Question

1. Question 1

   1 Point

   If firms are competitive and profit maximizing, the price of a good equals the

   1. marginal cost of production.

   2. fixed cost of production.

   3. total cost of production.

   4. average total cost of production.

2. Question 2

   1 Point

   Figure 14-14

   Refer to Figure 14-14. Assume that the market starts in equilibrium at point W in panel (b) and that panel (a) illustrates the cost curves facing individual firms. Suppose that demand increases from D0 to D1. Which of the following statements is correct?

   1. Points W, Y, and Z represent both short-run and long-run equilibria.

   2. Points W, Y, Z, and X represent short-run equilibria.

   3. Points W, Y, and Z represent long-run equilibria.

   4. Points W and Z represent long-run equilibria.

3. Question 3

   1 Point

   When a competitive market experiences an increase in demand that increases production costs for existing firms and potential new entrants, which of the following is most likely to arise?

   1. The long-run market supply curve will be upward sloping.

   2. The condition of free entry into the market will be violated.

   3. Producer profits will fall in the long run.

   4. The long-run market supply curve will be horizontal as new firms enter and drive the price downward.

4. Question 4

   1 Point

   Scenario 14-5

   A study sponsored by the Food Consumer Safety Board found that consumption of irradiated tomatoes increased the health of laboratory rats. As a result of national press coverage of the report, the demand for irradiated tomatoes increased dramatically. Organic farmers were able to switch from organic production of tomatoes to irradiated production with no additional cost. Assume that the tomato market satisfies all of the assumptions of perfect competition.

   Refer to Scenario 14-5. As a result of the increase in the demand for tomatoes, we would predict that in the short run that the

   1. production of tomatoes would be at efficient scale.

   2. price of tomatoes would rise.

   3. total cost for existing irradiated tomato producers must rise.

   4. number of firms in the market would fall as prices fall and firms exit the market.

5. Question 5

   1 Point

   Figure 14-11

   Refer to Figure 14-11. The figure above is for a firm operating in a competitive industry. If there were four identical firms in the industry, which of the following price-quantity combinations would be on the market supply curve?

   Point

   Price

   Quantity

   A

   $4

   16

   B

   $4

   32

   C

   $6

   6

   D

   $8

   64

   1. A only

   2. A and C only

   3. B only

   4. B and D only

6. Question 6

   1 Point

   You purchase a $30, nonrefundable ticket to a play at a local theater. Ten minutes into the show you realize that it is not a very good show and place only a $10 value on seeing the remainder of the show. Alternatively you could leave the theater and go home and watch TV or read a book. You place an $8 value on watching TV and a $6 value on reading a book.

   1. You should leave the theater since the net benefit from seeing the remainder of the show is -$20, while going home will earn you at least $8 of satisfaction.

   2. You should stay and watch the remainder of the show.

   3. You should go home and watch TV.

   4. You should go home and read a book.

7. Question 7

   1 Point

   A firm that shuts down temporarily has to pay

   1. its variable costs but not its fixed costs.

   2. its fixed costs but not its variable costs.

   3. both its variable costs and its fixed costs.

   4. neither its variable costs nor its fixed costs.

8. Question 8

   1 Point

   Figure 14-5

   Suppose a firm operating in a competitive market has the following cost curves:

   Refer to Figure 14-5. When market price is P7, a profit-maximizing firm's short-run profits can be represented by the area

   1. P7 × Q5.

   2. P7 × Q3.

   3. (P7 - P5) × Q3.

   4. We are unable to determine the firm’s profits because the quantity that the firm would produce is not labeled on the graph.

9. Question 9

   1 Point

   Susan quit her job as a teacher, which paid her $36,000 per year, in order to start her own catering business. She spent $12,000 of her savings, which had been earning 10 percent interest per year, on equipment for her business. She also borrowed $12,000 from her bank at 10 percent interest, which she also spent on equipment. For the past several months she has spent $1,000 per month on ingredients and other variable costs. Also for the past several months she has taken in $3,500 in monthly revenue. In the short run, Susan should

   1. shut down her business, and in the long run she should exit the industry.

   2. continue to operate her business, but in the long run she should exit the industry.

   3. continue to operate her business, but in the long run she will probably face competition from newly entering firms.

   4. continue to operate her business, and she is also in long-run equilibrium.

10. Question 10

    1 Point

    Scenario 14-1

    Assume a certain firm in a competitive market is producing Q = 1,000 units of output. At Q = 1,000, the firm's marginal cost equals $15 and its average total cost equals $11. The firm sells its output for $12 per unit.

    Refer to Scenario 14-1. At Q = 1,000, the firm's profits equal

    1. -$200.

    2. $1,000.

    3. $3,000.

    4. $4,000.

11. Question 11

    1 Point

    Consider a competitive market with 50 identical firms. Suppose the market demand is given by the equation Q^D = 200 - 10P and the market supply is given by the equation Q^S = 10P. In addition, suppose the following table shows the marginal cost of production for various levels of output for firms in this market.

    Output

    Marginal Cost

    0

    --

    1

    $5

    2

    $10

    3

    $15

    4

    $20

    5

    $25

    How many units should a firm in this market produce to maximize profit?

    1. 1 unit

    2. 2 units

    3. 3 units

    4. 4 units

Answer 1

1. In a perfectly competitive market, the profit-maximizing quantity of a firm is at which the price of the good equals the marginal cost.

Ans: marginal cost of production.

2. The figure is missing and hence cannot be answered.

3. It is given that an increase in demand the production costs are increasing. An increase in demand leads to an increase in the equilibrium price as well as the equilibrium quantity. Therefore, when the quantity produced by the firms' increases, the production costs are increases. Thus, the industry is an increasing cost industry and hence the market supply curve(long-run) is upward sloping.

Ans: The long-run market supply curve will be upward sloping

4. As a result of the study, the demand for irradiated tomatoes increases. A rightward shift in the demand curve increases the equilibrium price and equilibrium quantity in the short-run. In the long-run, more organic farmers shift their production to irradiated farmers and thus an increase in supply(rightward shift in supply_) would take place which reduces the equilibrium price of irradiated tomatoes in the market.

Ans: price of tomatoes would rise