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Copyright © 2011 Pearson Education, Inc.
Foundations of Microeconomics, 5e (Bade/Parkin)
Chapter 14 Perfect Competition
14.1 A Firm's Profit-Maximizing Choices
1) A market with a large number of sellers
A) can only be a perfectly competitive market.
B) might be an oligopoly or a perfectly competitive market.
C) might be a monopolistically competitive or a perfectly competitive market.
D) might be a perfectly competitive, monopolistically competitive, oligopoly, or monopoly
market.
E) can only be a monopolistically competitive market.
Skill: Level 1: Definition
Section: Checkpoint 14.1
Author: SA
AACSB: Reflective thinking
2) What is the difference between perfect competition and monopolistic competition?
A) Perfect competition has a large number of small firms while monopolistic competition does
not.
B) Perfect competition has barriers to entry while monopolistic competition does not.
C) Perfect competition has no barriers to entry, while monopolistic competition does.
D) In perfect competition, firms produce identical goods, while in monopolistic competition,
firms produce slightly different goods.
E) In monopolistic competition, firms produce identical goods, while in perfect competition,
firms produce slightly different goods.
Skill: Level 1: Definition
Section: Checkpoint 14.1
Author: SB
AACSB: Reflective thinking
3) A perfectly competitive firm
A) sells a product that has perfect substitutes.
B) has a perfectly inelastic demand.
C) has a perfectly elastic supply.
D) Answer A and answer B are correct.
E) Answer A and answer C are correct.
Skill: Level 1: Definition
Section: Checkpoint 14.1
Author: SA
AACSB: Reflective thinking
2
Copyright © 2011 Pearson Education, Inc.
4) In which market structure do firms exist in very large numbers, each firm produces an
identical product, and there is freedom of entry and exit?
A) monopoly
B) oligopoly
C) only perfect competition
D) only monopolistic competition
E) either perfect competition or monopolistic competition
Skill: Level 1: Definition
Section: Checkpoint 14.1
Author: PH
AACSB: Reflective thinking
5) The characteristics that describe a perfectly competitive industry include
A) many firms selling an identical product.
B) one firm selling to many buyers.
C) many firms selling a slightly differentiated product.
D) a few firms selling to many buyers.
E) None of the above answers is correct.
Skill: Level 1: Definition
Section: Checkpoint 14.1
Author: WM
AACSB: Reflective thinking
6) In part, perfect competition arises if
i. each firm's minimum efficient scale is large relative to demand.
ii. each firm produces a good or service identical to those produced by its many competitors.
iii. there are significant barriers to entry.
A) i only
B) ii only
C) i and ii
D) iii only
E) ii and iii
Skill: Level 1: Definition
Section: Checkpoint 14.1
Author: CD
AACSB: Reflective thinking
3
Copyright © 2011 Pearson Education, Inc.
7) In which of the following market types do all firms sell products so identical that buyers do
not care from which firm they buy?
A) perfect competition
B) monopolistic competition
C) oligopoly
D) monopoly
E) perfect competition and monopolistic competition
Skill: Level 1: Definition
Section: Checkpoint 14.1
Author: TS
AACSB: Reflective thinking
8) A market in which many firms sell identical products is
A) a monopoly.
B) an oligopoly.
C) perfectly competition.
D) monopolistic competition.
E) perfect competition and monopolistic competition.
Skill: Level 1: Definition
Section: Checkpoint 14.1
Author: MR
AACSB: Reflective thinking
9) One requirement for an industry to be perfectly competitive is that in the industry there
A) are a few firms who control the market.
B) are many firms for whom the efficient scale of production is small.
C) is one firm that sells a product with no close substitutes.
D) are many firms selling different products.
E) is a barrier to entry that makes the entry of new firms difficult.
Skill: Level 1: Definition
Section: Checkpoint 14.1
Author: JC
AACSB: Reflective thinking
4
Copyright © 2011 Pearson Education, Inc.
10) One requirement for an industry to be perfectly competitive is that
A) there are no restrictions on entry into or exit from the market.
B) there are multiple restrictions on entry into or exit from the market.
C) there are many firms selling different products.
D) sellers and buyers have imperfect information about prices.
E) the many firms sell slightly different products.
Skill: Level 1: Definition
Section: Checkpoint 14.1
Author: JC
AACSB: Reflective thinking
11) One requirement for an industry to be perfectly competitive is that
A) sellers and buyers have imperfect information about prices.
B) established firms have no advantage over new firms.
C) established firms have a significant advantage over new firms.
D) different firms produce widely different products.
E) many firms produce slightly different products.
Skill: Level 1: Definition
Section: Checkpoint 14.1
Author: JC
AACSB: Reflective thinking
12) A perfectly competitive market arises when
A) the market demand is small relative to the output of a firm.
B) there are many buyers but few sellers.
C) the market demand is very large relative to the output of one seller.
D) a firm has control over a unique resource.
E) each of the many firms produces a slightly different product.
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: WM
AACSB: Reflective thinking
5
Copyright © 2011 Pearson Education, Inc.
13) Each firm in a perfectly competitive industry
A) produces a good that is slightly different from that of the other firms.
B) produces a good that is identical to that of the other firms.
C) attains economies of scale so that its efficient size is large compared to the market as a whole.
D) has control over at least one unique resource to separate themselves from their competitors.
E) has an important influence on the market price of the good or service being produced.
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: WM
AACSB: Reflective thinking
14) Perfect competition is characterized by all of the following EXCEPT
A) a large number of buyers and sellers.
B) no restrictions on entry into or exit from the industry.
C) considerable advertising by individual firms.
D) buyers and sellers are well informed about prices.
E) firms produce an identical product.
Skill: Level 1: Definition
Section: Checkpoint 14.1
Author: TS
AACSB: Reflective thinking
15) Which of the following is the best example of a perfectly competitive market?
A) farming
B) diamonds
C) athletic shoes
D) soft drinks
E) electricity distribution
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: SB
AACSB: Reflective thinking
6
Copyright © 2011 Pearson Education, Inc.
16) Which of the following market types has the fewest number of firms?
A) perfect competition
B) monopolistic competition
C) oligopoly
D) monopoly
E) perfect competition and monopolistic competition
Skill: Level 1: Definition
Section: Checkpoint 14.1
Author: TS
AACSB: Reflective thinking
17) A monopoly occurs when
A) each of many firms produces a product that is slightly different from that of the other firms.
B) one firm sells a good that has no close substitutes and a barrier blocks entry for other firms.
C) there are many firms producing the same product.
D) a few firms control the market.
E) one firm is larger than the many other firms that make an identical product.
Skill: Level 1: Definition
Section: Checkpoint 14.1
Author: WM
AACSB: Reflective thinking
18) In which market structure does one firm sell a good or service with no close substitutes and
there is a barrier blocking the entry of new firms?
A) only monopoly
B) only oligopoly
C) perfect competition
D) monopolistic competition
E) either monopoly or oligopoly
Skill: Level 1: Definition
Section: Checkpoint 14.1
Author: PH
AACSB: Reflective thinking
7
Copyright © 2011 Pearson Education, Inc.
19) When one firm sells a good or service that has no close substitutes and a barrier blocks the
entry of new firms, what type of market is this?
A) perfect competition
B) only monopoly
C) oligopoly
D) only monopolistic competition
E) either monopoly or monopolistic competition
Skill: Level 1: Definition
Section: Checkpoint 14.1
Author: JC
AACSB: Reflective thinking
20) ________ a large number of firms competing by making similar but slightly different
products.
A) Monopoly requires
B) Perfect competition requires
C) Monopolistic competition requires
D) Oligopoly requires
E) Both perfect competition and monopolistic competition require
Skill: Level 1: Definition
Section: Checkpoint 14.1
Author: JC
AACSB: Reflective thinking
21) A market is classified as monopolistically competitive when
A) there is a barrier that blocks entry by other firms.
B) a small number of firms compete.
C) many firms produce the same product.
D) many firms produce a slightly differentiated product.
E) there is one firm that sells a good or service with no close substitutes.
Skill: Level 1: Definition
Section: Checkpoint 14.1
Author: WM
AACSB: Reflective thinking
8
Copyright © 2011 Pearson Education, Inc.
22) In which market structure is there a large number of firms producing slightly differentiated
products?
A) monopoly
B) oligopoly
C) only perfect competition
D) only monopolistic competition
E) either perfect competition or monopolistic competition
Skill: Level 1: Definition
Section: Checkpoint 14.1
Author: PH
AACSB: Reflective thinking
23) A market is classified as an oligopoly when
A) a few firms compete.
B) many firms produce a slightly differentiated product.
C) no matter how many firms are in the market, a barrier blocks entry by other new firms.
D) many firms produce the same product.
E) only one firm sells a product with no close substitutes.
Skill: Level 1: Definition
Section: Checkpoint 14.1
Author: WM
AACSB: Reflective thinking
24) Which of the following market types has only a few competing firms?
A) perfect competition
B) monopolistic competition
C) oligopoly
D) monopoly
E) perfect competition and monopolistic competition
Skill: Level 1: Definition
Section: Checkpoint 14.1
Author: TS
AACSB: Reflective thinking
9
Copyright © 2011 Pearson Education, Inc.
25) In which market structure are there a small number of firms competing?
A) only monopoly
B) only oligopoly
C) perfect competition
D) monopolistic competition
E) either monopoly or oligopoly
Skill: Level 1: Definition
Section: Checkpoint 14.1
Author: PH
AACSB: Reflective thinking
26) A market is ________ when a small number of firms compete.
A) a monopoly
B) perfectly competitive
C) monopolistically competitive
D) an oligopoly
E) either monopolistically competitive or an oligopoly
Skill: Level 1: Definition
Section: Checkpoint 14.1
Author: JC
AACSB: Reflective thinking
27) The firm's over-riding objective is to
A) earn a normal profit.
B) maximize normal profit.
C) maximize economic profit.
D) maximize total revenue.
E) avoid an economic loss.
Skill: Level 1: Definition
Section: Checkpoint 14.1
Author: WM
AACSB: Reflective thinking
10
Copyright © 2011 Pearson Education, Inc.
28) Normal profit is
A) the same thing as economic profit.
B) the return to entrepreneurship.
C) total revenue minus the total opportunity cost of production.
D) the point of profit when total revenue is maximized.
E) part of the firm's total revenue.
Skill: Level 1: Definition
Section: Checkpoint 14.1
Author: WM
AACSB: Reflective thinking
29) In a perfectly competitive market, the type of decision a firm has to make is different in the
short run than in the long run. Which of the following is an example of a perfectly competitive
firm's short-run decision?
A) the profit-maximizing level of output
B) how much to spend on advertising and sales promotion
C) what price to charge buyers for the product
D) whether or not to enter or exit an industry
E) whether or not to change its plant size
Skill: Level 3: Using models
Section: Checkpoint 14.1
Author: TS
AACSB: Reflective thinking
30) To maximize its profit, in the short run a perfectly competitive firm decides
A) what price to charge for its product.
B) what quantity of output to produce.
C) whether to exit the market.
D) whether to increase the size of its plant.
E) how much advertising it should undertake.
Skill: Level 3: Using models
Section: Checkpoint 14.1
Author: CD
AACSB: Reflective thinking
11
Copyright © 2011 Pearson Education, Inc.
31) A perfectly competitive firm can
A) sell all of its output at the prevailing market price.
B) set a higher price to customers who are willing to pay more.
C) raise its price in order to increase its total revenue.
D) sell additional output only by lowering its price.
E) usually not sell all the output it produces, but still "over-produces" because there are some
periods when it can sell the extra output at very profitable prices.
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: SA
AACSB: Reflective thinking
32) In a perfectly competitive market, one farmer's barley is
A) completely different from another farmer's barley.
B) a perfect substitute for another farmer's barley.
C) a monopolized product in that farmer's local market.
D) a monopolized product in the national market.
E) slightly different from another farmer's barley.
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: JC
AACSB: Reflective thinking
33) A firm in perfect competition is a price taker because
A) there are no good substitutes for its good.
B) many other firms produce identical products.
C) it is very large.
D) its demand curves are downward sloping.
E) it's demand curve is vertical at the profit-maximizing quantity.
Skill: Level 3: Using models
Section: Checkpoint 14.1
Author: SB
AACSB: Reflective thinking
12
Copyright © 2011 Pearson Education, Inc.
34) The price charged by a perfectly competitive firm is
A) the same as the market price.
B) different than the price charged by competing firms.
C) lower the more the firm produces.
D) higher the more the firm produces.
E) indeterminate.
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: SA
AACSB: Reflective thinking
35) For a perfectly competitive firm, the price of its good is equal to the firm's marginal revenue
because
A) information about price changes is hard to come by for small sellers.
B) price and marginal revenue are the same economic concepts.
C) individual perfectly competitive firms cannot influence the market price by changing their
output.
D) the firm's total revenue cannot be changed by anything the firms can do.
E) there are only a small number of firms in the market.
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: SA
AACSB: Analytical reasoning
36) A large number of sellers all selling an identical product implies which of the following?
A) market chaos
B) the inability of any seller to change the price of the product
C) large losses incurred by all sellers
D) horizontal market supply curves
E) vertical market supply curves
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: TS
AACSB: Reflective thinking
13
Copyright © 2011 Pearson Education, Inc.
37) A firm that is a price taker faces
A) an elastic supply curve.
B) an inelastic supply curve.
C) a perfectly elastic demand curve.
D) a perfectly inelastic demand curve.
E) an elastic but not perfectly elastic demand curve.
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: CD
AACSB: Reflective thinking
38) Suppose Pat's Paints is a perfectly competitive firm. If Pat's Paints' marginal revenue equals
$5 per can, and Pat decides to sell 100 cans of paint, Pat's total revenue equals
A) $5.
B) $100.
C) $500.
D) $20.
E) Information on the price of a can of paint is needed to answer the question.
Skill: Level 3: Using models
Section: Checkpoint 14.1
Author: CD
AACSB: Analytical reasoning
39) If demand for a seller's product is perfectly elastic, which of the following is true?
i. The firm will sell no output if it sets the price its product above the market price.
ii. There are many perfect substitutes for the seller's product.
iii. The firm will sell no output if it sets the price its product below the market price.
A) i only
B) ii only
C) iii only
D) i and ii
E) ii and iii
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: TS
AACSB: Reflective thinking
14
Copyright © 2011 Pearson Education, Inc.
40) A perfectly competitive firm's demand curve is horizontal because
i. the firm is so small, relative to the market, that it cannot affect the market price.
ii. there are many perfect substitutes for its product.
iii. the firm cannot sell any output at a price higher than the market price.
A) ii only
B) i and ii
C) iii only
D) i and iii
E) i, ii, and iii
Skill: Level 3: Using models
Section: Checkpoint 14.1
Author: SB
AACSB: Reflective thinking
41) Cynthia is an Oklahoma wheat farmer. The demand for her wheat is
A) perfectly inelastic.
B) inelastic but not perfectly inelastic.
C) elastic but not perfectly elastic.
D) perfectly elastic.
E) unit elastic.
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: JC
AACSB: Reflective thinking
42) Because perfectly competitive firms are price takers, each firm faces a demand that is
A) perfectly inelastic.
B) perfectly elastic.
C) highly inelastic but never is it perfectly inelastic.
D) unit elastic.
E) highly elastic but never is it perfectly elastic.
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: WM
AACSB: Reflective thinking
15
Copyright © 2011 Pearson Education, Inc.
43) If a perfectly competitive firm raised the price of its product,
A) its profits would increase.
B) the quantity of output it sells decreases to zero.
C) rival firms will follow suit and raise their prices also.
D) the firm will be forced to advertise more.
E) its total revenue would rise but its total cost would rise by more.
Skill: Level 3: Using models
Section: Checkpoint 14.1
Author: TS
AACSB: Reflective thinking
44) If the wheat industry is perfectly competitive with a market price of $4 per bushel and
Farmer Brown charged $5 per bushel, how many bushels would Farmer Brown sell?
A) some, but fewer than he would at a price of $4
B) more than he would at a price of $4
C) just as many as he would at a price of $4
D) none
E) More information is needed about the prices charged by the other wheat farmers.
Skill: Level 4: Applying models
Section: Checkpoint 14.1
Author: SB
AACSB: Reflective thinking
45) How does the demand for any one seller's product in perfect competition compare to the
market demand for that product?
A) They are identical.
B) The demand for any one seller is proportionally smaller but otherwise identical to the market
demand.
C) The demand for any one seller's product is perfectly elastic while the market demand curve is
downward sloping.
D) There is no demand for any one seller's competitively sold product.
E) The demand for any one seller's product is not perfectly elastic while the market demand is
perfectly elastic.
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: TS
AACSB: Reflective thinking
16
Copyright © 2011 Pearson Education, Inc.
46) For the perfectly competitive broccoli producers in California, the market demand curve for
broccoli is
A) a horizontal line.
B) downward sloping.
C) nonexistent.
D) upward sloping.
E) the same as the demand curve each firm faces.
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: JC
AACSB: Reflective thinking
47) The market demand curve in a perfectly competitive market is ________ and the demand
curve for a perfectly competitive firm's output is ________.
A) downward sloping; downward sloping
B) downward sloping; horizontal
C) horizontal; downward sloping
D) horizontal; horizontal
E) downward sloping; upward sloping
Skill: Level 1: Definition
Section: Checkpoint 14.1
Author: SA
AACSB: Reflective thinking
48) Elsie is a perfectly competitive dairy farmer. If the market price of milk falls to $2.20 a
gallon from $2.40 a gallon, Elsie
A) can sell as much milk as she wants at $2.20 a gallon.
B) will have to charge some customers $2.40 a gallon to stay in business.
C) will produce the same amount of milk at both prices.
D) can sell more at the lower price because the quantity demanded is higher at lower prices.
E) will be able to charge her initial customers $2.40 a gallon.
Skill: Level 3: Using models
Section: Checkpoint 14.1
Author: SA
AACSB: Reflective thinking
17
Copyright © 2011 Pearson Education, Inc.
49) For a perfectly competitive palm tree nursery in South Carolina, the total revenue curve is
A) downward sloping.
B) a horizontal line.
C) upward sloping.
D) U-shaped.
E) undefined because the firm is perfectly competitive.
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: JC
AACSB: Reflective thinking
50) If the market price of a product is $14 and all sellers are price takers, then which of the
following is correct?
A) Each seller's total revenue line is graphed as an upward-sloping straight line.
B) The demand curve for each seller's product is a downward-sloping straight line.
C) Each seller can earn more total revenue by raising the price he or she charges above $14.
D) The demand curve for each seller's product is a downward-sloping but not necessarily a
straight line.
E) Each seller's total revenue is graphed as an upside-down U-shaped curve.
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: TS
AACSB: Reflective thinking
51) Marginal revenue is
A) the change in total revenue from a one-unit increase in the quantity sold.
B) another name for total revenue.
C) the change in total cost from producing an additional unit of output.
D) the economic profit from producing an additional unit of output.
E) less than price for a perfectly competitive firm.
Skill: Level 1: Definition
Section: Checkpoint 14.1
Author: PH
AACSB: Reflective thinking
18
Copyright © 2011 Pearson Education, Inc.
52) A firm's marginal revenue is
A) the change in total revenue that results from a one-unit increase in the quantity sold.
B) total revenue minus total cost.
C) the change in total revenue minus the change in total cost.
D) the change in total revenue that results from an increase in the demand for the good or
service.
E) less than the market price for a perfectly competitive firm.
Skill: Level 1: Definition
Section: Checkpoint 14.1
Author: JC
AACSB: Reflective thinking
53) For a perfectly competitive firm, marginal revenue is
A) less than the price.
B) greater than the price.
C) equal to the price.
D) equal to the change in profit from selling one more unit.
E) undefined because the firm's demand curve is horizontal.
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: WM
AACSB: Reflective thinking
54) In perfect competition, marginal revenue
A) increases as more is sold.
B) decreases as more is sold.
C) is equal to the market price.
D) is zero.
E) is always greater than marginal cost.
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: SB
AACSB: Reflective thinking
19
Copyright © 2011 Pearson Education, Inc.
55) For a perfectly competitive firm, the market price of a good is
A) a given which the firm cannot change.
B) determined by the firm in order to maximize its profit.
C) equal to the firm's marginal revenue.
D) Answer A and answer B are correct.
E) Answer A and answer C are correct.
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: SA
AACSB: Reflective thinking
56) The marginal revenue curve for a perfectly competitive firm is
A) horizontal.
B) vertical.
C) upward sloping.
D) downward sloping.
E) a straight line coming out of the origin with a 45 degree slope.
Skill: Level 3: Using models
Section: Checkpoint 14.1
Author: SB
AACSB: Reflective thinking
20
Copyright © 2011 Pearson Education, Inc.
57) In the above, a marginal revenue curve for a perfectly competitive firm is shown in Figure
________.
A) W
B) X
C) Y
D) Z
E) X and Figure Z
Skill: Level 3: Using models
Section: Checkpoint 14.1
Author: CD
AACSB: Analytical reasoning
21
Copyright © 2011 Pearson Education, Inc.
58) As a perfectly competitive firm produces more and more of a good, its economic profit
A) constantly increases.
B) constantly decreases.
C) first decreases, then increases.
D) first increases, then decreases.
E) does not change.
Skill: Level 3: Using models
Section: Checkpoint 14.1
Author: SB
AACSB: Analytical reasoning
59) As a perfectly competitive firm's output increases, its total revenue ________ and its total
cost ________.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
E) does not change; increases
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: SB
AACSB: Reflective thinking
60) In a perfectly competitive industry, when a firm is producing so that its total revenue equals
its total cost, the firm is
A) earning an economic profit.
B) incurring an economic loss.
C) earning zero economic profit, that is, earning a normal profit.
D) definitely not maximizing its profit.
E) None of the above answers is correct because the relationship between total revenue and total
cost has nothing to do with the firm's profit or loss.
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: PH
AACSB: Reflective thinking
22
Copyright © 2011 Pearson Education, Inc.
61) For a syrup producer in central Vermont, profit is maximized at the level of output for which
total
A) revenue exceeds total cost by the largest amount.
B) revenue exceeds total cost by the smallest amount.
C) revenue is maximized.
D) cost is minimized.
E) revenue equals total cost.
Skill: Level 3: Using models
Section: Checkpoint 14.1
Author: JC
AACSB: Reflective thinking
62) A firm maximizes its profit by producing the amount of output such that
A) marginal revenue equals marginal cost.
B) marginal revenue exceeds marginal cost by some amount.
C) marginal revenue is maximized.
D) marginal cost is minimized.
E) marginal revenue exceeds marginal cost by the maximum amount possible.
Skill: Level 1: Definition
Section: Checkpoint 14.1
Author: JC
AACSB: Reflective thinking
63) For a perfectly competitive firm, profit maximization occurs when output is such that
A) total revenue (TR) is maximized.
B) total cost (TC) is minimized.
C) marginal revenue (MR) = marginal cost (MC).
D) average total cost (ATC) is minimized.
E) total revenue (TR) equals total cost (TC).
Skill: Level 3: Using models
Section: Checkpoint 14.1
Author: SB
AACSB: Reflective thinking
23
Copyright © 2011 Pearson Education, Inc.
64) A perfectly competitive firm will maximize profit when the quantity produced is such that
the
A) firm's total revenue is equal to total cost.
B) firm's marginal revenue is equal to the price.
C) firm's marginal revenue is equal to its marginal cost.
D) price exceeds the firm's marginal cost by as much as possible.
E) firm's marginal revenue exceeds its marginal cost by the maximum amount possible.
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: SA
AACSB: Reflective thinking
65) For a perfectly competitive firm, profit is maximized at the output level where
i. total revenue exceeds total cost by the largest amount.
ii. marginal revenue equals marginal cost.
iii. price equals marginal cost.
A) i only
B) ii only
C) ii and iii
D) i and ii
E) i, ii, and iii
Skill: Level 3: Using models
Section: Checkpoint 14.1
Author: SB
AACSB: Reflective thinking
66) If a perfectly competitive wheat farmer is maximizing its profit and then increases its output,
the farmer's
A) total revenue increases, but total cost rises by more so that the farmer's total profit decreases.
B) total revenue decreases and total cost increases, both thereby decreasing the farmer's total
profit.
C) total revenue does not change but total cost increases, thereby decreasing the farmer's total
profit.
D) marginal revenue increases, but so does marginal cost so that the farmer's total profit
increases.
E) total revenue and total cost both rise but the effect on the farmer's total profit is uncertain.
Skill: Level 4: Applying models
Section: Checkpoint 14.1
Author: MR
AACSB: Reflective thinking
24
Copyright © 2011 Pearson Education, Inc.
67) To increase its profit, a perfectly competitive firm will produce more output when
A) price is greater than average fixed cost.
B) price is greater than marginal cost.
C) marginal cost is less than average total cost.
D) average variable cost is greater than average fixed cost.
E) price is greater than average variable cost.
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: TS
AACSB: Reflective thinking
68) In a perfectly competitive market, the market price is $23. At the current level of output, a
firm has a marginal cost of $28. What should the firm do?
A) produce a larger output to earn more profit
B) nothing, it is currently maximizing profit
C) produce less output to earn more profit
D) shut down
E) raise the price of its product
Skill: Level 3: Using models
Section: Checkpoint 14.1
Author: TS
AACSB: Reflective thinking
69) A perfectly competitive firm is producing at the quantity where marginal cost is $6 and
average total cost is $4. The price of the good is $5. To maximize its profit, this firm should
A) raise its price.
B) lower its price.
C) increase its output.
D) decrease its output.
E) increase the price it charges for its product.
Skill: Level 3: Using models
Section: Checkpoint 14.1
Author: SB
AACSB: Reflective thinking
25
Copyright © 2011 Pearson Education, Inc.
70) Suppose that a perfectly competitive firm's marginal revenue equals $12 when it sells 10
units of output. If the marginal cost of producing the 10th unit is $14, to maximize its profit the
firm should
A) do nothing because it is already maximizing its profit.
B) decrease its production.
C) increase its production.
D) shut down.
E) increase the price it charges for its product.
Skill: Level 3: Using models
Section: Checkpoint 14.1
Author: CD
AACSB: Reflective thinking
71) Shama is producing candles in a perfectly competitive market. When she produces 500
candles, her total cost is $250. If she produces one additional candle, her total cost increases to
$260. In order to maximize her profit, she should produce the additional candle
A) if the market price for a candle is $12.
B) only if the market price exceeds $260 for a candle.
C) only if the market price exceeds $250 for a candle.
D) if the market price for a candle exceeds $0.50.
E) if her price exceeds her average total cost.
Skill: Level 3: Using models
Section: Checkpoint 14.1
Author: SA
AACSB: Analytical reasoning
72) Jennifer's Bakery Shop produces baked goods in a perfectly competitive market. If Jennifer
decides to produce her 100th batch of cookies, the marginal cost is $120. She can sell this batch
of cookies at a market price of $110. To maximize her profit, Jennifer should
A) not produce this additional batch.
B) produce this batch of cookies because they will help lower her average fixed cost.
C) charge $120 for this batch.
D) shut down.
E) produce this batch of cookies because their MR exceeds their MC.
Skill: Level 3: Using models
Section: Checkpoint 14.1
Author: SA
AACSB: Reflective thinking
26
Copyright © 2011 Pearson Education, Inc.
73) Henry, a perfectly competitive lime grower in Southern California, notices that the market
price of limes is greater than his marginal cost. What should Henry do?
A) expand his output to increase profits
B) shut down and incur a loss equal to his total fixed cost
C) advertise his limes to be able to sell more output
D) look for the output level where marginal revenue minus marginal cost is maximized
E) shut down and earn no profit but also incur no loss
Skill: Level 3: Using models
Section: Checkpoint 14.1
Author: TS
AACSB: Reflective thinking
74) Jerry's Jellybean Factory produces 2,000 pounds of jellybeans per month and sells them in a
perfectly competitive market. The marginal cost is $3 per pound, the average variable cost is $2
per pound, and the beans sell for $4 per pound. Jerry
A) is maximizing profit.
B) is incurring an economic loss and should shut down.
C) could increase his profit by producing more beans.
D) could increase his profit by producing fewer beans.
E) could increase his profit by raising the price of his beans.
Skill: Level 3: Using models
Section: Checkpoint 14.1
Author: SB
AACSB: Analytical reasoning
75) If a perfectly competitive firm's marginal revenue is greater than its marginal cost, as it
increases its output, its profit ________ and the price it can charge for its product ________.
A) increases; does not change
B) decreases; falls
C) increases; falls
D) decreases; rises
E) decreases; does not change
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: SB
AACSB: Reflective thinking
27
Copyright © 2011 Pearson Education, Inc.
76) Mark owns a cattle ranch near Hugo, Oklahoma. Mark is currently producing beef at an
output level where marginal revenue exceeds marginal cost. In order to maximize his profit,
Mark should
A) not change his output.
B) decrease his output.
C) increase his output.
D) shut down his ranch.
E) probably change his output, but more information is needed to determine if he should
increase, decrease, or not change it.
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: JC
AACSB: Reflective thinking
77) During the winter, theme parks in Orlando close earlier than in the summer. The reason the
theme parks close early during the winter is because during that season the marginal revenue
from staying open later is ________ the marginal cost.
A) greater than
B) less than
C) equal to
D) zero compared to
E) not comparable to
Skill: Level 3: Using models
Section: Checkpoint 14.1
Author: JC
AACSB: Reflective thinking
78) A perfectly competitive firm is earning an economic profit when total fixed costs increase.
Assuming the firm does not shut down, in the short run the firm will
A) charge a higher price.
B) produce more output so the extra revenue will cover the increased costs.
C) produce less output to decrease total costs.
D) continue producing the same quantity as before but will earn less economic profit.
E) continue producing the same quantity as before and continue earning the same economic
profit as before.
Skill: Level 4: Applying models
Section: Checkpoint 14.1
Author: TS
AACSB: Analytical reasoning
28
Copyright © 2011 Pearson Education, Inc.
79) The above table has the total revenue and total cost schedule for Omar, a perfectly
competitive grower of rutabagas. When Omar produces 2 bushels of rutabagas, his total profit
equals
A) $0.
B) $20.
C) $28.
D) -$8.
E) $48.
Skill: Level 3: Using models
Section: Checkpoint 14.1
Author: CD
AACSB: Analytical reasoning
80) The above table has the total revenue and total cost schedule for Omar, a perfectly
competitive grower of rutabagas. Omar's total profit is maximized when he produces ________
bushels of rutabagas.
A) 3
B) 5
C) 6
D) 8
E) 7
Skill: Level 3: Using models
Section: Checkpoint 14.1
Author: CD
AACSB: Analytical reasoning
29
Copyright © 2011 Pearson Education, Inc.
81) The above table has the total revenue and total cost schedule for Omar, a perfectly
competitive grower of rutabagas. When Omar maximizes his profit, Omar's profit equals
A) $80.
B) $11.
C) $30.
D) $16.
E) $105.
Skill: Level 3: Using models
Section: Checkpoint 14.1
Author: CD
AACSB: Analytical reasoning
82) The above figure illustrates a perfectly competitive firm. Curve A represents the
A) MR curve.
B) ATC curve.
C) MC curve.
D) AVC curve.
E) AFC curve.
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: MR
AACSB: Reflective thinking
30
Copyright © 2011 Pearson Education, Inc.
83) The above figure illustrates a perfectly competitive firm. Curve B represents the
A) MR curve.
B) ATC curve.
C) MC curve.
D) AVC curve.
E) AFC curve.
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: MR
AACSB: Reflective thinking
84) The above figure illustrates a perfectly competitive firm. Curve C represents the
A) MR curve.
B) ATC curve.
C) MC curve.
D) market demand curve.
E) AFC curve.
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: MR
AACSB: Reflective thinking
31
Copyright © 2011 Pearson Education, Inc.
85) The above figure illustrates a perfectly competitive firm. If the market price is $40 a unit, to
maximize its profit (or minimize its loss) the firm should
A) shut down.
B) produce more than 10 and less than 30 units.
C) produce 30 units.
D) produce more than 30 units and less than 40 units..
E) produce 40 units.
Skill: Level 3: Using models
Section: Checkpoint 14.1
Author: SA
AACSB: Analytical reasoning
86) The above figure illustrates a perfectly competitive firm. If the market price is $10 a unit, to
maximize its profit (or minimize its loss) the firm should
A) shut down.
B) produce between 10 and less than 30 units.
C) produce 30 units.
D) produce more than 30 units and less than 40 units.
E) produce 40 units.
Skill: Level 3: Using models
Section: Checkpoint 14.1
Author: SA
AACSB: Analytical reasoning
32
Copyright © 2011 Pearson Education, Inc.
87) If a firm shuts down, it
A) earns zero economic profit.
B) incurs an economic loss equal to its total variable cost.
C) incurs an economic loss equal to its total fixed cost.
D) earns a normal profit.
E) might earn an economic profit, a normal profit, or incur an economic loss.
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: SB
AACSB: Reflective thinking
88) If a struggling perfectly competitive furniture store in Detroit shuts down, it incurs an
economic loss equal to its
A) marginal cost.
B) total fixed cost.
C) total variable cost.
D) average variable cost.
E) average total cost.
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: JC
AACSB: Reflective thinking
89) A perfectly competitive firm will shutdown when the price is just below the minimum point
on the
A) average fixed cost curve.
B) average total cost curve.
C) marginal cost curve.
D) average variable cost curve.
E) marginal revenue curve.
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: JC
AACSB: Reflective thinking
33
Copyright © 2011 Pearson Education, Inc.
90) Under which of the following conditions will a profit-maximizing perfectly competitive firm
shut down in the short run?
A) when it is earning a normal profit
B) whenever its marginal cost is less than its marginal revenue
C) when the price is less than its minimum average variable cost
D) whenever its total cost is greater than its total revenue
E) when the price is less than its minimum average total cost
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: TS
AACSB: Reflective thinking
91) A perfectly competitive firm will continue to operate in the short run when the market price
is below its average total cost if the
A) marginal revenue is greater than marginal cost.
B) price is at least equal to the minimum average variable cost.
C) total fixed costs are less than total revenue.
D) marginal cost is minimized.
E) price is also less than the minimum average variable cost.
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: TS
AACSB: Reflective thinking
92) If the price is less than a perfectly competitive firm's minimum average variable cost, the
firm
A) earns an economic profit.
B) operates and incurs an economic loss equal to total fixed cost.
C) operates and incurs an economic loss equal to average variable cost.
D) shuts down and incurs an economic loss equal to total fixed cost.
E) shuts down and incurs an economic loss equal to average variable cost.
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: CD
AACSB: Reflective thinking
34
Copyright © 2011 Pearson Education, Inc.
93) Which of the following is true if a firm shuts down?
i. The price is less than minimum average variable cost.
ii. The firm is able to avoid an economic loss.
iii. The firm incurs a loss equal to its total variable cost.
A) i only
B) i and ii
C) i and iii
D) iii only
E) ii only
Skill: Level 3: Using models
Section: Checkpoint 14.1
Author: CD
AACSB: Reflective thinking
94) If the market price is $50 for a unit of a good produced in a perfectly competitive market and
the firm's minimum average variable cost is $52, then to maximize its profit (or minimize its
loss) the firm should
A) definitely produce the unit.
B) shut down.
C) not produce the unit but remain open.
D) not produce the unit. Whether the firm should shut down or remain open cannot be
determined without more information.
E) produce the unit only if the price exceeds the average fixed cost.
Skill: Level 3: Using models
Section: Checkpoint 14.1
Author: SA
AACSB: Analytical reasoning
95) Suppose a perfectly competitive firm's minimum average variable cost is $3 when it
produces 50. If the price is $2 and the firm's marginal cost is $2, the firm should
A) continue to produce, but produce more than 50.
B) continue to produce 50.
C) continue to produce, but produce less than 50.
D) shut down.
E) continue to operate, but to determine the amount of production needs more information than is
given.
Skill: Level 3: Using models
Section: Checkpoint 14.1
Author: MR
AACSB: Analytical reasoning
35
Copyright © 2011 Pearson Education, Inc.
96) Under what conditions would a perfectly competitive cotton farmer who is incurring an
economic loss temporarily stay in business?
A) if the total revenue exceeds the total fixed cost
B) if the total revenue exceeds the total variable cost
C) if the total revenue is positive
D) if the total revenue is increasing
E) if the marginal revenue exceeds the price.
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: JC
AACSB: Reflective thinking
97) The largest loss a profit-maximizing perfectly competitive firm can incur in the short run
equals its
A) average variable cost multiplied by output.
B) total fixed cost.
C) marginal cost multiplied by the number of units produced.
D) average total cost multiplied by the number of units produced.
E) total variable cost.
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: TS
AACSB: Reflective thinking
98) The rutabaga market is perfectly competitive and the price of a ton of rutabagas rises. As a
result, Rudy, a rutabaga farmer, will
A) decrease his output of rutabagas.
B) not change his output of rutabagas because Rudy's firm is a price taker.
C) increase his output of rutabagas.
D) at first decrease and then increase his output of rutabagas.
E) probably change his output of rutabagas, but more information is needed about the change in
the marginal revenue of a ton of rutabagas.
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: WM
AACSB: Reflective thinking
36
Copyright © 2011 Pearson Education, Inc.
99) A perfectly competitive firm's short-run supply curve is
A) horizontal at the market price.
B) its total cost curve above the AVC.
C) its marginal cost curve below the marginal revenue curve.
D) its marginal cost curve above the AVC curve.
E) its marginal revenue curve below the ATC curve.
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: WM
AACSB: Reflective thinking
100) The firm's supply curve is its
A) marginal cost curve above the average variable cost curve.
B) marginal cost curve below the average variable cost curve.
C) average variable cost curve above the marginal cost curve.
D) average total cost curve above the marginal cost curve.
E) marginal revenue curve above the average total cost curve.
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: SB
AACSB: Reflective thinking
101) Which of the following will increase a perfectly competitive seller's short-run supply and
shift the firm's short-run supply curve rightward?
A) an increase in the market price
B) a decrease in average fixed costs
C) a decrease in marginal cost
D) Both answers A and B are correct.
E) Both answers A and C are correct.
Skill: Level 3: Using models
Section: Checkpoint 14.1
Author: TS
AACSB: Reflective thinking
37
Copyright © 2011 Pearson Education, Inc.
102) The four market types are
A) perfect competition, imperfect competition, monopoly, and oligopoly.
B) oligopoly, monopsony, monopoly, and imperfect competition.
C) perfect competition, monopoly, monopolistic competition, and oligopoly.
D) oligopoly, oligopolistic competition, monopoly, and perfect competition.
E) perfect competition, imperfect competition, monopoly, and duopoly.
Skill: Level 1: Definition
Section: Checkpoint 14.1
Author: STUDY GUIDE
AACSB: Reflective thinking
103) A requirement of perfect competition is that
i. many firms sell an identical product to many buyers.
ii. there are no restrictions on entry into (or exit from) the market, and established firms have no
advantage over new firms
iii. sellers and buyers are well informed about prices.
A) i only
B) i and ii
C) iii only
D) i and iii
E) i, ii, and iii
Skill: Level 1: Definition
Section: Checkpoint 14.1
Author: STUDY GUIDE
AACSB: Reflective thinking
104) A perfectly competitive firm is a price taker because
A) many other firms produce the same product.
B) only one firm produces the product.
C) many firms produce a slightly differentiated product.
D) a few firms compete.
E) it faces a vertical demand curve.
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: STUDY GUIDE
AACSB: Reflective thinking
38
Copyright © 2011 Pearson Education, Inc.
105) The demand curve faced by a perfectly competitive firm is
A) horizontal.
B) vertical.
C) downward sloping.
D) upward sloping.
E) U-shaped.
Skill: Level 1: Definition
Section: Checkpoint 14.1
Author: STUDY GUIDE
AACSB: Reflective thinking
106) For a perfectly competitive corn grower in Nebraska, the marginal revenue curve is
A) downward sloping.
B) the same as its demand curve.
C) upward sloping.
D) U-shaped.
E) vertical at the profit maximizing quantity of production.
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: STUDY GUIDE
AACSB: Reflective thinking
107) A perfectly competitive firm maximizes its profit by producing at the point where
A) total revenue equals total cost.
B) marginal revenue is equal to marginal cost.
C) total revenue is equal to marginal revenue.
D) total cost is at its minimum.
E) total revenue is at its maximum.
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: STUDY GUIDE
AACSB: Reflective thinking
39
Copyright © 2011 Pearson Education, Inc.
108) If the market price is lower than a perfectly competitive firm's average total cost, the firm
will
A) immediately shut down.
B) continue to produce if the price exceeds the average fixed cost.
C) continue to produce if the price exceeds the average variable cost.
D) shut down if the price exceeds the average fixed cost.
E) shut down if the price is less than the average fixed cost.
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: STUDY GUIDE
AACSB: Reflective thinking
109) One part of a perfectly competitive trout farm's supply curve is its
A) marginal cost curve below the shutdown point.
B) entire marginal cost curve.
C) marginal cost curve above the shutdown point.
D) average variable cost curve above the shutdown point.
E) marginal revenue curve above the demand curve.
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: STUDY GUIDE
AACSB: Analytical reasoning
14.2 Output, Price, and Profit in the Short Run
1) The market supply in the short run for the perfectly competitive industry is
A) the same as each producer's supply.
B) the sum of the supply schedules of all firms.
C) divided up according to each firm's selling price.
D) set at the maximum price a buyer will pay for one unit.
E) equal to the average of each firm's supply schedule.
Skill: Level 1: Definition
Section: Checkpoint 14.2
Author: WM
AACSB: Reflective thinking
40
Copyright © 2011 Pearson Education, Inc.
2) If there are 1,000 identical rice farmers who are each willing to supply 200 bushels of rice at
$2 per bushel, what price and quantity combination is a point on the market supply curve for
rice?
A) $2 and 200 bushels
B) $2 and 200,000 bushels
C) $2,000 and 200,000 bushels
D) $2,000 and 1,000 bushels
E) $2 and 1,000 farmers
Skill: Level 3: Using models
Section: Checkpoint 14.2
Author: SB
AACSB: Analytical reasoning
3) In the short run, a perfectly competitive firm ________ earn an economic profit and ________
incur an economic loss.
A) might; will never
B) will never; might
C) might; might
D) will never; will never
E) will definitely; will never
Skill: Level 2: Using definitions
Section: Checkpoint 14.2
Author: SA
AACSB: Reflective thinking
4) In the short run, a perfectly competitive firm
A) can earn only a normal profit.
B) can possibly earn an economic profit or possibly incur an economic loss.
C) produces the level of output that sets the average total cost equal to the market price.
D) can vary all its inputs.
E) can change only its fixed inputs.
Skill: Level 2: Using definitions
Section: Checkpoint 14.2
Author: SA
AACSB: Reflective thinking
41
Copyright © 2011 Pearson Education, Inc.
5) In the short run, a perfectly competitive firm can experience which of the following?
i. an economic profit
ii. an economic loss but it continues to stay open
iii. an economic loss equal to its total fixed cost when it shuts down
A) only i
B) i and ii
C) i and iii
D) ii and iii
E) i, ii, and iii
Skill: Level 2: Using definitions
Section: Checkpoint 14.2
Author: TS
AACSB: Reflective thinking
6) If a perfectly competitive seller is maximizing profit and is earning zero economic profit,
which of the following will this seller do?
A) go to work in the next-best earning opportunity
B) shut down, with a loss equal to total fixed cost
C) continue at the current output, earning a normal profit
D) increase production in order to earn an economic profit
E) remain open but decrease production in order to earn an economic profit
Skill: Level 3: Using models
Section: Checkpoint 14.2
Author: TS
AACSB: Reflective thinking
7) If a perfectly competitive firm finds that the price exceeds its ATC, then the firm
A) will raise its price to increase its economic profit.
B) will lower its price to increase its economic profit.
C) is earning an economic profit.
D) is incurring an economic loss.
E) is earning zero economic profit.
Skill: Level 2: Using definitions
Section: Checkpoint 14.2
Author: WM
AACSB: Reflective thinking
42
Copyright © 2011 Pearson Education, Inc.
8) For a perfectly competitive sugar producer in Haiti, a short-run economic profit will occur if
the price of each ton of sugar sold is
A) greater than the average total cost of producing sugar.
B) equal to the average total cost of producing sugar.
C) less than the average total cost of producing sugar.
D) rising as more sugar is sold.
E) greater than the marginal revenue of each ton of sugar.
Skill: Level 2: Using definitions
Section: Checkpoint 14.2
Author: JC
AACSB: Reflective thinking
9) If Henry, a perfectly competitive lime grower in Southern California, can sell his limes at a
price greater than his average total cost, Henry will
A) incur an economic loss.
B) suffer an accounting loss.
C) have an incentive to shut down.
D) earn an economic profit.
E) make zero economic profit.
Skill: Level 2: Using definitions
Section: Checkpoint 14.2
Author: TS
AACSB: Reflective thinking
10) If a perfectly competitive firm's average total cost is less than the price, then the firm
A) incurs an economic loss.
B) earns an economic profit.
C) earns a normal profit.
D) earns either a normal profit or an economic profit depending on whether the marginal revenue
is equal to or greater than the price.
E) None of the above answers is correct because the relationship between the price and average
total cost has nothing to do with the firm's profit.
Skill: Level 2: Using definitions
Section: Checkpoint 14.2
Author: SA
AACSB: Reflective thinking
43
Copyright © 2011 Pearson Education, Inc.
11) If the market price is $50 per unit for a good produced in a perfectly competitive market and
the firm's average total cost is $52, then the firm
A) has an economic loss of $2 per unit.
B) has an economic profit of $2 per unit.
C) has a normal profit.
D) has a total economic loss of $52.
E) More information is needed to determine the firm's economic profit or loss per unit.
Skill: Level 3: Using models
Section: Checkpoint 14.2
Author: SA
AACSB: Analytical reasoning
12) Peter's Pencils is a perfectly competitive company producing pencils. Suppose Peter is
producing 1,000 pencils an hour. If the total cost of 1,000 pencils is $500, the market price per
pencil is $2, and the marginal cost is $2, then Peter
A) has an economic profit because marginal revenue is equal to marginal cost at this output
level.
B) should decrease his output to increase his profit.
C) is maximizing his profit and is earning an economic profit.
D) should increase his output to increase his profit.
E) is not maximizing his profit but is earning a normal profit anyway.
Skill: Level 3: Using models
Section: Checkpoint 14.2
Author: SA
AACSB: Analytical reasoning
13) Suppose that marginal revenue for a perfectly competitive firm is $20 . When the firm
produces 10 units, its marginal cost is $20, its average total cost is $22, and its average variable
cost is $17. Then to maximize its profit in the short run, the firm
A) should stay open and incur an economic loss of $20.
B) must increase its output to increase its profit.
C) must decrease its output to increase its profit.
D) should shut down.
E) should not change its production because it is already maximizing its profit and is earning a
normal profit.
Skill: Level 3: Using models
Section: Checkpoint 14.2
Author: CD
AACSB: Analytical reasoning
44
Copyright © 2011 Pearson Education, Inc.
14) A perfectly competitive firm is producing 50 units of output, which it sells at the market
price of $23 per unit. The firm's average total cost is $20. What is the firm's total revenue?
A) $23
B) $150
C) $1,000
D) $1,150
E) $20
Skill: Level 3: Using models
Section: Checkpoint 14.2
Author: TS
AACSB: Analytical reasoning
15) A perfectly competitive firm is producing 50 units of output and selling at the market price
of $23. The firm's average total cost is $20. What is the firm's total cost?
A) $23
B) $150
C) $1,000
D) $1,150
E) $20
Skill: Level 3: Using models
Section: Checkpoint 14.2
Author: TS
AACSB: Analytical reasoning
16) A perfectly competitive firm is producing 50 units of output and selling at the market price
of $23. The firm's average total cost is $20. What is the firm's economic profit?
A) $23
B) $150
C) $1,000
D) $1,150
E) $50
Skill: Level 3: Using models
Section: Checkpoint 14.2
Author: TS
AACSB: Analytical reasoning
45
Copyright © 2011 Pearson Education, Inc.
17) For a perfectly competitive syrup producer whose average total cost curve does not change,
an economic profit could turn into an economic loss if the
A) market demand for syrup decreases.
B) marginal cost curve shifts downward.
C) market demand for syrup does not change.
D) market demand for syrup increases.
E) price of syrup rises.
Skill: Level 3: Using models
Section: Checkpoint 14.2
Author: JC
AACSB: Reflective thinking
18) For a perfectly competitive rancher in Wyoming, if the price does not change, an economic
profit could turn into an economic loss if the
A) average total cost curve shifts downward.
B) average total cost curve does not change.
C) average total cost curve shifts upward.
D) marginal cost curve shifts downward.
E) average fixed cost decreases.
Skill: Level 3: Using models
Section: Checkpoint 14.2
Author: JC
AACSB: Analytical reasoning
46
Copyright © 2011 Pearson Education, Inc.
19) Computer memory chips are produced on wafers, each wafer having many separate chips
that are separated and sold. The above table shows costs for a perfectly competitive producer of
computer memory chips. If the market price of a wafer is $2,400 dollars, how many wafers will
the firm produce?
A) 0
B) 4 or 5
C) 3 or 4
D) 1 or 2
E) 6
Skill: Level 3: Using models
Section: Checkpoint 14.2
Author: PH
AACSB: Analytical reasoning
20) Computer memory chips are produced on wafers, each wafer having many separate chips
that are separated and sold. The above table shows costs for a perfectly competitive producer of
computer memory chips. If the market price of a wafer is $2,400 dollars, the firm is
A) earning a normal profit.
B) earning an economic profit of $12,000 an hour.
C) incurring an economic loss of $2,800 an hour.
D) incurring an economic loss of $2,000 an hour.
E) earning an economic profit of $2,400 an hour.
Skill: Level 3: Using models
Section: Checkpoint 14.2
Author: PH
AACSB: Analytical reasoning
47
Copyright © 2011 Pearson Education, Inc.
21) Computer memory chips are produced on wafers, each wafer having many separate chips
that are separated and sold. The above table shows costs for a perfectly competitive producer of
computer memory chips. This firm will produce as long as the market price of a wafer is above
A) $1,300.
B) $1,400.
C) $7,900.
D) $2,800.
E) $9,800.
Skill: Level 3: Using models
Section: Checkpoint 14.2
Author: PH
AACSB: Analytical reasoning
22) The above figure shows a perfectly competitive firm. If the market price is $15, the firm
A) is incurring an economic loss.
B) is earning an economic profit.
C) is earning a normal profit.
D) will immediately shut down.
E) might shut down but more information is needed about the AVC.
Skill: Level 3: Using models
Section: Checkpoint 14.2
Author: MR
AACSB: Analytical reasoning
48
Copyright © 2011 Pearson Education, Inc.
23) The above figure shows a perfectly competitive firm. If the market price is $10, the firm
A) is incurring an economic loss.
B) is earning an economic profit.
C) is earning a normal profit.
D) will immediately shut down.
E) might shut down but more information is needed about the AVC.
Skill: Level 3: Using models
Section: Checkpoint 14.2
Author: MR
AACSB: Analytical reasoning
24) The above figure shows a perfectly competitive firm. If the market price is $5, the firm
A) might shut down but more information is needed about the AVC.
B) is earning an economic profit.
C) is earning a normal profit.
D) will immediately shut down.
E) will not shut down.
Skill: Level 3: Using models
Section: Checkpoint 14.2
Author: SA
AACSB: Analytical reasoning
49
Copyright © 2011 Pearson Education, Inc.
25) The above figure shows a perfectly competitive firm. If the market price is more than $20 per
unit, the firm
A) will definitely shut down to minimize its losses.
B) will stay open to produce and will earn a normal profit.
C) will stay open to produce and will incur an economic loss.
D) will stay open to produce and will earn an economic profit.
E) might shut down but more information is needed about the fixed cost.
Skill: Level 3: Using models
Section: Checkpoint 14.2
Author: PH
AACSB: Analytical reasoning
26) The above figure shows a perfectly competitive firm. If the market price is $20 per unit, the
firm
A) will definitely shut down to minimize its losses.
B) will stay open to produce and will earn a normal profit.
C) will stay open to produce and will incur an economic loss.
D) will stay open to produce and will earn an economic profit.
E) might shut down but more information is needed about the fixed cost.
Skill: Level 3: Using models
Section: Checkpoint 14.2
Author: MR
AACSB: Analytical reasoning
50
Copyright © 2011 Pearson Education, Inc.
27) The above figure shows a perfectly competitive firm. If the market price is $15 per unit, the
firm
A) will definitely shut down to minimize its losses.
B) will stay open to produce and will earn a normal profit.
C) will stay open to produce and will incur an economic loss.
D) will stay open to produce and will earn an economic profit.
E) might shut down but more information is needed about the fixed cost.
Skill: Level 3: Using models
Section: Checkpoint 14.2
Author: PH
AACSB: Analytical reasoning
28) The above figure shows a perfectly competitive firm. If the market price is $5 per unit, the
firm
A) will definitely shut down to minimize its losses.
B) will stay open to produce and will earn a normal profit.
C) will stay open to produce and will incur an economic loss.
D) will stay open to produce and will earn an economic profit.
E) might shut down but more information is needed about the fixed cost.
Skill: Level 3: Using models
Section: Checkpoint 14.2
Author: PH
AACSB: Analytical reasoning
51
Copyright © 2011 Pearson Education, Inc.
29) The figure above shows a perfectly competitive firm. If the market price is $40 per unit, then
the firm produces ________ units and has an economic profit that is ________.
A) more than 45; more than $400
B) 40; more than $400
C) 40; less than $400
D) 30; equal to zero because the firm earns a normal profit
E) 30; more than $250
Skill: Level 3: Using models
Section: Checkpoint 14.2
Author: SA
AACSB: Analytical reasoning
30) The figure above shows a perfectly competitive firm. If the market price is $20 per unit, then
the firm produces ________ units and has an economic profit that is ________.
A) more than 30; more than $100
B) 30; more than $100
C) 20; less than $400
D) 0; zero because the firm earns a normal profit
E) 30; zero because the firm earns a normal profit
Skill: Level 3: Using models
Section: Checkpoint 14.2
Author: SA
AACSB: Analytical reasoning
52
Copyright © 2011 Pearson Education, Inc.
31) Bill owns a lawn-care company in Windermere, Florida, whose cost curves are illustrated in
the above figure. The market equilibrium price in this perfectly competitive market equals $32
per lawn mowed. At this price, how many lawns will Bill mow per week?
A) more than 10 and less than 30
B) 30
C) 40
D) 50
E) 0
Skill: Level 3: Using models
Section: Checkpoint 14.2
Author: JC
AACSB: Analytical reasoning
53
Copyright © 2011 Pearson Education, Inc.
32) Bill owns a lawn-care company in Windermere, Florida, whose cost curves are illustrated in
the above figure. The market equilibrium price in this perfectly competitive market equals $32
per lawn mowed. Bill's average total cost curve is ATC, so his total cost of production equals
A) $0 because Bill shuts down.
B) more than $0 and less than $1,200 per week.
C) more than $1,200 and less than $1,400 per week.
D) more than $1,400 per week and less than $1,800 per week.
E) more than $1,800 per week.
Skill: Level 3: Using models
Section: Checkpoint 14.2
Author: JC
AACSB: Analytical reasoning
33) Bill owns a lawn-care company in Windermere, Florida, Florida, whose cost curves are
illustrated in the above figure. The market equilibrium price in this perfectly competitive market
equals $32 per lawn mowed. If Bill's average total cost curve is ATC, his total economic
________ equals ________.
A) loss; $800 per week
B) profit; $1,280 per week
C) profit; $480 per week
D) loss; $1,280 per week
E) profit; $32 per week
Skill: Level 3: Using models
Section: Checkpoint 14.2
Author: JC
AACSB: Analytical reasoning
34) If the market supply curve and market demand curve for a good intersect at 600,000 units
and there are 10,000 identical firms in the market, then each firm is producing
A) 600,000 units.
B) 60,000,000,000 units.
C) 60,000 units.
D) 60 units.
E) 10,000 units.
Skill: Level 3: Using models
Section: Checkpoint 14.2
Author: STUDY GUIDE
AACSB: Analytical reasoning
54
Copyright © 2011 Pearson Education, Inc.
35) In the short run, a perfectly competitive firm
A) must make an economic profit.
B) must incur an economic loss.
C) must make zero economic profit.
D) might make an economic profit, an economic loss, or a normal profit.
E) None of the above answers is correct.
Skill: Level 3: Using models
Section: Checkpoint 14.2
Author: STUDY GUIDE
AACSB: Reflective thinking
36) A perfectly competitive firm definitely earns an economic profit in the short run if price is
A) equal to marginal cost.
B) equal to average total cost.
C) greater than average total cost.
D) greater than marginal cost.
E) greater than average variable cost.
Skill: Level 3: Using models
Section: Checkpoint 14.2
Author: STUDY GUIDE
AACSB: Reflective thinking
37) If a perfectly competitive firm is maximizing its profit and is earning an economic profit,
which of the following is correct?
i. price equals marginal revenue
ii. marginal revenue equals marginal cost
iii. price is greater than average total cost
A) i only
B) i and ii only
C) ii and iii only
D) i and iii only
E) i, ii, and iii
Skill: Level 2: Using definitions
Section: Checkpoint 14.2
Author: STUDY GUIDE
AACSB: Reflective thinking
55
Copyright © 2011 Pearson Education, Inc.
38) The market for watermelons in Alabama is perfectly competitive. A watermelon producer
earning zero economic profit could earn an economic profit if the
A) average total cost of selling watermelons does not change.
B) average total cost of selling watermelons rises.
C) average total cost of selling watermelons falls.
D) marginal cost of selling watermelons does not change.
E) marginal cost of selling watermelons rises.
Skill: Level 2: Using definitions
Section: Checkpoint 14.2
Author: STUDY GUIDE
AACSB: Reflective thinking
39) Juan's Software Service Company is in a perfectly competitive market. Juan has total fixed
cost of $25,000, average variable cost for 1,000 service calls is $45, and marginal revenue is $75.
Juan's makes 1,000 service calls a month. What is his economic profit?
A) $5,000
B) $25,000
C) $45,000
D) $75,000
E) $50,000
Skill: Level 3: Using models
Section: Checkpoint 14.2
Author: STUDY GUIDE
AACSB: Analytical reasoning
40) If a perfectly competitive firm finds that price is less than its ATC, then the firm
A) will raise its price to increase its economic profit.
B) will lower its price to increase its economic profit.
C) is earning an economic profit.
D) is incurring an economic loss.
E) is earning zero economic profit.
Skill: Level 2: Using definitions
Section: Checkpoint 14.2
Author: STUDY GUIDE
AACSB: Reflective thinking
56
Copyright © 2011 Pearson Education, Inc.
41) A perfectly competitive video-rental firm in Phoenix incurs an economic loss if the average
total cost of each video rental is
A) greater than the marginal revenue of each rental.
B) less than the marginal revenue of each rental.
C) equal to the marginal revenue of each rental.
D) equal to the price of each rental.
E) greater than the average variable cost of each video.
Skill: Level 2: Using definitions
Section: Checkpoint 14.2
Author: STUDY GUIDE
AACSB: Reflective thinking
14.3 Output, Price, and Profit in the Long Run
1) When new firms enter the perfectly competitive Miami bagel market, the market
A) supply curve shifts leftward.
B) supply curve does not change.
C) demand curve shifts rightward.
D) supply curve shifts rightward.
E) demand curve shifts leftward.
Skill: Level 2: Using definitions
Section: Checkpoint 14.3
Author: JC
AACSB: Reflective thinking
2) If new firms enter a perfectly competitive industry, the market supply
A) does not change.
B) becomes more price elastic.
C) becomes more price inelastic.
D) increases.
E) decreases because each firm produces less than before the entry.
Skill: Level 2: Using definitions
Section: Checkpoint 14.3
Author: TS
AACSB: Reflective thinking
57
Copyright © 2011 Pearson Education, Inc.
3) Alice, Bud, and Celia can produce rubber bands in a perfectly competitive market. If they
enter the market, the minimum average total cost for a bundle of rubber bands, for the three of
them is $2, $3, and $4, respectively. If the market price is $2.10 per bundle, then
A) all three of them will enter the market.
B) only Alice will enter the market.
C) Alice and Bud will enter the market.
D) Bud and Celia will enter the market.
E) Alice and Celia will enter the market.
Skill: Level 2: Using definitions
Section: Checkpoint 14.3
Author: SA
AACSB: Reflective thinking
4) Suppose a perfectly competitive market is in long-run equilibrium and then there is a
permanent increase in the demand for that product. The new long-run equilibrium will have
A) fewer firms in the market.
B) more firms in the market.
C) the same number of firms in the market.
D) probably a different number of firms, but it is not possible to determine if there will be more
or fewer firms.
E) a permanent decrease in supply.
Skill: Level 3: Using models
Section: Checkpoint 14.3
Author: SA
AACSB: Analytical reasoning
5) When firms in a perfectly competitive market are earning an economic profit, in the long run
A) no new firms will enter the market.
B) new firms will enter the market.
C) firms will exit the market.
D) the long-run average cost curve shifts downward.
E) the initial firms continue to earn an economic profit.
Skill: Level 2: Using definitions
Section: Checkpoint 14.3
Author: JC
AACSB: Reflective thinking
58
Copyright © 2011 Pearson Education, Inc.
6) If perfectly competitive firms are making an economic profit, then
A) the market must be in long-run equilibrium but cannot be in a short-run equilibrium.
B) some firms will exit the market.
C) new firms will enter the market.
D) the market might be in a long-run equilibrium but not a short-run equilibrium.
E) the market cannot be in either a short-run or a long-run equilibrium.
Skill: Level 2: Using definitions
Section: Checkpoint 14.3
Author: SB
AACSB: Reflective thinking
7) The corn market is perfectly competitive, with thousands of corn farmers. In the 2000s, the
price of corn soared so that new farmers entered the corn market. Initially, entry ________ the
economic profit of the initial corn farmers and in the long run the initial corn farmers ________.
A) increased; earned an even greater economic profit than initially
B) decreased; earned zero economic profit
C) increased; earned zero economic profit
D) decreased; incurred an economic loss
E) increased; earned an economic profit
Skill: Level 2: Using definitions
Section: Checkpoint 14.3
Author: JC
AACSB: Reflective thinking
8) If firms in a perfectly competitive industry are earning an economic profit, then in the
________ firms will ________ the industry.
A) short run; enter
B) long run; enter
C) short run; exit
D) long run; exit
E) More information about the firms' costs and the price of the product is needed to determine if
firms enter or exit the industry.
Skill: Level 3: Using models
Section: Checkpoint 14.3
Author: MR
AACSB: Reflective thinking
59
Copyright © 2011 Pearson Education, Inc.
9) When new firms enter a perfectly competitive market, the market supply curve shifts
________ and the price ________.
A) rightward; falls
B) rightward; rises
C) leftward; falls
D) leftward; rises
E) rightward; does not change
Skill: Level 2: Using definitions
Section: Checkpoint 14.3
Author: SB
AACSB: Reflective thinking
10) When firms in a perfectly competitive market incur economic losses, exit by some firms
means the market supply will
A) increase.
B) decrease.
C) not change.
D) become vertical.
E) become the same as the individual producers' supplies.
Skill: Level 2: Using definitions
Section: Checkpoint 14.3
Author: JC
AACSB: Reflective thinking
11) To eliminate losses in a perfectly competitive market, firms exit the industry. This exit
results in
A) an increase in market supply.
B) a decrease in market supply.
C) an increase in market demand.
D) a decrease in market demand.
E) a decrease in both the market supply and the market demand.
Skill: Level 2: Using definitions
Section: Checkpoint 14.3
Author: SB
AACSB: Reflective thinking
60
Copyright © 2011 Pearson Education, Inc.
12) Suppose a perfectly competitive market is in short-run equilibrium. Firms that are incurring a
________ economic loss ________.
A) persistent; increase their output to increase their profit
B) temporary; exit the industry
C) temporary; decrease their production but definitely stay open
D) persistent; exit the industry and shift the market supply curve leftward
E) persistent; exit the industry and shift the market supply curve rightward
Skill: Level 2: Using definitions
Section: Checkpoint 14.3
Author: CD
AACSB: Reflective thinking
13) In the long run, existing firms exit a perfectly competitive market
A) only if economic profits are zero.
B) if they earn a positive economic profit.
C) if normal profits are greater than zero.
D) only if they incur an economic loss.
E) if they either earn only a normal profit or if they incur an economic loss.
Skill: Level 2: Using definitions
Section: Checkpoint 14.3
Author: WM
AACSB: Reflective thinking
14) In the long run, perfectly competitive firms will exit the market if the price is
A) higher than average variable cost.
B) equal to average total cost.
C) less than average total cost.
D) equal to average fixed cost.
E) equal to marginal revenue.
Skill: Level 2: Using definitions
Section: Checkpoint 14.3
Author: SA
AACSB: Reflective thinking
61
Copyright © 2011 Pearson Education, Inc.
15) A perfectly competitive market is in equilibrium and then demand decreases. The decrease in
demand means the market price will ________ and eventually there will be ________.
A) rise; entry by new firms
B) fall; exit by existing firms
C) fall; entry by new firms
D) rise; exit by existing firms
E) fall; neither entry nor exit because the market is perfectly competitive
Skill: Level 3: Using models
Section: Checkpoint 14.3
Author: WM
AACSB: Reflective thinking
16) Catfish farming is a perfectly competitive industry. Catfish farmers suffered tremendous
economic losses in the late 1990s. As a result,
A) some new catfish farmers entered the market.
B) some catfish farmers exited the market.
C) no catfish farmers entered or exited this market.
D) the supply of catfish increased in 2000.
E) new demanders entered the market after some firms had exited.
Skill: Level 2: Using definitions
Section: Checkpoint 14.3
Author: JC
AACSB: Reflective thinking
17) Keith is a perfectly competitive carnation grower. The market price is $2 per dozen
carnations. Keith's average total cost to grow carnations is $2.50 per dozen. In the long run,
Keith will
A) raise his price to more than $2.50 per dozen carnations.
B) raise his price to $2.50 per dozen carnations.
C) exit the industry if the price and his costs do not change.
D) incur an economic loss.
E) continue to earn an economic profit.
Skill: Level 3: Using models
Section: Checkpoint 14.3
Author: SA
AACSB: Reflective thinking
62
Copyright © 2011 Pearson Education, Inc.
18) If concerns about mad-cow disease impose economic losses on the perfectly competitive
cattle ranchers, exit by the ranchers combined with no further changes in the demand for beef
will force the price of beef to
A) decrease.
B) not change.
C) increase.
D) fluctuate, with the trend being lower prices.
E) probably change, but more information about the market supply of beef is needed to answer
the question.
Skill: Level 2: Using definitions
Section: Checkpoint 14.3
Author: JC
AACSB: Analytical reasoning
19) Suppose a perfectly competitive market is in a short-run equilibrium. If some firms exit the
market, the profit of the remaining firms ________; if some firms enter the market, the profit of
each existing firm ________.
A) decreases; is unchanged
B) increases; decreases
C) increases; is unchanged
D) is unchanged; is unchanged
E) decreases; increases
Skill: Level 2: Using definitions
Section: Checkpoint 14.3
Author: CD
AACSB: Reflective thinking
20) In the long run, perfectly competitive firms produce at the output level that has the minimum
A) marginal cost.
B) average total cost.
C) average variable cost.
D) average fixed cost.
E) total revenue.
Skill: Level 2: Using definitions
Section: Checkpoint 14.3
Author: SB
AACSB: Reflective thinking
63
Copyright © 2011 Pearson Education, Inc.
21) In a perfectly competitive industry,
i. entry by new firms shifts the market supply curve rightward.
ii. exit by existing firms shifts the market supply curve leftward.
iii. at all times existing firms make only zero economic profit.
A) ii and iii.
B) ii only.
C) i and iii.
D) i and ii.
E) i, ii, and iii.
Skill: Level 2: Using definitions
Section: Checkpoint 14.3
Author: SA
AACSB: Reflective thinking
22) If it does not shut down, a perfectly competitive firm produces where marginal cost is equal
to the marginal revenue
A) only in the short run.
B) only in the long run.
C) always to maximize its profit.
D) only if it is not possible to produce where price equals average variable cost.
E) only if it is not possible to produce where price is greater than average total cost.
Skill: Level 2: Using definitions
Section: Checkpoint 14.3
Author: SA
AACSB: Reflective thinking
23) In the long run, a perfectly competitive firm earns
A) a positive economic profit.
B) zero economic profit.
C) negative economic profit, that is, an economic loss.
D) zero accounting profit.
E) either a positive economic profit or a normal profit.
Skill: Level 3: Using models
Section: Checkpoint 14.3
Author: JC
AACSB: Reflective thinking
64
Copyright © 2011 Pearson Education, Inc.
24) In the long run, a perfectly competitive firm will
A) be able to earn an economic profit.
B) produce but incur an economic loss.
C) make zero economic profit.
D) not produce and will have an economic loss equal to its total fixed cost.
E) not produce but not have an economic loss.
Skill: Level 3: Using models
Section: Checkpoint 14.3
Author: TS
AACSB: Reflective thinking
25) In the long run, a perfectly competitive firm
A) can make either an economic profit or a normal profit.
B) incurs an economic loss.
C) makes zero economic profit.
D) can make an economic profit, zero economic profit, or incur an economic loss.
E) makes an economic profit.
Skill: Level 3: Using models
Section: Checkpoint 14.3
Author: SB
AACSB: Reflective thinking
26) The cranberry market is perfectly competitive. Reports that consuming cranberries can lead
to improved health result in a permanent increase in the demand for cranberries and an
immediate upward jump in the price of cranberries. As time passes, the price of cranberries
________ and the initial firms' economic ________.
A) falls; profit will be eliminated
B) rises still higher; loss will be eliminated
C) rises still higher; profit will not change
D) falls; loss will be increased
E) falls; profit will not change
Skill: Level 2: Using definitions
Section: Checkpoint 14.3
Author: JC
AACSB: Reflective thinking
65
Copyright © 2011 Pearson Education, Inc.
27) Suppose a perfectly competitive market is in long-run equilibrium with a price of $12. Then
there is a permanent increase in demand. As a result, in the short run the market price ________
and in the long run the number of firms ________ and the price is ________ the price was in the
short run.
A) rises; does not change; is equal to
B) rises; increases; higher than
C) rises; does not change; lower than
D) falls; decreases; is equal to
E) rises; increases; lower than
Skill: Level 3: Using models
Section: Checkpoint 14.3
Author: SA
AACSB: Reflective thinking
28) If perfectly competitive firms are maximizing their profit and are making an economic profit,
the market ________ in a short-run equilibrium and ________ in a long-run equilibrium.
A) is; is
B) is; is not
C) is not; is
D) is not; is not
E) is; might be
Skill: Level 2: Using definitions
Section: Checkpoint 14.3
Author: SB
AACSB: Reflective thinking
29) A market is initially in a long-run equilibrium and there is a permanent increase in demand.
After the new long-run equilibrium is reached, there
A) are more firms in the market.
B) are fewer firms in the market.
C) are the same number of firms in the market.
D) probably is a different number of firms in the market, but more information is needed to
determine if the number of firms rises, falls, or perhaps does not change.
E) is no change in the market.
Skill: Level 3: Using models
Section: Checkpoint 14.3
Author: SB
AACSB: Reflective thinking
66
Copyright © 2011 Pearson Education, Inc.
30) A permanent decrease in demand definitely
A) shifts a firm's average total cost curve downward.
B) creates diseconomies for individual firms.
C) lowers the market price.
D) decreases the number of firms in the industry.
E) shifts a firm's average total cost curve upward.
Skill: Level 3: Using models
Section: Checkpoint 14.3
Author: CD
AACSB: Reflective thinking
31) The rutabaga market is perfectly competitive. Research is published claiming that eating
rutabagas leads to gaining weight and so the demand for rutabagas permanently decreases. The
permanent decrease in demand results in a
A) lower price, economic losses by rutabaga farmers, and entry into the market.
B) lower price, economic losses by rutabaga farmers, and exit from the market.
C) higher price, economic profits for rutabaga farmers, and entry into the market.
D) higher price, economic losses by rutabaga farmers, and exit from the market.
E) lower price, economic profits for rutabaga farmers, and entry into the market.
Skill: Level 3: Using models
Section: Checkpoint 14.3
Author: SB
AACSB: Analytical reasoning
32) Technological change
A) usually requires an investment in a new plant.
B) is implemented in the short run.
C) almost always increases the costs of production.
D) almost always increases the variable costs of production.
E) cannot help a firm to earn an economic profit in either the short run or the long run.
Skill: Level 2: Using definitions
Section: Checkpoint 14.3
Author: SB
AACSB: Reflective thinking
67
Copyright © 2011 Pearson Education, Inc.
33) When a firm adopts new technology, generally its
A) cost curves shift upward.
B) cost curves shift downward.
C) cost curves are unaffected.
D) supply curve shifts leftward.
E) production permanently decreases.
Skill: Level 3: Using models
Section: Checkpoint 14.3
Author: SB
AACSB: Reflective thinking
34) In a market undergoing technological change, firms that
A) adopt the new technology temporarily incur an economic loss.
B) adopt the new technology temporarily earn an economic profit.
C) do not adopt the new technology temporarily earn an economic profit.
D) do not adopt the new technology increase their market share.
E) do not adopt the new technology continue to earn a normal profit.
Skill: Level 3: Using models
Section: Checkpoint 14.3
Author: SB
AACSB: Reflective thinking
35) If the technology associated with producing fiber-optic cable continues to advance, over time
the cost of producing fiber-optic cable will
A) decrease, firms that use the new technology will earn an economic profit, and in the long run
new firms will enter the market.
B) decrease, firms that use the new technology will incur an economic loss, and in the long run
some firms will exit the industry.
C) increase, firms that use the new technology will earn an economic profit, and in the long run
new firms will enter the market.
D) increase, firms that use the new technology will incur an economic loss, and in the long run
some firms will exit the industry.
E) decrease, firms that do not use the new technology will earn an economic profit, and in the
long run new firms will enter the market.
Skill: Level 2: Using definitions
Section: Checkpoint 14.3
Author: JC
AACSB: Reflective thinking
68
Copyright © 2011 Pearson Education, Inc.
36) Technology reduces the average cost of production, so in the long run
i. perfectly competitive firms produce at a lower average cost.
ii. the market price of the good falls.
iii. firms with older plants either exit the market or adopt the new technology.
A) i only.
B) i and ii.
C) iii only.
D) i and iii.
E) i, ii, and iii.
Skill: Level 2: Using definitions
Section: Checkpoint 14.3
Author: SA
AACSB: Reflective thinking
37) In the long run, new firms enter a perfectly competitive market when
A) normal profit is greater than zero.
B) economic profit is equal to zero.
C) normal profit is equal to zero.
D) economic profit is greater than zero.
E) the existing firms are weak because they are incurring economic losses.
Skill: Level 2: Using definitions
Section: Checkpoint 14.3
Author: STUDY GUIDE
AACSB: Reflective thinking
38) If perfectly firms are earning an economic profit, the economic profit
A) attracts entry by more firms, which lowers the price.
B) can be earned both in the short run and the long run.
C) is less than the normal profit.
D) leads to a decrease in market demand.
E) generally leads to firms exiting as they seek higher profit in other markets.
Skill: Level 2: Using definitions
Section: Checkpoint 14.3
Author: STUDY GUIDE
AACSB: Reflective thinking
69
Copyright © 2011 Pearson Education, Inc.
39) If perfectly firms are earning an economic profit, then
A) the market is in its long-run equilibrium.
B) new firms enter the market and the equilibrium profit of the firms already in the market
decreases.
C) new firms enter the market and the equilibrium profit of the firms already in the market
increases.
D) firms exit the market and the economic profit of the surviving firms in the market decreases.
E) firms exit the market and the economic profit of the surviving firms in the market increases.
Skill: Level 2: Using definitions
Section: Checkpoint 14.3
Author: STUDY GUIDE
AACSB: Reflective thinking
40) As a result of firms leaving the perfectly competitive frozen yogurt market in the early
2000s, the market
A) supply curve shifted leftward.
B) supply curve did not change.
C) demand curve shifted rightward.
D) supply curve shifted rightward.
E) demand curve shifted leftward.
Skill: Level 2: Using definitions
Section: Checkpoint 14.3
Author: STUDY GUIDE
AACSB: Reflective thinking
41) Firms exit a competitive market when they incur an economic loss. In the long run, this exit
means that the economic losses of the surviving firms
A) increase.
B) decrease until they equal zero.
C) decrease until economic profits are earned.
D) do not change.
E) might change but more information is needed about what happens to the price of the good as
the firms exit.
Skill: Level 2: Using definitions
Section: Checkpoint 14.3
Author: STUDY GUIDE
AACSB: Reflective thinking
70
Copyright © 2011 Pearson Education, Inc.
42) If firms in a perfectly competitive market have economic losses, then as time passes firms
________ and the market ________.
A) enter; demand curve shifts leftward
B) enter; supply curve shifts rightward
C) exit; demand curve shifts leftward
D) exit; supply curve shifts rightward
E) exit; supply curve shifts leftward
Skill: Level 2: Using definitions
Section: Checkpoint 14.3
Author: STUDY GUIDE
AACSB: Reflective thinking
43) In the long run, a firm in a perfectly competitive market will
A) earn zero economic profit, so that its owners earn a normal profit.
B) earn zero normal profit but its owners will make an economic profit.
C) remove all competitors and become a monopolistically competitive firm.
D) incur an economic normal loss but not earn a positive economic profit.
E) remove all competitors and become a monopoly.
Skill: Level 1: Definition
Section: Checkpoint 14.3
Author: STUDY GUIDE
AACSB: Reflective thinking
44) Technological change brings a ________ to firms that adopt the new technology.
A) permanent economic profit
B) temporary economic profit
C) permanent economic loss
D) temporary economic loss
E) temporary normal profit
Skill: Level 3: Using models
Section: Checkpoint 14.3
Author: STUDY GUIDE
AACSB: Reflective thinking
71
Copyright © 2011 Pearson Education, Inc.
14.4 Chapter Figures
The figure above shows a firm's total revenue and total cost curves.
1) When the firm maximizes its profit, it produces ________ cans per day.
A) 0
B) more than 0 and less than 5
C) 5 or more but less than 10
D) 10
E) more than 10
Skill: Level 3: Using models
Section: Checkpoint 14.1
Author: MR
AACSB: Analytical reasoning
2) To maximize its profit, the firm in the figure above produces ________ cans per day and
________.
A) 0; incurs an economic loss of less than $20
B) between 3 to 5 cans; earns a normal profit
C) 10; earns an economic profit of $2.90
D) 10; earns an economic profit of $29
E) more than 10; earns an economic profit
Skill: Level 3: Using models
Section: Checkpoint 14.1
Author: MR
AACSB: Analytical reasoning
72
Copyright © 2011 Pearson Education, Inc.
The figure above shows a firm's marginal revenue and marginal cost curves.
3) The price of a can is $8; if the price increased to $12, then the firm would
A) produce zero cans.
B) decrease the amount of cans produces it but not to zero.
C) not change the amount of cans it produces.
D) increase the amount of cans it produces.
E) More information is needed to determine what action the firm will take.
Skill: Level 4: Applying models
Section: Checkpoint 14.1
Author: MR
AACSB: Analytical reasoning
4) Suppose the firm's marginal cost of producing a can increases by $1 per can. Then the firm
would
A) produce zero cans.
B) decrease the amount of cans it produces but not to zero cans.
C) not change the amount of cans it produces.
D) increase the amount of cans it produces.
E) More information is needed to determine what action the firm will take.
Skill: Level 4: Applying models
Section: Checkpoint 14.1
Author: MR
AACSB: Analytical reasoning
73
Copyright © 2011 Pearson Education, Inc.
The figure above shows the cost curves and marginal revenue curve for a perfectly competitive
firm.
5) Based on the figure above, what is the price of a can?
A) $0.
B) $3.00 per can
C) $5.14 per can
D) None of the above prices is correct.
E) More information is needed to determine the price of a can.
Skill: Level 3: Using models
Section: Checkpoint 14.2
Author: MR
AACSB: Analytical reasoning
6) Based on the figure above, if the firm produces 7 cans per day, the firm ________ maximizing
its profit and is ________.
A) is; incurring an economic loss
B) is; earning a normal profit
C) is; earning an economic profit
D) is not; incurring an economic loss
E) is not; earning a normal profit
Skill: Level 3: Using models
Section: Checkpoint 14.2
Author: MR
AACSB: Analytical reasoning
74
Copyright © 2011 Pearson Education, Inc.
7) Suppose the price of a can was $5.14. In this case, to maximize its profit the firm illustrated in
the figure above would
A) increase its production and would earn an economic profit.
B) not change its production and would earn a normal profit.
C) not change its production and would earn an economic profit.
D) increase its production and would incur an economic loss.
E) not change its production and would incur an economic loss.
Skill: Level 3: Using models
Section: Checkpoint 14.2
Author: MR
AACSB: Analytical reasoning
8) The firm in the figure above is ________ that is equal to ________.
A) earning an economic profit; $5.14 × 7
B) earning an economic profit; $3.00 × 7
C) incurring an economic loss; $5.14 × 7
D) incurring an economic loss; ($5.14 - $3.00) × 7
E) earning an economic profit; ($5.14 - $3.00) × 7
Skill: Level 3: Using models
Section: Checkpoint 14.2
Author: MR
AACSB: Analytical reasoning
75
Copyright © 2011 Pearson Education, Inc.
The figure above shows some of a firm's cost curves and its marginal revenue curve.
9) Based on the figure above, what is the price of a can?
A) $0
B) $8.00 per can
C) $5.10 per can
D) None of the above prices is correct.
E) More information is needed to determine the price of a can.
Skill: Level 3: Using models
Section: Checkpoint 14.2
Author: MR
AACSB: Analytical reasoning
10) Based on the figure above, if the firm produces 10 cans per day, the firm ________
maximizing its profit and is ________.
A) is; incurring an economic loss
B) is; earning a normal profit
C) is; earning an economic profit
D) is not; incurring an economic loss
E) is not; earning a normal profit
Skill: Level 3: Using models
Section: Checkpoint 14.2
Author: MR
AACSB: Analytical reasoning
76
Copyright © 2011 Pearson Education, Inc.
11) Suppose the price of a can was $5.10. In this case, to maximize its profit the firm illustrated
in the figure above would
A) decrease its production and would earn an economic profit.
B) not change its production and would earn a normal profit.
C) not change its production and would earn an economic profit.
D) decrease its production and would incur an economic loss.
E) not change its production and would incur an economic loss.
Skill: Level 3: Using models
Section: Checkpoint 14.2
Author: MR
AACSB: Analytical reasoning
12) The firm in the figure above has a total cost equal to ________ .
A) $5.10 × 10
B) $8.00 × 10
C) ($5.10 - $8.00) × 10
D) ($8.00 - $5.10) × 10
E) None of the above answers are correct because more information is needed.
Skill: Level 4: Applying models
Section: Checkpoint 14.2
Author: MR
AACSB: Analytical reasoning
13) The firm in the figure above has a total revenue equal to ________.
A) $5.10 × 10
B) $8.00 × 10
C) ($5.10 - $8.00) × 10
D) ($8.00 - $5.10) × 10
E) None of the above answers are correct because more information is needed.
Skill: Level 4: Applying models
Section: Checkpoint 14.2
Author: MR
AACSB: Analytical reasoning
77
Copyright © 2011 Pearson Education, Inc.
14) The firm in the figure above is ________ that is equal to ________.
A) earning an economic profit; $8.00 × 10
B) earning an economic profit; $5.10 × 10
C) incurring an economic loss; $5.10 × 10
D) incurring an economic loss; ($8.00 - $5.10) × 10
E) earning an economic profit; ($8.00 - $5.10) × 10
Skill: Level 3: Using models
Section: Checkpoint 14.2
Author: MR
AACSB: Analytical reasoning
The above figure shows some a firm's cost curves and its marginal revenue curve.
15) Based on the figure above, what is the price of a can?
A) $0
B) $3.00 per can
C) $5.15 per can
D) None of the above prices is correct.
E) More information is needed to determine the price of a can.
Skill: Level 3: Using models
Section: Checkpoint 14.2
Author: MR
AACSB: Analytical reasoning
78
Copyright © 2011 Pearson Education, Inc.
16) Based on the figure above, if the firm produces 7 cans per day, the firm ________
maximizing its profit and is ________.
A) is; incurring an economic loss
B) is; earning a normal profit
C) is; earning an economic profit
D) is not; incurring an economic loss
E) is not; earning a normal profit
Skill: Level 3: Using models
Section: Checkpoint 14.2
Author: MR
AACSB: Analytical reasoning
17) Suppose the price of a can was $5.14. In this case, to maximize its profit the firm illustrated
in the figure above would
A) increase its production and would earn an economic profit.
B) not change its production and would earn a normal profit.
C) not change its production and would earn an economic profit.
D) increase its production and would incur an economic loss.
E) not change its production and would incur an economic loss.
Skill: Level 3: Using models
Section: Checkpoint 14.2
Author: MR
AACSB: Analytical reasoning
18) The price for the shutdown point ________.
A) $5.14
B) between $3.01 and $5.13
C) $3.00
D) between $0 and $2.99
E) greater than $5.15
Skill: Level 3: Using models
Section: Checkpoint 14.2
Author: MR
AACSB: Analytical reasoning
79
Copyright © 2011 Pearson Education, Inc.
19) The firm in the figure above has a total cost equal to ________.
A) $5.14 × 7
B) $3.00 × 7
C) ($5.14 - $3.00) × 7
D) ($3.00 - $5.14) × 7
E) None of the above answers are correct because more information is needed.
Skill: Level 4: Applying models
Section: Checkpoint 14.2
Author: MR
AACSB: Analytical reasoning
20) The firm in the figure above has a total revenue equal to ________.
A) $5.14 × 7
B) $3.00 × 7
C) ($5.14 - $3.00) × 7
D) ($3.00 - $5.14) × 7
E) None of the above answers are correct because more information is needed.
Skill: Level 4: Applying models
Section: Checkpoint 14.2
Author: MR
AACSB: Analytical reasoning
21) The firm in the figure above is ________ that is equal to ________.
A) earning an economic profit; $5.14 × 7
B) earning an economic profit; $3.00 × 7
C) incurring an economic loss; $5.14 × 7
D) incurring an economic loss; ($5.14 - $3.00) × 7
E) earning an economic profit; ($5.14 - $3.00) × 7
Skill: Level 3: Using models
Section: Checkpoint 14.2
Author: MR
AACSB: Analytical reasoning
80
Copyright © 2011 Pearson Education, Inc.
14.5 Integrative Questions
1) Consider a short-run equilibrium in a perfectly competitive market. Suppose that the firms'
average total cost and marginal cost schedules differ. In the short run,
A) all firms in the market must be able to earn an economic profit.
B) all firms produce equal amounts of output.
C) some firms might incur an economic loss, but still produce output.
D) some firms might earn an economic profit and, as a result, shut down.
E) all firms in the market must be able to earn either an economic profit or a n normal profit.
Skill: Level 3: Using models
Section: Integrative
Author: CD
AACSB: Reflective thinking
81
Copyright © 2011 Pearson Education, Inc.
2) The above figure shows three possible average total cost curves. If all firms in a perfectly
competitive industry each have an average total cost curve identical to ATC0, each produces 20
units, and the market price of the good is $16 per unit, then
A) the firms earn an economic profit of $8 per unit.
B) firms will enter the industry and the number of firms increases.
C) the firms' ATC curves will eventually shift to become the same as ATC1.
D) firms will exit the industry and the number of firms decreases.
E) Both answer A and answer B are correct.
Skill: Level 4: Applying models
Section: Integrative
Author: CD
AACSB: Analytical reasoning
82
Copyright © 2011 Pearson Education, Inc.
3) The above figure shows three possible average total cost curves. If all firms in a perfectly
competitive industry each have an average total cost curve identical to ATC2, each produces 40
units, and the market price of the good is $20 per unit, then
A) the firms incur an economic loss of $12 per unit.
B) firms will enter the industry and the number of firms increases.
C) the firms' ATC curves will eventually shift to become the same as ATC1.
D) firms will exit the industry and the number of firms decreases.
E) Both answer A and answer D are correct.
Skill: Level 4: Applying models
Section: Integrative
Author: CD
AACSB: Analytical reasoning
4) The above figure shows three possible average total cost curves. If all firms in a perfectly
competitive industry each have an average total cost curve identical to ATC1, each produce 30
units, and the market price of the good is $16 per unit, then the firms
A) earn a normal profit and firms neither enter nor exit the industry.
B) earn only a normal profit and so some firms exit the industry.
C) incur an economic loss and so some firms exit the industry.
D) incur an economic loss and so new firms enter the industry.
E) earn an economic profit and new firms enter the industry.
Skill: Level 4: Applying models
Section: Integrative
Author: CD
AACSB: Analytical reasoning
5) The above figure shows three possible average total cost curves. If all firms in a perfectly
competitive industry each have an average total cost curve identical to ATC1, each produce 30
units, and the market price of the good is $16 per unit, then the firms
A) earn a normal profit and new firms enter the market.
B) earn a normal profit and no firms enter or exit the market.
C) earn a normal profit and some firms exit the market.
D) incur an economic loss and some firms exit the market.
E) earn an economic profit and new firms enter the market.
Skill: Level 4: Applying models
Section: Integrative
Author: CD
AACSB: Analytical reasoning
83
Copyright © 2011 Pearson Education, Inc.
6) If firms in a perfectly competitive industry are earning an economic profit and new firms enter
the industry, then
A) consumer surplus decreases.
B) the existing firms' economic profit decreases.
C) there must be external benefits to consumption of the good.
D) the new firms must incur an economic loss.
E) Both answer A and answer B are correct.
Skill: Level 4: Applying models
Section: Integrative
Author: CD
AACSB: Reflective thinking
7) Suppose that each of 8,000 firms in a perfectly competitive industry produces 1,000 units of a
good and maximizes profits when the price of the good is $10. If there is a permanent increase in
demand, in the short run each firm produces ________ 1,000 units and in the long run the
number of firms is ________ 8,000.
A) more than; more than
B) less than; more than
C) less than; less than
D) more than; less than
E) exactly; more than
Skill: Level 3: Using models
Section: Integrative
Author: CD
AACSB: Analytical reasoning
8) Suppose that each of 10,000 perfectly competitive firm in an industry produces 1,000 units of
a good and earns an economic profit when the price of the good is $10. In the long run, definitely
A) each firm increases its production above 1,000 units.
B) the number of firms is more than 10,000.
C) consumer surplus decreases.
D) producer surplus increases.
E) the number of firms is less than 10,000.
Skill: Level 3: Using models
Section: Integrative
Author: CD
AACSB: Analytical reasoning
84
Copyright © 2011 Pearson Education, Inc.
14.6 Essay: A Firm's Profit Maximizing Choices
1) Is the number of sellers in the market the only thing that is different in each of the four market
types economists study?
Skill: Level 1: Definition
Section: Checkpoint 14.1
Author: TS
AACSB: Communication
2) Why do you never see firms in a perfectly competitive market advertise their product?
Skill: Level 5: Critical thinking
Section: Checkpoint 14.1
Author: JC
AACSB: Communication
3) What are the four types of markets? Give a brief description of each type.
Skill: Level 1: Definition
Section: Checkpoint 14.1
Author: SB
AACSB: Reflective thinking
85
Copyright © 2011 Pearson Education, Inc.
4) What four conditions define a perfectly competitive market?
Skill: Level 1: Definition
Section: Checkpoint 14.1
Author: SA
AACSB: Reflective thinking
5) "Perfectly competitive firms have total control over the price they set for their product."
Explain why the previous statement is correct or incorrect.
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: SB
AACSB: Communication
6) Does a perfectly competitive producer have any incentive to lower its price so it is below the
current market price? Explain your answer
Skill: Level 3: Using models
Section: Checkpoint 14.1
Author: TS
AACSB: Communication
86
Copyright © 2011 Pearson Education, Inc.
7) Why are perfectly competitive ranchers in Montana price takers?
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: JC
AACSB: Communication
8) "A perfectly competitive firm is called a price maker because all the firms together must make
the market price." Is the previous statement correct or incorrect? Briefly explain your answer.
Skill: Level 1: Definition
Section: Checkpoint 14.1
Author: WM
AACSB: Communication
9) If a perfectly competitive firm manufacturing chairs produces 100 more chairs, what happens
to the market price of a chair?
Skill: Level 3: Using models
Section: Checkpoint 14.1
Author: SA
AACSB: Communication
10) Pineapple growing is a perfectly competitive industry. How does the market demand curve
for pineapples compare to the demand curve for an individual pineapple grower?
Skill: Level 1: Definition
Section: Checkpoint 14.1
Author: JC
AACSB: Reflective thinking
87
Copyright © 2011 Pearson Education, Inc.
11) What is the shape of the demand curve faced by the perfectly competitive firm, and why?
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: SA
AACSB: Communication
12) Why does the profit-maximizing level of production occur at the point where marginal
revenue equals marginal cost?
Skill: Level 3: Using models
Section: Checkpoint 14.1
Author: JC
AACSB: Communication
13) If the market price faced by a perfectly competitive firm increases, in the short run how does
the firm respond?
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: SA
AACSB: Communication
88
Copyright © 2011 Pearson Education, Inc.
14) What is a perfectly competitive firm's short-run supply curve?
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: MR
AACSB: Reflective thinking
15) If the price received by a perfectly competitive firm is less than its average variable cost,
what will the firm do in the short run? Why?
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: SA
AACSB: Communication
16) Will a perfectly competitive firm ever produce in the short run even though it is suffering an
economic loss?
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: PH
AACSB: Communication
17) What must be the case if a perfectly competitive firm's economic loss is less by shutting
down rather than by producing and selling some output?
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: SB
AACSB: Communication
89
Copyright © 2011 Pearson Education, Inc.
18) Pete is a perfectly competitive rose grower. The above table gives quantities and the price for
which Pete can sell his roses.
a. What is Pete's total revenue if he sells 1 dozen roses? 2 dozen roses? 3 dozen roses? 4 dozen
roses?
b. What is the marginal revenue of the 2nd dozen roses sold? Of the 3rd dozen? Of the 4th
dozen?
Skill: Level 2: Using definitions
Section: Checkpoint 14.1
Author: WM
AACSB: Analytical reasoning
90
Copyright © 2011 Pearson Education, Inc.
19) Farmer Brown produces corn in a perfectly competitive market. Farmer Brown produces and
sells 500 bushels of corn. The market supply and demand curves are illustrated in the above
figure.
a. What is Farmer Brown's total revenue?
b. What is Farmer Brown's marginal revenue?
Skill: Level 3: Using models
Section: Checkpoint 14.1
Author: SB
AACSB: Analytical reasoning
91
Copyright © 2011 Pearson Education, Inc.
20) The table below gives Amy's total cost schedule for producing holiday wreaths. Amy is a
perfect competitor and can sell each wreath for $9.
a. Complete the table by calculating Amy's total revenue and her profit or loss schedule.
b. When Amy is producing 4 wreaths, what is her total cost? What is her total revenue? What is
her economic profit or economic loss?
c. What number of wreaths maximizes Amy's profit?
Skill: Level 3: Using models
Section: Checkpoint 14.1
Author: SB
AACSB: Analytical reasoning
92
Copyright © 2011 Pearson Education, Inc.
21) Jimmy grows corn. His total revenue and total cost are in the above table. What quantity of
corn maximizes his profit and what is his profit? What is the marginal revenue and marginal cost
at this quantity?
Skill: Level 3: Using models
Section: Checkpoint 14.1
Author: WM
AACSB: Analytical reasoning
93
Copyright © 2011 Pearson Education, Inc.
22) The above table gives the quantity of output and the total cost for a perfectly competitive
firm that can sell all of its output at $9 per unit.
a. Find the profit maximizing level of output for this firm.
b. How much economic profit is the firm making?
Skill: Level 3: Using models
Section: Checkpoint 14.1
Author: SA
AACSB: Analytical reasoning
94
Copyright © 2011 Pearson Education, Inc.
23) The table below shows the total cost schedule for a perfectly competitive firm. The market
price is $250 per unit. Complete the table.
Skill: Level 3: Using models
Section: Checkpoint 14.1
Author: PH
AACSB: Analytical reasoning
95
Copyright © 2011 Pearson Education, Inc.
24) Acme is a perfectly competitive firm. It has the total cost schedule given in the above table.
Acme's product sells for $8.00 per unit. What amount of output is the most profitable and what is
Acme's economic profit or economic loss?
Skill: Level 3: Using models
Section: Checkpoint 14.1
Author: TS
AACSB: Analytical reasoning
96
Copyright © 2011 Pearson Education, Inc.
25) Acme is a perfectly competitive firm. It has the cost schedules given in the above table and
has a fixed cost of $12.00. The price of Acme's product is $14.20. What is Acme's most
profitable amount of output? What is Acme's total economic profit or loss?
Skill: Level 3: Using models
Section: Checkpoint 14.1
Author: TS
AACSB: Analytical reasoning
26) Acme is a perfectly competitive firm. It has the cost schedules given in the above table and
has a fixed cost of $12.00. The price of Acme's product is $4.00. What is Acme's most profitable
amount of output? What is Acme's total economic profit or loss?
Skill: Level 3: Using models
Section: Checkpoint 14.1
Author: TS
AACSB: Analytical reasoning
97
Copyright © 2011 Pearson Education, Inc.
27) The above figure illustrates a perfectly competitive wheat farmer.
a. What will be the firm's profit-maximizing price and output?
b. When the farmer produces 25,000 bushels of wheat, the difference between the firm's
average total cost and the price is at its maximum. Explain why this amount of wheat either is or
is not the profit-maximizing quantity.
Skill: Level 3: Using models
Section: Checkpoint 14.1
Author: SA
AACSB: Analytical reasoning
98
Copyright © 2011 Pearson Education, Inc.
28) The above diagram shows the cost curves for a perfectly competitive wheat farmer. At what
price does the wheat farmer shut down?
Skill: Level 3: Using models
Section: Checkpoint 14.1
Author: CD
AACSB: Analytical reasoning
14.7 Essay: Output, Price, and Profit in the Short Run
1) Can a perfectly competitive firm earn an economic profit in the short run? Can it incur an
economic loss?
Skill: Level 2: Using definitions
Section: Checkpoint 14.2
Author: SA
AACSB: Reflective thinking
99
Copyright © 2011 Pearson Education, Inc.
2) If the market price is less than a perfectly competitive firm's average total cost, what sort of
profit or loss is the firm earning?
Skill: Level 3: Using models
Section: Checkpoint 14.2
Author: WM
AACSB: Reflective thinking
3) What is the relationship between the price, P, and the average total cost, ATC, for a firm in
perfect competition that earns an economic profit? That earns a normal profit? That incurs an
economic loss?
Skill: Level 2: Using definitions
Section: Checkpoint 14.2
Author: MR
AACSB: Communication
4) John keeps beehives and sells 100 quarts of honey per month. The honey market is perfectly
competitive, and the price of a quart of honey is $10. John has an average variable cost of $5 and
an average fixed cost of $3. At 100 quarts per month, John's marginal cost is $10.
a. Is John maximizing his profit? If not, what should John do?
b. Calculate John's total revenue, total cost, and total economic profit or economic loss when he
produces 100 quarts of honey.
Skill: Level 4: Applying models
Section: Checkpoint 14.2
Author: SB
AACSB: Analytical reasoning
100
Copyright © 2011 Pearson Education, Inc.
5) The above diagram shows the cost curves for a perfectly competitive wheat farmer. At what
price(s) does the wheat farmer earn an economic profit? Earn a normal profit? Incur an economic
loss? How many bushels of wheat does the farmer produce if the price is $3 per bushel? If the
price is $0.50 per bushel?
Skill: Level 4: Applying models
Section: Checkpoint 14.2
Author: CD
AACSB: Analytical reasoning
101
Copyright © 2011 Pearson Education, Inc.
14.8 Essay: Output, Price, and Profit in the Long Run
1) "For a perfectly competitive market, an economic profit attracts new firms. But when these
firms enter the market, the price falls and the economic profit is eliminated." Are the previous
statements correct or incorrect? What is the long-run profit or loss outcome for firms in a
perfectly competitive market?
Skill: Level 2: Using definitions
Section: Checkpoint 14.3
Author: SB
AACSB: Reflective thinking
2) In the long run, perfectly competitive firms cannot earn an economic profit. Why?
Skill: Level 2: Using definitions
Section: Checkpoint 14.3
Author: SB
AACSB: Reflective thinking
3) The U-pick berry market is perfectly competitive. Suppose that all U-pick blueberry farms
have the same cost curves and all are earning an economic profit. What happens as time passes?
What is the long-run equilibrium outcome?
Skill: Level 3: Using models
Section: Checkpoint 14.3
Author: WM
AACSB: Communication
102
Copyright © 2011 Pearson Education, Inc.
4) When will new firms enter a perfectly competitive market? When does entry stop?
Skill: Level 3: Using models
Section: Checkpoint 14.3
Author: WM
AACSB: Communication
5) Describe how economic losses are eliminated in a perfectly competitive industry.
Skill: Level 2: Using definitions
Section: Checkpoint 14.3
Author: SB
AACSB: Communication
6) Pumpkin growing is a perfectly competitive industry. Suppose that pumpkin growers are all
suffering an economic loss. What happens as time passes? What is the long-run equilibrium
outcome?
Skill: Level 4: Applying models
Section: Checkpoint 14.3
Author: WM
AACSB: Communication
103
Copyright © 2011 Pearson Education, Inc.
7) Suppose a farmer raising beef is earning a normal profit. Then, because of a scare about mad
cow disease, the demand for beef decreases drastically. What happens to the profits of the beef
farmer in the short run and in the long run?
Skill: Level 3: Using models
Section: Checkpoint 14.3
Author: SA
AACSB: Communication
8) How does a decrease in the demand for wheat ultimately lead to normal profits for wheat
growers in the long run?
Skill: Level 3: Using models
Section: Checkpoint 14.3
Author: JC
AACSB: Communication
9) Entry by competitive firms decreases the market price, while exit by competitive firms
increases the market price. Explain why firms enter or exit an industry and why these price
changes occur.
Skill: Level 3: Using models
Section: Checkpoint 14.3
Author: PH
AACSB: Communication
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10) In the long run, a perfectly competitive firm earns zero economic profit. What incentive does
the firm have to stay in business if it is making zero economic profit?
Skill: Level 3: Using models
Section: Checkpoint 14.3
Author: SA
AACSB: Communication
11) With regard to its profits and losses, how is the short run different from the long run for a
perfectly competitive firm?
Skill: Level 3: Using models
Section: Checkpoint 14.3
Author: SA
AACSB: Communication
12) During the middle of the 2000s, the price of gasoline soared and there was a movement to
switch to fuels made from a mixture of gasoline and ethanol. Ethanol can be made from corn.
The price of corn skyrocketed and then, after a couple of years, the price decreased. What might
have led to these price changes in the corn market?
Skill: Level 5: Critical thinking
Section: Checkpoint 14.3
Author: MR
AACSB: Communication
105
Copyright © 2011 Pearson Education, Inc.
13) The above figure shows the cost curves of a profit-maximizing perfectly competitive firm. If
the price equals $7,
a. how much will the firm produce?
b. how much is the firm's average total, average variable, and marginal costs?
c. how much is the firm's total, total variable, and total fixed costs?
d. how much is the firm's total revenue and economic profit?
e. what will happen in this market in the long run?
Skill: Level 3: Using models
Section: Checkpoint 14.3
Author: SB
AACSB: Analytical reasoning
106
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14) American restaurants receive their supply of baby back-ribs from American farms and from
farms in Denmark. In the figures above, the left diagram shows the perfectly competitive market
for baby back ribs in the United States. The right figure shows the situation at Premium Standard
Farm in Kansas, one of the many U.S. farms supplying these ribs.
Now assume that the United States imposes a ban on European meat in response to the foot-
and-mouth disease that has infected livestock in Europe. (Which the United States did a few
years ago.) In particular, suppose that the U.S. ban decreases the supply by 40 tons a year. Using
the figure on the left, show the impact of this ban on the baby back rib market. Using the figure
on the right, show the impact on Premium Standard Farm in Kansas.
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Skill: Level 3: Using models
Section: Checkpoint 14.3
Author: SA
AACSB: Analytical reasoning
108
Copyright © 2011 Pearson Education, Inc.
15) Suppose the bobby pin industry is perfectly competitive. The price of a packet of bobby pins
is $2.00. Pins and Needles, Inc. is a firm in this industry and is producing 1,000 packets of bobby
pins per day at the point where the MC = MR. The average cost of production at this output level
is $1.50 per packet.
a. What is the marginal cost of the 1,000th packet?
b. Is this firm making an economic profit, a normal profit, or an economic loss? How much?
c. Is the firm in long-run equilibrium? Why or why not?
Skill: Level 4: Applying models
Section: Checkpoint 14.3
Author: SA
AACSB: Analytical reasoning
