Chapter 14 Answer Key

Indicate the answer choice that best completes the statement or answers the question. Scenario 14-1 Assume a certain firm in a competitive market is producing Q = 1,000 units of output. At Q = 1,000, the firm's marginal cost equals $15 and its average total cost equals $11. The firm sells its output for $12 per unit. 1. Refer to Scenario 14-1. At Q = 999, the firm's total costs equal a. $10,985. b. $10,990. c. $10,995. d. $10,999. Table 14-15 Quantity Total Cost 0 $3 1 $8 2 $10 3 $12 4 $20 5 $35 6 $50 2. Refer to Table 14-15. What is the lowest price at which this firm would operate in the short run? a. $3. b. $4. c. $5. d. $6. Scenario 14-4 The information below applies to a competitive firm that sells its output for $40 per unit. • When the firm produces and sells 150 units of output, its average total cost is $24.50. • When the firm produces and sells 151 units of output, its average total cost is $24.55. 3. Refer to Scenario 14-4. How does the firm’s marginal revenue (MR) compare to its marginal cost (MC) wh increases its output from 150 units to 151 units? a. MR exceeds MC by $7.95. b. MR exceeds MC by $11.05. c. MC exceeds MR by $11.05. d. MC exceeds MR by $13.50. Figure 14-3 Suppose a firm operating in a competitive market has the following cost curves: 4. Refer to Figure 14-3. If the market price is $10, what is the firm’s shortrun economic profit? a. $9 b. $15 c. $30 d. $50 5. Give two reasons why the long-run industry supply curve may slope upward. Use an example to demonstrate your reasons. Indicate the answer choice that best completes the statement or answers the question. Table 14-12 Bill’s Birdhouses COSTS Quantity Produced Total Cost REVENUES Marginal Cost Quantity Demanded Price Total Revenue Marginal Revenue 0 $0 -0 $80 -1 $50 1 $80 2 $102 2 $80 3 $157 3 $80 4 $217 4 $80 5 $285 5 $80 6 $365 6 $80 7 $462 7 $80 8 $582 8 $80 6. Refer to Table 14-12. What is Bill's economic profit at the profit-maximizing output level? a. $25 b. $75 c. $115 d. $225 7. A firm in a competitive market has the following cost structure: Output 0 1 2 3 4 5 Total Cost $5 $10 $12 $15 $24 $40 If the market price is $16, this firm will a. produce 4 units of output in the short run and exit in the long run. b. produce 5 units of output in the short run and exit in the long run. c. produce 5 units of output in the short run and face competition from new market entrants in the long run. d. shut down in the short run and exit in the long run. 8. Laura is a gourmet chef who runs a small catering business in a competitive industry. Laura specializes in making wedding cakes. Laura sells 20 wedding cakes per month. Her monthly total revenue is $5,000. The marginal cost of making a wedding cake is $300. In order to maximize profits, Laura should a. make more than 20 wedding cakes per month. b. make fewer than 20 wedding cakes per month. c. continue to make 20 wedding cakes per month. d. We do not have enough information to answer the question. 9. Bill operates a boat rental business in a competitive industry. He owns 10 boats and pays $1,000 per month on the loan that he took out to buy them. He rents each boat for $200 per month. The variable cost for each boat rental is $50. In the off season, Bill should a. operate his business as long as he rents at least 7 boats per month. b. operate his business as long as he rents at least 1 boat per month. c. operate his business as long as he rents all 10 boats each month. d. raise the price he charges per boat rental. 10. A certain competitive firm sells its output for $20 per unit. The 50th unit of output that the firm produces has a marginal cost of $22. Production of the 50th unit of output does not necessarily a. increase the firm's total revenue by $20. b. increase the firm's total cost by $22. c. decrease the firm's profit by $2. d. increase the firm’s average variable cost by $0.44. Scenario 14-1. A competitive firm sells its output for $20 per unit. When the firm produces 200 units of output, average variable cost is $16, marginal cost is $18, and average total cost is $23. 11. Refer to Scenario 14-1. Compare the firm’s profit or loss at 200 units of output with its profit or shut down. 12. When it produces and sells 90 units of output, a competitive firm’s average total cost is $42 and What is the firm’s marginal revenue if it sells 100 units of output? Indicate the answer choice that best completes the statement or answers the question. Scenario 14-3 Suppose a certain competitive firm is producing Q=500 units of output. The marginal cost of the 500th unit is $17, and the average total cost of producing 500 units is $12. The firm sells its output for $20. 13. Refer to Scenario 14-3. If the marginal cost of producing the 501st unit would be $19, producing and selling the 501st unit would a. decrease the firm’s profit by $19. b. decrease the firm’s profit by $2. c. increase the firm’s profit by $1. d. increase the firm’s profit by $3. Table 14-11 Suppose that a firm in a competitive market faces the following prices and costs: Total Price Quantity Cost $6 0 $4 $6 1 $6 $6 2 $9 $6 3 $13 $6 4 $18 $6 5 $24 $6 6 $31 14. Refer to Table 14-11. The marginal revenue from producing the 5th unit equals (i) $6. (ii) the price. (iii) the marginal cost. a. (i) only b. (i) and (ii) only c. (iii) only d. (i), (ii), and (iii) Figure 14-7 15. Refer to Figure 14-7. Suppose AVC = $113 when the firm produces 515 units of output. Then the firm’s fixed cost amounts to a. $5,500, and its profit amounts to $20,375. b. $5,750, and its profit amounts to $20,375 c. $5,980, and its profit amounts to $25,750. d. $6,180, and its profit amounts to $25,750. 16. Competitive markets are characterized by a. a small number of buyers and sellers. b. unique products. c. the interdependence of firms. d. free entry and exit by firms. 17. Suppose that in a competitive market the equilibrium price is $2.50. What is marginal revenue for the last unit sold by the typical firm in this market? a. less than $2.50 b. more than $2.50 c. exactly $2.50 d. The marginal revenue cannot be determined without knowing the actual quantity sold by the typical firm. 18. When the process of entry and exit has ended in a competitive market, are firms’ profits positiv 19. In a certain large city there are two firms that supply concrete. The concrete sold by the first firm is indistinguishable from the concrete sold by the second firm. Is the market competitive? Indicate the answer choice that best completes the statement or answers the question. 20. The analysis of competitive firms sheds light on the decisions that lie behind the a. demand curve. b. supply curve. c. way firms make pricing decisions in the not-for-profit sector of the economy. d. way financial markets set interest rates. 21. The idea of “spilt milk” is associated with what type of cost? 22. “The water that comes out of your faucets at home is not supplied by a competitive firm.” Exp statement is correct. 23. If a competitive firm is operating at its efficient scale, then is the firm’s profit positive, zero, or 24. A competitive firm sells its output for $30 per unit. Is the firm’s marginal revenue less than, equal to, or $30? Indicate whether the statement is true or false. 25. A firm's incentive to compare marginal revenue and marginal cost is an application of the principle that rational people think at the margin. a. True b. False Indicate the answer choice that best completes the statement or answers the question. Table 14-14 The following table presents cost and revenue information for Bob’s bakery production and sales. Marginal Total Marginal Quantity Total Cost Cost Price Revenue Revenue 0 $5.00 --$3.25 --1 $5.50 $3.25 2 $6.50 $3.25 3 $8.00 $3.25 4 $10.00 $3.25 5 $12.50 $3.25 6 $15.50 $3.25 7 $19.00 $3.25 8 $23.00 $3.25 26. Refer to Table 14-14. What is Bob’s total fixed cost? a. $0 b. $3 c. $5 d. $9 27. A competitive firm currently produces and sells 800 units of output at a price of $10 per unit. The firm’s fixed cos $4,000 and its variable cost is $8,300. In the short run, should the firm continue to operate? Indicate whether the statement is true or false. 28. A firm will shut down in the short run if revenue is not sufficient to cover its variable costs of production. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 29. In a perfectly competitive market, the process of entry and exit will end when firms face a. marginal revenue equal to long-run average total cost. b. total revenue equal to average total cost. c. average revenue greater than marginal cost. d. accounting profits equal to zero. Indicate whether the statement is true or false. 30. When an individual firm in a competitive market decreases its production, it is likely that the market price will rise. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 31. When firms are said to be price takers, it implies that if a firm raises its price, a. buyers will go elsewhere. b. buyers will pay the higher price in the short run. c. competitors will also raise their prices. d. firms in the industry will exercise market power. Indicate whether the statement is true or false. 32. 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. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 33. Suppose a firm in a competitive market earned $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 units b. $5 and 100 units c. $10 and 50 units d. $10 and 100 units 34. A competitive firm is producing 1,000 units of output with average total cost equal to $35 and marginal cost equal to $40. Can the market in which this firm operates be in a long-run equilibrium? Briefly explain. Indicate the answer choice that best completes the statement or answers the question. 35. Suppose a firm operates in the short run at a price above its average total cost of production. In the long run the firm should expect a. new firms to enter the market. b. the market price to rise. c. its profits to rise. d. Both b and c are correct. Table 14-10 Suppose that a firm in a competitive market faces the following revenues and costs: Quantity Total Revenue Total Cost 0 $0 $3 1 $7 $5 2 $14 $9 3 $21 $15 4 $28 $23 5 $35 $33 6 $42 $45 7 $49 $59 36. Refer to Table 14-10. This firm should continue to produce and sell units as long as the marginal cost of production is less than or equal to a. $3. b. $5. c. $7. d. $9. Figure 14-11 37. Refer to Figure 14-11. The figure above is for a firm operating in a competitive industry. If there were eight identical firms in the industry, which of the following price-quantity combinations would be on the market supply curve? Point Price Quantity A $4 4 B $4 32 C $6 6 D $8 64 a. A only b. A and C only c. B only d. B and D only Indicate whether the statement is true or false. 38. In making a short-run profit-maximizing production decision, the firm must consider both fixed and variable cost. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 39. Which of the following statements best reflects the production decision of a profit-maximizing firm in a competitive market when price falls below the minimum of average variable cost? a. The firm will continue to produce to attempt to pay fixed costs. b. The firm will immediately stop production to minimize its losses. c. The firm will stop production as soon as it is able to pay its sunk costs. d. The firm will continue to produce in the short run but will likely exit the market in the long run. 40. When a firm sells 1 million coat hangers, its total revenue is $2 million. When it sells 2 million coat hangers, its total revenue is $3.5 million. Is this firm a price taker? Explain. Indicate the answer choice that best completes the statement or answers the question. 41. Free entry means that a. the government pays any entry costs for individual firms. b. government-funded research lowers the costs of patents and other barriers to entry. c. a firm's marginal cost is zero. d. no legal barriers prevent a firm from entering an industry. Indicate whether the statement is true or false. 42. Because there are many sellers in a competitive market, individual firms are unable to maximize profits. a. True b. False Indicate the answer choice that best completes the statement or answers the question. 43. When firms in a perfectly competitive market face the same costs, in the long run they must be operating a. under diseconomies of scale. b. with small, but positive, levels of profit. c. at their efficient scale. d. where price is equal to average fixed cost. 44. 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. 45. Which of the following statements regarding a competitive firm is correct? a. Because demand is downward sloping, if a firm increases its level of output, the firm will have to charge a lower price to sell the additional output. b. If a firm raises its price, the firm may be able to increase its total revenue even though it will sell fewer units. c. By lowering its price below the market price, the firm will benefit from selling more units at the lower price than it could have sold by charging the market price. d. For all firms, average revenue equals the price of the good. 46. Which of the following statements best reflects a price-taking firm? a. The firm can sell only a limited amount of output at the market price before the market price will fall. b. If the firm were to charge less than the going price, it would maximize its profits and revenues. c. If the firm were to charge more than the going price, it would sell none of its goods. d. Both b and c are correct. Figure 14-9 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. 47. Refer to Figure 14-9. 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 Figure 14-6 Suppose a firm operating in a competitive market has the following cost curves: 48. Refer to Figure 14-6. When market price is P3, a profit-maximizing firm's total revenue a. can be represented by the area P3 × Q3. b. can be represented by the area P3 × Q2. c. can be represented by the area (P3-P2) × Q3. d. is zero. 49. 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. 50. Which of the following statements is not correct about competitive firms? a. In a long-run equilibrium, firms must be operating at their efficient scale. b. In the short run, the number of firms in an industry may be fixed. c. In the long run, the number of firms can adjust to changing market conditions. d. In the short run, firms must be operating at a level of output where price equals average variable cost. Answer Key 1. 2. 3. 4. 5. 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. 6. 7. 8. 9. 10. 11. At 12. At $46. , Profit , profit is . The firm’s fixed cost is so at , Profit , so The firm’s marginal revenue, including that on the 1 13. 14. 15. 16. 17. 18. At the end of the entry/exit process, firms’ profits are zero. 19. The market is not competitive because there are only two sellers. 20. 21. The idea of “spilt milk” is associated with sunk cost. 22. In order to be a competitive firm, the supplier of your water would have to be one of many sellers of water. In fact, it is likely that there is only one firm (or governmental unit) that supplies water to homes in your community. 23. Profit is zero for a competitive firm operating at its efficient scale. 24. For a competitive firm, price is equal to marginal revenue for all levels of output. Therefore, the firm’s marginal revenue is equal to $30. 25. 26. 27. No, the firm should shut down, since the price of $10 falls short of average variable cost, which is $10.375. 28. 29. 30. 31. 32. 33. 34. No, the market cannot be in a long-run equilibrium because average total cost and marginal cost must equal one another in such an equilibrium. 35. 36. 37. 38. 39. 40. No. When the firm sells 1 million coat hangers its average revenue (price) is $2. When it sells 2 million coat hangers its average revenue is $1.75. Because the firm’s average revenue is not constant at the two different output, it is not a price taker. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50.