Firms in Competitive Markets 3571
50. Which of the following statements is not correct?
a. In a long–run equilibrium, marginal firms make zero economic profit.
b. To maximize profit, firms should produce at a level of output where price equals average
variable cost.
c. The amount of gold in the world is limited. Therefore, the gold jewelry market probably has a
long–run supply curve that is upward sloping.
d. Long-run supply curves are typically more elastic than short-run supply curves.
51. Which of the following statements is not correct about competitive firms?
a. In a long–run equilibrium, firms must be operating at their efficient scale.
b. In the short run, the number of firms in an industry may be fixed.
c. In the long run, the number of firms can adjust to changing market conditions.
d. In the short run, firms must be operating at a level of output where price equals average
variable cost.
3572 Firms in Competitive Markets
Scenario 14-4
Victor is the recipient of $1 million from a lawsuit. Victor decides to use the money to purchase a
small business in Florida. His business operates in a perfectly competitive industry. If Victor
would have invested the $1 million in a risk-free bond fund, he could have earned $100,000 each
year. After he bought the small business, Victor quit his job as a market analyst with Research,
Inc., where he used to earn $75,000 per year.
52. Refer to Scenario 14-4. At the end of the first year of operating his new business, Victor’s
accountant reported an accounting profit of $150,000. What was Victor’s economic profit?
a. –$150,000
b. –$50,000
c. –$25,000
d. $25,000
53. Refer to Scenario 14-4. What is Victor’s opportunity costs of operating his new business?
a. $25,000
b. $75,000
c. $100,000
d. $175,000
Firms in Competitive Markets 3573
54. Refer to Scenario 14-4. How large would Victor’s accounting profits need to be to allow him to
attain zero economic profit?
a. $100,000
b. $125,000
c. $175,000
d. $225,000
Scenario 14-5
A study sponsored by the Food Consumer Safety Board found that consumption of irradiated
tomatoes increased the health of laboratory rats. As a result of national press coverage of the
report, the demand for irradiated tomatoes increased dramatically. Organic farmers were able to
switch from organic production of tomatoes to irradiated production with no additional cost.
Assume that the tomato market satisfies all of the assumptions of perfect competition.
55. Refer to Scenario 14-5. As a result of the increase in the demand for tomatoes, we would
predict that in the short run that the
a. production of tomatoes would be at efficient scale.
b. price of tomatoes would rise.
c. total cost for existing irradiated tomato producers must rise.
d. number of firms in the market would fall as prices fall and firms exit the market.
3574 Firms in Competitive Markets
56. Refer to Scenario 14-5. If the increased production of irradiated tomatoes caused a rise in the
marginal transportation costs of moving irradiated tomatoes to market, the
a. short-run market supply curve for irradiated tomatoes would be affected but not the long–run
market supply.
b. long-run market supply curve for irradiated tomatoes would be perfectly elastic.
c. long–run market supply of irradiated tomatoes would be downward sloping.
d. long–run market supply of irradiated tomatoes would be upward sloping.
57. When a profit-maximizing firm in a competitive market has zero economic profit, accounting
profit
a. is negative.
b. is at least zero.
c. is also zero.
d. could be positive, negative or zero.
Firms in Competitive Markets 3575
58. As a general rule, when accountants calculate profit they account for explicit costs but usually
ignore
a. certain outlays of money by the firm.
b. implicit costs.
c. operating costs.
d. fixed costs.
59. In calculating accounting profit, accountants typically don’t include
a. long-run costs.
b. sunk costs.
c. explicit costs of production.
d. opportunity costs that do not involve an outflow of money.
3576 Firms in Competitive Markets
60. If the profit-maximizing quantity of production for a competitive firm occurs at a point where the
firm’s average
total cost of production is falling as production increases, then the firm
a. will be earning positive economic profit at the profit-maximizing quantity.
b. will have economic profit less than zero at the profit-maximizing quantity.
c. will have zero economic profit at the profit-maximizing quantity.
d. should increase the quantity of production to increase profit.
61. In a perfectly competitive market, the process of entry and exit will end when
a. price equals minimum marginal cost.
b. marginal revenue equals marginal cost.
c. economic profits are zero.
d. accounting profits are zero.
Firms in Competitive Markets 3577
62. In a perfectly competitive market, the process of entry and exit will end when
(i) accounting profits are zero.
(ii) economic profits are zero.
(iii) price equals minimum marginal cost.
(iv) price equals minimum average total cost.
a. (i) and (ii) only
b. (ii) and (iii) only
c. (ii) and (iv) only
d. (i), (ii), (iii), and (iv)
63. In a competitive market with free entry and exit, if all firms have the same cost structure, then
a. all firms will operate at their efficient scale in the short run.
b. all firms will operate at their efficient scale in the long run.
c. the price of the product will differ across firms.
d. Both a and b are correct.
3578 Firms in Competitive Markets
64. In a perfectly competitive market, the process of entry and exit will end when firms face
a. marginal revenue equal to long–run average total cost.
b. total revenue equal to average total cost.
c. average revenue greater than marginal cost.
d. accounting profits equal to zero.
65. In the long run, each firm in a competitive industry earns
a. zero accounting profits.
b. zero economic profits.
c. positive economic profits.
d. positive, negative, or zero economic profits.
66. In the long run, each firm in a competitive industry earns
a. zero accounting profits.
b. zero economic profits.
c. positive economic profits.
d. Both a and b are correct.
Firms in Competitive Markets 3579
67. In the long run, assuming that the owner of a firm in a competitive industry has positive
opportunity costs, she
a. should exit the industry unless her economic profits are positive.
b. will earn zero accounting profits but positive economic profits.
c. will earn zero economic profits but positive accounting profits.
d. should ignore opportunity costs because they are a type of sunk cost that disappears in the long
run.
68. In the long–run equilibrium of a competitive market, the number of firms in the market adjusts until
the market demand is satisfied at a price equal to the minimum of
a. average fixed cost for the marginal firm.
b. marginal cost of the marginal firm.
c. average total cost of the marginal firm.
d. average variable cost of the marginal firm.
3580 Firms in Competitive Markets
69. When firms are neither entering nor exiting a perfectly competitive market,
a. total revenue must equal total variable cost for each firm.
b. economic profits must be zero.
c. price must equal average variable cost for each firm.
d. Both a and c are correct.
70. When firms are neither entering nor exiting a perfectly competitive market,
a. total revenue must equal total cost for each firm.
b. economic profits must be zero.
c. price must equal the minimum of marginal cost for each firm.
d. Both a and b are correct.
Firms in Competitive Markets 3581
71. When firms in a perfectly competitive market face the same costs, in the long run they must be
operating
a. under diseconomies of scale.
b. with small, but positive, levels of profit.
c. at their efficient scale.
d. where price is equal to average fixed cost.
72. Regardless of the cost structure of firms in a competitive market, in the long run
a. firms will experience rising demand for their products.
b. the marginal firm will earn zero economic profit.
c. firms will experience a less competitive market environment.
d. exit and entry is likely to lead to a horizontal long–run supply curve.
3582 Firms in Competitive Markets
73. In a long-run equilibrium, the marginal firm has
a. price equal to average total cost.
b. total revenue equal to total cost.
c. economic profit equal to zero.
d. All of the above are correct.
74. In a long-run equilibrium, the marginal firm has
a. price equal to minimum marginal cost.
b. total revenue equal to total cost.
c. accounting profit equal to zero.
d. All of the above are correct.
Firms in Competitive Markets 3583
75. In the long-run equilibrium of a market with free entry and exit, if all firms have the same cost
structure, then
a. marginal cost exceeds average total cost.
b. the price of the good exceeds average total cost.
c. average total cost exceeds the price of the good.
d. firms are operating at their efficient scale.
76. In the long–run equilibrium of a market with free entry and exit, marginal firms are operating
a. at the point where average variable cost equals marginal cost.
b. at the minimum point on their marginal cost curves.
c. at their efficient scale.
d. where accounting profit is zero.
3584 Firms in Competitive Markets
77. Consider a competitive market with a large number of identical firms. The firms in this market do
not use any resources that are available only in limited quantities. In long–run equilibrium, market
price is determined by
a. the minimum point on the firms‘ average variable cost curve.
b. the minimum point on the firms’ average total cost curve.
c. the portion of the marginal cost curve below average variable cost.
d. a firm’s level of sunk costs.
78. If all firms have the same costs of production, then in long-run equilibrium,
a. price exceeds average total cost for all firms.
b. price exceeds marginal cost for all firms.
c. some firms may earn positive economic profits.
d. all firms have zero economic profits and just cover their opportunity costs.
Firms in Competitive Markets 3585
79. Suppose that firms in a competitive industry are earning positive economic profits. All else equal,
in the long run, we would expect the number of firms in the industry to
a. increase.
b. decrease.
c. remain the same.
d. We do not have enough information with which to answer this question.
80. Suppose that some firms in a competitive industry are earning zero economic profits, while others
are experiencing losses. All else equal, in the long run, we would expect the number of firms in the
industry to
a. increase.
b. decrease.
c. remain the same.
d. We do not have enough information with which to answer this question.
3586 Firms in Competitive Markets
81. In the long run,
a. competitive firms’ profits are zero.
b. competitive firms’ variable costs are zero.
c. competitive firms’ ATC curves shift upward or downward to ensure that all demand is
satisfied.
d. the number of firms in the market is fixed.
Firms in Competitive Markets 3587
Figure 14–13
Suppose a firm in a competitive industry has the following cost curves:
82. Refer to Figure 14-13. If the price is $6 in the short run, what will happen in the long run?
a. Nothing. The price is consistent with zero economic profits, so there is no incentive for firms to
enter or exit the industry.
b. Individual firms will earn positive economic profits in the short run, which will entice other
firms to enter the industry.
c. Individual firms will earn negative economic profits in the short run, which will cause some
firms to exit the industry.
d. Because the price is below the firm’s average variable costs, the firms will shut down.
3588 Firms in Competitive Markets
83. Refer to Figure 14-13. If the price is $4.50 in the short run, what will happen in the long run?
a. Nothing. The price is consistent with zero economic profits, so there is no incentive for firms to
enter or exit the industry.
b. Individual firms will earn positive economic profits in the short run, which will entice other
firms to enter the industry.
c. Individual firms will earn negative economic profits in the short run, which will cause some
firms to exit the industry.
d. Because the price is below the firm’s average variable costs, the firms will shut down.
84. Refer to Figure 14-13. If the price is $3.50 in the short run, what will happen in the long run?
a. Nothing. The price is consistent with zero economic profits, so there is no incentive for firms to
enter or exit the industry.
b. Individual firms will earn positive economic profits in the short run, which will entice other
firms to enter the industry.
c. Individual firms will earn negative economic profits in the short run, which will cause some
firms to exit the industry.
d. Because the price is below the firm’s average variable costs, the firms will shut down.
Firms in Competitive Markets 3589
85. Refer to Figure 14-13. If the price is $2 in the short run, what will happen in the long run?
a. Nothing. The price is consistent with zero economic profits, so there is no incentive for firms to
enter or exit the industry.
b. Individual firms will earn positive economic profits in the short run, which will entice other
firms to enter the industry.
c. Individual firms will earn negative economic profits in the short run, which will cause some
firms to exit the industry.
d. Because the price is below the firm’s average variable costs, the firms will shut down.
86. Consider a competitive market with a large number of identical firms. The firms in this market do
not use any resources that are available only in limited quantities. In this market, an increase in
demand will
a. increase price in the short run but not in the long run.
b. increase price in the long run but not in the short run.
c. increase price both in the short and the long run.
d. not affect price in either the short or the long run.
3590 Firms in Competitive Markets
87. A competitive market is in long–run equilibrium. If demand decreases, we can be certain that
price will
a. fall in the short run. All firms will shut down, and some of them will exit the industry. Price will
then rise to reach the new long–run equilibrium.
b. fall in the short run. No firms will shut down, but some of them will exit the industry. Price will
then rise to reach the new long–run equilibrium.
c. fall in the short run. All, some, or no firms will shut down, and some of them will exit the
industry. Price will then rise to reach the new long-run equilibrium.
d. not fall in the short run because firms will exit to maintain the price.
88. A competitive market is in long-run equilibrium. If demand increases, we can be certain that price
will
a. rise in the short run. Some firms will enter the industry. Price will then rise to reach the new
long-run equilibrium.
b. rise in the short run. Some firms will enter the industry. Price will then fall to reach the new
long-run equilibrium.
c. fall in the short run. All, some, or no firms will shut down, and some of them will exit the
industry. Price will then rise to reach the new long-run equilibrium.
d. not rise in the short run because firms will enter to maintain the price.