Question 1

Which of the following is NOT a characteristic of a perfectly competitive market?

Accepted Answer

There are significant barriers to entry.

Question 2

Suppose Farmer Jones sells oranges in a perfectly competitive market at a price of $$14 per crate. If she sells 4 crates, what is her total revenue, average revenue, and marginal revenue? Use the formulas TR = P$$ 	imes Q$$, AR$$ = \frac{TR}{Q}$$, and MR$$ = \frac{\Delta TR}{\Delta Q}$.

Accepted Answer

Total revenue is $$56, average revenue is 14$$, marginal revenue is $14.

Question 3

A perfectly competitive firm faces a market price of $$22 per unit. Its average variable cost is 18 $$per unit, and its average total cost is $25 per unit. What should the firm do in the short run?

Accepted Answer

Continue to produce because price is greater than average variable cost.

Question 4

An assistant professor quits her $$75,000 job, withdraws 115$$,000 from a CD earning 4% interest, and opens a bookstore. At year-end, her accounting profit is $$82,500. What is her economic profit? Use the formula $$	ext{Economic Profit} = 	ext{Accounting Profit} - 	ext{Implicit Costs}$.

Accepted Answer

$2,900

Question 5

Suppose Xavier’s explicit costs are $$20,000 (rent), 28$$,000 (secretary), and $$7,000 (advertising). His total revenue is 87$$,000, and he could earn $32,000 elsewhere. What is Xavier’s economic profit?

Accepted Answer

$30,000

Question 6

If a perfectly competitive firm is earning positive economic profit in the short run, what will happen in the long run?

Accepted Answer

New firms will enter, driving economic profit to zero.

Question 7

A farmer invests $$1,000,000 in land, pays 70$$,000 in rent, $$110,000 in wages, and produces 200,000 baskets of peaches sold at 3 $$each. The interest rate is 3%, and the farmer could earn $$45,000 as a shoe salesman. What is the farmer’s economic profit? Use $$	ext{Economic Profit} = 	ext{Total Revenue} - 	ext{Explicit Costs} - 	ext{Implicit Costs}$.

Accepted Answer

$345,000

Question 8

Suppose the market for apples becomes more popular due to a new diet. What will likely happen to the number of apple orchards and housing prices near New York City?

Accepted Answer

The number of orchards will increase and housing prices will increase.

Question 9

In the short run, a perfectly competitive firm should shut down if:

Accepted Answer

Price is less than average variable cost.

Question 10

Matthew Rafferty produces hiking boots. If the market price is $$185 and his marginal cost of producing the 10th boot is 185$$, what is his profit-maximizing output?

Accepted Answer

10 boots

Question 11

Suppose the equilibrium price in the hiking boot market falls to $$70, and Rafferty’s average variable cost for all positive output is above 70. $$What should he do?

Accepted Answer

Produce zero boots (shut down)

Question 12

A perfectly competitive firm’s marginal cost curve intersects its average total cost curve at $24 per box and 30 boxes per week. What is the firm’s long-run equilibrium profit?

Accepted Answer

$0

Question 13

Farmer Parker’s marginal revenue is $$4 for each bushel of wheat. His marginal cost for the third bushel is 1.50$$, and for the fourth bushel is $2.00. What is the profit-maximizing quantity?

Accepted Answer

6 bushels

Question 14

If the marginal cost of wheat increases by $$0.50 for every bushel, and the marginal revenue remains at 4$$, will Farmer Parker’s profit-maximizing output change?

Accepted Answer

No, because marginal revenue still equals marginal cost at the same output.

Question 15

Isabella grows pumpkins in a perfectly competitive market. If the market price is $$5 per box, and her average total cost is 6 $$per box at the profit-maximizing output, what is her profit?

Accepted Answer

Negative

Question 16

Which of the following best describes the demand curve faced by an individual firm in a perfectly competitive market?

Accepted Answer

A horizontal line at the market price

Question 17

Sony suffered losses selling televisions from 2004 to 2013 despite strong demand. Why couldn’t Sony simply raise prices to earn a profit?

Accepted Answer

Because the market was highly competitive and raising prices would cause consumers to buy from competitors.

Question 18

In the long run, what happens to the number of firms in a perfectly competitive industry if firms are earning economic profits?

Accepted Answer

The number of firms increases until economic profit is zero.

Question 19

A firm in a perfectly competitive market is producing where $$P = MC = ATC. $$What is the firm’s profit?

Accepted Answer

Zero (normal profit)

Question 20

Suppose a firm’s total revenue is $$40,000, total explicit costs are 30$$,000, and implicit costs are $15,000. What is the firm’s economic profit?

Accepted Answer

$-5,000

CH. 12 Study Guide

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