964 ? Chapter 14/Firms in Competitive Markets
74. 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 DIF: LOC: Perfect competition MSC: Analytical
2 REF: 14-2 NAT: Analytic TOP: Profit maximization
75. Raiman's Shoe Repair produces custom-made shoes. When Mr. Raiman produces 12 pairs per week, the
marginal cost of the twelfth pair is $84, and the marginal revenue of the twelfth pair 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 DIF: LOC: Perfect competition MSC: Analytical
2 REF: 14-2 NAT: Analytic TOP: Profit maximization
76. 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 DIF: LOC: Perfect competition MSC: Analytical
2 REF: 14-2 NAT: Analytic TOP: Profit maximization
77. 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 DIF: LOC: Perfect competition MSC: Interpretive
2 REF: 14-2 NAT: Analytic TOP: Profit maximization
78. Which of the following expressions is correct for a competitive firm?
a. Profit = (Quantity of output) x (Price - Average total cost)
b. Marginal revenue = (Change in total revenue)/(Quantity of output) c. Average total cost = Total variable cost/Quantity of output d. Average revenue = (Marginal revenue) x (Quantity of output)
ANS: A DIF: LOC: Perfect competition 2 REF: 14-2 TOP: Profit NAT: Analytic MSC: Definitional
79. Total profit for a firm is calculated as
a. marginal revenue minus average total cost. b. average revenue minus average total cost. c. marginal revenue minus marginal cost.
d. (price minus average cost) times quantity of output.
ANS: D DIF: LOC: Perfect competition 1 REF: 14-2 TOP: Profit NAT: Analytic MSC: Definitional
Chapter 14/Firms in Competitive Markets ? 965
80. We can measure the profits earned by a firm in a competitive industry as
a. (P - ATC) x Q. b. (P - MC) x Q. c. MR x MC.
d. (MC - ATC) x Q.
ANS: A DIF: LOC: Perfect competition 2 REF: 14-2 TOP: Profit NAT: Analytic MSC: Analytical
81. 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 DIF: LOC: Perfect competition 2 REF: 14-2 TOP: Profit NAT: Analytic MSC: Interpretive
82. Assume a firm is producing 800 units of output, and it sells each unit for $6. Its average total cost is $4. Its
profit is a. $-1,600. b. $1,600. c. $3,200. d. $8,000.
ANS: B DIF: LOC: Perfect competition 2 REF: 14-2 TOP: Profit NAT: Analytic MSC: Applicative
83. Which of the following could be used to calculate the profit for a firm?
a. Profit = MR - MC b. Profit = MR - TC c. Profit = (P - MC)xQ d. Profit = (P - ATC)xQ
ANS: D DIF: LOC: Perfect competition 2 REF: 14-2 TOP: Profit NAT: Analytic MSC: Definitional
84. Suppose that a firm is currently maximizing its short-run profit at an output of 50 units. If the current price is
$9, the marginal cost of the 50th unit is $9, and the average total cost of producing 50 units is $4, what is the firm's profit? a. $0 b. $200 c. $250 d. $450
ANS: C DIF: LOC: Perfect competition 2 REF: 14-2 TOP: Profit NAT: Analytic MSC: Analytical
85. In a competitive market the price is $8. A typical firm in the market has ATC = $6, AVC = $5, and MC = $8.
How much economic profit is the firm earning in the short run? a. $0 per unit b. $1 per unit c. $2 per unit d. $3 per unit
ANS: C DIF: LOC: Perfect competition 2 REF: 14-2 TOP: Profit NAT: Analytic MSC: Analytical
966 ? Chapter 14/Firms in Competitive Markets
86. Consider a firm operating in a competitive market. The firm is producing 40 units of output, has an average
total cost of production equal to $5, and is earning $240 economic profit in the short run. What is the current market price? a. $9 b. $10 c. $11 d. $12
ANS: C DIF: LOC: Perfect competition Figure 14-1
109876543211234567Price3 REF: 14-2 TOP: Profit NAT: Analytic MSC: Analytical
MCATCAVCP1P2P3P48Quantity87. Refer to Figure 14-1. If the market price is P1, in the short run, the perfectly competitive firm will earn
a. positive economic profits.
b. negative economic profits but will try to remain open. c. negative economic profits and will shut down. d. zero economic profits.
ANS: A DIF: LOC: Perfect competition 2 REF: 14-2
TOP: Shut down NAT: Analytic MSC: Interpretive
88. Refer to Figure 14-1. If the market price is P2, in the short run, the perfectly competitive firm will earn
a. positive economic profits.
b. negative economic profits but will try to remain open. c. negative economic profits and will shut down. d. zero economic profits.
ANS: D DIF: LOC: Perfect competition MSC: Interpretive
2 REF: 14-2
TOP: Supply curve NAT: Analytic
89. Refer to Figure 14-1. If the market price is P3, in the short run, the perfectly competitive firm will earn
a. positive economic profits.
b. negative economic profits but will try to remain open. c. negative economic profits and will shut down. d. zero economic profits.
ANS: B DIF: LOC: Perfect competition MSC: Interpretive
2 REF: 14-2
TOP: Supply curve NAT: Analytic
Chapter 14/Firms in Competitive Markets ? 967
90. Refer to Figure 14-1. If the market price is P4, in the short run, the perfectly competitive firm will earn
a. positive economic profits.
b. negative economic profits but will try to remain open. c. negative economic profits and will shut down. d. zero economic profits.
ANS: C DIF: LOC: Perfect competition MSC: Interpretive
2 REF: 14-2
TOP: Supply curve NAT: Analytic
91. Refer to Figure 14-1. Which of the four prices corresponds to a perfectly competitive firm earning positive
economic profits in the short run? a. P1 b. P2 c. P3 d. P4
ANS: A DIF: LOC: Perfect competition MSC: Interpretive
2 REF: 14-2
TOP: Supply curve NAT: Analytic
92. Refer to Figure 14-1. Which of the four prices corresponds to a perfectly competitive firm earning zero
economic profits in the short run? a. P1 b. P2 c. P3 d. P4
ANS: B DIF: LOC: Perfect competition MSC: Interpretive
2 REF: 14-2
TOP: Supply curve NAT: Analytic
93. Refer to Figure 14-1. Which of the four prices corresponds to a perfectly competitive firm earning negative
economic profits in the short run but trying to remain open? a. P1 b. P2 c. P3 d. P4
ANS: C DIF: LOC: Perfect competition MSC: Interpretive
2 REF: 14-2
TOP: Supply curve NAT: Analytic
94. Refer to Figure 14-1. Which of the four prices corresponds to a perfectly competitive firm earning negative
economic profits in the short run and shutting down? a. P1 b. P2 c. P3 d. P4
ANS: D DIF: LOC: Perfect competition MSC: Interpretive
2 REF: 14-2
TOP: Supply curve NAT: Analytic
968 ? Chapter 14/Firms in Competitive Markets
Figure 14-2
19181716151413121110987654321PriceMCATC12345678Quantity95. Refer to Figure 14-2. If the market price is $10, what is the firm’s short-run economic profit?
a. $9 b. $15 c. $30 d. $50
ANS: B DIF: LOC: Perfect competition 3 REF: 14-2 TOP: Profit NAT: Analytic MSC: Analytical
96. Refer to Figure 14-2. If the market price is $10, what is the firm’s total cost?
a. $15 b. $30 c. $35 d. $50
ANS: C DIF: LOC: Perfect competition 3 REF: 14-2
TOP: Total cost NAT: Analytic MSC: Analytical
97. Refer to Figure 14-2. If the market price is $10, what is the firm’s total revenue?
a. $15 b. $30 c. $35 d. $50
ANS: D DIF: LOC: Perfect competition MSC: Analytical
3 REF: 14-2 NAT: Analytic TOP: Total revenue
98. Refer to Figure 14-2. The firm will earn zero economic profit if the market price is
a. $0 b. $6 c. $7 d. $10
ANS: B DIF: LOC: Perfect competition 3 REF: 14-2 TOP: Profit NAT: Analytic MSC: Interpretive