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163. Cold Duck Airlines flies between Tacoma and Portland. The company leases planes on a year-long contract at a cost
that averages $600 per flight. Other costs (fuel, flight attendants, etc.) amount to $550 per flight. Currently, Cold Duck's revenues are $1,000 per flight. All prices and costs are expected to continue at their present levels. If it wants to maximize profit, Cold Duck Airlines should a. drop the flight immediately. b. continue the flight.
c. continue flying until the lease expires and then drop the run. d. drop the flight now but renew the lease if conditions improve. ANS: C PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Analytical 164. Raiman's Shoe Repair also produces custom-made shoes. When Mr. Raiman produces 12 pairs a week, the marginal
cost of the twelfth pair is $84, and the MR of that unit is $70. What would you advise Mr. Raiman to do? a. Shut down the business.
b. Produce more custom-made shoes. c. Decrease the price.
d. Produce fewer custom-made shoes. ANS: D PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Analytical 165. Carla's Candy Store is maximizing profits by producing 1,000 pounds of candy per day. If Carla's fixed costs
unexpectedly increase and the market price remains constant, then the short run profit-maximizing level of output a. is less than 1,000 pounds. b. is still 1,000 pounds.
c. is more than 1,000 pounds. d. becomes zero. ANS: B PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Analytical 166. The firm will make the most profits if it produces the quantity of output at which
a. marginal cost equals average cost. b. profit per unit is greatest.
c. marginal revenue equals total revenue. d. marginal revenue equals marginal cost. ANS: D PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Interpretive
167. Joe's Garage 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. Joe's Garage is earning a positive economic profit. b. Joe's Garage should shut down immediately.
c. Joe's is losing money in the short run, but should continue to operate. d. the market price will rise in the short run to increase profits. ANS: B PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Analytical 168. If there is an increase in market demand in a perfectly competitive market, then in the short run
a. there will be no change in the demand curves faced by individual firms in the market. b. the demand curves for firms will shift downward. c. the demand curves for firms will become more elastic. d. profits will rise. ANS: D PTS: 1 DIF: 2 REF: 14-2 TOP: Profit maximization MSC: Analytical 169. A sunk cost is one that
a. changes as the level of output changes in the short run.
b. was paid in the past and will not change regardless of the present decision. c. should determine the rational course of action in the future. d. has the most impact on profit-making decisions. ANS: B PTS: 1 DIF: 2 REF: 14-2 TOP: Sunk costs MSC: Definitional
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170. A corporation has been steadily losing money on one of its product lines. The factory used to produce that product
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, and that 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 TOP: Sunk costs MSC: Analytical 171. In a market with 1,000 identical firms, the short-run market supply is the
a. marginal cost curve (above average variable cost) for a typical firm in the market. b. quantity supplied by the typical firm in the market.
c. sum of the prices charged by each of the 1,000 individual firms. d. sum of the quantities supplied by each of the 1,000 individual firms. ANS: D PTS: 1 DIF: 2 REF: 14-3 TOP: Supply curve MSC: Interpretive
Figure 14-6
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.
172. Refer to Figure 14-6. 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. 2,000 b. 5,000 c. 10,000 d. 20,000 ANS: D PTS: 1 DIF: 2 REF: 14-3 TOP: Supply curve MSC: Applicative 173. Refer to Figure 14-6. When 100 identical firms participate in this market, at what price will 15,000 units be supplied
to this market? a. $1.00 b. $1.50 c. $2.00
d. It cannot be determined from the information provided. ANS: B PTS: 1 DIF: 2 REF: 14-3 TOP: Supply curve MSC: Applicative
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174. Refer to Figure 14-6. 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. 75 b. 100 c. 250 d. 300 ANS: D PTS: 1 DIF: 3 REF: 14-3 TOP: Supply curve MSC: Applicative 175. When existing firms in a competitive market are profitable, an incentive exists for
a. new firms to seek government subsidies that would allow them to enter the market. b. new firms to enter the market, even without government subsidies. c. existing firms to raise prices.
d. existing firms to increase production. ANS: B PTS: 1 DIF: 2 REF: 14-3 TOP: Competitive markets MSC: Interpretive 176. When new firms have an incentive to enter a competitive market, their entry will
a. increase the price of the product.
b. drive down profits of existing firms in the market. c. shift the market supply curve to the left. d. increase demand for the product. ANS: B PTS: 1 DIF: 2 REF: 14-3 TOP: Competitive markets MSC: Interpretive 177. When firms have an incentive to exit a competitive market, their exit will
a. lower market price.
b. necessarily raise the costs of firms that remain in the market. c. raise profits for firms that remain in the market. d. reduce demand for the product. ANS: C PTS: 1 DIF: 2 REF: 14-3 TOP: Competitive markets MSC: Interpretive
178. In a perfectly competitive market, the process of entry and exit will end when, for firms in the market,
a. price is equal to average variable cost.
b. marginal revenue is equal to average variable cost. c. economic profits are zero. d. accounting profits are zero. ANS: C PTS: 1 DIF: 2 REF: 14-3 TOP: Competitive markets MSC: Interpretive
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179. If the figure in panel (a) reflects the long-run equilibrium of a profit-maximizing firm in a competitive market, the
figure in panel (b) most likely reflects
a. perfectly inelastic long-run market supply.
b. the idea that free entry and exit of firms in the market lead to only one market price in the long run. c. the product of the individual supply curves of all firms in the market. d. the fact that zero profits cannot be sustained in the long run. ANS: B PTS: 1 DIF: 2 REF: 14-3 TOP: Supply curve MSC: Interpretive 180. In a competitive market with free entry and exit, the process of entry and exit ends when, for the typical firm in the
market,
a. marginal revenue is equal to long-run average total cost. b. total revenue is equal to average total cost. c. average revenue exceeds marginal cost. d. accounting profit is driven to zero. ANS: A PTS: 1 DIF: 2 REF: 14-3 TOP: Competitive markets MSC: Analytical 181. When new firms enter a perfectly competitive market,
a. demand increases.
b. the short-run market supply curve shifts right. c. the short-run market supply curve shifts left.
d. existing firms will increase prices to keep the new firms from entering. ANS: B PTS: 1 DIF: 2 REF: 14-3 TOP: Supply curve MSC: Interpretive
182. When new firms enter a perfectly competitive market,
a. economic profits of existing firms will continue to be zero.
b. entering firms will earn zero economic profit upon entry into the market.
c. existing firms may see their costs rise as more firms compete for limited resources. d. 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 TOP: Competitive markets MSC: Interpretive 183. In a competitive market with free entry and exit, if all firms have the same cost structure, then
a. all firms will operate at efficient scale in the short run. b. all firms will operate at efficient scale in the long run. c. the price of the product will differ across firms.
d. the number of sellers in the market will steadily decrease over time. ANS: B PTS: 1 DIF: 2 REF: 14-3 TOP: Competitive markets MSC: Interpretive
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184. 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 a. market supply curve is equal to the sum of marginal cost. b. supply curve for the market must slope downward. c. market supply curve must slope upward.
d. supply curve for the market is horizontal and equal to the minimum of long-run average cost for each firm. ANS: D PTS: 1 DIF: 2 REF: 14-3 TOP: Supply curve MSC: Interpretive 185. 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. earning small levels of economic profit. b. facing the prospect of future losses. c. operating at efficient scale.
d. that band together to raise market prices. ANS: C PTS: 1 DIF: 2 REF: 14-3 TOP: Competitive markets MSC: Interpretive
Scenario 14-3
In March of 2000 a study sponsored by the Food Consumer Safety Board found that consumption of irradiated grapefruit increased the health of laboratory rats. As a result of national press coverage of the report, the demand for irradiated grapefruit increased dramatically. Organic farmers were able to switch from organic production of grapefruit to
irradiated production with no additional cost. Assume that the grapefruit market satisfies all of the attributes of perfect competition.
186. Refer to Scenario 14-3. As a result of the increase in the demand for grapefruit, we would predict that in the short
run that the
a. production of grapefruit would be at efficient scale. b. price of grapefruit would rise.
c. total cost for existing irradiated grapefruit producers must rise.
d. 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 TOP: Competitive markets MSC: Analytical 187. Refer to Scenario 14-3. If the increased production of irradiated grapefruit caused a rise in the marginal
transportation costs of moving irradiated grapefruit to market, the
a. short-run market supply curve for irradiated grapefruit would be affected, but not the long-run market supply. b. long-run market supply curve for irradiated grapefruit would be perfectly elastic. c. long-run market supply of irradiated grapefruit would be downward sloping. d. long-run market supply of irradiated grapefruit would be upward sloping. ANS: D PTS: 1 DIF: 2 REF: 14-3 TOP: Supply curve MSC: Analytical 188. 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
a. average fixed cost for the marginal firm.
b. the maximum of marginal cost of the marginal firm. c. the minimum of average total cost of the marginal firm. d. the minimum of average variable cost of the marginal firm. ANS: C PTS: 1 DIF: 2 REF: 14-3 TOP: Competitive markets MSC: Interpretive 189. The entry of new firms into a competitive market will
a. increase market supply and increase market prices. b. increase market supply and decrease market prices. c. decrease market supply and increase market prices. d. decrease market supply and decrease market prices. ANS: B PTS: 1 DIF: 2 REF: 14-3 TOP: Competitive markets MSC: Interpretive