True / False
1. For a firm operating in a perfectly competitive industry, total revenue, marginal revenue, and average revenue are all
equal.
a.
True
b.
False
2. For a firm operating in a perfectly competitive industry, marginal revenue and average revenue are equal.
a.
True
b.
False
3. If a firm notices that its average revenue equals the current market price, that firm must be participating in a
competitive market.
a.
True
b.
False
4. For a firm operating in a competitive market, both marginal revenue and average revenue exceed the market price.
a.
True
b.
False
5. A profit-maximizing firm in a competitive market will increase production when average revenue exceeds marginal
cost.
a.
True
b.
False
6. A profit-maximizing firm in a competitive market will decrease production when marginal cost exceeds average
revenue.
a.
True
b.
False
7. Because there are many buyers and sellers in a perfectly competitive market, no one seller can influence the market
price.
a.
True
b.
False
8. In competitive markets, firms that raise their prices are typically rewarded with larger profits.
a.
True
b.
False
9. When an individual firm in a competitive market increases its production, it is likely that the market price will fall.
a.
True
b.
False
10. When an individual firm in a competitive market decreases its production, it is likely that the market price will rise.
a.
True
b.
False
11. In a competitive market, firms are unable to differentiate their product from that of other producers.
a.
True
b.
False
12. Firms in a competitive market are said to be price takers because there are many sellers in the market, and the goods
offered by the firms are very similar if not identical.
a.
True
b.
False
13. The two characteristics of a competitive market are 1) many buyers and sellers in the market and 2) the goods offered
by the various sellers are highly differentiated.
a.
True
b.
False
14. Firms operating in perfectly competitive markets try to maximize profits.
a.
True
b.
False
15. Because there are many sellers in a competitive market, individual firms are unable to maximize profits.
a.
True
b.
False
16. A firm’s incentive to compare marginal revenue and marginal cost is an application of the principle that rational
people think at the margin.
a.
True
b.
False
17. By comparing the marginal revenue and marginal cost from each unit produced, a firm in a competitive market can
determine the profit-maximizing level of production.
a.
True
b.
False
18. Firms operating in perfectly competitive markets produce an output level where marginal revenue equals marginal
cost.
a.
True
b.
False
19. A firm is currently producing 100 units of output per day. The manager reports to the owner that producing the 100th
unit costs the firm $5. The firm can sell the 100th unit for $4.75. The firm should continue to produce 100 units in order to
maximize its profits (or minimize its losses).
a.
True
b.
False
20. A firm is currently producing 100 units of output per day. The manager reports to the owner that producing the 100th
unit costs the firm $5. The firm can sell the 100th unit for $5. The firm should continue to produce 100 units in order to
maximize its profits (or minimize its losses).
a.
True
b.
False
21. A firm is currently producing 100 units of output per day. The manager reports to the owner that producing the 100th
unit costs the firm $5. The firm can sell the unit for $6. The firm should produce more than 100 units in order to maximize
its profits (or minimize its losses).
a.
True
b.
False
22. All firms maximize profits by producing an output level where marginal revenue equals marginal cost; for firms
operating in perfectly competitive industries, maximizing profits also means producing an output level where price equals
marginal cost.
a.
True
b.
False
23. When a profit-maximizing firm in a competitive market experiences rising prices, it will respond with an increase in
production.
a.
True
b.
False
24. A firm operating in a perfectly competitive industry will continue to operate in the short run but earn losses if the
market price is less than that firm’s average total cost but greater than the firm’s average variable cost.
a.
True
b.
False
25. A firm operating in a perfectly competitive industry will continue to operate in the short run but earn losses if the
market price is less than that firm’s average variable cost but greater than the firm’s average fixed cost.
a.
True
b.
False
26. A firm operating in a perfectly competitive industry will continue to operate in the short run but earn losses if the
market price is less than that firm’s average variable cost.
a.
True
b.
False
27. A firm operating in a perfectly competitive industry will shut down in the short run but earn losses if the market price
is less than that firm’s average variable cost.
a.
True
b.
False
28. In the short run, a firm should exit the industry if its marginal cost exceeds its marginal revenue.
a.
True
b.
False
29. The supply curve of a firm in a competitive market is the average variable cost curve above the minimum of marginal
cost.
a.
True
b.
False
30. A firm will shut down in the short run if revenue is not sufficient to cover its variable costs of production.
a.
True
b.
False
31. Suppose a firm is considering producing zero units of output. We call this shutting down in the short run and exiting
an industry in the long run.
a.
True
b.
False
32. Suppose a firm is considering producing zero units of output. We call this exiting an industry in the short run and
shutting down in the long run.
a.
True
b.
False
33. A firm will shut down in the short run if revenue is not sufficient to cover all of its fixed costs of production.
a.
True
b.
False
34. A firm operating in a competitive market will stay in business in the short run so long as the market price exceeds the
firm’s average total cost; otherwise, the firm will shut down.
a.
True
b.
False
35. In the short run, if the market price is below the firm’s average total cost of production, the firm will always shut
down.
a.
True
b.
False
36. The marginal firm in a competitive market will earn zero economic profit in the long run.
a.
True
b.
False
37. A profit-maximizing firm in a competitive market will earn zero accounting profits in the long run.
a.
True
b.
False
38. A miniature golf course is a good example of where fixed costs become relevant to the decision of when to open and
when to close for the season.
a.
True
b.
False
39. A popular resort restaurant will maximize profits if it chooses to stay open during the less-crowded “off season” when
its total revenues exceed its variable costs.
a.
True
b.
False
40. A popular resort restaurant will maximize profits if it chooses to stay open during the less-crowded “off season” when
its total revenues exceed its fixed costs.
a.
True
b.
False
41. A dairy farmer must be able to calculate sunk costs in order to determine how much revenue the farm receives for the
typical gallon of milk.
a.
True
b.
False
42. Because nothing can be done about sunk costs, they are irrelevant to decisions about business strategy.
a.
True
b.
False
43. The manager of a firm operating in a competitive market can ignore sunk costs when making business decisions.
a.
True
b.
False
44. In the long run, when price is less than average total cost for all possible levels of production, a firm in a competitive
market will choose to exit (or not enter) the market.
a.
True
b.
False
45. In the long run, when price is greater than average total cost, some firms in a competitive market will choose to enter
the market.
a.
True
b.
False
46. In the long run, a firm should exit the industry if its total costs exceed its total revenues.
a.
True
b.
False
47. A competitive firm’s profit will be increasing as long as marginal revenue is greater than marginal cost.
a.
True
b.
False
48. In making a short-run profit-maximizing production decision, the firm must consider both fixed and variable cost.
a.
True
b.
False
49. A firm operating in a perfectly competitive industry will continue to operate if it earns zero economic profits because
it is likely to be earning positive accounting profits.
a.
True
b.
False
50. A firm operating in a perfectly competitive market may earn positive, negative, or zero economic profit in the long
run.
a.
True
b.
False
51. A firm operating in a perfectly competitive market may earn positive, negative, or zero economic profit in the short
run.
a.
True
b.
False
52. A firm operating in a perfectly competitive industry will shut down in the short run if its economic profits fall to zero
because it is likely to be earning negative accounting profits.
a.
True
b.
False
53. A firm operating in a perfectly competitive market earns zero economic profit in the long run but remains in business
because the firm’s revenues cover the business owners’ opportunity costs.
a.
True
b.
False
54. A competitive market will typically experience entry and exit until accounting profits are zero.
a.
True
b.
False
55. The long-run equilibrium in a competitive market characterized by firms with identical costs is generally characterized
by firms operating at efficient scale.
a.
True
b.
False
56. In the long run, a competitive market with 1,000 identical firms will experience an equilibrium price equal to the
minimum of each firm’s average total cost.
a.
True
b.
False
57. In a long-run equilibrium where firms have identical costs, it is possible that some firms in a competitive market are
making a positive economic profit.
a.
True
b.
False
58. When economic profits are zero in equilibrium, the firm’s revenue must be sufficient to cover all opportunity costs.
a.
True
b.
False
59. The stable, long-run equilibrium in a competitive market occurs when the market price equals the lowest point on a
firm’s average total cost curve.
a.
True
b.
False
60. All competitive firms earn zero economic profit in both the short run and the long run.
a.
True
b.
False
61. When a resource used in the production of a good sold in a competitive market is available in only limited quantities,
the long-run supply curve is likely to be upward sloping.
a.
True
b.
False
62. The short-run supply curve in a competitive market must be more elastic than the long-run supply curve.
a.
True
b.
False
63. The long-run supply curve in a competitive market is more elastic than the short-run supply curve.
a.
True
b.
False
64. If some resources used in the production of a good are only available in limited quantities, then the long run market
supply curve will be perfectly elastic.
a.
True
b.
False
65. For firms operating in a perfectly competitive market, price must always be greater than marginal revenue.
a.
True
b.
False
66. Firms operating in a perfectly competitive market have an incentive to advertise their products since this will increase
the demand for their products.
a.
True
b.
False
67. All firms operating in a perfectly competitive market produce unique goods.
a.
True
b.
False
68. Whenever firms in a perfectly competitive market produce the output level where marginal revenue equals marginal
cost, we know that the firm is earning an economic profit.
a.
True
b.
False
69. If a firm observes that the price of its product is above average variable cost, it would choose to continue to produce
the good in the short run, even if that firm experiences economic losses.
a.
True
b.
False
70. A restaurant, which operates in a perfectly competitive market, is evaluating whether it should serve breakfast on a
daily basis. It would choose to do this when its revenues cover its variable costs.
a.
True
b.
False
71. A ski resort will choose to remain open in the summer whenever its fixed costs are low enough.
a.
True
b.
False
72. In the long run, if we observe firms in a competitive market earning economic profits, we know that this market is in
long-run equilibrium.
a.
True
b.
False
73. In competitive markets where firms are observed to be exiting the market, the firms that remain will obtain economic
profits in the long run.
a.
True
b.
False
74. Firms in competitive markets can only earn economic profits in the long run, once the market is in equilibrium.
a.
True
b.
False