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Exam 14: Firms in Competitive Markets

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Question 21

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Why would a profit-maximising firm in a competitive market set a price higher than the market price?

A) if this would result in higher profits
B) if the firm's costs had increased
C) if this would increase the firm's market share
D) none of the above

E) A) and D)
F) C) and D)

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Question 22

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When a profit-maximising firm in a competitive market experiences rising prices, it will respond with an increase in production.

A) True
B) False

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Question 23

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New Zealand possums produce the highest quality fur, due to the large pelts per body size. Demand for New Zealand possums products has risen dramatically. This is partly a result of the conservation benefits of harvesting New Zealand possums. This has made the product seem more environment-friendly than other fur products and boosted sales to concerned consumers. Assume that the possums market satisfies all of the attributes of a competitive market. Further assume that high grade possum furs are the most expensive input into the possum fur production function. a. Use a graph of the market for possum fur to demonstrate the effect of its environmentally friendly status on the market equilibrium. b. Graph the reaction of an individual incumbent firm to the increase in market demand. In your graph, identify the firm's revenue and cost structures. c. What would you predict would happen to long-run industry supply if the price of possum fur increased as possum culling increased their production of possum furs? Use a graph to demonstrate the validity of your prediction.

When new firms have an incentive to enter a competitive market, their entry will:

By comparing the marginal revenue and marginal cost from each unit produced, a firm in a competitive market can determine the profit-maximising level of production.

Graph 14-5 This graph depicts the cost structure of a firm in a competitive market. Use the graph to answer the following question(s) . -Refer to Graph 14-5. When market price is P₁, a profit-maximising firm's total revenue can be represented by the area:

A firm in a competitive market produces and sells 500 door knobs at a price of $10 each. It then chooses to increase its output to 1000 door knobs. After the increase in output, its average revenue will:

A profit-maximising firm should always increase the level of production if marginal cost exceeds marginal revenue.

When a competitive market experiences an increase in demand that induces an increase in producer costs, which of the following is most likely to occur?

When profit-maximising firms in competitive markets are making losses:

Give two reasons why the long-run industry supply curve may slope upward. Use an example to demonstrate your reasons.

If it is optimal for a firm to exit in the short-run, then it will also be optimal for the firm to exit in the long-run, all else equal.

Graph 14-6 In this graph, panel (a) depicts the linear marginal cost of a firm in a competitive market, and panel (b) depicts the linear market supply curve for a market with a fixed number of identical firms. Use the graph to answer the following question(s) . -Refer to Graph 14-6. If there are 40 identical firms in this market, what level of output will be supplied to the market when the price is $2.00?

Graph 14-5 This graph depicts the cost structure of a firm in a competitive market. Use the graph to answer the following question(s) . -Refer to Graph 14-5. When market price is P₄, a profit-maximising firm's total cost can be represented by the area:

Assume the market for lawn mowing is competitive. If a firm has no fixed costs and constant marginal costs, then a doubling of output will lead to a doubling of total revenue.

Graph 14-6 In this graph, panel (a) depicts the linear marginal cost of a firm in a competitive market, and panel (b) depicts the linear market supply curve for a market with a fixed number of identical firms. Use the graph to answer the following question(s) . -Refer to Graph 14-6. If at a market price of $1.50, 18 750 units of output are supplied to this market, how many identical firms are participating in this market?

In a competitive market, individual buyers and sellers have little ability to influence price.

Graph 14-5 This graph depicts the cost structure of a firm in a competitive market. Use the graph to answer the following question(s) . -Refer to Graph 14-5. When market price is P₁, a profit-maximising firm's total profit or loss can be represented by which area?

Table 14-1 This table shows the revenue and costs of a parrot farmer. -Refer to Table 14-1. If the farmer chooses to maximise profit, the appropriate output level is where marginal cost is equal to:

Graph 14-8 -Refer to Graph 14-8. If the market starts in equilibrium at point C in panel (b) , a decrease in demand will ultimately lead to: