Econ CA Chapter 14 -02

CA Chapter 14 -02 1. If a competitive firm is currently producing a level of output at which marginal revenue exceeds marginal cost, then a. a one-unit increase in output will increase the firm's profit. b. a one-unit decrease in output will increase the firm's profit. c. total revenue exceeds total cost. d. total cost exceeds total revenue. 2. Comparing marginal revenue to marginal cost (i) reveals the contribution of the last unit of production to total profit. (ii) is helpful in making profit-maximizing production decisions. (iii) tells a firm whether its fixed costs are too high. a (i) only. . b (i) and (ii) only. . c (ii) and (iii) only. . d (i) and (iii) only. . 3. Max sells maps. The map industry is competitive. Max hires a business consultant to analyze his company’s financial records. The consultant recommends that Max increase his production. The consultant must have concluded that Max’s a. total revenues exceed his total accounting costs. b. marginal revenue exceeds his total cost. c. marginal revenue exceeds his marginal cost. d. marginal cost exceeds his marginal revenue. 4. When profit-maximizing firms in competitive markets are earning profits, a. market demand must exceed market supply at the market equilibrium price. b. market supply must exceed market demand at the market equilibrium price. c. new firms will enter the market. d. the most inefficient firms will be encouraged to leave the market. Table 14-1 Suppose that a firm in a competitive market faces the following prices and costs: Price Quantity Total Cost 5 0 3 5 1 5 5 2 8 5 3 12 5 4 17 5 5 23 5. Refer to Table 14-1. In order to maximize profits, the firm should stop producing after it makes the a. first unit. b. second unit. c. fourth unit. d. fifth unit. 6. Refer to Table 14-1. Marginal revenue equals marginal cost when the firm produces a. 2 units. b. 3 units. c. 4 units. d. 5 units. 7.Refer to Table 14-11. The marginal revenue from producing the 3rd unit equals (i) 5. (ii) the price. (iii) the marginal cost. a. (i) only. b. (i) and (ii) only. c. (ii) only. d. (i), (ii), and (iii). 8. Refer to Table 14-1. If the firm is producing 2 units of output, it should a. produce more units of output because its marginal revenue is greater than its marginal cost. b. fewer units of output because its marginal revenue is less than its marginal cost. c. produce more units of output because its marginal revenue is less than its marginal cost. d. produce fewer units of output because its marginal revenue is greater than its marginal cost. 9. Which of the following statements best expresses a firm’s profit-maximizing decision rule? a. If marginal revenue is greater than marginal cost, the firm should increase its output. b. If marginal revenue is less than marginal cost, the firm should decrease its output. c. If marginal revenue equals marginal cost, the firm should continue producing its current level of output. d. All of the above are correct. 10. Profit-maximizing firms in a competitive market produce an output level where a. marginal cost equals marginal revenue. b. marginal cost equals average total cost. c. marginal revenue is increasing. d. price is less than marginal revenue. 11. A profit-maximizing firm in a competitive market will always make marginal adjustments to production as long as a. average revenue is greater than average total cost. b. average revenue is equal to marginal cost. c. marginal cost is greater than average total cost. d. price is above or below marginal cost. 12. If a competitive firm is currently producing a level of output at which profit is not maximized, then it must be true that a. marginal revenue exceeds marginal cost. b. marginal cost exceeds marginal revenue. c. total cost exceeds total revenue. d. None of the above is correct. 13. Refer to Table 13-1. Consider a competitive market with 50 identical firms. Suppose the market demand is given by the equation QD = 200 - 10P and the market supply is given by the equation QS = 10P. In addition, suppose the following table shows the marginal cost of production for various levels of output for firms in this market. Output Marginal Cost 0 -1 5 2 10 3 15 4 20 5 25 Table 13-1 How many units should a firm in this market produce to maximize profit? a. 1 unit. b. 2 units. c. 3 units. d. 4 units. 14. 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 fall. c. its profits to fall. d. All of the above are correct. 15. When a profit-maximizing firm is earning profits, those profits can be identified by a. P Q. b. (MC - AVC) Q. c. (P - ATC) Q. d. (P - AVC) Q. 16. Assume a firm in a competitive industry is producing 800 units of output, and it sells each unit for $6. Its average total cost is $4. Its profit is a. $-1,600. b. $1,600. c. $3,200. d. $8,000. 17. In the short run, a firm operating in a competitive industry will produce the quantity of output where price equals marginal cost as long as the a. price is less than average total cost. b. marginal revenue exceeds the marginal cost. c. price is greater than average variable cost. d. price is greater than average fixed cost but less than average variable cost. 18. Suppose a profit-maximizing firm in a competitive market produces rubber bands. When the market price for rubber bands rises above the minimum of its average variable cost, but still lies below the minimum of average total cost, in the short run the firm will a. experience losses but will continue to produce rubber bands. b. shut down. c. earn both economic and accounting profits. d. raise the price of its product. 19. 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. 20. Competitive firms that earn a loss in the short run should a. shut down if P < AVC. b. raise their price. c. lower their output. d. All of the above are correct. Figure 14-1 Suppose a firm operating in a competitive market has the following cost curves: MC 10 9 AT C 8 AVC 7 P1 6 5 P2 P3 4 3 P4 2 1 1 2 3 4 5 6 7 8 21. Refer to Figure 14-1. If the market price is P1, in the short run the firm will earn a. positive economic profits. b. negative economic profits but will try to remain open. c. negative economic profits and will shut down. d. zero economic profits. P=MR 22. Refer to Figure 14-1. Which of the four prices corresponds to a firm earning positive economic profits in the short run? a. P1. b. P2. c. P3. d. P4. Figure 14-2 Suppose a firm operating in a competitive market has the following cost curves: MC AT C AVC P7 P6 P5 P4 P3 P2 P1 Q1 Q2 Q3 Q4 Q5 23.Refer to Figure 14-2. When market price is P7, a profit-maximizing firm's short-run profits can be represented by the area a. P7 Q5. b. P7 Q3. c. (P7 - P5) Q3. d. We are unable to determine the firm’s profits because the quantity that the firm would produce is not labeled on the graph. BECAUSE IN THAT POINT THE MARGINAL REVENUE = Marginal cost 24. Refer to Figure 14-2. When market price is P2, a profit-maximizing firm's losses can be represented by the area a. (P4 - P2) Q2. b. (P2 - P1) (Q2-Q1). c. At a market price of P2, the firm earns profits, not losses. d. At a market price of P2 the firm has losses, but the reference points in the figure don't identify the losses. 25. Which of the following statements is correct regarding a firm's decision-making? a. The decision to shut down and the decision to exit are both short-run decisions. b. The decision to shut down and the decision to exit are both long-run decisions. c. The decision to shut down is a short-run decision, whereas the decision to exit is a long-run decision. d. The decision to exit is a short-run decision, whereas the decision to shut down is a long-run decision.