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Figure 14-4
The figure below depicts the cost structure of a firm in a competitive market.
85. Refer to Figure 14-4. When market price is P5, a profit-maximizing firm's profits can be represented by the area
a. P5 Q3.
b. (P5 - P3) Q2. c. (P5 - P4) Q3.
d. When market price is P5 there are no profits. ANS: C PTS: 1 DIF: 2 REF: 14-2 TOP: Profit MSC: Analytical 86. Refer to Figure 14-4. Firms would be encouraged to enter this market for all prices that exceed
a. P1. b. P2. c. P3.
d. None of the above is correct. ANS: C PTS: 1 DIF: 2 REF: 14-2 TOP: Profit MSC: Analytical
87. Refer to Figure 14-4. When market price is P2, a profit-maximizing firm's losses can be represented by the area
a. (P3 - P2) Q2. b. (P2 - P1) Q2.
c. At a market price of P2, the firm does not have losses.
d. At a market price of P2 the firm has losses, but the reference points in the figure don't identify the losses. ANS: D PTS: 1 DIF: 2 REF: 14-2 TOP: Profit MSC: Analytical
590 ? Chapter 14/Firms in Competitive Markets
Figure 14-5
The figure below depicts the cost structure of a firm in a competitive market.
88. Refer to Figure 14-5. When market price is P1, a profit-maximizing firm's total revenue can be represented by the
area a. P1 × Q2. b. P2 × Q2. c. P3 × Q2. d. P1 × Q3. ANS: A PTS: 1 DIF: 2 REF: 14-2 TOP: Total revenue MSC: Analytical 89. Refer to Figure 14-5. When market price is P4, a profit-maximizing firm's total cost can be represented by the area
a. P4 × Q1 b. P4 × Q4 c. P2 × Q4
d. Total costs cannot be determined from the information in the figure. ANS: C PTS: 1 DIF: 2 REF: 14-2 TOP: Total cost MSC: Analytical
90. Refer to Figure 14-5. When market price is P1, a profit-maximizing firm's total profit or loss can be represented by
which area? a. P1 × Q3; profit b. (P3 – P1) × Q2 ; loss c. (P2 – P1) × Q1; loss
d. We can't tell because we don't know fixed costs. ANS: B PTS: 1 DIF: 2 REF: 14-2 TOP: Profit MSC: Analytical 91. 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. ANS: C PTS: 1 DIF: 2 REF: 14-2 TOP: Profit MSC: Interpretive
Chapter 14/Firms in Competitive Markets ? 591
92. 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. ANS: D PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Interpretive 93. When a profit-maximizing firm's fixed costs are considered sunk in the short run, then the firm
a. can set price above marginal cost.
b. must set price below average total cost. c. will never show losses.
d. can safely ignore fixed costs when deciding how much output to produce. ANS: D PTS: 1 DIF: 2 REF: 14-2 TOP: Sunk costss MSC: Interpretive
94. A competitive firm's short-run supply curve is part of which of the following curves?
a. Marginal revenue b. Average variable cost c. Average total cost d. Marginal cost ANS: D PTS: 1 DIF: 2 REF: 14-2 TOP: Supply curve MSC: Definitional
95. If a profit-maximizing firm in a competitive market discovers that, at its current level of production, price is greater
than marginal cost, it should a. shut down.
b. reduce its output, but continue operating. c. keep output the same. d. increase its output. ANS: D PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Interpretive 96. For any given price, a firm in a competitive market will maximize profit by selecting the level of output at which
price intersects the
a. average total cost curve. b. average variable cost curve. c. marginal cost curve. d. marginal revenue curve. ANS: C PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Interpretive 97. By comparing marginal revenue and marginal cost, a firm in a competitive market is able to adjust production to the
level that achieves its objective, which we assume to be a. maximization of total revenue. b. maximization of profit.
c. minimization of variable cost. d. minimization of average total cost. ANS: B PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Interpretive
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98. When a restaurant stays open for lunch service even though few customers patronize the restaurant for lunch, which
of the following principles is (are) best demonstrated? (i) Fixed costs are sunk in the short run.
(ii) In the short run, only fixed costs are important to the decision to stay open for lunch. (iii) If revenue exceeds variable cost, the restaurant owner is making a profitable strategic decision to remain open for
lunch.
a. (i) and (ii) only b. (ii) and (iii) only c. (i) and (iii) only
d. All are demonstrated. ANS: C PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Interpretive 99. In the long run, a profit-maximizing firm will choose to exit a market when
a. average fixed cost is falling. b. variable costs exceed sunk costs.
c. marginal cost exceeds marginal revenue at the current level of production. d. total revenue is less than total cost. ANS: D PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Analytical
100. One of the most important determinants of the success of free-market capitalism is
a. enlightened governments selecting firms that should not be allowed to exit a market. b. free entry and exit in markets.
c. government regulation of market participants.
d. having a few large firms rather than thousands of small ones. ANS: B PTS: 1 DIF: 2 REF: 14-2 TOP: Competitive markets MSC: Interpretive
101. A profit-maximizing firm in a competitive market is currently producing 200 units of output. It has average revenue
of $9 and average total cost of $7. It follows that the firm's
a. average total cost curve intersects the marginal cost curve at an output level of less than 200 units. b. average variable cost curve intersects the marginal cost curve at an output level of less than 200 units. c. profit is $400.
d. All of the above are correct. ANS: D PTS: 1 DIF: 3 REF: 14-2 TOP: Profit maximization MSC: Applicative 102. A profit-maximizing firm in a competitive market is able to sell its product for $7. At its current level of output, the
firm's average total cost is $10. The firm’s marginal cost curve crosses its marginal revenue curve at an output level of 9 units. The firm experiences a a. profit of more than $27. b. profit of exactly $27. c. loss of more than $27. d. loss of exactly $27. ANS: D PTS: 1 DIF: 3 REF: 14-2 TOP: Profit MSC: Applicative 103. 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. ANS: A PTS: 1 DIF: 2 REF: 14-2 TOP: Competitive firms MSC: Analytical
Chapter 14/Firms in Competitive Markets ? 593
104. If a competitive firm is currently producing a level of output at which marginal cost exceeds marginal revenue, then
a. average revenue exceeds marginal cost. b. the firm is earning a positive profit.
c. a one-unit decrease in output would increase the firm's profit. d. All of the above are correct. ANS: C PTS: 1 DIF: 2 REF: 14-2 TOP: Competitive firms MSC: Analytical 105. 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. ANS: D PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Interpretive 106. At the profit-maximizing level of output,
a. marginal revenue equals average total cost. b. marginal revenue equals average variable cost. c. marginal revenue equals marginal cost. d. average revenue equals average total cost. ANS: C PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Interpretive
107. The intersection of a firm's marginal revenue and marginal cost curves determines the level of output at which
a. total revenue is equal to variable cost. b. total revenue is equal to fixed cost. c. total revenue is equal to total cost. d. profit is maximized. ANS: D PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Interpretive 108. For a certain firm, the 100th unit of output that the firm produces has a marginal revenue of $10 and a marginal cost
of $7. It follows that
a. the production of the 100th unit of output increases the firm's profit by $3.
b. the production of the 100th unit of output increases the firm's average total cost by $7. c. the firm's profit-maximizing level of output is less than 100 units.
d. the production of the 110th unit of output must increase the firm’s profit by less than $3. ANS: A PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Analytical 109. 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. Which of following is not necessarily true?
a. Production of the 50th unit of output increases the firm's total revenue by $20. b. Production of the 50th unit of output increases the firm's total cost by $22. c. Production of the 50th unit of output decreases the firm's profit by $2.
d. Production of the 50th unit of output increases the firm’s average variable cost. ANS: D PTS: 1 DIF: 2 REF: 14-2 TOP: Competitive firms MSC: Analytical