Firms in Competitive Markets 3611
16. A firm’s incentive to compare marginal revenue and marginal cost is an application of the
principle that rational people think at the margin.
a. True
b. False
17. By comparing the marginal revenue and marginal cost from each unit produced, a firm in a
competitive market can determine the profit-maximizing level of production.
a. True
b. False
18. Firms operating in perfectly competitive markets produce an output level where marginal revenue
equals marginal cost.
a. True
b. False
3612 Firms in Competitive Markets
19. A firm is currently producing 100 units of output per day. The manager reports to the owner that
producing the 100th unit costs the firm $5. The firm can sell the 100th unit for $4.75. The firm
should continue to produce 100 units in order to maximize its profits (or minimize its losses).
a. True
b. False
20. A firm is currently producing 100 units of output per day. The manager reports to the owner that
producing the 100th unit costs the firm $5. The firm can sell the 100th unit for $5. The firm
should continue to produce 100 units in order to maximize its profits (or minimize its losses).
a. True
b. False
21. A firm is currently producing 100 units of output per day. The manager reports to the owner that
producing the 100th unit costs the firm $5. The firm can sell the unit for $6. The firm should
produce more than 100 units in order to maximize its profits (or minimize its losses).
a. True
b. False
Firms in Competitive Markets 3613
22. All firms maximize profits by producing an output level where marginal revenue equals marginal
cost; for firms operating in perfectly competitive industries, maximizing profits also means
producing an output level where price equals marginal cost.
a. True
b. False
23. When a profit–maximizing firm in a competitive market experiences rising prices, it will respond
with an increase in production.
a. True
b. False
24. A firm operating in a perfectly competitive industry will continue to operate in the short run but
earn losses if the market price is less than that firm’s average total cost but greater than the firm’s
average variable cost.
a. True
b. False
3614 Firms in Competitive Markets
25. A firm operating in a perfectly competitive industry will continue to operate in the short run but
earn losses if the market price is less than that firm’s average variable cost but greater than the
firm’s average fixed cost.
a. True
b. False
26. A firm operating in a perfectly competitive industry will continue to operate in the short run but
earn losses if the
market price is less than that firm’s average variable cost.
a. True
b. False
27. A firm operating in a perfectly competitive industry will shut down in the short run but earn losses
if the market price
is less than that firm’s average variable cost.
a. True
b. False
Firms in Competitive Markets 3615
28. In the short run, a firm should exit the industry if its marginal cost exceeds its marginal revenue.
a. True
b. False
29. The supply curve of a firm in a competitive market is the average variable cost curve above the
minimum of marginal cost.
a. True
b. False
30. A firm will shut down in the short run if revenue is not sufficient to cover its variable costs of
production.
a. True
b. False
3616 Firms in Competitive Markets
31. Suppose a firm is considering producing zero units of output. We call this shutting down in the
short run and exiting an industry in the long run.
a. True
b. False
32. Suppose a firm is considering producing zero units of output. We call this exiting an industry in the
short run and shutting down in the long run.
a. True
b. False
33. A firm will shut down in the short run if revenue is not sufficient to cover all of its fixed costs of
production.
a. True
b. False
Firms in Competitive Markets 3617
34. A firm operating in a competitive market will stay in business in the short run so long as the
market price exceeds the firm’s average total cost; otherwise, the firm will shut down.
a. True
b. False
35. In the short run, if the market price is below the firm’s average total cost of production, the firm
will always shut down.
a. True
b. False
36. The marginal firm in a competitive market will earn zero economic profit in the long run.
a. True
b. False
3618 Firms in Competitive Markets
37. A profit-maximizing firm in a competitive market will earn zero accounting profits in the long run.
a. True
b. False
38. A miniature golf course is a good example of where fixed costs become relevant to the decision of
when to open and when to close for the season.
a. True
b. False
39. A popular resort restaurant will maximize profits if it chooses to stay open during the
less-crowded “off season” when its total revenues exceed its variable costs.
a. True
b. False
Firms in Competitive Markets 3619
40. A popular resort restaurant will maximize profits if it chooses to stay open during the
less-crowded “off season” when its total revenues exceed its fixed costs.
a. True
b. False
41. A dairy farmer must be able to calculate sunk costs in order to determine how much revenue the
farm receives for the typical gallon of milk.
a. True
b. False
42. Because nothing can be done about sunk costs, they are irrelevant to decisions about business
strategy.
a. True
b. False
3620 Firms in Competitive Markets
43. The manager of a firm operating in a competitive market can ignore sunk costs when making
business decisions.
a. True
b. False
44. In the long run, when price is less than average total cost for all possible levels of production, a
firm in a competitive market will choose to exit (or not enter) the market.
a. True
b. False
45. In the long run, when price is greater than average total cost, some firms in a competitive market
will choose to enter the market.
a. True
b. False
Firms in Competitive Markets 3621
46. In the long run, a firm should exit the industry if its total costs exceed its total revenues.
a. True
b. False
47. A competitive firm’s profit will be increasing as long as marginal revenue is greater than marginal
cost.
a. True
b. False
48. In making a short-run profit-maximizing production decision, the firm must consider both fixed
and variable cost.
a. True
b. False
3622 Firms in Competitive Markets
49. A firm operating in a perfectly competitive industry will continue to operate if it earns zero
economic profits because it is likely to be earning positive accounting profits.
a. True
b. False
50. A firm operating in a perfectly competitive market may earn positive, negative, or zero economic
profit in the long run.
a. True
b. False
51. A firm operating in a perfectly competitive market may earn positive, negative, or zero economic
profit in the short run.
a. True
b. False
Firms in Competitive Markets 3623
52. A firm operating in a perfectly competitive industry will shut down in the short run if its economic
profits fall to zero because it is likely to be earning negative accounting profits.
a. True
b. False
53. A firm operating in a perfectly competitive market earns zero economic profit in the long run but
remains in business because the firm’s revenues cover the business owners’ opportunity costs.
a. True
b. False
54. A competitive market will typically experience entry and exit until accounting profits are zero.
a. True
b. False
3624 Firms in Competitive Markets
55. The long–run equilibrium in a competitive market characterized by firms with identical costs is
generally characterized by firms operating at efficient scale.
a. True
b. False
56. In the long run, a competitive market with 1,000 identical firms will experience an equilibrium
price equal to the minimum of each firm’s average total cost.
a. True
b. False
57. In a long–run equilibrium where firms have identical costs, it is possible that some firms in a
competitive market are making a positive economic profit.
a. True
b. False
Firms in Competitive Markets 3625
58. When economic profits are zero in equilibrium, the firm‘s revenue must be sufficient to cover all
opportunity costs.
a. True
b. False
59. The stable, long-run equilibrium in a competitive market occurs when the market price equals the
lowest point on a firm’s average total cost curve.
a. True
b. False
60. All competitive firms earn zero economic profit in both the short run and the long run.
a. True
b. False
3626 Firms in Competitive Markets
61. When a resource used in the production of a good sold in a competitive market is available in only
limited quantities, the long-run supply curve is likely to be upward sloping.
a. True
b. False
62. The short-run supply curve in a competitive market must be more elastic than the long–run supply
curve.
a. True
b. False
63. The long-run supply curve in a competitive market is more elastic than the short–run supply curve.
a. True
b. False