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218. Which of the following represents the firm's short-run condition for shutting down?
a.
shut down if TR < TC
b.
shut down if TR < FC
c.
shut down if P < ATC
d.
shut down if TR < VC
219. When determining whether to shut down in the short run, a competitive firm should ignore
(i)
fixed costs.
(ii)
variable costs.
(iii)
sunk costs.
a.
(iii) only
b.
(i) and (iii) only
c.
(ii) only
d.
(i), (ii), and (iii)
220. In a competitive market the current price is $5. The typical firm in the market has ATC = $5.50 and AVC = $5.15.
a.
In the short run firms will shut down, and in the long run firms will leave the market.
b.
In the short run firms will continue to operate, but in the long run firms will leave the market.
c.
New firms will likely enter this market to capture any remaining economic profits.
d.
The firm will earn zero profits in both the short run and long run.
221. In a competitive market the current price is $5. The typical firm in the market has ATC = $5.50 and AVC = $4.50.
a.
In the short run firms will shut down, and in the long run firms will leave the market.
b.
In the short run firms will continue to operate, but in the long run firms will leave the market.
c.
New firms will likely enter this market to capture any remaining economic profits.
d.
The firm will earn zero profits in both the short run and long run.
222. In a competitive market the current price is $5. The typical firm in the market has ATC = $5.00 and AVC = $4.50.
a.
In the short run firms will shut down, and in the long run firms will leave the market.
b.
In the short run firms will continue to operate, but in the long run firms will leave the market.
c.
New firms will likely enter this market to capture any remaining economic profits.
d.
The firm will earn zero profits in both the short run and long run.
223. In a competitive market the current price is $6. The typical firm in the market has ATC = $5.00 and AVC = $4.50.
a.
In the short run firms will shut down, and in the long run firms will leave the market.
b.
In the short run firms will continue to operate, but in the long run firms will leave the market.
c.
New firms will likely enter this market to capture some of the economic profits.
d.
The firm will earn zero profits in both the short run and long run.
224. Jose's restaurant operates in a perfectly competitive market. At the point where marginal cost equals marginal
revenue, ATC = $20, AVC = $15, and the price per unit is $10. In this situation,
a.
Jose's restaurant is earning a positive economic profit.
b.
Jose's restaurant should shut down immediately.
c.
Jose's restaurant is losing money in the short run but should continue to operate.
d.
the market price will rise in the short run to increase profits.
225. The term shutdown
a.
and the term exit both refer to short-run decisions that a firm might make.
b.
and the term exit both refer to long-run decisions that a firm might make.
c.
refers to a short-run decision that a firm might make, whereas the term exit refers to a long-run decision that a
firm might make.
d.
refers to a long-run decision that a firm might make, whereas the term exit refers to a short-run decision that a
firm might make.
226. For a particular competitive firm, the minimum value of average variable cost (AVC) is $12 and is reached when 200
units of output are produced. For the same firm, the minimum value of average total cost (ATC) is $15 and is reached
when 230 units of output are produced. Which of the following statements is correct?
a.
In the short run, the firm will shut down if the price of its product is $11.
b.
In the long run, the firm will shut down if the price of its product is $14.
c.
If the price of its product is $12, then the firm’s loss if it produces 200 units of output is the same as its loss if
it shuts down.
d.
All of the above are correct.
227. For a particular competitive firm, the minimum value of average variable cost (AVC) is $12 and is reached when 200
units of output are produced. For the same firm, the minimum value of average total cost (ATC) is $15 and is reached
when 230 units of output are produced. Which of the following statements is correct?
a.
In the short run, the firm will shut down if the price of its product is $14.
b.
In the long run, the firm will shut down if the price of its product is $11.
c.
For this firm, the minimum value of variable cost (VC) is $2,400.
d.
If the firm’s fixed cost (FC) amounts to $500, then the firm cannot earn a positive profit unless the price of its
product exceeds $16.
228. When fixed costs are ignored because they are irrelevant to a business's production decision, they are called
a.
explicit costs.
b.
implicit costs.
c.
sunk costs.
d.
opportunity costs.
229. When a profit-maximizing firm's fixed costs are considered sunk in the short run, then the firm
a.
can set price above marginal cost.
b.
must set price below average total cost.
c.
will never show losses.
d.
can safely ignore fixed costs when deciding how much output to produce.
230. Which of these types of costs can be ignored when an individual or a firm is making decisions?
a.
sunk costs
b.
marginal costs
c.
variable costs
d.
opportunity costs
231. Suppose you value a special watch at $100. You purchase it for $75. On your way home from class one day, you lose
the watch. The store is still selling the same watch, but the price has risen to $85. Assume that losing the watch has not
altered how you value it. What should you do?
a.
Pay the $85 to buy the watch.
b.
Wait to see if the watch goes on sale. If the price drops to $75 or less, buy the watch.
c.
Wait to see if the watch goes on sale. If the price drops to $25 or less, buy the watch.
d.
Do not buy the watch.
232. Suppose you bought a ticket to a football game for $30 and that you place a $35 value on seeing the game. If you
lose the ticket, then what is the maximum price you should pay for another ticket? Assume that losing the ticket does not
alter how you value it.
a.
$5
b.
$30
c.
$35
d.
$65
233. You purchase a $30, nonrefundable ticket to a play at a local theater. Ten minutes into the show you realize that it is
not a very good show and place only a $10 value on seeing the remainder of the show. Alternatively you could leave the
theater and go home and watch TV or read a book. You place an $8 value on watching TV and a $6 value on reading a
book.
a.
You should leave the theater since the net benefit from seeing the remainder of the show is -$20, while going
home will earn you at least $8 of satisfaction.
b.
You should stay and watch the remainder of the show.
c.
You should go home and watch TV.
d.
You should go home and read a book.
234. You purchase a $30, nonrefundable ticket to a play at a local theater. Ten minutes into the show you realize that it is
not a very good show and place only a $10 value on seeing the remainder of the show. Alternatively you could leave the
theater and go home and watch TV or read a book. You place an $8 value on watching TV and a $12 value on reading a
book.
a.
You should stay and watch the remainder of the show.
b.
You should go home and watch TV.
c.
You should go home and read a book.
d.
You should go home and either watch TV or read a book.
235. A sunk cost is one that
a.
changes as the level of output changes in the short run.
b.
was paid in the past and will not change regardless of the present decision.
c.
should determine the rational course of action in the future.
d.
has the most impact on profit-making decisions.
236. When economists refer to a production cost that has already been committed and cannot be recovered, they use the
term
a.
implicit cost.
b.
explicit cost.
c.
variable cost.
d.
sunk cost.
237. A corporation has been steadily losing money on one of its product lines, plastic flamingo lawn ornaments. The firm
produces plastic flamingos in a factory that cost $20 million to build 10 years ago. The firm is now considering an offer to
buy that factory for $15 million. Which of the following statements about the decision to sell or not to sell is correct?
a.
The firm should turn down the purchase offer because the factory cost more than $15 million to build.
b.
The $20 million spent on the factory is a sunk cost; that cost should not affect the decision.
c.
The $20 million spent on the factory is an implicit cost, which should be included in the decision.
d.
The firm should sell the factory only if it can reduce its costs elsewhere by $5 million.
238. Suppose that you value a hat from your favorite university at $20. The university bookstore has the hat on sale for
$15. You purchase the hat but lose it on the way home. What should you do? Assume that losing the hat does not alter
how you value it.
a.
Go back to the bookstore and purchase another hat.
b.
Wait until the cost of the hat falls to $15 or less before purchasing another hat.
c.
Wait until the cost of the hat falls to $5 or less before purchasing another hat.
d.
Do not purchase another hat regardless of the price.
239. In the long run, a firm will enter a competitive industry if
a.
total revenue exceeds total cost.
b.
the price exceeds average total cost.
c.
the firm can earn economic profits.
d.
All of the above are correct.
240. In the long run, a firm will exit a competitive industry if
a.
total revenue exceeds total cost.
b.
the price exceeds average total cost.
c.
average total cost exceeds the price.
d.
Both a and b are correct.
241. In the long run, a profit-maximizing firm will choose to exit a market when
a.
average fixed cost is falling.
b.
variable costs exceed sunk costs.
c.
marginal cost exceeds marginal revenue at the current level of production.
d.
total revenue is less than total cost.
242. A firm that exits its market has to pay
a.
its variable costs but not its fixed costs.
b.
its fixed costs but not its variable costs.
c.
both its variable costs and its fixed costs.
d.
neither its variable costs nor its fixed costs.
243. The competitive firm's long-run supply curve is that portion of the marginal cost curve that lies above average
a.
fixed cost.
b.
variable cost.
c.
total cost.
d.
revenue.
244. Which of the following represents the firm's long-run condition for exiting a market?
a.
exit if P < MC
b.
exit if P < FC
c.
exit if P < ATC
d.
exit if MR < MC
245. Consider a firm operating in a perfectly competitive market. At its current output of 200 units, marginal revenue is
$28. At this output, average total cost is minimized and equals $25. Given this information, what should the firm do?
a.
Continue to produce 200 units, since costs per unit are minimized
b.
Increase output beyond 200 units, since this higher output will yield the profit maximizing output level.
c.
Decrease output below 200 units, since this lower output will result in the profit maximizing output level.
d.
More information is needed to determine the firm’s next step.
246. Consider a firm operating in a perfectly competitive market. At its current output of 200 units, marginal revenue is
$25. At this output, average total cost is decreasing and equals $22. Given this information, what should the firm do?
a.
Continue to produce 200 units, because this maximizes profits.
b.
Increase output beyond 200 units, since a higher output will yield the profit maximizing output level.
c.
Decrease output below 200 units, since a lower output will result in the profit maximizing output level.
d.
More information is needed to determine the firm’s next step.
247. Consider a firm that operates in a perfectly competitive market. The firm is producing at its profit maximizing
output level. If this is true, then
a.
average revenue is maximized.
b.
the firm must be earning a positive economic profit.
c.
marginal revenue is greater than the market price.
d.
price must be equal to marginal cost.
248. Consider a firm that operates in a perfectly competitive market. Currently the firm is producing 300 units of output
and the price is $20. If marginal cost at 300 units is $22, the firm
a.
could increase profits by reducing output from 300 units.
b.
could increase profits by increasing output from 300 units.
c.
should decide to increase the price above $20.
d.
should shut down, since it must be losing money.
Table 14-17
The table below shows the price and cost information for a firm that operates in a perfectly competitive market.
Price
Quantity
Total Cost
$8
0
$6
$8
1
$10
$8
2
$15
$8
3
$21
$8
4
$28
$8
5
$36
$8
6
$45
249. Refer to Table 14-17. The marginal cost of the fourth unit is
a.
$28.
b.
$32.
c.
$5.
d.
$7.
250. Refer to Table 14-17. Using this information, determine the average variable cost (AVC) when Q = 5.
a.
$36.
b.
$30.
c.
$5.
d.
$6.
251. Refer to Table 14-17. Based upon this information, the profit maximizing output level is
a.
3 units.
b.
4 units.
c.
5 units.
d.
6 units.
252. Refer to Table 14-17. Based upon this information, if the firm is producing the profit maximizing output, how
much profit does the firm make?
a.
$32.
b.
$40.
c.
$4.
d.
$6.
