tToàn bộ những gì bạn cần để qua môn kinh tế học, tài liệu này tập hợp những câu hỏi trắc nghiệm mới nhất của kinh tế vi mô năm 2018. Về nội dung tài liệu, với các khái niệm phổ biến và khái quát nhất về kinh tế vi mô cũng như những giải thích về các cơ chế hoạt động của nền kinh tế, bộ giáo trình bao gồm 23 phần cung cấp cho người đọc các kiến thức khá toàn diện và chuyên sâu về các nguyên lý kinh tế học như các lý thuyết cổ điển, các lý thuyết về phát triển: nền kinh tế trong dài hạn, các lý thuyết về vòng tròn kinh tế: nền kinh tế trong ngắn hạn, các yếu tố vi mô ẩn sau kinh tế vĩ mô, các tranh luận về chính sách vĩ mô… Tất cả đều được giải thích và đánh giá bởi một vị giáo sư kinh tế hàng đầu trên thế giới. Các khái niệm trong sách được định nghĩa rất rõ ràng, dễ nắm bắt, dễ hiểu, có tóm tắt các chương tạo điều kiện tốt nhất cho việc ôn tập.
Chapter 14/Firms in Competitive Markets 161 Chapter 14 Firms in Competitive Markets TRUE/FALSE For a firm operating in a perfectly competitive industry, total revenue, marginal revenue, and average revenue are all equal ANS: F DIF: REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Average revenue | Marginal revenue MSC: Interpretive For a firm operating in a perfectly competitive industry, marginal revenue and average revenue are equal ANS: T DIF: REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Average revenue | Marginal revenue MSC: Interpretive If a firm notices that its average revenue equals the current market price, that firm must be participating in a competitive market ANS: F DIF: REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Average revenue MSC: Interpretive A profit-maximizing firm in a competitive market will increase production when average revenue exceeds marginal cost ANS: T DIF: REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Average revenue MSC: Interpretive Because there are many buyers and sellers in a perfectly competitive market, no one seller can influence the market price ANS: T DIF: REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Definitional Firms operating in perfectly competitive markets try to maximize profits ANS: T DIF: REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Applicative In competitive markets, firms that raise their prices are typically rewarded with larger profits ANS: F DIF: REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive When an individual firm in a competitive market increases its production, it is likely that the market price will fall ANS: F DIF: REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive In a competitive market, firms are unable to differentiate their product from that of other producers ANS: T DIF: REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 10 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 ANS: T DIF: REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 162 Chapter 14/Firms in Competitive Markets 11 A firm's incentive to compare marginal revenue and marginal cost is an application of the principle that rational people think at the margin ANS: T DIF: REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Interpretive 12 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 ANS: T DIF: REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Interpretive 13 Firms operating in perfectly competitive markets produce an output level where marginal revenue equals marginal cost ANS: T DIF: REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Marginal revenue MSC: Applicative 14 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) ANS: F DIF: REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Analytical 15 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) ANS: T DIF: REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Analytical 16 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) ANS: T DIF: REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Analytical 17 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 ANS: F DIF: REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Sunk costs MSC: Interpretive 18 Because nothing can be done about sunk costs, they are irrelevant to decisions about business strategy ANS: T DIF: REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Sunk costs MSC: Interpretive 19 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 ANS: F DIF: REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Sunk costs MSC: Interpretive 20 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 ANS: T DIF: REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Sunk costs MSC: Interpretive Chapter 14/Firms in Competitive Markets 163 21 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 ANS: T DIF: REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Interpretive 22 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 ANS: T DIF: REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Interpretive 23 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 ANS: F DIF: REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Interpretive 24 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 ANS: T DIF: REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Interpretive 25 In the short run, a firm should exit the industry if its marginal cost exceeds its marginal revenue ANS: F DIF: REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Interpretive 26 In making a short-run profit-maximizing production decision, the firm must consider both fixed and variable cost ANS: F DIF: REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Interpretive 27 A firm will shut down in the short run if revenue is not sufficient to cover its variable costs of production ANS: T DIF: REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Shut down MSC: Interpretive 28 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 ANS: T DIF: REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Shut down MSC: Interpretive 29 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 ANS: F DIF: REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Shut down MSC: Interpretive 30 A firm will shut down in the short run if revenue is not sufficient to cover all of its fixed costs of production ANS: F DIF: REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Shut down MSC: Interpretive 31 The supply curve of a firm in a competitive market is the average variable cost curve above the minimum of marginal cost ANS: F DIF: REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Interpretive 164 Chapter 14/Firms in Competitive Markets 32 When a profit-maximizing firm in a competitive market experiences rising prices, it will respond with an increase in production ANS: T DIF: REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Interpretive 33 The marginal firm in a competitive market will earn zero economic profit in the long run ANS: T DIF: REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Economic profit MSC: Interpretive 34 A profit-maximizing firm in a competitive market will earn zero accounting profits in the long run ANS: F DIF: REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Accounting profit MSC: Interpretive 35 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 ANS: T DIF: REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Interpretive 36 In the long run, when price is greater than average total cost, some firms in a competitive market will choose to enter the market ANS: T DIF: REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Interpretive 37 In the long run, a firm should exit the industry if its total costs exceed its total revenues ANS: T DIF: REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Interpretive 38 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 ANS: T DIF: REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Interpretive 39 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 ANS: T DIF: REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 40 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 ANS: F DIF: REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 41 A firm operating in a perfectly competitive market may earn positive, negative, or zero economic profit in the long run ANS: F DIF: REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive Chapter 14/Firms in Competitive Markets 165 42 A firm operating in a perfectly competitive market may earn positive, negative, or zero economic profit in the short run ANS: T DIF: REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive 43 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 ANS: T DIF: REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive 44 A competitive market will typically experience entry and exit until accounting profits are zero ANS: F DIF: REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive 45 The long-run equilibrium in a competitive market characterized by firms with identical costs is generally characterized by firms operating at efficient scale ANS: T DIF: REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive 46 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 ANS: T DIF: REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive 47 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 ANS: F DIF: REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive 48 When economic profits are zero in equilibrium, the firm's revenue must be sufficient to cover all opportunity costs ANS: T DIF: REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive 49 The short-run supply curve in a competitive market must be more elastic than the long-run supply curve ANS: F DIF: REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Interpretive 50 The long-run supply curve in a competitive market is more elastic than the short-run supply curve ANS: T DIF: REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Interpretive 166 Chapter 14/Firms in Competitive Markets SHORT ANSWER Describe the difference between average revenue and marginal revenue Why are both of these revenue measures important to a profit-maximizing firm? ANS: Average revenue is total revenue divided by the quantity of output Marginal revenue is the change in total revenue from the sale of each additional unit of output Marginal revenue is used to determine the profit-maximizing level of production, and average revenue is used to help determine the level of profits Note that for all firms, price equals average revenue because AR=(PxQ)/Q=P But only for a firm operating in a perfectly competitive industry does price also equal marginal revenue DIF: TOP: Price REF: 14-1 MSC: Definitional NAT: Analytic LOC: Perfect competition List and describe the characteristics of a perfectly competitive market ANS: There are many buyers and sellers in the market The goods offered by the various sellers are largely the same Firms can freely enter or exit the market DIF: TOP: REF: Competitive markets 14-1 NAT: Analytic MSC: Definitional LOC: Perfect competition Why would a firm in a perfectly competitive market always choose to set its price equal to the current market price? If a firm set its price below the current market price, what effect would this have on the market? ANS: The firm could not sell any more of its product at a lower price than it could sell at the market price As a result, it would needlessly forgo revenue if it set a price below the market price If the firm set a higher price, it would not sell anything at all because a competitive market has many sellers who would supply the product at the market price DIF: TOP: REF: Profit maximization 14-1 NAT: Analytic MSC: Analytical LOC: Perfect competition Use a graph to demonstrate the circumstances that would prevail in a competitive market where firms are earning economic profits Can this scenario be maintained in the long run? Explain your answer ANS: In a competitive market where firms are earning economic profits, new firms will have an incentive to enter the market This entry will expand the number of firms, increase the quantity of the good supplied, and drive down prices and profits Entry will cease once firms are producing the output level where price equals the minimum of the average total cost curve, meaning that each firm earns zero economic profits in the long run DIF: TOP: REF: Profit maximization 14-2 NAT: Analytic MSC: Analytical LOC: Perfect competition Chapter 14/Firms in Competitive Markets 167 Explain how a firm in a competitive market identifies the profit-maximizing level of production When should the firm raise production, and when should the firm lower production? ANS: The firm selects the level of output at which marginal revenue is equal to marginal cost If MR > MC, profit will increase if the firm increases Q If MR < MC, profit will increase if the firm decreases Q DIF: TOP: REF: Profit maximization 14-2 NAT: Analytic MSC: Analytical LOC: Perfect competition News reports from the western United States occasionally report incidents of cattle ranchers slaughtering a large number of newborn calves and burying them in mass graves rather than transporting them to markets Assuming that this is rational behavior by profit-maximizing "firms," explain what economic factors may influence such behavior ANS: If the selling price is not sufficient to cover the variable cost of sending the calves to market, this (potentially emotionally upsetting) behavior makes economic sense DIF: TOP: REF: Profit maximization 14-2 NAT: Analytic MSC: Analytical LOC: Perfect competition Use a graph to demonstrate the circumstances that would prevail in a perfectly competitive market where firms are experiencing economic losses Identify costs, revenue, and the economic losses on your graph Using your graph, determine whether an individual firm will shut down in the short run, or choose to remain in the market Explain your answer ANS: The losses and revenues are identified on the individual firm's graph Total cost is equal to the sum of the losses and revenue (because profit/loss=TR-TC, so TC=TR+profit/loss) The decision about whether this firm shuts down or remains in the market depends upon the position of average variable cost If average variable cost is below P at output level Q0, the firm will remain in the market If average variable cost is above P0 at output level Q0 the firm will shut down in the short run DIF: TOP: REF: Profit maximization 14-2 NAT: Analytic MSC: Analytical LOC: Perfect competition At its current level of production a profit-maximizing firm in a competitive market receives $12.50 for each unit it produces and faces an average total cost of $10 At the market price of $12.50 per unit, the firm's marginal cost curve crosses the marginal revenue curve at an output level of 1,000 units What is the firm's current profit? What is likely to occur in this market and why? ANS: $2,500; firms are likely to enter this market since existing firms are earning economic profits DIF: TOP: Profit REF: 14-2 MSC: Analytical NAT: Analytic LOC: Perfect competition 168 Chapter 14/Firms in Competitive Markets Give two reasons why the long-run industry supply curve may slope upward Use an example to demonstrate your reasons ANS: 1) Some resource used in production may be available only in limited quantities 2) Firms may have different cost structures The example provided in the text for the first reason is the market for farm products As more people become farmers, the price of land is bid up since its supply is limited As the price of farm land is bid up, the costs to all farmers in the market rise The example used to support the second reason is the market for painters Anyone can enter the market for painting services, but not everyone has the same costs because some painters work faster than others DIF: TOP: 10 Supply curve REF: 14-3 NAT: Analytic MSC: Interpretive LOC: Perfect competition If identical firms that remain in a competitive market over the long run make zero economic profit, why these firms choose to remain in the market? ANS: Because a normal rate of return on their investment is included as part of the opportunity cost of production DIF: TOP: REF: Economic profit 14-3 MSC: NAT: Analytic Interpretive LOC: Perfect competition Sec00 - Firms in Competitive Markets MULTIPLE CHOICE A firm has market power if it can a b c d maximize profits minimize costs influence the market price of the good it sells hire as many workers as it needs at the prevailing wage rate ANS: C DIF: LOC: Perfect competition MSC: Definitional 14-0 NAT: Market power Analytic demand curve supply curve way firms make pricing decisions in the not-for-profit sector of the economy way financial markets set interest rates ANS: B DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-0 NAT: Competitive market Analytic For any competitive market, the supply curve is closely related to the a b c d preferences of consumers who purchase products in that market income tax rates of consumers in that market firms’ costs of production in that market interest rates on government bonds ANS: C DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: The analysis of competitive firms sheds light on the decisions that lie behind the a b c d 1 REF: TOP: 14-0 NAT: Competitive market Analytic Suppose that firms in each of the two markets listed below were to increase their prices by 20 percent Which pair represents the example where customers would decrease their quantity purchased dramatically in one market and only slightly in the other market due to differences in market structure? a b c d corn and soybeans gasoline and restaurants water and cable television spiral notebooks and college textbooks Chapter 14/Firms in Competitive Markets 169 ANS: D DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-0 NAT: Competitive market Analytic Sec01 - Firms in Competitive Markets - What is a Competitive Market? MULTIPLE CHOICE A key characteristic of a competitive market is that a b c d government antitrust laws regulate competition producers sell nearly identical products firms minimize total costs firms have price setting power ANS: B DIF: LOC: Perfect competition MSC: Definitional REF: TOP: 14-1 NAT: Competitive markets Analytic REF: TOP: 14-1 NAT: Competitive markets Analytic 14-1 NAT: Competitive markets Analytic 14-1 NAT: Competitive markets Analytic Who is a price taker in a competitive market? a b c d buyers only sellers only both buyers and sellers neither buyers nor sellers ANS: C DIF: LOC: Perfect competition MSC: Definitional REF: TOP: Competitive markets are characterized by a b c d a small number of buyers and sellers unique products the interdependence of firms free entry and exit by firms ANS: D DIF: LOC: Perfect competition MSC: Definitional (i) (ii) (iii) no one seller can influence the price of the product price exceeds marginal revenue for each unit sold average revenue exceeds marginal revenue for each unit sold administrative barriers can make it difficult for firms to enter an industry ANS: A DIF: LOC: Perfect competition MSC: Interpretive Analytic In a perfectly competitive market, a b c d 14-1 NAT: Competitive markets Buyers and sellers are price takers Each firm sells a virtually identical product Free entry is limited Each firm chooses an output level that maximizes profits ANS: C DIF: LOC: Perfect competition MSC: Definitional REF: TOP: Which of the following is not a characteristic of a competitive market? a b c d 1 REF: TOP: A market is competitive if firms have the flexibility to price their own product each buyer is small compared to the market each seller is small compared to the market 170 Chapter 14/Firms in Competitive Markets a b c d (i) and (ii) only (i) and (iii) only (ii) and (iii) only (i), (ii), and (iii) ANS: C DIF: LOC: Perfect competition MSC: Interpretive 14-1 NAT: Competitive markets Analytic competitive market strategic market thin market power market ANS: A DIF: LOC: Perfect competition MSC: Definitional REF: TOP: 14-1 NAT: Competitive markets Analytic In a competitive market, the actions of any single buyer or seller will a b c d have a negligible impact on the market price have little effect on market equilibrium quantity but will affect market equilibrium price affect marginal revenue and average revenue but not price adversely affect the profitability of more than one firm in the market ANS: A DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: When a firm has little ability to influence market prices it is said to be in a a b c d 2 REF: TOP: 14-1 NAT: Competitive markets Analytic Because the goods offered for sale in a competitive market are largely the same, a b c d there will be few sellers in the market there will be few buyers in the market only a few buyers will have market power sellers will have little reason to charge less than the going market price ANS: D DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-1 NAT: Competitive markets Analytic 10 Which of the following is not a characteristic of a perfectly competitive market? a b c d Firms are price takers Firms have difficulty entering the market There are many sellers in the market Goods offered for sale are largely the same ANS: B DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-1 NAT: Competitive markets Analytic 11 Which of the following is not a characteristic of a perfectly competitive market? a b c d Firms are price takers Firms can freely enter the market Many firms have market power Goods offered for sale are largely the same ANS: C DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-1 NAT: Competitive markets 12 Free entry means that a b c d the government pays any entry costs for individual firms no legal barriers prevent a firm from entering an industry a firm's marginal cost is zero a firm has no fixed costs in the short run Analytic 218 Chapter 14/Firms in Competitive Markets 16 Refer to Figure 14-8 When 100 identical firms participate in this market, at what price will 15,000 units be supplied to this market? a b c d $1.00 $1.50 $2.00 The price cannot be determined from the information provided ANS: B DIF: LOC: Perfect competition MSC: Applicative REF: TOP: 14-3 Supply curve NAT: Analytic 17 Refer to Figure 14-8 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 b c d 75 100 250 300 ANS: D DIF: LOC: Perfect competition MSC: Applicative REF: TOP: 14-3 Supply curve NAT: Analytic 18 When new firms have an incentive to enter a competitive market, their entry will a b c d increase the price of the product drive down profits of existing firms in the market shift the market supply curve to the left increase demand for the product ANS: B DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 NAT: Competitive markets Analytic 19 When firms have an incentive to exit a competitive market, their exit will a b c d lower the market price necessarily raise the costs for the firms that remain in the market raise the profits for the firms that remain in the market shift the demand for the product to the left ANS: C DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 NAT: Competitive markets Analytic 20 When new firms enter a perfectly competitive market, a b c d demand increases the short-run market supply curve shifts right the short-run market supply curve shifts left existing firms will increase prices to keep the new firms from entering ANS: B DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 NAT: Competitive markets Analytic 21 The entry of new firms into a competitive market will a b c d increase market supply and increase market price increase market supply and decrease market price decrease market supply and increase market price decrease market supply and decrease market price ANS: B DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 NAT: Competitive markets Analytic Chapter 14/Firms in Competitive Markets 219 22 The exit of existing firms from a competitive market will a b c d increase market supply and increase market price increase market supply and decrease market price decrease market supply and increase market price decrease market supply and decrease market price ANS: C DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 NAT: Competitive markets Analytic 23 When managers of firms in a competitive market observe falling profits, they are likely to infer that the market is characterized by a b c d a violation of conventional market forces over-investment the entry of new firms too few firms in the market ANS: C DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 NAT: Competitive markets Analytic 24 Tommy's Tires operates in a perfectly competitive market If tires sell for $50 each and average total cost per tire is $40 at the profit-maximizing output level, then in the long run a b c d more firms will enter the market some firms will exit from the market the equilibrium price per tire will rise average total costs will fall ANS: A DIF: LOC: Perfect competition MSC: Analytical REF: TOP: 14-3 NAT: Competitive markets Analytic 25 When market conditions in a competitive industry are such that firms cannot cover their total production costs, then a b c d the firms will suffer long-run economic losses the firms will suffer short-run economic losses that will be exactly offset by long-run economic profits some firms will exit the market, causing prices to rise until the remaining firms can cover their total production costs all firms will go out of business, since consumers will not pay prices that enable firms to cover their total production costs ANS: C DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 NAT: Competitive markets Analytic 26 If occupational safety laws were changed so that firms no longer had to take expensive steps to meet regulatory requirements, we would expect that a b c d the demand for products in this industry would increase the market price of products in this industry would decrease in the short run but not in the long run the firms in the industry would make a long-run economic profit competition would force producers to pass the lower production costs on to consumers in the long run ANS: D DIF: LOC: Perfect competition MSC: Analytical REF: TOP: 14-3 NAT: Competitive markets Analytic 220 Chapter 14/Firms in Competitive Markets 27 The textile industry is composed of a large number of small firms In recent years, these firms have suffered economic losses and many sellers have left the industry Economic theory suggests that these conditions will a b c d shift the demand curve outward so that price will rise to the level of production cost cause the remaining firms to collude so that they can produce more efficiently cause the market supply to decline and the price of textiles to rise cause firms in the textile industry to suffer long-run economic losses ANS: C DIF: LOC: Perfect competition MSC: Analytical REF: TOP: 14-3 NAT: Competitive markets Analytic 28 If there is an increase in market demand in a perfectly competitive market, then in the short run a b c d there will be no change in the demand curves faced by individual firms in the market the demand curves for firms will shift downward the demand curves for firms will become more elastic profits will rise ANS: D DIF: LOC: Perfect competition MSC: Analytical REF: TOP: 14-3 NAT: Competitive markets Analytic 29 If there is an increase in market demand in a perfectly competitive market, then in the short run prices will a b c d rise remain unchanged at the minimum of average total cost fall remain unchanged at the minimum of marginal cost ANS: A DIF: LOC: Perfect competition MSC: Analytical REF: TOP: 14-3 NAT: Competitive markets Analytic 30 Which of the following statements is not correct? a b c d In a long-run equilibrium, marginal firms make zero economic profit To maximize profit, firms should produce at a level of output where price equals average variable cost The amount of gold in the world is limited Therefore, the gold jewelry market probably has a longrun supply curve that is upward sloping Long-run supply curves are typically more elastic than short-run supply curves ANS: B DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 NAT: Competitive markets Analytic 31 Which of the following statements is not correct? a b c d In a long-run equilibrium, firms must be operating at their efficient scale In the short run, the number of firms in an industry may be fixed In the long run, the number of firms can adjust to changing market conditions In the short run, firms must be operating at a level of output where price equals average variable cost ANS: D DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 NAT: Competitive markets Analytic 32 When a profit-maximizing firm in a competitive market has zero economic profit, accounting profit a b c d is negative is at least zero is also zero could be positive, negative or zero Chapter 14/Firms in Competitive Markets 221 ANS: B DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 NAT: Economic profit Analytic 33 As a general rule, when accountants calculate profit they account for explicit costs but usually ignore a b c d certain outlays of money by the firm implicit costs operating costs fixed costs ANS: B DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 NAT: Accounting profit Analytic 34 In calculating accounting profit, accountants typically don't include a b c d long-run costs sunk costs explicit costs of production opportunity costs that not involve an outflow of money ANS: D DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 NAT: Accounting profit Analytic Scenario 14-3 As part of an estate settlement Mary received $1 million She decided to use the money to purchase a small business in Anywhere, USA Her business operates in a perfectly competitive industry If Mary would have invested the $1 million in a risk-free bond fund she could have made $100,000 each year She also quit her job with Lucky.Com Inc to devote all of her time to her new business; her salary at Lucky.Com Inc was $75,000 per year 35 Refer to Scenario 14-3 At the end of the first year of operating her new business, Mary’s accountant reported an accounting profit of $150,000 What was Mary’s economic profit? a b c d -$150,000 -$50,000 -$25,000 $25,000 ANS: C DIF: LOC: Perfect competition MSC: Applicative REF: TOP: 14-3 NAT: Economic profit Analytic 36 Refer to Scenario 14-3 What are Mary’s opportunity costs of operating her new business? a b c d $25,000 $75,000 $100,000 $175,000 ANS: D DIF: LOC: Perfect competition MSC: Applicative REF: TOP: 14-3 NAT: Economic profit Analytic 37 Refer to Scenario 14-3 How large would Mary's accounting profits need to be to allow her to attain zero economic profit? a b c d $100,000 $125,000 $175,000 $225,000 ANS: C DIF: LOC: Perfect competition MSC: Applicative REF: TOP: 14-3 NAT: Economic profit Analytic 222 Chapter 14/Firms in Competitive Markets 38 In a perfectly competitive market, the process of entry and exit will end when a b c d price equals minimum marginal cost marginal revenue equals marginal cost economic profits are zero accounting profits are zero ANS: C DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 NAT: Zero-profit condition Analytic 39 In a competitive market with free entry and exit, if all firms have the same cost structure, then a b c d all firms will operate at their efficient scale in the short run all firms will operate at their efficient scale in the long run the price of the product will differ across firms Both a and b are correct ANS: B DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 NAT: Zero-profit condition Analytic 40 In a perfectly competitive market, the process of entry and exit will end when firms face a b c d marginal revenue equal to long-run average total cost total revenue equal to average total cost average revenue greater than marginal cost accounting profits equal to zero ANS: A DIF: LOC: Perfect competition MSC: Analytical REF: TOP: 14-3 NAT: Zero-profit condition Analytic 41 In the long run, each firm in a competitive industry earns a b c d zero accounting profits zero economic profits positive economic profits positive, negative, or zero economic profits ANS: B DIF: LOC: Perfect competition MSC: Applicative REF: TOP: 14-3 NAT: Zero-profit condition Analytic 42 In the long run, each firm in a competitive industry earns a b c d zero accounting profits zero economic profits positive economic profits Both a and b are correct ANS: B DIF: LOC: Perfect competition MSC: Applicative REF: TOP: 14-3 NAT: Zero-profit condition Analytic 43 In the long run, assuming that the owner of a firm in a competitive industry has positive opportunity costs, she a b c d should exit the industry unless her economic profits are positive will earn zero accounting profits but positive economic profits will earn zero economic profits but positive accounting profits should ignore opportunity costs because they are a type of sunk cost that disappears in the long run ANS: C DIF: LOC: Perfect competition MSC: Applicative REF: TOP: 14-3 NAT: Zero-profit condition Analytic Chapter 14/Firms in Competitive Markets 223 44 In the long-run equilibrium of a competitive market, the number of firms in the market adjusts until the market demand is satisfied at a price equal to the minimum of a b c d average fixed cost for the marginal firm marginal cost of the marginal firm average total cost of the marginal firm average variable cost of the marginal firm ANS: C DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 NAT: Zero-profit condition Analytic 45 When firms are neither entering nor exiting a perfectly competitive market, a b c d total revenue must equal total variable cost for each firm economic profits must be zero price must equal average variable cost for each firm Both a and c are correct ANS: B DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 NAT: Zero-profit condition Analytic 46 When firms are neither entering nor exiting a perfectly competitive market, a b c d total revenue must equal total cost for each firm economic profits must be zero price must equal the minimum of marginal cost for each firm Both a and b are correct ANS: D DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 NAT: Zero-profit condition Analytic 47 When firms in a perfectly competitive market face the same costs, in the long run they must be operating a b c d under diseconomies of scale with small, but positive, levels of profit at their efficient scale where price is equal to average fixed cost ANS: C DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 NAT: Zero-profit condition Analytic 48 Regardless of the cost structure of firms in a competitive market, in the long run a b c d firms will experience rising demand for their products the marginal firm will earn zero economic profit firms will experience a less competitive market environment exit and entry is likely to lead to a horizontal long-run supply curve ANS: B DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 NAT: Zero-profit condition Analytic 49 In a long-run equilibrium, the marginal firm has a b c d price equal to average total cost total revenue equal to total cost economic profit equal to zero All of the above are correct ANS: D DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 NAT: Zero-profit condition Analytic 224 Chapter 14/Firms in Competitive Markets 50 In a long-run equilibrium, the marginal firm has a b c d price equal to minimum marginal cost total revenue equal to total cost accounting profit equal to zero All of the above are correct ANS: B DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 NAT: Zero-profit condition Analytic 51 In the long-run equilibrium of a market with free entry and exit, if all firms have the same cost structure, then a b c d marginal cost exceeds average total cost the price of the good exceeds average total cost average total cost exceeds the price of the good firms are operating at their efficient scale ANS: D DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 NAT: Zero-profit condition Analytic 52 In the long-run equilibrium of a market with free entry and exit, marginal firms are operating a b c d at the point where average variable cost equals marginal cost at the minimum point on their marginal cost curves at their efficient scale where accounting profit is zero ANS: C DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 NAT: Zero-profit condition Analytic 53 Consider a competitive market with a large number of identical firms The firms in this market not use any resources that are available only in limited quantities In long-run equilibrium, market price is determined by a b c d the minimum point on the firms' average variable cost curve the minimum point on the firms' average total cost curve a firm’s level of sunk costs Both b and c are correct ANS: B DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 NAT: Zero-profit condition Analytic 54 If all firms have the same costs of production, then in long-run equilibrium, a b c d price exceeds average total cost for all firms price exceeds marginal cost for all firms some firms may earn positive economic profits all firms have zero economic profits and just cover their opportunity costs ANS: D DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 NAT: Zero-profit condition Analytic Chapter 14/Firms in Competitive Markets 225 Figure 14-9 Price (a) Price MC (b) S0 S1 ATC B P2 P2 P1 P1 P0 P0 A C D D1 D0 Q1 Q2 Quantity QA QBQD QC Quantity 55 Refer to Figure 14-9 When the market is in long-run equilibrium at point A in panel (b), the firm represented in panel (a) will a b c d have a zero economic profit have a negative accounting profit exit the market choose to increase production to increase profit ANS: A DIF: LOC: Perfect competition MSC: Analytical REF: TOP: 14-3 NAT: Zero-profit condition Analytic 56 Refer to Figure 14-9 Assume that the market starts in equilibrium at point A in panel (b) An increase in demand from D0 to D1 will result in a b c d a new market equilibrium at point D an eventual increase in the number of firms in the market and a new long-run equilibrium at point C rising prices and falling profits for existing firms in the market falling prices and falling profits for existing firms in the market ANS: B DIF: LOC: Perfect competition MSC: Analytical REF: TOP: 14-3 NAT: Analytic Long-run supply curve 57 Refer to Figure 14-9 Assume that the market starts in equilibrium at point A in panel (b) and that panel (a) illustrates the cost curves facing individual firms Suppose that demand increases from D0 to D1 Which of the following statements is correct? a b c d Points A, B, and C represent both short-run and long-run equilibria points Points A, B, C, and D represent short-run equilibria points Points A and B represent long-run equilibria points Points A and C represent long-run equilibria points ANS: D DIF: LOC: Perfect competition MSC: Analytical REF: TOP: 14-3 NAT: Analytic Long-run supply curve 58 Refer to Figure 14-9 Assume that the market starts in equilibrium at point A in panel (b) and that panel (a) illustrates the cost curves facing individual firms Suppose that demand increases from D0 to D1 Which of the following statements is not correct? a b c d Point A is a long-run equilibrium point Points A, B, and C are short-run equilibria points Point B is a long-run equilibrium point Point C is a long-run equilibrium point 226 Chapter 14/Firms in Competitive Markets ANS: C DIF: LOC: Perfect competition MSC: Analytical REF: TOP: 14-3 NAT: Analytic Long-run supply curve 59 Refer to Figure 14-9 If the market starts in equilibrium at point C in panel (b), a decrease in demand will ultimately lead to a b c d more firms in the industry but lower levels of output for each firm fewer firms in the market a new long-run equilibrium at point D in panel (b) lower prices once the new long-run equilibrium is reached ANS: B DIF: LOC: Perfect competition MSC: Analytical REF: TOP: 14-3 NAT: Analytic Long-run supply curve 60 Refer to Figure 14-9 Suppose a firm in a competitive market, like the one depicted in panel (a), observes market price rising from P1 to P2 Which of the following could explain this observation? a b c d The entry of new firms into the market The exit of existing consumers from the market An increase in market supply from S0 to S1 An increase in market demand from D0 to D1 ANS: D DIF: LOC: Perfect competition MSC: Analytical REF: TOP: 14-3 NAT: Analytic Long-run supply curve 61 A competitive market is in long-run equilibrium If demand decreases, we can be certain that price will a b c d fall in the short run All firms will shut down, and some of them will exit the industry Price will then rise to reach the new long-run equilibrium fall in the short run No firms will shut down, but some of them will exit the industry Price will then rise to reach the new long-run equilibrium fall in the short run All, some, or no firms will shut down, and some of them will exit the industry Price will then rise to reach the new long-run equilibrium not fall in the short run because firms will exit to maintain the price ANS: C DIF: LOC: Perfect competition MSC: Analytical REF: TOP: 14-3 NAT: Analytic Long-run supply curve 62 A competitive market is in long-run equilibrium If demand increases, we can be certain that price will a b c d rise in the short run Some firms will enter the industry Price will then rise to reach the new longrun equilibrium rise in the short run Some firms will enter the industry Price will then fall to reach the new longrun equilibrium fall in the short run All, some, or no firms will shut down, and some of them will exit the industry Price will then rise to reach the new long-run equilibrium not rise in the short run because firms will enter to maintain the price ANS: B DIF: LOC: Perfect competition MSC: Analytical REF: TOP: 14-3 NAT: Analytic Long-run supply curve 63 In the transition from the short run to the long run, the number of firms in a competitive industry is a b c d fixed increasing at a constant rate decreasing able to adjust to market conditions ANS: D DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 NAT: Analytic Long-run supply curve Chapter 14/Firms in Competitive Markets 227 64 The long-run supply curve for a competitive industry a b c d may be horizontal if entry into the industry lowers average total cost may be upward-sloping if higher-cost firms enter the industry will be horizontal if there is free entry into the industry will be upward-sloping if there are barriers to entry into the industry ANS: B DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 NAT: Analytic Long-run supply curve 65 The long-run supply curve for a competitive industry may be upward sloping if a b c d there are barriers to entry firms that enter the industry are able to so at lower average total costs than the existing firms in the industry some resources are available only in limited quantities accounting profits are positive ANS: C DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 NAT: Analytic Long-run supply curve Figure 14-10 Price 10 MC ATC AVC P1 P2 P3 P4 1 Quantity 66 Refer to Figure 14-10 If the price is P1 in the short run, what will happen in the long run? a b c d Nothing The price is consistent with zero economic profits, so there is no incentive for firms to enter or exit the industry Individual firms will earn positive economic profits in the short run, which will entice other firms to enter the industry Individual firms will earn negative economic profits in the short run, which will cause some firms to exit the industry Because the price is below the firm’s average variable costs, the firms will shut down ANS: B DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 NAT: Analytic Long-run supply curve 67 Refer to Figure 14-10 If the price is P2 in the short run, what will happen in the long run? a b c d Nothing The price is consistent with zero economic profits, so there is no incentive for firms to enter or exit the industry Individual firms will earn positive economic profits in the short run, which will entice other firms to enter the industry Individual firms will earn negative economic profits in the short run, which will cause some firms to exit the industry Because the price is below the firm’s average variable costs, the firms will shut down 228 Chapter 14/Firms in Competitive Markets ANS: A DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 NAT: Analytic Long-run supply curve 68 Refer to Figure 14-10 If the price is P3 in the short run, what will happen in the long run? a b c d Nothing The price is consistent with zero economic profits, so there is no incentive for firms to enter or exit the industry Individual firms will earn positive economic profits in the short run, which will entice other firms to enter the industry Individual firms will earn negative economic profits in the short run, which will cause some firms to exit the industry Because the price is below the firm’s average variable costs, the firms will shut down ANS: C DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 NAT: Analytic Long-run supply curve Figure 14-11 Price (a) Price MC (b) ATC P1 Q1 Quantity Quantity 69 Refer to Figure 14-11 If the figure in panel (a) reflects the long-run equilibrium of a profitmaximizing firm in a competitive market, the figure in panel (b) most likely reflects a b c d perfectly inelastic long-run market supply perfectly elastic long-run market supply the entry of firms into the industry when some resources used in production are available only in limited quantities the fact that zero profits cannot be sustained in the long run ANS: B DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 Supply curve NAT: Analytic 70 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 market supply curve a b c d is horizontal and equal to the minimum of long-run marginal cost for each firm must slope downward must slope upward is horizontal and equal to the minimum of long-run average cost for each firm ANS: D DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 NAT: Analytic Long-run supply curve Chapter 14/Firms in Competitive Markets 229 71 When all firms and potential firms in a market have the same cost curves, the long-run equilibrium of a competitive market with free entry and exit will be characterized by firms a b c d earning small but positive economic profits facing the prospect of future losses operating at the efficient scale that work together to raise market prices ANS: C DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 NAT: Analytic Long-run supply curve 72 When entry and exit behavior of firms in an industry does not affect a firm's cost structure, a b c d the long-run market supply curve must be horizontal the long-run market supply curve must be upward-sloping the long-run market supply curve must be downward-sloping we can't tell anything about the shape of the long-run market supply curve ANS: A DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 NAT: Analytic Long-run supply curve 73 When some resources used in production are only available in limited quantities, it is likely that the long-run supply curve in a competitive market is a b c d downward sloping upward sloping horizontal vertical ANS: B DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 NAT: Analytic Long-run supply curve 74 When a competitive market experiences an increase in demand that increases production costs for existing firms and potential new entrants, which of the following is most likely to arise? a b c d The long-run market supply curve will be upward sloping The condition of free entry into the market will be violated Producer profits will fall in the long run The long-run market supply curve will be horizontal as new firms enter and drive the price downward ANS: A DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 NAT: Analytic Long-run supply curve 75 When firms in a competitive market have different costs, it is likely that a b c d free entry and exit in the market will be violated the market will no longer be considered competitive long-run market supply will be downward sloping some firms will earn positive economic profits in the long run ANS: D DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 NAT: Analytic Long-run supply curve 76 A long-run supply curve is flatter than a short-run supply curve because a b c d firms can enter and exit a market more easily in the long run than in the short run long-run supply curves are sometimes downward sloping competitive firms have more control over demand in the long run firms in a competitive market face identical cost structures ANS: A DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 NAT: Analytic Long-run supply curve 230 Chapter 14/Firms in Competitive Markets 77 A market might have an upward-sloping long-run supply curve if a b c d firms have different costs consumers exercise market power over producers all factors of production are essentially available in unlimited supply the entry of new firms into the market has no effect on the cost structure of firms in the market ANS: A DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 NAT: Analytic Long-run supply curve 78 When new entrants into a competitive market have higher costs than existing firms, a b c d accounting profits will be the primary determinant of entry into the market sunk costs become an important determinant of the short-run entry strategy market price will rise long-run supply is constant ANS: C DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 NAT: Analytic Long-run supply curve 79 Suppose a competitive market has a horizontal long-run supply curve and is in long-run equilibrium If demand decreases, we can be certain that in the short-run, a b c d at least some firms will shut down price will fall below marginal cost for some firms price will fall below average total cost for some firms at least some firms will enter the industry ANS: C DIF: LOC: Perfect competition MSC: Analytical REF: TOP: 14-3 NAT: Analytic Long-run supply curve 80 Consider a competitive market with a large number of identical firms The firms in this market not use any resources that are available only in limited quantities In this market, an increase in demand will a b c d increase price in the short run but not in the long run increase price in the long run but not in the short run increase price both in the short and the long run not affect price in either the short or the long run ANS: A DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 NAT: Competitive markets Analytic 81 The long-run market supply curve in a competitive market will a b c d always be horizontal be the portion of the MC that lies above the minimum of AVC for the marginal firm typically be more elastic than the short-run supply curve be above the competitive firm's efficient scale ANS: C DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 NAT: Analytic Long-run supply curve 82 In a competitive market with identical firms, a b c d an increase in demand in the short run will result in a new price above the minimum of average total cost, allowing firms to earn a positive economic profit in both the short run and the long run firms cannot earn positive economic profit in either the short run or long run firms can earn positive economic profit in the long run if the long-run market supply curve is upward sloping free entry and exit into the market requires that firms earn zero economic profit in the long run even though they may be able to earn positive economic profit in the short run Chapter 14/Firms in Competitive Markets 231 ANS: D DIF: LOC: Perfect competition MSC: Analytical REF: TOP: 14-3 NAT: Competitive markets Analytic 83 In the long run the market supply a b c d must always be horizontal could be upward sloping if the cost of production falls as new firms enter the market could be upward sloping if the cost of production rises as new firms enter the market could be upward sloping if technological improvements lower the cost of producing in the market ANS: C DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 NAT: Analytic Long-run supply curve Scenario 14-4 A study sponsored by the Food Consumer Safety Board found that consumption of irradiated tomatoes increased the health of laboratory rats As a result of national press coverage of the report, the demand for irradiated tomatoes increased dramatically Organic farmers were able to switch from organic production of tomatoes to irradiated production with no additional cost Assume that the tomato market satisfies all of the assumptions of perfect competition 84 Refer to Scenario 14-4 As a result of the increase in the demand for tomatoes, we would predict that in the short run that the a b c d production of tomatoes would be at efficient scale price of tomatoes would rise total cost for existing irradiated tomato producers must rise number of firms in the market would fall as prices fall and firms exit the market ANS: B DIF: LOC: Perfect competition MSC: Analytical REF: TOP: 14-3 NAT: Competitive markets Analytic 85 Refer to Scenario 14-4 If the increased production of irradiated tomatoes caused a rise in the marginal transportation costs of moving irradiated tomatoes to market, the a b c d short-run market supply curve for irradiated tomatoes would be affected but not the long-run market supply long-run market supply curve for irradiated tomatoes would be perfectly elastic long-run market supply of irradiated tomatoes would be downward sloping long-run market supply of irradiated tomatoes would be upward sloping ANS: D DIF: LOC: Perfect competition MSC: Analytical REF: TOP: 14-3 Supply curve NAT: Analytic 86 When new firms enter a perfectly competitive market, a b c d economic profits of existing firms will continue to be zero entering firms will earn zero economic profit upon entry into the market existing firms may see their costs rise if more firms compete for limited resources prices will rise as existing firms raise prices to keep new firms out of the market ANS: C DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 NAT: Competitive markets Analytic 87 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) (ii) (iii) New firms will enter the market In the short run, price will rise; in the long run, price will rise further In the long run, all firms will be producing at their efficient scale 232 Chapter 14/Firms in Competitive Markets a b c d (i) and (ii) only (i) and (iii) only (ii) and (iii) only (i), (ii) and (iii) ANS: B DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-3 NAT: Competitive markets Analytic Sec04 - Firms in Competitive Markets - Conclusion MULTIPLE CHOICE The production decisions of perfectly competitive firms follow one of the Ten Principles of Economics, which states that rational people a b c d consider sunk costs equate prices to the average costs of production will eventually leave markets that experience zero profit think at the margin ANS: D DIF: LOC: Perfect competition MSC: Definitional 2 REF: TOP: 14-4 NAT: Marginal analysis Analytic Profit maximizing firms in competitive industries with free entry and exit face a price equal to the lowest possible a b c d marginal cost of production fixed cost of production total cost of production average total cost of production ANS: D DIF: LOC: Perfect competition MSC: Interpretive REF: TOP: 14-4 NAT: Competitive markets Analytic ... TOP: 14- 1 NAT: Competitive markets Analytic Table 14- 1 Quantity Total Revenue $0 $7 $14 $21 $28 29 Refer to Table 14- 1 For a firm operating in a competitive market, the price is a b c d $0 $7 $14. .. competition MSC: Definitional REF: TOP: 14- 1 NAT: Competitive markets Analytic REF: TOP: 14- 1 NAT: Competitive markets Analytic 14- 1 NAT: Competitive markets Analytic 14- 1 NAT: Competitive markets Analytic... Interpretive REF: TOP: 14- 2 NAT: Competitive markets Analytic Table 14- 4 Quantity Total Revenue $0 $7 $14 $21 $28 $35 $42 $49 Total Cost $3 $5 $8 $12 $17 $23 $30 $38 19 Refer to Table 14- 4 A firm operating