Question 1

Tom, a math major, examines Jane's economics class notes and observes that when price-taking firms earn economic profit, they do not seem to produce a quantity that minimizes their costs. Is he correct? Is there significance to this observation?

Accepted Answer

Tom is right, but he is forgetting the fact that the most important goal motivating a firm is profit maximization. In equilibrium, the firm does minimize cost, but in a dynamic situation when the demand for the firm's product increases, the firm will take advantage of that change in demand. To produce an output that maximizes profit, the firm may have to pay employees overtime and use more costly suppliers for raw materials. Costs might be minimized at a different output, but the new level of output is produced at a minimum cost for that output, the firm's goal of maximizing profit is achieved, and consumers who want to buy the added output also gain.

Question 2

Even if a firm is optimistic about the future, why should it shut down if it cannot cover its variable cost? If it does shut down, are there ramifications not mentioned in the textbook?

Accepted Answer

If a firm cannot cover its variable cost...

Question 3

If a technological advance lowers a firm's production costs, why do prices typically fall? Shouldn't the firm maintain the same price and earn economic profit?

Accepted Answer

While any firm would like to maintain th...

Question 4

When a firm is operating in a price-taker market, marginal revenue is

Accepted Answer

A)  equal to price.
B)  always less than price.
C)  equal to zero when the market is in long-run equilibrium.
D)  equal to the change in output divided by the change in total revenue.E) A) and D)
F) C) and D) A

Question 5

When the demand for a product falls, why do costs of production go down in an increasing cost industry?

Accepted Answer

When the demand falls, surplus resources...

Question 6

Competitive price-taker markets are characterized by

Accepted Answer

A)  low entry barriers and a large number of firms selling a homogeneous product.
B)  intense rivalry among firms selling differentiated products.
C)  quality competition among firms and a wide variety of products.
D)  advertising.E) A) and C)
F) B) and C)

Question 7

In a competitive price taker market, a firm's short-run supply curve is its

Accepted Answer

A)  average total cost curve above its average variable cost curve.
B)  marginal cost curve above its average variable cost curve.
C)  marginal cost curve above its average fixed cost curve.
D)  entire marginal cost curve.E) A) and B)
F) B) and D)

Question 8

In a competitive market, profit can be considered a reward to businesses that

Accepted Answer

A)  produce a good that consumers value more highly than its component resources.
B)  reduce the value of resources used as inputs in production.
C)  prohibit rival firms from entering the market and competing.
D)  control costs, rather than following the wishes of consumers when deciding what products to produce.E) None of the above
F) B) and C)

Question 9

The short-run market supply curve in a price-taker industry equals the horizontal sum of the individual firm's

Accepted Answer

A)  MC curves above AVC.
B)  AVC curves above marginal revenue.
C)  MC curves above ATC.
D)  MC curves between AVC and ATC.E) A) and C)
F) A) and B)

Question 10

Amy runs a business in a market where all firms are price takers. Bill suggests that she lower her price to attract even more business. Should Amy follow Bill's suggestion, or should she even consider raising her price?

Accepted Answer

If Amy lowers her price, this will reduce her total revenue. Since she can sell all of her product at the market price, there is no reason to sell at a lower price. Because of the nature of this market structure, she would lose all her business at a higher price, as her customers went to her competitors to purchase identical products. There is a reason for calling Amy a price taker.

Question 11

Why is it considered "ideal" for price to just equal marginal cost?

Accepted Answer

When price equals marginal cost, the cos...

Question 12

Which of the following products would most closely fit the competitive price-taker model?

Accepted Answer

A)  stereo systems-there are many reputable brands.
B)  beer-it has many consumers.
C)  eggs-there are many producers of this relatively homogeneous product.
D)  automobiles-there are substantial economies of scale in production.E) B) and C)
F) A) and B)

Question 13

In some industries, like insurance, both small and very large firms coexist and compete quite effectively in the market. This indicates that the long-run average total cost curve in these industries

Accepted Answer

A)  is "U" shaped.
B)  is downward sloping over all levels of output.
C)  exhibits constant returns to scale over a wide range of output.
D)  exhibits diseconomies of scale beginning at a low rate of output.E) All of the above
F) B) and D)

Question 14

If the demand for pizza falls, pizza suppliers will suffer economic losses, and some firms will leave the industry. Why is this considered good? Shouldn't we feel sorry for these business owners?

Accepted Answer

As humans, we can certainly feel sorry f...

Question 15

If the model of price-taking firms is so unrealistic and restrictive, why study it?

Accepted Answer

It may be somewhat unrealistic, but it d...

Question 16

In some industries, like insurance, both small and very large firms coexist and compete quite effectively in the market. This indicates that the long-run average total cost curve in these industries

Accepted Answer

A)  is "U" shaped.
B)  is downward sloping over all levels of output.
C)  exhibits constant returns to scale over a wide range of output.
D)  exhibits diseconomies of scale beginning at a low rate of output.E) None of the above
F) A) and D)

Question 17

Regarding costs of production, can a firm ever be at a point that is not on the marginal cost curve? Explain.

Accepted Answer

A profit-maximizing, price-taker firm al...

Question 18

When a competitive price-taker market is in long-run equilibrium

Accepted Answer

A)  the firms in the market will earn zero economic profit.
B)  the average total cost of the firms in the market will be minimized.
C)  every unit of the relevant good that is valued more than its opportunity costs will be produced and sold.
D)  all of the above are correct.E) All of the above
F) A) and B)

Question 19

"I'm losing money, but having invested so much in equipment, I simply cannot afford to shut down." If the firm were attempting to maximize profit, this decision may be

Accepted Answer

A)  correct if the firm is covering its fixed costs.
B)  incorrect because a firm experiencing economic losses should never continue to operate.
C)  correct if the firm is covering its variable costs and expects the price of its product to rise in the near future.
D)  incorrect since the firm's fixed costs are sunk costs.E) None of the above
F) B) and C)

Question 20

The competitive price-taker model is usually used to illustrate the competitive process. If firms cannot choose their price, where is the competition?

Accepted Answer

This is a good question. The firms do no...

Exam 9: B: Price Takers and the Competitive Process

Tom, a math major, examines Jane's economics class notes and observes that when price-taking firms earn economic profit, they do not seem to produce a quantity that minimizes their costs. Is he correct? Is there significance to this observation?

Even if a firm is optimistic about the future, why should it shut down if it cannot cover its variable cost? If it does shut down, are there ramifications not mentioned in the textbook?

Correct Answer
verified
If a firm cannot cover its variable cost...
View Answer

If a technological advance lowers a firm's production costs, why do prices typically fall? Shouldn't the firm maintain the same price and earn economic profit?

Correct Answer
verified
While any firm would like to maintain th...
View Answer

When a firm is operating in a price-taker market, marginal revenue is

Correct Answer
verified
A

When the demand for a product falls, why do costs of production go down in an increasing cost industry?

Correct Answer
verified
When the demand falls, surplus resources...
View Answer

Competitive price-taker markets are characterized by

Correct Answer
verified

In a competitive price taker market, a firm's short-run supply curve is its

Correct Answer
verified

In a competitive market, profit can be considered a reward to businesses that

Correct Answer
verified

The short-run market supply curve in a price-taker industry equals the horizontal sum of the individual firm's

Correct Answer
verified

Amy runs a business in a market where all firms are price takers. Bill suggests that she lower her price to attract even more business. Should Amy follow Bill's suggestion, or should she even consider raising her price?

Why is it considered "ideal" for price to just equal marginal cost?

Correct Answer
verified
When price equals marginal cost, the cos...
View Answer

Which of the following products would most closely fit the competitive price-taker model?

Correct Answer
verified

In some industries, like insurance, both small and very large firms coexist and compete quite effectively in the market. This indicates that the long-run average total cost curve in these industries

Correct Answer
verified

If the demand for pizza falls, pizza suppliers will suffer economic losses, and some firms will leave the industry. Why is this considered good? Shouldn't we feel sorry for these business owners?

Correct Answer
verified
As humans, we can certainly feel sorry f...
View Answer

If the model of price-taking firms is so unrealistic and restrictive, why study it?

Correct Answer
verified
It may be somewhat unrealistic, but it d...
View Answer

In some industries, like insurance, both small and very large firms coexist and compete quite effectively in the market. This indicates that the long-run average total cost curve in these industries

Correct Answer
verified

Regarding costs of production, can a firm ever be at a point that is not on the marginal cost curve? Explain.

Correct Answer
verified
A profit-maximizing, price-taker firm al...
View Answer

When a competitive price-taker market is in long-run equilibrium

Correct Answer
verified

"I'm losing money, but having invested so much in equipment, I simply cannot afford to shut down." If the firm were attempting to maximize profit, this decision may be

Correct Answer
verified

The competitive price-taker model is usually used to illustrate the competitive process. If firms cannot choose their price, where is the competition?

Correct Answer
verified
This is a good question. The firms do no...
View Answer

Exam 9: B: Price Takers and the Competitive Process

Tom, a math major, examines Jane's economics class notes and observes that when price-taking firms earn economic profit, they do not seem to produce a quantity that minimizes their costs. Is he correct? Is there significance to this observation?

Even if a firm is optimistic about the future, why should it shut down if it cannot cover its variable cost? If it does shut down, are there ramifications not mentioned in the textbook?

Correct AnswerverifiedIf a firm cannot cover its variable cost...View AnswerShow Answer

If a technological advance lowers a firm's production costs, why do prices typically fall? Shouldn't the firm maintain the same price and earn economic profit?

Correct AnswerverifiedWhile any firm would like to maintain th...View AnswerShow Answer

When a firm is operating in a price-taker market, marginal revenue is

Correct AnswerverifiedA

When the demand for a product falls, why do costs of production go down in an increasing cost industry?

Correct AnswerverifiedWhen the demand falls, surplus resources...View AnswerShow Answer

Competitive price-taker markets are characterized by

Correct AnswerverifiedShow Answer

In a competitive price taker market, a firm's short-run supply curve is its

Correct AnswerverifiedShow Answer

In a competitive market, profit can be considered a reward to businesses that

Correct AnswerverifiedShow Answer

The short-run market supply curve in a price-taker industry equals the horizontal sum of the individual firm's

Correct AnswerverifiedShow Answer

Amy runs a business in a market where all firms are price takers. Bill suggests that she lower her price to attract even more business. Should Amy follow Bill's suggestion, or should she even consider raising her price?

Why is it considered "ideal" for price to just equal marginal cost?

Correct AnswerverifiedWhen price equals marginal cost, the cos...View AnswerShow Answer

Which of the following products would most closely fit the competitive price-taker model?

Correct AnswerverifiedShow Answer

In some industries, like insurance, both small and very large firms coexist and compete quite effectively in the market. This indicates that the long-run average total cost curve in these industries

Correct AnswerverifiedShow Answer

If the demand for pizza falls, pizza suppliers will suffer economic losses, and some firms will leave the industry. Why is this considered good? Shouldn't we feel sorry for these business owners?

Correct AnswerverifiedAs humans, we can certainly feel sorry f...View AnswerShow Answer

If the model of price-taking firms is so unrealistic and restrictive, why study it?

Correct AnswerverifiedIt may be somewhat unrealistic, but it d...View AnswerShow Answer

In some industries, like insurance, both small and very large firms coexist and compete quite effectively in the market. This indicates that the long-run average total cost curve in these industries

Correct AnswerverifiedShow Answer

Regarding costs of production, can a firm ever be at a point that is not on the marginal cost curve? Explain.

Correct AnswerverifiedA profit-maximizing, price-taker firm al...View AnswerShow Answer

When a competitive price-taker market is in long-run equilibrium

Correct AnswerverifiedShow Answer

"I'm losing money, but having invested so much in equipment, I simply cannot afford to shut down." If the firm were attempting to maximize profit, this decision may be

Correct AnswerverifiedShow Answer

The competitive price-taker model is usually used to illustrate the competitive process. If firms cannot choose their price, where is the competition?

Correct AnswerverifiedThis is a good question. The firms do no...View AnswerShow Answer

Correct Answer
verified
If a firm cannot cover its variable cost...
View Answer

Correct Answer
verified
While any firm would like to maintain th...
View Answer

Correct Answer
verified
A

Correct Answer
verified
When the demand falls, surplus resources...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
When price equals marginal cost, the cos...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
As humans, we can certainly feel sorry f...
View Answer

Correct Answer
verified
It may be somewhat unrealistic, but it d...
View Answer

Correct Answer
verified

Correct Answer
verified
A profit-maximizing, price-taker firm al...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
This is a good question. The firms do no...
View Answer