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Exam 14: Firms in Competitive Markets

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Question 1

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Graph 14-2 This graph depicts the cost structure for a firm in a competitive market. Use the graph to answer the following question(s) . -Refer to Graph 14-2. Which of the following statements best reflects the situation faced by the firm when price falls from P₄ to P₂?

A) marginal revenue is lower than marginal cost at the previous level of output, so it decreases production
B) marginal revenue is higher than marginal cost at the previous level of output, so it increases production
C) average total cost is lower than at the previous level of output so it increases production
D) the firm will earn profit equal to (P₄ - P₂) * Q₂

E) All of the above
F) A) and D)

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Question 2

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When firms have an incentive to exit a competitive market, their exit will:

A) necessarily raise the costs of firms that remain in the market
B) raise profits for firms that remain in the market
C) lower market price
D) do all of the above

E) None of the above
F) B) and C)

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Question 3

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Graph 14-7 -Refer to Graph 14-7. If the figure in panel (a) reflects the long-run equilibrium of a profit-maximising firm in a competitive market, the figure in panel (b) is most likely to reflect long-run market:

Table 14-1 This table shows the revenue and costs of a parrot farmer. -Refer to Table 14-1. If the farmer determines that marginal cost is $14, a harvest of parrots should:

When firms already in a competitive market are profitable, an incentive exists for:

Graph 14-3 This graph depicts the cost structure of a profit-maximising firm in a competitive market. Use the graph to answer the following question(s) . -Refer to Graph 14-3. Which line segment best reflects the short-run supply curve for this firm?

The Wheeler Wheat Farm sells wheat to a grain broker. Since the market for wheat is generally considered to be competitive, the Wheeler Farm:

The exit of existing firms from a competitive market will:

It is possible for firms in a competitive market to earn positive accounting profits in the long-run.

The market's short-run supply curve will be steeper than an individual firm's supply curve.

Which of the following statements best reflects the production decision of a profit-maximising firm in a competitive market when price falls below the minimum of average variable cost?

Graph 14-1 This graph depicts the cost structure for a firm in a competitive market. Use the graph to answer the following question(s) . -Refer to Graph 14-1. When market price is at MC₄, a profit-maximising firm will produce what level of output?

If P < AVC, P < ATC, and marginal costs are increasing, then:

A profit-maximising firm in a competitive market produces leather wallets. Suppose the market price for leather wallets drops below the minimum of its average total cost. However, the price still lies above the minimum of average variable cost. This means the firm:

When price is below average variable cost, a firm in a competitive market will:

Graph 14-2 This graph depicts the cost structure for a firm in a competitive market. Use the graph to answer the following question(s) . -Refer to Graph 14-2. When price rises from P₂ to P₃, the firm finds that:

If, at a given output, the marginal cost curve lies below the marginal revenue curve but above the average total cost curve, then the firm can increase its profit by decreasing output.

When will a firm shut-down temporarily? When do firms exit an industry? Holding all else constant, is it ever the case that a firm will shut down in the short-run, but will find it profitable to stay in the long run?

In long-run equilibrium of a competitive market, the number of firms in the markets adjusts so that all of the market demand is satisfied at a price equal to:

Sunk costs are relevant to decisions about business strategy, as huge amounts of time have been invested in ensuring that the business is set up for success.