chapter 11: managerial decisions in …...1 60 2 80 3 110 4 165 5 245 if market price is $60, how...

Chapter 11: MANAGERIAL DECISIONS IN COMPETITIVE MARKETS © 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in

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Chapter 11: MANAGERIAL DECISIONS IN COMPETITIVE MARKETS

Multiple Choice 11-1 Which of the following is NOT a condition of a perfect competition:

a. products produced by rival firms are perfect substitutes

b. a single firm cannot affect market supply

c. unrestricted entry and exit

d. industry sales are small

e. each firm has complete knowledge about production and prices

Answer: d

Difficulty: 01 Easy

Topic: Characteristics of Perfect Competition

AACSB: Reflective Thinking

Blooms: Remember

Learning Objective: 11-01

11-2 In a perfectly competitive market

a. a firm must lower price to attract more customers.

b. the additional revenue from selling one more unit of output is less than price.

c. demand facing the industry is perfectly elastic.

d. all of the above

e. none of the above

Answer: e

Difficulty: 01 Easy



Blooms: Remember


11-3 For a price-taking firm, marginal revenue

a. is the addition to total revenue from producing one more unit of output.

b. decreases as the firm produces more output.

c. is equal to price at any level of output.

d. both a and b

e. both a and c

Answer: e

Difficulty: 02 Medium

Topic: Demand Facing a Price-Taking Firm


Blooms: Remember




11-4 Total cost schedule for a competitive firm:

Output Total Cost

0 $ 10

1 60

2 80

3 110

4 165

5 245

If market price is $60, how many units of output will the firm produce?

a. Zero units of output because the firm shuts down.

b. 1 unit of output.

c. 2 units of output.

d. 3 units of output.

e. none of the above.

Answer: e


Topic: Profit Maximization in the Short-Run

AACSB: Analytic

Blooms: Apply



Output Total Cost

0 $ 10

1 60

2 80

3 110

4 165

5 245

If market price is $60, what is the maximum profit the firm can earn?

a. −$10

b. Zero profit, the firm shuts down

c. $75

d. $80

e. $85

Answer: c



AACSB: Analytic

Blooms: Apply





Output Total Cost

0 $ 10

1 60

2 80

3 110

4 165

5 245

If market price is $30, how many units of output will the firm produce?

a. 0, the firm shuts down

b. 1

c. 2

d. 3

e. 4

Answer: a



AACSB: Analytic

Blooms: Apply


11-7 In a perfectly competitive industry the market price is $25. A firm is currently producing 10,000

units of output; average total cost is $28, marginal cost is $20, and average variable cost is $20.

The firm should

a. raise price because the firm is losing money.

b. keep output the same because the firm is producing at minimum average variable cost.

c. produce more because the next unit of output increases profit by $5.

d. produce less because the next unit of output decreased profit by $3.

e. shut down because the firm is losing money.

Answer: c

Difficulty: 01 Easy


AACSB: Analytic

Blooms: Apply




11-8 Below, the graph on the left shows the short-run marginal cost curve for a typical firm selling in a

perfectly competitive industry. The graph on the right shows current industry demand and supply.

If the firm’s demand and marginal revenue curves were drawn in the left-hand graph, what would

be the elasticity of demand?

a. zero

b. −6

c. −0.6

d. infinitely elastic

e. unitary

Answer: d

Difficulty: 01 Easy



Blooms: Remember


11-9 Below, The graph on the left shows the short-run marginal cost curve for a typical firm selling in

a perfectly competitive industry. The graph on the right shows current industry demand and

supply.



What is the marginal revenue for the FIRM from selling the 250th unit of output?

a. $10

b. $8

c. $6

d. $4

e. zero

Answer: b

Difficulty: 01 Easy



Blooms: Understand


11-10 The graph below on the left shows the short-run marginal cost curve for a typical firm selling in a

perfectly competitive industry. The graph on the right shows current industry demand and supply.

What output should the firm produce?

a. 200

b. 250

c. 150

d. 300

Answer: a

Difficulty: 01 Easy





Blooms: Understand


11-11 The graph below shows demand and marginal cost for a perfectly competitive firm. If the firm is

producing 100 units of output, increasing output by one unit would ______ the firm’s profit by

$______.

a. increase, $3

b. increase, $2

c. decrease, $1

d. increase, $1

e. decrease, $2

Answer: d



AACSB: Analytic

Blooms: Apply


11-12 The graph below shows demand and marginal cost for a perfectly competitive firm. If the firm is

producing 300 units of output, decreasing output by one unit would ______ the firm’s profit by

$______.



a. decrease, $2

b. increase, $2

c. increase, $3

d. decrease, $5

e. increase, $5

Answer: b



AACSB: Analytic

Blooms: Apply


11-13 In order to minimize losses in the short run, a perfectly competitive firm should shut down if

a. total revenue is less than total cost.

b. total revenue is less than total fixed cost.

c. total revenue is less than total variable cost.

d. total revenue is less than the difference between total fixed cost and total variable cost.

Answer: c




Blooms: Understand


11-14 Below, the graph on the left shows the short−run cost curves for a firm in a perfectly competitive

market, and the graph on the right shows the current market conditions in this industry. In order

to maximize profit, how much output should the firm produce?



a. 20 units

b. 40 units

c. 50 units

d. 60 units

e. 80 units

Answer: c



AACSB: Analytic

Blooms: Apply



market, and the graph on the right shows the current market conditions in this industry. What is

the maximum amount of profit the firm can earn?

a. $ 50

b. $ 40

c. $ 80

d. $150

Answer: a

Difficulty: 03 Hard


AACSB: Analytic

Blooms: Apply





market, and the graph on the right shows the current market conditions in this industry. What do

you expect to happen in the long-run?

a. Market supply will decrease.

b. Market price will decrease.

c. The firm's profit will decrease.

d. both b and c

e. all of the above

Answer: d

Difficulty: 01 Easy



Blooms: Understand


11-17 Which of the following is NOT a characteristic of long-run equilibrium for a perfectly

competitive firm?

a. Price is greater than long-run average cost.

b. Price is equal to long-run marginal cost.

c. Economic profit is zero.

d. The firm produces the output level at which long-run average cost is at its minimum.

Answer: a

Difficulty: 01 Easy



Blooms: Remember


11-18 When total fixed costs increase,

a. the profit-maximizing level of output falls.

b. the firm may be forced to shut down if total fixed costs get too high.

c. economic profit decreases.

d. both a and b

e. both b and c

Answer: c




Topic: Fixed costs


Blooms: Understand


11-19 A competitive firm will maximize profit by producing the level of output at which

a. the last unit of output produced adds the same amount to total revenue as to total cost.

b. the additional revenue from the last unit of output produced exceeds the additional cost of

the last unit by the largest amount.

c. the firm's total revenue exceeds total cost by the largest amount.

d. both a and b

e. both a and c

Answer: e




Blooms: Understand


11-20 Firm A and firm B both have total revenues of $200,000 and total costs of $250,000; firm A has

total fixed costs of $40,000, while firm B has total fixed costs of $70,000. Which of the following

statements are true in the short run?

a. Firm A should operate.

b. Firm B should operate.

c. Firm A should shut down.

d. Firm B should shut down.

e. both b and c

Answer: e



AACSB: Analytic

Blooms: Apply


11-21 When a perfect competitive industry is in long-run equilibrium,

a firms have no incentive to enter or exit the industry.

b. market price is equal to minimum long−run average cost.

c. each firm earns a normal return.

d. both a and c

e. all of the above

Answer: e

Difficulty: 01 Easy



Blooms: Understand




11-22 Which of the following is NOT a characteristic of an increasing cost competitive industry? As the

industry expands in the long run,

a. the price of product remains constant.

b. the prices of some inputs rise.

c. the cost of production increases.

d. the number of firms increase.


Answer: a

Difficulty: 01 Easy



Blooms: Understand


11-23 Which of the following is NOT a characteristic of a constant cost competitive industry? As the

industry expands in the long run,

a. the price of the product remains constant.

b. input prices remain constant.

c. the cost of production remains constant.

d. the number of firms remain constant.


Answer: d

Difficulty: 01 Easy



Blooms: Understand


11-24 An industry is in long-run competitive equilibrium. The price of a substitute good increases.

a. The product price will rise.

b. New firms will enter the market.

c. Firms will begin earning economic profit.

d. a and b

e. all of the above

Answer: e

Difficulty: 01 Easy



Blooms: Understand


11-25 A typical firm in a perfectly competitive market made positive economic profits last period. This

period,

a. market supply will increase.

b. market price will rise.

c. the firm will produce more.

d. the firm's profits will increase.

Answer: a






Blooms: Understand


11-26 Suppose that a perfectly competitive industry is in long-run equilibrium. The price of a

complement good decreases. What will happen?

a. Next period a typical firm will increase output.

b. Next period a typical firm will earn positive economic profit.

c. Eventually firms will exit the industry.

d. both a and b

e. all of the above will happen

Answer: d




Blooms: Understand


11-27 The table below shows a competitive firm's short-run production function. Labor is the firm's

only variable input, and market price for the firm's product is $2 per unit.

Units of Labor Units of Output

3 370

4 490

5 570

6 600

7 620

How much does the fifth unit of labor add to the firm's total revenue?

a. $160

b. $80

c. $60

d. $40

e. $10

Answer: a

Difficulty: 01 Easy

Topic: Profit-Maximizing Input Usage

AACSB: Analytic

Blooms: Apply





3 370

4 490

5 570



6 600

7 620

If the wage rate is $200, how many units of labor will the firm employ?

a. 3

b. 4

c. 5

d. 6

e. 0, the firm shuts down

Answer: b



AACSB: Analytic

Blooms: Apply





3 370

4 490

5 570

6 600

7 620

If the wage rate is $200, the firm should

a. shut down because average revenue product is $200, which is less than marginal revenue

product.

b. shut down because average revenue product is $228, which is greater than the wage rate.

c. produce because average revenue product is $200, which is less than marginal revenue

product.

d. produce because average revenue product is $245, which is greater than the wage rate.

Answer: d



AACSB: Analytic

Blooms: Apply





3 370

4 490

5 570

6 600

7 620



If market price for the firm's product increases to $5, how many units of labor will the firm

employ at a wage rate of $200?

a. 0, the firm shuts down

b. 4

c. 5

d. 6

e. 7

Answer: c



AACSB: Analytic

Blooms: Apply


11-31 A competitive firm will maximize profit by hiring the amount of an input at which

a. the last unit of the input hired adds the same amount to total revenue as to total cost.

b. the additional revenue from the last unit of the input hired exceeds the additional cost of


c. the last unit of the input hired adds the same amount to total output as to total cost.

d. the additional output from the last unit of the input hired exceeds the additional cost of


Answer: a




Blooms: Understand


11-32 A firm in a competitive industry faces a market price for output of $25 and a wage rate of $750.

At the current level of employment (50 units of labor), the marginal product of labor is 20. In

order to maximize profit, the firm should

a. hire less labor because the firm is suffering a loss of $12,500.

b. hire less labor because hiring the last unit of labor decreased profit by 250.

c. hire more labor because hiring another unit of labor would increase profit by $500.

d. keep the level of employment the same because the firm is earning a profit of $500.

Answer: b



AACSB: Analytic

Blooms: Apply




11-33

The graph above shows cost curves for a perfectly competitive firm. If market price is $5, how

much output will the firm produce?

a. 0 units

b. 200 units.

c. 500 units.

d. 600 units

Answer: d

Difficulty: 01 Easy


AACSB: Analytic

Blooms: Apply




11-34


much profit will the firm earn?

a $600

b. $900

c. $3,000

d. −$600

Answer: a



AACSB: Analytic

Blooms: Apply




11-35



a. $200

b. −$200

c. $400

d. −$400

Answer: d



AACSB: Analytic

Blooms: Apply


11-36



a. $600

b. −$600



c. zero

d. $400

Answer: b



AACSB: Analytic

Blooms: Apply


11-37

The graph above shows cost curves for a perfectly competitive firm. The firm will break even if

price is:

a. $2

b. $3.90

c. $5

d. $6

Answer: b

Difficulty: 01 Easy


AACSB: Analytic

Blooms: Apply


11-38 Which of the following CANNOT be true at any output along a perfectly competitive firm's

short-run supply curve?

a. Average total cost is greater than marginal cost.

b. Marginal cost is greater than average total cost.

c. Average variable cost is greater than marginal cost.

d. Marginal cost is greater than average variable cost.

Answer: c




Blooms: Understand




11-39 In a perfectly competitive market,

a. a firm can attract more customers by lowering its price.

b. a firm can sell as much as it wants at the existing market price.

c. the additional revenue from selling one more unit of output is less than the market price.

d. both a and c

e. both b and c

Answer: b

Difficulty: 01 Easy



Blooms: Remember




11-40 To answer the question, refer to the following figure, showing the marginal revenue product

(MRP) and the average revenue product (ARP) curves of a perfectly competitive firm hiring a

single variable input, labor.

If the wage is $20, how many workers will the firm hire?

a. 225

b. 175

c. 200

d. zero

Answer: b

Difficulty: 01 Easy



Blooms: Understand







If the wage is $15, how many workers will the firm hire?

a. 250

b. zero

c. 100

d. 200

Answer: d

Difficulty: 01 Easy



Blooms: Understand







If the wage is above $______, the firm will shut down and hire zero workers in the short run.

a. $41

b. $30

c. $34

d. $32

Answer: c




Blooms: Understand


11-43 Economic rent

a. is the payment to a more productive resource above its opportunity cost.

b. cannot be earned in long-run competitive equilibrium.

c. is competed away in the long run.

d. both b and c

e. all of the above

Answer: a

Difficulty: 01 Easy

Topic: Profit Maximization in the Long-Run


Blooms: Remember




11-44 In long-run competitive equilibrium it is possible for firm owners to

a. earn both rent and economic profit.

b. earn rent but not economic profit.

c. earn both economic profit and rent.

d. both b and c

e. both a and c

Answer: d




Blooms: Understand


11-45 In a perfectly competitive market

a. a firm faces a perfectly elastic demand because there is unrestricted entry and exit.

b. if a firm raises its price, it will lose some, but not all, of its customers.

c. when a firm sells another unit of output, the addition to total revenue is equal to market

price.

d. all of the above


Answer: c

Difficulty: 01 Easy



Blooms: Understand


11-46

The figure above shows cost curves for a perfectly competitive firm. Suppose that market price is

$2.60. A firm producing 800 units of output

a. is earning the maximum amount of profit, $880.

b. is earning the maximum amount of profit, $2,080.

c. should produce 500 units of output instead, to earn profits of $500.



d. should produce 1100 units of output instead, to earn profits of $1,100.

e. should shut down

Answer: d



AACSB: Analytic

Blooms: Apply


11-47

The figure above shows cost curves for a perfectly competitive firm. A profit-maximizing firm

will break even when market price is:

a. $0.60

b. $0.80

c. $1.50

d. $1.60

Answer: c

Difficulty: 01 Easy


AACSB: Analytic

Blooms: Apply


11-48



The figure above shows cost curves for a perfectly competitive firm. If market price is $0.70, a

profit-maximizing firm will produce _____ units of output and earn profits of _____.

a. 500, −$450

b. 500, −$50

c. zero, −$450

d. zero, −$400

Answer: d



AACSB: Analytic

Blooms: Apply


11-49 In a competitive industry the market-determined price is $12. A firm is currently producing 50

units of output; average total cost is $10, marginal cost is $15, and average variable cost is $7. In

order to maximize profit, the firm should:

a. produce more because the firm is earning a profit of $100.

b. keep output the same because the firm is earning a profit of $100.

c. produce more because the next unit of output increases profit by $2.

d. produce less because the last unit of output decreased profit by $3.

Answer: d



AACSB: Analytic

Blooms: Apply


11-50 Consider the short-run supply curve for a perfectly competitive industry. In general, which of the

following statements are true?

a. The short-run industry supply is obtained by horizontally summing the supply curves of

all the individual firms in the industry.

b. The industry supply curve tends to be flatter (more elastic) than the horizontal sum of all

the industrial firms' supply curves.

c. Short-run supply for a perfectly competitive industry is flat for constant cost industries.

d. both a and b



e. none of the above are true in general

Answer: d




Blooms: Understand


11-51 In a competitive market characterized by increasing costs, the

a. long-run industry supply curve gives the minimum long-run average cost of production at

various levels of industry output.

b. long-run industry supply curve gives the long-run marginal cost of production at various

levels of industry output.

c. long-run industry supply curve is upward sloping.

d. both a and b

e. all of the above

Answer: e




Blooms: Understand


11-52 Firms that employ exceptionally productive resources

a. have lower costs than other firms in the industry and are able to earn positive economic

profit in the long run.

b. earn zero economic profit.

c. will typically have to pay the exceptional resource economic rent equal to the reduction

in cost due to employing the exceptionally productive resource.

d. both a and b

e. both b and c

Answer: e




Blooms: Understand


11-53 Suits Only, a dry cleaning firm that specializes in cleaning business suits, operates in a perfectly

competitive market. Robin Smith, an exceptionally talented manager, has been hired to manage

Suits Only. In the dry cleaning business, a manager typically makes a salary of $400 per week.

Suits Only faces the long-run average and marginal costs shown in the figure below. In long-run

competitive equilibrium, the market price for cleaning a business suit is $4.50.



Given the above, the typical dry-cleaning firm has a minimum long-run average cost of cleaning a

business suit equal to $________ and the typical dry cleaning firm earns economic profit equal to

$______.

a. $4.50, $0

b. $2, $2.50 per suit cleaned

c. $3, $1.50 per suit cleaned

d. $2, $0

Answer: a




Blooms: Understand









Given the above, Robin Smith is probably going to negotiate a salary of $______ per week,

$______ of which is economic rent.

a. $400, $0

b. $475, $75

c. $500, $100

d. $500, $500

Answer: b




Blooms: Understand







Given the above, if Robin Smith buys Suits Only and continues to manage it herself, she will

a. earn zero economic profit.

b. earn $75 in economic rent per week.

c. earn $75 in economic profit each week.

d. both a and b.

Answer: d




Blooms: Understand


11-56 The short-run market supply in a perfectly competitive market is the horizontal summation of the

firms' marginal cost curves when

a. increases in industry output do not affect input prices.

b. increases in industry output lead to increases in input prices.

c. increases in industry output lead to increases in market price.



d. increases in industry output do not affect market price.

Answer: a




Blooms: Understand


11-57 Below, the graph on the left shows long-run average and marginal cost for a typical firm in a

perfectly competitive industry. The graph on the right shows demand and long-run supply for an

increasing-cost industry.

What output will the firm produce?

a. 250

b. 300

c. 350

d. 400

Answer: d

Difficulty: 01 Easy



Blooms: Understand







How much profit will the firm earn?

a. zero

b. $2,600

c. $3,100

d. $3,750

e. $6,000

Answer: e



AACSB: Analytic

Blooms: Apply







If this were a constant-cost industry, what would be the price when the industry gets to long-run

competitive equilibrium?

a. between $35 and $20

b. $35

c. $20

d. below $20

e. above $35

Answer: c



AACSB: Analytic

Blooms: Apply





If this were an increasing cost industry, what would be the price when the industry gets to long-

run competitive equilibrium?

a. between $35 and $15

b. $35

c. $15

d. below $15

e. above $35

Answer: a

Difficulty: 01 Easy


AACSB: Analytic

Blooms: Apply




11-61 A consulting company estimated market demand and supply in a perfectly competitive industry

and obtained the following results:

Q

d= 25,000 -5,000P + 25M

Q

s= 240,000 + 5,000P - 2,000P

I

where P is price, M is income, and P

I is the price of a key input. The forecasts for the next year

are M̂ = $15,000 and P̂

I= $20. Average variable cost is estimated to be

AVC = 14 - 0.008Q + 0.000002Q2

Total fixed cost will be $6,000 next year. What is the price forecast for next year?

a. $12

b. $20

c. $60

d. $68

Answer: b

Difficulty: 01 Easy

Topic: Implementing the Profit-Maximizing Output Decision

AACSB: Analytic

Blooms: Apply




Q

d= 25,000 -5,000P + 25M

Q

s= 240,000 + 5,000P - 2,000P

I



are M̂ = $15,000 and P̂


AVC = 14 - 0.008Q + 0.000002Q2

Total fixed cost will be $6,000 next year. What is the firm's minimum average variable cost?

a. $ 2

b. $ 6

c. $ 8

d. $20

Answer: b



AACSB: Analytic

Blooms: Apply






Q

d= 25,000 -5,000P + 25M

Q

s= 240,000 + 5,000P - 2,000P

I



are M̂ = $15,000 and P̂


AVC = 14 - 0.008Q + 0.000002Q2

Total fixed cost will be $6,000 next year. What is the profit-maximizing output choice for the

firm?

a. 3,000 units

b. 4,000 units

c. 5,000 units

d. 6,000 units

Answer: a



AACSB: Analytic

Blooms: Apply




Q

d= 25,000 -5,000P + 25M

Q

s= 240,000 + 5,000P - 2,000P

I



are M̂ = $15,000 and P̂


AVC = 14 - 0.008Q + 0.000002Q2

Total fixed cost will be $6,000 next year. What will the firm's profit (loss) be?

a. $20,000

b. $26,000

c. $30,000

d. $36,000

e. −$6,000, the firm shuts down and loses only its fixed costs.

Answer: c



AACSB: Analytic

Blooms: Apply






Q

d= 25,000 -5,000P + 25M

Q

s= 240,000 + 5,000P - 2,000P

I



are M̂ = $15,000 and P̂


AVC = 14 - 0.008Q + 0.000002Q2

Total fixed cost will be $6,000 next year. Suppose that income next year is forecasted to be

$10,000 instead. What is the revised price forecast for next year?

a. $5.00

b. $7.50

c. $15.75

d. $10.50

e. $12.00

Answer: b



AACSB: Analytic

Blooms: Apply




Q

d= 25,000 -5,000P + 25M

Q

s= 240,000 + 5,000P - 2,000P

I



are M̂ = $15,000 and P̂


AVC = 14 - 0.008Q + 0.000002Q2

Total fixed cost will be $6,000 next year. Suppose income next year is forecasted to be $10,000

instead. What is the profit-maximizing output choice for the firm?

a. 8,000

b. 5,548

c. 3,480

d. 2,167

e. zero

Answer: d



AACSB: Analytic

Blooms: Apply






Q

d= 25,000 -5,000P + 25M

Q

s= 240,000 + 5,000P - 2,000P

I



are M̂ = $15,000 and P̂


AVC = 14 - 0.008Q + 0.000002Q2

Total fixed cost will be $6,000 next year. Suppose that income next year is forecasted to be

$10,000 instead. What will the firm’s profit (loss) be?

a. zero

b. $2,500

c. −$3,550

d. −$2,856

e. −$6,000

Answer: d



AACSB: Analytic

Blooms: Apply




Q

d= 25,000 -5,000P + 25M

Q

s= 240,000 + 5,000P - 2,000P

I



are M̂ = $15,000 and P̂


AVC = 14 - 0.008Q + 0.000002Q2

Total fixed cost will be $6,000 next year. Suppose that income for next year is forecasted to be

$9,000 instead. What is the revised price forecast for next year?

a. $ 3

b. $ 5

c. $15

d. $18


Answer: b



AACSB: Analytic

Blooms: Apply






Q

d= 25,000 -5,000P + 25M

Q

s= 240,000 + 5,000P - 2,000P

I



are M̂ = $15,000 and P̂


AVC = 14 - 0.008Q + 0.000002Q2


$9,000 instead. What is the profit-maximizing output choice for the firm?

a. 1,000 units

b. 1,860 units

c. 2,000 units

d. 2,860 units


Answer: e



AACSB: Analytic

Blooms: Apply




Q

d= 25,000 -5,000P + 25M

Q

s= 240,000 + 5,000P - 2,000P

I



are M̂ = $15,000 and P̂


AVC = 14 - 0.008Q + 0.000002Q2


$9,000 instead. What will the firm's profit (loss) be?

a. zero

b. −$6,000

c. −$7,934

d. −$8,000


Answer: b





AACSB: Analytic

Blooms: Apply


11-71 Consider a competitive industry and a price-taking firm that produces in that industry. The market

demand and supply functions are estimated to be:

Demand: Q

d= 10,000 -10,000P +1.0M

Supply: Q

s= 80,000 +10,000P - 4,000P

I

where Q is quantity, P is the price of the product, M is income, and P

Iis the input price. The

manager of the perfectly competitive firm uses time−series data to obtain the following forecasted

values of M and P

I for 2015:

M̂ = $50,000 and P̂

I= $20

The manager also estimates the average variable cost function to be

AVC = 3.0 - 0.0027Q + 0.0000009Q2

Total fixed costs will be $2,000 in 2015. What is the price forecast for 2015?

a. $2

b. $2.50

c. $2.75

d. $3


Answer: d



AACSB: Analytic

Blooms: Apply




Demand: Q

d= 10,000 -10,000P +1.0M

Supply: Q

s= 80,000 +10,000P - 4,000P

I




values of M and P

I for 2015:

M̂ = $50,000 and P̂

I= $20


AVC = 3.0 - 0.0027Q + 0.0000009Q2



Total fixed costs will be $2,000 in 2015. Average variable cost reaches its minimum value of

_____ units of output.

a. 1,000

b. 1,500

c. 2,000

d. 2,500

Answer: b



AACSB: Analytic

Blooms: Apply




Demand: Q

d= 10,000 -10,000P +1.0M

Supply: Q

s= 80,000 +10,000P - 4,000P

I




values of M and P

I for 2015:

M̂ = $50,000 and P̂

I= $20


AVC = 3.0 - 0.0027Q + 0.0000009Q2

Total fixed costs will be $2,000 in 2015. The minimum value of average variable cost is $_____.

a. $0.50

b. $0.75

c. $0.975

d. $1.00

e. $2.15

Answer: c



AACSB: Analytic

Blooms: Apply






Demand: Q

d= 10,000 -10,000P +1.0M

Supply: Q

s= 80,000 +10,000P - 4,000P

I




values of M and P

I for 2015:

M̂ = $50,000 and P̂

I= $20


AVC = 3.0 - 0.0027Q + 0.0000009Q2

Total fixed costs will be $2,000 in 2015. The manager _____ produce since _____________.

a. should; $3 > $0.975

b. should; $2.75 > $0.75

c. should not; $2 < $2.15

d. should not; $0.50 < $1.00

Answer: a



AACSB: Analytic

Blooms: Apply


11-75 Consider a competitive industry and a price-taking firm that produces in that industry. The

market demand and supply functions are estimated to be:

Demand: Q

d= 10,000 -10,000P +1.0M

Supply: Q

s= 80,000 +10,000P - 4,000P

I




values of M and P

I for 2015:

M̂ = $50,000 and P̂

I= $20


AVC = 3.0 - 0.0027Q + 0.0000009Q2

Total fixed costs will be $2,000 in 2015. The marginal cost function is:

a. SMC = 3.0 − 0.0027Q + 0.0000009Q2

b. SMC = 3.0 − 0.00135Q + 0.00000045Q2

c. SMC = 3.0Q − 0.0027Q2 + 0.0000009Q3

d. SMC = 3.0 − 0.0054Q + 0.0000018Q2




Answer: e



AACSB: Analytic

Blooms: Apply




Demand: Q

d= 10,000 -10,000P +1.0M

Supply: Q

s= 80,000 +10,000P - 4,000P

I




values of M and P

I for 2015:

M̂ = $50,000 and P̂

I= $20


AVC = 3.0 - 0.0027Q + 0.0000009Q2

Total fixed costs will be $2,000 in 2015. The optimal level of production for the firm is

a. 1,000

b. 1,500

c. 2,000

d. 2,500


Answer: c



AACSB: Analytic

Blooms: Apply




Demand: Q

d= 10,000 -10,000P +1.0M

Supply: Q

s= 80,000 +10,000P - 4,000P

I




values of M and P

I for 2015:

M̂ = $50,000 and P̂

I= $20




AVC = 3.0 - 0.0027Q + 0.0000009Q2

Total fixed costs will be $2,000 in 2015. The profit (loss) is

a. $2,600

b. $2,000

c. $4,000

d. $3,250


Answer: e



AACSB: Analytic

Blooms: Apply


11-78 Bartech, Inc. is a firm operating in a competitive market. The manager of Bartech forecasts

product price to be $28 in 2015. Bartech's average variable cost function is estimated to be

AVC = 10 - 0.003Q + 0.0000005Q2

Bartech expects to face fixed costs of $12,000 in 2015. At what level of output will Bartech's

average variable cost reach its minimum value?

a. 2,000 units

b. 3,000 units

c. 4,000 units

d. 5,000 units

e. 6,000 units

Answer: b



AACSB: Analytic

Blooms: Apply




AVC = 10 - 0.003Q + 0.0000005Q2

Bartech expects to face fixed costs of $12,000 in 2015. What is the minimum average variable

cost?

a. $0

b. $5.50

c. $6.00

d. $6.50

e. $7.00

Answer: b





AACSB: Analytic

Blooms: Apply




AVC = 10 - 0.003Q + 0.0000005Q2

Bartech expects to face fixed costs of $12,000 in 2015. The profit-maximizing (or loss-

minimizing) output for Bartech is

a. 0 units

b. 500 units

c. 1,000 units

d. 2,000 units

e. 6,000 units

Answer: e



AACSB: Analytic

Blooms: Apply




AVC = 10 - 0.003Q + 0.0000005Q2

Bartech expects to face fixed costs of $12,000 in 2015. How much profit (loss) does Bartech, Inc.

expect to earn?

a. −$2,500

b. $96,000

c. $127,000

d. $156,000

e. $166,000

Answer: b



AACSB: Analytic

Blooms: Apply




AVC = 10 - 0.003Q + 0.0000005Q2



Bartech expects to face fixed costs of $12,000 in 2015. Now, suppose that the 2015 price forecast

is drastically revised downward to $5. What is Bartech's profit-maximizing (or loss-minimizing)

output for 2015?

a. 0 units

b. 1,000 units

c. 2,000 units

d. 3,000 units

e. 4,000 units

Answer: a



AACSB: Analytic

Blooms: Apply




AVC = 10 - 0.003Q + 0.0000005Q2

Bartech expects to face fixed costs of $12,000 in 2015. Now, suppose that the 2015 price forecast

is drastically revised downward to $5. Under the revised forecast how much profit (loss) does

Bartech, Inc. expect to earn?

a. $0

b. −$12,000

c. $2,500

d. $16,000

e. $18,000

Answer: b



AACSB: Analytic

Blooms: Apply


11-84 Radon Research Corporation (RRC) is one of 24 firms in Albuquerque testing homes for

dangerous levels of radon gas. There is a standard test that all testing companies use. The

manager of RRC wants to know the number of homes to test in 2015 in order to maximize the

firm’s profit. The manager forecasted a price of $160 for radon tests in 2015. The firm’s marginal

cost was estimated as

SMC = 200 -15Q + 0.8Q2

where Q is the number of tests performed each week. RRC’s fixed cost will be $250 per week.

The average variable cost at RRC is



a. 200 − 30Q + 1.6Q2

b. 200Q − 15Q2 + 0.8Q3

c. 100 − 10Q + 0.4Q2

d. 200 − 7.5Q + 0.2667Q2


Answer: d

Difficulty: 03 Hard


AACSB: Analytic

Blooms: Apply







SMC = 200 -15Q + 0.8Q2


How many radon tests per week should be undertaken?

a. 12.5

b. 15.5

c. 16.8

d. 17.3

e. 20

Answer: b



AACSB: Analytic

Blooms: Apply







SMC = 200 -15Q + 0.8Q2


The weekly profit (loss) at RRC in 2015 will be

a. $121

b. $320

c. $86

d. −$61

e. −$121

Answer: d





AACSB: Analytic

Blooms: Apply


11-87 Sport Tee Corporation manufactures T-shirts bearing the logos of professional football teams.

The wholesale market for sport T-shirts is perfectly competitive. The manager forecasts the

wholesale price of T-shirts next year to be $7.00. The firm’s estimated marginal cost is

SMC = 12 - 0.005Q + 0.0000008Q2

where Q is the number of T-shirts produced and sold each month. Sport Tee Corporation will

have a fixed cost of $2,000 per month. Average variable cost at Sport Tee is

a. 12 − 0.01Q + 0.0000024Q2

b. 12 − 0.0025Q + 0.000000266Q2

c. 12 − 0.0001Q + 0.000001Q2

d. 12Q − 0.0025Q2 + 0.000000266Q3


Answer: b



AACSB: Analytic

Blooms: Apply





SMC = 12 - 0.005Q + 0.0000008Q2


have a fixed cost of $2,000 per month. To maximize profit how many T-shirts should be

produced and sold each month?

a. 1,000

b. 2,000

c. 3,000

d. 4,000

e. 5,000

Answer: e



AACSB: Analytic

Blooms: Apply







SMC = 12 - 0.005Q + 0.0000008Q2


have a fixed cost of $2,000 per month. At the profit-maximizing level of output total revenue will

be

a. $10,000

b. $15,000

c. $20,000

d. $25,000

e. $35,000

Answer: e

Difficulty: 01 Easy


AACSB: Analytic

Blooms: Apply



The wholesale market for sport T-shirts is perfectly competitive. The manager forecasts the wholesale

price of T-shirts next year to be $7.00. The firm’s estimated marginal cost is

SMC = 12 - 0.005Q + 0.0000008Q2


have a fixed cost of $2,000 per month. Monthly profit will be

a. −$2,000

b. −$1,150

c. $4,250

d. $3,400

e. $2,250

Answer: e



AACSB: Analytic

Blooms: Apply


chapter 11: managerial decisions in …...1 60 2 80 3 110 4 165 5 245 if market price is $60, how...

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