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					CHAPTER 9

PRICE TAKERS AND THE COMPETITIVE
PROCESS
QUESTIONS 1 THROUGH 10 ARE A SUGGESTED CHAPTER QUIZ.

1.    Which of the following is a primary difference between price searchers and price takers?
      a. Price searchers maximize profits, but price takers do not.
      b. Price searchers have to cut their price to sell additional output, but price takers do not.
      c. The market demand for goods produced by price searchers is downward sloping, while the
          market demand for goods produced by price takers is horizontal.
      d. Profit-maximizing price searchers will expand output to the quantity where marginal revenue
          equals marginal cost, but price takers will not.
2.    In competitive price-taker markets, firms
      a. can sell all of their output at the market price.
      b. produce differentiated products.
      c. can influence the market price by altering their output level.
      d. are large relative to the total market.
3.    When we say that a firm is a price taker, we are indicating that the
      a. firm takes the price established in the market then tries to increase that price through
         advertising.
      b. firm can change output levels without having any significant effect on price.
      c. demand curve faced by the firm is perfectly inelastic.
      d. firm will have to take a lower price if it wants to increase the number of units that it sells.
4.    In price-taker markets, individual firms have no control over price. Therefore, the firm’s marginal
      revenue curve is
      a. a downward-sloping curve.
      b. indeterminate.
      c. constant at the market price of the product.
      d. precisely the same as the firm’s total revenue curve.
5.    If marginal revenue exceeds marginal cost, a price-taker firm should
      a. expand output.
      b. reduce output.
      c. lower its price.
      d. do both a and c.
6.    When firms in a price-taker market are temporarily able to charge prices that exceed their
      production costs,
      a. the firms will earn long-run economic profit.
      b. additional firms will be attracted into the market until price falls to the level of per-unit
          production cost.
      c. the firms will earn short-run economic profits that will be offset by long-run economic losses.
      d. the existing firms must be colluding or rigging the market, otherwise, they would be unable to
          charge such high prices.


328
                                                   Chapter 9/Price Takers and the Competitive Process      329


7.    When market conditions in a price-taker market are such that firms cannot cover their production
      costs,
      a. the firms will suffer long-run economic losses.
      b. the firms will suffer short-run economic losses that will be exactly offset by long-run economic
           profits.
      c. some firms will go out of business, causing prices to rise until the remaining firms can cover
           their production costs.
      d. all firms will go out of business, since consumers will not pay prices that enable firms to cover
           their production costs.
8.    When the price of a product rises, the increase in quantity supplied will generally be greater in the
      long run than the short run because
      a. producers maximize short-run, not long-run, profits.
      b. over time, new firms will enter the industry and old firms will expand their operations in
           response to the price increase.
      c. consumers are less resistant to higher prices in the long run than in the short run because they
           have fewer options in the long run.
      d. consumer income will expand in the long run, causing resource prices to rise, which will
           induce producers to increase output.
9.    If occupational safety laws were changed so that firms no longer had to take expensive steps to meet
      regulatory requirements, we would expect
      a. the demand for the products of this industry to increase.
      b. the market price of the products of this industry to decrease in the short run but not in the long
           run.
      c. the firms in the industry to make long-run economic profit.
      d. competition to force producers to pass the lower production costs on to consumers in the long
           run.
10.   Suppose a restaurant that is highly profitable during the summer months is unable to cover its total
      cost during the winter months. If it wants to maximize profits, the restaurant should
      a. shut down during the winter, even if it is able to cover its variable costs during that period.
      b. continue operating during the winter months if it is able to cover its variable costs.
      c. go a out of business immediately; losses should never be tolerated.
      d. lower its prices during the summer months.

ANSWER KEY 1 THROUGH 10

1. (b), 2. (a), 3. (b), 4. (c), 5. (a), 6. (b), 7. (c), 8. (b), 9. (d), 10. (b)

PRICE TAKERS AND PRICE SEARCHERS
11.   A firm in a price-taker market
*     a. must take the price that is determined in the market.
      b. must reduce its price if it wants to sell a larger quantity.
      c. must be large relative to the total market.
      d. can exert a major influence on the market price.
330    Chapter 9/Price Takers and the Competitive Process


12.   Firms that are price takers
      a. produce differentiated products.
      b. can charge a price above the market price for some of its output.
*     c. cannot decide what price to charge for their products.
      d. must be large relative to the total market.
13.   Firms that are price takers
*     a. are small relative to the total market.
      b. produce products that are different than their competitors.
      c. can sell only a portion of their output at the market price.
      d. have downward-sloping demand curves.
14.   A firm that is a price taker can
      a. substantially change the market price of its product by changing its level of production.
*     b. sell all of its output at the market price.
      c. sell some of its output at a price higher than the market price.
      d. decide what price to charge for its product.
15.   Which of the following is true in price-taker markets?
      a. The goods supplied by the firms are differentiated.
      b. Each seller is large relative to the total market.
      c. Changes in a firm’s output affect the market price of the good.
*     d. There are no pricing decisions to be made by firms.
16.   Which of the following is the best example of a business firm operating in a competitive price-taker
      market?
*     a. a Midwest farmer producing beef cattle
      b. a Laundromat located a few blocks from a major university
      c. a pizza parlor located in a major metropolitan area
      d. a small brewery supplying a local brand of beer
      e. Wal-Mart, a large retailer that competes in many markets
17.   Which of the following is the best example of a business firm operating in a competitive price-taker
      market?
      a. TGIFriday’s, a restaurant chain that operates in numerous locations
      b. a bookstore located a few blocks from a major university
      c. Ford Motor company, a major manufacturer of automobiles that operates in numerous markets
          throughout the world
*     d. an Indiana hog farmer that raises pigs
18.   Most firms in the real world are
      a. price takers.
*     b. price searchers.
      c. monopolists.
      d. oligopolists.
19.   In the real world, most firms are
*     a. price searchers.
      b. price takers.
      c. purely competitive.
      d. monopolies.
                                             Chapter 9/Price Takers and the Competitive Process           331


20.   Which of the following business decisions will be made by firms that are price searchers but not
      those that are price takers?
      a. What combination of resources should be used to produce a product that is supplied?
      b. What output should be produced?
*     c. What price should be charged?
      d. What legal structure of business organization (for example, a proprietorship or corporation)
           should be used?
21.   Firms that can choose what price they will charge for their product and can increase the number of
      units sold by reducing price are called
*     a. price searchers.
      b. price leaders.
      c. purely competitive.
      d. price takers.
22.   The main difference between a firm that is a price searcher and a firm that is a price taker is that a
      a. price searcher produces products that are identical to its competitors’ products.
      b. price taker can decide what price to charge for its product.
      c. price searcher cannot decide what price to charge for its product.
*     d. price searcher will still be able to sell some of its product if it increases its price.
23.   Which of the following is a primary difference between price takers and price searchers that operate
      in markets with low barriers to entry?
      a. The price searchers will maximize profits in the short run, but price takers will not. Price takers
          can only maximize profits in the long run.
*     b. The price searchers will have to search for the price, while price takers will have to take the
          price determined in the market.
      c. The price searchers will be able to earn profit in the long run, but the price takers will not.
      d. The price searchers may be able to earn profit in the short run, but the price takers will not be
          able to do so.
24.   Competition as a dynamic process implies that the individual firms in an industry
      a. face a perfectly elastic demand curve.
*     b. utilize a variety of techniques, such as product, style, and price, to win the dollar votes of
         consumers.
      c. produce a homogeneous product.
      d. cooperate, attempting to establish a price and output structure so each firm can survive and
         continue to serve the consumer.
25.   The dynamic process of competition
      a. is hindered by the self-interest of business decision makers.
*     b. puts the profit motive of sellers to work for buyers.
      c. conflicts with the interest of consumers when businesses pursue profit rather than the public
          interest.
      d. will permit business decision makers to earn long-run economic profit unless they are regulated
          by government.
332    Chapter 9/Price Takers and the Competitive Process


26.   Competition as a dynamic process implies that individual firms in a market
      a. seek to utilize a variety of techniques, such as product, style, and convenience of location, to
         win the dollar vote of consumers, but they never use price to compete.
*     b. use price competition as well as other forms of competition to gain the dollar votes of
         consumers.
      c. produce a homogeneous product.
      d. cooperate, attempting to establish a price and output structure so each firm can survive and
         continue to serve the consumer.
27.   The dynamic process of competition
      a. provides profit-seeking sellers with little incentive to heed consumer preferences.
      b. was shown by Adam Smith to be a major source of economic inefficiency.
*     c. provides consumers with alternative suppliers and thus a mechanism with which they can
          discipline sellers.
      d. will permit business decision makers to earn long-run economic profit unless they are regulated
          by government officials.
28.   Which of the following is a reason to study the decisions of price takers?
      a. While there are not many price-taker markets, these few markets dominate the economy.
      b. The decision making of both price searchers and price takers is identical.
*     c. The price-taker model enhances our knowledge of competition as a dynamic process.
      d. Price takers are the most common type of business in the real world.
29.   When a law is passed that requires businesses to obtain permission from government officials in
      order to enter a market, this is an example of
      a. price-control legislation.
*     b. a barrier to entry
      c. antitrust legislation.
      d. the invisible hand principle.
30.   Several states require cosmetologists to undertake 1,500 hours or more of training in order to obtain
      a license to provide hair styling or braiding services. This is an example of
      a. antitrust legislation.
      b. government action that promotes competition.
*     c. a barrier to entry
      d. the legal structure that is required for the operation of price-taker markets.
31.   A law that requires sellers to obtain a funeral director’s license from the government before they are
      permitted to sell caskets is an example of
      a. antitrust legislation.
      b. a corporate charter.
*     c. a barrier to entry.
      d. government action designed to promote competition.
32.   If someone refers to a purely competitive market, they mean one where
      a. barriers to entry are high.
      b. the firms in the market face a downward-sloping demand curve.
      c. there is intense rivalry between a small number of large firms in the market.
*     d. market conditions are like those of a competitive price-taker market.
                                           Chapter 9/Price Takers and the Competitive Process        333


33.   ―Competitive price-taker markets‖ and ―purely competitive markets‖ are
      a. similar, but competition is stronger in the latter.
      b. similar, but products are differentiated in the former.
*     c. merely alternative names for the same concept.
      d. terms used to designate markets in which the firms confront a downward sloping demand
         curve.
34.   Which of the following is true?
*     a. Historically, competitive price-taker markets have often been called ―purely competitive
          markets.‖
      b. Historically, competitive price-taker markets have often been called ―price-searcher markets.‖
      c. Competitive price-taker markets are characterized by high barriers to entry.
      d. The sellers in a competitive price-taker market produce differentiated products.

MARKETS WHEN FIRMS ARE PRICE TAKERS
35.   Which one of the following is a price taker?
      a. a star baseball player
      b. a North Carolina furniture manufacturer
      c. a local retail clothing shop
*     d. an Indiana cattle farmer (beef producer)
36.   Which of the following is a price taker?
      a. a respected lawyer
      b. an ice cream store at Disney World
      c. a star baseball player
*     d. a potato grower in Idaho
37.   Which one of the following industries most closely resembles the competitive price-taker model?
      a. telecommunications
      b. retail clothing
      c. computer manufacturing
*     d. vegetable farming
38.   In the absence of government regulation, which of the following products would most closely fit the
      competitive price-taker (purely competitive) model?
      a. beer because there are many consumers
      b. cigarettes because there are several alternative brands that look similar
*     c. milk because there are many dairy farmers producing a virtually identical product
      d. automobiles because there are substantial economies of scale in production
39.   In the competitive price-taker model, all firms in the market are assumed to be producing
*     a. identical products.
      b. differentiated products.
      c. products that are heavily advertised.
      d. complementary products.
40.   Which of the following best explains why a firm in a competitive price-taker market must take the
      price determined in the market?
      a. The short-run average total costs of firms that are price takers will be constant.
*     b. If a price taker increased its price, consumers would buy from other suppliers.
      c. Firms in a price-taker market will have to advertise in order to increase sales.
      d. There are no good substitutes for the product supplied by a firm that is a price taker.
334    Chapter 9/Price Takers and the Competitive Process


41.   The horizontal demand curve facing an individual firm in a competitive price-taker market is
      a. a violation of the law that demand curves slope downward.
*     b. a reflection of the firm’s small size relative to the total market.
      c. maintained only with the help of high barriers to entry.
      d. a reflection of the firm’s price-searching ability.
42.   Which of the following is a characteristic of a competitive price-taker market?
      a. Profit maximizing firms in the market will expand output until price equals average variable
          cost.
      b. The market demand curve for the product is a horizontal line.
*     c. There are many firms in the market, each producing a small share of total market output.
      d. The product produced by each of the firms is differentiated.
43.   Which of the following is characteristic of a competitive price-taker market?
*     a. There is free entry into and exit from the market.
      b. Individual firms can exert a perceptible influence on the market price.
      c. The firms in the market produce differentiated products.
      d. All of the above are true.
44.   In a competitive price-taker market, the barriers limiting the entry into or exit from the market are
*     a. low.
      b. high.
      c. low for entry but high for exit.
      d. high for entry but low for exit.
45.   Which of the following is always true in competitive price-taker markets?
      a. There are more sellers than buyers.
*     b. Barriers to entry into the market are low.
      c. The products of firms in the industry are differentiated.
      d. The firms never earn economic profit.
46.   Which of the following is a necessary condition for the presence of competition in a market?
      a. government regulations that assure firms will make excess profits
      b. suppliers that offer a homogeneous product
      c. a price that always equals per-unit production costs
*     d. low barriers to entry into the market
47.   Competitive price-taker markets are characterized by
*     a. firms that all produce the same product.
      b. a small number of firms in the market.
      c. firms that are large relative to the size of the market.
      d. widespread use of advertising as a competitive weapon.
48.   If a single firm in a price-taker market lowers its price below the market equilibrium price,
      a. it will get a larger share of the market.
*     b. it will lose revenue without increasing the quantity it can sell.
      c. other firms will lower their prices.
      d. other firms will be driven out of the industry.
49.   If a price-taker firm selling in a competitive market offers its product at a higher price than others, it
      will
      a. increase its profits.
      b. maintain its profit base if the demand for the product is inelastic.
      c. be able to expand output.
*     d. not be able to sell any output.
                                           Chapter 9/Price Takers and the Competitive Process          335


50.   Harry Smith sells wheat in a price-taker market. With regard to Smith’s price and output choices,
      which of the following is true?
      a. Smith will constantly attempt to increase the price of his product so he can increase his total
          revenue.
      b. Since the price of his product is dictated by the market, Smith will not have an incentive to
          control per-unit cost.
      c. Since the price of his product is dictated by the market, Smith has no production decisions to
          make.
*     d. It would be senseless for Smith to try to increase sales by lowering the price of his product.
51.   In a price-taker market, how does the elasticity of the market demand curve compare with the
      elasticity of demand of an individual firm in the market?
      a. Both demand curves have the same elasticity.
      b. Both demand curves are perfectly elastic.
      c. The firm’s demand curve is downward sloping, while the industry demand curve is flat at low
           levels of output.
*     d. The firm’s demand curve is perfectly elastic, while the industry demand curve is not.

OUTPUT IN THE SHORT RUN
52.   In the price-taker model, what impact does the individual firm have on the price of its product?
*     a. The firm must accept the price determined in the market if it is going to sell its product.
      b. The firm may raise or lower its price to a small extent, but sales revenues will tend to be the
           same regardless of price.
      c. The firm may raise its price and, thereby, increase its revenues.
      d. The firm may raise or lower its price to a considerable extent, but sales revenues will tend to be
           the same regardless of price.
53.   The demand for the product of a competitive price-taker firm is
      a. perfectly inelastic.
*     b. perfectly elastic.
      c. greater than zero but less than one.
      d. dependent on the availability of substitutes for the firm’s product.
54.   If the demand and marginal revenue curves confronting firm A are identical, it may be concluded
      that firm A is a
      a. monopolistic competitor.
*     b. price taker.
      c. price searcher.
      d. monopolist.
55.   In the competitive price-taker model, individual firms exert no effect on the market price. Therefore,
      the firm’s marginal revenue curve is
      a. indeterminate.
      b. an upward-sloping curve.
      c. a downward-sloping curve.
*     d. the same as the firm’s demand curve.
56.   When a firm is operating in a price-taker market, marginal revenue will always equal
      a. average total cost.
      b. one minus the elasticity of the market demand curve.
      c. total revenue.
*     d. price.
336    Chapter 9/Price Takers and the Competitive Process


57.   The marginal revenue of a price taker is
*     a. equal to price.
      b. less than price.
      c. more than price.
      d. unrelated to price.
58.   A price-taker firm will tend to expand its output so long as its
      a. marginal revenue is positive.
      b. marginal revenue is greater than the market price.
      c. marginal revenue is less than the market price.
*     d. marginal cost is less than the market price.
59.   If a firm is a price taker and wants to earn as much profit as possible, it should expand output
      a. to the quantity at which marginal cost is minimized.
*     b. as long as marginal cost is less than price.
      c. to the quantity at which average total costs are minimized.
      d. to try to sell all the output it can produce so that its average fixed costs will be minimized.
60.   When the marginal cost of a price-taker firm is more than the market price of its product, the firm
      should
      a. expand output.
*     b. reduce output.
      c. maintain output.
      d. charge more than the market price.
61.   Within the framework of the price-taker model, a price taker will always produce a quantity of
      output that
      a. minimizes the per-unit cost of production.
      b. is expected to provide the largest possible total revenue.
*     c. maximizes total revenue minus total cost.
      d. brings average total cost and price into equality.
62.   A profit-maximizing entrepreneur will produce and sell an additional unit of output as long as
      a. it lowers the firm’s unit costs.
      b. it lowers the firm’s marginal cost.
*     c. it adds more to revenue than it adds to cost.
      d. there is additional plant capacity to produce.
63.   The usefulness of the price-taker model requires that the firm’s decision makers
      a. act to maximize their total revenue and fully understand marginal costs and marginal revenues.
      b. be able to draw accurate marginal cost and marginal revenue curves.
      c. place the social interest of the economy above their individual self interests.
*     d. seek to maximize the profits of the firm.
64.   A profit-maximizing firm will continue to expand output
      a. as long as the revenues from the production and sale of an additional unit exceeds the average
          costs of the unit.
      b. until the average cost of producing the good or service is at a minimum.
*     c. as long as the revenues from the production and sale of an additional unit exceeds the marginal
          cost of the unit.
      d. until the marginal cost of producing a good or service is at a minimum.
                                            Chapter 9/Price Takers and the Competitive Process            337


65.   If a firm competing in a price-taker market seeks to maximize profit, the firm should
      a. increase output whenever marginal cost is less than average total cost.
      b. increase output whenever marginal revenue is less than marginal cost.
      c. choose the output where per-unit profit is greatest.
*     d. increase output whenever price exceeds marginal cost.
66.   ―Our marginal revenue equals our marginal costs at current factor prices.‖ This statement indicates
      that
      a. an expansion in output will increase revenues more than costs.
*     b. the firm is maximizing its profit.
      c. a larger output will increase the firm’s profit.
      d. the firm is better at marketing its goods than it is at producing its goods efficiently.
67.   In general, firms will produce at a rate of output such that marginal revenue equals marginal cost
      because this output rate will
      a. bring total revenue into equality with total cost.
      b. maximize the difference between the revenue received from the last unit and the cost incurred
           in producing the last unit.
      c. result in the lowest possible average total costs of production.
*     d. maximize the firm’s profit.
68.   The schedule of total costs for a chair-manufacturing firm is presented in the table below. If the
      market price of chairs is $100, which of the output levels should this price-taker firm produce in
      order to maximize profit?
                 Units of Output         Total Cost (dollars)
                       10                       1,000
                       20                       1,900
                       30                       2,850
                       40                       4,000
      a. 10
      b. 20
*     c. 30
      d. 40
69.   The schedule of total costs for a table-manufacturing company is presented below. The firm sells its
      product in a price-taker market at $120 per table. What is the maximum monthly profit (or
      minimum loss) that the firm will be able to earn?
            Units of Output (monthly)      Total Cost (dollars, monthly)
                        8                               875
                        9                              1,080
                       10                              1,195
                       11                              1,320
      a.   $15 loss
      b.   zero
*     c.   $5 profit
      d.   $10 profit
338    Chapter 9/Price Takers and the Competitive Process


70. The schedule of total costs for a chair-manufacturing firm is presented in the table above. If the
      market price of chairs is $100, which output should this price-taker firm produce to maximize
      profit?


                 Units of Output       Total Cost (dollars)
                       100                   11,000
                       200                   20,000
                       300                   29,400
                       400                   39,500
                       500                   50,500
      a.   200
*     b.   300
      c.   400
      d.   500
Use the following table of expected cost and revenue data for the Tuckers Tomato Farm to answer the
next four questions. The Tuckers produce tomatoes in a greenhouse and sell them wholesale in a
competitive price-taker market.
             Output (tons per month) Total Cost (dollars) Price per Ton (dollars)
                        3                     2,250                    500
                        4                     2,500                    500
                        5                     2,800                    500
                        6                     3,050                    500
                        7                     3,450                    500
                        8                     4,000                    500
                        9                     4,575                    500
                       10                     5,150                    500
71.   If the Tuckers are profit maximizers, how many tomatoes should they produce when the market
      price is $500 per ton?
      a. 6
*     b. 7
      c. 8
      d. 9
72.   If the market price is $500, what is the maximum economic profit per month the Tuckers can earn?
      a. –$50
      b. zero
*     c. $50
      d. $100
73.   If the market price of tomatoes rose to $570 per ton, how many tons per month would the Tuckers
      produce if they were maximizing profit?
      a. 6
      b. 7
*     c. 8
      d. 9
                                              Chapter 9/Price Takers and the Competitive Process          339


74.   After the increase in the market price to $570, what is the maximum profit per month the Tuckers
      can earn?
*     a. $560
      b. $580
      c. $630
      d. $1,130
75.   In the short run, a firm that is a price taker will stay in business as long as
      a. price equals average revenue.
      b. marginal revenue is greater than or equal to marginal cost.
*     c. price exceeds average variable cost.
      d. price is less than average variable cost.
76.   Suppose that price is below the minimum average total cost (ATC) but above the minimum average
      variable cost (AVC) and that the market price is expected to rise at least to ATC in the near future.
      In the short run, a firm that is a price taker would
      a. immediately shut down and get out of the industry.
*     b. continue to produce a quantity such that marginal revenue equals marginal cost.
      c. shut down temporarily, in hopes of restarting in the near future.
      d. cut price and expand output in hopes of achieving economies of scale
77.   ―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
      a. correct if the firm is covering its fixed costs.
      b. incorrect because a firm experiencing economic losses should never continue to operate; it is
          contrary to the idea of profit maximization.
*     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.
78.   The price-taker firm should discontinue production immediately if
      a. the market price exceeds the firm’s average total costs.
*     b. the market price is less than the firm’s average variable costs.
      c. the market price is less than the firm’s average total costs but greater than its average variable
          cost.
      d. its accounting statement indicates that it is suffering losses.
79.   To cut its losses, a firm that is optimistic about the future should shutdown temporarily if price falls
      below
      a. marginal cost.
*     b. average variable cost.
      c. average total cost.
      d. total cost.
80.   If an amusement park that is highly profitable during the summer months is unable to cover its
      variable costs during the winter months, it should
      a. raise its prices during the winter months.
      b. lower its prices during the summer months.
*     c. operate during the summer but shut down during the winter months.
      d. operate during all months of the year as long as its profits during the summer exceed its losses
           during the winter.
340    Chapter 9/Price Takers and the Competitive Process


81.   If a restaurant in a summer tourist area is highly profitable during the summer months but unable to
      cover even its variable costs during the winter months, the restaurant should
      a. go out of business immediately, because no firm should continue to operate if it is losing
            money; doing so is contrary to the idea of profit maximization.
      b. go out of business as soon as the summer is over; losses should never be tolerated.
      c. operate during all months of the year as long as its profits during the summer exceed its losses
            during the winter.
*     d. shut down during the winter, but continue operating during the summer as long as the summer
            profits exceed the losses (fixed costs) during the winter shutdown period.
82.   Fun Time Inc. uses the same property and equipment to provide skiing services for six months
      during the winter and mountain roller boarding for six months during the summer. Monthly revenue
      and cost figures during the summer and winter months for Fun Time are shown below. Fun Time’s
      $1,000 monthly fixed costs will be incurred as long as it remains in business.
                                          Winter Months           Summer Months
                Total revenue               $10,000                  $5,000
           Operating (variable) costs        $6,000                  $4,600
                  Fixed costs                $1,000                  $1,000
                 Net Revenue                 $3,000                  –$600
      Which of the following should Fun Time do if it wants to maximize its annual profit?
*     a. operate in both the winter and summer
      b. operate in the summer, but shut down during the winter
      c. perate in the winter, but shut down during the summer
      d. go out of business immediately
83.   Fun Time Inc. uses the same property and equipment to provide skiing services for six months
      during the winter and mountain roller boarding for six months during the summer. Monthly revenue
      and cost figures during the summer and winter months for Fun Time are shown below. Fun Time’s
      $1,000 monthly fixed costs will be incurred as long as it remains in business.
                                          Winter Months           Summer Months
                  Total revenue              $10,000                   $4,000
           Operating (variable) costs        $6,000                    $4,600
                   Fixed costs               $1,000                    $1,000
                   Net Revenue               $3,000                   –$1,600
      Which of the following should Fun Time do if it wants to maximize its profit?
      a. operate in both the winter and summer
      b. operate in the summer, but shut down during the winner
*     c. operate in the winter, but shut down during the summer
      d. go out of business immediately
84.   If price is above average variable cost and below average total cost, a profit-maximizing price taker
      should
      a. immediately shut down; failing to do so is contrary to the idea of profit maximization in a
            competitive market.
*     b. continue producing as long as it expects the market price to rise above average total cost in the
            near future.
      c. attempt to push price upward by slowly reducing output.
      d. cut price so more units can be sold.
                                            Chapter 9/Price Takers and the Competitive Process            341


85.   In the short run, a profit-maximizing firm in a price-taker market will definitely stop production if
      a. economic profit is zero.
      b. price falls below average total cost.
*     c. price is less than average variable cost.
      d. it cannot completely cover its fixed costs.
86.   Suppose the minimum average total cost (ATC) of a firm competing in a competitive price-taker
      market was $1.00 per unit and that the firm’s minimum average variable cost (AVC) was $.80 per
      unit. If the market price was $.75 per unit, a profit-seeking firm would
*     a. shut down immediately.
      b. produce where MR = MC in the short run.
      c. shut down in the long run but remain in business in the short run.
      d. do both b and c.
87.   The only way a firm can avoid fixed costs is by
      a. laying off employees.
      b. shutting down.
      c. reorganizing its production methods.
*     d. going out of business.
88.   A firm that is losing money in an industry where conditions are not expected to improve should
*     a. go out of business.
      b. shutdown temporarily if price falls below average variable cost.
      c. continue to operate so long as price is greater than marginal cost.
      d. increase its product price so that it can expand output.
89.   When the conditions in a competitive price-taker market are such that the firms are consistently
      unable to cover their production costs,
      a. the firms will suffer short-run economic losses that will be exactly offset by long-run economic
          profits.
      b. all firms will go out of business since consumers will not pay prices that enable firms to cover
          their production costs.
*     c. some firms will exit from the industry, and market price will rise until the remaining firms can
          earn the normal rate of return.
      d. resource prices will increase, competition will decline, and eventually the firms in the industry
          will earn monopoly profit.
90.   If a firm is making zero economic profit, it
      a. will be forced to shutdown and leave the market.
      b. will also generally be making zero accounting profit.
*     c. is doing as well as typical firms in other markets.
      d. will not survive in the long run.
91.   As market price increases, in the short run, a profit-maximizing firm in a price-taker market will
      expand output along its
*     a. marginal cost curve.
      b. average total cost curve.
      c. average variable cost curve.
      d. market demand curve.
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92.   The supply curve of a price-taker firm in the short run is the
      a. firm’s average variable cost curve.
      b. portion of the firm’s average total cost curve that lies above average variable cost curve.
*     c. portion of the firm’s marginal cost curve that lies above average variable cost curve.
      d. firm’s marginal revenue curve.
93.   In the short run, the supply curve of a firm in a price-taker market is
*     a. the firm’s MC curve (above the minimum AVC).
      b. the firm’s ATC curve (above the minimum AVC).
      c. the firm’s AVC curve (to the right of MC).
      d. a horizontal line at the market price.
94.   In a price-taker market, the short-run market supply curve is the
      a. vertical sum of the marginal cost curves of all firms in the market.
      b. vertical sum of the average variable cost curves of all firms.
*     c. horizontal sum of the marginal cost curves of all firms so long as price exceeds average
           variable cost.
      d. horizontal sum of the average total cost curves of all the firms in the market so long as average
           total cost exceeds the market price.
95.   The short-run supply curve in a price-taking industry is the
      a. horizontal summation of the individual firms’ MC curves above ATC.
*     b. horizontal summation of the individual firms’ MC curves above AVC.
      c. horizontal summation of the individual firms’ AVC curves above MC.
      d. vertical summation of ATC curves above AVC.

OUTPUT ADJUSTMENTS IN THE LONG RUN
96.   When a firm in a price-taker industry is in long-run equilibrium, the market price equals
      a. marginal cost but may be greater or less than average total cost.
*     b. both average total cost and marginal cost.
      c. average total cost but may be greater or less than marginal cost.
      d. marginal revenue but may be greater or less than both average total cost and marginal cost.
97.   Which of the following is essential for long-run equilibrium in a price-taker industry?
*     a. zero economic profit
      b. a price equal to average variable cost
      c. a highly elastic industry supply curve
      d. a highly inelastic industry supply curve
98.   If long-run equilibrium is present in a competitive market, the typical firm in the market will be
      a. making economic losses.
*     b. making zero economic profit.
      c. making economic profit.
      d. making a rate of return that is higher than the rate earned in other industries.
      e. both c and d are correct.
99.   When entry barriers into a market are low, firms will tend to earn zero economic profit in the long
      run because
      a. low entry barriers lead to rising costs.
      b. profit-seeking entrepreneurs will not enter a market when entry barriers are low.
*     c. short-run profit attracts additional suppliers and drives down the market price.
      d. consumers will refuse to pay more than the cost of producing a good once they find out the
           producer’s per-unit costs.
                                            Chapter 9/Price Takers and the Competitive Process            343


100. If a price-taker industry is in long-run equilibrium, the market price in the industry will be just
     sufficient to cover the firm’s average
*    a. total costs.
     b. fixed costs.
     c. variable costs.
     d. variable costs plus a 10 percent accounting profit.
101. Which of the following conditions will be present when a price-taker market is in long-run
     equilibrium?
     a. Price will exceed marginal revenue.
     b. Firms will earn economic profit.
     c. Marginal revenue will exceed marginal cost.
*    d. Average total cost will be at a minimum.
102. There are 1,000 identical firms in a price-taker industry. In the short run, total revenues of each firm
     exceed total costs. What will happen in the long run?
     a. Nothing, because each firm is already maximizing its profits.
     b. Many firms will enter the market and each firm will eventually operate at a loss.
*    c. Additional firms will enter the market, and price will be driven down to where each firm will
         be making just enough to stay in business.
     d. Additional firms will enter the market, but the price will remain the same because the existing
         firms will not allow price to decrease.
103. There are 1,000 identical firms in a price-taker industry. In the short run, the total revenues of each
     firm are less than total costs. What will happen in the long run?
     a. Nothing, because each firm is already maximizing its profits.
     b. Additional firms will enter the market, and price will be driven down to where each firm will
          be making just enough to stay in business (cover its variable costs).
     c. Additional firms will enter the market, but the price will remain the same because the existing
          firms will not allow it to decrease.
*    d. Firms will exit the market, and the product price will rise.
104. In the long run, in a price-taker market, the price of a good is determined primarily by the
*    a. average total cost of producing it.
     b. decision of buyers in determining how much they are willing to pay for the good.
     c. elasticity of supply.
     d. number of firms in the industry.
105. Suppose sharply higher coffee prices lead to an increase in demand for tea. As tea prices increase,
     tea producers experience short-run economic profits. If the tea industry is a price-taker industry and
     if sufficient time is allowed for the market to adjust fully to the increase in demand for tea, one
     would expect the tea industry’s output to
     a. increase, and economic profits to increase as well.
*    b. increase, and economic profits to disappear.
     c. decline, and economic profits to increase.
     d. decline, and economic profits to disappear.
344    Chapter 9/Price Takers and the Competitive Process


106. Several producers in industry A developed an improved technology that reduces the quantity of
     resources used to produce a given output. Which of the following would be expected?
     a. The per-unit costs of production of the firms adopting the technology would increase.
*    b. In the short run, economic profits would be earned by the earliest firms adopting the
          technology.
     c. Product price would immediately fall to the minimum average total cost of the firms quickly
          adopting the technology, thus retarding the rate at which firms enter the industry.
     d. Producers who adopt the technology will have short-run economic losses.
107. If firms in the small-boat industry are initially in long-run equilibrium, what will be the long-run
     effect on profits and boat prices of an increase in the demand for small boats? (Assume boat
     manufacturers are price takers and that increases in industry output raise resource prices.)
     a. Both profits and boat prices will return to their original levels.
     b. Profits will be higher, but prices will return to their previous level.
*    c. Profits will return to their original level, but prices will be higher.
     d. Both profits and prices will be higher in the long run.
108. Suppose the demand for large (and therefore high-gasoline consumption) cars decreases sharply
     during an energy crisis. The most likely market adjustment would be
     a. a sharp rise in the price of large cars in the short run as people rush to purchase these vehicles
          before producers cut back on manufacturing them.
     b. a moderate increase in short-run prices, followed by a larger long-run price increase as the
          supply of large cars is depleted.
     c. lower short-run prices, which will lead to an expansion in the number of large cars sold.
*    d. a decrease in the price of large cars in the short run, leading to a reduction in output, which will
          moderate the price decline in the long run.
109. Suppose that sharply lower coffee prices lead to a decrease in the demand for tea. Tea price
     decreases, and the tea producers experience short-run economic losses. If the tea industry is a price-
     taker market, after sufficient time is allowed for the market to adjust fully to the decrease in the
     demand for tea, one would expect the tea industry’s output to
     a. increase and economic losses to persist.
     b. decline and economic losses to persist.
     c. decline and economic losses to disappear.
*    d. increase and economic losses to disappear
110. If the ice cream industry is a competitive price-taker market and all ice cream producers are earning
     zero economic profit, what will be the impact of an increase in the demand for ice cream?
     a. Firms will exit the ice cream industry in the long run since they are earning zero economic
           profit.
     b. The firms will now be able to earn long-run economic profit assuming that barriers to entry
           remain low and new firms can enter the market.
     c. A shortage of ice cream will develop.
*    d. The price of ice cream will rise initially, inducing the existing firms to expand output and new
           firms to enter the industry.
111. Other things constant, if wheat production is a price-taker industry, a decrease in the price of
     fertilizer used to grow wheat will
*    a. increase the supply of wheat.
     b. increase the demand for wheat.
     c. decrease the supply of wheat.
     d. do both a and b.
                                           Chapter 9/Price Takers and the Competitive Process            345


112. If factor prices rise as demand increases and the firms expand output, the long-run market supply
     curve will be upward sloping. In terms of economics, this describes a(n)
     a. oligopolistic industry.
     b. constant cost industry.
*    c. increasing cost industry.
     d. decreasing cost industry.
113. The textile industry is composed of a large number of small firms. In recent years, these firms have
     suffered economic losses, and many sellers have left the industry. Economic theory suggests that if
     technology, imports, and other factors remain constant, these conditions will
     a. shift the market demand curve outward so that price will rise to the level of production cost.
     b. cause the remaining firms to collude so they can produce more efficiently.
*    c. cause the market supply to decline and the price of textiles to rise.
     d. cause firms in the textile industry to suffer long-run economic losses.
114. If a decrease in the demand for corn leads to economic losses for corn farmers,
*    a. some existing corn farmers will exit the industry.
     b. the price of corn will remain low in the long run due to the economic losses.
     c. the suppliers of corn will suffer long-run economic losses.
     d. all of the above are correct.
115. Which one of the following factors is not an explanation of the positive relationship between market
     price and quantity supplied?
     a. The law of diminishing returns makes it more costly for firms to expand output quickly.
     b. As price increases, some less efficient firms will enter the market.
*    c. For most firms, unit costs decrease as output increases in the long run.
     d. As all firms in an industry hire more factors of production, the prices paid for them often
          increase.
116. In a constant cost industry,
     a. a natural monopoly is likely to occur.
     b. total cost is the same, no matter how much a firm produces.
*    c. the long-run supply curve will be perfectly elastic.
     d. entry of new firms in the industry will lead to a reduction in the cost of inputs.
117. In a constant-cost industry, an increase in output that increases the demand for resources used by the
     industry
     a. is likely to result in higher prices for at least some resources.
     b. causes the firm’s cost curves to shift downward.
     c. causes the demand curve for the industry to rise.
*    d. is not likely to result in higher prices for resources.
118. A perfectly elastic, long-run market supply curve is most likely to be achieved in a(n)
     a. price-taker industry.
*    b. constant cost industry.
     c. increasing cost industry.
     d. price searcher industry.
119. If the expansion of output in an industry leads to unchanged resource prices, the industry is most
     likely to be a(n)
     a. decreasing cost industry.
     b. increasing cost industry.
*    c. constant cost industry.
     d. industry characterized by economies of scale.
346    Chapter 9/Price Takers and the Competitive Process


120. Which of the following is true for a constant cost industry?
     a. The total cost of producing 500 units will be the same as the total cost of producing 250 units.
*    b. If 100 units can be produced for $500, then 200 units can be produced for $1,000.
     c. The demand curve and, therefore, the unit price in the industry are constant.
     d. Firms in the industry will hold output constant if the price of the product increases.
121. If a product is manufactured under conditions of constant cost, an increase in the demand for the
     product will increase
     a. both equilibrium quantity and equilibrium price in the long run.
     b. equilibrium price, but equilibrium quantity will be unchanged in the long run.
     c. equilibrium price but reduce equilibrium quantity in the long run.
*    d. equilibrium quantity, but equilibrium price will be unchanged in the long run.
122. If a product is manufactured under conditions of constant cost, an increase in the demand for the
     product will increase
     a. both equilibrium quantity and equilibrium price in the long run.
     b. equilibrium price, but equilibrium quantity will be unchanged in the long run.
*    c. equilibrium quantity, but equilibrium price will be unchanged in the long run.
     d. equilibrium quantity but reduce equilibrium price in the long run.
123. Suppose the demand curve for aluminum cans is downward sloping, and the cans are produced in a
     constant cost industry where the firms are price takers. A $.25-per-can tax is levied on aluminum
     cans. How much will the price of aluminum cans increase in the short run and the long run?
     a. short run, $.25; long run, more than $.25
*    b. short run, less than $.25; long run, $.25
     c. short run, less than $.25; long run, more than $.25
     d. short run, $.25; long run, less than $.25
124. If resource prices rise and the per-unit cost of producing a product increases as the firms in an
     industry expand output in response to an increase in demand, the long-run market supply curve for
     the product will
     a. be perfectly elastic (a horizontal line).
     b. be perfectly inelastic (a vertical line).
*    c. slope upward to the right.
     d. be more inelastic than the short-run supply curve for the product.
125. If the demand for a product increases in an increasing cost industry, as the market adjusts in the long
     run,
     a. price will rise.
*    b. the firm’s per-unit costs will increase.
     c. the firm’s per-unit costs will fall.
     d. the market price will return to its initial position.
126. Why will the long-run market supply curve for most products slope upward to the right?
     a. The firms producing the product will be unable to expand the size of their plant and equipment
        in the long run.
     b. Economies of scale are present in most industries.
     c. Most products are produced under conditions of constant cost.
*    d. Resource prices will rise and push costs upward as the output of the industry expands.
                                            Chapter 9/Price Takers and the Competitive Process              347


127. Suppose antitheft auto alarms are produced in a price-taker market that is initially in long-run
     equilibrium. It is estimated that only 23 percent of all autos have alarms. Due to rising auto theft,
     Congress mandates alarms in every vehicle. Assume complete compliance. If the industry is an
     increasing cost industry, price will
*    a. increase in both the short run and long run.
     b. decrease in both the short run and long run.
     c. increase in the short run but not in the long run.
     d. decrease in the short run but not in the long run.
128. The long-run supply curve for a product differs from the short-run supply curve in that the long-run
     supply curve is usually
     a. vertical.
     b. more inelastic.
*    c. more elastic.
     d. of unitary elasticity.
129. As the period for firms to expand output is lengthened, the elasticity of the market supply curve will
     a. approach zero.
*    b. increase.
     c. decrease.
     d. remain the same since time does not affect the elasticity of market supply.

ROLE OF PROFITS AND LOSSES
130. Which of the following is a residual reward that accrues to business decision makers who use
     resources so as to increase their value?
     a. opportunity cost
     b. earnings of employees
*    c. economic profit
     d. interest earnings of corporate bondholders
131. In a price-taker market, profits are
     a. the result of consumers being charged arbitrarily high prices.
*    b. a reward for creating value.
     c. the result of barriers to entry into the market.
     d. a signal that fewer resources are needed in a market.
132. When profits occur in a competitive market, this indicates that
*    a. consumers value the goods more than the resources used to produce them.
     b. producers value the goods more than the resources used to produce them.
     c. producers value the goods more than consumers value the goods.
     d. consumers value the goods less than the resources used to produce them.
133. When a firm in a competitive market is earning profits, this indicates that the firm is
     a. exploiting consumers.
*    b. increasing the value of resources.
     c. blocking the entry of competing firms.
     d. reducing overall wealth in the market.
348    Chapter 9/Price Takers and the Competitive Process


134. Suppose the development of new drought-resistant hybrid seed corn leads to a 50-percent increase
     in the average yield per acre without increasing the cost to the farmers who use the new technology.
     If the conditions in the corn production industry are approximated by the price-taker model, which
     of the following is most likely to occur?
     a. The price of corn will increase.
     b. The price of soybeans (a substitute for corn) will increase.
*    c. The profits of corn farmers who quickly adopt the new technology will increase.
     d. The profits of corn farmers who do not adopt the new technology will increase.
135. The owners of a firm are earning economic profit if
     a. return on their capital is lower than the opportunity cost of employing that capital in their
         industry.
     b. their total revenues exceed the monetary payments to labor and other resources in the long run
         after all plant size adjustments are made.
     c. price exceeds average variable costs at the shutdown point.
*    d. they are earning a return on their capital that is higher than what can generally be earned in
         other markets.
136. Suppose a typical firm in a particular industry is making positive economic profits. These economic
     profits
     a. reflect a waste of society’s scarce resources and reflect inefficient production.
     b. signal owners of factors of production to move their resources out of that industry.
     c. imply that accounting costs are greater than economic costs in this industry.
*    d. signal owners of factors of production to move resources into this industry.
137. If a firm is losing money, this implies that
     a. consumers do not understand the value of the product.
*    b. the value of the resources used to make the product is being reduced.
     c. the firm must go out of business immediately.
     d. this product cannot be produced profitably in the long run.
138. In a price-taker market, economic losses indicate that
     a. some firms are using unfair tactics to harm others.
*    b. some firms have miscalculated, producing goods that are less valuable than the resources used
          to make them.
     c. the situation is normal and firms need to make no adjustments.
     d. the firms in the industry are not minimizing their cost; they should expand output in order to
          fully realize the economies of scale in the industry.
                                            Chapter 9/Price Takers and the Competitive Process           349


139. If profit-seeking entrepreneurs are going to be successful, they must
*    a. produce a product that the consumers value more than the resources required for its production.
     b. produce the product more cheaply than their rivals regardless of quality.
     c. maximize the salaries of high-level management so they will be able to attract people who will
          work hard.
     d. charge a higher price than their competitors so they can make economic profits in the long run.

PRICE TAKERS, COMPETITION, AND PROSPERITY
140. The equilibrium conditions of a price-taker industry are ―ideal‖ in the sense that
     a. in the long run, goods are produced at their minimum average total cost.
     b. in the absence of externalities, consumers will purchase a product as long as the marginal
         benefit exceeds the marginal cost to society of producing that unit.
     c. the market price of the product is just sufficient to cover the production cost of the product.
*    d. all of the above are correct.
141. When competition is present, self-interested business decision makers have a strong incentive to
*    a. produce efficiently.
     b. ignore the wishes of customers who are also self-interested.
     c. adopt technological improvements slowly in order to avoid making wrong decisions
     d. maximize price in order to maximize profits.
142. The ability of price-taker firms to freely expand or contract their businesses and to enter or exit the
     market means that
     a. prices will always be high enough to generate positive economic profit.
     b. resources that would be more valuable elsewhere will be trapped, unproductively, in a
         particular industry.
     c. resource owners cannot move their resources to other areas where they would be more highly
         valued.
*    d. resources that would be more valuable elsewhere will not be trapped, unproductively, in a
         particular industry.
143. If a price taker in a competitive market is going to maximize profits, he must
     a. increase the price of his product.
     b. minimize his fixed costs of production.
*    c. minimize the per-unit cost of producing the good.
     d. use the highest valued set of resources to produce his product.
350    Chapter 9/Price Takers and the Competitive Process


GRAPHIC QUESTIONS
Figure 1




144. Figure 1 shows the marginal and average total cost curves for a firm producing product A. What
     would be the minimum price this firm could charge and still continue to supply A to the market in
     the long run?
     a. $4
*    b. $5
     c. $6
     d. $8

Figure 2




145. Figure 2 illustrates a firm
     a. capable of earning economic profit.
     b. that is only able to break even when it maximizes profit.
*    c. taking economic losses.
     d. that should shut down immediately.
                                           Chapter 9/Price Takers and the Competitive Process         351


Use the figure to answer the following questions.

Figure 3




146. Figure 3 depicts the cost curves of a firm in a price-taker industry. At what output would the firm’s
     per-unit cost be at a minimum?
     a. 100
*    b. 125
     c. 150
     d. an output greater than 150
147. For Figure 3, if the market price is $30, indicate the firm’s profit-maximizing output and maximum
     profit.
*    a. profit-maximizing output, 125; maximum profit, zero
     b. profit-maximizing output, 125; maximum profit, between $1,000 and $1,250
     c. profit-maximizing output, 150; maximum profit, $1,500
     d. profit-maximizing output, 150; maximum profit, between $1,250 and $1,500
352    Chapter 9/Price Takers and the Competitive Process


Use the figure to answer the following questions.

Figure 4




148. Figure 4 indicates the cost conditions for a firm operating in a price-taker market. If the market
     price of the firm’s product is $6, what action will maximize the firm’s profit?
     a. go out of business since it cannot make a profit
     b. produce an output of 3 million
*    c. produce an output of 5 million
     d. produce an output of 6 million
149. At the market price of $6 in Figure 4, indicate the firm’s total revenue and total cost at its profit-
     maximizing level of output.
     a. total revenue, $30 million; total cost, $22.5 million (approx.)
*    b. total revenue, $30 million; total cost, $30 million
     c. total revenue, $40 million; total cost, $30 million
     d. total revenue, $48 million; total cost, $38 million (approx.)
150. If the market price of the product in Figure 4 rose to $8, indicate the firm’s profit-maximizing
     output and total revenue.
     a. output, 5 million; total revenue, $30 million
     b. output, 5 million; total revenue, $40 million
     c. output, 6 million; total revenue, $10 million (approx.)
*    d. output, 6 million; total revenue, $48 million
                                           Chapter 9/Price Takers and the Competitive Process        353


Use the figure to answer the following questions.

Figure 5




151. The cost conditions for a profit-maximizing firm operating in a price-taker market are indicated in
     Figure 5. If the market price was $3, what output should the firm produce, and what would be the
     firm’s maximum profit?
     a. output, 3; maximum profit, $3 loss
*    b. output, 5; maximum profit, zero
     c. output, 5; maximum profit, $5
     d. output, 6; maximum profit, $6
152. If the market price in Figure 5 increases to $4, what output should the firm produce, and what would
     be the firm’s maximum profit?
     a. output, 3; maximum profit, $3 loss
     b. output, 5; maximum profit, zero
     c. output, 5; maximum profit, slightly less than $5
*    d. output, 6; maximum profit, slightly less than $6
153. If the market price in Figure 5 fell to $2.50, what should the firm do?
     a. raise its price
     b. shut down and wait for conditions to improve
*    c. continue operating in the short run if it expects conditions to improve
     d. go out of business immediately
354    Chapter 9/Price Takers and the Competitive Process


Use the figure to answer the following questions.

Figure 6




154. The average total cost (ATC) and marginal costs (MC) of a firm producing in a price-taker industry
     are depicted in Figure 6. If the current market price of the firm’s product is $15, what output should
     this firm produce?
     a. 10
*    b. 15
     c. 20
     d. 25
155. If the market price in Figure 6 increases to $20, what should the firm do?
     a. produce an output of 15
*    b. expand output to 20
     c. expand output to 25
     d. increase its price to $25
156. When the market price in Figure 6 is $20, the firm’s maximum profit will be approximately
     a. zero.
     b. $3.
*    c. $60.
     d. $400.
                                           Chapter 9/Price Takers and the Competitive Process         355


Use the figure to answer the following questions.

Figure 7




157. The average total cost (ATC) and marginal costs (MC) of a firm producing in a price-taker industry
     are depicted in Figure 7. If the current market price of the firm’s product is $3, what output should
     this firm produce per week?
     a. 5,000
*    b. 7,500
     c. 10,000
     d. 12,500
158. If the market price in Figure 7 increases to $4, what should the firm do?
     a. produce 5,000 per week
     b. produce 7,500 per week
*    c. produce 10,000 per week
     d. increase its price to $5
159. When the market price in Figure 7 is $4, the firm’s maximum weekly profit will be approximately
     a. zero.
     b. $40.
*    c. $6,000.
     d. $40,000.
356    Chapter 9/Price Takers and the Competitive Process


Use the figure to answer the following questions.

Figure 8




160. The average total cost (ATC) and marginal costs (MC) of a firm producing in a price-taker industry
     are depicted in Figure 8. If the current market price of the firm’s product is $3, what output should
     this firm produce per day?
     a. 10
*    b. 15
     c. 20
     d. 25
161. At the market price of $3 in Figure 8, indicate the firm’s total revenue and total cost at its profit-
     maximizing level of output.
     a. total revenue, $45; total cost, $37 (approx.)
*    b. total revenue, $45; total cost, $45
     c. total revenue, $60; total cost, $45
     d. total revenue, $80; total cost, $65 (approx.)
162. If the market price in Figure 8 increases to $4, indicate the firm’s profit-maximizing output and total
     revenue.
     a. output, 15; total revenue, $45
     b. output, 15; total revenue, $60
*    c. output, 17; total revenue, $68 (approx.)
     d. output, 20; total revenue, $80
                                           Chapter 9/Price Takers and the Competitive Process          357


Use the figure to answer the following questions.

Figure 9




163. The average total cost (ATC) and marginal costs (MC) of a firm producing in a price-taker industry
     are depicted in Figure 9. If the current market price of the firm’s product is $50, what output should
     this firm produce per day?
     a. 10
*    b. 15
     c. 20
     d. 25
164. If the market price in Figure 9 increases to $60, what should the firm do?
     a. produce 10 per day
     b. produce 15 per day
*    c. produce 20 per day
     d. increase its price to $70
165. When the market price is $60 in Figure 9, the firm’s maximum daily profit will be approximately
     a. zero.
*    b. $100.
     c. $900.
     d. $1,200.
358    Chapter 9/Price Takers and the Competitive Process


Figure 10




166. In Figure 10, the movement from points A to B to C can best be explained by which of the following
     factors?
     a. a decrease in demand, followed by the entry of new firms and an expansion in supply in a
          constant cost industry.
*    b. an increase in demand, followed by the entry of new firms and an expansion in supply in an
          increasing cost industry.
     c. a decrease in demand, followed by the exit of firms and a decline in supply in an increasing
          cost industry.
     d. an increase in demand, followed by the exit of firms and a decline in supply in a constant cost
          industry.

Use the figure to answer the following questions.

Figure 11




167. If the current market price for the firm depicted in Figure 11 is A, given the firm’s cost conditions,
     which output should it produce?
     a. OM
*    b. OL
     c. OK
     d. OI
                                            Chapter 9/Price Takers and the Competitive Process        359


168. Which of the following represents the firm’s total cost of producing the profit-maximizing output in
     Figure 11?
     a. OCFK
     b. OBGK
*    c. OAEL
     d. OCHI
169. Which of the following indicates the firm’s profit (or loss) at the profit-maximizing output in Figure
     11?
     a. profit BCFG
     b. profit OCDM
*    c. zero economic profit
     d. loss AEFC

Figure 12




170. Figure 12 illustrates a
     a. competitive price-taker firm that is earning economic profit.
*    b. competitive price-taker firm that is only able to break even when it is maximizing economic
         profit.
     c. firm that should shut down immediately.
     d. competitive price-taker firm that is making economic losses.

COURSEBOOK: MULTIPLE CHOICE QUESTIONS
171. In a price-taker market,
     a. all firms in the market charge different prices depending upon their respective costs of
          production.
     b. there are generally a small number of very large firms.
*    c. the firms all produce identical products.
     d. firms will usually make economic losses in the long run.
172. A firm that must sell its output at a market-determined price is called a
*    a. price-taker firm.
     b. price-searcher firm.
     c. price-setter firm.
     d. price-maker firm.
360    Chapter 9/Price Takers and the Competitive Process


173. For a firm in a price-taker market, the firm’s demand curve is
*    a. a horizontal line at the market price that is equal to the firm’s marginal revenue curve.
     b. an upward-sloping line that is equal to the firm’s marginal cost above AVC.
     c. a downward-sloping line that lies below the firm’s marginal revenue curve.
     d. undefined because it cannot determine the price it charges for its output.
174. To maximize profits, a firm should always produce the level of output where
     a. marginal cost equals average total cost.
     b. average total cost equals price.
*    c. marginal cost equals marginal revenue.
     d. marginal revenue equals price.
175. If you were the owner of a price-taker firm operating at an output level where the marginal cost of
     producing another unit was $5, and the market price was $7, then you
*    a. could increase your profit by expanding output.
     b. could increase your profit by decreasing output.
     c. are maximizing your profit at your current output level.
     d. will be able to earn positive economic profits in the long run.
176. A price-taker firm is currently producing 50 units of output at an average total cost of $3 per unit. If
     the market price is $7, then the firm’s total economic profit is
     a. $4.
     b. $150.
*    c. $200.
     d. $350.
177. For a price-taker firm, marginal revenue is
     a. equal to price.
     b. equal to zero when the market is in long-run equilibrium.
     c. equal to the change in total revenue divided by the change in output.
*    d. both a and c.
178. If a firm in a price-taker market is earning zero economic profit, it
     a. will shut down in the long run but not the short run.
     b. will also be earning zero accounting profit.
*    c. is doing as well as typical firms in other markets.
     d. will shut down in the short run.
179. If marginal revenue exceeds marginal cost at the current level of output, profit will increase when
     output is expanded because
     a. other firms in the industry will shut down as the firm expands output.
     b. the market price will rise as the firm expands output.
*    c. producing and selling an additional unit will add more to total revenue than it adds to total cost.
     d. marginal cost will decline as output is expanded.
180. Historically, most economists have referred to markets where firms are price takers as
*    a. purely competitive markets.
     b. monopoly markets.
     c. open-door markets.
     d. price-searcher markets.
                                            Chapter 9/Price Takers and the Competitive Process         361


181. Which of the following is true?
     a. When firms in a price-taker market are earning zero economic profit, they will shut down.
     b. When firms in a price-taker market are earning positive economic profits, new firms will enter
         the industry causing the market price to fall until the firms in the industry are earning only zero
         economic profit.
     c. When firms in a price-taker market are earning economic losses, some firms will exit the
         industry causing the market price to rise until the remaining firms are earning zero economic
         profit.
*    d. Both b and c are true.
182. Beginning from a point of long-run equilibrium, an increase in the market demand for wheat would
     result in
     a. an increase in the market price of wheat.
     b. existing wheat producers increasing output in the short run and earning positive economic
          profits.
     c. new firms entering the wheat industry in the long run.
*    d. all of the above.
183. If the market price in a price-taking industry was currently above the average total cost of
     production for firms in the industry,
     a. firms in the industry would earn short-run economic profits that would be offset by long-run
           economic losses.
*    b. new firms would enter the industry, which would drive price down to the average total cost of
           production in the long run.
     c. firms in the industry would earn positive economic profits in the long run.
     d. most firms in the industry would shut down in the long run.
184. Which of the following statements is correct?
     a. In order to maximize profits in the short run, a price taker should always produce at the output
         level where marginal cost is equal to price.
     b. In long-run equilibrium, a price taker will produce at an output level where average total cost is
         at its minimum.
     c. A price taker will remain open in the short run, even if it is earning an economic loss, so long
         as price is sufficient to cover average variable cost.
*    d. All of the above are true.
185. When consumer demand for a good produced in a price-taker market decreases,
     a. firms in the industry will continue to produce at the same output levels as before.
     b. total market output will generally rise, but each individual firm will reduce its output.
     c. the market price of the good will rise, causing additional resources to flow into the industry in
        the long run.
*    d. some firms will shut down in the long run, making their resources available for the production
        of other goods.
186. (I) A firm’s short-run supply curve is equal to its average variable cost curve above marginal
     revenue. (II) The short-run supply curve for a price-taker market is the horizontal sum of the supply
     curves of all firms in the industry.
     a. I is true; II is false.
*    b. I is false; II is true.
     c. Both I and II are true.
     d. Both I and II are false.
362    Chapter 9/Price Takers and the Competitive Process


187. The long-run supply curve is
*    a. a horizontal line for a constant-cost industry.
     b. upward sloping for a decreasing-cost industry.
     c. downward sloping for an increasing-cost industry.
     d. all of the above.
188. If the demand for a product increases in an increasing-cost industry, as the market adjusts in the
     long run, production costs for all firms will
*    a. rise as new firms enter the industry.
     b. fall as new firms enter the industry.
     c. remain unchanged.
     d. fall as firms exit the industry.
189. If firms in a price-taker industry were forced to install antipollution devices that increased their
     production costs, we should expect
     a. the cost curves for the firms in this industry to shift downward.
     b. the market price of the product to decrease.
     c. that the firms in the industry would suffer long-run economic losses.
*    d. that the firms in the industry would earn normal economic profits in the long run, as the higher
           production costs were passed along to consumers in the form of higher prices.
190. A price-taker market tends toward a state of long-run equilibrium in which firms earn only a normal
     rate of return (zero economic profits) because
     a. firms will keep their prices low under fear of government regulation.
*    b. with firms able to enter and leave the industry freely, competition will drive prices down to the
          level of production costs.
     c. by definition, production costs always rise to equal the market price.
     d. mismanagement on the part of owners generally results in the firms not equating marginal
          revenue and marginal cost.
191. Which portion of the marginal cost curve is used to create a firm’s short-run supply curve?
     a. the entire marginal cost curve
*    b. the marginal cost curve above its intersection with the average variable cost curve because
         below this price, firms will shut down in the short run
     c. the marginal cost curve above its intersection with the marginal revenue (demand) curve
     d. the marginal cost curve above its intersection with the average total cost curve because below
         this price, firms will shut down in the short run
192. You are the owner of an ice cream shop that earns a profit most of the year except during the cold
     winter months. During the month of December, your rent and other fixed costs amount to a total of
     $200. If you remain open, your total variable costs (workers, ice cream cones, etc.) will amount to
     $300. If you would be able to sell 100 ice cream cones at $4 each during December, then
*    a. to maximize profits, you should remain open in December.
     b. to maximize profits, you should shut down in December.
     c. you will be able to avoid making a loss by shutting down in December.
     d. you should go out of business in the long run if there is any single month in which you do not
         earn a profit.
                                            Chapter 9/Price Takers and the Competitive Process          363


193. FYI Sanitation is currently eight months into a year-long lease contract on a garbage truck at a cost
     that averages $500 per month. Other variable costs (fuel, workers, etc.) for operating the truck
     amount to $300 per month. If the monthly revenue from operating the truck is $400, and these
     conditions are expected to continue into the future, to maximize its profit, FYI Sanitation should
     a. stop operating the truck immediately and not renew the lease for next year.
     b. continue operating the truck indefinitely.
*    c. continue operating the truck until the lease expires then not renew the lease for next year.
     d. stop operating the truck now but renew the lease and begin operating the truck again next year.
194. ―I have been making furniture for 27 years. I have never heard of either marginal cost or marginal
     revenue. Fancy economic theories mean nothing to me. I just know how to do well in business.
     Whenever I can sell something for more than it cost me to produce it, I make it, and whenever I
     can’t sell it for enough to cover my cost, I don’t. That’s how I stay in business and earn income for
     my family. Common sense and watching the market are good enough for me.‖ For producers like
     this, economic models
*    a. accurately describe their behavior and allow predictions to be made as to how they will
           respond to changes in market conditions.
     b. indicate nothing about the behavior of such producers.
     c. will generally only apply if the person has a college education.
     d. do not apply because the producers do not understand the terminology.
195. If consumers suddenly began desiring more apples and fewer oranges,
     a. the market price of apples would rise, creating short-run economic profits in the apple industry.
          Current firms will expand output, and new firms will enter the industry.
     b. the market price of oranges would fall, creating short-run economic losses in the orange
          industry. Current firms will reduce output, and some will go out of business in the long run.
     c. neither a nor b are correct.
*    d. both a and b are correct.

Figure 13




196. The schedule of total cost for a firm in a price-taker market is given in Figure 13. If the market price
     for this product is $50, which of the following output levels should this firm produce if it wants to
     maximize its profit?
     a. 1
     b. 2
*    c. 3
     d. 4
364    Chapter 9/Price Takers and the Competitive Process


Figure 14 depicts a firm in a price-taker market. Use this figure to answer the following questions.

Figure 14




197. To maximize profit, the firm in Figure 14 should produce an output level of
     a. q1.
     b. q2.
     c. q3.
     d. q4.
198. At the profit-maximizing level of output, the firm in Figure 14 will earn an economic (Hint: Areas
     in the exhibit are referenced by the four letters on the corners of the respective area.)
     a. profit of AHEC.
     b. profit of BIFC.
     c. loss of AHEC.
     d. loss of BIFC.
199. Given the current market conditions depicted in Figure 14, in the long run,
     a. new firms will enter the industry, and market price will fall.
     b. firms will exit the industry, and market price will rise.
     c. firms will neither enter nor exit because the market is in long-run equilibrium.
     d. firms will maintain their current level of economic profit.
                                           Chapter 9/Price Takers and the Competitive Process         365


Figure 15




200. Figure 15 shows a representative firm in a price-taker market. Which of the following is true
     regarding the situation depicted in the figure?
     a. This firm is earning zero economic profit.
     b. The industry is in long-run equilibrium.
     c. Firms will neither enter nor exit the market.
     d. All of the above are true.

Figure 16 depicts a firm in a price-taker market. Use this figure to answer the following questions.

Figure 16




201. To maximize profit, the firm in Figure 16 should produce an output level of
     a. zero; the firm should shut down immediately.
     b. q2.
     c. q3.
     d. q4.
202. At the profit-maximizing level of output, the firm in Figure 16 will earn an economic
     a. profit of AHEB.
     b. loss of AGDC.
     c. loss of AHEB.
     d. loss of AIFB.
203. Given the current market conditions depicted in Figure 16, in the long run,
     a. new firms will enter the industry, and market price will fall.
     b. firms will exit the industry, and market price will rise.
     c. firms will neither enter nor exit because the market is in long-run equilibrium.
     d. firms will continue to suffer economic losses.
366    Chapter 9/Price Takers and the Competitive Process


Figure 17




204. Figure 17 shows a representative firm in a price-taker market. Which of the following is true
     regarding the situation depicted in the exhibit?
     a. This firm should shut down immediately.
     b. This firm is earning positive economic profit.
     c. This firm is able to cover its variable cost but not its total cost.
     d. All of the above are true.

Figure 18




205. Which of the following best describes the series of events shown in Figure 18? The original
     conditions prior to the change are shown by D0 and S0 (point A), and SLR is the market long-run
     supply curve.
     a. an increase in demand and an expansion in the number of firms in an increasing cost industry
     b. an increase in demand and an expansion in the number of firms in a decreasing cost industry
     c. an increase in demand and an expansion in the number of firms in a constant cost industry
     d. none of the above
                                            Chapter 9/Price Takers and the Competitive Process           367


ON-LINE PRACTICE QUESTIONS
206. The dynamic process of competition
     a. provides profit-seeking sellers with little incentive to heed consumer preferences.
     b. was shown by Adam Smith to be a major source of economic inefficiency.
*    c. provides consumers with alternative suppliers and thus a mechanism with which they can
         discipline sellers.
     d. will permit business decision makers to earn long-run economic profit unless they are regulated
         by government officials.
207. Which of the following is reason to study markets where the suppliers are price takers?
     a. There are several markets in which firms essentially take the price as given.
     b. The price-taker model enhances our understanding of how a broad range of markets with low
         entry barriers work.
     c. The price-taker model helps increase our knowledge of competition as a dynamic process.
*    d. All of the above are true.
208. Competitive price-taker markets are characterized by
*    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.
209. Which of the following products would most closely fit the competitive price-taker model?
     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
210. Mr. Merita sells wheat in a price-taker market. With regard to his price and output choices, which of
     the following is true?
     a. Merita will constantly attempt to increase the price of his product so he can increase his total
          revenue.
     b. Since the price of his product is dictated by the market, Merita will not have an incentive to
          control per-unit cost.
     c. Since the price of his product is dictated by the market, Merita has no production decisions to
          make.
*    d. It would be senseless for Merita to try to increase sales by lowering the price of his product
          because he can already sell all of his output at the market price.
211. In which one of the following market structures are sellers price takers?
*    a. pure competition
     b. pure monopoly
     c. monopolistic competition
     d. oligopoly
212. ―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
     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.
368    Chapter 9/Price Takers and the Competitive Process


213. Which of the following conditions will necessarily be true in short-run equilibrium for a profit-
     maximizing firm in a price-taker market?
     a. The firm will earn economic profit.
     b. The firm’s average total cost will be at a minimum.
*    c. The firm will produce at an output where marginal revenue just equals marginal cost.
     d. The firm’s average fixed cost will be constant.
214. The short-run market supply curve in a price-taker industry equals the horizontal sum of the
     individual firm’s
*    a. MC curves above AVC.
     b. AVC curves above marginal revenue.
     c. MC curves above ATC.
     d. MC curves between AVC and ATC.
215. When a firm is operating in a price-taker market, marginal revenue is
*    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.
216. In the short run, a profit-maximizing price taker will expand output as long as the market price
     exceeds
     a. average variable cost.
*    b. marginal cost.
     c. average total cost.
     d. average fixed cost.
217. In the short run, a firm should remain in business as long as the market price at least exceeds
*    a. average variable cost.
     b. marginal cost.
     c. average total cost.
     d. average fixed cost.
218. If the market price for a product falls to where a firm is taking losses, but the firm perceives this
     situation to be temporary, the firm should
     a. go out of business immediately because firms in this industry can expect only long-run
           economic losses.
     b. shut down in the short run but plan on remaining in business in the long run.
*    c. continue to operate as long as it can cover its variable costs.
     d. enter into collusive agreements so that market price can be increased more rapidly.
219. Cold Duck Airlines flies between Tacoma and Portland. The company leases planes on a year-long
     contract at a cost that averages $100 per flight. Other costs (fuel, flight attendants, etc.) amount to
     $100 per flight. Currently, Cold Duck’s revenues are $200 per flight. All prices and costs are
     expected to continue at their present levels. If it wants to maximize profit, Cold Duck Airlines
     should
     a. drop this flight route immediately.
*    b. continue the flight route indefinitely.
     c. continue flying until the lease expires and then drop the run.
     d. drop the flight route now but renew the lease if conditions improve.
                                            Chapter 9/Price Takers and the Competitive Process             369


220. Suppose a price-taker firm is currently unable to cover its average variable costs but it expects to
     operate profitably in the future. What should the firm do now?
     a. Nothing, it is making a profit.
     b. It should continue to operate in the short run even though it is losing money.
*    c. It should shut down immediately.
     d. It should go-out-of-business to avoid any additional losses.
221. In a competitive price-taker market, a firm’s short-run supply curve is its
     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.
222. Which of the following will be true for a competitive firm in long-run equilibrium?
     a. P = MC
     b. P = ATC
     c. ATC = MC
*    d. All of the above are correct.
223. Suppose wheat farmers are price takers. If wheat farmers are currently making economic profits,
     over time we would expect that
     a. existing wheat farmers would plant more acres of wheat.
     b. farmers growing other crops would switch some of their land from these crops to the growing
          of wheat.
     c. the wheat farmers will continue to earn economic profits because they would be driven out of
          business without such profit.
*    d. both a and b are correct.
224. When an economist states that a firm is earning zero economic profit, this statement implies that the
     firm
     a. will be forced out of business unless market conditions change.
*    b. is doing as well as it could in any other line of business.
     c. is earning a zero rate of return on its assets.
     d. could earn a higher rate of return in other industries.
225. When a competitive price-taker market is in long-run equilibrium,
     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 true.
226. Assume that ―PC Clone‖ computer makers are price takers operating in an increasing cost industry.
     If demand increases, initially the PC manufacturers will be able to make economic profits. What is
     likely to happen to these profits with the passage of time?
     a. They will persist as long as the demand for personal computers is high.
     b. As computer makers compete for inputs (chips, disk drives, engineers, etc.), they will bid up
          input prices, which will decrease costs and increase their profitability.
     c. Once consumers know that the computer makers are earning profits, they will reduce their
          purchases, which will lead to a reduction in demand and a lower market price.
*    d. New PC manufacturers will enter the industry over time, which will lead to an increase in
          supply and a reduction in computer prices until the profits are eliminated.
370    Chapter 9/Price Takers and the Competitive Process


227. 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
     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.
228. In a competitive market, profit can be considered a reward to businesses that
*    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.
229. If the video/CD rental business is a market with low entry barriers, and the firms in the market are
     earning economic profit, which of the following will tend to happen in the future?
*    a. Additional firms will enter the market.
     b. The profitability of the firms in the industry will increase.
     c. The rental prices for videos and CDs will rise.
     d. Many firms in the video/CD rental market will begin to leave the industry.
230. The competitive market process tends to promote economic prosperity because it
     a. keeps the prices of goods higher than their production costs.
     b. creates inefficiencies, which causes people to economize.
*    c. directs self-interested action toward the production of goods that are highly valued relative to
         their cost.
     d. sends signals to the government about which goods to produce.

Figure 19




231. Figure 19 illustrates a firm
     a. in a price-taker market earning economic profit.
     b. in a price-searcher market earning a profit.
     c. that can break even when it maximizes profit.
*    d. that should shut down immediately.
                                         Chapter 9/Price Takers and the Competitive Process      371


Figure 20




232. Figure 20 illustrates a firm
     a. capable of earning economic profits.
*    b. that can only break even when it maximizes economic profit.
     c. taking economic losses.
     d. that should shut down immediately.


Figure 21




233. Figure 21 illustrates a firm
*    a. capable of earning economic profit.
     b. that is only able to break even when it maximizes economic profit.
     c. making economic losses.
     d. that should shut down immediately.
372    Chapter 9/Price Takers and the Competitive Process


Figure 22




234. Figure 22 illustrates a price-taker firm operating at a loss. This firm should
     a. go out of business immediately because it will never be able to make a profit.
     b. raise the price of its product.
*    c. operate in the short run if it expects that an increase in the market price will lead to future
         profitability.
     d. shut down in the short run but reopen if conditions improve.
235. Which one of the following is most likely to be a price taker?
     a. a well-known movie actor
*    b. a vegetable farmer
     c. a local fast-food outlet
     d. a popular local restaurant
236. If a firm is optimistic about its future business prospects but is losing money, the firm should
     shutdown temporarily if price falls below
     a. marginal cost.
*    b. average variable cost.
     c. average total cost.
     d. total cost.
237. If a ski resort that is highly profitable during the winter months is unable to cover its variable costs
     during the summer months, it should
     a. raise its prices during the winter months.
     b. lower its prices during the summer months.
*    c. operate during the winter but shut down during the summer months.
     d. operate during all months of the year as long as its profits during the winter exceed its losses
           during the summer.
238. When a price-taker market is in long-run equilibrium which of the following will exist?
     a. Price will exceed marginal revenue.
*    b. Average total cost will be at a minimum.
     c. The firm will earn economic profit.
     d. Marginal revenue will exceed marginal cost.
                                           Chapter 9/Price Takers and the Competitive Process         373


239. When a firm is losing money in a price-taker industry, this implies that
     a. consumers are unaware of just how valuable the product supplied by the firm really is.
*    b. the value of the resources used to make the product is being reduced.
     c. the firm must go out of business immediately.
     d. this product cannot be produced profitably in the long run.
240. Which is the best example of an industry where there are significant diseconomies of scale?
     a. automobiles
*    b. parking garages in many downtown areas
     c. higher education
     d. fast food

CRITICAL THINKING QUESTIONS
241. The competitive price-taker model is usually used to illustrate the competitive process. If firms
     cannot choose their price, where is the competition?
     Answer
     This is a good question. The firms do not compete with price. The products are identical, so there is
     no competition based on product quality, packaging, advertising, or location. These concepts are all
     introduced in later market models. Competition does occur in the price-taker model when existing
     firms earn economic profit. When this occurs, other firms enter and compete the profit away. Firms
     also compete to keep unit production costs low. Only the firms with low production costs will be
     able to survive in the market.
242. If the model of price-taking firms is so unrealistic and restrictive, why study it?
     Answer
     It may be somewhat unrealistic, but it does have powerful explanatory power that approximates
     actions in the real world. Also, by studying this simple model first, we can move on to more
     complicated, and realistic, models. As with anything, you have to walk before you can run.
243. Why is it considered ―ideal‖ for price to just equal marginal cost?
     Answer
     When price equals marginal cost, the cost of manufacturing the marginal good just equals
     consumer desire for the good, as reflected by the market price. Consider the situation where price
     exceeds marginal cost. This implies that consumer desire for the product exceeds what it would cost
     the firm to produce one additional unit. From society’s viewpoint (allocative efficiency), it would
     benefit from having the marginal good produced.
244. 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?
     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.
374    Chapter 9/Price Takers and the Competitive Process


245. 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?
     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.
246. Regarding costs of production, can a firm ever be at a point that is not on the marginal cost curve?
     Explain.
     Answer
     A profit-maximizing, price-taker firm always operates along its marginal cost curve. If output
     expands, we move rightward along the curve, and if it contracts, we move along the curve to the
     left. Since, by definition, a profit-maximizing price taker will produce the quantity where price
     (marginal revenue) equals marginal cost, the cost of producing the last unit will always be relevant,
     and you never move to a point that is not on the marginal cost curve.
247. When the demand for a product falls, why do costs of production go down in an increasing cost
     industry?
     Answer
     When the demand falls, surplus resources will be available in this industry. The input markets for
     this increasing cost industry will not clear at their existing prices, and they will have to fall.
     Suppliers of raw materials would prefer to sell at lower prices than to not sell at all. Similarly, we
     would expect workers to prefer lower wages to unemployment. For these reasons, the long-run
     supply curve is upward sloping, whether firms are experiencing an increase or a decrease in
     demand.
248. 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?
     Answer
     If a firm cannot cover its variable cost, this implies revenue insufficient to pay variable expenses,
     such as employee wages, raw materials, and electricity. By shutting down, you lose less money
     (reflected in your fixed cost) than by continuing to operate. When the situation improves (price
     rises), you can again begin production and sales. Even if start-up costs are zero, you may
     permanently lose customers who will have switched to your competitors. Since firms sell all of their
     output in pure competition, this is not significant, but it may be a consideration in other market
     structures, especially where brand loyalty is important.
249. 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?
     Answer
     While any firm would like to maintain the higher price and experience economic profit, competition
     prevents this. Any technological advances (with the exception of discoveries covered by patents and
     trademarks) are likely to be available to all firms. As these technological advances lower costs,
     firms lower their prices to compete customers away from other sellers. This process occurs until the
     market price reflects the long-run equilibrium condition of zero economic profit.
250. 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?
     Answer
     As humans, we can certainly feel sorry for individuals forced out of business, but the process is
     efficient from an economic standpoint and desirable from society’s standpoint. When demand falls,
                                      Chapter 9/Price Takers and the Competitive Process         375


resources are then overallocated to the pizza industry. The losses reflect this overallocation. They
show that the firms are taking resources and reducing their value. To achieve the new resource
allocation desired by consumers, resources will have to leave the industry and relocate in an
industry where consumers value them more.

				
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