5 but above $4.
C) anywhere above $4.
D) below $4.
E) above $5.

Question 46

Jim and Lisa own a dog-grooming business in Champlain, New York, called JL Groomers. There are many buyers and many sellers in the dog-grooming service market. JL Groomers experiences normal cost curves, with the marginal cost (MC) curve crossing average variable cost (AVC) at $14 and average total cost (ATC) at $22. JL Groomers will make zero economic profits if the market price is:

A) $14.
B) between $14 and $22.
C) below $14.
D) $22.
E) above $14.

Question 47

Assume that a firm's costs are split between variable costs and fixed costs. Once variable costs are covered:

A) any extra money is profit.
B) any extra money goes toward paying the fixed costs.
C) the firm will shut down.
D) the firm will make an economic profit.
E) the firm will break even.

Question 48

Chuck Diesel Burger is a food truck in Houston, Texas. Imagine that Chuck Diesel Burger's minimum average total cost (ATC) is $3.75 and that its minimum average variable cost (AVC) is $2.50. Assume there are no barriers to entry into or exit from the food-truck market. Chuck Diesel Burger will break even if the price is equal to:

A) $4.00.
B) $3.75.
C) $3.00.
D) $2.50.
E) $2.00.

Question 49

Jim and Lisa own a dog-grooming business in Champlain, New York, called JL Groomers. There are many buyers and many sellers in the dog-grooming service market. JL Groomers experiences normal cost curves, with the marginal cost (MC) curve crossing average variable cost (AVC) at $14 and average total cost (ATC) at $22. JL Groomers will always shut down if the market price is:

A) $14.
B) between $14 and $22.
C) below $14.
D) $22.
E) above $14.

Question 50

Chuck Diesel Burger is a food truck in Houston, Texas. Imagine that Chuck Diesel Burger's minimum average total cost (ATC) is $3.75 and that its minimum average variable cost (AVC) is $2.50. Assume there are no barriers to entry into or exit from the food-truck market. Chuck Diesel Burger will always shut down if the price is equal to:

A) $4.00.
B) $3.75.
C) $3.00.
D) $2.50.
E) $2.00.

Question 51

When revenue is insufficient to cover cost, the firm:

A) will always shut down.
B) will always stay open.
C) gains a profit.
D) breaks even.
E) suffers a loss.

Question 52

Refer to the accompanying table. A firm participating in a competitive market with these costs would always shut down if the price is: $\begin{array}{lll}\text { Price }&\text { Average Fixed Cost }&\text { Average Vaxiable Cost }\\\$ 2 & \$ 5 & \$ 6 \\\$ 4 & \$ 3 & \$ 4 \\\$ 6 & \$ 1 & \$ 5 \\\$ 8 & \$0.50 & \$ 7\end{array}$

A) $6.
B) $8.
C) $4.
D) $2.
E) either $6 or $8.

Question 53

Refer to the accompanying table. A firm participating in a competitive market with these costs would be making a profit if the price is: $\begin{array}{lll}\text { Price }&\text { Average Fixed Cost }&\text { Average Vaxiable Cost }\\\$ 2 & \$ 5 & \$ 6 \\\$ 4 & \$ 3 & \$ 4 \\\$ 6 & \$ 1 & \$ 5 \\\$ 8 & \$0.50 & \$ 7\end{array}$

A) $6.
B) $8.
C) $4.
D) $2.
E) either $6 or $8.

Question 54

Tom's Campgrounds is a firm conducting business in a competitive market. Tom realizes he is making a loss and is trying to decide whether to shut down or stay open. He should stay open:

A) regardless of the price being charged.
B) if the price being charged is less than his minimum average variable cost (AVC).
C) if his revenues do not cover his variable costs.
D) if his revenues cover his variable costs.
E) as long as he is making revenue.

Question 55

In the short run, a competitive firm may choose to operate at a loss:

A) to ensure that other firms make a loss as well.
B) only if those losses are economic losses.
C) to gain market power in the future.
D) only if those losses are accounting losses.
E) to recover a portion of its fixed costs.

Question 56

Refer to the accompanying figure. A firm would be suffering a loss but still be producing if the price is:

A) anywhere below $5.
B) below $5 but above $4.
C) anywhere above $4.
D) below $4.
E) above $5.

Question 57

Firms will be indifferent about shutting down or producing if the price they charge is:

A) less than their minimum average total cost (ATC).
B) less than their minimum average variable cost (AVC).
C) greater than their minimum average variable cost (AVC).
D) greater than their minimum average total cost (ATC).
E) equal to their minimum average variable cost (AVC).

Question 58

Refer to the accompanying table. A firm participating in a competitive market with these costs would break even if the price is: $\begin{array}{lll}\text { Price }&\text { Average Fixed Cost }&\text { Average Variable Cost }\\\$ 2 & \$ 5 & \$ 6 \\\$ 4 & \$ 3 & \$ 4 \\\$ 6 & \$ 1 & \$ 5 \\\$ 8 & \$ 0.50 & \$ 7\end{array}$

A) $6.
B) $8.
C) $4.
D) $2.
E) either $6 or $8.

Question 59

Firms will always suffer a loss only if the price they charge is:

A) less than their minimum average total cost (ATC).
B) less than their minimum average variable cost (AVC).
C) greater than their minimum average variable cost (AVC).
D) greater than their minimum average total cost (ATC).
E) equal to their minimum average total cost (ATC).

Question 60

Firms will always stay in the market if the price they charge is:

A) less than their minimum average total cost (ATC).
B) less than their minimum average variable cost (AVC).
C) greater than their minimum average variable cost (AVC).
D) greater than their minimum average total cost (ATC) but not greater than their minimum average variable cost (AVC).
E) equal to their minimum average variable cost (AVC).

Question 61

Refer to the accompanying figure. This firm's short-run supply curve is represented by the:

A) average total cost (ATC) curve above $20.
B) marginal cost (MC) curve above $15.
C) marginal cost (MC) curve above $8.
D) marginal cost (MC) curve above $20.
E) average variable cost (AVC) curve above $15.

Question 62

The marginal cost curve is the short-run supply curve:

A) at all points.
B) as long as the firm is not operating.
C) as long as the firm is operating.
D) only between minimum average total cost (ATC) and minimum average variable cost (AVC).
E) only above minimum average total cost (ATC).

Question 63

Refer to the accompanying figure. A firm would shut down in the short run if the price is:

A) anywhere below $5.
B) below $5 but above $4.
C) anywhere above $4.
D) below $4.
E) above $5.

Question 64

This firm would shut down in the long run if the price:

A) fell below $3.
B) fell below $8.
C) rose above $5.
D) rose above $8.
E) fell below $5.

Question 65

A good economist will ignore __________ and focus on _________ when it comes to making the right decisions.

A) marginal value; sunk costs
B) sunk costs; marginal value
C) costs; revenues
D) marginal cost; marginal revenue
E) opportunity costs; sunk costs

Question 66

Refer to the accompanying figure. A firm would produce in the long-run only if the market price is:

A) above $20.
B) above $15.
C) between $15 and $20.
D) above $8.
E) between $8 and $15.

Question 67

If the market price of a product is between the minimum average variable cost (AVC) and minimum average total cost (ATC) of a firm, that firm will:

A) always shut down.
B) always continue to produce.
C) produce in the short run but shut down in the long run.
D) produce in the long run but shut down in the short run.
E) make positive economic profits.

Question 68

Jim and Lisa own a dog-grooming business in Champlain, New York, called JL Groomers. There are many buyers and many sellers in the dog-grooming service market. JL Groomers experiences normal cost curves, with the marginal cost (MC) curve crossing average variable cost (AVC) at $14 and average total cost (ATC) at $22. JL Groomers' long-run supply curve would be the:

A) marginal revenue (MR) curve above $14.
B) marginal revenue (MR) curve above $22.
C) marginal cost (MC) curve above $14.
D) marginal cost (MC) curve above $22.
E) average variable cost (AVC) curve above $14.

Question 69

If the price is $3, the firm is making:

A) a loss and will exit the market.
B) a profit and will exit the market.
C) a loss and more firms will enter the market.
D) a profit and more firms will enter the market.
E) zero profits and the market is at long-run equilibrium.

Question 70

A firm will shut down in the long-run if the:

A) price is above the minimum average total cost (ATC).
B) price is equal to the minimum average total cost (ATC).
C) price is anywhere above the minimum average variable cost (AVC).
D) price is anywhere below the minimum average total cost (ATC).
E) firm is making zero economic profits.

Question 71

A firm's short-run supply curve is equal to the firm's:

A) marginal revenue curve.
B) demand curve.
C) marginal cost curve above minimum average total cost (ATC).
D) marginal cost curve below minimum average variable cost (AVC).
E) marginal cost curve above minimum average variable cost (AVC).

Question 72

It's easy to determine if a firm is making long-run production decisions by looking at its cost structure because, in the long run, a firm does not have any:

A) opportunity costs.
B) sunk costs.
C) fixed costs.
D) variable costs.
E) marginal costs.

Question 73

Jim and Lisa own a dog-grooming business in Champlain, New York, called JL Groomers. There are many buyers and many sellers in the dog-grooming service market. JL Groomers experiences normal cost curves, with the marginal cost (MC) curve crossing average variable cost (AVC) at $14 and average total cost (ATC) at $22. JL Groomers' short-run supply curve would be the:

A) marginal revenue (MR) curve above $14.
B) marginal revenue (MR) curve above $22.
C) marginal cost (MC) curve above $14.
D) marginal cost (MC) curve above $22.
E) average variable cost (AVC) curve above $14.

Question 74

Chuck Diesel Burger is a food truck in Houston, Texas. Imagine that Chuck Diesel Burger's minimum average total cost (ATC) is $3.75 and that its minimum average variable cost (AVC) is $2.50. Assume there are no barriers to entry or exit into the food-truck market. Chuck Diesel Burger will be indifferent about staying open or shutting down if the price is equal to:

A) $4.00.
B) $3.75.
C) $3.00.
D) $2.50.
E) $2.00.

Question 75

A firm's willingness to supply its product in the long run is represented on a graph by the:

A) market supply curve.
B) entire marginal cost (MC) curve.
C) marginal revenue (MR) curve.
D) part of the marginal cost (MC) curve above minimum average total cost (ATC).
E) part of the marginal cost (MC) curve above minimum average variable cost (AVC).

Question 76

According to the accompanying figure, if the price is $5, the firm is making:

A) a loss and will exit the market.
B) a profit and will exit the market.
C) a loss and more firms will enter the market.
D) a profit and more firms will enter the market.
E) zero profits and the market is at long-run equilibrium.

Question 77

A firm's willingness to supply its product in the short run is represented on a graph by the:

A) market supply curve.
B) entire marginal cost (MC) curve.
C) marginal revenue (MR) curve.
D) part of the marginal cost (MC) curve above minimum average total cost (ATC).
E) part of the marginal cost (MC) curve above minimum average variable cost (AVC).

Question 78

At current production levels, the marginal revenue of a competitive firm is $15 and the marginal cost of the firm is $15. The firm should:

A) cut back on production.
B) stop production all together.
C) produce more.
D) continue producing at current levels.
E) raise its prices.

Question 79

In the long run, if a firm is making a loss, it will:

A) continue to operate no matter what.
B) continue to operate if it covers its fixed costs.
C) increase production in order to increase profits.
D) decrease production in order to increase profits.
E) stop producing and exit the market.

Question 80

Costs that have been incurred as a result of past decisions are known as:

A) sunk costs.
B) variable costs.
C) fixed costs.
D) opportunity costs.
E) marginal costs.