Chapter 14/Firms in Competitive Markets ? 619
6. News reports from the western United States occasionally report incidents of cattle ranchers slaughtering a large
number of newborn calves and burying them in mass graves rather than transporting them to markets. Assuming that this is rational behavior by profit-maximizing \ANS:
If the selling price is not sufficient to cover the variable cost of sending them to market this behavior would make sense.PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Analytical
7. Use a graph to demonstrate the circumstances that would prevail in a perfectly competitive market where firms are
experiencing economic losses. Identify costs, revenue, and the economic losses on your graph. Using your graph, determine whether this firm will shut down in the short run, or choose to remain in the market. Explain your answer. ANS:
The loss and revenue are identified on the individual firm's graph. Total cost is equal to the sum of the losses and revenue. The decision about whether this firm shuts down or remains in the market depends upon the position of average variable cost. If average variable cost is below P0 at output level Q0, the firm will remain in the market. If average variable cost is above P0 at output level Q0 the firm will shut down in the short run.
PTS: 1 DIF: 2 TOP: Profit maximization
REF: 14-2
MSC: Analytical
8. At its current level of production a profit-maximizing firm in a competitive market receives $12.50 for each unit it produces and faces an average total cost of $10. At the market price of $12.50 per unit, the firm's marginal cost curve crosses the marginal revenue curve at an output level of 1,000 units. What is the firm's current profit? What is likely to occur in this market and why? ANS:
$2,500; firms are likely to enter this market since existing firms are earning economic profits. PTS: 1 DIF: 2 REF: 14-2 TOP: Profit MSC: Analytical
9. Give two reasons why the long-run industry supply curve may slope upward. Use an example to demonstrate your
reasons. ANS:
Some resource used in production may be available only in limited quantities and 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 of 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.PTS: 1 DIF: 3 REF: 14-3 TOP: Supply curve MSC: Interpretive
620 ? Chapter 14/Firms in Competitive Markets
10. If identical firms that remain in a competitive market over the long run make zero economic profit, why do these
firms choose to remain in the market? ANS:
Because a normal rate of return on their investment is included as part of the opportunity cost of production.PTS: 1 DIF: 2 REF: 14-3 TOP: Economic profit MSC: Interpretive