Chapter 11: MANAGERIAL DECISIONS IN COMPETITIVE MARKETS
If the wage is $15, how many workers will the firm hire?
a. 250
b. zero
c. 100
d. 200
11-42 To answer the question, refer to the following figure, showing the marginal revenue product
(MRP) and the average revenue product (ARP) curves of a perfectly competitive firm hiring a
single variable input, labor.
Chapter 11: MANAGERIAL DECISIONS IN COMPETITIVE MARKETS
If the wage is above $______, the firm will shut down and hire zero workers in the short run.
a. $41
b. $30
c. $34
d. $32
11-43 Economic rent
a. is the payment to a more productive resource above its opportunity cost.
b. cannot be earned in long-run competitive equilibrium.
c. is competed away in the long run.
d. both b and c
e. all of the above
Chapter 11: MANAGERIAL DECISIONS IN COMPETITIVE MARKETS
11-44 In long-run competitive equilibrium it is possible for firm owners to
a. earn both rent and economic profit.
b. earn rent but not economic profit.
c. earn both economic profit and rent.
d. both b and c
e. both a and c
11-45 In a perfectly competitive market
a. a firm faces a perfectly elastic demand because there is unrestricted entry and exit.
b. if a firm raises its price, it will lose some, but not all, of its customers.
c. when a firm sells another unit of output, the addition to total revenue is equal to market
price.
d. all of the above
e. none of the above
11-46
The figure above shows cost curves for a perfectly competitive firm. Suppose that market price is
$2.60. A firm producing 800 units of output
a. is earning the maximum amount of profit, $880.
b. is earning the maximum amount of profit, $2,080.
c. should produce 500 units of output instead, to earn profits of $500.
Chapter 11: MANAGERIAL DECISIONS IN COMPETITIVE MARKETS
d. should produce 1100 units of output instead, to earn profits of $1,100.
e. should shut down
11-47
The figure above shows cost curves for a perfectly competitive firm. A profit-maximizing firm
will break even when market price is:
a. $0.60
b. $0.80
c. $1.50
d. $1.60
11-48
Chapter 11: MANAGERIAL DECISIONS IN COMPETITIVE MARKETS
The figure above shows cost curves for a perfectly competitive firm. If market price is $0.70, a
profit-maximizing firm will produce _____ units of output and earn profits of _____.
a. 500, −$450
b. 500, −$50
c. zero, −$450
d. zero, −$400
11-49 In a competitive industry the market-determined price is $12. A firm is currently producing 50
units of output; average total cost is $10, marginal cost is $15, and average variable cost is $7. In
order to maximize profit, the firm should:
a. produce more because the firm is earning a profit of $100.
b. keep output the same because the firm is earning a profit of $100.
c. produce more because the next unit of output increases profit by $2.
d. produce less because the last unit of output decreased profit by $3.
11-50 Consider the short-run supply curve for a perfectly competitive industry. In general, which of the
following statements are true?
a. The short-run industry supply is obtained by horizontally summing the supply curves of
all the individual firms in the industry.
b. The industry supply curve tends to be flatter (more elastic) than the horizontal sum of all
the industrial firms’ supply curves.
c. Short-run supply for a perfectly competitive industry is flat for constant cost industries.
d. both a and b
Chapter 11: MANAGERIAL DECISIONS IN COMPETITIVE MARKETS
e. none of the above are true in general
11-51 In a competitive market characterized by increasing costs, the
a. long-run industry supply curve gives the minimum long-run average cost of production at
various levels of industry output.
b. long-run industry supply curve gives the long-run marginal cost of production at various
levels of industry output.
c. long-run industry supply curve is upward sloping.
d. both a and b
e. all of the above
11-52 Firms that employ exceptionally productive resources
a. have lower costs than other firms in the industry and are able to earn positive economic
profit in the long run.
b. earn zero economic profit.
c. will typically have to pay the exceptional resource economic rent equal to the reduction
in cost due to employing the exceptionally productive resource.
d. both a and b
e. both b and c
11-53 Suits Only, a dry cleaning firm that specializes in cleaning business suits, operates in a perfectly
competitive market. Robin Smith, an exceptionally talented manager, has been hired to manage
Suits Only. In the dry cleaning business, a manager typically makes a salary of $400 per week.
Suits Only faces the long-run average and marginal costs shown in the figure below. In long-run
competitive equilibrium, the market price for cleaning a business suit is $4.50.
Chapter 11: MANAGERIAL DECISIONS IN COMPETITIVE MARKETS
Given the above, the typical dry-cleaning firm has a minimum long-run average cost of cleaning a
business suit equal to $________ and the typical dry cleaning firm earns economic profit equal to
$______.
a. $4.50, $0
b. $2, $2.50 per suit cleaned
c. $3, $1.50 per suit cleaned
d. $2, $0
11-54 Suits Only, a dry cleaning firm that specializes in cleaning business suits, operates in a perfectly
competitive market. Robin Smith, an exceptionally talented manager, has been hired to manage
Suits Only. In the dry cleaning business, a manager typically makes a salary of $400 per week.
Suits Only faces the long-run average and marginal costs shown in the figure below. In long-run
competitive equilibrium, the market price for cleaning a business suit is $4.50.
Chapter 11: MANAGERIAL DECISIONS IN COMPETITIVE MARKETS
Given the above, Robin Smith is probably going to negotiate a salary of $______ per week,
$______ of which is economic rent.
a. $400, $0
b. $475, $75
c. $500, $100
d. $500, $500
11-55 Suits Only, a dry cleaning firm that specializes in cleaning business suits, operates in a perfectly
competitive market. Robin Smith, an exceptionally talented manager, has been hired to manage
Suits Only. In the dry cleaning business, a manager typically makes a salary of $400 per week.
Suits Only faces the long-run average and marginal costs shown in the figure below. In long-run
competitive equilibrium, the market price for cleaning a business suit is $4.50.
Given the above, if Robin Smith buys Suits Only and continues to manage it herself, she will
a. earn zero economic profit.
b. earn $75 in economic rent per week.
c. earn $75 in economic profit each week.
11-56 The short-run market supply in a perfectly competitive market is the horizontal summation of the
firms’ marginal cost curves when
a. increases in industry output do not affect input prices.
b. increases in industry output lead to increases in input prices.
c. increases in industry output lead to increases in market price.
Chapter 11: MANAGERIAL DECISIONS IN COMPETITIVE MARKETS
d. increases in industry output do not affect market price.
11-57 Below, the graph on the left shows long-run average and marginal cost for a typical firm in a
perfectly competitive industry. The graph on the right shows demand and long-run supply for an
increasing-cost industry.
What output will the firm produce?
a. 250
b. 300
c. 350
d. 400
Chapter 11: MANAGERIAL DECISIONS IN COMPETITIVE MARKETS
11-58 Below, the graph on the left shows long-run average and marginal cost for a typical firm in a
perfectly competitive industry. The graph on the right shows demand and long-run supply for an
increasing-cost industry.
How much profit will the firm earn?
a. zero
b. $2,600
c. $3,100
d. $3,750
e. $6,000
11-59 Below, the graph on the left shows long-run average and marginal cost for a typical firm in a
perfectly competitive industry. The graph on the right shows demand and long-run supply for an
increasing-cost industry.
Chapter 11: MANAGERIAL DECISIONS IN COMPETITIVE MARKETS
If this were a constant-cost industry, what would be the price when the industry gets to long-run
competitive equilibrium?
a. between $35 and $20
b. $35
c. $20
d. below $20
e. above $35
11-60 Below, the graph on the left shows long-run average and marginal cost for a typical firm in a
perfectly competitive industry. The graph on the right shows demand and long-run supply for an
increasing-cost industry.
If this were an increasing cost industry, what would be the price when the industry gets to long-
run competitive equilibrium?
a. between $35 and $15
b. $35
c. $15
d. below $15
e. above $35
Chapter 11: MANAGERIAL DECISIONS IN COMPETITIVE MARKETS
11-61 A consulting company estimated market demand and supply in a perfectly competitive industry
and obtained the following results:
Q
d
=25,000 –5,000
P
+25
M
Qs=240,000 +5,000P–2,000P
I
where P is price, M is income, and
P
I
is the price of a key input. The forecasts for the next year
are
ˆ
M
= $15,000 and
ˆ
P
I
= $20. Average variable cost is estimated to be
Total fixed cost will be $6,000 next year. What is the price forecast for next year?
a. $12
b. $20
c. $60
d. $68
11-62 A consulting company estimated market demand and supply in a perfectly competitive industry
and obtained the following results:
Q
d
=25,000 –5,000
P
+25
M
Qs=240,000 +5,000P–2,000P
I
where P is price, M is income, and
P
I
is the price of a key input. The forecasts for the next year
are
ˆ
M
= $15,000 and
ˆ
P
I
= $20. Average variable cost is estimated to be
Total fixed cost will be $6,000 next year. What is the firm’s minimum average variable cost?
a. $ 2
b. $ 6
c. $ 8
d. $20
Chapter 11: MANAGERIAL DECISIONS IN COMPETITIVE MARKETS
11-63 A consulting company estimated market demand and supply in a perfectly competitive industry
and obtained the following results:
Q
d
=25,000 –5,000
P
+25
M
Qs=240,000 +5,000P–2,000P
I
where P is price, M is income, and
P
I
is the price of a key input. The forecasts for the next year
are
ˆ
M
= $15,000 and
ˆ
P
I
= $20. Average variable cost is estimated to be
Total fixed cost will be $6,000 next year. What is the profit-maximizing output choice for the
firm?
a. 3,000 units
b. 4,000 units
c. 5,000 units
d. 6,000 units
11-64 A consulting company estimated market demand and supply in a perfectly competitive industry
and obtained the following results:
Q
d
=25,000 –5,000
P
+25
M
Qs=240,000 +5,000P–2,000P
I
where P is price, M is income, and
P
I
is the price of a key input. The forecasts for the next year
are
ˆ
M
= $15,000 and
ˆ
P
I
= $20. Average variable cost is estimated to be
Total fixed cost will be $6,000 next year. What will the firm’s profit (loss) be?
a. $20,000
b. $26,000
c. $30,000
d. $36,000
e. −$6,000, the firm shuts down and loses only its fixed costs.