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c.
$250
d.
$450
127. In a competitive market the price is $8. A typical firm in the market has ATC = $6, AVC = $5, and MC = $8. How
much economic profit is the firm earning in the short run?
a.
$0 per unit
b.
$1 per unit
c.
$2 per unit
d.
$3 per unit
128. Consider a firm operating in a competitive market. The firm is producing 40 units of output, has an average total cost
of production equal to $5, and is earning $240 economic profit in the short run. What is the current market price?
a.
$9
b.
$10
c.
$11
d.
$12
129. Consider a firm operating in a competitive market. The firm is producing 40 units of output, has an average total cost
of production equal to $6, and is earning $240 economic profit in the short run. What is the current market price?
a.
$0
b.
$6
c.
$10
d.
$12
130. In the short run, a firm operating in a competitive industry will produce the quantity of output where price equals
marginal cost as long as the
a.
price is less than average total cost.
b.
marginal revenue exceeds the marginal cost.
c.
price is greater than average variable cost.
d.
price is greater than average fixed cost but less than average variable cost.
131. In the short run, a firm operating in a competitive industry will shut down if price is
a.
less than average total cost.
b.
less than average variable cost.
c.
greater than average variable cost but less than average total cost.
d.
greater than marginal cost.
132. The short-run supply curve for a firm in a perfectly competitive market is
a.
horizontal.
b.
likely to slope downward.
c.
determined by forces external to the firm.
d.
the portion of its marginal cost curve that lies above its average variable cost.
133. A competitive firm's short-run supply curve is part of which of the following curves?
a.
marginal revenue
b.
average variable cost
c.
average total cost
d.
marginal cost
134. Which of these curves is the competitive firm's short-run supply curve?
a.
the average variable cost curve above marginal cost
b.
the average total cost curve above marginal cost
c.
the marginal cost curve above average variable cost
d.
the average fixed cost curve
135. The competitive firm's short-run supply curve is that portion of the
a.
average variable cost curve that lies above marginal cost.
b.
average total cost curve that lies above marginal cost.
c.
marginal cost curve that lies above average variable cost.
d.
marginal cost curve that lies above average total cost.
136. When price exceeds average variable cost in the short run, a competitive firm's marginal cost curve is regarded as its
supply curve because
a.
the position of the marginal cost curve determines the price for which the firm should sell its product.
b.
among the various cost curves, the marginal cost curve is the only one that slopes upward.
c.
the marginal cost curve determines the quantity of output the firm is willing to supply at any price.
d.
the firm is aware that marginal revenue must exceed marginal cost in order for profit to be maximized.
137. A firm in a competitive market has the following cost structure:
Output
Total Costs
0
$1
1
$6
2
$9
3
$10
4
$17
5
$26
What is the lowest price at which this firm might choose to operate?
a.
$2
b.
$3
c.
$4
d.
$5
138. The competitive firm's short-run supply curve is its
a.
marginal revenue curve, but only the portion where marginal revenue exceeds marginal cost.
b.
marginal cost curve.
c.
marginal cost curve, but only the portion above the minimum of average total cost.
d.
marginal cost curve, but only the portion above the minimum of average variable cost.
139. Suppose a profit-maximizing firm in a competitive market produces rubber bands. When the market price for rubber
bands falls below the minimum of its average total cost, but still lies above the minimum of average variable cost, in the
short run the firm will
a.
experience losses but will continue to produce rubber bands.
b.
shut down.
c.
earn both economic and accounting profits.
d.
raise the price of its product.
140. Suppose a profit-maximizing firm in a competitive market produces rubber bands. When the market price for rubber
bands rises above the minimum of its average variable cost, but still lies below the minimum of average total cost, in the
short run the firm will
a.
experience losses but will continue to produce rubber bands.
b.
shut down.
c.
earn both economic and accounting profits.
d.
raise the price of its product.
141. Shrimp Galore, a shrimp harvesting business in the Pacific Northwest, has a 30-year loan on its shrimp harvesting
boat. The annual loan payment is $25,000 and the boat has a market (salvage) value that exceeds its outstanding loan
balance. Prior to the 2010 shrimp harvesting season, Shrimp Galore's accountant predicted that at expected market prices
for shrimp, Shrimp Galore would have a net loss of $75,000 dollars after paying all 2010 expenses (including the annual
loan payment). In this case, Shrimp Galore should
a.
produce nothing and experience a loss of $25,000.
b.
produce nothing and experience a loss of $75,000.
c.
continue to operate because expected profits will rise in the future.
d.
continue to operate even though it predicts a loss of $75,000.
142. When a profit-maximizing competitive firm finds itself minimizing losses because it is unable to earn a positive
profit, this task is accomplished by producing the quantity at which price is equal to
a.
sunk cost.
b.
average fixed cost.
c.
average variable cost.
d.
marginal cost.
143. When a restaurant stays open for lunch service even though few customers patronize the restaurant for lunch, which
of the following principles is (are) best demonstrated?
(i)
Fixed costs are sunk in the short run.
(ii)
In the short run, only fixed costs are important to the decision to stay open for lunch.
(iii)
If revenue exceeds variable cost, the restaurant owner is making a smart decision to
remain open for lunch.
a.
(i) and (ii) only
b.
(ii) and (iii) only
c.
(i) and (iii) only
d.
(i), (ii), and (iii)
144. A profit-maximizing firm in a competitive market is able to sell its product for $7. At its current level of output, the
firm's average total cost is $10. The firm’s marginal cost curve crosses its marginal revenue curve at an output level of 9
units. The firm experiences a
a.
profit of more than $27.
b.
profit of exactly $27.
c.
loss of more than $27.
d.
loss of exactly $27.
145. Susan quit her job as a teacher, which paid her $36,000 per year, in order to start her own catering business. She
spent $12,000 of her savings, which had been earning 10 percent interest per year, on equipment for her business. She also
borrowed $12,000 from her bank at 10 percent interest, which she also spent on equipment. For the past several months
she has spent $1,000 per month on ingredients and other variable costs. Also for the past several months she has taken in
$3,500 in monthly revenue. In the short run, Susan should
a.
shut down her business, and in the long run she should exit the industry.
b.
continue to operate her business, but in the long run she should exit the industry.
c.
continue to operate her business, but in the long run she will probably face competition from newly entering
firms.
d.
continue to operate her business, and she is also in long-run equilibrium.
146. A firm in a competitive market has the following cost structure:
Output
Total Cost
0
$5
1
$10
2
$12
3
$15
4
$24
5
$40
If the market price is $4, this firm will
a.
produce 2 units in the short run and exit in the long run.
b.
produce 3 units in the short run and exit in the long run.
c.
produce 4 units in the short run and exit in the long run.
d.
shut down in the short run and exit in the long run.
147. Competitive firms that earn a loss in the short run should
a.
shut down if P < AVC.
b.
raise their price.
c.
lower their output.
d.
All of the above are correct.
148. Mrs. Smith is operating a firm in a competitive market. The market price is $6.50. At her profit-maximizing level of
output, her average total cost of production is $7.00, and her average variable cost of production is $6.00. Which of the
following statements about Mrs. Smith’s firm is correct?
a.
Mrs. Smith is earning a loss and should shut down in the short run.
b.
Mrs. Smith is earning a loss but should continue to operate in the short run.
c.
Mrs. Smith is earning a profit since the price is above the average variable cost.
d.
Without knowing Mrs. Smith's marginal cost, we cannot determine whether she should stay in business or shut
down.
149. Refer to Figure 14-1. The firm’s short-run supply curve is its marginal cost curve above
a.
$1.
b.
$3.
c.
$4.50.
d.
$6.30.
150. Refer to Figure 14-1. The firm should shut down if the market price is
a.
above $8.
b.
above $6.30 but less than $8.
c.
above $4.50 but less than $6.30.
d.
less than $4.50.
151. Refer to Figure 14-1. If the market price falls below $4.50, the firm will earn
a.
positive economic profits in the short run.
b.
negative economic profits in the short run but remain in business.
c.
negative economic profits in the short run and shut down.
d.
zero economic profits in the short run.
152. Refer to Figure 14-1. The firm will earn a negative economic profit but remain in business in the short run if the
market price is
a.
above $6.30 but less than $8.
b.
above $6.30.
c.
less than $6.30 but more than $4.50.
d.
less than $4.50.
153. Refer to Figure 14-1. The firm will earn a positive economic profit in the short run if the market price is
a.
above $6.30.
b.
less than $6.30 but more than $4.50.
c.
less than $4.50.
d.
exactly $6.30.
154. Refer to Figure 14-1. If the market price rises above $6.30, the firm will earn
a.
positive economic profits in the short run.
b.
negative economic profits in the short run but remain in business.
c.
negative economic profits and shut down.
d.
zero economic profits in the short run.
155. Refer to Figure 14-1. If the market price is $6.30, the firm will earn
a.
positive economic profits in the short run.
b.
negative economic profits in the short run but remain in business.
c.
negative economic profits and shut down.
d.
zero economic profits in the short run.
156. Refer to Figure 14-1. If the market price is $5.00, the firm will earn
a.
positive economic profits in the short run.
b.
negative economic profits in the short run but remain in business.
c.
negative economic profits and shut down.
d.
zero economic profits in the short run.
157. Refer to Figure 14-1. If the market price is $4.00, the firm will earn
a.
positive economic profits in the short run.
b.
negative economic profits in the short run but remain in business.
c.
negative economic profits and shut down.
d.
zero economic profits in the short run.
Figure 14-2
Suppose a firm operating in a competitive market has the following cost curves:
158. Refer to Figure 14-2. If the market price is Pa, in the short run the firm will earn
a.
positive economic profits.
b.
negative economic profits but will try to remain open.
c.
negative economic profits and will shut down.
d.
zero economic profits.
159. Refer to Figure 14-2. If the market price is Pb, in the short run the firm will earn
a.
positive economic profits.
b.
negative economic profits but will try to remain open.
c.
negative economic profits and will shut down.
d.
zero economic profits.
160. Refer to Figure 14-2. If the market price is Pc, in the short run the firm will earn
a.
positive economic profits.
b.
negative economic profits but will try to remain open.
c.
negative economic profits and will shut down.
d.
zero economic profits.
161. Refer to Figure 14-2. If the market price is Pd, in the short run the firm will earn
a.
positive economic profits.
b.
negative economic profits but will try to remain open.
c.
negative economic profits and will shut down.
d.
zero economic profits.
162. Refer to Figure 14-2. Which of the four prices corresponds to a firm earning positive economic profits in the short
run?
a.
Pa
b.
Pb
c.
Pc
d.
Pd
163. Refer to Figure 14-2. Which of the four prices corresponds to a firm earning zero economic profits in the short run?
a.
Pa
b.
Pb
c.
Pc
d.
Pd
164. Refer to Figure 14-2. Which of the four prices corresponds to a firm earning negative economic profits in the short
run but trying to remain open?
a.
Pa
b.
Pb
c.
Pc
d.
Pd
165. Refer to Figure 14-2. Which of the four prices corresponds to a firm earning negative economic profits in the short
run and shutting down?
a.
Pa
b.
Pb
c.
Pc
d.
Pd
166. Refer to Figure 14-3. If the market price is $10, what is the firm’s short-run economic profit?
a.
$9
b.
$15
c.
$30
d.
$50
167. Refer to Figure 14-3. If the market price is $6, what is the firm’s short-run economic profit?
a.
$0
b.
$12
c.
$15
d.
$18
168. Refer to Figure 14-3. If the market price is $10, what is the firm’s total cost?
a.
$15
b.
$30
c.
$35
d.
$50
169. Refer to Figure 14-3. If the market price is $10, what is the firm’s total revenue?
a.
$15
b.
$30
c.
$35
d.
$50
170. Refer to Figure 14-3. The firm will earn zero economic profit if the market price is
a.
$0.
b.
$6.
c.
$7.
d.
$10.
171. Refer to Figure 14-3. The firm will earn positive economic profit if the market price is
a.
positive.
b.
$6.
c.
above $6.
d.
There is no price at which the firm earns positive economic profits.
Suppose a firm operating in a competitive market has the following cost curves:
172. Refer to Figure 14-4. When price rises from P2 to P3, the firm finds that
a.
marginal cost exceeds marginal revenue at a production level of Q2.
b.
if it produces at output level Q3 it will earn a positive profit.
c.
expanding output to Q4 would leave the firm with losses.
d.
it could increase profits by lowering output from Q3 to Q2.
173. Refer to Figure 14-4. When price falls from P3 to P1, the firm finds that it
a.
decreases its fixed costs.
b.
should produce Q1 units of output.
c.
should produce Q3 units of output.
d.
should shut down immediately.
174. Refer to Figure 14-4. The firm will earn positive economic profits if the price is
(i)
P4.
(ii)
P3.
(iii)
P2.
(iv)
P1.
a.
(i) only
b.
(i) or (ii) only
c.
(i), (ii), or (iii) only
d.
(i), (ii), (iii), and (iv)
175. Refer to Figure 14-4. At which price range will the firm continue to operate in the short run but earn negative
profits?
a.
any price higher than P4
b.
any price higher than P3 but less than P4
c.
any price higher than P2 but less than P3
d.
any price lower than P1
176. Refer to Figure 14-4. When price rises from P3 to P4, the firm finds that
a.
fixed costs decrease as output increases from Q3 to Q4.
b.
it can earn a positive profit by increasing production to Q4.
c.
profit is still maximized at a production level of Q3.
d.
average revenue exceeds marginal revenue at a production level of Q4.
Figure 14-5
Suppose a firm operating in a competitive market has the following cost curves:
177. Refer to Figure 14-5. When market price is P7, a profit-maximizing firm's short-run profits can be represented by
the area
a.
P7 × Q5.
b.
P7 × Q3.
c.
(P7 - P5) × Q3.
d.
We are unable to determine the firm’s profits because the quantity that the firm would produce is not labeled
on the graph.
178. Refer to Figure 14-5. In the short run, if the market price is higher than P1 but less than P4, individual firms in a
competitive industry will earn
a.
positive profits.
b.
zero profits.
c.
losses but will remain in business.
d.
losses and will shut down.
179. Refer to Figure 14-5. In the short run,if the market price is higher than P4 but less than P6, individual firms in a
competitive industry will earn
a.
positive profits.
b.
zero profits.
c.
losses but will remain in business.
d.
losses and will shut down.
180. Refer to Figure 14-5. In the short run, if the market price is P4, individual firms in a competitive industry will earn
a.
positive profits.
b.
zero profits.
c.
losses but will remain in business.
d.
losses and will shut down.
181. Refer to Figure 14-5. Firms would be encouraged to enter this market for all prices that exceed
a.
P1.
b.
P2.
c.
P3.
d.
P4.
182. Refer to Figure 14-5. When market price is P2, a profit-maximizing firm's losses can be represented by the area
a.
(P4 - P2) × Q2.
b.
(P2 - P1) × (Q2-Q1).
c.
At a market price of P2, the firm earns profits, not losses.
d.
At a market price of P2 the firm has losses, but the reference points in the figure don't identify the losses.
