Subjective Short Answer
1. If a firm can influence the market price of the good it sells, then it is said to have __________.
2. A firm lacks market power if it cannot influence __________.
3. “The water that comes out of your faucets at home is not supplied by a competitive firm.” Explain why this statement is
correct.
4. A competitive market has two basic characteristics. What are those two characteristics?
5. What does it mean for a buyer or seller to be a price taker?
6. When a firm sells 1 million coat hangers, its total revenue is $2 million. When it sells 2 million coat hangers, its total
revenue is $3.5 million. Is this firm a price taker? Explain.
7. A competitive firm sells its output for $10 per unit. Is the firm’s average revenue less than, equal to, or greater than
$10?
8. A competitive firm sells its output for $30 per unit. Is the firm’s marginal revenue less than, equal to, or greater than
$30?
9. In a certain market there are many buyers and many sellers. It is easy to distinguish the product sold by one firm from
the products sold by other firms. Is the market competitive?
10. In a certain large city there are two firms that supply concrete. The concrete sold by the first firm is indistinguishable
from the concrete sold by the second firm. Is the market competitive?
11. Does a competitive firm have the ability to influence the quantity of output it supplies? Does it have the ability to
influence its average revenue?
not have the ability to influence the price (average revenue).
12. What is the relationship between price and marginal revenue for a competitive firm?
13. A competitive firm sells 100 units of output for $5 per unit. The firm’s marginal revenue amounts to __________.
$5
14. When a certain competitive firm produces and sells 40 units of output, its total revenue is $740. If there is no change
in price, then what is the amount of the firm’s total revenue if it produces and sells 45 units of output?
15. A firm maximizes its profit by selling 2,500 units of output with an average revenue of $6.99. The firm’s marginal
cost at 2,500 units of output is __________.
16. A firm sells 100 units of output and its total revenue is $800. The firm’s average revenue amounts to __________.
17. A competitive firm sells 500 units of output and its marginal revenue at 500 units of output is $35. The firm’s total
revenue amounts to __________.
18. A competitive firm is maximizing its profit by selling 150 units of output. The firm’s marginal cost is $8 and its
average total cost is $6. The firm’s profit amounts to __________.
19. A profit-maximizing competitive firm is earning a profit of $24,000. Its marginal cost is $17 and its average total cost
is $13. How many units of output is the firm producing and selling?
20. A competitive firm currently produces and sells 500 units of output. Its total revenue is $3,500; the marginal cost of
producing the 500th unit of output is $5.75; and the average total cost of producing the 500th unit of output is $4.00. Is the
firm maximizing its profit, or should it increase or decrease output in order to increase its profit?
21. A competitive firm currently produces and sells 500 units of output. Its total revenue is $6,000; the marginal cost of
producing the 500th unit of output is $14.50; and the average total cost of producing the 500th unit of output is $9.50. Is
the firm maximizing its profit, or should it increase or decrease output in order to increase its profit?
22. A competitive firm currently produces and sells 800 units of output at a price of $10 per unit. The firm’s fixed cost is
$4,000 and its variable cost is $8,300. In the short run, should the firm continue to operate?
23. A competitive firm currently produces and sells 7,500 units of output at a price of $2.50 per unit. The firm’s average
fixed cost is $0.75 and its average total cost is $2.80. In the short run, should the firm continue to operate?
24. When a competitive firm produces and sells 600 units of output, its total revenue is $35,970. What is the firm’s total
revenue when it produces and sells 620 units of output?
25. When a firm produces 2,000 units of output, its average total cost is $3.00 and its average revenue is $2.90. What is
the firm’s profit or loss?
26. When it produces 500 units of output, a firm earns a profit of $20,000. If the firm sells its output for $65 per unit, then
what is its average total cost?
27. When it produces and sells 80 units of output, a competitive firm’s average total cost is $25 and its profit is $480.
What is the firm’s total revenue if it sells 85 units of output?
28. When it produces and sells 90 units of output, a competitive firm’s average total cost is $42 and its profit is $360.
What is the firm’s marginal revenue if it sells 100 units of output?
29. A competitive firm maximizes its profit by producing output up to the point at which price is equal to ______.
30. Refer to Scenario 14–1. Calculate the firm’s total revenue, total cost, and profit at 200 units of output.
31. Refer to Scenario 14–1. Calculate the firm’s fixed cost at 200 units of output.
32. Refer to Scenario 14–1. Is the firm maximizing its profit (or minimizing its loss) by producing 200 units of output?
33. Refer to Scenario 14–1. Compare the firm’s profit or loss at 200 units of output with its profit or loss if it were to shut
down.
34. A competitive firm’s short-run supply curve intersects its average-total-cost curve at the point
What is the value of marginal cost at Q = 450?
35. The idea of “spilt milk” is associated with what type of cost?
36. What name do economists have for a cost that has already been committed and cannot be recovered?
37. The expression “Let bygones be bygones” is associated with what type of cost?
38. A golf course in Fargo, North Dakota — where it is very cold in the winter — is closed between November 1 and
April 1. If the owner of the golf course is rational, what criterion does he or she use in deciding to close the course for this
extended period of time?
39. In a shopping mall in a large city, the Rudolph the Reindeer store sells only merchandise for the Christmas holiday
season. Most of the store’s revenue and profit are attributable to the months of October, November, and December.
However, the store is open throughout the year. If the owner of the store is rational, what criterion does he or she use in
deciding to keep the store open year-round?
40. Explain the difference between the short run and the long run in terms of the number of firms in a competitive market.
41. When the process of entry and exit has ended in a competitive market, are firms’ profits positive, negative, or zero?
42. A competitive firm is producing 500 units of output and its efficient scale is 400 units of output. Can the market in
which this firm operates be in a long-run equilibrium? Briefly explain.
43. A competitive firm is producing 1,000 units of output with average total cost equal to $35 and marginal cost equal to
$40. Can the market in which this firm operates be in a long-run equilibrium? Briefly explain.
44. A competitive market begins in a situation of long-run equilibrium. Then, there is an increase in demand. Describe the
process that eventually leads to a new long-run equilibrium.
45. A competitive market begins in a situation of long-run equilibrium. Then, there is a decrease in demand. Describe the
process that eventually leads to a new long-run equilibrium.
46. In the long run with free entry and exit and identical firms, are competitive firms’ profits positive, zero, or negative?
47. In the long-run equilibrium of a competitive market with free entry and exit, firms operate at their __________ scale.
48. If a competitive firm is operating at its efficient scale, then is the firm’s profit positive, zero, or negative?
49. Under what condition is the long-run market supply curve for a competitive market perfectly elastic?
50. In a competitive market, is the long-run supply curve typically more elastic than the short-run supply curve, or is it
less elastic than the short-run supply curve?
51. Describe the difference between average revenue and marginal revenue. Why are both of these revenue measures
important to a profit-maximizing firm?
52. List and describe the characteristics of a perfectly competitive market.
53. Why would a firm in a perfectly competitive market always choose to set its price equal to the current market price? If
a firm set its price below the current market price, what effect would this have on the market?
54. Use a graph to demonstrate the circumstances that would prevail in a competitive market where firms are earning
economic profits. Can this scenario be maintained in the long run? Explain your answer.
55. Explain how a firm in a competitive market identifies the profit-maximizing level of production. When should the
firm raise production, and when should the firm lower production?
56. News reports from the western United States occasionally report incidents of cattle ranchers slaughtering a large
number of newborn calves and burying them in mass graves rather than transporting them to markets. Assuming that this
is rational behavior by profit-maximizing “firms,” explain what economic factors may influence such behavior.
57. Use a graph to demonstrate the circumstances that would prevail in a perfectly competitive market where firms are
experiencing economic losses. Identify costs, revenue, and the economic losses on your graph. Using your graph,
determine whether an individual firm will shut down in the short run, or choose to remain in the market. Explain your
answer.
58. At its current level of production a profit-maximizing firm in a competitive market receives $12.50 for each unit it
produces and faces an average total cost of $10. At the market price of $12.50 per unit, the firm’s marginal cost curve
crosses the marginal revenue curve at an output level of 1,000 units. What is the firm’s current profit? What is likely to
occur in this market and why?
59. Give two reasons why the long-run industry supply curve may slope upward. Use an example to demonstrate your
reasons.
60. If identical firms that remain in a competitive market over the long run make zero economic profit, why do these firms
choose to remain in the market?