economics data bank

Multiple Choice

Identify the choice that best completes the statement or answers the question.

____ 1. In a competitive market, the actions of any single buyer or seller will

a. have a negligible impact on the market price.

b. have little effect on overall production but will ultimately change final product price.

c. cause a noticeable change in overall production and a change in final product price.

d. adversely affect the profitability of more than one firm in the market.

Table 14-1

Quantity Price

1 13

2 13

3 13

4 13

5 13

6 13

7 13

8 13

9 13

____ 2.Refer to Table 14-1. The price and quantity relationship in the table is most likely that faced by a firm in a

a. monopoly.

b. concentrated market.

c. competitive market.

d. strategic market.

____ 3. When buyers in a competitive market take the selling price as given, they are said to be

a. market entrants.

b. monopolists.

c. free riders.

d. price takers.

____ 4. Of the following characteristics of competitive markets, which are necessary for firms to be price takers?

(i) There are many sellers.

(ii) Firms can freely enter or exit the market.

(iii) Goods offered for sale are largely the same.

a. (i) and (ii) only

b. (i) and (iii) only

c. (ii) only

d. All are necessary.

Name: ________________________ ID: A

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____ 5. Suppose a firm in a competitive market received $1,000 in total revenue and had a marginal revenue of $10

for the last unit produced and sold. What is the average revenue per unit, and how many units were sold?

a. $5 and 50

b. $5 and 100

c. $10 and 50

d. $10 and 100

____ 6. Total profit for a firm is calculated as

a. (marginal revenue) minus (average cost).

b. (average revenue) minus (average cost).

c. (marginal revenue) minus (marginal cost).

d. (price minus average cost) times (quantity of output).

____ 7. As a general rule, profit-maximizing producers in a competitive market produce output at a point where

a. marginal cost is increasing.

b. marginal cost is decreasing.

c. marginal revenue is increasing.

d. price is less than marginal revenue.

Figure 14-1

The graph below depicts the cost structure for a firm in a competitive market.

____ 8.Refer to Figure 14-1. When price falls from P3to P1, the firm finds that

a. fixed cost is higher at a production level of Q1than it is at Q3.

b. it should produce Q1 units of output.

c. it should produce Q3 units of output.

d. it should shut down immediately.

____ 9. When price is greater than marginal cost for a firm in a competitive market,

a. marginal cost must be falling.

b. the firm must be minimizing its losses.

c. there are opportunities to increase profit by increasing production.

d. the firm should decrease output to maximize profit.

Name: ________________________ ID: A

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____ 10. 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.

____ 11. 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.

____ 12. A profit-maximizing firm in a competitive market is currently producing 200 units of output. It has average revenue of $9 and average total cost of $7. It follows that the firm's

a. average total cost curve intersects the marginal cost curve at an output level of less than

200 units. b. average variable cost curve intersects the marginal cost curve at an output level of less than 200 units.

c. profit is $400.

d. All of the above are correct.

____ 13. 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.

____ 14. The following table gives the average total cost of production for various levels of output for a competitive

firm:

Q ATC

0 --

1 10

2 8

3 7

4 8

5 10

If the firm's fixed cost of production is $3 and the market price is $10, how many units should the firm produce to maximize its profit?

a. 1

b. 2

c. 3

d. 4

Name: ________________________ ID: A

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____ 15. 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

____ 16. Mrs. Smith operates a business in a competitive market. The current market price is $8.50, and at her profit-maximizing level of production, the average variable cost is $8.00 and the average total cost is $8.25.

a. Mrs. Smith should shut down her business in the short run but continue to operate in the

long run..

b. Mrs. Smith should continue to operate in the short run but shut down in the long run.

c. Mrs. Smith should continue to operate in both the short run and long run.

d. Mrs. Smith should shut down in both the short run and long run.

____ 17. 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

Figure 14-6

In the figure below, panel (a) depicts the linear marginal cost of a firm in a competitive market, and panel (b)

depicts the linear market supply curve for a market with a fixed number of identical firms.

____ 18.Refer to Figure 14-6. If at a market price of $1.75, 52,500 units of output are supplied to this market, how

many identical firms are participating in this market?

a. 75

b. 100

c. 250

d. 300

Name: ________________________ ID: A

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____ 19.

If the figure in panel (a) reflects the long-run equilibrium of a profit-maximizing firm in a competitive

market, the figure in panel (b) most likely reflects

a. perfectly inelastic long-run market supply.

b. the idea that free entry and exit of firms in the market lead to only one market price in

the long run.

c. the product of the individual supply curves of all firms in the market.

d. the fact that zero profits cannot be sustained in the long run.

____ 20. If all existing firms and all potential firms have the same cost curves, there are no inputs in limited quantities,

and the market is characterized by free entry and exit, then the long-run

a. market supply curve is equal to the sum of marginal cost.

b. supply curve for the market must slope downward.

c. market supply curve must slope upward.

d. supply curve for the market is horizontal and equal to the minimum of long-run average

cost for each firm.

____ 21. When entry and exit behavior of firms in an industry does not affect a firm's cost structure,

a. the long-run market supply curve must be horizontal.

b. the long-run market supply curve must be upward-sloping.

c. the long-run market supply curve must be downward-sloping.

d. we can't tell anything about the shape of the long-run market supply curve.

____ 22. Suppose a competitive market is comprised of firms that face identical cost curves. The firms experience an

increase in demand that results in positive profits for the firms. Which of the following events are then most

likely to occur?

(i) New firms will enter the market.

(ii) In the short run, price will rise; in the long run, price will rise further.

(iii) In the long run, all firms will be producing at their efficient scale.

a. (i) and (ii) only

b. (i) and (iii) only

c. (ii) and (iii) only

d. (i), (ii) and (iii)

Name: ________________________ ID: A

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____ 23. Regardless of the cost structure of firms in a competitive market, in the long run

a. firms will experience rising demand for their products.

b. the marginal firm will earn zero economic profit.

c. firms will experience a less competitive market environment.

d. exit and entry is likely to lead to a horizontal long-run supply curve.

____ 24. A market might have an upward-sloping long-run supply curve if

a. firms have different costs.

b. consumers exercise market power over producers.

c. all factors of production are essentially available in unlimited supply.

d. the entry of new firms into the market has no effect on the cost structure of firms in the

market.

____ 25. When new entrants into a competitive market have higher costs than existing firms,

a. accounting profits will be the primary determinant of entry into the market.

b. sunk costs become an important determinant of the short-run entry strategy.

c. market price must be rising.

d. all firms will earn zero economic profit once the new equilibrium is reached.