Principles of Microeconomics, 8e (Case/Fair)
Chapter 7: The Production Process: The Behavior of Profit-Maximizing Firms
147
The Behavior of Profit Maximizing Firms
Multiple Choice
147
Refer to the information provided in Figure 7.1 below to answer the questions that follow.
Figure 7.1
147
1)
147
Refer to Figure 7.1. Panel _____ represents the demand curve facing a perfectly competitive producer of wheat.
147
A)
147
A
147
B)
147
B
147
C)
147
C
147
D)
147
D
147
Answer:
147
B
147
Diff: 2
147
Type: A
147
147
2)
147
Jerry sells cherry sno-cones along the boardwalk in New Jersey. During the summer this is a perfectly competitive business, and Jerry faces a perfectly elastic demand curve. If he wants to try to increase revenues he should
147
A)
147
raise the price of his sno-cones to make more per sale.
147
B)
147
lower the price of his sno-cones to try to sell more.
147
C)
147
keep the price the same but produce more to increase sales.
147
D)
147
do nothing; there is nothing he can do to increase revenue.
147
Answer:
147
C
147
Diff: 3
147
Type: C
147
147
3)
147
A firm in a perfectly competitive market has no control over price because
147
A)
147
the government imposes price ceilings on the products produced in perfectly competitive industries.
147
B)
147
there is free entry and exit from the industry.
147
C)
147
every firm's product is a perfect substitute for every other firm's product.
147
D)
147
the market demand for products produced in perfectly competitive industries is perfectly elastic.
147
Answer:
147
C
147
Diff: 1
147
Type: F
147
147
4)
147
The closest example of a perfectly competitive industry is
147
A)
147
fast foods.
147
B)
147
beer.
147
C)
147
gasoline stations.
147
D)
147
soybeans.
147
Answer:
147
D
147
Diff: 3
147
Type: C
147
147
5)
147
Total revenue minus total cost is equal to
147
A)
147
the rate of return.
147
B)
147
marginal revenue.
147
C)
147
profit.
147
D)
147
net cost.
147
Answer:
147
C
147
Diff: 1
147
Type: F
147
147
Refer to the information provided in Figure 7.2 below to answer the following questions.
Figure 7.2
147
6)
147
Refer to Figure 7.2. This corn producer produces 100 bushels of corn and sells each bushel at $5. The cost of producing each unit bushel is $2. This corn producer's total revenue is
147
A)
147
$20.
147
B)
147
$200.
147
C)
147
$300.
147
D)
147
$500.
147
Answer:
147
D
147
Diff: 2
147
Type: A
147
147
7)
147
Refer to Figure 7.2. This corn producer earns a total revenue of $900. Each bushel of corn is sold for $5. This corn producer must be selling __________ bushels of corn.
147
A)
147
180
147
B)
147
450
147
C)
147
900
147
D)
147
4,500
147
Answer:
147
A
147
Diff: 2
147
Type: A
147
147
8)
147
The Wax Works sells 400 candles at a price of $10 per candle. The Wax Works' total costs for producing 400 candles are $500. The Wax Works' economic profit is
147
A)
147
$100.
147
B)
147
$3,500.
147
C)
147
$4,500.
147
D)
147
indeterminate from this information.
147
Answer:
147
D
147
Diff: 2
147
Type: A
147
147
9)
147
Economic costs
147
A)
147
include both a normal rate of return on investment and the opportunity cost of each factor of production.
147
B)
147
are equal to the direct costs of hiring all factors of production.
147
C)
147
are the opportunity cost of each factor of production minus any interest charges paid on borrowed funds.
147
D)
147
are equal to total revenue minus accounting profit.
147
Answer:
147
A
147
Diff: 2
147
Type: D
147
147
10)
147
The Sweet Success Bakery sells 400 cakes at a price of $10 per cake. Its total costs for producing 400 cakes are $500. The Sweet Success Bakery's economic profits are
147
A)
147
$100.
147
B)
147
$3,500.
147
C)
147
$4,500.
147
D)
147
indeterminate from this information.
147
Answer:
147
B
147
Diff: 2
147
Type: A
147
147
11)
147
The Oh So Humble Bakery sells 300 muffins at a price of $1 per muffin. Its explicit costs for producing 300 muffins are $250. The Oh So Humble Bakery's economic profits are
147
A)
147
$35.
147
B)
147
$50.
147
C)
147
$250.
147
D)
147
indeterminate from this information.
147
Answer:
147
D
147
Diff: 2
147
Type: A
147
147
12)
147
If economic profit is zero, a firm
147
A)
147
earns a negative rate of return.
147
B)
147
will leave the industry.
147
C)
147
earns a positive but below normal rate of return.
147
D)
147
earns exactly a normal rate of return.
147
Answer:
147
D
147
Diff: 2
147
Type: D
147
147
13)
147
You own a building that has four possible uses: a cafe, a craft store, a hardware store, and a bookstore. The value of the building in each use is $2,000; $3,000; $4,000; and $5,000, respectively. You decide to open a hardware store. The opportunity cost of using this building for a hardware store is
147
A)
147
$2,000, the value if the building is used as a cafe.
147
B)
147
$3,000, the value if the building is used as a craft store.
147
C)
147
$10,000, the sum of the values if the building is used for a cafe, a craft store, or a bookstore.
147
D)
147
$5,000, the value if the building is used for a bookstore.
147
Answer:
147
D
147
Diff: 3
147
Type: C
147
147
Refer to the information provided in Scenario 1 below to answer the questions that follow.
SCENARIO 1: You are the owner and only employee of a company that writes computer software that is used by gamblers to collect sports data. Last year you earned a total revenue of $90,000. Your costs for equipment, rent, and supplies were $60,000. To start this business you invested an amount of your own capital that could pay you a return of $40,000 a year.
147
14)
147
Refer to Scenario 1. During the year your economic costs were
147
A)
147
$40,000.
147
B)
147
$60,000.
147
C)
147
$100,000.
147
D)
147
$130,000.
147
Answer:
147
C
147
Diff: 2
147
Type: A
147
147
15)
147
Refer to Scenario 1. A yearly normal rate of return for your computer software firm would be
147
A)
147
$20,000.
147
B)
147
$40,000.
147
C)
147
$60,000.
147
D)
147
$100,000.
147
Answer:
147
B
147
Diff: 2
147
Type: A
147
147
16)
147
Refer to Scenario 1. Your accounting profit last year was
147
A)
147
$10,000.
147
B)
147
$30,000.
147
C)
147
$50,000.
147
D)
147
$60,000.
147
Answer:
147
B
147
Diff: 2
147
Type: A
147
147
17)
147
Refer to Scenario 1. Your economic profit last year was
147
A)
147
-$40,000.
147
B)
147
-$10,000.
147
C)
147
$10,000.
147
D)
147
$30,000.
147
Answer:
147
B
147
Diff: 2
147
Type: A
147
147
Refer to the information provided in Scenario 2 below to answer the questions that follow.
SCENARIO 2: You are the owner and only employee of a company that sets odds for sporting events. Last year you earned a total revenue of $100,000. Your costs for rent and supplies were $50,000. To start this business you invested an amount of your own capital that could pay you a return of $20,000 a year.
147
18)
147
Refer to Scenario 2. During the year your economic costs were
147
A)
147
$70,000.
147
B)
147
$60,000.
147
C)
147
$50,000.
147
D)
147
$20,000.
147
Answer:
147
A
147
Diff: 2
147
Type: A
147
147
19)
147
Refer to Scenario 2. A yearly normal profit for your company is
147
A)
147
$20,000.
147
B)
147
$40,000.
147
C)
147
$60,000.
147
D)
147
$100,000.
147
Answer:
147
A
147
Diff: 2
147
Type: A
147
147
20)
147
Refer to Scenario 2. Your accounting profit last year was
147
A)
147
$10,000.
147
B)
147
$30,000.
147
C)
147
$50,000.
147
D)
147
$60,000.
147
Answer:
147
C
147
Diff: 2
147
Type: A
147
147
21)
147
Refer to Scenario 2. Your economic profit last year was
147
A)
147
-$40,000.
147
B)
147
-$10,000.
147
C)
147
$10,000.
147
D)
147
$30,000.
147
Answer:
147
D
147
Diff: 2
147
Type: A
147
147
22)
147
There are 100 dog kennels in Atlanta. An economist studying the pricing behavior of dog kennels tells you that she is limiting her analysis to a time period that does not allow for any new dog kennels to enter the industry or for any established dog kennels to leave the industry. The time period this economist referred to is the
147
A)
147
market period.
147
B)
147
industry run.
147
C)
147
long run.
147
D)
147
short run.
147
Answer:
147
D
147
Diff: 3
147
Type: C
147
147
23)
147
In the long run,
147
A)
147
a firm can shut down, but it cannot exit the industry.
147
B)
147
there are no fixed factors of production.
147
C)
147
a firm can vary all inputs, but it cannot change the mix of inputs it uses.
147
D)
147
all firms must make economic profits.
147
Answer:
147
B
147
Diff: 3
147
Type: C
147
147
Refer to the information provided in the figure below to answer the questions that follow.
147
24)
147
Refer to the figure above. Assuming wool is a perfectly competitive industry, the demand curve faced by each wool producer is __________ starting at $3.00 per pound.
147
A)
147
downward sloping
147
B)
147
upward sloping
147
C)
147
vertical
147
D)
147
horizontal
147
Answer:
147
D
147
Diff: 1
147
Type: F
147
147
Refer to the information provided in the figure below to answer the questions that follow.
147
25)
147
Refer to figure above. The demand curve faced by each coffee producer is __________ starting at $4.00 per pound.
147
A)
147
downward sloping.
147
B)
147
upward sloping.
147
C)
147
vertical.
147
D)
147
horizontal.
147
Answer:
147
D
147
Diff: 3
147
Type: C
147
147
26)
147
A market demand curve is __________.
147
A)
147
downward sloping
147
B)
147
upward sloping
147
C)
147
perfectly elastic
147
D)
147
perfectly inelastic
147
Answer:
147
A
147
Diff: 2
147
Type: D
147
147
27)
147
If a firm in a perfectly competitive industry raises price above market price,
147
A)
147
total revenue for the firm will increase.
147
B)
147
profit will increase.
147
C)
147
sales will drop to zero.
147
D)
147
demand curves will become downward sloping.
147
Answer:
147
C
147
Diff: 3
147
Type: C
147
147
28)
147
A perfectly elastic demand curve implies that, ceteris paribus,
147
A)
147
a firm can sell more by lowering its price.
147
B)
147
if a firm raises its price above the market price, quantity demanded will equal zero.
147
C)
147
the price a firm charges is irrelevant, as it will sell the same amount regardless of the price charged.
147
D)
147
a firm can raise its price and not lose all its customers.
147
Answer:
147
B
147
Diff: 1
147
Type: F
147
147
29)
147
Assume the wool industry is perfectly competitive. Why is it difficult for a wool producer to make excess profits?
147
A)
147
The fact that wool producers are "price takers."
147
B)
147
The assumption that wool producers in the industry do not "differentiate" their products.
147
C)
147
The fact that the demand curve facing each wool producer is perfectly elastic.
147
D)
147
There is free entry into the wool industry.
147
Answer:
147
D
147
Diff: 2
147
Type: D
147
147
30)
147
Assume the wool industry is perfectly competitive. The market demand curve for wool is __________ and each individual wool producer's demand curve is __________.
147
A)
147
downward sloping; horizontal
147
B)
147
horizontal; downward sloping
147
C)
147
horizontal; horizontal
147
D)
147
downward sloping; downward sloping
147
Answer:
147
A
147
Diff: 3
147
Type: C
147
147
31)
147
Free entry implies that
147
A)
147
a perfectly competitive firm can never earn a profit.
147
B)
147
if firms in an industry are making excessively high profits, new firms are likely to enter the industry.
147
C)
147
the government regulates the number of firms that are allowed in an industry.
147
D)
147
firms will always earn a profit, as new firms can enter the industry at any time they like.
147
Answer:
147
B
147
Diff: 2
147
Type: D
147
147
32)
147
The fast-food industry is not considered perfectly competitive because:
147
A)
147
entry and exit are strictly regulated by the government.
147
B)
147
the firm's products are not homogeneous.
147
C)
147
firms spend a large amount of money on advertising.
147
D)
147
there are a very large number of firms.