Firms in Competitive Markets 3471
102. Refer to Scenario 14-2. 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.
103. Refer to Scenario 14-2. At Q = 1,000, the firm’s profits equal
a. –$5,000.
b. $2,500.
c. $5,000.
d. $10,000.
104. Refer to Scenario 14-2. At Q = 999, the firm’s total costs equal
a. $24,970.
b. $24,975.
c. $24,980.
d. $25,025.
3472 Firms in Competitive Markets
105. Refer to Scenario 14-2. At Q = 999, the firm’s profits equal
a. $4,990.
b. $5,000.
c. $5,020.
d. $5,030.
Scenario 14-3
Suppose a certain competitive firm is producing Q=500 units of output. The marginal cost of the
500th unit is $17, and the average total cost of producing 500 units is $12. The firm sells its
output for $20.
106. Refer to Scenario 14-3. At Q=500, the firm’s profits equal
a. $1,000.
b. $4,000.
c. $7,000.
d. $10,000.
Firms in Competitive Markets 3473
107. Refer to Scenario 14-3. At Q=499, the firm’s total costs equal
a. $5,983.
b. $5,988.
c. $5,995.
d. $5,999.
108. Refer to Scenario 14-3. At Q=499, the firm’s profits equal
a. $3,980.
b. $3,992.
c. $3,997.
d. $4,017.
3474 Firms in Competitive Markets
109. Refer to Scenario 14-3. If the marginal cost of producing the 501st unit would be $19,
producing and selling the 501st unit would
a. decrease the firm’s profit by $19.
b. decrease the firm’s profit by $2.
c. increase the firm’s profit by $1.
d. increase the firm’s profit by $3.
Scenario 14-4
The information below applies to a competitive firm that sells its output for $40 per unit.
• When the firm produces and sells 150 units of output, its average total cost is $24.50.
• When the firm produces and sells 151 units of output, its average total cost is $24.55.
110. Refer to Scenario 14-4. When the firm produces 150 units of output, its total cost is
a. $3,450.00.
b. $3,525.75.
c. $3,675.00.
d. $3,850.25.
Firms in Competitive Markets 3475
111. Refer to Scenario 14-4. Let Q represent the quantity of output. Which of the following
magnitudes has the same value at Q = 150 and at Q = 151?
a. average fixed cost
b. average revenue
c. total cost
d. total revenue
112. Refer to Scenario 14-4. When the firm produces 150 units of output, its profit is
a. $2,150.00.
b. $2,325.00.
c. $3,100.75.
d. $3,675.00.
3476 Firms in Competitive Markets
113. Refer to Scenario 14-4. Suppose the firm is producing 150 units of output and its fixed cost is
$975. Then its variable cost amounts to
a. $2,360.25.
b. $2,500.00.
c. $2,612.75.
d. $2,700.00.
114. Refer to Scenario 14-4. Suppose the firm is producing 150 units of output and its fixed cost is
$975. Then its average variable cost amounts to
a. $16.40.
b. $17.00.
c. $18.00.
d. $19.60.
Firms in Competitive Markets 3477
115. Refer to Scenario 14-4. When the firm increases its output from 150 units to 151 units, its
profit
a. decreases by $5.75.
b. decreases by $7.20.
c. increases by $4.15.
d. increases by $7.95.
116. Refer to Scenario 14-4. When the firm increases its output from 150 units to 151 units, its
marginal cost is
a. $29.95.
b. $32.05.
c. $33.00.
d. $34.25.
3478 Firms in Competitive Markets
117. Refer to Scenario 14-4. How does the firm’s marginal revenue (MR) compare to its marginal
cost (MC) when it increases its output from 150 units to 151 units?
a. MR exceeds MC by $7.95.
b. MR exceeds MC by $11.05.
c. MC exceeds MR by $11.05.
d. MC exceeds MR by $13.50.
118. Refer to Scenario 14-4. Suppose the firm is currently producing and selling 150 units of output.
Should the firm increase its output to 151 units?
a. Yes, because the marginal revenue exceeds the marginal cost.
b. Yes, because the marginal revenue exceeds the average total cost.
c. No, because the marginal cost exceeds the marginal revenue.
d. No, because the average total cost exceeds the marginal revenue.
Firms in Competitive Markets 3479
119. Which of the following expressions is correct for a competitive firm?
a. profit = (quantity of output) x (price – average total cost)
b. marginal revenue = (change in total revenue)/(quantity of output)
c. average total cost = total variable cost/quantity of output
d. average revenue = (marginal revenue) x (quantity of output)
120. A competitive firm is currently producing a quantity of output at which marginal revenue
exceeds marginal cost. In order to increase its profit, the firm should
a. increase the price of the good that it produces and sells.
b. increase its quantity of output.
c. decrease its total cost.
d. decrease its average total cost.
3480 Firms in Competitive Markets
121. Total profit for a firm is calculated as
a. marginal revenue minus average total cost.
b. average revenue minus average total cost.
c. marginal revenue minus marginal cost.
d. (price minus average cost) times quantity of output.
122. We can measure the profits earned by a firm in a competitive industry as
a. (P – ATC) × Q.
b. (P – MC) × Q.
c. MR × MC.
d. (MC – ATC) × Q.
123. When a profit-maximizing firm is earning profits, those profits can be identified by
a. P × Q.
b. (MC – AVC) × Q.
c. (P – ATC) × Q.
d. (P – AVC) × Q.
Firms in Competitive Markets 3481
124. Assume a firm in a competitive industry is producing 800 units of output, and it sells each unit for
$6. Its average total cost is $4. Its profit is
a. –$1,600.
b. $1,600.
c. $3,200.
d. $8,000.
125. Which of the following could be used to calculate the profit for a firm?
a. Profit = MR – MC
b. Profit = MR – TC
c. Profit = (P – MC) × Q
d. Profit = (P – ATC) × Q
3482 Firms in Competitive Markets
126. Suppose that a firm in a competitive market is currently maximizing its short–run profit at an
output of 50 units. If the current price is $9, the marginal cost of the 50th unit is $9, and the
average total cost of producing 50 units is $4, what is the firm’s profit?
a. $0
b. $200
c. $250
d. $450
127. In a competitive market the price is $8. A typical firm in the market has ATC = $6, AVC = $5,
and MC = $8. How much economic profit is the firm earning in the short run?
a. $0 per unit
b. $1 per unit
c. $2 per unit
d. $3 per unit
Firms in Competitive Markets 3483
128. Consider a firm operating in a competitive market. The firm is producing 40 units of output, has
an average total cost of production equal to $5, and is earning $240 economic profit in the short
run. What is the current market price?
a. $9
b. $10
c. $11
d. $12
129. Consider a firm operating in a competitive market. The firm is producing 40 units of output, has
an average total cost of production equal to $6, and is earning $240 economic profit in the short
run. What is the current market price?
a. $0
b. $6
c. $10
d. $12
3484 Firms in Competitive Markets
130. In the short run, a firm operating in a competitive industry will produce the quantity of output
where price equals marginal cost as long as the
a. price is less than average total cost.
b. marginal revenue exceeds the marginal cost.
c. price is greater than average variable cost.
d. price is greater than average fixed cost but less than average variable cost.
131. In the short run, a firm operating in a competitive industry will shut down if price is
a. less than average total cost.
b. less than average variable cost.
c. greater than average variable cost but less than average total cost.
d. greater than marginal cost.
Firms in Competitive Markets 3485
132. The short-run supply curve for a firm in a perfectly competitive market is
a. horizontal.
b. likely to slope downward.
c. determined by forces external to the firm.
d. the portion of its marginal cost curve that lies above its average variable cost.
133. A competitive firm’s short-run supply curve is part of which of the following curves?
a. marginal revenue
b. average variable cost
c. average total cost
d. marginal cost
134. Which of these curves is the competitive firm‘s short–run supply curve?
a. the average variable cost curve above marginal cost
b. the average total cost curve above marginal cost
c. the marginal cost curve above average variable cost
d. the average fixed cost curve
3486 Firms in Competitive Markets
135. The competitive firm‘s short–run supply curve is that portion of the
a. average variable cost curve that lies above marginal cost.
b. average total cost curve that lies above marginal cost.
c. marginal cost curve that lies above average variable cost.
d. marginal cost curve that lies above average total cost.
136. When price exceeds average variable cost in the short run, a competitive firm’s marginal cost
curve is regarded as its supply curve because
a. the position of the marginal cost curve determines the price for which the firm should sell its
product.
b. among the various cost curves, the marginal cost curve is the only one that slopes upward.
c. the marginal cost curve determines the quantity of output the firm is willing to supply at any
price.
d. the firm is aware that marginal revenue must exceed marginal cost in order for profit to be
maximized.
Firms in Competitive Markets 3487
137. A firm in a competitive market has the following cost structure:
Output
Total Costs
0
$1
1
$6
2
$9
3
$10
4
$17
5
$26
What is the lowest price at which this firm might choose to operate?
a. $2
b. $3
c. $4
d. $5
138. The competitive firm’s short-run supply curve is its
a. marginal revenue curve, but only the portion where marginal revenue exceeds marginal cost.
b. marginal cost curve.
c. marginal cost curve, but only the portion above the minimum of average total cost.
d. marginal cost curve, but only the portion above the minimum of average variable cost.
3488 Firms in Competitive Markets
139. Suppose a profit-maximizing firm in a competitive market produces rubber bands. When the
market price for rubber bands falls below the minimum of its average total cost, but still lies
above the minimum of average variable cost, in the short run the firm will
a. experience losses but will continue to produce rubber bands.
b. shut down.
c. earn both economic and accounting profits.
d. raise the price of its product.
140. Suppose a profit-maximizing firm in a competitive market produces rubber bands. When the
market price for rubber bands rises above the minimum of its average variable cost, but still lies
below the minimum of average total cost, in the short run the firm will
a. experience losses but will continue to produce rubber bands.
b. shut down.
c. earn both economic and accounting profits.
d. raise the price of its product.
Firms in Competitive Markets 3489
141. Shrimp Galore, a shrimp harvesting business in the Pacific Northwest, has a 30-year loan on its
shrimp harvesting boat. The annual loan payment is $25,000 and the boat has a market (salvage)
value that exceeds its outstanding loan balance. Prior to the 2010 shrimp harvesting season,
Shrimp Galore’s accountant predicted that at expected market prices for shrimp, Shrimp Galore
would have a net loss of $75,000 dollars after paying all 2010 expenses (including the annual loan
payment). In this case, Shrimp Galore should
a. produce nothing and experience a loss of $25,000.
b. produce nothing and experience a loss of $75,000.
c. continue to operate because expected profits will rise in the future.
d. continue to operate even though it predicts a loss of $75,000.
142. When a profit-maximizing competitive firm finds itself minimizing losses because it is unable to
earn a positive profit, this task is accomplished by producing the quantity at which price is equal
to
a. sunk cost.
b. average fixed cost.
c. average variable cost.
d. marginal cost.
3490 Firms in Competitive Markets
143. When a restaurant stays open for lunch service even though few customers patronize the
restaurant for lunch, which of the following principles is (are) best demonstrated?
(i) Fixed costs are sunk in the short run.
(ii) In the short run, only fixed costs are important to the decision to stay open for lunch.
(iii) If revenue exceeds variable cost, the restaurant owner is making a smart decision to
remain open for lunch.
a. (i) and (ii) only
b. (ii) and (iii) only
c. (i) and (iii) only
d. (i), (ii), and (iii)
144. A profit-maximizing firm in a competitive market is able to sell its product for $7. At its current
level of output, the firm’s average total cost is $10. The firm’s marginal cost curve crosses its
marginal revenue curve at an output level of 9 units. The firm experiences a
a. profit of more than $27.
b. profit of exactly $27.
c. loss of more than $27.
d. loss of exactly $27.