Question 1

When a firm experiences zero-profit equilibrium, the firm's revenue must be sufficient to cover all opportunity costs.

Accepted Answer

A) True 
 B)False

Question 2

Graph 14-1
 3, the profit-maximising firm will produce what level of output? A)  Q1 B)  Q2 C)  Q3 D)  Q4" class="answers-bank-image d-inline" rel="preload" > This graph depicts the cost structure for a firm in a competitive market. Use the graph to answer the following question(s) .
-Refer to Graph 14-1. When marginal revenue is equal to MC3, the profit-maximising firm will produce what level of output?

Accepted Answer

A)   Q1
B)   Q2
C)   Q3
D)   Q4E) C) and D)
F) A) and C)

Question 3

Firms that shut down in the short run are unable to avoid their:

Accepted Answer

A)   fixed costs
B)   sunk costs
C)   variable costs
D)   marginal costE) A) and D)
F) B) and C)

Question 4

Restaurants often remain open for lunch even if they attract few customers because, the variable costs are small relative to the revenue, even if the fixed costs are large.

Accepted Answer

A) True 
 B)False

Question 5

Graph 14-8
 0 to Demand1 will result in: A)  a new market equilibrium at point D B)  rising prices and falling profits for existing firms in the market C)  falling prices and falling profits for existing firms in the market D)  an eventual increase in the number of firms in the market and a new long-run equilibrium at point C" class="answers-bank-image d-inline" rel="preload" >
-Refer to Graph 14-8. Assume that the market starts in equilibrium at point A in panel (b) . An increase in demand from Demand0 to Demand1 will result in:

Accepted Answer

A)   a new market equilibrium at point D
B)   rising prices and falling profits for existing firms in the market
C)   falling prices and falling profits for existing firms in the market
D)   an eventual increase in the number of firms in the market and a new long-run equilibrium at point CE) C) and D)
F) A) and C)

Question 6

Graph 14-7
 
-Refer to Graph 14-7. If the figure in panel (a)  reflects the long-run equilibrium of a profit-maximising firm in a competitive market, the figure in panel (b)  most likely reflects:

Accepted Answer

A)   perfectly inelastic long-run market supply
B)   the product of individual firm supply curves for all firms in the market
C)   the idea that free entry and exit of firms in the market lead to only one market price in the long run
D)   zero profits cannot be sustained in the long runE) All of the above
F) None of the above

Question 7

To maximise profit, a firm should operate at the minimum of average total cost.

Accepted Answer

A) True 
 B)False

Question 8

In a competitive market, the price line also represents a firm's:

Accepted Answer

A)   marginal revenue curve
B)   average revenue curve
C)   marginal profit curve
D)   both the marginal revenue and average revenue curvesE) A) and B)
F) B) and C)

Question 9

When entry and exit behaviour of firms in an industry does not affect a firm's cost structure:

Accepted Answer

A)   the long-run market supply curve must be upward-sloping
B)   the long-run market supply curve must be downward-sloping
C)   the long-run market supply curve must be horizontal
D)   we can't tell anything about the shape of the long-run market supply curveE) A) and B)
F) A) and C)

Question 10

Suppose a profit-maximising firm in a competitive market is unable to generate enough revenue to pay all of its fixed costs. In the short run it should:

Accepted Answer

A)   shut down and incur the total loss of its fixed cost
B)   continue to produce as long as marginal cost is less than average revenue
C)   continue to produce as long as revenue is sufficient to pay variable costs
D)   continue to produce and lower its price to gain more market shareE) A) and D)
F) None of the above

Question 11

Discuss the process that induces firms to operate at efficient scale in the long run in a competitive market with free entry and exit.

Accepted Answer

If all firms in a competitive industry f...

Question 12

Table 14-2
The market for Whizzly Jigs consists of many identical firms, each with the cost structure below. Suppose the current market price is $2.
  
-Refer to Table 14-2. Suppose the current market price is $2. Which of the following is likely to occur?

Accepted Answer

A)   firms will shut-down in the short-run
B)   firms will exit in the long-run
C)   firms will enter in the long-run
D)   the number of firms in the industry will be stable in both the long- and short-runE) B) and C)
F) None of the above

Question 13

The irrelevance of sunk costs is best described by which of the following business decisions?

Accepted Answer

A)   forestry companies continue to sell logs even though they are reporting large losses
B)   forestry companies sell up and exit the market when they report losses
C)   new forestry companies enter the market and earn profits selling logs
D)   all of the aboveE) None of the above
F) A) and B)

Question 14

The long-run equilibrium in a competitive market characterised by firms with identical costs is generally characterised by firms operating at efficient scale.

Accepted Answer

A) True 
 B)False

Question 15

Graph 14-8
 0 to Supply1 is most likely the result of: A)  existing firms changing their cost structure B)  existing firms in the market increasing their level of production beyond Q1 C)  the entrance of new firms in the market D)  all of the above" class="answers-bank-image d-inline" rel="preload" >
-Refer to Graph 14-8. An increase in market supply from Supply0 to Supply1 is most likely the result of:

Accepted Answer

A)   existing firms changing their cost structure
B)   existing firms in the market increasing their level of production beyond Q1
C)   the entrance of new firms in the market
D)   all of the aboveE) A) and B)
F) A) and C)

Question 16

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.

Accepted Answer

A) True 
 B)False

Question 17

Profit-maximising firms enter a competitive market when:

Accepted Answer

A)   total revenue for existing firms in the market exceeds their total fixed costs
B)   total revenue for existing firms in the market exceeds their total variable costs
C)   price exceeds average total cost for existing firms in the market
D)   average revenue is less than average total cost for existing firms in the marketE) A) and D)
F) All of the above

Question 18

Graph 14-1
 1 B)  MC2 C)  MC3 D)  MC4" class="answers-bank-image d-inline" rel="preload" > This graph depicts the cost structure for a firm in a competitive market. Use the graph to answer the following question(s) .
-Refer to Graph 14-1. What price level will leave the profit-maximising firm with zero profits?

Accepted Answer

A)   MC1
B)   MC2
C)   MC3
D)   MC4E) None of the above
F) A) and D)

Question 19

When a profit-maximising firm in a competitive market has zero economic profit, accounting profit:

Accepted Answer

A)   is positive
B)   is negative (accounting losses) 
C)   is also zero
D)   could be positive, negative or zeroE) A) and C)
F) None of the above

Question 20

A rice farmer sells rice to an Australian grain broker. Suppose that the market for rice is competitive. This means that the farmer will maximise profit by choosing:

Accepted Answer

A)   to produce the quantity at which average fixed cost is minimised
B)   to sell its wheat at a price where marginal cost is equal to average total cost
C)   the quantity at which market price is equal to the farm's marginal cost of production
D)   the quantity where average revenue is equal to the farm's average variable costE) None of the above
F) A) and D)

Exam 14: Firms in Competitive Markets

To maximise profit, a firm should operate at the minimum of average total cost.

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Restaurants often remain open for lunch even if they attract few customers because, the variable costs are small relative to the revenue, even if the fixed costs are large.

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Graph 14-7 -Refer to Graph 14-7. If the figure in panel (a) reflects the long-run equilibrium of a profit-maximising firm in a competitive market, the figure in panel (b) most likely reflects:

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Graph 14-8 -Refer to Graph 14-8. Assume that the market starts in equilibrium at point A in panel (b) . An increase in demand from Demand0 to Demand1 will result in:

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When a firm experiences zero-profit equilibrium, the firm's revenue must be sufficient to cover all opportunity costs.

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When entry and exit behaviour of firms in an industry does not affect a firm's cost structure:

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Firms that shut down in the short run are unable to avoid their:

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In a competitive market, the price line also represents a firm's:

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Graph 14-1 This graph depicts the cost structure for a firm in a competitive market. Use the graph to answer the following question(s) . -Refer to Graph 14-1. What price level will leave the profit-maximising firm with zero profits?

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Discuss the process that induces firms to operate at efficient scale in the long run in a competitive market with free entry and exit.

Correct AnswerverifiedIf all firms in a competitive industry f...View AnswerShow Answer

Graph 14-8 -Refer to Graph 14-8. An increase in market supply from Supply0 to Supply1 is most likely the result of:

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Suppose a profit-maximising firm in a competitive market is unable to generate enough revenue to pay all of its fixed costs. In the short run it should:

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A rice farmer sells rice to an Australian grain broker. Suppose that the market for rice is competitive. This means that the farmer will maximise profit by choosing:

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When a profit-maximising firm in a competitive market has zero economic profit, accounting profit:

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The long-run equilibrium in a competitive market characterised by firms with identical costs is generally characterised by firms operating at efficient scale.

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The irrelevance of sunk costs is best described by which of the following business decisions?

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Profit-maximising firms enter a competitive market when:

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Graph 14-1 This graph depicts the cost structure for a firm in a competitive market. Use the graph to answer the following question(s) . -Refer to Graph 14-1. When marginal revenue is equal to MC3, the profit-maximising firm will produce what level of output?

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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.

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Table 14-2 The market for Whizzly Jigs consists of many identical firms, each with the cost structure below. Suppose the current market price is $2. -Refer to Table 14-2. Suppose the current market price is $2. Which of the following is likely to occur?

Correct AnswerverifiedShow Answer

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Graph 14-8 -Refer to Graph 14-8. Assume that the market starts in equilibrium at point A in panel (b) . An increase in demand from Demand₀ to Demand₁ will result in:

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If all firms in a competitive industry f...
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Graph 14-8 -Refer to Graph 14-8. An increase in market supply from Supply₀ to Supply₁ is most likely the result of:

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Graph 14-1 This graph depicts the cost structure for a firm in a competitive market. Use the graph to answer the following question(s) . -Refer to Graph 14-1. When marginal revenue is equal to MC₃, the profit-maximising firm will produce what level of output?

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