Firms in Competitive Markets 3451
64.
Refer to Table 14–14. Suppose that due to a decrease in the market demand for bread the
market price of bread
drops to $2.75 per loaf. At this new price, what is Bob’s profit–maximizing
quantity?
a.
5 units
b.
6 units
c.
7 units
d.
8 units
65.
Refer to Table 14–14. Suppose that due to a decrease in the market demand for bread the
market price of bread
drops to $2.75. At this new price, if Bob produces and sells the profit-
maximizing quantity, how much profit will he
earn?
a. $0.25
b. $1.25
c. $2.25
d. The firm will lose $6.25.
66.
Which of the following statements best expresses a firm’s profit-maximizing decision rule?
a.
If marginal revenue is greater than marginal cost, the firm should increase its output.
b.
If marginal revenue is less than marginal cost, the firm should decrease its output.
c.
If marginal revenue equals marginal cost, the firm should continue producing its current level of
output.
d.
All of the above are correct.
67.
Which of the following statements best expresses a firm’s profit–maximizing decision rule?
a.
If marginal revenue is greater than marginal cost, the firm should increase its output.
b.
If marginal revenue is less than marginal cost, the firm should shut down in the short run.
c.
If marginal revenue equals marginal cost, the firm should produce exactly one more unit of
output.
d.
All of the above are correct.
68.
If marginal cost exceeds marginal revenue, the firm
a.
is most likely to be at a profit-maximizing level of output.
b.
should increase the level of production to maximize its profit.
c.
should reduce its average fixed cost in order to lower its marginal cost.
d.
may still be earning a positive accounting profit.
69.
When marginal revenue equals marginal cost, the firm
a.
should increase the level of production to maximize its profit.
b.
may be minimizing its losses rather than maximizing its profit.
c.
must be generating positive economic profits.
d.
must be generating positive accounting profits.
70.
In order to maximize profits in the short run, a firm should produce where
a.
marginal revenue exceeds marginal cost by the greatest amount.
b.
marginal cost is minimized.
c.
average total cost is minimized.
d.
marginal cost equals marginal revenue.
71.
Profit-maximizing firms in a competitive market produce an output level where
a.
marginal cost equals marginal revenue.
b.
marginal cost equals average total cost.
c.
marginal revenue is increasing.
d.
price is less than marginal revenue.
72.
A profit–maximizing firm in a competitive market will always make marginal adjustments to
production as long as
a.
average revenue is greater than average total cost.
b.
average revenue is equal to marginal cost.
c.
marginal cost is greater than average total cost.
d.
price is above or below marginal cost.
73.
When price is greater than marginal cost for a firm in a competitive market,
a.
marginal cost must be falling.
b.
the firm must be minimizing its losses.
c.
there are opportunities to increase profit by increasing production.
d.
the firm should decrease output to maximize profit.
74.
Profit-maximizing firms enter a competitive market when existing firms in that market have
a.
total revenues that exceed fixed costs.
b.
total revenues that exceed total variable costs.
c.
average total costs that exceed average revenue.
d.
average total costs less than market price.
75.
If a profit-maximizing firm in a competitive market discovers that, at its current level of
production, price is greater
than marginal cost, it should
a.
shut down.
b.
reduce its output but continue operating.
c.
continue to produce at the current levels.
d.
increase its output.
76.
For any given price, a firm in a competitive market will maximize profit by selecting the level of
output at which
price intersects the
a.
average total cost curve.
b.
average variable cost curve.
c.
marginal cost curve.
d.
marginal revenue curve.
77.
By comparing marginal revenue and marginal cost, a firm in a competitive market is able to adjust
production to the
level that achieves its objective, which we assume to be
a.
maximizing total revenue.
b.
maximizing profit.
c.
minimizing variable cost.
d.
minimizing average total cost.
78.
A profit-maximizing firm in a competitive market is currently producing 200 units of output. It has
average revenue
of $9 and average total cost of $7. It follows that the firm‘s
a.
average total cost curve intersects the marginal cost curve at an output level of less than 200
units.
b.
average variable cost curve intersects the marginal cost curve at an output level of less than
200 units.
c.
profit is $400.
d.
All of the above are correct.
79.
If a competitive firm is currently producing a level of output at which profit is not maximized,
then it must be true
that
a.
marginal revenue exceeds marginal cost.
b.
marginal cost exceeds marginal revenue.
c.
total cost exceeds total revenue.
d.
None of the above is correct.
80.
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 earned
$4,500 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.
81.
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 $16, this firm will
a.
produce 4 units of output in the short run and exit in the long run.
b.
produce 5 units of output in the short run and exit in the long run.
c.
produce 5 units of output in the short run and face competition from new market entrants in the
long run.
d.
shut down in the short run and exit in the long run.
82.
A firm in a competitive market has the following cost structure:
Output
Total Costs
0
$10
1
$12
2
$15
3
$19
4
$24
5
$30
6
$37
7
$46
8
$55
9
$65
If the market price is $8, how many units of output should the firm produce to maximize profit?
a.
5 units
b.
6 units
c.
7 units
d.
8 units
83.
A firm in a competitive market has the following cost structure:
Output
ATC
0
—
1
$10
2
$8
3
$7
4
$8
5
$10
If the firm‘s fixed cost of production is $3, and the market price is $10, how many units should the
firm produce to
maximize profit?
a.
1 unit
b.
2 units
c.
3 units
d.
4 units
84.
Consider a competitive market with 50 identical firms. Suppose the market demand is given by
the equation QD =
200 – 10P and the market supply is given by the equation QS = 10P. In
addition, suppose the following table shows
the marginal cost of production for various levels of
output for firms in this market.
Output
Marginal Cost
0
—
1
$5
2
$10
3
$15
4
$20
5
$25
How many units should a firm in this market produce to maximize profit?
a.
1 unit
b.
2 units
c.
3 units
d.
4 units
85.
Mrs. Smith operates a business in a competitive market. The current market price is $8.50. At her
profit-
maximizing level of production, the average variable cost is $8.00, and the average total
cost is $8.25. Mrs. Smith
should
a.
shut down her business in the short run but continue to operate in the long run.
b.
continue to operate in the short run but shut down in the long run.
c.
continue to operate in both the short run and long run.
d.
shut down in both the short run and long run.
86.
Mrs. Smith operates a business in a competitive market. The current market price is $7.50. At
her profit–
maximizing level of production, the average variable cost is $8.00, and the average
total cost is $8.25. Mrs. Smith
should
a.
shut down her business in the short run but continue to operate in the long run.
b.
continue to operate in the short run but shut down in the long run.
c.
continue to operate in both the short run and long run.
d.
shut down in both the short run and long run.
87.
Mrs. Smith operates a business in a competitive market. The current market price is $8.10. At her
profit-
maximizing level of production, the average variable cost is $8.00, and the average total
cost is $8.25. Mrs. Smith
should
a.
shut down her business in the short run but continue to operate in the long run.
b.
continue to operate in the short run but shut down in the long run.
c.
continue to operate in both the short run and long run.
d.
shut down in both the short run and long run.
88.
Suppose a firm operates in the short run at a price above its average total cost of production. In
the long run the
firm should expect
a.
new firms to enter the market.
b.
the market price to fall.
c.
its profits to fall.
d.
All of the above are correct.
89.
Suppose a firm operates in the short run at a price above its average total cost of production. In
the long run the
firm should expect
a.
new firms to enter the market.
b.
the market price to rise.
c.
its profits to rise.
d.
Both b and c are correct.
90.
The accountants hired by the Brookside Racquet Club have determined total fixed cost to be
$75,000, total variable
cost to be $130,000, and total revenue to be $145,000. Because of this
information, in the short run, the Brookside
Racquet Club should
a.
shut down.
b.
exit the industry.
c.
stay open because shutting down would be more expensive.
d.
stay open because the firm is making an economic profit.
91.
The accountants hired by the Brookside Racquet Club have determined total fixed cost to be
$75,000, total variable
cost to be $130,000, and total revenue to be $125,000. Because of this
information, in the short run, the Brookside
Racquet Club should
a.
shut down because staying open would be more expensive.
b.
lower their prices to increase their profits.
c.
stay open because shutting down would be more expensive.
d.
stay open because the firm is making an economic profit.
92.
Cold Duck Airlines flies between Tacoma and Portland. The company leases planes on a year-
long contract at a
cost that averages $600 per flight. Other costs (fuel, flight attendants, etc.)
amount to $550 per flight. Currently,
Cold Duck’s revenues are $1,000 per flight. All prices and
costs are expected to continue at their present levels. If
it wants to maximize profit, Cold Duck
Airlines should
a.
drop the flight immediately.
b.
continue the flight.
c.
continue flying until the lease expires and then drop the run.
d.
drop the flight now but renew the lease if conditions improve.
93.
Raiman’s Shoe Repair produces custom-made shoes. When Mr. Raiman produces 12 pairs per
week, the marginal
cost of the 12th pair is $84, and the marginal revenue of the 12th pair is $70.
What would you advise Mr. Raiman to
do?
a.
shut down the business
b.
produce more custom-made shoes
c.
decrease the price
d.
produce fewer custom-made shoes
94.
Winona’s Fudge Shoppe is maximizing profits by producing 1,000 pounds of fudge per day. If
Winona’s fixed costs
unexpectedly increase and the market price remains constant, then the short
run profit-maximizing level of output
a.
is less than 1,000 pounds.
b.
is still 1,000 pounds.
c.
is more than 1,000 pounds.
d.
becomes zero.
95.
The firm will make the most profits if it produces the quantity of output at which
a.
marginal cost equals average cost.
b.
profit per unit is greatest.
c.
marginal revenue equals total revenue.
d.
marginal revenue equals marginal cost.
96.
A firm in a competitive market currently produces and sells 500 doorknobs for a price of $10 per
doorknob. Which
of the following events would decrease the firm‘s average revenue?
a.
The firm increases its output above 500 doorknobs.
b.
The firm decreases its output below 500 doorknobs.
c.
The market price of doorknobs rises above $10.
d.
The market price of doorknobs falls below $10.
97.
For a firm, marginal revenue minus marginal cost is equal to
a.
profit.
b.
average total cost.
c.
change in profit.
d.
change in average revenue.
Firms in Competitive Markets 3469
Scenario 14-1
Assume a certain firm in a competitive market is producing Q = 1,000 units of output. At Q =
1,000, the firm‘s
marginal cost equals $15 and its average total cost equals $11. The firm sells its
output for $12 per unit.
98.
Refer to Scenario 14-1. At Q = 1,000, the firm’s profits equal
a. –$200.
b. $1,000.
c. $3,000.
d. $4,000.
99.
Refer to Scenario 14-1. At Q = 999, the firm‘s total costs equal
a. $10,985.
b. $10,990.
c. $10,995.
d. $10,999.
100.
Refer to Scenario 14-1. At Q = 999, the firm‘s profits equal
a. $993.
b. $997.
c. $1,003.
d. $1,007.
101.
Refer to Scenario 14-1. To maximize its profit, the firm should
a.
increase its output.
b.
continue to produce 1,000 units.
c.
decrease its output but continue to produce.
d.
shut down.
Scenario 14–2
Assume a certain firm is producing Q = 1,000 units of output. At Q = 1,000, the firm‘s marginal
cost equals $20 and
its average total cost equals $25. The firm sells its output for $30 per unit.