Economics for Today 7th Edition by Irvin B. Tucker - Test Bank
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Economics for Today 7th Edition by Irvin B. Tucker - Test Bank

Economics for Today 7th Edition by Irvin B. Tucker - Test Bank   Instant Download - Complete Test Bank With Answers     Sample Questions Are Posted Below   Chapter 8—Perfect Competition   MULTIPLE CHOICE   Market structure is defined as the: a. number of firms in each industry. b. similarity of the product sold. …

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Economics for Today 7th Edition by Irvin B. Tucker – Test Bank

 

Instant Download – Complete Test Bank With Answers

 

 

Sample Questions Are Posted Below

 

Chapter 8—Perfect Competition

 

MULTIPLE CHOICE

 

  1. Market structure is defined as the:
a. number of firms in each industry.
b. similarity of the product sold.
c. ease of entry into and exit from the market.
d. all of these.

 

 

ANS:  D                    PTS:   1                    DIF:    Easy               REF:   Full: 213 | Mic: 213

TOP:   Market structure                              TYP:   RE

 

  1. Market structure describes which of the following characteristics?
a. The ease of entry into and exit from the market.
b. The similarity of the product sold.
c. The number of firms in each industry.
d. All of these are true.

 

 

ANS:  D                    PTS:   1                    DIF:    Easy               REF:   Full: 213 | Mic: 213

TOP:   Market structure                              TYP:   RE

 

  1. In the perfectly competitive market, all firms in the market are assumed to be producing:
a. identical products.
b. differentiated products.
c. products that are heavily advertised.
d. complementary products.

 

 

ANS:  A                    PTS:   1                    DIF:    Easy               REF:   Full: 213 | Mic: 213

TOP:   Perfect competition                         TYP:   RE

 

  1. Which of the following is a characteristic of a competitive price-taker market?
a. Profit maximizing firms in the market will expand output until price equals average variable cost.
b. The market demand curve for the product is a horizontal line.
c. There are many firms in the market, each producing a small share of total market output.
d. The product produced by each of the firms is differentiated.

 

 

ANS:  C                    PTS:   1                    DIF:    Medium         REF:   Full: 213 | Mic: 213

TOP:   Perfect competition                         TYP:   RE

 

  1. Which of the following is characteristic of a perfectly competitive market?
a. There is free entry into and exit from the market.
b. Individual firms can exert a perceptible influence on the market price.
c. The firms in the market produce differentiated products.
d. All of these are true.

 

 

ANS:  A                    PTS:   1                    DIF:    Easy               REF:   Full: 213 | Mic: 213

TOP:   Perfect competition                         TYP:   RE

 

  1. Perfect competition is defined as market structure in which:
a. there are many small sellers.
b. the product is homogeneous.
c. it is very easy for firms to enter or exit the market.
d. all of these.

 

 

ANS:  D                    PTS:   1                    DIF:    Easy               REF:   Full: 213 | Mic: 213

TOP:   Perfect competition                         TYP:   RE

 

  1. Perfect competition is a market structure in which there is:
a. a contest among firms to provide good service after the sale.
b. competition in product quality.
c. rivalry in product design.
d. none of these.

 

 

ANS:  D                    PTS:   1                    DIF:    Medium         REF:   Full: 213 | Mic: 213

TOP:   Perfect competition                         TYP:   RE

 

  1. Which of the following best illustrates perfect competition?
a. Wheat farming.
b. Orange growers setting quotas under the Sunkist cooperative.
c. General Motors advertising campaign for its cars.
d. All of these.

 

 

ANS:  A                    PTS:   1                    DIF:    Medium         REF:   Full: 213 | Mic: 213

TOP:   Perfect competition                         TYP:   SA

 

  1. Which of the following best illustrates a perfectly competitive market?
a. Soft drinks.
b. Automobiles.
c. Electric power.
d. Soybean farmers.

 

 

ANS:  D                    PTS:   1                    DIF:    Easy               REF:   Full: 213 | Mic: 213

TOP:   Perfect competition                         TYP:   SA

 

  1. Which of the following is not a characteristic of a perfectly competitive market?
a. There is a large number of small firms.
b. Firms sell a homogeneous product.
c. Firms can easily enter or exit the market.
d. Firms are price makers, not price takers.

 

 

ANS:  D                    PTS:   1                    DIF:    Easy               REF:   Full: 213 | Mic: 213

TOP:   Perfect competition                         TYP:   RE

 

  1. Perfectly competitive markets are characterized by:
a. a small number of very large producers.
b. very strong barriers to entry and exit.
c. firms selling a homogeneous product.
d. all of these.

 

 

ANS:  C                    PTS:   1                    DIF:    Easy               REF:   Full: 213 | Mic: 213

TOP:   Perfect competition                         TYP:   RE

 

  1. Which of the following is true of a perfectly competitive firm?
a. The firm is a price maker.
b. If the firm wishes to maximize profits it will produce an output level in which total revenue equals total cost.
c. The firm will not earn an economic profit in the long run.
d. The firm’s short-run supply curve is its MC curve below its AVC curve.

 

 

ANS:  C                    PTS:   1                    DIF:    Medium         REF:   Full: 213 | Mic: 213

TOP:   Perfect competition                         TYP:   SA

 

  1. If a firm has no ability to select the price of its product, it:
a. will go out of business due to losses.
b. is a price-maker.
c. cannot maximize profit.
d. has a horizontal individual demand curve.

 

 

ANS:  D                    PTS:   1                    DIF:    Difficult         REF:   Full: 213 | Mic: 213

TOP:   Perfect competition                         TYP:   RE

 

  1. A firm in a price-taker market:
a. must take the price that is determined in the market.
b. must reduce its price if it wants to sell a larger quantity.
c. must be large relative to the total market.
d. can exert a major influence on the market price.

 

 

ANS:  A                    PTS:   1                    DIF:    Easy               REF:   Full: 214 | Mic: 214

TOP:   Price taker      TYP:   RE

 

  1. A firm that is a price taker can:
a. substantially change the market price of its product by changing its level of production.
b. sell all of its output at the market price.
c. sell some of its output at a price higher than the market price.
d. decide what price to charge for its product.

 

 

ANS:  B                    PTS:   1                    DIF:    Easy               REF:   Full: 214 | Mic: 214

TOP:   Price taker      TYP:   RE

 

  1. Which of the following best explains why a firm in a perfectly competitive market must take the price determined in the market?
a. The short-run average total costs of firms that are price takers will be constant.
b. If a price taker increased its price, consumers would buy from other suppliers.
c. Firms in a price-taker market will have to advertise in order to increase sales.
d. There are no good substitutes for the product supplied by a firm that is a price taker.

 

 

ANS:  B                    PTS:   1                    DIF:    Easy               REF:   Full: 214 | Mic: 214

TOP:   Price taker      TYP:   SA

 

  1. The demand for the product of a competitive price-taker firm is:
a. perfectly inelastic.
b. perfectly elastic.
c. greater than zero but less than one.
d. dependent on the availability of substitutes for the firm’s product.

 

 

ANS:  B                    PTS:   1                    DIF:    Easy               REF:   Full: 214 | Mic: 214

TOP:   Price taker      TYP:   RE

 

  1. Because a competitive firm is a price taker, it faces a demand curve that is:
a. perfectly inelastic.
b. relatively inelastic.
c. relatively elastic.
d. perfectly elastic.

 

 

ANS:  D                    PTS:   1                    DIF:    Medium         REF:   Full: 214 | Mic: 214

TOP:   Price taker      TYP:   RE

 

  1. A firm operating in a perfectly competitive market is a price taker because:
a. no firm has a significant market share.
b. no firm’s product is perceived as different.
c. setting a price higher than the going price results in zero sales.
d. all of these.

 

 

ANS:  D                    PTS:   1                    DIF:    Difficult         REF:   Full: 214 | Mic: 214

TOP:   Price taker      TYP:   RE

 

  1. Under perfect competition, a firm is a price taker because:
a. setting a price higher than the going price results in profits.
b. each firm’s product is perceived as different.
c. each firm has a significant market share.
d. setting a price higher than the going price results in zero sales.

 

 

ANS:  D                    PTS:   1                    DIF:    Medium         REF:   Full: 214 | Mic: 214

TOP:   Price taker      TYP:   RE

 

  1. Under perfect competition, which of the following are the same (equal) at all levels of output?
a. Price and marginal cost.
b. Price and marginal revenue.
c. Marginal cost and marginal revenue.
d. All of these.

 

 

ANS:  B                    PTS:   1                    DIF:    Difficult         REF:   Full: 214 | Mic: 214

TOP:   Price taker      TYP:   RE

 

  1. A perfectly competitive firm in the short-run maximizes its profit by producing the output where:
a. marginal cost equals price.
b. marginal cost equals marginal revenue.
c. total revenue minus total cost is at a maximum.
d. all of these.

 

 

ANS:  D                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. In the short run, a perfectly competitive firm’s most profitable level of output is where:
a. total revenue minus total cost is at a maximum.
b. marginal cost equals marginal revenue.
c. Both of the above.
d. Neither of the above.

 

 

ANS:  C                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. A perfectly competitive firm in the short-run can earn:
a. positive economic profits.
b. negative economic profits.
c. zero economic profits.
d. all of these are possible

 

 

ANS:  D                    PTS:   1                    DIF:    Easy               REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   RE

 

  1. A perfectly competitive firm maximizes profits or minimizes losses in the short-run by producing at the output level at which:
a. marginal revenue equals marginal cost.
b. total revenue equals total cost.
c. total revenue is at a maximum.
d. none of these.

 

 

ANS:  A                    PTS:   1                    DIF:    Easy               REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   RE

 

  1. A perfectly competitive firm sells its output for $100 per unit and marginal cost is $100 per unit. To maximize short-run profit, the firm should:
a. increase output.
b. decrease output.
c. maintain its current output.
d. shut down.

 

 

ANS:  C                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. In the short run, if a perfectly competitive firm is producing at a price below average total cost, its economic profit is:
a. positive.
b. zero.
c. negative.
d. normal.

 

 

ANS:  C                    PTS:   1                    DIF:    Easy               REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   SA

 

  1. In the short run, if a perfectly competitive firm is producing at a price above average total cost, its economic profit must be:
a. positive.
b. zero.
c. negative.
d. normal.

 

 

ANS:  A                    PTS:   1                    DIF:    Easy               REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   SA

 

  1. A competitive firm maximizes its profits (or minimizes is losses) by producing the quantity where the market price equals the firm’s:
a. marginal cost.
b. average total cost.
c. average variable cost.
d. average fixed cost.

 

 

ANS:  A                    PTS:   1                    DIF:    Easy               REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   RE

 

  1. Assume that a firm’s marginal revenue just barely exceeds marginal cost. Under these conditions the firm should:
a. expand output.
b. contract output.
c. maintain output.
d. There is insufficient information to answer the question.

 

 

ANS:  A                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. In the short run, a perfectly competitive firm’s most profitable level of output is where:
a. marginal cost exceeds marginal revenue.
b. total revenue is at a maximum.
c. marginal cost equals marginal revenue.
d. All of these.

 

 

ANS:  C                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. The profit maximizing or loss minimizing quantity of output for any firm to produce exists at that output level in which:
a. total revenue is maximized.
b. total cost is minimized.
c. marginal cost is minimized.
d. marginal revenue equals marginal cost.

 

 

ANS:  D                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. When the marginal cost of a price-taker firm is more than the market price of its product, the firm should:
a. expand output.
b. reduce output.
c. maintain output.
d. charge more than the market price.

 

 

ANS:  B                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. A profit-maximizing firm will continue to expand output:
a. as long as the revenues from the production and sale of an additional unit exceeds the average cost of the unit.
b. until the average cost of producing the good or service is at a minimum.
c. as long as the revenues from the production and sale of an additional unit exceeds the marginal cost of the unit.
d. until the marginal cost of producing a good or service is at a minimum.

 

 

ANS:  C                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   SA

 

  1. In the short run, a firm will stay in business as long as:
a. price equals average revenue.
b. marginal revenue is greater than or equal to marginal cost.
c. price exceeds average variable cost.
d. price is less than average variable cost.

 

 

ANS:  C                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   RE

 

  1. Suppose that price is below the minimum average total cost (ATC) but above the minimum average variable cost (AVC), and the market price is expected to rise at least to ATC in the near future. In the short run, a firm that is a price taker would:
a. immediately shut down and get out of the industry.
b. continue to produce a quantity such that marginal revenue equals marginal cost.
c. shut down temporarily, in hopes of restarting in the near future.
d. cut price and expand output in hopes of achieving economies of scale

 

 

ANS:  B                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. The price-taker firm should discontinue production immediately if:
a. the market price exceeds the firm’s average total costs.
b. the market price is less than the firm’s average variable costs.
c. the market price is less than the firm’s average total costs, but greater than its average variable cost.
d. its accounting statement indicates that it is suffering losses.

 

 

ANS:  B                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   RE

 

  1. A firm is currently operating where the MC of the last unit produced = $84, and the MR of this unit = $70. What would you advise this firm to do?
a. Shut down.
b. Increase output.
c. Stay at its current output.
d. Decrease output.
e. Decrease price.

 

 

ANS:  D                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   SA

 

  1. A firm is currently operating where the MC of the last unit produced = $64, and the MR of this unit = $70. What would you advise this firm to do?
a. Shut down.
b. Increase output.
c. Stay at current output.
d. Decrease output.
e. Decrease price.

 

 

ANS:  B                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. The point of maximum profit for a business firm is where:
a. P = AC.
b. TR = TC.
c. MR = AR.
d. MR = MC.
e. TR = MR.

 

 

ANS:  D                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   RE

 

  1. If a firm increases output when MR > MC, then:
a. profit will equal zero.
b. profit will increase.
c. profit will decrease.
d. profit will remain the same.
e. the firm is minimizing losses.

 

 

ANS:  B                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. If a firm decreases output when MR > MC, then:
a. profit will equal zero.
b. profit will increase.
c. profit will decrease.
d. profit will remain the same.
e. the firm is minimizing losses.

 

 

ANS:  C                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. If a firm increases output when MR < MC, then:
a. profit will equal zero.
b. profit will increase.
c. profit will decrease.
d. profit will remain the same.
e. the firm is minimizing losses.

 

 

ANS:  C                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. If a firm decreases output when MR < MC, then:
a. profit will equal zero.
b. profit will increase.
c. profit will decrease.
d. profit will remain the same.
e. the firm is minimizing losses.

 

 

ANS:  B                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. By producing at the point where MR = MC, the firm:
a. is guaranteed a profit.
b. will earn a profit of zero.
c. will lose money.
d. profit is maximized.
e. output.

 

 

ANS:  D                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   RE

 

  1. Maximizing profit means finding the maximum difference between:
a. TR and TC.
b. MR and MC.
c. price and ATC.
d. price and AR.
e. ATC and MC.

 

 

ANS:  A                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. If a business firm is not operating at the point where MR = MC, then:
a. it should shut down.
b. it will incur losses.
c. it cannot be earning a profit.
d. its profit is zero.
e. it is not earning the maximum potential profit.

 

 

ANS:  E                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. If, at the point where MR = MC, the firm incurs losses, in the short run the firm should:
a. shut down.
b. increase output.
c. decrease output.
d. continue at its current output if P > AVC.
e. continue at its current output if P > ATC.

 

 

ANS:  D                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. In the short run, a firm should shut down its business if price is less than:
a. ATC.
b. AR.
c. MC.
d. AVC.
e. AFC.

 

 

ANS:  D                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. In the short run, a firm should shut down its operation if:
a. its losses are less than TFC at the MR = MC point.
b. its losses equal TFC at the MR = MC point.
c. its losses are greater than TFC at the MR = MC point.
d. TR is less than TC.
e. TR exceeds TVC.

 

 

ANS:  C                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. Suppose product price is fixed at $24; MR = MC at Q = 200; AFC = $6; AVC = $16. What do you advise this firm to do?
a. Increase output.
b. Decrease output.
c. Shut down operations.
d. Stay at the current output; the firm is earning a profit of $400.
e. Stay at the current output; the firm is losing $200.

 

 

ANS:  D                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. Suppose product price is fixed at $24; MR = MC at Q = 200; AFC = $6; AVC = $25. What do you advise this firm to do?
a. Increase output.
b. Decrease output.
c. Shut down operations.
d. Stay at the current output; the firm is earning a profit of $1,400.
e. Stay at the current output; the firm is losing $1,400.

 

 

ANS:  C                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. Under perfect competition, a business firm can accept losses:
a. only in the short run.
b. only for 1 year.
c. only in the long run.
d. no longer than 10 years.
e. never.

 

 

ANS:  A                    PTS:   1                    DIF:    Easy               REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   RE

 

  1. If a firm equates MR and MC, then:
a. TR is at a maximum, and TC is at a minimum.
b. output is at a maximum.
c. losses are at a maximum.
d. profits are at a maximum or losses are at a minimum.
e. both TR and TC are at a maximum.

 

 

ANS:  D                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   RE

 

  1. If a firm is currently equating MR and MC and product price = $24, AVC = $22, and ATC = $26, then in the long run this firm:
a. will continue to operate at a loss.
b. will earn a positive profit.
c. will go out of business.
d. should increase output.
e. should decrease price.

 

 

ANS:  C                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   SA

 

  1. If a potato farmer expands output, he finds that the increase in total revenue is less than the increase in total costs. This means that:
a. profit is being maximized.
b. he should not have expanded output.
c. he should produce even more output.
d. the firm is wasting resources.
e. the farmer should go out of business.

 

 

ANS:  B                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   SA

 

  1. The most profitable output level can be found by looking at which two curves?
a. P and MR.
b. MR and MC.
c. MC and TC.
d. P and AVC.
e. AVC and ATC.

 

 

ANS:  B                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   RE

 

  1. If a firm’s marginal revenue from its 100th unit of output is $50 and the marginal cost from its 100th unit of output is $45, then in the short run this firm should:
a. increase its plant size.
b. change its technology.
c. produce more than 99 units of output.
d. produce less than 100 units of output.
e. shut down.

 

 

ANS:  C                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. If ABC Printing is producing an output level of 100, where MR is $5 and MC is $3, then the firm is:
a. maximizing total profit.
b. making too much profit.
c. making $200 total profit.
d. making $200 total loss.
e. making an unknown amount of profit or loss.

 

 

ANS:  E                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. The fundamental rule of profit maximization for firms is to produce where:
a. MR = MC.
b. ATC is minimized.
c. quantity of output is maximized.
d. price is maximized.
e. total revenue is maximized.

 

 

ANS:  A                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   RE

 

  1. The marginal approach to profit maximization means that a firm should produce until:
a. marginal revenue equals zero.
b. marginal revenue equals marginal cost.
c. marginal cost becomes negatively sloped.
d. marginal revenue equals price.
e. price equals average total cost.

 

 

ANS:  B                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   RE

 

  1. A sandwich shop owner has the following information: P = MR = $4, ATC = $2, AVC = $1, MC = 4, and Q = 500. From this, she can determine:
a. her profits are not being maximized.
b. she has earned zero economic profits.
c. she has earned economic profits of $1,000.
d. she has earned economic profits of $1,500.
e. she should sell fewer sandwiches.

 

 

ANS:  C                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. Jerome, the florist, sold 500 bridesmaid’s bouquets in June. He estimates his costs that month were ATC = $10, AVC = $6, and MC = $9. If he sold each bouquet at the constant market price of $9, Jerome:
a. made an economic profit of $500.
b. made a loss of $500.
c. made an economic profit of $1,500.
d. made a loss of $1,500.
e. should have shut down in June.

 

 

ANS:  B                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. Consider a firm with the following cost information: ATC = $15, AVC = $12, and MC = $14. If we know that this firm has decided to produce Q = 20 by following the rule to maximize profits or minimize losses, then the price of the output is:
a. $12.
b. $14.
c. $15.
d. $20.

 

 

ANS:  B                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. Consider a firm with the following cost and revenue information: ATC = $8, AVC = $7, and MR = MC = $6. If the firm produces Q = 60 in the short run, it:
a. is minimizing losses.
b. makes a total loss of $60.
c. should produce more output.
d. is making a mistake and should shut down.
e. is maximizing total profit.

 

 

ANS:  D                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. If the price of a product falls below average total cost in the short run, the firm:
a. has an economic profit.
b. cannot cover total fixed costs.
c. experiences a loss.
d. must always shut down.
e. should expand output until MC = MR.

 

 

ANS:  C                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. If a firm shuts down in the short run, it will:
a. incur losses equal to its fixed costs.
b. produce at the output level where MC = MR.
c. reduce its losses to zero.
d. do this because P > AVC.
e. have total revenue greater than total fixed costs.

 

 

ANS:  A                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. Suppose the price of a product is less than its average variable cost. When the firm’s fixed obligations are completely ended, it will now most likely:
a. make an economic profit.
b. go out of business.
c. expand to a bigger operation.
d. continue to be shut down.
e. break even.

 

 

ANS:  B                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   SA

 

  1. The neighborhood ice cream shop finds that when it charges $3 per ice cream cone, its total revenues are $90,000. It has total variable costs of $30,000 and total fixed costs of $40,000. From this we can infer the:
a. shop should be moved because the rent is too high.
b. price is less than average total cost.
c. economic profits are $20,000.
d. shop will be closed in the long run.
e. shop sells 10,000 ice cream cones.

 

 

ANS:  C                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. If a firm is operating at a loss in the short run and finds that its price is greater than average variable cost, then in the short run:
a. it should produce where MR = MC.
b. it should produce zero output.
c. it should go out of business.
d. total revenue is less than total variable costs.
e. total revenue is greater than total costs.

 

 

ANS:  A                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   RE

 

  1. Total profit can be calculated by:
a. c and e.
b. subtracting total revenue from total costs.
c. subtracting total costs from total revenue.
d. finding the product of the difference between average profit and average total cost and the quantity produced.
e. quantity produced times the difference between average revenue and average total cost.

 

 

ANS:  A                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. If a fishing boat owner brings 10,000 fish to market and the market price is $7 per fish, she will have $70,000 in total revenue. If the average variable cost of 10,000 fish is $4 and the fixed cost of the boat is $20,000, what is her profit?
a. $1.
b. $3.
c. $1,000.
d. $3,000.
e. $10,000.

 

 

ANS:  E                    PTS:   1                    DIF:    Easy               REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   SA

 

  1. A fishing boat owner brings 50,000 fish to market and the market price is $4 per fish. Her average variable cost of 50,000 fish is $1 and the fixed cost of the boat is $100,000. What is her profit per fish?
a. $1.
b. $500.
c. $5,000.
d. $25,000.
e. $500,000.

 

 

ANS:  A                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. Suppose that you have returned from your fishing expedition with 20,000 fish. The market price is $3 per fish. Your average fixed cost was $1 and your total variable cost was $5,000. If the price jumps to $3.50 before you sell your first fish, how much extra profit, if any, do you earn?
a. c and d.
b. Extra profit is zero.
c. Extra profit is enough to cover half of the fixed cost of your next trip.
d. Extra profit is enough to cover all of the variable costs of your next two trips.
e. Extra profit is $45,000.

 

 

ANS:  D                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. Suppose that you have returned from your fishing expedition with 20,000 fish. The market price is $3 per fish. Your average fixed cost was $1 and your total variable cost was $5,000. If the price jumps to $3.50 before you sell your first fish, how much extra profit, if any, do you earn?
a. $10,000.
b. $25,000.
c. $30,000.
d. $45,000.
e. $70,000.

 

 

ANS:  A                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. If the market price is $5 and you are currently producing at a level where average total cost is $3 and falling, you should:
a. b or c, it doesn’t matter.
b. shut down.
c. produce only enough to cover variable costs.
d. produce where MR = MC.
e. produce until the average total cost and average revenue are equal.

 

 

ANS:  D                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   SA

 

  1. The market price for wallets is $20. Your technology is such that at your most efficient production point, the average total cost of producing a wallet is $2.50. Your manager runs into your office and shouts, “Boss!!! Average costs are rising!! Average costs are rising!!” To make a profit-maximizing decision, you should:
a. d or e.
b. immediately stop production.
c. completely ignore your manager.
d. ask the manager about the marginal cost.
e. ask the manager about the average total cost.

 

 

ANS:  D                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. When choosing the production level for tomorrow you find that at an output of 100 units, the total variable costs are $20,000 and the average fixed cost is only $50. If the market price is $200, you should:
a. b or e.
b. shut down.
c. produce more than 100 units.
d. produce fewer than 100 units.
e. produce where MC = MR.

 

 

ANS:  A                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. Suppose a company increases production from a point where marginal cost equals average total cost to a point where marginal revenue and marginal cost are equal. Is it a good idea for the company to do this? Why?
a. No, average total costs have increased which means the company is not minimizing losses.
b. Yes, because average variable costs are always less than average total costs.
c. No, because the marginal cost of producing the last unit is the same as the marginal revenue.
d. Yes, even though the previous level of output had minimized the average total cost, there was still profit to be earned by producing additional units.
e. No, the previous level of output was the most efficient because it had the lowest average total cost.

 

 

ANS:  D                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. If a firm in a competitive industry is making zero economic profit but still producing, it must be the case that:
a. MC = MR > ATC.
b. MC = MR < ATC.
c. MC = ATC > MR.
d. MC = MR = ATC.
e. this situation is not possible.

 

 

ANS:  D                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. Which of the following statements are false?
a. b and d.
b. Marginal cost is always rising.
c. Marginal and average total costs are equal at the most efficient production level.
d. The AFC and AVC curves do not cross.
e. The AFC and ATC curves do not cross.

 

 

ANS:  A                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. If marginal revenue exceeds marginal cost, profit maximizers should:
a. reduce output until they are equal.
b. increase output until they are equal.
c. increase output until profits are zero.
d. decrease output unless profits are zero.
e. maintain current output.

 

 

ANS:  B                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. Imagine you own a machine that produces perfectly authentic and legal $100 bills. You would use this machine until:
a. the bills became worthless.
b. the total cost began to fall.
c. the marginal cost was $100.
d. the variable cost began to rise.
e. the marginal revenue began to fall.

 

 

ANS:  C                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. Assume that a firm’s marginal revenue just barely exceeds marginal cost. Under these conditions the firm should:
a. expand output.
b. contract output.
c. maintain output.
d. There is insufficient information to answer the question.

 

 

ANS:  A                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

Exhibit 8-1 Quantity and total revenue data for a firm

 

Quantity Total Revenue
0 $    0
1     62
2   124
3   186

 

 

  1. Exhibit 8-1 indicates that this firm is operating in which type of market structure?
a. Price-maker.
b. Unprofitable.
c. Perfect competition.
d. Nonhomogeneous.

 

 

ANS:  C                    PTS:   1                    DIF:    Difficult         REF:   Full: 213 | Mic: 213

TOP:   Perfect competition                         TYP:   SA

 

  1. In the perfectly competitive market, individual firms exert no effect on the market price. Therefore, the firm’s marginal revenue curve is:
a. indeterminate.
b. an upward-sloping curve.
c. a downward-sloping curve.
d. the same as the firm’s demand curve.

 

 

ANS:  D                    PTS:   1                    DIF:    Medium         REF:   Full: 218 | Mic: 218

TOP:   Marginal revenue                            TYP:   RE

 

  1. The marginal revenue of a price taker is:
a. equal to price.
b. less than price.
c. more than price.
d. unrelated to price.

 

 

ANS:  A                    PTS:   1                    DIF:    Medium         REF:   Full: 218 | Mic: 218

TOP:   Marginal revenue                            TYP:   RE

 

  1. If a perfectly competitive firm sells 50 units of output at a market price of $10 per unit, its marginal revenue is:
a. more than $10.
b. less than $10.
c. $10.
d. $5300.

 

 

ANS:  C                    PTS:   1                    DIF:    Medium         REF:   Full: 218 | Mic: 218

TOP:   Marginal revenue                            TYP:   SA

 

  1. Marginal revenue is the change in:
a. total revenue resulting from a one unit change in output.
b. total revenue resulting from a change in marginal cost.
c. price resulting from a one unit change in output.
d. none of these.

 

 

ANS:  A                    PTS:   1                    DIF:    Medium         REF:   Full: 218 | Mic: 218

TOP:   Marginal revenue                            TYP:   RE

 

  1. If a perfectly competitive firm sells 10 units of output at a market price of $5 per unit, its marginal revenue per unit is:
a. $5.
b. $50.
c. more than $5 but less than $50.
d. less than $5.

 

 

ANS:  A                    PTS:   1                    DIF:    Difficult         REF:   Full: 218 | Mic: 218

TOP:   Marginal revenue                            TYP:   CA

 

  1. Marginal revenue is the change in:
a. total profit brought about by selling one more unit of output.
b. price brought about by selling one more unit of output.
c. total revenue brought about by selling one more unit of output.
d. output brought about by a $1 change in product price.
e. average revenue brought about by selling one more unit of output.

 

 

ANS:  C                    PTS:   1                    DIF:    Medium         REF:   Full: 218 | Mic: 218

TOP:   Marginal revenue                            TYP:   RE

 

  1. Under perfect competition, no matter how much output is produced, the total revenue curve is:
a. a positively-sloped line.
b. a negatively-sloped line.
c. a horizontal straight line.
d. a U-shaped curve.
e. a hill-shaped curve.

 

 

ANS:  A                    PTS:   1                    DIF:    Difficult         REF:   Full: 218 | Mic: 218

TOP:   Marginal revenue                            TYP:   SA

 

  1. When the price of a good is a constant, the marginal revenue per unit of output is the same as:
a. total revenue.
b. average total cost.
c. price.
d. quantity of output.
e. profit per unit.

 

 

ANS:  C                    PTS:   1                    DIF:    Medium         REF:   Full: 218 | Mic: 218

TOP:   Marginal revenue                            TYP:   RE

 

  1. A portrait photographer produces output in packages of 100 photos each. If the output sold increases from 600 to 700 photos, total revenue increases from $1,200 to $1,400. The marginal revenue per photo is:
a. $200.
b. $100.
c. $20.
d. $2.
e. $1.

 

 

ANS:  D                    PTS:   1                    DIF:    Medium         REF:   Full: 218 | Mic: 218

TOP:   Marginal revenue                            TYP:   CA

 

  1. As market price increases in the short run, a profit-maximizing firm in a perfectly competitive market will expand output along its:
a. marginal cost curve.
b. average total cost curve.
c. average variable cost curve.
d. market demand curve.

 

 

ANS:  A                    PTS:   1                    DIF:    Medium         REF:   Full: 223 | Mic: 223

TOP:   Short-run supply curve                    TYP:   RE

 

  1. The supply curve of a price-taker firm in the short run is the:
a. firm’s average variable cost curve.
b. portion of the firm’s average total cost curve that lies above average variable cost curve.
c. portion of the firm’s marginal cost curve that lies above average variable cost curve.
d. firm’s marginal revenue curve.

 

 

ANS:  C                    PTS:   1                    DIF:    Difficult         REF:   Full: 223 | Mic: 223

TOP:   Short-run supply curve                    TYP:   RE

 

  1. A perfectly competitive firm’s short-run supply curve is the:
a. average total cost curve.
b. demand curve above the marginal revenue curve.
c. same as the market supply curve.
d. marginal cost curve above the average variable cost curve.

 

 

ANS:  D                    PTS:   1                    DIF:    Difficult         REF:   Full: 223 | Mic: 223

TOP:   Short-run supply curve                    TYP:   RE

 

  1. A perfectly competitive firm’s short-run supply curve is the:
a. segment of the marginal cost curve above average fixed cost.
b. segment of the marginal cost curve above the minimum level of average variable cost.
c. upward-sloping segment of the marginal cost curve.
d. both a and b.

 

 

ANS:  B                    PTS:   1                    DIF:    Difficult         REF:   Full: 223 | Mic: 223

TOP:   Short-run supply curve                    TYP:   CA

 

  1. Above the shutdown point, a competitive firm’s supply curve coincides with its:
a. marginal revenue curve.
b. marginal cost curve.
c. average variable cost curve.
d. average total cost curve.

 

 

ANS:  B                    PTS:   1                    DIF:    Medium         REF:   Full: 223 | Mic: 223

TOP:   Short-run supply curve                    TYP:   RE

 

  1. If a competitive firm is losing money then it should:
a. always shut down.
b. shut down if its losses are greater than total fixed costs.
c. shut down if its total fixed costs are greater than losses.
d. raise its price.

 

 

ANS:  B                    PTS:   1                    DIF:    Difficult         REF:   Full: 223 | Mic: 223

TOP:   Short-run supply curve                    TYP:   CA

 

  1. A perfectly competitive firm’s short-run supply curve is the part of its marginal cost curve that is:
a. upward sloping.
b. above the minimum level of average variable cost.
c. above average fixed cost.
d. both a and b.

 

 

ANS:  B                    PTS:   1                    DIF:    Difficult         REF:   Full: 223 | Mic: 223

TOP:   Short-run supply curve                    TYP:   CA

 

  1. A perfectly competitive firm’s supply curve follows the upward-sloping segment of its marginal cost curve above the:
a. average total cost curve.
b. average variable cost curve.
c. average fixed curve.
d. average price curve.

 

 

ANS:  B                    PTS:   1                    DIF:    Difficult         REF:   Full: 223 | Mic: 223

TOP:   Short-run supply curve                    TYP:   CA

 

Exhibit 8-2 Total revenue and total cost graph

 

 

  1. In Exhibit 8-2, if output is 200 units per week, economic profit for the firm is:
a. zero.
b. at its minimum.
c. at its maximum.
d. none of these.

 

 

ANS:  A                    PTS:   1                    DIF:    Easy               REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   SA

 

  1. In Exhibit 8-2, economic profit for the firm is at a maximum when output per week equals:
a. zero units.
b. 100 units.
c. 200 units.
d. 250 units.
e. 300 units.

 

 

ANS:  D                    PTS:   1                    DIF:    Easy               REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   SA

 

  1. At an output of 250 units, as shown in Exhibit 8-2, marginal cost is:
a. greater than marginal revenue.
b. equal to marginal revenue.
c. less than marginal revenue.
d. none of these.

 

 

ANS:  B                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

Exhibit 8-3 Cost per unit curves

 

 

  1. As shown in Exhibit 8-3, if the product price is either $1.00, $1.50, $2.00, or $4.00, the firm’s economic profit is maximum at an output of:
a. 5 units per day.
b. 10 units per day.
c. 15 units per day.
d. 20 units per day.

 

 

ANS:  D                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   SA

 

  1. In Exhibit 8-3, if the price of the firm’s product is $2.00 per unit, the firm will produce:
a. 5 units per day.
b. 10 units per day.
c. 15 units per day.
d. 20 units per day.

 

 

ANS:  C                    PTS:   1                    DIF:    Easy               REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   SA

 

  1. As shown in Exhibit 8-3, the price at which the firm earns zero economic profit in the short-run is:
a. $1.00 per unit.
b. $1.50 per unit.
c. $4.00 per unit.
d. more than $2.00 per unit.
e. $2.00 per unit.

 

 

ANS:  E                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   SA

 

  1. If the price of the firm’s product in Exhibit 8-3 is $1.50 per unit, which intersects AVC at point B, the firm should:
a. continue to operate because it is earning a positive economic profit.
b. stay in operation for the time being even though it is making a pure economic loss.
c. shut down temporarily.
d. shut down permanently.

 

 

ANS:  B                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   SA

 

  1. As shown in Exhibit 8-3, the firm will produce in the short run if the price is at least equal to:
a. $1.00 per unit (point A).
b. $1.50 per unit (point B).
c. $2.00 per unit (point C).
d. $4.00 per unit (point D).

 

 

ANS:  B                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   SA

 

Exhibit 8-4 Marginal cost and revenue for a firm

 

Unit

Quantity

 Marginal Cost Marginal Revenue
12 $  5 $9
13     6   9
14     7   9
15     8   9
16     9   9
17   10   9

 

 

  1. In Exhibit 8-4, this firm is currently producing 14 units of output. What would you advise this firm to do?
a. Decrease output to 13.
b. Increase output to 15.
c. Remain at 14 units of output.
d. Increase output to 16.
e. Increase output to 17.

 

 

ANS:  D                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   SA

 

  1. In Exhibit 8-4, this firm is currently producing 16 units of output. What would you advise this firm to do?
a. Decrease output to 13.
b. Increase output to 15.
c. Remain at 16 units of output.
d. Decrease output to 14.
e. Increase output to 17.

 

 

ANS:  C                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   SA

 

  1. In Exhibit 8-4, what is this firm’s profit-maximizing rate of output?
a. 13.
b. 14.
c. 15.
d. 16.
e. 17.

 

 

ANS:  D                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   SA

 

  1. In Exhibit 8-4, this firm is currently operating at its profit-maximizing level of output. How much profit is the firm earning?
a. Zero.
b. $1.
c. $16.
d. -$16.
e. Unable to determine with this information.

 

 

ANS:  E                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   SA

 

Exhibit 8-5 A firm’s MR and MC curves

 

 

  1. In Exhibit 8-5, a firm is currently producing 40 units of output. What would you advise this firm to do?
a. Shut down.
b. Increase output.
c. Stay at its current output.
d. Decrease output.
e. Decrease price.

 

 

ANS:  B                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   SA

 

  1. In Exhibit 8-5, suppose a firm is currently producing 50 units of output. What would you advise this firm to do?
a. Shut down.
b. Increase output.
c. Stay at its current output.
d. Decrease output.
e. Decrease price.

 

 

ANS:  D                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   SA

 

  1. In Exhibit 8-5, suppose a firm is currently producing 45 units of output. What would you advise this firm to do?
a. Shut down.
b. Increase output.
c. Stay at its current output
d. Decrease output
e. Decrease price.

 

 

ANS:  B                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   SA

 

Exhibit 8-6 A firm’s cost and MC curves

 

 

  1. In Exhibit 8-6, if this firm is currently producing 20 units of output, this firm:
a. is at its profit-maximizing point.
b. could increase profits by increasing output.
c. could increase profits by decreasing output.
d. should shut down.
e. should decrease price.

 

 

ANS:  A                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. In Exhibit 8-6, if this firm is currently producing 20 units of output, this firm:
a. is earning a profit of $10.
b. is earning a profit of $.50.
c. is losing $10.
d. should shut down.
e. is losing $.50

 

 

ANS:  A                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   SA

 

Exhibit 8-7 A firm’s cost and MR curves

 

 

  1. In Exhibit 8-7, if this firm is currently producing 20 units of output, this firm:
a. is at its profit-maximizing point.
b. could increase profits by increasing output.
c. could increase profits by decreasing output.
d. should shut down.
e. should decrease price.

 

 

ANS:  A                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   SA

 

  1. In Exhibit 8-7, if this firm is currently producing 20 units of output, this firm:
a. is at its profit-maximizing point.
b. is losing $20.
c. is earning a total profit of $60.
d. should shut down.
e. is earning a total profit of $3.

 

 

ANS:  C                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   SA

 

  1. In Exhibit 8-7, if this firm is currently producing 20 units of output, this firm:
a. is at its profit-maximizing point.
b. is earning a $3 profit on each item sold.
c. is losing $3 on each item sold.
d. should shut down.
e. is earning a total profit of $3.

 

 

ANS:  B                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   SA

 

  1. In Exhibit 8-7, if this firm is currently producing 20 units of output, this firm:
a. is at its profit-maximizing point.
b. could increase profits by increasing output.
c. could increase profits by decreasing output.
d. should shut down.
e. should decrease price.

 

 

ANS:  A                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   SA

 

Exhibit 8-8 A firm’s cost and marginal revenue curves

 

 

  1. In Exhibit 8-8, product price in this market is fixed at $35. This firm is currently operating where MR = MC. What do you advise this firm to do?
a. This firm should shut down.
b. This firm could increase profits by increasing output.
c. This firm could increase profits by decreasing output.
d. This firm should continue to operate at its current output.
e. This firm should decrease price.

 

 

ANS:  D                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   SA

 

  1. In Exhibit 8-8, product price in this market is fixed at $35. This firm is currently operating where MR = MC. Which of the following is true?
a. Price < AVC and this firm should shut down.
b. This firm is earning a profit of zero.
c. This firm could increase profits by increasing output.
d. Price > ATC and the firm is earning a positive profit.
e. Price > AVC, and the firm should stay at its current output.

 

 

ANS:  E                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

Exhibit 8-9 A firm’s cost and marginal revenue curves

 

 

  1. In Exhibit 8-9, product price in this market is fixed at $14. This firm is currently operating where MR = MC. What do you advise this firm to do?
a. This firm should shut down.
b. This firm could increase profits by increasing output.
c. This firm could increase profits by decreasing output.
d. This firm should continue to operate at its current output.
e. This firm should decrease price.

 

 

ANS:  D                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   SA

 

  1. In Exhibit 8-9, product price in this market is fixed at $7. This firm is currently operating where MR = MC. What do you advise this firm to do?
a. This firm should shut down.
b. This firm could increase profits by increasing output.
c. This firm could increase profits by decreasing output.
d. This firm should continue to operate at its current output.
e. This firm should decrease price.

 

 

ANS:  A                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   SA

 

Exhibit 8-10 Price and cost data for a firm

 

Q P AVC ATC MC
0 $12 – – –
1   12 3   5   5
2   12 5   6   7
3   12    7.3   8 12
4   12    9.5 10 16

 

 

  1. In Exhibit 8-10, following the rule regarding MR and MC, the most profitable output level is:
a. 0.
b. 1.
c. 2.
d. 3.
e. 4.

 

 

ANS:  D                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   SA

 

  1. In Exhibit 8-10, the maximum possible total profit is:
a. $36.
b. $24.
c. $20.
d. $12.
e. $8.

 

 

ANS:  D                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. In Exhibit 8-10, MR is the same as which column?
a. Q.
b. P.
c. AVC.
d. ATC.
e. MC.

 

 

ANS:  B                    PTS:   1                    DIF:    Difficult         REF:   Full: 218 | Mic: 218

TOP:   Marginal revenue                            TYP:   RE

 

Exhibit 8-11 A firm’s cost and marginal revenue curves

 

 

  1. In Exhibit 8-11, the profit-maximizing output level at the price of $8 is:
a. 0.
b. 4.
c. 7.
d. 8.
e. 10.

 

 

ANS:  E                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   SA

 

  1. In Exhibit 8-11, when the price is $5, the firm:
a. is making an economic profit of $21.
b. should produce output equal to 10.
c. is breaking even.
d. should shut down.
e. should produce output equal to 7.

 

 

ANS:  E                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   SA

 

  1. In Exhibit 8-11, when the price is $2, the profit-maximizing (or loss-minimizing) firm:
a. should shut down and produce zero.
b. should produce output equal to 4.
c. is making an economic profit of $8.
d. should try to produce more output.
e. has total revenue equal to $20.

 

 

ANS:  A                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. In Exhibit 8-11, when the price rises from $5 to $8, the profit-maximizing (or loss-minimizing) firm goes from making a:
a. loss to making a smaller loss.
b. loss to making a larger loss.
c. loss to making a profit.
d. profit to making a loss.
e. profit to making a larger profit.

 

 

ANS:  C                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

Exhibit 8-12 Marginal revenue and cost per unit curves

 

 

  1. As shown in Exhibit 8-12, suppose the firm’s price is OB. The firm’s total economic profit at this price is equal to the area of:
a. CJID.
b. BFHD.
c. AEXD.
d. CGHD.
e. zero.

 

 

ANS:  E                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. As shown in Exhibit 8-12, the price that will yield zero economic profit is:
a. OA.
b. OB.
c. OC.
d. OD.

 

 

ANS:  B                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. As shown in Exhibit 8-12, the firm will not produce in the short-run if the price is below:
a. OA.
b. OB.
c. OC.
d. OD.

 

 

ANS:  A                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   SA

 

  1. As shown in Exhibit 8-12, if the price is OD, a perfectly competitive firm maximizes profit at which point on its marginal cost curve?
a. E.
b. F.
c. I.
d. Between E and I.

 

 

ANS:  C                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   SA

 

  1. As shown in Exhibit 8-12, if the price is OB, the firm’s total cost of producing at its most profitable level of output is:
a. YF.
b. XL.
c. OYFB.
d. OXEA.

 

 

ANS:  C                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. As shown in Exhibit 8-12, if the price is OD, the firm’s total revenue at its most profitable level of output is:
a. OZID.
b. OYHD.
c. OXLD.
d. OYFB.

 

 

ANS:  A                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. If price is equal to OD for the firm shown in Exhibit 8-12, total profit is maximized when:
a. output is X.
b. output is Y.
c. output is Z.
d. output is greater than Z.

 

 

ANS:  C                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   SA

 

  1. The firm shown in Exhibit 8-12 will:
a. produce where marginal cost equals marginal revenue.
b. be a price taker.
c. not produce below a price of OA.
d. all of these.

 

 

ANS:  D                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   SA

 

  1. As shown in Exhibit 8-12, the firm’s supply curve is the:
a. entire marginal cost curve.
b. rising part of marginal cost beginning at E.
c. rising part of marginal cost beginning at F.
d. entire marginal revenue curve.

 

 

ANS:  B                    PTS:   1                    DIF:    Medium         REF:   Full: 223 | Mic: 223

TOP:   Short-run supply curve                    TYP:   SA

 

  1. As shown in Exhibit 8-12, the firm will shut down in the short-run at a price below:
a. OA.
b. OB.
c. OC.
d. OD.

 

 

ANS:  A                    PTS:   1                    DIF:    Medium         REF:   Full: 223 | Mic: 223

TOP:   Short-run supply curve                    TYP:   SA

 

Exhibit 8-13 Price and cost per unit curves

 

 

  1. As shown by the five points in Exhibit 8-13, the firm’s total economic profit is maximized when the price is:
a. P1.
b. P2.
c. P3.
d. P4.
e. P5.

 

 

ANS:  E                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   SA

 

  1. In Exhibit 8-13, if the price is P3, total economic profit is maximized or economic loss minimized at the output:
a. Q1.
b. Q2.
c. Q3.
d. Q4.
e. Q5.

 

 

ANS:  C                    PTS:   1                    DIF:    Easy               REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   SA

 

  1. In Exhibit 8-13, the firm will not produce when the price is between:
a. zero and P2.
b. P2 and P3.
c. P3 and P4.
d. P4 and P5.

 

 

ANS:  A                    PTS:   1                    DIF:    Easy               REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   SA

 

Exhibit 8-14 Total cost and total revenue curves

 

 

  1. In Exhibit 8-14, if output is at 200 units per week, total economic profit for the firm is:
a. zero.
b. positive.
c. negative.
d. none of these.

 

 

ANS:  C                    PTS:   1                    DIF:    Easy               REF:   Full: 215 | Mic: 215

TOP:   Short-run loss minimization             TYP:   SA

 

  1. If the firm in Exhibit 8-14 minimizes its loss at 200 units of output, marginal cost is:
a. $75 per unit.
b. equal to marginal revenue.
c. $100 per unit.
d. $175 per unit.

 

 

ANS:  B                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run loss minimization             TYP:   SA

 

Exhibit 8-15 Short-run cost curves for E-Z Care lawn mowing company

 

 

  1. In Exhibit 8-15, if the market price of mowing lawns is $16 per lawn, then E-Z-Care will earn the biggest profit by mowing:
a. 5 lawns per day.
b. 7 lawns per day.
c. 8 lawns per day.
d. as many lawns per day as is physically possible.

 

 

ANS:  C                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   SA

 

  1. In Exhibit 8-15, what market price would cause E-Z-Care to just beak even?
a. $6 per lawn.
b. $8 per lawn.
c. $12 per lawn.
d. $16 per lawn.

 

 

ANS:  C                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   SA

 

  1. In Exhibit 8-15, suppose the market price of mowing lawns falls to $10 per lawn. In this situation, E-Z-Care will:
a. permanently exit the industry.
b. shut down its operations, at least in the short run.
c. continue to mow lawns despite its economic losses.
d. earn a normal profit.

 

 

ANS:  C                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run loss minimization             TYP:   SA

 

Exhibit 8-16 Short-run cost curves for a competitive firm

 

 

  1. In Exhibit 8-16, suppose the firm faces a price of $80 per unit. How much should the firm produce to earn the largest possible profit?
a. 2 units per hour.
b. 4 units per hour.
c. 5 units per hour.
d. 6 units per hour.

 

 

ANS:  D                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   SA

 

  1. In Exhibit 8-16, the firm should shut down in the short run if the market price of its product falls below:
a. $20 per unit.
b. $30 per unit.
c. $50 per unit.
d. $80 per unit.

 

 

ANS:  B                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run loss minimization             TYP:   SA

 

  1. In Exhibit 8-16, if the market price of its product is $50 per unit, then the firm will:
a. break even.
b. shut down.
c. exit the industry.
d. earn a positive economic profit.

 

 

ANS:  A                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run loss minimization             TYP:   SA

 

Exhibit 8-17 Marginal revenue and cost per unit curves

 

 

  1. As shown in Exhibit 8-17, if the product price is either $10, $15, $20, or $40, the firm’s economic profit is maximum at an output of:
a. 20 units per day.
b. 40 units per day.
c. 60 units per day.
d. 80 units per day.

 

 

ANS:  D                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. In Exhibit 8-17, if the price of the firm’s product is $20 per unit, the firm will produce:
a. 20 units per day.
b. 40 units per day.
c. 60 units per day.
d. 80 units per day.

 

 

ANS:  C                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. As shown in Exhibit 8-17, the price at which the firm earns zero economic profit in the short-run is:
a. $10 per unit.
b. $15 per unit.
c. $40 per unit.
d. more than $20 per unit.
e. $20 per unit.

 

 

ANS:  E                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. If the price of the firm’s product in Exhibit 8-17 is $15 per unit, the firm should:
a. shut down permanently.
b. stay in operation for the time being even though it is making a pure economic loss.
c. shut down temporarily.
d. continue to operate because it is earning a positive economic profit.

 

 

ANS:  B                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. As shown in Exhibit 8-17, the firm will produce in the short run if the price is at least equal to:
a. $10 per unit.
b. $15 per unit.
c. $20 per unit.
d. $30 per unit.
e. $40 per unit.

 

 

ANS:  A                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. As shown in Exhibit 8-17, the short-run supply curve for the firm corresponds to which segment of its marginal cost curve?
a. C and all points above.
b. B and all points above.
c. A and all points above.
d. A to C only.
e. B to D only.

 

 

ANS:  B                    PTS:   1                    DIF:    Medium         REF:   Full: 223 | Mic: 223

TOP:   Short-run supply curve                    TYP:   SA

 

  1. In long-run equilibrium, the typical perfectly competitive firm has no incentive to:
a. change output.
b. change plant size.
c. enter or leave the industry.
d. do any of these.

 

 

ANS:  D                    PTS:   1                    DIF:    Difficult         REF:   Full: 226 | Mic: 226

TOP:   Long-run equilibrium for a competitive firm                      TYP:   CA

 

  1. The long run is a planning period:
a. during which the firm can vary its plant size.
b. less than six months.
c. less than one year.
d. less than five years.

 

 

ANS:  A                    PTS:   1                    DIF:    Easy               REF:   Full: 226 | Mic: 226

TOP:   Long-run equilibrium for a competitive firm                      TYP:   RE

 

  1. In long-run equilibrium, the perfectly competitive firm sets its price equal to which of the following?
a. Short-run average total cost.
b. Short-run marginal cost.
c. Long-run average cost.
d. All of these.

 

 

ANS:  D                    PTS:   1                    DIF:    Difficult         REF:   Full: 226 | Mic: 226

TOP:   Long-run equilibrium for a competitive firm                      TYP:   CA

 

  1. In long-run equilibrium, which of the following is not equal to price for a perfectly competitive firm?
a. Short-run average variable cost.
b. Long-run average total cost.
c. Short-run marginal cost.
d. Short-run average total cost.

 

 

ANS:  A                    PTS:   1                    DIF:    Difficult         REF:   Full: 226 | Mic: 226

TOP:   Long-run equilibrium for a competitive firm                      TYP:   CA

 

  1. In long-run equilibrium, a competitive firm produces the level of output at which:
a. marginal cost is at a minimum.
b. short-run average total cost and long-run average cost are at a minimum.
c. total revenue is at a maximum.
d. diseconomies of scale end.

 

 

ANS:  B                    PTS:   1                    DIF:    Medium         REF:   Full: 226 | Mic: 226

TOP:   Long-run equilibrium for a competitive firm                      TYP:   RE

 

  1. Which of the following statements is true?
a. To maximize profits, a firm must maximize total revenue.
b. In long-run equilibrium, a competitive firm produces at the point of minimum average total cost.
c. In the short-run, a perfectly competitive firm produces where total cost is minimum.
d. In the short-run, a perfectly competitive firm will close down whenever price is less than average total cost.

 

 

ANS:  B                    PTS:   1                    DIF:    Medium         REF:   Full: 226 | Mic: 226

TOP:   Long-run equilibrium for a competitive firm                      TYP:   RE

 

  1. In long-run equilibrium for a perfectly competitive firm, price equals which of the following?
a. Economies of scale.
b. Minimum short-run average total cost.
c. The sum of each short-run marginal cost curve.
d. All of these.

 

 

ANS:  B                    PTS:   1                    DIF:    Medium         REF:   Full: 226 | Mic: 226

TOP:   Long-run equilibrium for a competitive firm                      TYP:   RE

 

  1. In the long-run equilibrium for a perfectly competitive firm, price equals which of the following?
a. price.
b. minimum short-run average total cost.
c. short-run marginal cost.
d. All of these.

 

 

ANS:  D                    PTS:   1                    DIF:    Medium         REF:   Full: 226 | Mic: 226

TOP:   Long-run equilibrium for a competitive firm                      TYP:   RE

 

  1. If there is a permanent increase in demand for the product of a perfectly competitive industry, the process of transition to a new long-run equilibrium will include:
a. the entry of new firms.
b. temporarily higher profits.
c. both a and b.
d. neither a nor b.

 

 

ANS:  C                    PTS:   1                    DIF:    Medium         REF:   Full: 226 | Mic: 226

TOP:   Long-run equilibrium for a competitive firm                      TYP:   RE

 

  1. In long-run equilibrium, the typical perfectly competitive firm will:
a. earn zero economic profit.
b. change plant size in the long run.
c. change output in the short run.
d. do any of these.

 

 

ANS:  A                    PTS:   1                    DIF:    Easy               REF:   Full: 226 | Mic: 226

TOP:   Long-run equilibrium for a competitive firm                      TYP:   RE

 

  1. In long-run equilibrium for a perfectly competitive firm, price equals which of the following?
a. Economies of real cost.
b. Maximum total revenue.
c. Diseconomies of scale cost.
d. Minimum point on the long-run average cost curve.

 

 

ANS:  D                    PTS:   1                    DIF:    Medium         REF:   Full: 226 | Mic: 226

TOP:   Long-run equilibrium for a competitive firm                      TYP:   RE

 

  1. In a perfectly competitive industry, assume there is a permanent increase in demand for a product. The process of transition to a new long-run equilibrium will include:
a. the exit of firms.
b. temporarily lower production costs.
c. both a and b.
d. neither a nor b.

 

 

ANS:  D                    PTS:   1                    DIF:    Difficult         REF:   Full: 226 | Mic: 226

TOP:   Long-run equilibrium for a competitive firm                      TYP:   CA

 

  1. In a perfectly competitive industry, assume the short-run average total cost increases as the output of the industry expands. In the long run, the industry supply curve will:
a. first have a positive slope and then a negative slope.
b. have a negative slope.
c. be perfectly horizontal.
d. be perfectly vertical.
e. have a positive slope.

 

 

ANS:  E                    PTS:   1                    DIF:    Difficult         REF:   Full: 226 | Mic: 226

TOP:   Long-run equilibrium for a competitive firm                      TYP:   CA

 

  1. Under long-run perfect competition, which of the following are the same (equal) at all levels of output?
a. Price and marginal cost.
b. Price and marginal revenue.
c. Marginal cost and marginal revenue.
d. All of these.

 

 

ANS:  B                    PTS:   1                    DIF:    Difficult         REF:   Full: 226 | Mic: 226

TOP:   Long-run equilibrium for a competitive firm                      TYP:   CA

 

  1. Suppose that in a perfectly competitive market, firms are making economic profits. In the long run, we can expect to see:
a. some firms leave.
b. the market price rise.
c. market supply shift to the left.
d. economic profits become zero.
e. production levels remaining the same as in the short-run.

 

 

ANS:  D                    PTS:   1                    DIF:    Medium         REF:   Full: 226 | Mic: 226

TOP:   Long-run equilibrium for a competitive firm                      TYP:   SA

 

  1. The long-run equilibrium condition for perfect competition is:
a. P = AVC = MR = MC.
b. P = ATC = MR = MC.
c. Q = AVC = MR = MC.
d. Q = ATC = MR = MC.
e. TR = ATC = MR = MC.

 

 

ANS:  B                    PTS:   1                    DIF:    Medium         REF:   Full: 226 | Mic: 226

TOP:   Long-run equilibrium for a competitive firm                      TYP:   RE

 

  1. Consider a firm operating with the following: price = 10; MR = 10; MC = 10; ATC = 10. This firm is:
a. making an economic profit of 10.
b. an example of monopolistic competition.
c. going to go out of business in the long run.
d. a monopolist for a product with a relatively inelastic demand.
e. perfectly competitive in long-run equilibrium.

 

 

ANS:  E                    PTS:   1                    DIF:    Difficult         REF:   Full: 226 | Mic: 226

TOP:   Long-run equilibrium for a competitive firm                      TYP:   CA

 

Exhibit 8-18 A typical firm in a perfectly competitive market

 

 

  1. As shown in Exhibit 8-18, the perfectly competitive firm is in long-run equilibrium at an output of:
a. zero units per week.
b. 200 units per week.
c. 400 units per week.
d. 600 units per week.

 

 

ANS:  C                    PTS:   1                    DIF:    Easy               REF:   Full: 226 | Mic: 226

TOP:   Long-run equilibrium for a competitive firm                      TYP:   SA

 

  1. As shown in Exhibit 8-18, the perfectly competitive firm is in long-run equilibrium at a price of:
a. $100.
b. $200.
c. $300.
d. $400.

 

 

ANS:  B                    PTS:   1                    DIF:    Easy               REF:   Full: 226 | Mic: 226

TOP:   Long-run equilibrium for a competitive firm                      TYP:   SA

 

  1. In Exhibit 8-18, assume the perfectly competitive firm is in long-run equilibrium and there is an increase in demand. As a result, the firm in the short run will increase output along its:
a. short-run average total cost curve B.
b. short-run marginal cost curve B.
c. long-run average cost curve.
d. none of these because the firm shuts down.

 

 

ANS:  B                    PTS:   1                    DIF:    Difficult         REF:   Full: 226 | Mic: 226

TOP:   Long-run equilibrium for a competitive firm                      TYP:   CA

 

  1. In a constant cost industry:
a. a natural monopoly is likely to occur.
b. total cost is the same, no matter how much a firm produces.
c. the long-run supply curve will be perfectly elastic.
d. entry of new firms in the industry will lead to a reduction in the cost of inputs.

 

 

ANS:  C                    PTS:   1                    DIF:    Difficult         REF:   Full: 228 | Mic: 228

TOP:   Long-run supply curve                     TYP:   RE

 

  1. If the expansion of output in an industry leads to unchanged resource prices, the industry is most likely to be a(n):
a. decreasing cost industry.
b. increasing cost industry.
c. constant cost industry.
d. industry characterized by economies of scale.

 

 

ANS:  C                    PTS:   1                    DIF:    Easy               REF:   Full: 228 | Mic: 228

TOP:   Long-run supply curve                     TYP:   RE

 

  1. If resource prices rise and the per-unit cost of producing a product increases as the firms in an industry expand output in response to an increase in demand, the long-run market supply curve for the product will:
a. be perfectly elastic (a horizontal line).
b. be perfectly inelastic (a vertical line).
c. slope upward to the right.
d. be more inelastic than the short-run supply curve for the product.

 

 

ANS:  C                    PTS:   1                    DIF:    Difficult         REF:   Full: 228 | Mic: 228

TOP:   Long-run supply curve                     TYP:   CA

 

  1. If the demand for a product increases in an increasing cost industry, as the market adjusts in the long run:
a. price will rise.
b. the firm’s per-unit cost will increase.
c. the firm’s per-unit cost will fall.
d. the market price will return to its initial position.

 

 

ANS:  B                    PTS:   1                    DIF:    Easy               REF:   Full: 228 | Mic: 228

TOP:   Long-run supply curve                     TYP:   CA

 

  1. Assume the short-run average total cost for a perfectly competitive industry remains constant as the output of the industry expands. In the long run, the industry supply curve will:
a. have a positive slope.
b. have a negative slope.
c. be perfectly horizontal.
d. be perfectly vertical.

 

 

ANS:  C                    PTS:   1                    DIF:    Difficult         REF:   Full: 228 | Mic: 228

TOP:   Long-run supply curve                     TYP:   CA

 

  1. Assume the short-run average total cost for a perfectly competitive industry decreases as the output of the industry expands. In the long run, the industry supply curve will:
a. have a positive slope.
b. have a negative slope.
c. be perfectly horizontal.
d. be perfectly vertical.

 

 

ANS:  B                    PTS:   1                    DIF:    Difficult         REF:   Full: 228 | Mic: 228

TOP:   Long-run supply curve                     TYP:   CA

 

  1. Assume the short-run average total cost for a perfectly competitive industry increases as the output of the industry expands. In the long run, the industry supply curve will:
a. have a positive slope.
b. have a negative slope.
c. be perfectly horizontal.
d. be perfectly vertical.

 

 

ANS:  A                    PTS:   1                    DIF:    Difficult         REF:   Full: 228 | Mic: 228

TOP:   Long-run supply curve                     TYP:   CA

 

  1. If input prices for a perfectly competitive industry remain constant as the output of the industry expands in the long run, the industry supply curve will:
a. have a positive slope.
b. have a negative slope.
c. be perfectly horizontal.
d. be perfectly vertical.

 

 

ANS:  C                    PTS:   1                    DIF:    Difficult         REF:   Full: 228 | Mic: 228

TOP:   Long-run supply curve                     TYP:   CA

 

  1. If a perfectly competitive industry’s long-run supply curve is downward sloping, we can conclude that input prices will:
a. increase as industry output increases.
b. decrease as industry output increases.
c. remain constant as industry output increases.
d. none of these conclusions can be drawn.

 

 

ANS:  B                    PTS:   1                    DIF:    Difficult         REF:   Full: 228 | Mic: 228

TOP:   Long-run supply curve                     TYP:   CA

 

  1. If input prices for a perfectly competitive firm increase as the output of the industry expand in the long run, the long-run industry supply curve will:
a. have a positive slope.
b. have a negative slope.
c. be perfectly horizontal.
d. be perfectly vertical.

 

 

ANS:  A                    PTS:   1                    DIF:    Difficult         REF:   Full: 228 | Mic: 228

TOP:   Long-run supply curve                     TYP:   CA

 

  1. In a constant-cost industry, input prices remain constant as:
a. the supply of inputs fluctuates.
b. firms encounter diseconomies of scale.
c. workers become more experienced.
d. firms enter and exit the industry.

 

 

ANS:  D                    PTS:   1                    DIF:    Medium         REF:   Full: 228 | Mic: 228

TOP:   Long-run supply curve                     TYP:   SA

 

  1. Suppose that, in the long run, the price of feature films rises as the movie production industry expands. We can conclude that movie production is a(n):
a. increasing-cost industry.
b. constant-cost industry.
c. decreasing-cost industry.
d. marginal-cost industry.

 

 

ANS:  A                    PTS:   1                    DIF:    Medium         REF:   Full: 228 | Mic: 228

TOP:   Long-run supply curve                     TYP:   RE

 

  1. As the electronic components industry expands, the salaries paid to electrical engineers rise in response to higher demand. We can conclude that the electronic components industry is:
a. a constant-cost industry.
b. an increasing-cost industry.
c. a decreasing-cost industry.
d. a marginal-cost industry.

 

 

ANS:  B                    PTS:   1                    DIF:    Medium         REF:   Full: 228 | Mic: 228

TOP:   Long-run supply curve                     TYP:   CA

 

  1. The long-run supply curve for a competitive constant-cost industry is:
a. horizontal.
b. vertical.
c. upward-sloping.
d. downward-sloping.

 

 

ANS:  A                    PTS:   1                    DIF:    Easy               REF:   Full: 228 | Mic: 228

TOP:   Long-run supply curve                     TYP:   RE

 

  1. Which of the following is true of a perfectly competitive market?
a. If economic profits are earned then the price will fall over time.
b. In long-run equilibrium P = MR = SRMC = SRATC = LRAC.
c. A constant-cost industry exists when the entry of new firms has no effect on their cost curves.
d. All of these.

 

 

ANS:  D                    PTS:   1                    DIF:    Difficult         REF:   Full: 228 | Mic: 228

TOP:   Long-run supply curve                     TYP:   CA

 

Exhibit 8-19 Long-run perfectly competitive industry

 

 

  1. As shown in Exhibit 8-19, assume that a perfectly competitive industry is in long-run equilibrium at point A and the demand curve shifts from D1 to D2. Which of the following is a part of the industry adjustment process?
a. The price will temporarily rise at point B.
b. New firms will enter the industry.
c. Firms will temporarily make positive economic profits.
d. All of these.

 

 

ANS:  D                    PTS:   1                    DIF:    Difficult         REF:   Full: 228 | Mic: 228

TOP:   Long-run supply curve                     TYP:   CA

 

  1. As shown in Exhibit 8-19, assume that a perfectly competitive industry is in long-run equilibrium at point A. If the demand curve shifts from D1 to D2, the adjustment sequence between points will be:
a. A to B, then back to A.
b. A to D, then back to A.
c. A to D, then to C.
d. A to B, then to C.

 

 

ANS:  D                    PTS:   1                    DIF:    Difficult         REF:   Full: 228 | Mic: 228

TOP:   Long-run supply curve                     TYP:   CA

 

  1. As shown in Exhibit 8-19, assume that a perfectly competitive industry is in long-run equilibrium at point A and the demand curve shifts from D1 to D2. The result is a long-run supply curve drawn from point:
a. A to point B.
b. B to point A.
c. A to point D.
d. A to point C.

 

 

ANS:  D                    PTS:   1                    DIF:    Difficult         REF:   Full: 228 | Mic: 228

TOP:   Long-run supply curve                     TYP:   CA

 

TRUE/FALSE

 

  1. Competitive firms frequently use advertising to differentiate their product from their competitors’ products.

 

ANS:  F                    PTS:   1                    DIF:    Medium         REF:   Full: 213 | Mic: 213

TOP:   Perfect competition                         TYP:   RE

 

  1. A perfectly competitive market is characterized by the free entry and exit of firms.

 

ANS:  T                    PTS:   1                    DIF:    Easy               REF:   Full: 213 | Mic: 213

TOP:   Perfect competition                         TYP:   RE

 

  1. A perfectly competitive market is characterized by highly advertised goods.

 

ANS:  F                    PTS:   1                    DIF:    Difficult         REF:   Full: 213 | Mic: 213

TOP:   Perfect competition                         TYP:   RE

 

  1. If a perfectly competitive firm charges more than the market price, then it loses all of its customers.

 

ANS:  T                    PTS:   1                    DIF:    Medium         REF:   Full: 200 | Mic: 200

TOP:   Price taker      TYP:   SA

 

  1. In the short run, the profit maximizing (or minimizing) quantity of output for any firm to produce exists at that output level at which marginal revenue equals marginal cost.

 

ANS:  T                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   SA

 

  1. If a firm is producing an output level at which marginal revenue exceeds marginal cost, the firm will increase profits by reducing its output level.

 

ANS:  F                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. In the short run, a firm should shut down if its economic loss from operating exceeds its total fixed cost.

 

ANS:  T                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   SA

 

  1. If at some output level for a firm price exceeds average total cost, then the firm is earning an economic profit.

 

ANS:  T                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   SA

 

  1. If marginal revenue exceeds marginal cost in the short run, the perfectly competitive firm earns an economic profit in the short-run.

 

ANS:  F                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. If marginal revenue equals marginal cost in the short run, the perfectly competitive firm earns zero profits.

 

ANS:  F                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. If marginal revenue exceeds marginal cost in the short run, total revenue for the perfectly competitive firm is greater than total cost.

 

ANS:  F                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. A perfectly competitive firm will shut down in the short run when marginal revenue equals marginal cost at a price less than minimum average variable cost.

 

ANS:  T                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. The short-run supply curve and short-run marginal cost curve for a perfectly competitive firm coincide when the market price is greater than average variable cost.

 

ANS:  T                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. In the short run, the profit maximizing (or minimizing) quantity of output for any firm to produce exists at that output level at which marginal revenue equals marginal cost.

 

ANS:  T                    PTS:   1                    DIF:    Medium         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   RE

 

  1. If a firm is producing an output level at which marginal revenue exceeds marginal cost in the short run, the firm will increase profits by reducing its output level.

 

ANS:  F                    PTS:   1                    DIF:    Difficult         REF:   Full: 215 | Mic: 215

TOP:   Short-run profit maximization          TYP:   CA

 

  1. If a perfectly competitive firm cannot cover all of its costs, then it should shut down in the short run.

 

ANS:  F                    PTS:   1                    DIF:    Difficult         REF:   Full: 223 | Mic: 223

TOP:   Short-run supply curve                    TYP:   CA

 

  1. When faced with an economic loss, a competitive firm will shut down its operations in the short run.

 

ANS:  F                    PTS:   1                    DIF:    Medium         REF:   Full: 223 | Mic: 223

TOP:   Short-run supply curve                    TYP:   CA

 

  1. A perfectly competitive firm shuts down in the short-run when the market price is less than the average variable cost.

 

ANS:  T                    PTS:   1                    DIF:    Medium         REF:   Full: 223 | Mic: 223

TOP:   Short-run supply curve                    TYP:   CA

 

  1. In the short run, the supply curve for a perfectly competitive firm is its marginal cost curve for all levels of output.

 

ANS:  F                    PTS:   1                    DIF:    Difficult         REF:   Full: 223 | Mic: 223

TOP:   Short-run supply curve                    TYP:   CA

 

  1. A perfectly competitive firm’s short-run supply curve is its marginal cost curve below its average variable cost curve.

 

ANS:  F                    PTS:   1                    DIF:    Medium         REF:   Full: 223 | Mic: 223

TOP:   Short-run supply curve                    TYP:   RE

 

  1. In long-run equilibrium, a perfectly competitive firm’s short-run marginal cost curve crosses the long-run average cost curve at the lowest point on the long-run average cost curve.

 

ANS:  T                    PTS:   1                    DIF:    Medium         REF:   Full: 226 | Mic: 226

TOP:   Long-run equilibrium for a competitive firm                      TYP:   RE

 

  1. A perfectly competitive industry must have a perfectly elastic long-run supply curve.

 

ANS:  F                    PTS:   1                    DIF:    Medium         REF:   Full: 226 | Mic: 226

TOP:   Long-run equilibrium for a competitive firm                      TYP:   RE

 

  1. In long-run equilibrium, a perfectly competitive firm will produce an output level at which its long-run average cost curve is upward sloping.

 

ANS:  F                    PTS:   1                    DIF:    Difficult         REF:   Full: 226 | Mic: 226

TOP:   Long-run equilibrium for a competitive firm                      TYP:   RE

 

  1. In the long run, a competitive firm will earn zero economic profit.

 

ANS:  T                    PTS:   1                    DIF:    Easy               REF:   Full: 226 | Mic: 226

TOP:   Long-run equilibrium for a competitive firm                      TYP:   RE

 

  1. When faced with an economic loss, a competitive firm will exit the industry in the long run.

 

ANS:  T                    PTS:   1                    DIF:    Easy               REF:   Full: 226 | Mic: 226

TOP:   Long-run equilibrium for a competitive firm                      TYP:   RE

 

  1. In long-run equilibrium, a perfectly competitive firm’s short-run marginal cost curve crosses the long-run average cost curve at the lowest point on the long-run average cost curve.

 

ANS:  T                    PTS:   1                    DIF:    Medium         REF:   Full: 226 | Mic: 226

TOP:   Long-run equilibrium for a competitive firm                      TYP:   RE

 

  1. The long-run supply curve for a competitive industry always has a positive slope.

 

ANS:  F                    PTS:   1                    DIF:    Medium         REF:   Full: 228 | Mic: 228

TOP:   Long-run supply curve                     TYP:   RE

 

  1. A perfectly competitive industry always has a perfectly elastic (flat) long-run supply curve.

 

ANS:  F                    PTS:   1                    DIF:    Medium         REF:   Full: 228 | Mic: 228

TOP:   Long-run supply curve                     TYP:   RE

 

ESSAY

 

  1. What are the characteristics of the perfectly competitive market?

 

ANS:

The perfectly competitive market is characterized by a very large number of sellers, firms sell a standardized product, firms are price-takers, there are no barriers to entry and firms do not undertake any non-price competition.

 

PTS:   1                    REF:   Full: 213 | Mic: 213

 

  1. What is the profit maximizing (loss minimizing) quantity for the perfectly competitive firm to produce?

 

ANS:

The profit maximizing (loss minimizing) quantity for any firm to produce exists at that output level in which marginal revenue equals marginal cost (MR = MC). For the perfectly competitive firm, price (P) equals marginal revenue. Therefore, the profit maximizing quantity for the perfectly competitive firm to produce exits at that output level where P = MC.

 

PTS:   1                    REF:   Full: 215 | Mic: 215

 

  1. What is a firm’s short run supply curve?

 

ANS:

A firm’s short run supply curve is that portion of its marginal cost curve above minimum average variable cost.

 

PTS:   1                    REF:   Full: 223 | Mic: 223

 

  1. Assume a competitive market has firms earning large economic profits. What is expected to happen over time in this competitive market and to firm’s profits?

 

ANS:

Economic profits will attract new firms into the market. This increases market supply and decreases market price. The demand curve facing firms will decline (shift downward). Profits will decline until a zero economic profit (a normal profit) is earned. In the long run, competitive firms can earn only a normal profit.

 

PTS:   1                    REF:   Full: 226 | Mic: 226

 

  1. What are the pros and cons of a competitive market in the long run?

 

ANS:

The pros include price equals minimum average total costs and marginal cost. Also, only a normal profit is earned in the long run. The major drawback of a competitive market is that it usually does not promote technological advances (because competitive firms do not earn the profits necessary to enable long-term investments in research and development).

 

PTS:   1                    REF:   Full: 226 | Mic: 226

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