College of Saint Benedict Profit Maximizing Firms and Competitive Market Questions

Question 1 (5 points)

Profit-maximizing firms enter a competitive market when existing firms in that market have

Question 1 options:

	a) total revenues that exceed fixed costs.
	b) total revenues that exceed total variable costs.
	c) average total costs that exceed average revenue.
	d) average total costs less than market price.

Question 2 (5 points)

Table 14-9
Suppose that a firm in a competitive market faces the following revenues and costs:

Quantity	Total Revenue	Total Cost
0	$0	$10
1	$9	$14
2	$18	$19
3	$27	$25
4	$36	$32
5	$45	$40
6	$54	$49
7	$63	$59
8	$72	$70
9	$81	$82

Refer to Table 14-9. If the firm’s marginal cost is $11, it should

Question 2 options:

	a) increase production to maximize profit.
	b) increase the price of the product to maximize profit.
	c) advertise to attract additional buyers to maximize profit.
	d) reduce production to increase profit.

Question 3 (5 points)

Which of the following statements best reflects a price-taking firm?

Question 3 options:

	a) If the firm were to charge more than the going price, it would sell none of its goods.
	b) The firm has an incentive to charge less than the market price to earn higher revenue.
	c) The firm can sell only a limited amount of output at the market price before the market price will fall.
	d) Price-taking firms maximize profits by charging a price above marginal cost.

Question 4 (5 points)

A firm that has little ability to influence market prices operates in a

Question 4 options:

	a) competitive market.
	b) strategic market.
	c) thin market.
	d) power market.

Question 5 (5 points)

Table 14-9
Suppose that a firm in a competitive market faces the following revenues and costs:

Quantity	Total Revenue	Total Cost
0	$0	$10
1	$9	$14
2	$18	$19
3	$27	$25
4	$36	$32
5	$45	$40
6	$54	$49
7	$63	$59
8	$72	$70
9	$81	$82

Refer to Table 14-9. In order to maximize profit, the firm will produce a level of output where marginal reve-nue is equal to

Question 5 options:

	a) $6.
	b) $7.
	c) $8.
	d) $9.

Question 6 (5 points)

Table 14-4

Quantity	Total Revenue
0	$0
1	$15
2	$30
3	$45
4	$60

Refer to Table 14-4. For a firm operating in a competitive market, the average revenue is

Question 6 options:

	a) $45.
	b) $30.
	c) $15.
	d) $0.

Question 7 (5 points)

For a firm in a competitive market, an increase in the quantity produced by the firm will result in

Question 7 options:

	a) a decrease in the product’s market price.
	b) an increase in the product’s market price.
	c) no change in the product’s market price.
	d) either an increase or no change in the product’s market price depending on the number of firms in the market.

Question 8 (5 points)

Comparing marginal revenue to marginal cost

(i) reveals the contribution of the last unit of production to total profit.
(ii) is helpful in making profit-maximizing production decisions.
(iii) tells a firm whether its fixed costs are too high.

Question 8 options:

	a) (i) only
	b) (i) and (ii) only
	c) (ii) and (iii) only
	d) (i) and (iii) only

Question 9 (5 points)

Table 14-9
Suppose that a firm in a competitive market faces the following revenues and costs:

Quantity	Total Revenue	Total Cost
0	$0	$10
1	$9	$14
2	$18	$19
3	$27	$25
4	$36	$32
5	$45	$40
6	$54	$49
7	$63	$59
8	$72	$70
9	$81	$82

Refer to Table 14-9 At which quantity of output is marginal revenue equal to marginal cost?

Question 9 options:

	a) 3 units
	b) 6 units
	c) 8 units
	d) 9 units

Question 10 (5 points)

Figure 14-1
Suppose that a firm in a competitive market has the following cost curves:

Refer to Figure 14-1. The firm should shut down if the market price is

Question 10 options:

	a) above $8.
	b) above $6.30 but less than $8.
	c) above $4.50 but less than $6.30.
	d) less than $4.50.

Question 11 (5 points)

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

Question 11 options:

	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.

Question 12 (5 points)

Figure 14-1
Suppose that a firm in a competitive market has the following cost curves:

Refer to Figure 14-1. The firm’s short-run supply curve is its marginal cost curve above

Question 12 options:

	a) $1.
	b) $3.
	c) $4.50.
	d) $6.30.

Question 13 (5 points)

If a competitive firm is currently producing a level of output at which marginal revenue exceeds marginal cost, then

Question 13 options:

	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 revenue exceeds total cost.

Question 14 (5 points)

Table 14-13
Diana’s Dress Emporium

COSTS			REVENUES
Quantity Produced	Total Cost	Marginal Cost	Quantity Demanded	Price	Total Revenue	Marginal Revenue
0	$100	—	0	$120		—
1	$150		1	$120
2	$202		2	$120
3	$257		3	$120
4	$317		4	$120
5	$385		5	$120
6	$465		6	$120
7	$562		7	$120
8	$682		8	$120

Refer to Table 14-13. What is the marginal cost of the 1st unit?

Question 14 options:

	a) $50
	b) $75
	c) $80
	d) $150

Question 15 (5 points)

Figure 14-2
Suppose a firm operating in a competitive market has the following cost curves:

Refer to Figure 14-2. Which of the four prices corresponds to a firm earning negative economic profits in the short run but trying to remain open?

Question 15 options:

	a) P1
	b) P2
	c) P3
	d) P4

Question 16 (5 points)

Scenario 14-3
Suppose a certain competitive firm is producing Q=500 units of output. The marginal cost of the 500th unit is $17, and the average total cost of producing 500 units is $12. The firm sells its output for $20.

Refer to Scenario 14-3. At Q=499, the firm’s total costs equal

Question 16 options:

	a) $5,983.
	b) $5,988.
	c) $5,995.
	d) $5,999.

Question 17 (5 points)

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 smart decision to remain open for lunch.

Question 17 options:

	a) (i) and (ii) only
	b) (ii) and (iii) only
	c) (i) and (iii) only
	d) (i), (ii), and (iii)

Question 18 (5 points)

Suppose that a firm in a competitive market 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?

Question 18 options:

	a) $0
	b) $200
	c) $250
	d) $450

Question 19 (5 points)

Suppose a firm in each of the two markets listed below were to increase its price by 30 percent. In which pair would the firm in the first market listed experience a dramatic decline in sales, but the firm in the second mar-ket listed would not?

Question 19 options:

	a) oil and natural gas
	b) cable television and gasoline
	c) restaurants and MP3 players
	d) movie theaters and ballpoint pens

Question 20 (5 points)

Figure 14-1
Suppose that a firm in a competitive market has the following cost curves:

Refer to Figure 14-1. If the market price falls below $4.50, the firm will earn

Question 20 options:

	a) positive economic profits in the short run.
	b) negative economic profits in the short run but remain in business.
	c) negative economic profits in the short run and shut down.
	d) zero economic profits in the short run.

Question 21 (5 points)

Table 14-10
Suppose that a firm in a competitive market faces the following revenues and costs:

Quantity	Total Revenue	Total Cost
0	$0	$3
1	$7	$5
2	$14	$9
3	$21	$15
4	$28	$23
5	$35	$33
6	$42	$45
7	$49	$59

Refer to Table 14-10. Which level of production in the table has the lowest average variable cost?

Question 21 options:

	a) 1 unit
	b) 2 units
	c) 3 units
	d) 4 units

Question 22 (5 points)

If a firm in a perfectly competitive market triples the quantity of output sold, then total revenue will

Question 22 options:

	a) more than triple.
	b) less than triple.
	c) exactly triple.
	d) Any of the above may be true depending on the firm’s labor productivity.

Question 23 (5 points)

Which of the following statements best expresses a firm’s profit-maximizing decision rule?

Question 23 options:

	a) If marginal revenue is greater than marginal cost, the firm should increase its output.
	b) If marginal revenue is less than marginal cost, the firm should decrease its output.
	c) If marginal revenue equals marginal cost, the firm should continue producing its current level of output.
	d) All of the above are correct.

Question 24 (5 points)

When firms are said to be price takers, it implies that if