Chapter 7 Questions and Answers PDF

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This is practice questions and answers for Chapter 7 material....

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PRACTICE QUESTIONS (Chapter 7)

1. If a California avocado stand operates in a perfectly competitive market, that stand owner will be a price: A) maker. B) taker. C) discriminator. D) maximizer. 3. If a Florida strawberry wholesaler operates in a perfectly competitive market, that wholesaler will have a _____ share of the market, and consumers will consider her strawberries and her competitors' strawberries to be _____. Therefore, _____ advertising will take place in this market. A) large; standardized; no B) small; standardized; little or no C) small; differentiated; no D) large; differentiated; extensive 5. For the Colorado beef industry to be classified as perfectly competitive, ranchers in Colorado must have _____ on prices and beef must be a _____ product. A) no noticeable effect; standardized B) a huge effect; standardized C) a huge effect; differentiated D) no noticeable effect; differentiated 6. Which of the following is a necessary condition for perfect competition? A) A small number of firms control a large share of the total market. B) Movement into and out of the market is limited. C) Firms produce a standardized product. D) Extensive advertising is used to promote the firm's product. 7. The perfectly competitive model assumes all of the following EXCEPT: A) a great number of buyers. B) easy entry to and exit from the market. C) a standardized product. D) that firms attempt to maximize their total revenue.

8. A firm's total output times the price at which it sells that output is _____ revenue. A) net B) total C) average D) marginal

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9. If a perfectly competitive firm increases production from 10 units to 11 units and the market price is $20 per unit, total revenue for 11 units is: A) $10. B) $20. C) $200. D) $220. 11. The demand curve for a perfectly competitive firm is: A) perfectly inelastic. B) perfectly elastic. C) downward-sloping. D) relatively but not perfectly elastic. 12. Marginal revenue: A) is the slope of the average revenue curve. B) equals the market price in perfect competition. C) is the change in quantity divided by the change in total revenue. D) is the price divided by the change in quantity.

13. The marginal revenue received by a firm in a perfectly competitive market: A) is greater than the market price. B) is less than the market price. C) is equal to its average revenue. D) increases with the quantity of output sold. 14. If a perfectly competitive gardening shop sells 30 evergreen bushes at $10 per bush, its marginal revenue is: A) $10. B) more than $10. C) less than $10. D) $300.

15. Perfectly competitive firms will: A) maximize total revenue by using the marginal decision rule. B) increase output up to the point that the marginal benefit of an additional unit of output is greater than the marginal cost. C) increase output up to the point that the marginal benefit of an additional unit of output is equal to the marginal cost. D) always attempt to minimize average variable cost.

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16. For a perfectly competitive firm, marginal revenue: A) is less than price. B) is greater than price. C) decreases as the firm increases output. D) is equal to price.

19. Zoe's Bakery operates in a perfectly competitive industry and has standard cost curves. The variable costs at Zoe's Bakery increase, so all of the cost curves (except fixed cost) shift upward. The demand for Zoe's pastries does not change, nor does the firm shut down. To maximize profits after the variable cost increase, Zoe's Bakery will _____ its price and _____ its level of production. A) raise; increase B) decrease; increase C) raise; decrease D) do nothing to; decrease 20. The slope of the total revenue curve is: A) marginal cost. B) net revenue. C) equal to marginal revenue and is constant under perfect competition. D) equal to marginal revenue and varies under perfect competition. 21. The slope of the total cost curve is: A) marginal cost. B) marginal revenue. C) constant under perfect competition. D) always negative.

22. For a firm producing at any level of output LOWER THAN the most profitable one, an increase in output adds: A) more to total cost than to total revenue. B) more to total revenue than to total cost. C) the same amount to total revenue as to total cost. D) to total revenue but not to total cost. 23. For a firm producing at any level of output GREATER THAN the most profitable one, a reduction in output decreases total revenue _____ total cost. A) less than B) more than C) by the same amount as D) but not

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24. A perfectly competitive firm maximizes profit in the short run by producing the quantity at which: A) TR = TC. B) MR = MC. C) Q × (P – ATC) = 0. D) P < AVC. 25. The marginal revenue received by a firm in a perfectly competitive market: A) is unrelated to the market price. B) is less than the market price. C) is greater than the market price. D) is the change in total revenue divided by the change in output. 26. If a firm in perfect competition sells 10 units of output at $5 per unit, its marginal revenue is: A) $5. B) more than $5 but less than $50. C) $50. D) $250. 27. If a perfectly competitive firm is producing a quantity where MC > MR, then profit: A) is maximized. B) can be increased by increasing production. C) can be increased by decreasing production. D) can be increased by decreasing the price. 28. If a perfectly competitive firm is producing a quantity where MC < MR, then profit: A) is maximized. B) can be increased by increasing production. C) can be increased by decreasing production. D) can be increased by decreasing the price.

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Use the following to answer question 29: Figure: Total Revenue and Total Cost

29. (Figure: Total Revenue and Total Cost) Look at the figure Total Revenue and Total Cost. The most profitable level of output occurs at quantity: A) F. B) K. C) L. D) M. 30. If the price is greater than average total cost at the profit-maximizing quantity of output in the short run, a perfectly competitive firm will: A) produce at a loss. B) produce at a profit. C) shut down production. D) produce more than the profit-maximizing quantity. 32. In the short run, a perfectly competitive firm produces output and earns ZERO economic profit if: A) P < ATC. B) P = ATC. C) P < MC. D) P > ATC.

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33. For a perfectly competitive firm in the short run, if the firm produces the quantity at which _____, the firm _____. A) P > ATC; is profitable B) P < ATC; breaks even C) P = ATC; incurs a loss D) P < ATC; is profitable 34. In the short run, a perfectly competitive firm produces output and breaks even if the firm produces the quantity at which: A) P < ATC. B) P = ATC. C) P > ATC. D) P = (TR / Q + TC / Q) × Q.

35. In the short run, if P = ATC, a perfectly competitive firm: A) produces output and earns zero economic profit. B) produces output and earns an economic profit. C) produces output and incurs an economic loss. D) does not produce output and incurs an economic loss. 36. In the short run, if P > ATC, a perfectly competitive firm: A) produces output and earns zero economic profit. B) produces output and earns an economic profit. C) produces output and incurs an economic loss. D) does not produce output and earns economic profit. 37. A perfectly competitive firm will earn a profit and will continue producing the profitmaximizing quantity of output in the short run if the price is: A) less than the average fixed cost. B) less than marginal cost. C) greater than average variable cost but less than average total cost. D) greater than average total cost. 38. Suppose a perfectly competitive firm can increase its profits by increasing its output. Then it must be true that the firm's _____ exceeds its _____. A) marginal revenue; marginal cost B) price; average total cost but is less than marginal cost C) marginal cost; marginal revenue D) price; marginal revenue

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39. A competitive firm operating in the short run is producing at the output level at which ATC is at a minimum. If ATC = $8 and MR = $9, to maximize profits (or minimize losses), this firm should: A) increase output. B) reduce output. C) increase price. D) do nothing; the firm is already maximizing profits. 40. Suppose Sarah's pottery studio is charging the market price, which is just higher than her minimum average total cost. This means that Sarah: A) is breaking even. B) should shut down immediately. C) is earning a small economic profit. D) is incurring a small economic loss.

41. The break-even price for a perfectly competitive firm is equal to: A) the minimum value of average variable cost. B) the marginal revenue, provided that marginal revenue is equal to marginal cost. C) the average fixed cost at the given output level. D) the minimum value of average total cost. 42. Zoe's Bakery determines that P < ATC and P > AVC. In the short run, Zoe should: A) continue to operate even though she is taking an economic loss. B) continue to operate, as she is making an economic profit. C) shut down immediately, as she is taking an economic loss. D) raise the price until she has maximized her profits.

43. Consider a perfectly competitive firm in the short run. Assume that it is sustaining economic losses but continues to produce at the profit-maximizing (loss-minimizing) output. Which statement is FALSE? A) Marginal cost is less than average total cost. B) Marginal cost is equal to marginal revenue. C) Price is equal to marginal cost. D) Marginal cost is less than average variable cost. 44. A perfectly competitive small organic farm produces 1,000 cauliflower heads in the short run. Its ATC = $6 and AFC = $2. The market price is $3 per head and is equal to MC. To maximize profits or minimize losses, this farm should: A) increase output. B) reduce output but continue to produce. C) shut down. D) do nothing; the firm is already maximizing profits.

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45. If the price is consistently below average total cost, then in the short run a perfectly competitive firm should: A) always shut down. B) continue to produce because it is maximizing profit. C) raise price. D) continue to produce if price is greater than average variable cost. 46. During the summer, Alex runs a mowing service, and lawn mowing is a perfectly competitive industry. In the short run, Alex will shut down if: A) the total revenues can't cover fixed costs. B) the total revenues can't cover variable costs. C) the total revenues can't cover total costs. D) the price exceeds the average total cost.

47. Many furniture stores run “going out of business” sales but never go out of business. For the shut-down decision to be the appropriate one, the price of furniture must be _____ than the _____ average variable cost. A) higher; maximum B) lower; minimum C) higher; minimum D) lower; maximum 48. The short-run supply curve for a perfectly competitive firm is its: A) demand curve above its marginal revenue curve. B) marginal revenue curve to the right of its marginal cost curve. C) marginal cost curve above its average variable cost curve. D) average total cost curve below its marginal cost curve.

49. The lowest point on a perfectly competitive firm's short-run supply curve corresponds to the minimum point on the _____ curve. A) ATC B) AVC C) AFC D) MC 50. If the price is consistently below the average variable cost, then in the short run a perfectly competitive firm should: A) raise price. B) sell more output. C) shut down. D) lower price to sell more.

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51. A perfectly competitive firm will incur an economic loss but will continue to produce a positive quantity of output in the short run if the price is: A) less than marginal cost. B) less than average variable cost. C) greater than average total cost. D) greater than average variable cost and less than average total cost. 52. If the price is greater than the average variable cost and less than the average total cost at the profit-maximizing quantity of output in the short run, a perfectly competitive firm will: A) produce at an economic loss. B) produce at an economic profit. C) shut down production. D) produce more than the profit-maximizing quantity.

53. The short-run shut-down price is: A) the price at which economic profit is zero. B) the minimum of the AVC curve. C) the intersection of the MC and ATC curves. D) the minimum of the AFC curve. 54. A perfectly competitive firm will continue producing in the short run as long as it can cover its _____ cost. A) total B) average fixed C) variable D) fixed

56. Which of the following is TRUE? A) If price falls below average variable cost, the firm will shut down in the short run. B) Total revenue and marginal revenue are the same in perfect competition. C) Economic profit per unit is found by subtracting MC from price. D) Economic profit is always positive in the long run.

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Use the following to answer questions 57-58: Figure: Prices, Cost Curves, and Profits

57. (Figure: Prices, Cost Curves, and Profits) Look at the figure Prices, Cost Curves, and Profits. If the price is P1 and the firm decides to produce at output Q1, then the firm earns: A) a loss equal to (ba) × Q1. B) a loss equal to (ca) × Q1. C) a loss equal to (bc) × Q1. D) zero. 58. (Figure: Prices, Cost Curves, and Profits) Look at the figure Prices, Cost Curves, and Profits. If the price is P2 and the firm is profit-maximizing, then the firm's profit is: A) (fg) × Q3. B) (de) × Q2. C) (fg) × Q2. D) (de) × P2.

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Use the following to answer questions 59-61: Figure: Cost Curves for Corn Producers

59. (Figure: Cost Curves for Corn Producers) Look at the figure Cost Curves for Corn Producers. The market for corn is perfectly competitive. If the price of a bushel of corn is $14, in the short run, the farmer will produce _____ of corn and earn an economic _____ equal to _____. A) 4 bushels; profit; $0 B) 4 bushels; profit; just less than $80 per bushel C) 2 bushels; profit; $0 D) 2 bushels; loss; just more than $80 per bushel 60. (Figure: Cost Curves for Corn Producers) Look at the figure Cost Curves for Corn Producers. The market for corn is perfectly competitive. If the price of a bushel of corn is $4, in the short run the farmer will produce _____ bushels of corn and earn an economic _____ equal to _____. A) 0; loss; average fixed costs B) 0; loss; total fixed costs C) 3; loss; $30 per bushel D) 3; profit; $20 per bushel 61. (Figure: Cost Curves for Corn Producers) Look at the figure Cost Curves for Corn Producers. The market for corn is perfectly competitive. If the price of a bushel of corn is $10, then in the short run the farmer will produce _____ bushels of corn and take an economic loss equal to _____. A) 0; average fixed costs B) 0; total variable costs C) 3; total fixed costs D) 3; $22 per bushel

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Use the following to answer questions 62-63: Figure: Costs and Profits for Tomato Producers

62. (Figure: Costs and Profits for Tomato Producers) Look at the figure Costs and Profits for Tomato Producers. The market for tomatoes is perfectly competitive. The market price of a bushel of tomatoes is $18. If the market price increases to $20, the farmer's marginal revenue _____ and the profit-maximizing output _____. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases 63. (Figure: Costs and Profits for Tomato Producers) Look at the figure Costs and Profits for Tomato Producers. The market for tomatoes is perfectly competitive. The market price of a bushel of tomatoes is $18. If the market price falls to $16, the farmer's marginal revenue _____ and the profit-maximizing output _____. A) increases; decreases B) increases; increases C) decreases; increases D) decreases; decreases

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Use the following to answer question 64: Figure: Total Cost for Tomato Producers

64. (Figure: Total Cost for Tomato Producers) Look at the figure Total Cost for Tomato Producers. The market for tomatoes is perfectly competitive. The market price of a bushel of tomatoes is $14. The farmer's total cost at the profit-maximizing number of bushels is: A) $3.50. B) $14.00. C) $56.00. D) $72.00. Use the following to answer question 65: Figure: Revenues, Costs, and Profits for Tomato Producers

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65. (Figure: Revenues, Costs, and Profits for Tomato Producers) Look at the figure Revenues, Costs, and Profits for Tomato Producers. The market for tomatoes is perfectly competitive. The market price of a bushel of tomatoes is $18. At the profitmaximizing quantity of output in the figure, the farmer's total revenue is _____, total cost is _____, and profit is _____. A) $90; $14; $76 B) $90; $70; $20 C) $30; $42; –$12 D) $48; $56; –$8

Use the following to answer question 66: Figure: Revenues, Costs, and Profits for Tomato Producers II

66. (Figure: Revenues, Costs, and Profits for Tomato Producers II) Look at the figure Revenues, Costs, and Profits for Tomato Producers II. The market for tomatoes is perfectly competitive. The market price of a bushel of tomatoes is $10. At the farmer's profit-maximizing output, total revenue is _____, total cost is _____, and profit is _____. A) $90; $72; $18 B) $56; $56; $0 C) $30; $48; –$18 D) $48; $56; –$8

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Use the following to answer questions 67-72: Figure: Revenues, Costs, and Profits for Tomato Producers III

68. (Figure: Revenues, Costs, and Profits for Tomato Producers III) Look at the figure Revenues, Costs, and Profits for Tomato Producers III. The market for tomatoes is perfectly competitive. If the market price of a bushel of tomatoes is $14, in the short run the farmer's profit-maximizing output is _____ bushels. A) 2 B) 3 C) 4 D) 5

70. (Figure: Revenues, Costs, and Profits for Tomato Producers III) Look at the figure Revenues, Costs, and Profits for Tomato Producers III. The market for tomatoes is perfectly competitive. If the market price of a bushel of tomatoes is $18, this farm will: A) minimize its losses by shutting down. B) minimize its losses by continuing to produce. C) break even. D) earn an economic profit. 71. (Figure: Revenues, Costs, and Profits for Tomato Producers III) Look at the figure Revenues, Costs, and Profits for Tomato Producers III. The market for tomatoes is perfectly competitive. If the market price of a bushel of tomatoes is $12, in the short run this farm will: A) minimize its losses by shutting down. B) minimize its losses by continuing to produce. C) break even. D) earn an economic profit.

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Use the following to answer questions 73-78: Figure: The Marginal Decision Rule

73. (Figure: The Marginal Decision Rule) Look at the figure The Marginal Decision Rule. At q2, or the _____, the _____ price is equal to marginal cost. A) minimum-cost output; shut-down B) profit-maximizing quantity; market C) maximum-cost output; break-even D) profit-minimizing quantity; break-even

74. (Figure: The Marginal Decision Rule) Look at the figure The Marginal Decision Rule. If P1 is the market price and if this firm is maximizing profit, it should produce: A) where MR > MC. B) at quantity q2. C) at quantity q1, where MR > MC. D) a quantity greater than q1 but less than q2. 75. (Figure: The Marginal Decision Rule) Look at the figure The Marginal Decision Rule. Given the market price P1, B is the _____ curve. A) marginal revenue B) marginal cost C) marginal product D) average fixed cost 76. (Figure: The Marginal Decision Rule) Look at the figure The Marginal Decision Rule. Economic profit: A) is earned between q1 and q2. B) is earned between the origin and q1. C) is earned as a maximum at q1. D) cannot be determined from the information provided.

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77. (Figure: The Marginal Decision Rule) Look at the figure The Marginal Decision Rule. As long as the price is above the minimum variable cost, this firm should produce quantity _____ where _____ equals _____...