Exam 2 Chp 8

Question 1

Economists define a market to be competitive when the firms
A) watch each​ other’s behavior closely.
B) spend large amounts of money on advertising to lure customers away from the competition.
C) are price takers.
D) All of the above.

Answer 1

C) are price takers

Question 2

In a perfectly competitive​ market,
A) firms can freely enter and exit.
B) firms sell a differentiated product.
C) transaction costs are high.
D) All of the above.

Answer 2

A) firms can freely enter and exit.

Question 3

Should a competitive firm ever produce when it is losing​ money? Why or why​ not?
A) No, the firm should shutdown if it is making an accounting loss.
B) ​No, the firm should shutdown if it is making an economic loss.
C) ​Yes, as long as revenue can cover total variable costs plus any portion of fixed costs.
D) ​Yes, as long as revenue can cover some portion of total variable costs.

Answer 3

C) ​Yes, as long as revenue can cover total variable costs plus any portion of fixed costs.

Question 4

List the 5 characteristics that force firms to be price takers:

Answer 4

• Many small buyers and sellers
• All firms produce identical products
• Buyers and sellers have full information about price and product characteristics
• Negligible transaction costs
• Firms can freely enter and exit the market

Question 5

Suppose the firm faces a price of $31, an average variable cost of $26, and has an average fixed cost of $5. In the short-run, the firm
A) may earn a profit.
B) will just cover all costs.
C) may not be able to determine what to do.
D) None of the above.

Answer 5

B) will just cover all costs.

Question 6

If a firm is currently in a​ short-run equilibrium earning a​ profit, what impact will a​ lump-sum tax have on its production​ decision?

Answer 6

the firm will not change output, but earn a lower profit

Question 7

If a firm is currently in a​ short-run equilibrium earning a​ profit, what impact will an increase in variable factor prices have on its production​ decision?

Answer 7

the firm will decrease output and earn a lower profit.

Question 8

If a country imports a small fraction of the​ world’s supply, we expect it to face
A) a nearly perfectly inelastic, vertical residual supply curve.
B) The type of supply curve it faces cannot be determined.
C) a nearly perfectly elastic, horizontal residual supply curve.
D) an upward-sloping residual supply curve.

Answer 8

C) a nearly perfectly elastic, horizontal residual supply curve.

Question 9

Suppose that the market supply​ elasticity, ƞ=1.2, the demand elasticity in other countries, εo=-0.7, and that the United States’ share of world rice output, θ=10.0%. Its residual supply elasticity, ƞr, is ____.

Answer 9

18.3

(ƞ/θ)-(1/θ - 1)*(εo)

Question 10

A competitive firms residual demand curve is __a__ at the __b__ price.

Answer 10

a) nearly horizontal
b) market