Profit Maximization and the Competitive Firm's Supply Curve 5

Chapter 14/Firms in Competitive Markets ❖ 57 170. Refer to Figure 14-6. When market price is P3, a profit-maximizing firm's total revenue a. b. c. d. can be represented by the area P3  Q3. can be represented by the area P3  Q2. can be represented by the area (P3-P2)  Q3. is zero. ANS: B PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Analytical REF: 14-2 TOP: Total revenue 171. Refer to Figure 14-5. Firms will be encouraged to enter this market for all prices that exceed a. b. c. d. P1. P2. P3. None of the above is correct. ANS: C PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Analytical 2 REF: 14-2 TOP: Profit 172. Refer to Figure 14-6. When market price is P3, a profit-maximizing firm's total costs a. b. c. d. can be represented by the area P2  Q2. can be represented by the area P3  Q2. can be represented by the area (P3-P2)  Q3. are zero. ANS: B PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Analytical REF: 14-2 TOP: Total cost 173. Refer to Figure 14-6. Firms will earn positive profits in the short run if the market price a. b. c. d. is less than P1. is greater than P1 but less than P3. equals P3. exceeds P3. ANS: D PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Analytical 2 REF: 14-2 TOP: Profit 174. Refer to Figure 14-6. When market price is P3, a profit-maximizing firm's profit a. b. c. d. can be represented by the area P3  Q3. can be represented by the area P3  Q2. can be represented by the area (P3-P2)  Q3. is zero. ANS: D PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Analytical REF: 14-2 TOP: Profit 175. Refer to Figure 14-6. Firms will be earn losses in the short run but will remain in business if the market price a. b. c. d. exceeds P3. is less than P1. is greater than P1 but less than P3. exceeds P2. ANS: C PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Analytical 2 REF: 14-2 TOP: Losses 58 ❖ Chapter 14/Firms in Competitive Markets 176. Refer to Figure 14-6. Firms will shut down in the short run if the market price a. b. c. d. exceeds P3. is less than P1. is greater than P1 but less than P3. exceeds P2. ANS: B PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Analytical 2 REF: 14-2 TOP: Shut down Figure 14-7 Suppose a firm operating in a competitive market has the following cost curves: Price F MC AT C AVC D B C A Quantity 177. Refer to Figure 14-7. Which line segment best reflects the short-run supply curve for this firm? a. b. c. d. ABCF CD DF BCD ANS: A NAT: Analytic MSC: Interpretive PTS: 1 DIF: LOC: Perfect competition 2 REF: 14-2 TOP: Supply curve 178. Refer to Figure 14-7. Which segment of the supply curve represents the firm shutting down? a. b. c. d. ABCD BCD CD AB ANS: D NAT: Analytic MSC: Interpretive PTS: 1 DIF: LOC: Perfect competition 2 REF: 14-2 TOP: Supply curve Chapter 14/Firms in Competitive Markets ❖ 59 Figure 14-8 Suppose a firm operating in a competitive market has the following cost curves: Price D MC AT C B C A Quantity 179. Refer to Figure 14-8. Which line segment best reflects the long-run supply curve for this firm? a. b. c. d. ABCD BC ABC None of the above is correct. We must know the firm’s average variable cost. ANS: A PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive 180. Refer to Figure 14-8. The firm will exit the market for any price on the line segment a. b. c. d. ABCD. AB. CD. None of the above is correct. ANS: B PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Interpretive 2 REF: 14-2 TOP: Long-run supply curve 181. If a firm operating in a competitive industry shuts down in the short run, it can avoid paying a. b. c. d. fixed costs. variable costs. total costs. The firm must pay all its costs, even if it shuts down. ANS: B PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Interpretive REF: 14-2 TOP: Shut down 182. 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. b. c. d. operate his business as long as he rents at least 7 boats per month. operate his business as long as he rents at least 1 boat per month. operate his business as long as he rents all 10 boats each month. raise the price he charges per boat rental. ANS: B PTS: 1 DIF: 3 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Shut down MSC: Interpretive 60 ❖ Chapter 14/Firms in Competitive Markets 183. When a perfectly competitive firm decides to shut down, it is most likely that a. b. c. d. marginal cost is above average variable cost. marginal cost is above average total cost. price is below the firm’s average variable cost. fixed costs exceed variable costs. ANS: C PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Interpretive REF: 14-2 TOP: Shut down 184. When total revenue is less than variable costs, a firm in a competitive market will a. b. c. d. continue to operate as long as average revenue exceeds marginal cost. continue to operate as long as average revenue exceeds average fixed cost. shut down. raise its price. ANS: C PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Shut down MSC: Analytical 185. When price is below average variable cost, a firm in a competitive market will a. b. c. d. shut down and incur fixed costs. shut down and incur both variable and fixed costs. continue to operate as long as average revenue exceeds marginal cost. continue to operate as long as average revenue exceeds average fixed cost. ANS: A PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Shut down MSC: Interpretive 186. 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. b. c. d. The firm will continue to produce to attempt to pay fixed costs. The firm will immediately stop production to minimize its losses. The firm will stop production as soon as it is able to pay its sunk costs. The firm will continue to produce in the short run but will likely exit the market in the long run. ANS: B PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Shut down MSC: Interpretive 187. A profit-maximizing firm will shut down in the short run when a. b. c. d. price is less than average variable cost. price is less than average total cost. average revenue is greater than marginal cost. average revenue is greater than average fixed cost. ANS: A PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Interpretive REF: 14-2 TOP: Shut down 188. In the long run, all of a firm's costs are variable. In this case the exit criterion for a profitmaximizing firm is to shut down if a. b. c. d. price is less than average total cost. price is greater than average total cost. average revenue is greater than average fixed cost. average revenue is greater than marginal cost. ANS: A PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Interpretive REF: 14-2 TOP: Shut down Chapter 14/Firms in Competitive Markets ❖ 61 189. Which of the following statements is correct regarding a firm's decision-making? a. b. c. The decision to shut down and the decision to exit are both short-run decisions. The decision to shut down and the decision to exit are both long-run decisions. 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. ANS: C PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Shut down MSC: Interpretive 190. A firm that shuts down temporarily has to pay a. b. c. d. its variable costs but not its fixed costs. its fixed costs but not its variable costs. both its variable costs and its fixed costs. neither its variable costs nor its fixed costs. ANS: B PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Interpretive 2 REF: 14-2 TOP: Shut down 191. A firm will shut down in the short run if the total revenue that it would get from producing and selling its output is less than its a. b. c. d. opportunity costs. fixed costs. variable costs. total costs. ANS: C PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Interpretive 2 REF: 14-2 TOP: Shut down 192. A firm will shut down in the short run if, for all positive levels of output, a. b. c. d. its losses exceed its fixed costs. its total revenue is less than its variable costs. the price of its product is less than its average variable cost. All of the above are correct. ANS: D PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Interpretive REF: 14-2 TOP: Shut down 193. A firm's marginal cost has a minimum value of $2, its average variable cost has a minimum value of $4, and its average total cost has a minimum value of $5. Then the firm will shut down if the price of its product is less than a. b. c. d. $5 but more than $2. $5. $4. There is not enough information given to answer the question. ANS: C PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Shut down MSC: Analytical 62 ❖ Chapter 14/Firms in Competitive Markets 194. A firm's marginal cost has a minimum value of $50, its average variable cost has a minimum value of $80, and its average total cost has a minimum value of $90. Then the firm will shut down once the price of its product falls below a. b. c. d. $90. $80. $50. $40. ANS: B NAT: Analytic MSC: Analytical PTS: 1 DIF: LOC: Perfect competition 2 REF: 14-2 TOP: Shut down 195. Which of the following represents the firm's short-run condition for shutting down? a. b. c. d. shut down if TR < TC shut down if TR < FC shut down if P < ATC shut down if TR < VC ANS: D PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Definitional 2 REF: 14-2 TOP: Shut down 196. When determining whether to shut down in the short run, a competitive firm should ignore (i) fixed costs. (ii) variable costs. (iii) sunk costs. a. (iii) only b. (i) and (iii) only c. (ii) only d. (i), (ii), and (iii) ANS: B PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Analytical 2 REF: 14-2 TOP: Shut down 197. In a competitive market the current price is $7, and the typical firm in the market has ATC = $7.50 and AVC = $7.15. a. b. c. d. In the short run firms will shut down, and in the long run firms will leave the market. In the short run firms will continue to operate, but in the long run firms will leave the market. New firms will likely enter this market to capture any remaining economic profits. The firm will earn zero profits in both the short run and long run. ANS: A PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Shut down MSC: Applicative 198. Jose's restaurant operates in a perfectly competitive market. At the point where marginal cost equals marginal revenue, ATC = $20, AVC = $15, and the price per unit is $10. In this situation, a. b. c. d. Jose's restaurant is earning a positive economic profit. Jose's restaurant should shut down immediately. Jose's restaurant is losing money in the short run but should continue to operate. the market price will rise in the short run to increase profits. ANS: B PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Shut down MSC: Analytical Chapter 14/Firms in Competitive Markets ❖ 63 199. When fixed costs are ignored because they are irrelevant to a business's production decision, they are called a. b. c. d. explicit costs. implicit costs. sunk costs. opportunity costs. ANS: C PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Interpretive 1 REF: 14-2 TOP: Sunk costs 200. When a profit-maximizing firm's fixed costs are considered sunk in the short run, then the firm a. b. c. d. can set price above marginal cost. must set price below average total cost. will never show losses. can safely ignore fixed costs when deciding how much output to produce. ANS: D PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Sunk costs MSC: Interpretive 201. Which of these types of costs can be ignored when an individual or a firm is making decisions? a. b. c. d. sunk costs marginal costs variable costs opportunity costs ANS: A PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Interpretive 1 REF: 14-2 TOP: Sunk costs 202. 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. b. c. d. Pay the $85 to buy the watch. Wait to see if the watch goes on sale. If the price drops to $75 or less, buy the watch. Wait to see if the watch goes on sale. If the price drops to $25 or less, buy the watch. Do not buy the watch. ANS: A PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Sunk costs MSC: Interpretive 203. Suppose you bought a ticket to a football game for $30 and that you place a $35 value on seeing the game. If you lose the ticket, then what is the maximum price you should pay for another ticket? Assume that losing the ticket does not alter how you value it. a. b. c. d. $5 $30 $35 $65 ANS: C NAT: Analytic MSC: Interpretive PTS: 1 DIF: LOC: Perfect competition 2 REF: 14-2 TOP: Sunk costs 64 ❖ Chapter 14/Firms in Competitive Markets 204. You purchase a $30, nonrefundable ticket to a play at a local theater. Ten minutes into the show you realize that it is not a very good show and place only a $10 value on seeing the remainder of the show. Alternatively you could leave the theater and go home and watch TV or read a book. You place an $8 value on watching TV and a $6 value on reading a book. a. You should leave the theater since the net benefit from seeing the remainder of the show is -$20, while going home will earn you at least $8 of satisfaction. b. You should stay and watch the remainder of the show. c. You should go home and watch TV. d. You should go home and read a book. ANS: B PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Sunk costs MSC: Applicative 205. You purchase a $30, nonrefundable ticket to a play at a local theater. Ten minutes into the show you realize that it is not a very good show and place only a $10 value on seeing the remainder of the show. Alternatively you could leave the theater and go home and watch TV or read a book. You place an $8 value on watching TV and a $12 value on reading a book. a. b. c. d. You should stay and watch the remainder of the show. You should go home and watch TV. You should go home and read a book. You should go home and either watch TV or read a book. ANS: C PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Applicative REF: 14-2 TOP: Sunk costs 206. A sunk cost is one that a. b. c. d. changes as the level of output changes in the short run. was paid in the past and will not change regardless of the present decision. should determine the rational course of action in the future. has the most impact on profit-making decisions. ANS: B PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Sunk costs MSC: Definitional 207. When economists refer to a production cost that has already been committed and cannot be recovered, they use the term a. b. c. d. implicit cost. explicit cost. variable cost. sunk cost. ANS: D NAT: Analytic MSC: Definitional PTS: 1 DIF: LOC: Perfect competition 1 REF: 14-2 TOP: Sunk costs Chapter 14/Firms in Competitive Markets ❖ 65 208. A corporation has been steadily losing money on one of its product lines, plastic flamingo lawn ornaments. The firm produces plastic flamingos in a factory that cost $20 million to build 10 years ago. The firm is now considering an offer to buy that factory for $15 million. Which of the following statements about the decision to sell or not to sell is correct? a. The firm should turn down the purchase offer because the factory cost more than $15 million to build. b. The $20 million spent on the factory is a sunk cost; that cost should not affect the decision. c. The $20 million spent on the factory is an implicit cost, which should be included in the decision. d. The firm should sell the factory only if it can reduce its costs elsewhere by $5 million. ANS: B PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Sunk costs MSC: Analytical 209. Suppose that you value a hat from your favorite university at $20. The university bookstore has the hat on sale for $15. You purchase the hat but lose it on the way home. What should you do? Assume that losing the hat does not alter how you value it. a. b. c. d. Go back to the bookstore and purchase another hat. Wait until the cost of the hat falls to $15 or less before purchasing another hat. Wait until the cost of the hat falls to $5 or less before purchasing another hat. Do not purchase another hat regardless of the price. ANS: A PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Sunk costs MSC: Applicative 210. In the long run, a firm will enter a competitive industry if a. b. c. d. total revenue exceeds total cost. the price exceeds average total cost. the firm can earn economic profits. All of the above are correct. ANS: D PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Interpretive 2 REF: 14-2 TOP: Long-run supply curve 211. In the long run, a firm will exit a competitive industry if a. b. c. d. total revenue exceeds total cost. the price exceeds average total cost. average total cost exceeds the price. Both a and b are correct. ANS: C PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Interpretive 2 REF: 14-2 TOP: Long-run supply curve 212. In the long run, a profit-maximizing firm will choose to exit a market when a. b. c. d. average fixed cost is falling. variable costs exceed sunk costs. marginal cost exceeds marginal revenue at the current level of production. total revenue is less than total cost. ANS: D PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Analytical 66 ❖ Chapter 14/Firms in Competitive Markets 213. A firm that exits its market has to pay a. b. c. d. its variable costs but not its fixed costs. its fixed costs but not its variable costs. both its variable costs and its fixed costs. neither its variable costs nor its fixed costs. ANS: D PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Interpretive 2 REF: 14-2 TOP: Long-run supply curve 214. The competitive firm's long-run supply curve is that portion of the marginal cost curve that lies above average a. b. c. d. fixed cost. variable cost. total cost. revenue. ANS: C NAT: Analytic MSC: Definitional PTS: 1 DIF: LOC: Perfect competition 2 REF: 14-2 TOP: Long-run supply curve 215. Which of the following represents the firm's long-run condition for exiting a market? a. b. c. d. exit if P < MC exit if P < FC exit if P < ATC exit if MR < MC ANS: C PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Definitional 2 REF: 14-2 TOP: Long-run supply curve