ECO2023 Notes Multiple Choice Practice Test 3 Chapter 9 Price Takers and the Competitive Process 2 Learning Goals 1 Determine when a firm will temporarily or permanently go out of business 2 Explain the process of competition and identify the effects on consumers and producers Competition 1 Reduces costs and prices 2 Induces firms to produce the goods consumers want 1 Recourses moved from unproductive areas to productive areas 3 Spurs innovation and the expansion of new markets 1 Competition as Dynamic Process 1 Puts the profit motive of sellers to work for buyers 2 Provides consumers with alternative suppliers 1 Discipline Sellers Price Takers 1 Identical Products 1 Ex Wheat corn soybeans 2 Small firm relative to market 3 Price market equilibrium price 4 No barriers to entry exit 5 Purely competitive their respective costs of production firms are price takers as a purely competitive markets In a price taker market a all firms in the market charge different prices depending upon 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 Historically most economists have referred to markets where it b monopoly markets c open door markets d price searcher markets If a firm in a price taker market is earning zero economic profit 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 How they maximize profit 1 1 Decide to open or close 1 Decision made based on fixed costs variable costs and total revenue 1 Close can t pay variable costs 2 1 MR AVC 3 2 TR TVC 2 2 If open decide how much to produce If MR MC keep producing 1 2 MC Marginal Price 3 Shut down rules 1 Temporary Close can cover variable costs in near future 2 Permanent Close cannot cover variable costs in near future To maximize profits a firm should always produce the level of a marginal cost equals average total cost b average total cost equals price c marginal cost equals marginal revenue d marginal revenue equals price output where 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 If you were the owner of a price taker firm operating at an d marginal cost will decline as output is expanded c When firms in a price taker market are earning economic d will be able to earn positive economic profits in the long run If marginal revenue exceeds marginal cost at the current level a other firms in the industry will shut down as the firm expands Which of the following is true a When firms in a price taker market are earning zero b the market price will rise as the firm expands output c producing and selling an additional unit will add more to total of output profit will increase when output is expanded because output revenue than it adds to total cost 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 losses some firms will exit the industry causing the market price to rise until the remaining firms are earning zero economic profit the average total cost of production for firms in the industry that would be offset by longrun economic losses down to the average total cost of production in the long run the long run 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 regulation b with firms able to enter and leave the industry freely competition will drive prices down to the level of production costs c firms in the industry would earn positive economic profits in b new firms would enter the industry which would drive price d most firms in the industry would shut down in the long run a firms in the industry would earn short run economic profits a firms will keep their prices low under fear of government d Both b and c are true If the market price in a price taking industry was currently above c by definition production costs always rise to equal the d mismanagement on the part of owners generally results in a to maximize profits you should remain open in December c you will be able to avoid making a loss by shutting down in d you should go out of business in the long run if there is any market price the firms not equating marginal revenue and marginal cost 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 b to maximize profits you should shut down in December December single month in which you do not earn a profit FYI Sanitation is currently eight months into a year long lease contract on a garbage truck at a cost that averages 500 per month 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 for next year year renew the lease for next year operating the truck again next year a stop operating the truck immediately and not renew the lease c continue operating the truck until the lease expires then not d stop operating the truck now but renew the lease and begin b continue operating the truck then renew the lease for next Output 0 1 2 3 4 Total Cost 25 65 95 140 195 255 The schedule of total cost for a firm in a price taker market is 5 given in the table 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 Know Difference between Price Taker and Price Searcher a 1 b 2 c 3 d 4 Chapter 10 Price Searcher Markets with Low Entry Barriers Learning Goals 1 Characterize and explain the output decisions of competitive price searcher markets 2 Bring out the role of the entrepreneur in Bring out the role of the entrepreneur in decision
View Full Document
Unlocking...