Firms in Competitive Markets 3531
219. When determining whether to shut down in the short run, a competitive firm should ignore
(i) fixed costs.
(ii) variable costs.
(iii) sunk costs.
a. (iii) only
b. (i) and (iii) only
c. (ii) only
d. (i), (ii), and (iii)
220. In a competitive market the current price is $5. The typical firm in the market has ATC = $5.50
and AVC = $5.15.
a. In the short run firms will shut down, and in the long run firms will leave the market.
b. In the short run firms will continue to operate, but in the long run firms will leave the market.
c. New firms will likely enter this market to capture any remaining economic profits.
d. The firm will earn zero profits in both the short run and long run.
3532 Firms in Competitive Markets
221. In a competitive market the current price is $5. The typical firm in the market has ATC = $5.50
and AVC = $4.50.
a. In the short run firms will shut down, and in the long run firms will leave the market.
b. In the short run firms will continue to operate, but in the long run firms will leave the market.
c. New firms will likely enter this market to capture any remaining economic profits.
d. The firm will earn zero profits in both the short run and long run.
222. In a competitive market the current price is $5. The typical firm in the market has ATC = $5.00
and AVC = $4.50.
a. In the short run firms will shut down, and in the long run firms will leave the market.
b. In the short run firms will continue to operate, but in the long run firms will leave the market.
c. New firms will likely enter this market to capture any remaining economic profits.
d. The firm will earn zero profits in both the short run and long run.
Firms in Competitive Markets 3533
223. In a competitive market the current price is $6. The typical firm in the market has ATC = $5.00
and AVC = $4.50.
a. In the short run firms will shut down, and in the long run firms will leave the market.
b. In the short run firms will continue to operate, but in the long run firms will leave the market.
c. New firms will likely enter this market to capture some of the economic profits.
d. The firm will earn zero profits in both the short run and long run.
224. Jose’s restaurant operates in a perfectly competitive market. At the point where marginal cost
equals marginal revenue, ATC = $20, AVC = $15, and the price per unit is $10. In this situation,
a. Jose‘s restaurant is earning a positive economic profit.
b. Jose’s restaurant should shut down immediately.
c. Jose‘s restaurant is losing money in the short run but should continue to operate.
d. the market price will rise in the short run to increase profits.
3534 Firms in Competitive Markets
225. The term shutdown
a. and the term exit both refer to short-run decisions that a firm might make.
b. and the term exit both refer to long-run decisions that a firm might make.
c. refers to a short-run decision that a firm might make, whereas the term exit refers to a long–
run decision that a firm might make.
d. refers to a long-run decision that a firm might make, whereas the term exit refers to a short–
run decision that a firm might make.
226. For a particular competitive firm, the minimum value of average variable cost (AVC) is $12 and
is reached when 200 units of output are produced. For the same firm, the minimum value of
average total cost (ATC) is $15 and is reached when 230 units of output are produced. Which of
the following statements is correct?
a. In the short run, the firm will shut down if the price of its product is $11.
b. In the long run, the firm will shut down if the price of its product is $14.
c. If the price of its product is $12, then the firm’s loss if it produces 200 units of output is the
same as its loss if
it shuts down.
d. All of the above are correct.
Firms in Competitive Markets 3535
227. For a particular competitive firm, the minimum value of average variable cost (AVC) is $12 and
is reached when 200 units of output are produced. For the same firm, the minimum value of
average total cost (ATC) is $15 and is reached when 230 units of output are produced. Which of
the following statements is correct?
a. In the short run, the firm will shut down if the price of its product is $14.
b. In the long run, the firm will shut down if the price of its product is $11.
c. For this firm, the minimum value of variable cost (VC) is $2,400.
d. If the firm’s fixed cost (FC) amounts to $500, then the firm cannot earn a positive profit
unless the price of its product exceeds $16.
228. When fixed costs are ignored because they are irrelevant to a business’s production decision,
they are called
a. explicit costs.
b. implicit costs.
c. sunk costs.
d. opportunity costs.
3536 Firms in Competitive Markets
229. When a profit-maximizing firm‘s fixed costs are considered sunk in the short run, then the firm
a. can set price above marginal cost.
b. must set price below average total cost.
c. will never show losses.
d. can safely ignore fixed costs when deciding how much output to produce.
230. Which of these types of costs can be ignored when an individual or a firm is making decisions?
a. sunk costs
b. marginal costs
c. variable costs
d. opportunity costs
Firms in Competitive Markets 3537
231. Suppose you value a special watch at $100. You purchase it for $75. On your way home from
class one day, you lose the watch. The store is still selling the same watch, but the price has
risen to $85. Assume that losing the watch has not altered how you value it. What should you
do?
a. Pay the $85 to buy the watch.
b. Wait to see if the watch goes on sale. If the price drops to $75 or less, buy the watch.
c. Wait to see if the watch goes on sale. If the price drops to $25 or less, buy the watch.
d. Do not buy the watch.
232. Suppose you bought a ticket to a football game for $30 and that you place a $35 value on seeing
the game. If you lose the ticket, then what is the maximum price you should pay for another
ticket? Assume that losing the ticket does not alter how you value it.
a. $5
b. $30
c. $35
d. $65
3538 Firms in Competitive Markets
233. You purchase a $30, nonrefundable ticket to a play at a local theater. Ten minutes into the show
you realize that it is not a very good show and place only a $10 value on seeing the remainder of
the show. Alternatively you could leave the theater and go home and watch TV or read a book.
You place an $8 value on watching TV and a $6 value on reading a book.
a. You should leave the theater since the net benefit from seeing the remainder of the show is –
$20, while going home will earn you at least $8 of satisfaction.
b. You should stay and watch the remainder of the show.
c. You should go home and watch TV.
d. You should go home and read a book.
234. You purchase a $30, nonrefundable ticket to a play at a local theater. Ten minutes into the show
you realize that it is not a very good show and place only a $10 value on seeing the remainder of
the show. Alternatively you could leave the theater and go home and watch TV or read a book.
You place an $8 value on watching TV and a $12 value on reading a book.
a. You should stay and watch the remainder of the show.
b. You should go home and watch TV.
c. You should go home and read a book.
d. You should go home and either watch TV or read a book.
Firms in Competitive Markets 3539
235. A sunk cost is one that
a. changes as the level of output changes in the short run.
b. was paid in the past and will not change regardless of the present decision.
c. should determine the rational course of action in the future.
d. has the most impact on profit-making decisions.
236. When economists refer to a production cost that has already been committed and cannot be
recovered, they use the term
a. implicit cost.
b. explicit cost.
c. variable cost.
d. sunk cost.
3540 Firms in Competitive Markets
237. A corporation has been steadily losing money on one of its product lines, plastic flamingo lawn
ornaments. The firm produces plastic flamingos in a factory that cost $20 million to build 10 years
ago. The firm is now considering an offer to buy that factory for $15 million. Which of the
following statements about the decision to sell or not to sell is correct?
a. The firm should turn down the purchase offer because the factory cost more than $15 million
to build.
b. The $20 million spent on the factory is a sunk cost; that cost should not affect the decision.
c. The $20 million spent on the factory is an implicit cost, which should be included in the
decision.
d. The firm should sell the factory only if it can reduce its costs elsewhere by $5 million.
238. Suppose that you value a hat from your favorite university at $20. The university bookstore has
the hat on sale for $15. You purchase the hat but lose it on the way home. What should you do?
Assume that losing the hat does not alter how you value it.
a. Go back to the bookstore and purchase another hat.
b. Wait until the cost of the hat falls to $15 or less before purchasing another hat.
c. Wait until the cost of the hat falls to $5 or less before purchasing another hat.
d. Do not purchase another hat regardless of the price.
Firms in Competitive Markets 3541
239. In the long run, a firm will enter a competitive industry if
a. total revenue exceeds total cost.
b. the price exceeds average total cost.
c. the firm can earn economic profits.
d. All of the above are correct.
240. In the long run, a firm will exit a competitive industry if
a. total revenue exceeds total cost.
b. the price exceeds average total cost.
c. average total cost exceeds the price.
d. Both a and b are correct.
241. In the long run, a profit-maximizing firm will choose to exit a market when
a. average fixed cost is falling.
b. variable costs exceed sunk costs.
c. marginal cost exceeds marginal revenue at the current level of production.
d. total revenue is less than total cost.
3542 Firms in Competitive Markets
242. A firm that exits its market has to pay
a. its variable costs but not its fixed costs.
b. its fixed costs but not its variable costs.
c. both its variable costs and its fixed costs.
d. neither its variable costs nor its fixed costs.
243. The competitive firm’s long-run supply curve is that portion of the marginal cost curve that lies
above average
a. fixed cost.
b. variable cost.
c. total cost.
d. revenue.
Firms in Competitive Markets 3543
244. Which of the following represents the firm’s long–run condition for exiting a market?
a. exit if P < MC
b. exit if P < FC
c. exit if P < ATC
d. exit if MR < MC
3544 Firms in Competitive Markets
Multiple Choice – Section 03: The Supply Curve in a Competitive Market
Figure 14-9
In the figure below, panel (a) depicts the linear marginal cost of a firm in a competitive market, and
panel (b) depicts the linear market supply curve for a market with a fixed number of identical firms.
1. Refer to Figure 14-9. If there are 300 identical firms in this market, what level of output will be
supplied to the market when price is $1.00?
a. 300
b. 6,000
c. 30,000
d. 60,000
Firms in Competitive Markets 3545
2. Refer to Figure 14-9. If there are 300 identical firms in this market, what level of output will be
supplied to the market when price is $2.00?
a. 300
b. 6,000
c. 30,000
d. 60,000
3. Refer to Figure 14-9. If there are 400 identical firms in this market, what level of output will be
supplied to the market when price is $2.00?
a. 10,000
b. 20,000
c. 40,000
d. 80,000
3546 Firms in Competitive Markets
4. Refer to Figure 14–9. If there are 600 identical firms in this market, what is the value of Q1?
a. 6,000
b. 12,000
c. 60,000
d. 120,000
5. Refer to Figure 14–9. If there are 100 identical firms in this market, what is the value of Q2?
a. 10,000
b. 20,000
c. 40,000
d. 80,000
Firms in Competitive Markets 3547
6. Refer to Figure 14-9. When 100 identical firms participate in this market, at what price will
15,000 units be supplied to this market?
a. $1.00
b. $1.50
c. $2.00
d. The price cannot be determined from the information provided.
7. Refer to Figure 14-9. If at a market price of $1.75, 52,500 units of output are supplied to this
market, how many identical firms are participating in this market?
a. 75
b. 100
c. 250
d. 300
3548 Firms in Competitive Markets
Figure 14–10
In the figure below, panel (a) depicts the linear marginal cost of a firm in a competitive market, and
panel (b) depicts the linear market supply curve for a market with a fixed number of identical firms.
8. Refer to Figure 14-10. If there are 500 identical firms in this market, what is the value of Q1?
a. 10,000
b. 20,000
c. 50,000
d. 150,000
Firms in Competitive Markets 3549
9. Refer to Figure 14-10. If there are 500 identical firms in this market, what is the value of Q2?
a. 12,000
b. 60,000
c. 240,000
d. 300,000
10. Refer to Figure 14–10. If there are 700 identical firms in this market, what is the value of Q1?
a. 140,000
b. 210,000
c. 280,000
d. 420,000
11. Refer to Figure 14-10. If there are 700 identical firms in this market, what is the value of Q2?
a. 140,000
b. 210,000
c. 280,000
d. 420,000
3550 Firms in Competitive Markets
Figure 14–11
12. Refer to Figure 14–11. The figure above is for a firm operating in a competitive industry. If
there were four identical firms in the industry, which of the following price-quantity combinations
would be on the market supply curve?
Point
Price
Quantity
A
$4
16
B
$4
32
C
$6
6
D
$8
64
a. A only
b. A and C only
c. B only
d. B and D only