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Firms in Competitive Markets 3491
145.
Susan quit her job as a teacher, which paid her $36,000 per year, in order to start her own
catering business. She
spent $12,000 of her savings, which had been earning 10 percent interest
per year, on equipment for her business.
She also borrowed $12,000 from her bank at 10 percent
interest, which she also spent on equipment. For the past
several months she has spent $1,000
per month on ingredients and other variable costs. Also for the past several
months she has taken
in $3,500 in monthly revenue. In the short run, Susan should
a.
shut down her business, and in the long run she should exit the industry.
b.
continue to operate her business, but in the long run she should exit the industry.
c.
continue to operate her business, but in the long run she will probably face competition from
newly entering
firms.
d.
continue to operate her business, and she is also in long-run equilibrium.
146.
A firm in a competitive market has the following cost structure:
Output
Total Cost
0
$5
1
$10
2
$12
3
$15
4
$24
5
$40
If the market price is $4, this firm will
a.
produce 2 units in the short run and exit in the long run.
b.
produce 3 units in the short run and exit in the long run.
c.
produce 4 units in the short run and exit in the long run.
d.
shut down in the short run and exit in the long run.
147.
Competitive firms that earn a loss in the short run should
a.
shut down if P < AVC.
b.
raise their price.
c.
lower their output.
d.
All of the above are correct.
148.
Mrs. Smith is operating a firm in a competitive market. The market price is $6.50. At her profit-
maximizing level of
output, her average total cost of production is $7.00, and her average variable
cost of production is $6.00. Which of
the following statements about Mrs. Smith’s firm is
correct?
a.
Mrs. Smith is earning a loss and should shut down in the short run.
b.
Mrs. Smith is earning a loss but should continue to operate in the short run.
c.
Mrs. Smith is earning a profit since the price is above the average variable cost.
d.
Without knowing Mrs. Smith's marginal cost, we cannot determine whether she should stay in
business or
shut down.
Firms in Competitive Markets 3493
Figure 14-1
Suppose that a firm in a competitive market has the following cost curves:
149.
Refer to Figure 14-1. The firm’s short-run supply curve is its marginal cost curve above
a.
$1.
b.
$3.
c. $4.50.
d. $6.30.
150.
Refer to Figure 14-1. The firm should shut down if the market price is
a.
above $8.
b.
above $6.30 but less than $8.
c.
above $4.50 but less than $6.30.
d.
less than $4.50.
151.
Refer to Figure 14-1. If the market price falls below $4.50, the firm will earn
a.
positive economic profits in the short run.
b.
negative economic profits in the short run but remain in business.
c.
negative economic profits in the short run and shut down.
d.
zero economic profits in the short run.
152.
Refer to Figure 14-1. The firm will earn a negative economic profit but remain in business in
the short run if the
market price is
a.
above $6.30 but less than $8.
b.
above $6.30.
c.
less than $6.30 but more than $4.50.
d.
less than $4.50.
153.
Refer to Figure 14-1. The firm will earn a positive economic profit in the short run if the
market price is
a.
above $6.30.
b.
less than $6.30 but more than $4.50.
c.
less than $4.50.
d.
exactly $6.30.
154.
Refer to Figure 14-1. If the market price rises above $6.30, the firm will earn
a.
positive economic profits in the short run.
b.
negative economic profits in the short run but remain in business.
c.
negative economic profits and shut down.
d.
zero economic profits in the short run.
155.
Refer to Figure 14-1. If the market price is $6.30, the firm will earn
a.
positive economic profits in the short run.
b.
negative economic profits in the short run but remain in business.
c.
negative economic profits and shut down.
d.
zero economic profits in the short run.
156.
Refer to Figure 14-1. If the market price is $5.00, the firm will earn
a.
positive economic profits in the short run.
b.
negative economic profits in the short run but remain in business.
c.
negative economic profits and shut down.
d.
zero economic profits in the short run.
157.
Refer to Figure 14-1. If the market price is $4.00, the firm will earn
a.
positive economic profits in the short run.
b.
negative economic profits in the short run but remain in business.
c.
negative economic profits and shut down.
d.
zero economic profits in the short run.
3498 Firms in Competitive Markets
Figure 14-2
Suppose a firm operating in a competitive market has the following cost curves:
158.
Refer to Figure 14-2. If the market price is Pa, in the short run the firm will earn
a.
positive economic profits.
b.
negative economic profits but will try to remain open.
c.
negative economic profits and will shut down.
d.
zero economic profits.
159.
Refer to Figure 14-2. If the market price is Pb, in the short run the firm will earn
a.
positive economic profits.
b.
negative economic profits but will try to remain open.
c.
negative economic profits and will shut down.
d.
zero economic profits.
160.
Refer to Figure 14-2. If the market price is Pc, in the short run the firm will earn
a.
positive economic profits.
b.
negative economic profits but will try to remain open.
c.
negative economic profits and will shut down.
d.
zero economic profits.
161.
Refer to Figure 14-2. If the market price is Pd, in the short run the firm will earn
a.
positive economic profits.
b.
negative economic profits but will try to remain open.
c.
negative economic profits and will shut down.
d.
zero economic profits.
162.
Refer to Figure 14-2. Which of the four prices corresponds to a firm earning positive
economic profits in the
short run?
a.
Pa
b.
Pb
c.
Pc
d.
Pd
163.
Refer to Figure 14-2. Which of the four prices corresponds to a firm earning zero economic
profits in the short
run?
a.
Pa
b.
Pb
c.
Pc
d.
Pd
164.
Refer to Figure 14-2. Which of the four prices corresponds to a firm earning negative
economic profits in the
short run but trying to remain open?
a.
Pa
b.
Pb
c.
Pc
d.
Pd
165.
Refer to Figure 14-2. Which of the four prices corresponds to a firm earning negative
economic profits in the
short run and shutting down?
a.
Pa
b.
Pb
c.
Pc
d.
Pd
Figure 14-3
Suppose a firm operating in a competitive market has the following cost curves:
166.
Refer to Figure 14-3. If the market price is $10, what is the firm’s short-run economic profit?
a.
$9
b. $15
c. $30
d. $50
167.
Refer to Figure 14-3. If the market price is $6, what is the firm’s short-run economic profit?
a.
$0
b.
$12
c.
$15
d.
$18
168.
Refer to Figure 14-3. If the market price is $10, what is the firm’s total cost?
a.
$15
b.
$30
c.
$35
d.
$50
169.
Refer to Figure 14-3. If the market price is $10, what is the firm’s total revenue?
a.
$15
b.
$30
c.
$35
d.
$50
170.
Refer to Figure 14-3. The firm will earn zero economic profit if the market price is
a. $0.
b.
$6.
c.
$7.
d.
$10.
171.
Refer to Figure 14-3. The firm will earn positive economic profit if the market price is
a.
positive.
b.
$6.
c.
above $6.
d.
There is no price at which the firm earns positive economic profits.
Firms in Competitive Markets 3505
Figure 14-4
Suppose a firm operating in a competitive market has the following cost curves:
172.
Refer to Figure 14-4. When price rises from P2 to P3, the firm finds that
a.
marginal cost exceeds marginal revenue at a production level of Q2.
b.
if it produces at output level Q3 it will earn a positive profit.
c.
expanding output to Q4 would leave the firm with losses.
d.
it could increase profits by lowering output from Q3 to Q2.
173.
Refer to Figure 14-4. When price falls from P3 to P1, the firm finds that it
a.
decreases its fixed costs.
b.
should produce Q1 units of output.
c.
should produce Q3 units of output.
d.
should shut down immediately.
174.
Refer to Figure 14-4. The firm will earn positive economic profits if the price is
(i)
P4.
(ii)
P3.
(iii)
P2.
(iv)
P1.
a.
(i) only
b.
(i) or (ii) only
c.
(i), (ii), or (iii) only
d.
(i), (ii), (iii), and (iv)
175.
Refer to Figure 14-4. At which price range will the firm continue to operate in the short run
but earn negative
profits?
a.
any price higher than P4
b.
any price higher than P3 but less than P4
c.
any price higher than P2 but less than P3
d.
any price lower than P1
176.
Refer to Figure 14-4. When price rises from P3 to P4, the firm finds that
a.
fixed costs decrease as output increases from Q3 to Q4.
b.
it can earn a positive profit by increasing production to Q4.
c.
profit is still maximized at a production level of Q3.
d.
average revenue exceeds marginal revenue at a production level of Q4.
3508 Firms in Competitive Markets
Figure 14-5
Suppose a firm operating in a competitive market has the following cost curves:
177.
Refer to Figure 14-5. When market price is P7, a profit-maximizing firm's short-run profits
can be represented by
the area
a.
P7 × Q5.
b.
P7 × Q3.
c. (P7 - P5) × Q3.
d. We are unable to determine the firm’s profits because the quantity that the firm would
produce is not labeled on the graph.
178.
Refer to Figure 14-5. In the short run, if the market price is higher than P1 but less than P4,
individual firms in a
competitive industry will earn
a.
positive profits.
b.
zero profits.
c.
losses but will remain in business.
d.
losses and will shut down.
179.
Refer to Figure 14-5. In the short run,if the market price is higher than P4 but less than P6,
individual firms in a
competitive industry will earn
a.
positive profits.
b.
zero profits.
c.
losses but will remain in business.
d.
losses and will shut down.
180.
Refer to Figure 14-5. In the short run, if the market price is P4, individual firms in a
competitive industry will earn
a.
positive profits.
b.
zero profits.
c.
losses but will remain in business.
d.
losses and will shut down.
181.
Refer to Figure 14-5. Firms would be encouraged to enter this market for all prices that
exceed
a.
P1.
b.
P2.
c.
P3.
d.
P4.
