Deck 8: Profit Maximization and Competitive Supply

Question 1

If managers do not choose to maximize profit,but pursue some other goal such as revenue maximization or growth,

A)they are more likely to become takeover targets of profit-maximizing firms.
B)they are less likely to be replaced by stockholders.
C)they are less likely to be replaced by the board of directors.
D)they are more likely to have higher profit than if they had pursued that policy explicitly.
E)their companies are more likely to survive in the long run.

Answer 1

A

Question 2

A few sellers may behave if they operate in a perfectly competitive market is the market demand is:

A)highly inelastic.
B)very elastic.
C)unitary elastic.
D)composed of many small buyers.

Answer 2

B

Question 3

If any of the assumptions of perfect competition are violated,

A)supply-and-demand analysis cannot be used to study the industry.
B)graphs with flat demand curves cannot be used to study the firm.
C)graphs with downward-sloping demand curves cannot be used to study the firm.
D)there may still be enough competition in the industry to make the model of perfect competition usable.
E)one must use the monopoly model instead.

Answer 3

D

Question 4

Revenue is equal to

A)price times quantity.
B)price times quantity minus total cost.
C)price times quantity minus average cost.
D)price times quantity minus marginal cost.
E)expenditure on production of output.

Question 5

Firms often use patent rights as a:

A)barrier to exit.
B)barrier to entry.
C)way to achieve perfect competition.
D)none of the above

Question 6

In many rural areas,electric generation and distribution utilities were initially set up as cooperatives in which the electricity customers were member-owners.Like most cooperatives,the objective of these firms was to:

A)maximize profits for the member-owners.
B)maximize total revenue that could be redistributed to the member-owners.
C)operate at zero profit in order to provide low electricity prices for the member-owners.
D)minimize the costs of production.

Question 7

Several years ago,Alcoa was effectively the sole seller of aluminum because the firm owned nearly all of the aluminum ore reserves in the world.This market was not perfectly competitive because this situation violated the:

A)price-taking assumption.
B)homogeneous product assumption.
C)free entry assumption.
D)A and B are correct.
E)A and C are correct.

Question 8

Owners and managers

A)must be the same people.
B)may be different people with different goals,and in the long run firms that do best are those in which the managers are allowed to pursue their own independent goals.
C)may be different people with different goals,but in the long run firms that do best are those in which the managers pursue the goals of the owners.
D)may be different people with different but exactly complementary goals.
E)may be different people with the same goals.

Question 9

A firm maximizes profit by operating at the level of output where

A)average revenue equals average cost.
B)average revenue equals average variable cost.
C)total costs are minimized.
D)marginal revenue equals marginal cost.
E)marginal revenue exceeds marginal cost by the greatest amount.

Question 10

The "perfect information" assumption of perfect competition includes all of the following except one.Which one?

A)Consumers know their preferences.
B)Consumers know their income levels.
C)Consumers know the prices available.
D)Consumers can anticipate price changes.
E)Firms know their costs,prices and technology.

Question 11

Marginal revenue,graphically,is

A)the slope of a line from the origin to a point on the total revenue curve.
B)the slope of a line from the origin to the end of the total revenue curve.
C)the slope of the total revenue curve at a given point.
D)the vertical intercept of a line tangent to the total revenue curve at a given point.
E)the horizontal intercept of a line tangent to the total revenue curve at a given point.

Question 12

Which of following is a key assumption of a perfectly competitive market?

A)Firms can influence market price.
B)Commodities have few sellers.
C)It is difficult for new sellers to enter the market.
D)Each seller has a very small share of the market.
E)none of the above

Question 13

Which of following is an example of a homogeneous product?

A)Gasoline
B)Copper
C)Personal computers
D)Winter parkas
E)both A and B

Question 14

Use the following statements to answer this question: I.Markets that have only a few sellers cannot be highly competitive.
II)Markets with many sellers are always perfectly competitive.

A)I and II are true.
B)I is true and II is false.
C)II is true and I is false.
D)I and II are false.

Question 15

The textbook for your class was not produced in a perfectly competitive industry because

A)there are so few firms in the industry that market shares are not small,and firms' decisions have an impact on market price.
B)upper-division microeconomics texts are not all alike.
C)it is not costless to enter or exit the textbook industry.
D)of all of the above reasons.

Question 16

A price taker is

A)a firm that accepts different prices from different customers.
B)a consumer who accepts different prices from different firms.
C)a perfectly competitive firm.
D)a firm that cannot influence the market price.
E)both C and D

Question 17

At the profit-maximizing level of output,what is true of the total revenue (TR)and total cost (TC)curves?

A)They must intersect,with TC cutting TR from below.
B)They must intersect,with TC cutting TR from above.
C)They must be tangent to each other.
D)They cannot be tangent to each other.
E)They must have the same slope.

Question 18

The authors note that the goal of maximizing the market value of the firm may be more appropriate than maximizing short-run profits because:

A)the market value of the firm is based on long-run profits.
B)managers will not focus on increasing short-run profits at the expense of long-run profits.
C)this would more closely align the interests of owners and managers.
D)all of the above

Question 19

When the TR and TC curves have the same slope,

A)they are the furthest from each other.
B)they are closest to each other.
C)they intersect each other.
D)profit is negative.
E)profit is zero.

Question 20

An association of businesses that are jointly owned and operated by members for mutual benefit is a:

A)condominium.
B)corporation.
C)cooperative.
D)joint tenancy.

Question 21

The amount of output that a firm decides to sell has no effect on the market price in a competitive industry because

A)the market price is determined (through regulation)by the government
B)the firm supplies a different good than its rivals
C)the firm's output is a small fraction of the entire industry's output
D)the short run market price is determined solely by the firm's technology
E)the demand curve for the industry's output is downward sloping

Question 22

The perfectly competitive firm's marginal revenue curve is

A)exactly the same as the marginal cost curve.
B)downward-sloping,at twice the (negative)slope of the market demand curve.
C)vertical.
D)horizontal.
E)upward-sloping.

Question 23

Consider the following diagram where a perfectly competitive firm faces a price of $40. Figure 8.1
Refer to Figure 8.1.At 67 units of output,profit is

A)maximized and zero.
B)maximized and negative.
C)maximized and positive.
D)not maximized,and zero.
E)not maximized,and negative.

Question 24

The demand curve facing a perfectly competitive firm is

A)the same as the market demand curve.
B)downward-sloping and less flat than the market demand curve.
C)downward-sloping and more flat than the market demand curve.
D)perfectly horizontal.
E)perfectly vertical.

Question 25

The demand curve facing a perfectly competitive firm is

A)the same as its average revenue curve,but not the same as its marginal revenue curve.
B)the same as its average revenue curve and its marginal revenue curve.
C)the same as its marginal revenue curve,but not its average revenue curve.
D)not the same as either its marginal revenue curve or its average revenue curve.
E)not defined in terms of average or marginal revenue.

Question 26

Consider the following diagram where a perfectly competitive firm faces a price of $40. Figure 8.1
Refer to Figure 8.1.The profit-maximizing output is

A)30.
B)54.
C)60.
D)67.
E)79.

Question 27

Marginal profit is equal to

A)marginal revenue minus marginal cost.
B)marginal revenue plus marginal cost.
C)marginal cost minus marginal revenue.
D)marginal revenue times marginal cost.
E)marginal revenue divided by marginal cost.

Question 28

Marginal profit is negative when:

A)marginal revenue is negative.
B)total cost exceeds total revenue.
C)output exceeds the profit-maximizing level.
D)profit is negative.

Question 29

Consider the following diagram where a perfectly competitive firm faces a price of $40. Figure 8.1
Refer to Figure 8.1.At the profit-maximizing level of output,total revenue is

A)$1200.
B)$2160.
C)$2400.
D)$2680.
E)$3160.

Question 30

Because of the relationship between a perfectly competitive firm's demand curve and its marginal revenue curve,the profit maximization condition for the firm can be written as

A)P = MR.
B)P = AVC.
C)AR = MR.
D)P = MC.
E)P = AC.

Question 31

If current output is less than the profit-maximizing output,then the next unit produced

A)will decrease profit.
B)will increase cost more than it increases revenue.
C)will increase revenue more than it increases cost.
D)will increase revenue without increasing cost.
E)may or may not increase profit.

Question 32

Consider the following diagram where a perfectly competitive firm faces a price of $40. Figure 8.1
Refer to Figure 8.1.At the profit-maximizing level of output,AVC is

A)$22.
B)$26.
C)$30.
D)$32.
E)$40.

Question 33

At the profit-maximizing level of output,marginal profit

A)is also maximized.
B)is zero.
C)is positive.
D)is increasing.
E)may be positive,negative or zero.

Question 34

Consider the following diagram where a perfectly competitive firm faces a price of $40. Figure 8.1
Refer to Figure 8.1.The firm earns zero profit at what output?

A)0)
B)34 and 79.
C)54.
D)60.
E)67.

Question 35

If current output is less than the profit-maximizing output,which must be true?

A)Total revenue is less than total cost.
B)Average revenue is less than average cost.
C)Average revenue is greater than average cost.
D)Marginal revenue is less than marginal cost.
E)Marginal revenue is greater than marginal cost.

Question 36

Consider the following diagram where a perfectly competitive firm faces a price of $40. Figure 8.1
Refer to Figure 8.1.At the profit-maximizing level of output,total profit is

A)-$120.
B)$0.
C)$432.
D)$600.
E)$603.

Question 37

Consider the following diagram where a perfectly competitive firm faces a price of $40. Figure 8.1
Refer to Figure 8.1.At the profit-maximizing level of output,ATC is

A)$26.
B)$30.
C)$31.
D)$40.
E)$44.

Question 38

If the market price for a competitive firm's output doubles then

A)the profit maximizing output will double
B)the marginal revenue doubles
C)at the new profit maximizing output,price has increased more than marginal cost
D)at the new profit maximizing output,price has risen more than marginal revenue
E)competitive firms will earn an economic profit in the long-run.

Question 39

Suppose the state legislature in your state imposes a state licensing fee of $100 per year to be paid by all firms that file state tax revenue reports.This new business tax:

A)increases marginal cost.
B)decreases marginal cost.
C)increases marginal revenue.
D)decreases marginal revenue.
E)none of the above

Question 40

Consider the following diagram where a perfectly competitive firm faces a price of $40. Figure 8.1
Refer to Figure 8.1.At the profit-maximizing level of output,

A)AVC is minimized.
B)ATC is minimized.
C)MC is minimized.
D)total cost is minimized.
E)no costs are minimized.

Question 41

The supply curve for a competitive firm is

A)its entire MC curve.
B)the upward-sloping portion of its MC curve.
C)its MC curve above the minimum point of the AVC curve.
D)its MC curve above the minimum point of the ATC curve.
E)its MR curve.

Question 42

Table 8.1
Refer to Table 8.1.That the firm is perfectly competitive is evident from its

A)increasing marginal cost.
B)increasing total cost.
C)zero economic profits.
D)constant marginal revenue.
E)absence of marginal values at Q = 0.

Question 43

That Table 8.1 shows a short-run situation is evident from

A)the linear marginal revenue function.
B)the constant price.
C)the increasing marginal cost.
D)the presence of positive costs at Q = 0.
E)the absence of marginal values at Q = 0.

Question 44

In the short run,a perfectly competitive firm earning positive economic profit is

A)on the downward-sloping portion of its ATC.
B)at the minimum of its ATC.
C)on the upward-sloping portion of its ATC.
D)above its ATC.
E)below its ATC.

Question 45

If a graph of a perfectly competitive firm shows that the MR = MC point occurs where MR is above AVC but below ATC,

A)the firm is earning negative profit,and will shut down rather than produce that level of output.
B)the firm is earning negative profit,but will continue to produce where MR = MC in the short run.
C)the firm is still earning positive profit,as long as variable costs are covered.
D)the firm is covering explicit,but not implicit,costs.
E)the firm can cover all of fixed costs but only a portion of variable costs.

Question 46

If a competitive firm's marginal cost curve is U-shaped then

A)its short run supply curve is U-shaped too
B)its short run supply curve is the downward-sloping portion of the marginal cost curve
C)its short run supply curve is the upward-sloping portion of the marginal cost curve
D)its short run supply curve is the upward-sloping portion of the marginal cost curve that lies above the short run average variable cost curve
E)its short run supply curve is the upward-sloping portion of the marginal cost curve that lies above the short run average total cost curve

Question 47

In the short run,a perfectly competitive firm earning negative economic profit

A)is on the downward-sloping portion of its AVC.
B)is at the minimum of its AVC.
C)is on the upward-sloping portion of its AVC.
D)is not operating on its AVC.
E)can be at any point on its AVC.

Question 48

If a competitive firm has a U-shaped marginal cost curve then

A)the profit maximizing output will always generate positive economic profit.
B)the profit maximizing output will always generate positive producer surplus.
C)the profit maximizing output is found where MC = MR and MC is decreasing.
D)the profit maximizing output is found where MC = MR and MC is constant.
E)the profit maximizing output is found where MC = MR and MC is increasing.

Question 49

Table 8.1
Refer to Table 8.1.The maximum profit available to the firm is

A)$20.
B)$30.
C)$35.
D)$155.
E)$180.

Question 50

An industry analyst observes that in response to a small increase in price,a competitive firm's output sometimes rises a little and sometimes a lot.The best explanation for this finding is that

A)the firm's marginal cost curve is random.
B)the firm's marginal cost curve has a very small positive slope.
C)the firm's marginal cost has a very large positive slope.
D)the firm's marginal cost curve is horizontal for some ranges of output and rises in steps.
E)the firm's marginal cost curve is downward sloping.

Question 51

In the short run,a perfectly competitive profit maximizing firm that has not shut down

A)is operating on the downward-sloping portion of its AVC curve.
B)is operating at the minimum of its AVC curve.
C)is operating on the upward-sloping portion of its AVC curve.
D)is not operating on its AVC curve.
E)can be at any point on its AVC curve.

Question 52

A firm never operates

A)at the minimum of its ATC curve.
B)at the minimum of its AVC curve.
C)on the downward-sloping portion of its ATC curve.
D)on the downward-sloping portion of its AVC curve.
E)on its long-run marginal cost curve.

Question 53

An improvement in technology would result in

A)upward shifts of MC and reductions in output.
B)upward shifts of MC and increases in output.
C)downward shifts of MC and reductions in output.
D)downward shifts of MC and increases in output.
E)increased quality of the good,but little change in MC.

Question 54

The total revenue graph consistent with Table 8.1 is

A)linear and upward-sloping.
B)linear and horizontal.
C)linear and vertical.
D)linear and downward-sloping.
E)concave downwards.

Question 55

Average cost for the firm in Table 8.1

A)cannot be determined from the information given.
B)is upward-sloping for all output values shown.
C)is constant for all output values shown.
D)is downward-sloping for all output values shown.
E)is U-shaped.

Question 56

If price is between AVC and ATC,the best and most practical thing for a perfectly competitive firm to do is

A)raise prices.
B)lower prices to gain revenue from extra volume.
C)shut down immediately,but not liquidate the business.
D)shut down immediately and liquidate the business.
E)continue operating,but plan to go out of business.

Question 57

Bette's Breakfast,a perfectly competitive eatery,sells its "Breakfast Special" (the only item on the menu)for $5.00.The costs of waiters,cooks,power,food etc.average out to $3.95 per meal; the costs of the lease,insurance and other such expenses average out to $1.25 per meal.Bette should

A)close her doors immediately.
B)continue producing in the short and long run.
C)continue producing in the short run,but plan to go out of business in the long run.
D)raise her prices above the perfectly competitive level.
E)lower her output.

Question 58

In the short run,a perfectly competitive firm earning negative economic profit is

A)on the downward-sloping portion of its ATC curve.
B)at the minimum of its ATC curve.
C)on the upward-sloping portion of its ATC curve.
D)above its ATC curve.

Question 59

When the price faced by a competitive firm was $5,the firm produced nothing in the short run.However,when the price rose to $10,the firm produced 100 tons of output.From this we can infer that

A)the firm's marginal cost curve must be flat.
B)the firm's marginal costs of production never fall below $5.
C)the firm's average cost of production was less than $10.
D)the firm's total cost of producing 100 tons is less than $1000.
E)the minimum value of the firm's average variable cost lies between $5 and $10.

Question 60

Use the following statements to answer this question: I.The firm's decision to produce zero output when the price is less than the average variable cost of production is known as the shutdown rule.
II)The firm's supply decision is to generate zero output for all prices below the minimum AVC.

A)I and II are true.
B)I is true and II is false.
C)II is true and I is false.
D)I and II are false.

Question 61

Consider the following statements when answering this question I.Increases in the demand for a good,which is produced by a competitive industry,will raise the short-run market price.
II)Increases in the demand for a good,which is produced by a competitive industry will raise the long-run market price.

A)I and II are true.
B)I is true,and II is false.
C)I is false,and II is true.
D)I and II are false.

Question 62

Suppose a technological innovation shifts the marginal cost curve downward.Which one of the following cost curves does NOT shift?

A)Firm's short-run supply curve
B)Average total cost curve
C)Average variable cost curve
D)Average fixed cost curve

Question 63

If a competitive firm's marginal costs always increase with output,then at the profit maximizing output level,producer surplus is

A)zero because marginal costs equal marginal revenue.
B)zero because price equals marginal costs.
C)positive because price exceeds average variable costs.
D)positive because price exceeds average total costs.
E)positive because revenues are increasing faster than variable costs.

Question 64

One practical implication of a kinked market supply curve is that:

A)producer surplus is not defined at the kink point.
B)the MC = MR rule does not hold at the kink point.
C)the market supply elasticity for a price increase may be different than the market supply elasticity for a price decrease at the kink point.
D)All of the above are true.

Question 65

Three hundred firms supply the market for paint.For fifty of the firms,their short-run average variable costs are minimized at $10 and short-run total costs are minimized at $15.For the remaining firms,the short-run average variable costs and short-run average total costs are minimized at $20 and $25,respectively.If each firm has a U-shaped marginal cost curve then the short-run market supply curve is

A)U-shaped too
B)kinked at $10
C)kinked at $15
D)kinked at $20
E)kinked at $25

Question 66

Consider the following statements when answering this question I.If the cost of producing each unit of output falls $5,then the short-run market price falls $5.
II)If the cost of producing each unit of output falls $5,then the long-run market price falls $5.

A)I and II are true.
B)I is true,and II is false.
C)I is false,and II is true.
D)I and II are false.

Question 67

Higher input prices result in

A)upward shifts of MC and reductions in output.
B)upward shifts of MC and increases in output.
C)downward shifts of MC and reductions in output.
D)downward shifts of MC and increases in output.
E)increased demand for the good the input is used for.

Question 68

Consider the following statements when answering this question I.In the long run,if a firm wants to remain in a competitive industry,then it needs to own resources that are in limited supply."
II)In this competitive market our firm's long run survival depends only on the efficiency of our production process.

A)I and II are true.
B)I is true,and II is false.
C)I is false,and II is true.
D)I and II are false.

Question 69

Imposition of an output tax on all firms in a competitive industry will result in

A)a downward shift in each firm's marginal cost curve.
B)a downward shift in each firm's average cost curve.
C)a leftward shift in the market supply curve.
D)the entry of new firms into the industry.
E)higher profits for the industry as price rises.

Question 70

Suppose all firms have constant marginal costs that are the same for each firm in the short run.In this case,the market level supply curve is __________ and producer surplus equals __________:

A)perfectly inelastic,fixed costs
B)perfectly inelastic,zero
C)perfectly elastic,fixed costs
D)perfectly elastic,zero

Question 71

Consider the following statements when answering this question I.In the long-run equilibrium of a perfectly competitive market,a firm's producer surplus equals the sum of the economic rents earned on its inputs to production.
II)In the long-run equilibrium of a perfectly competitive market,the amount of economic profit earned can differ across firms,but not the amount of producer surplus.

A)I and II are true.
B)I is true,and II is false.
C)I is false,and II is true.
D)I and II are false.

Question 72

Producer surplus in a perfectly competitive industry is

A)the difference between profit at the profit-maximizing output and profit at the profit-minimizing output.
B)the difference between revenue and total cost.
C)the difference between revenue and variable cost.
D)the difference between revenue and fixed cost.
E)the same thing as revenue.

Question 73

In the long run,a firm's producer surplus is equal to the

A)economic rent it enjoys from its scarce inputs.
B)revenue it earns in the long run.
C)positive economic profit it earns in the long run.
D)difference between total revenue and total variable costs.
E)difference between total revenue and total fixed costs.

Question 74

A firm's producer surplus equals its economic profit when

A)average variable costs are minimized.
B)average fixed costs are minimized.
C)marginal costs equal marginal revenue.
D)fixed costs are zero.
E)total revenues equal total variable costs.

Question 75

Figure 8.2
Refer to Figure 8.2.At P = $80,the profit-maximizing output in the short run is

A)22.
B)34.
C)39.
D)50.
E)64.

Question 76

An industry has 1000 competitive firms,each producing 50 tons of output.At the current market price of $10,half of the firms have a short-run supply curve with a slope of 1; the other half each have a short-run supply curve with slope 2.The short-run elasticity of market supply is

A)1/50
B)3/10
C)1/5
D)2/5
E)none of the above

Question 77

Short-run supply curves for perfectly competitive firms tend to be upward sloping because:

A)there is diminishing marginal product for one or more variable inputs.
B)marginal costs increase as output increases.
C)marginal fixed costs equal zero.
D)A and B are correct.
E)B and C are correct.

Question 78

The shutdown decision can be restated in terms of producer surplus by saying that a firm should produce in the short run as long as

A)revenue exceeds producer surplus.
B)producer surplus is positive.
C)producer surplus exceeds fixed cost.
D)producer surplus exceeds variable cost.
E)profit and producer surplus are equal.

Question 79

In a supply-and-demand graph,producer surplus can be pictured as the

A)vertical intercept of the supply curve.
B)area between the demand curve and the supply curve to the left of equilibrium output.
C)area under the supply curve to the left of equilibrium output.
D)area under the demand curve to the left of equilibrium output.
E)area between the equilibrium price line and the supply curve to the left of equilibrium output.

Question 80

Use the following statements to answer this question: I.Under perfect competition,an upward shift in the marginal cost curve (perhaps due to a higher price for a variable input)also shifts the average variable cost curve upward.
II)Under perfect competition.,an upward shift in the marginal cost curve (perhaps due to a higher price for a variable input)reduces firm output but may increase firm profits.

A)I and II are true.
B)I is true and II is false.
C)II is true and I is false.
D)I and II are false.