The Supply Curve in a Competitive Market

66 ❖ Chapter 14/Firms in Competitive Markets THE SUPPLY CURVE IN A COMPETITIVE MARKET 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. Price Price (a) Firm (b) Market MC MC $2.00 $2.00 $1.00 $1.00 100 200 Quantity Q1 Q2 Quantity Chapter 14/Firms in Competitive Markets ❖ 67 1. Refer to Figure 14-9. If there are 200 identical firms in this market, what level of output will be supplied to the market when price is $1.00? a. b. c. d. 2,000 5,000 10,000 20,000 ANS: D NAT: Analytic MSC: Applicative PTS: 1 DIF: LOC: Perfect competition 2 REF: 14-3 TOP: Supply curve 2. Refer to Figure 14-9. If there are 200 identical firms in this market, what level of output will be supplied to the market when price is $2.00? a. b. c. d. 2,000 10,000 20,000 40,000 ANS: D NAT: Analytic MSC: Applicative PTS: 1 DIF: LOC: Perfect competition 2 REF: 14-3 TOP: Supply curve 3. Refer to Figure 14-9. If there are 600 identical firms in this market, what is the value of Q1? a. b. c. d. 6,000 12,000 60,000 120,000 ANS: C NAT: Analytic MSC: Applicative PTS: 1 DIF: LOC: Perfect competition 2 REF: 14-3 TOP: Supply curve 4. Refer to Figure 14-9. If there are 400 identical firms in this market, what is the value of Q2? a. b. c. d. 4,000 8,000 40,000 80,000 ANS: D NAT: Analytic MSC: Applicative PTS: 1 DIF: LOC: Perfect competition 2 REF: 14-3 TOP: Supply curve 5. Refer to Figure 14-9. 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 PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Applicative 68 ❖ Chapter 14/Firms in Competitive Markets 6. 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. b. c. d. 75 100 250 300 ANS: D NAT: Analytic MSC: Applicative PTS: 1 DIF: LOC: Perfect competition 2 REF: 14-3 TOP: Supply curve Figure 14-10 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. Price Price (a) Firm (b) Market MC MC $4.00 $4.00 $2.00 $2.00 300 600 Quantity Q1 Q2 Quantity 7. Refer to Figure 14-10. If there are 500 identical firms in this market, what is the value of Q1? a. b. c. d. 10,000 20,000 50,000 150,000 ANS: D NAT: Analytic MSC: Applicative PTS: 1 DIF: LOC: Perfect competition 2 REF: 14-3 TOP: Supply curve 8. Refer to Figure 14-10. If there are 500 identical firms in this market, what is the value of Q2? a. b. c. d. 12,000 60,000 240,000 300,000 ANS: D NAT: Analytic MSC: Applicative PTS: 1 DIF: LOC: Perfect competition 2 REF: 14-3 TOP: Supply curve 9. Refer to Figure 14-10. If there are 700 identical firms in this market, what is the value of Q1? a. b. c. d. 140,000 210,000 280,000 420,000 ANS: B NAT: Analytic MSC: Applicative PTS: 1 DIF: LOC: Perfect competition 2 REF: 14-3 TOP: Supply curve Chapter 14/Firms in Competitive Markets ❖ 69 10. Refer to Figure 14-10. If there are 700 identical firms in this market, what is the value of Q2? a. b. c. d. 140,000 210,000 280,000 420,000 ANS: D NAT: Analytic MSC: Applicative PTS: 1 DIF: LOC: Perfect competition 2 REF: 14-3 TOP: Supply curve Figure 14-11 Price 10 MC 9 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 Quantity 11. 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 ANS: D PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Analytical 2 REF: 14-3 TOP: Market supply 12. The short-run market supply curve in a perfectly competitive industry a. b. c. d. shows the total quantity supplied by all firms at each possible price. is perfectly inelastic at the market price. is perfectly elastic at the market price. shows the variety of prices that different firms will charge for a given quantity. ANS: A PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Definitional 70 ❖ Chapter 14/Firms in Competitive Markets 13. In the short-run, a firm's supply curve is equal to the a. b. c. d. marginal cost curve above its average variable cost curve. marginal cost curve above its average total cost curve. average variable cost curve above its marginal cost curve. average total cost curve above its marginal cost curve. ANS: A PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Definitional REF: 14-3 TOP: Supply curve 14. In a market with 1,000 identical firms, the short-run market supply is the a. b. c. d. marginal cost curve above average variable cost for a typical firm in the market. quantity supplied by the typical firm in the market at each price. sum of the prices charged by each of the 1,000 individual firms at each quantity. sum of the quantities supplied by each of the 1,000 individual firms at each price. ANS: D PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Market supply MSC: Interpretive 15. In a perfectly competitive market, the horizontal sum of all the individual firms' supply curves is a. b. c. d. zero. equal to the industry profits. the market supply curve. a horizontal line. ANS: C PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Definitional 2 REF: 14-3 TOP: Market supply 16. In a perfectly competitive market, the market supply curve is a. b. c. d. the marginal cost curve above average total cost for a representative firm. the horizontal sum of all the individual firms' supply curves. the vertical sum of all the individual firms’ supply curves. always a horizontal line. ANS: B PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Market supply MSC: Definitional 17. In the short run for a particular market, there are 500 firms. Each firm has a marginal cost of $30 when it produces 200 units of output. One point on the market supply curve is a. b. c. d. quantity = 200, price = $30. quantity = 500, price = $30. quantity = 100,000, price = $30. quantity = 100,000, price = $15,000. ANS: C PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Applicative 2 REF: 14-3 TOP: Market supply Chapter 14/Firms in Competitive Markets ❖ 71 Table 14-15 Quantity 0 1 2 3 4 5 6 Total Cost $2 $7 $10 $11 $18 $27 $38 18. Refer to Table 14-15. What is the lowest price at which this firm would operate in the short run? a. b. c. d. $3. $4. $5. $6. ANS: A NAT: Analytic MSC: Applicative PTS: 1 DIF: LOC: Perfect competition 3 REF: 14-3 TOP: Supply curve | Short run Figure 14-12 Price (a) Price MC (b) AT C P1 Q1 Quantity Quantity 19. Refer to Figure 14-12. 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. 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. d. the fact that zero profits cannot be sustained in the long run. ANS: B PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Interpretive 72 ❖ Chapter 14/Firms in Competitive Markets 20. In a competitive market with identical firms, a. 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. d. 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. ANS: D PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Analytical b. c. 21. 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 PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 22. 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) New firms will enter the market. (ii) In the short run, price will rise; in the long run, price will rise further. (iii) In the long run, all firms will be producing at their efficient scale. a. (i) and (ii) only b. (i) and (iii) only c. (ii) and (iii) only d. (i), (ii) and (iii) ANS: B PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 23. In the short run, there are 500 identical firms in a competitive market. The firms do not use any resources that are available in limited quantities, and each of them has the following cost structure: Output 0 1 2 3 4 5 Total Cost $0 $10 $12 $15 $24 $40 The long-run supply curve for this market is a. b. c. d. positively sloped. horizontal at a price of $3.33. horizontal at a price of $5. horizontal at a price of $7. ANS: C PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Analytical 3 REF: 14-3 TOP: Competitive markets Chapter 14/Firms in Competitive Markets ❖ 73 24. In the short run, a market consists of 100 identical firms. The market price is $8, and the total cost to each firm of producing various levels of output is given in the table below. What will total quantity supplied be in the market? Quantity 0 1 2 3 4 5 a. 200 units b. 300 units c. 400 units d. 500 units ANS: B NAT: Analytic MSC: Analytical Total Costs $1 $7 $14 $22 $31 $41 PTS: 1 DIF: LOC: Perfect competition 3 REF: 14-3 TOP: Competitive markets 25. When existing firms in a competitive market are profitable, an incentive exists for a. b. c. d. new firms to seek government subsidies that would allow them to enter the market. new firms to enter the market, even without government subsidies. existing firms to raise prices. existing firms to increase production. ANS: B PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 26. The assumption of a fixed number of firms is appropriate for analysis of a. b. c. d. the short run but not the long run. the long run but not the short run. both the short run and the long run. neither the short run nor the long run. ANS: A PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Interpretive 2 REF: 14-3 TOP: Competitive markets 27. Entry into a market by new firms will increase the a. b. c. d. supply of the good. profits of existing firms. price of the good. marginal cost of producing the good. ANS: A PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Interpretive 2 REF: 14-3 TOP: Competitive markets 28. 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 PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Interpretive REF: 14-3 TOP: Competitive markets 74 ❖ Chapter 14/Firms in Competitive Markets 29. 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 of the firms that remain in the market. shift the demand for the product to the left. ANS: C PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 30. 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 PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 31. 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 PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Interpretive REF: 14-3 TOP: Competitive markets 32. 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 PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Interpretive REF: 14-3 TOP: Competitive markets 33. When managers of firms in a competitive market observe falling profits, they may infer that the market is experiencing 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 PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Interpretive 2 REF: 14-3 TOP: Competitive markets 34. Timmy's Trophies operates in a perfectly competitive market. If trophies sell for $20 each and average total cost per trophy is $15 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 trophy will rise. average total costs will fall. ANS: A PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Analytical 2 REF: 14-3 TOP: Competitive markets Chapter 14/Firms in Competitive Markets ❖ 75 35. Carol owns a running shoe store that operates in a perfectly competitive market. If running shoes sell for $120 per pair and the average total cost per pair of shoes is $125 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 pair of shoes will fall. average total costs will fall. ANS: B PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Analytical REF: 14-3 TOP: Competitive markets 36. When market conditions in a competitive industry are such that firms cannot cover their total production costs, then a. b. 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. c. some firms will exit the market, causing prices to rise until the remaining firms can cover their total production costs. d. all firms will go out of business, since consumers will not pay prices that enable firms to cover their total production costs. ANS: C PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 37. 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 PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Analytical 38. 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 PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Analytical 39. 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 PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Analytical 76 ❖ Chapter 14/Firms in Competitive Markets 40. 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 PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Analytical REF: 14-3 TOP: Competitive markets 41. Which of the following statements is not correct? a. b. 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. c. The amount of gold in the world is limited. Therefore, the gold jewelry market probably has a longrun supply curve that is upward sloping. d. Long-run supply curves are typically more elastic than short-run supply curves. ANS: B PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 42. Which of the following statements is not correct about competitive firms? 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 PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive Scenario 14-4 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 earned $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. 43. Refer to Scenario 14-4. 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 NAT: Analytic MSC: Applicative PTS: 1 DIF: LOC: Perfect competition 2 REF: 14-3 TOP: Economic profit 44. Refer to Scenario 14-4. 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 NAT: Analytic MSC: Applicative PTS: 1 DIF: LOC: Perfect competition 2 REF: 14-3 TOP: Economic profit Chapter 14/Firms in Competitive Markets ❖ 77 45. Refer to Scenario 14-4. 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 NAT: Analytic MSC: Applicative PTS: 1 DIF: LOC: Perfect competition 2 REF: 14-3 TOP: Economic profit Scenario 14-5 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. 46. Refer to Scenario 14-5. 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 PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Analytical 47. Refer to Scenario 14-5. If the increased production of irradiated tomatoes caused a rise in the marginal transportation costs of moving irradiated tomatoes to market, the a. short-run market supply curve for irradiated tomatoes would be affected but not the long-run market supply. b. long-run market supply curve for irradiated tomatoes would be perfectly elastic. c. long-run market supply of irradiated tomatoes would be downward sloping. d. long-run market supply of irradiated tomatoes would be upward sloping. ANS: D PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Supply curve MSC: Analytical 48. 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. ANS: B PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Interpretive 2 REF: 14-3 TOP: Economic profit 49. 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 PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Interpretive 1 REF: 14-3 TOP: Accounting profit 78 ❖ Chapter 14/Firms in Competitive Markets 50. 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 do not involve an outflow of money. ANS: D PTS: 1 DIF: 1 NAT: Analytic LOC: Perfect competition MSC: Interpretive REF: 14-3 TOP: Accounting profit 51. If the profit-maximizing quantity of production for a competitive firm occurs at a point where the firm’s average total cost of production is falling as production increases, then the firm a. b. c. d. will be earning positive economic profit at the profit-maximizing quantity. will have economic profit less than zero at the profit-maximizing quantity. will have zero economic profit at the profit-maximizing quantity. should increase the quantity of production to increase profit. ANS: B PTS: 1 DIF: 3 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Applicative 52. 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 PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Interpretive 2 REF: 14-3 TOP: Zero-profit condition 53. In a perfectly competitive market, the process of entry and exit will end when (i) accounting profits are zero. (ii) economic profits are zero. (iii) price equals minimum marginal cost. (iv) price equals minimum average total cost. a. (i) and (ii) only b. (ii) and (iii) only c. (ii) and (iv) only d. (i), (ii), (iii), and (iv) ANS: C PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Interpretive REF: 14-3 TOP: Zero-profit condition 54. 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 PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Interpretive REF: 14-3 TOP: Zero-profit condition Chapter 14/Firms in Competitive Markets ❖ 79 55. 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 PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Analytical REF: 14-3 TOP: Zero-profit condition 56. 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 PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Applicative REF: 14-3 TOP: Zero-profit condition 57. 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 PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Applicative 2 REF: 14-3 TOP: Zero-profit condition 58. 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 PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Applicative 59. 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 PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Interpretive 2 REF: 14-3 TOP: Zero-profit condition 60. 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 PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Interpretive REF: 14-3 TOP: Zero-profit condition 80 ❖ Chapter 14/Firms in Competitive Markets 61. 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 PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive 62. 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 PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Interpretive 2 REF: 14-3 TOP: Zero-profit condition 63. 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 PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive 64. 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 PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Interpretive 2 REF: 14-3 TOP: Zero-profit condition 65. 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 PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Interpretive 2 REF: 14-3 TOP: Zero-profit condition 66. 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 PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Interpretive REF: 14-3 TOP: Zero-profit condition Chapter 14/Firms in Competitive Markets ❖ 81 67. 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 PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive 68. Consider a competitive market with a large number of identical firms. The firms in this market do 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. the portion of the marginal cost curve below average variable cost. a firm’s level of sunk costs. ANS: B PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive 69. 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 PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive 70. Suppose that firms in a competitive industry are earning positive economic profits. All else equal, in the long run, we would expect the number of firms in the industry to a. b. c. d. increase. decrease. remain the same. We do not have enough information with which to answer this question. ANS: A PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive 71. Suppose that some firms in a competitive industry are earning zero economic profits, while others are experiencing losses. All else equal, in the long run, we would expect the number of firms in the industry to a. b. c. d. increase. decrease. remain the same. We do not have enough information with which to answer this question. ANS: B PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Interpretive 82 ❖ Chapter 14/Firms in Competitive Markets Figure 14-13 Suppose a firm in a competitive industry has the following cost curves: Price 10 MC 9 AT C 8 AVC 7 6 P1 5 P2 4 P3 3 2 P4 1 1 2 3 4 5 6 7 8 Quantity 72. Refer to Figure 14-13. If the price is P1 in the short run, what will happen in the long run? a. Nothing. The price is consistent with zero economic profits, so there is no incentive for firms to enter or exit the industry. b. Individual firms will earn positive economic profits in the short run, which will entice other firms to enter the industry. c. Individual firms will earn negative economic profits in the short run, which will cause some firms to exit the industry. d. Because the price is below the firm’s average variable costs, the firms will shut down. ANS: B PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive 73. Refer to Figure 14-13. If the price is P2 in the short run, what will happen in the long run? a. Nothing. The price is consistent with zero economic profits, so there is no incentive for firms to enter or exit the industry. b. Individual firms will earn positive economic profits in the short run, which will entice other firms to enter the industry. c. Individual firms will earn negative economic profits in the short run, which will cause some firms to exit the industry. d. Because the price is below the firm’s average variable costs, the firms will shut down. ANS: A PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive 74. Refer to Figure 14-13. If the price is P3 in the short run, what will happen in the long run? a. Nothing. The price is consistent with zero economic profits, so there is no incentive for firms to enter or exit the industry. b. Individual firms will earn positive economic profits in the short run, which will entice other firms to enter the industry. c. Individual firms will earn negative economic profits in the short run, which will cause some firms to exit the industry. d. Because the price is below the firm’s average variable costs, the firms will shut down. ANS: C PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive Chapter 14/Firms in Competitive Markets ❖ 83 75. Consider a competitive market with a large number of identical firms. The firms in this market do 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 PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Interpretive REF: 14-3 TOP: Competitive markets 76. A competitive market is in long-run equilibrium. If demand decreases, we can be certain that price will a. 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. b. 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. c. 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. d. not fall in the short run because firms will exit to maintain the price. ANS: C PTS: 1 DIF: 3 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Analytical 77. A competitive market is in long-run equilibrium. If demand increases, we can be certain that price will a. rise in the short run. Some firms will enter the industry. Price will then rise to reach the new longrun equilibrium. b. rise in the short run. Some firms will enter the industry. Price will then fall to reach the new longrun equilibrium. c. 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. d. not rise in the short run because firms will enter to maintain the price. ANS: B PTS: 1 DIF: 3 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Analytical 78. 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 PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Interpretive 2 REF: 14-3 TOP: Long-run supply curve 79. 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 PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive 84 ❖ Chapter 14/Firms in Competitive Markets 80. The long-run supply curve for a competitive industry may be upward sloping if a. b. there are barriers to entry. firms that enter the industry are able to do so at lower average total costs than the existing firms in the industry. c. some resources are available only in limited quantities. d. accounting profits are positive. ANS: C PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive 81. 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 PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive 82. 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 PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Interpretive REF: 14-3 TOP: Long-run supply curve 83. 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 do not have sufficient information to determine the shape of the long-run market supply curve. ANS: A PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive 84. 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 PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Interpretive 2 REF: 14-3 TOP: Long-run supply curve Chapter 14/Firms in Competitive Markets ❖ 85 85. 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 PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive 86. 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 PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive 87. 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 PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive 88. 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 PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive 89. 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 PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive 90. 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 PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Analytical REF: 14-3 TOP: Long-run supply curve 86 ❖ Chapter 14/Firms in Competitive Markets 91. 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 PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive 92. 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 PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive 93. Suppose that a competitive market is initially in equilibrium. Then demand increases. If some resources used in production are not available in sufficient quantities for entering firms, a. b. c. d. the long-run market supply curve will be upward sloping. the long-run market supply curve will be perfectly elastic. in the long run firms will suffer economic losses, leading them to exit the industry. the number of firms will decrease, and the market will become a monopoly. ANS: A PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive 94. Suppose that a competitive market is initially in equilibrium. Then demand increases. If entering firms face the same costs as existing firms and sufficient resources are available for entering firms, a. b. c. d. the long-run market supply curve will be upward sloping. the long-run market supply curve will be perfectly elastic. in the long run firms will suffer economic losses, leading them to exit the industry. the number of firms will decrease, and the market will become a monopoly. ANS: B PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive Chapter 14/Firms in Competitive Markets ❖ 87 Figure 14-14 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 95. Refer to Figure 14-14. 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 PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Analytical REF: 14-3 TOP: Zero-profit condition 96. Refer to Figure 14-14. 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. 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. c. rising prices and falling profits for existing firms in the market. d. falling prices and falling profits for existing firms in the market. ANS: B PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Analytical 97. Refer to Figure 14-14. 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 A, B, C, and D represent short-run equilibria. Points A and B represent long-run equilibria. Points A and C represent long-run equilibria. ANS: D PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Analytical 88 ❖ Chapter 14/Firms in Competitive Markets 98. Refer to Figure 14-14. 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. ANS: C PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Analytical REF: 14-3 TOP: Long-run supply curve 99. Refer to Figure 14-14. 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 PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Analytical 100. Refer to Figure 14-14. 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 PTS: 1 DIF: 2 NAT: Analytic LOC: Perfect competition MSC: Analytical REF: 14-3 TOP: Long-run supply curve CONCLUSION: BEHIND THE SUPPLY CURVE 1. 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. prefer to purchase products from smaller rather than larger firms. think at the margin. ANS: D PTS: 1 DIF: 2 REF: 14-4 NAT: Analytic LOC: Perfect competition TOP: Marginal analysis MSC: Definitional 2. If firms are competitive and profit maximizing, the price of a good equals the a. b. c. d. marginal cost of production. fixed cost of production. total cost of production. average total cost of production. ANS: A PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Interpretive 2 REF: 14-4 TOP: Competitive markets Chapter 14/Firms in Competitive Markets ❖ 89 3. 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 PTS: 1 DIF: NAT: Analytic LOC: Perfect competition MSC: Interpretive 2 REF: 14-4 TOP: Competitive markets