1. Which of the following is not an assumption of the theory of perfect competition?a. There are many sellers and many buyers, none of which is large in relation to total sales or
purchases.b. Each firm produces and sells a differentiated product.c. Buyers and sellers have all relevant information with respect to prices, product quality,
and sources of supply.d. There is easy entry and exit.
2. Real-world markets that approximate the four assumptions of the theory of perfect competition includea. some agricultural markets.b. the soft drink market.c. the stock market.d. a and ce. a, b, and c
3. The theory of perfect competition generally assumes thata. sellers act independently of other sellers, but buyers do not act independently of other
buyers.b. buyers act independently of other buyers, but sellers do not act independently of other
sellers.c. buyers and sellers act independently of other buyers and sellers.d. neither buyers nor sellers act independently of other buyers and sellers.
4. In the theory of perfect competition,a. sellers of the product are not influenced by other sellers and therefore have virtually
complete control over the production and pricing of their product.b. buyers of the product may have a preference as to whom they purchase from based on
brand loyalty.c. buyers and sellers of the product know everything that there is to know about the product.d. it can be quite expensive for a firm to enter this type of market, but once the firm is
5. Does a real-world market have to meet all the assumptions of the theory of perfect competition before it is considered a perfectly competitive market?a. No, probably no real-world market meets all the assumptions of the theory of perfect
competition. All that is necessary is that a real-world market behave as if it satisfies all the assumptions.
b. Yes, if a real-world market does not meet the assumptions, then it cannot be considered a perfectly competitive market.
c. Yes, unless it is a new market such as the computer market. New markets are not held to the same assumptions as old, more established markets.
d. No, but it does have to meet the assumption of producing and selling a homogeneous product. It does not have to fully meet the other assumptions.
6. Perfectly competitive industries area. difficult to enter because there are already so many producers in the industry.b. not particularly appealing or attractive to enter because there tend to be so many buyers
that it is difficult to deal with them.c. relatively easy to enter but not so easy to exit from.d. a and be. none of the above
7. A "price taker" is a firm thata. does not have the ability to control the price of the product it sells.b. does have the ability, although limited, to control the price of the product it sells.c. can raise the price of the product (above the market price) and still sell some units of its
product.d. sells a differentiated product.e. none of the above
8. Perfectly competitive firms are price takers for all of the following reasons except thata. each firm is quite small relative to the total market supply.b. buyers and sellers have all the necessary information about prices, etc.c. the product is homogeneous.d. barriers to exit force firms to sell at the market price.
a. is downward sloping.b. is upward sloping.c. is perfectly horizontal.d. is perfectly vertical.e. may be downward or upward sloping, depending upon the type of product offered for sale.
10. The market demand curve in a perfectly competitive market isa. downward sloping.b. upward sloping.c. perfectly horizontal.d. perfectly vertical.e. downward or upward sloping depending upon the type of product offered for sale.
11. In the theory of perfect competition,a. the market demand curve is horizontal.b. the single firm's demand curve is horizontal.c. the single firm's demand curve is downward sloping.d. the market demand curve is downward sloping.e. b and d
12. Which of the following statements is false?a. The perfectly competitive firm's demand curve is horizontal at the market price.b. The theory of perfect competition is completely and accurately descriptive of most real-
world firms.c. If Firm X does not strictly meet all the assumptions of the theory of perfect competition,
but behaves as if it does, then the theory of perfect competition is relevant to it.d. In perfect competition, the market price is established at the intersection of the market
13. The price at which a perfectly competitive firm sells its product is determined bya. the individual seller based on his costs of production and his profit margin.b. all sellers and buyers of the product.c. the buyers of the product, because there are so many sellers that they cannot agree on a
price.d. the government, because there are so many buyers and sellers of the product that together
14. The perfectly competitive firm will seek to produce the output level for whicha. average variable cost is at a minimum.b. average total cost is at a minimum.c. average fixed cost is at a minimum.d. marginal cost equals marginal revenue.
15. Marginal revenue isa. total revenue divided by the quantity of output.b. total profit minus total costs.c. the change in total output brought about by using an additional unit of a variable input.d. the change in total revenue brought about by selling an additional unit of the good.e. the change in total revenue minus the change in total costs.
16. For a perfectly competitive firm,a. the marginal revenue curve and the demand curve are the same.b. the marginal revenue curve and the marginal cost curve are the same.c. the supply curve and the marginal revenue curve are the same.d. the demand curve and the marginal cost curve are the same.e. none of the above
17. Refer to Exhibit 23-1. The dollar amounts that go in blanks (A) and (B) are, respectively,a. $1 and $12.b. $12 and $12.c. $8.42 and $8.50.d. $12 and $6.
ANS: B PTS: 1 DIF: Difficulty: ModerateNAT: BUSPROG: Analytic LOC: DISC: Perfect competitionKEY: Bloom's: Application NOT: New
18. Refer to Exhibit 23-1. The dollar amounts that go in blanks (C) and (D) are, respectively,a. $1 and $12.b. $12 and $12.c. $8.58 and $8.67.d. $4 and $3.
ANS: B PTS: 1 DIF: Difficulty: ModerateNAT: BUSPROG: Analytic LOC: DISC: Perfect competitionKEY: Bloom's: Application NOT: New
19. Refer to Exhibit 23-1. The data in this table are relevant to a perfectly competitive firm becausea. its total revenue is different at different levels of quantities sold.b. its total revenue is the same at all levels of quantities sold.c. it doesn't have to lower price to sell additional units of the product.d. marginal revenue is greater than price.
20. Refer to Exhibit 23-1. The firm’s demand curve represented by the information in this table isa. downward-sloping.b. upward-sloping.c. horizontal.d. vertical.
ANS: C PTS: 1 DIF: Difficulty: ModerateNAT: BUSPROG: Analytic LOC: DISC: Perfect competitionKEY: Bloom's: Application NOT: New
21. Refer to Exhibit 23-1. The marginal revenue curve represented by the information in this table isa. downward-sloping.b. upward-sloping.c. horizontal.d. vertical.
ANS: C PTS: 1 DIF: Difficulty: ModerateNAT: BUSPROG: Analytic LOC: DISC: Perfect competitionKEY: Bloom's: Application NOT: New
22. A perfectly competitive firm should increase its level of production as long asa. total revenue is less than total cost.b. the total revenue curve is rising.c. marginal revenue is greater than marginal cost.d. the marginal revenue curve is rising.
23. For a perfectly competitive firm, profit maximization or loss minimization occurs at the output at whicha. MR = MC.b. MR = AVC.c. P = ATC.d. MR = ATC.
24. If MR > MC, thena. profits will be at their maximum.b. the firm is producing too much of the good to be maximizing profits.c. the firm can increase its profits or minimize its losses by increasing output.d. the firm is necessarily incurring losses.
25. If, for the last unit of a good produced by a perfectly competitive firm, MR > MC, then in producing that unit the firma. added more to total costs than it added to total revenue.b. added more to total revenue than it added to total costs.c. added an equal amount to both total revenue and total costs.d. maximized profits or minimized losses.
a. Q1, where "what is coming in" on the last unit is greater than "what is going out."b. Q2, where the difference between "what is coming in" on the last unit and "what is going
out" is zero.c. Q3, where marginal cost is greater than marginal revenue.d. Q4, which maximizes the excess of marginal cost over marginal revenue.
27. Refer to Exhibit 23-2. If the firm produces the quantity of output at which marginal revenue (MR) equals marginal cost (MC), is it guaranteed maximum profit or minimized loss?a. Yes, when MR = MC, it follows that MR - MC = 0, and thus the firm maximizes profit
and minimizes losses.b. No, at the quantity of output at which MR = MC, it could be the case that average variable
cost is greater than price and the firm would do better to shut down.c. Yes, when the firm produces the quantity at which MR = MC, it has maximized both
revenue and profit.d. Yes, because if the MC curve is rising, the average total cost curve always lies below it
28. Refer to Exhibit 23-2. For the firm that faces the demand curve in the exhibit,a. marginal revenue is constant.b. price equals marginal revenue.c. if the firm maximizes profits, it produces the quantity of output at which price equals
a. 41 unitsb. 42 unitsc. 44 unitsd. 45 unitse. 46 units
ANS: C PTS: 1 DIF: Difficulty: ModerateNAT: BUSPROG: Analytic LOC: DISC: Perfect competitionKEY: Bloom's: Application NOT: New
30. Refer to Exhibit 23-3. What is the increase in profit that would result from producing 43 units of the product rather than producing 40 units?a. $60b. $48c. $28d. $16e. $13
ANS: E PTS: 1 DIF: Difficulty: ModerateNAT: BUSPROG: Analytic LOC: DISC: Perfect competitionKEY: Bloom's: Application NOT: New
31. Refer to Exhibit 23-3. What is the maximum profit?a. $65b. $59c. $20d. $376
ANS: B PTS: 1 DIF: Difficulty: ModerateNAT: BUSPROG: Analytic LOC: DISC: Perfect competitionKEY: Bloom's: Application NOT: New
32. Refer to Exhibit 23-3. Is it possible for this firm to produce "too much" in the short-run?a. Any quantity above 42 units is too much.b. Any quantity above 44 units is too much.c. Any quantity above 40 units is too much.d. none of the above
ANS: B PTS: 1 DIF: Difficulty: ModerateNAT: BUSPROG: Analytic LOC: DISC: Perfect competitionKEY: Bloom's: Application NOT: New
33. Consider the following data: equilibrium price = $9, quantity of output produced = 1,000 units, average total cost = $7, and average variable cost $5. Given this, total revenue is __________, total cost is __________, and total fixed cost is __________.a. $6,000; $8,000; $1,000b. $9,000; $7,000; $5,000c. $10,000; $8,000; $3,000d. $9,000; $7,000; $2,000e. none of the above
34. In the short-run, if P < ATC, a perfectly competitive firm shoulda. increase production to the output level at which P = ATC.b. continue producing at a loss.c. shut down.d. continue producing at a profit.e. There is not enough information to answer the question.
35. Consider the following data: equilibrium price = $10, quantity of output produced = 100 units, average total cost = $13, and average variable cost = $7. What will the firm do and why?a. Shut down in the short run, because it is taking a loss of $200.b. Continue to produce in the short run, because price is greater than average variable cost.c. Shut down in the short run, because average variable cost is less than average total cost.d. Continue to produce in the short run, because firms are always stuck with having to
36. The perfectly competitive firm will produce in thea. short run if price is below average variable cost.b. long run if price is below average variable cost.c. short run if price is below average total cost but above average variable cost.d. long run if price is below average total cost but above average variable cost.
37. Consider the following data: equilibrium price = $8.50, quantity of output produced = 100 units, average total cost = $10, and average variable cost = $9. What will the firm do and why?a. Shut down in the short run, because price is below average variable cost.b. Shut down in the short run, because it will be taking a loss of $100.c. Continue to produce in the short run, because price is greater than average variable cost.d. Continue to produce in the short run, because firms are always stuck with having to
38. In order for a firm to continue producing, price must exceed __________ and total revenue must exceed __________.a. marginal cost, total costb. ATC; total cost
39. The perfectly competitive firm's short-run supply curve is thea. upward-sloping portion of its average total cost curve.b. horizontal portion of its marginal revenue curve.c. portion of its average variable cost curve that lies above the average fixed cost curve.d. upward-sloping portion of its marginal cost curve.e. portion of its marginal cost curve that lies above its average variable cost curve.
40. Refer to Exhibit 23-4. Equilibrium price is P1, and the firm produces Q1. At this level of output, average variable cost and average total cost are indicated by the dots. Given this situation, the firm isa. receiving a profit equal to area 3.b. taking a loss equal to areas 2 + 3.c. earning total revenue equal to areas 1 + 2.d. receiving a profit equal to area 2.e. none of the above
41. Refer to Exhibit 23-4. The firm sells its product at P1 and produces Q1. Given this situation,a. total variable cost is equal to areas 1 + 2.b. total revenue is equal to area 1.c. total cost is equal to areas 2 + 3.
42. Refer to Exhibit 23-4. The firm sells its product at P1 and produces Q1. Given this situation,a. total variable cost is equal to areas 2 + 3.b. total revenue is equal to areas 1 + 2.c. total cost is equal to areas 1 + 2 + 3.d. profit equals area 1.e. none of the above
43. Refer to Exhibit 23-4. Where can you find the lowest price that will motivate the firm to produce Q1 in the short run?a. at the horizontal line running to "ATC"b. at the horizontal line running to "AVC"c. P1
44. Firm X is producing the quantity of output at which marginal revenue equals marginal cost. It isa. receiving a positive economic profit.b. taking a loss.c. earning a normal profit.d. There is not enough information to answer the question.
45. The short-run industry supply curve is thea. horizontal summation of the short-run supply curves for all firms in the industry.b. vertical summation of the short-run supply curves for all firms in the industry.c. average of the short-run supply curves for all firms in the industry.d. same as that of the typical firm in the industry.
46. Which of the following conditions does not characterize long-run competitive equilibrium?a. Economic profit is zero.b. Price is greater than marginal cost.c. No firm has an incentive to change its plant size.
47. If firms are earning zero economic profits, they must be producing at an output level at whicha. price equals marginal cost.b. price equals average total cost.c. price equals average variable cost.d. marginal revenue equals marginal cost.e. none of the above
48. When the perfectly competitive firm produces the quantity of output at which marginal revenue equals marginal cost, it naturallya. produces the quantity of output at which marginal cost equals price, since for the perfectly
competitive firm price equals marginal revenue.b. produces the quantity of output at which short-run average total cost equals price, since for
the perfectly competitive firm short-run average total cost equals marginal revenue.c. earns a profit, since equating marginal revenue and marginal cost guarantees profit.d. takes a loss.
49. Assume the following for a certain industry: (l) there is no incentive for firms to enter or exit the industry; (2) for some firms in the industry, short-run average total cost is greater than long-run average total cost at the level of output where marginal revenue equals marginal cost; (3) all firms in the industry are currently producing the quantity of output at which marginal revenue equals marginal cost. Is the industry in long-run competitive equilibrium?a. Yes.b. No, because of number 2.c. No, because of numbers 2 and 3.d. No, because of numbers 1 and 2.e. No, because of numbers 1, 2, and 3.
50. Why must profits be zero in long-run competitive equilibrium?a. If profits are not zero, firms will enter or exit the industry.b. If profits are not zero, firms will produce higher-quality goods.c. If profits are not zero, marginal revenue will rise.d. If profits are not zero, marginal cost will rise.
51. If the perfectly competitive firm is producing an output level at which price equals marginal cost, it isa. earning profits.b. taking losses.c. earning normal profit.d. There is not enough information to answer the question.
52. Assume a constant-cost industry that is initially in long-run competitive equilibrium. An increase in demand will cause a(n) __________ in prices and profits, and as a result, firms will __________ the industry, causing the market supply curve to shift __________, which, in turn, will eventually cause the equilibrium price to be __________ before.a. decrease; exit; leftward; lower thanb. increase; enter; rightward; higher thanc. decrease; exit; rightward; higher thand. increase; enter; rightward; the same ase. increase; exit; leftward; lower than
53. Demand increases in an increasing-cost industry that is initially in long-run competitive equilibrium. After full adjustment, price will bea. equal to its original level.b. below its original level.c. above its original level.d. There is not enough information to answer the question.
55. Assume a decreasing-cost industry that is initially in long-run competitive equilibrium. A decrease in demand will cause a(n) __________ in prices and profits, and as a result, firms will __________ the industry, causing the market supply curve to shift __________,which, in turn, will eventually cause the equilibrium price to be __________ before.a. a decrease; exit; rightward; lower than
b. an increase; enter; rightward; higher thanc. a decrease; exit; leftward; higher thand. an increase; enter; rightward; the same ase. an increase; exit; leftward; lower than
56. If an industry is in long-run competitive equilibrium and experiences a decrease in demand, then as a result the equilibrium price will __________, which will cause the representative firm's __________ curve to shift downward and some firms will __________ the industry.a. rise; marginal cost; enterb. fall; marginal cost; enterc. rise; marginal revenue; enterd. fall; demand; exite. fall; marginal cost; exit
57. As firms exit an industry, the industry supply curve shifts __________ and the equilibrium price __________ until long-run competitive equilibrium is established and the surviving firms are earning __________ economic profits.a. leftward; rises; zerob. leftward; falls; positivec. leftward; rises; positived. rightward; falls; negativee. rightward; rises; positive
58. Resource allocative efficiency occurs when a firma. minimizes costs of production yet charges the highest possible price.b. produces the quantity of output at which price exceeds average total cost by the greatest
amount.c. produces the quantity of output at which price equals marginal cost.d. produces the quantity of output at which price equals average total cost.e. produces the quantity of output at which price equals average variable cost.
60. Is it possible for a perfectly competitive firm to be maximizing profits, but not achieving resource allocative efficiency?a. Definitely yes, because it is impossible to achieve both at the same time.b. Yes, it is possible, but it is not possible to minimize losses without also achieving resource
allocative efficiency.c. No, it is not possible, because the output at which MR = MC is also the output at which P
= MC.d. There is not enough information to answer this question.
61. Suppose one firm in a perfectly competitive industry experiences an increase in its costs of production. Which of the following best describes the most likely long run adjustment to this situation?a. Eventually, all firms in the industry will also experience this same increase in costs.b. Eventually, the price of the product will increase, and consumers will pay for the increase
in costs.c. The firm in question may suffer losses and exit the industry.d. none of the above
62. In a perfectly competitive industry, there is a motive for __________ to advertise in order to induce a rightward shift of the demand curve.a. the typical firmb. the industry as a wholec. both the typical firm and the industry as a wholed. neither the typical firm nor the industry as a whole
63. If an industry advertises, then ita. is definitely not a perfectly competitive industry.b. must be a perfectly competitive industry.c. may or may not be a perfectly competitive industry.d. is not using its resources wisely.e. will surely be able to increase its sales.
64. Which of the following is a characteristic of perfect competition?a. many sellers and few buyersb. many buyers and few sellersc. a heterogeneous productd. buyers and sellers having all relevant informatione. high barriers to entry and exit
65. Which of the following is not a characteristic of perfect competition?a. buyers and sellers having no influence on priceb. no barriers to entry and exitc. a heterogeneous productd. buyers and sellers having all relevant informatione. none of the above
68. Which of the assumptions in the theory of perfect competition assures us that economic profit will be zero in the long run?a. buyers and sellers having all relevant informationb. firms producing homogeneous goodsc. too few buyersd. easy entry and exite. smallness of firms with respect to the market
69. The price charged by a perfectly competitive firm is determined bya. the firm's demand curve alone.b. the firm's cost curves alone.c. market demand and market supply, together.d. market demand alone.e. market supply alone.
70. At the quantity where total revenue equals total cost,a. profit is zero.b. cost is minimized.c. cost is maximized.d. quantity is minimized.e. profit is maximized.
71. Marginal revenue is defined asa. the difference between costs and revenues.b. the change in total revenue caused by selling one additional unit of output.c. price times quantity.d. total revenue divided by the level of output.e. total revenue minus the level of output.
73. In the theory of perfect competition, the assumptions of many buyers and sellers, the production of a homogeneous product, and the possession of all relevant information by buyers and sellers imply that the perfectly competitive firma. sets the price it wishes.
75. In the theory of perfect competition, the market demand curve is __________ and the firm's demand curve is __________.a. perfectly elastic; perfectly elasticb. downward sloping; downward slopingc. perfectly elastic; downward slopingd. downward sloping; perfectly elastice. perfectly inelastic; downward sloping
76. In the theory of perfect competition, the assumption of easy entry into and exit from the market impliesa. positive economic profits in the long run.b. losses in the long-run equilibrium.c. zero economic profits in the long run.d. zero economic profits in both the short run and the long run.e. positive economic profits in both the short run and the long run.
77. In perfect competition, the firm's marginal revenue curve isa. perfectly elastic.b. the same as the firm's demand curve.c. the same as the firm's total revenue curve.d. a and be. a and c
78. The perfectly competitive firm will shut down in the short run if price isa. less than average variable cost.b. greater than average variable cost but less than average total cost.c. greater than average total cost.d. equal to average total cost.e. a and b
79. In short-run equilibrium, the perfectly competitive firm may be making __________ economic profits.a. positiveb. zeroc. negatived. a or be. any of the above
81. A decreasing-cost industry is characterized bya. an upward-sloping long-run supply curve.b. a downward-sloping long-run supply curve.c. a perfectly elastic long-run supply curve.d. perfectly elastic short-run and long-run supply curves.e. a perfectly elastic short-run supply curve and an upward-sloping long-run supply curve.
82. An increasing-cost industry is characterized bya. an upward-sloping long-run supply curve.b. a downward-sloping long-run supply curve.c. a perfectly elastic long-run supply curve.d. perfectly elastic short-run and long-run supply curves.e. a perfectly elastic short-run supply curve and an upward-sloping long-run supply curve.
83. A constant-cost industry is characterized bya. an upward-sloping long-run supply curve.b. a downward-sloping long-run supply curve.c. a perfectly elastic long-run supply curve.d. perfectly elastic short-run and long-run supply curves.e. a perfectly elastic short-run supply curve and an upward-sloping long-run supply curve.
84. A perfectly competitive firm that maximizes profit exhibits resource allocative efficiency because it produces where pricea. equals minimum average total cost.b. equals marginal revenue.c. equals marginal cost.d. is greater than minimum average variable cost.
85. Which of the following is not a condition of long-run competitive equilibrium?a. Economic profits are zero.b. Marginal revenue is greater than marginal cost.c. Price is equal to marginal cost.d. Firms do not have an incentive to change plant size.e. none of the above
86. Assume that a decreasing-cost industry experiences an increase in demand. In the short run, this willa. lead to a price increase.b. lead to a price decrease.c. have no influence on price.d. a or b, depending on the marginal cost curve
87. Assume that a decreasing-cost industry experiences an increase in demand. In the long run, this willa. lead to a price increase.b. lead to a price decrease.c. have no influence on price.d. a or b, depending on the marginal cost curve
88. Assume that a constant-cost industry experiences an increase in demand. In the long run, this willa. exceed its original equilibrium level.b. equal its original level.c. be lower than its original level.d. any of the above, depending on the elasticity of demand
89. A firm operating in a perfectly competitive market finds itself producing at an output level for which marginal revenue is lower than marginal cost. In order to maximize profits (or minimize losses), the firm shoulda. increase the level of output.b. decrease the level of output.c. shut down operations.d. lower its prices.e. raise its prices.
90. Which of the following statements about a perfectly competitive firm is necessarily false?a. There are few substitutes for the firm's product.b. There are few complements to the firm's product.c. The firm produces the quantity at which marginal revenue equals marginal cost.d. The firm sells a product that is identical in the eyes of buyers to any other product sold in
91. Refer to Exhibit 23-6. A perfectly competitive firm operating in the market depicted in graph (1) faces the demand curve depicted ina. graph (1)-the same as the market demand curve.b. graph (2).c. graph (3).d. graph (4).
92. Refer to Exhibit 23-6. A perfectly competitive firm operating in the market depicted in graph (1) is producing 311 units of output at the profit-maximizing level. What is the marginal revenue of the 312th unit?a. $0.312b. $1c. $10d. $312e. This cannot be determined based on the information provided.
94. Refer to Exhibit 23-7. At the profit-maximizing level of output, marginal cost isa. $60.00.b. $4.50.c. $5.00.d. $6.00.e. This cannot be determined based on the information provided.
95. Refer to Exhibit 23-7. At the profit-maximizing output level, average fixed cost isa. $2.00.b. $4.00.c. $5.00.d. $6.00.e. This cannot be determined based on the information provided.
99. One of the economic reasons for the U.S. postal service issuing and selling collector's stamps is thata. the fixed costs associated with these stamps are less than for other stamps.b. the variable costs associated with these stamps are less than for other stamps.c. the postal service charges customers a higher price for these stamps.d. a and be. none of the above
100. Refer to Exhibit 23-8. Which of the following is true in the short run of A and B, two perfectly competitive firms?a. Both A and B will continue to produce in the short run.b. Firm A will continue to produce and Firm B will shut down.c. Firm A will shut down and Firm B will continue to produce.d. Firm A will continue to produce in the short run and shut down in the long run.e. a and d
101. Refer to Exhibit 23-8. What is the profit (loss) of Firm A at the profit-maximizing (or loss-minimizing) level of production?a. $300b. $270c. $600d. $400e. -$300
102. Refer to Exhibit 23-8. What is the total fixed cost of Firm A at the point where it produces in the short run?a. $3b. $300c. $90d. $400e. There is not enough information provided to answer this question.
106. Refer to Exhibit 23-8. What is the profit (loss) of Firm B at the profit-maximizing (or loss-minimizing) level of production?a. -$600b. $270c. $600d. $400
107. Refer to Exhibit 23-8. What is the total fixed cost of Firm B at the point where it produces in the short run?a. $5b. $750c. $90d. $400e. There is not enough information provided to answer this question.
111. Refer to Exhibit 23-9. Suppose that the market starts at its long-run competitive equilibrium (P1, Q1), and that demand increases from D1 to D2. As a consequence, the typical profit-maximizing firm willa. increase quantity produced by (q2 - q1).b. decrease quantity produced by (q2 - q1).c. decrease quantity produced by (q1 - q3).d. not change its output level because the demand curve it is facing did not change.
112. Refer to Exhibit 23-9. Following an increase in market demand from D1 to D2, the firm's profits in the short run willa. remain the same at P1 times q1.b. remain the same at zero.c. increase by less than (P2 - P1) times q2.d. increase by (P2 - P1) times q3.
113. Refer to Exhibit 23-9. Assume that demand increases from D1 to D2; in the new long run equilibrium, price settles at a level between P1 and P2 This means that the industry in question is a(n) __________-cost industry.a. decreasingb. increasingc. constantd. marginale. low
114. In a constant-cost industry, positive profits are eliminated througha. an increase in costs only.b. a decrease in price only.c. both an increase in costs and a decrease in price.d. None of the above, because positive profits are persistent in a constant-cost industry.
115. Which of the following is inconsistent with long-run industry equilibrium?a. upward-sloping marginal cost curves for all of the firms in the industryb. zero economic profitsc. P = minimum ATCd. SRATC = LRATCe. none of the above
116. A seller is a price taker. This means that the seller sells his product at the pricea. he chooses.b. determined in the market.c. determined by the biggest firm in the market.d. determined by the largest consumer in the market.e. none of the above
117. A price-taker firm can sella. any quantity of product it wants at any price.b. less of its product at a higher price than at a lower price.c. any quantity of product it wants at the market equilibrium price.d. more of its product at a higher price than at a lower price.e. none of the above
118. A price-taker firm will not sell any of its product for less than the equilibrium price becausea. it is against the law to do this.b. it can sell all it wants at the equilibrium price.c. this would invite competition from outside the market and end up reducing the profits of
the firm.d. this would be breaking the cartel agreement that price-taker firms often enter into.e. none of the above
119. Which of the following is false?a. The market demand curve in a perfectly competitive market is downward sloping.b. The firm's demand curve in a perfectly competitive market is horizontal.c. The firm's demand curve in a perfectly competitive market is perfectly elastic.d. Marginal revenue is equal to the change in total revenue divided by the change in quantity
120. For a perfectly competitive firm,a. marginal revenue is equal to price.b. price is equal to marginal cost at the output level that maximizes profit.c. selling an additional unit of the good it produces increases total revenue by the price of the
121. For a perfectly competitive firm,a. price equals marginal revenue only for the first unit of the good produced and sold.b. only at a lower price can more units of a good be sold.c. demand is perfectly inelastic.d. a and be. none of the above
122. If a market comes close to meeting (but does not perfectly meet) all the assumptions of the theory of perfect competition, it follows thata. the market is not perfectly competitive.b. the theory of perfect competition still may be able to predict behavior in the market.c. firms in the market cannot be price takers.d. firms in the market do not try to maximize profit.e. a and c
123. The profit-maximization rule is as follows:a. Produce the quantity of output at which price equals average total cost (unit cost).b. Produce as much output as can be sold.
c. Produce the quantity of output at which marginal revenue equals marginal cost.d. Produce the quantity of output at which marginal revenue equals unit cost.e. Produce the quantity of output at which total cost is minimized.
124. A perfectly-competitive firm produces 2,000 units of a good during some period of time. For the 2,000th unit, marginal cost is equal to marginal revenue. The difference between marginal revenue and marginal cost is greater for the first unit the firm produces than the second, and greater for the second than the third, and so on. Furthermore, marginal revenue is greater than marginal cost for every unit from the first to the 1,999th. It follows that thea. marginal cost curve for the firm has a downward-sloping portion and an upward-sloping
portion.b. marginal cost curve for the firm is downward-sloping.c. marginal cost curve for the firm is upward-sloping.d. marginal revenue curve is downward-sloping.e. c and d
125. If, for a perfectly competitive firm, marginal cost is greater than marginal revenue for the 100th unit, then it follows thata. producing the 100th unit adds more to total revenue than it does to total cost.b. producing the 100th unit adds more to total cost than it does to total revenue.c. marginal cost equals marginal revenue for the 99th unit.d. the firm is not maximizing profit, or minimizing losses, if it produces the 100th unit.e. b and d
126. For a price taker, market equilibrium price is $100. At 50 units, MR = MC, ATC = $80, and AVC = $70. This price taker willa. earn $100 profits if it produces 50 units of the good.b. earn $1,000 profits if it produces 50 units.c. shut down its operation and by doing this minimize its losses.d. maximize its profits if it produces fewer than 50 units.e. maximize its profits if it produces more than 50 units.
127. In the short run, the best policy for a perfectly competitive firm is toa. shut down its operation if price ever falls below average total cost.b. produce and sell its product as long as price is greater than average variable cost.c. shut down its operation if price falls between average total cost and average variable cost.
128. When a perfectly competitive firm incurs losses, it follows that price isa. necessarily below average total cost.b. necessarily below average variable cost.c. below marginal cost.d. below marginal revenue.
129. A perfectly competitive firm that wants to maximize profits or minimize losses will produce in the short run as long asa. customers are buying its product.b. price is above average variable cost.c. price is above marginal revenue.d. average variable cost is above price.e. average total cost is above price.
130. If, for a perfectly competitive firm, price is greater than average variable cost, then it follows thata. total revenue is greater than total cost.b. total revenue is greater than total variable cost.c. the firm will lose more or earn less by shutting down in the short run than by continuing to
produce.d. b and ce. There is not enough information to answer the question.
131. Equilibrium price is $10 in a perfectly competitive market. For a perfectly competitive firm, MR = MC at 233 units of output. At 233 units, ATC is $12, and AVC is $9. The best policy for this firm is to __________ in the short run. Also, total fixed cost equals __________ for this firm.a. continue to produce; $3b. shut down; $699c. continue to produce; $699d. shut down; $2,796e. continue to produce; $2,796
132. Equilibrium price is $8 in a perfectly competitive market. For a perfectly competitive firm, MR = MC at 150 units of output. At 150 units, ATC is $11, and AVC is $10. The best policy for this firm is to __________ in the short run. Also, total fixed cost equals __________ and total variable cost equals __________ for this firm.a. continue to produce; $125; $1,375b. shut down; $150; $1,500c. shut down; $1,375; $1,250d. continue to produce; $150; $1,500e. There is not enough information to answer all parts of the question.
133. Equilibrium price is $19 in a perfectly competitive market. For a perfectly competitive firm, MR = MC at 120 units of output. At 120 units, ATC is $11, and AVC is $8. The best policy for this firm is to __________ in the short run. Also, this firm earns __________ of __________ if it produces and sells 120 units. Finally, the difference between total revenue and total fixed cost for this firm is __________.a. continue to produce; profits; $960; $1,920b. continue to produce; losses; $960; $1,000c. shut down; losses; $1,200; $2,300d. continue to produce; profits; $1,920; $1,960e. none of the above
134. For a perfectly competitive firm, MR = MC at 250 units of output. At 250 units, ATC is greater than AVC. It necessarily follows thata. the firm should shut down its operation.b. the marginal cost curve must have an upward-sloping portion and a downward-sloping
portion.c. the firm should continue to produce.d. b and ce. none of the above
135. Equilibrium price is $22 in a perfectly competitive market. For a perfectly competitive firm, MR = MC at 200 units of output. At 200 units, ATC is $23, and AVC is $18. The best policy for this firm is to __________ in the short run. Also, this firm earns __________ of __________ if it produces and sells 200 units. Finally, the difference between total variable cost and total fixed cost for this firm is __________.a. continue to produce, profits, $1800, $3,600b. shut down, losses, $200, $3,600c. continue to produce, losses, $200, $2,600d. shut down, profits, $200, $1,800
136. Equilibrium price is $10 in a perfectly competitive market. For a perfectly competitive firm, MR = MC at 1,200 units of output. At 1,200 units, ATC is $23, and AVC is $18. The best policy for this firm is to __________ in the short run. Also, this firm earns __________ of __________ if it produces and sells 1,200 units.a. shut down; losses; $15,600b. shut down; losses; $9,600c. continue to produce; losses; $15,600d. continue to produce; profits; $15,600
137. Ultimately, market supply curves are upward sloping because ofa. the law of diminishing marginal returns.b. economies of scale.c. average fixed cost falling continually as more output is produced.d. the law of the short run marginal cost curve.e. specialization.
138. Which of the following is false?a. If a perfectly competitive firm produces the quantity of output at which MR = MC, it
follows that the firm may or may not be earning a profit.b. The firm's supply curve is that portion of its AVC curve that lies above its MC curve.c. If price is above ATC at the quantity of output at which MR = MC, the firm will be
earning a profit.d. In long-run competitive equilibrium, price is equal to marginal cost.
139. There are 200 firms in a perfectly competitive industry. Half of the firms supply 100 units at $3 per unit and the other half of the firms supply 130 units at $3 per unit. One point on the market supply curve isa. 23,000 units at $3.b. 10,000 units at $3.c. 13,000 units at $3.d. 23,000 units at $6.e. none of the above
140. In long-run competitive equilibrium P = SRATC, because if P > SRATCa. losses in the industry would cause some existing firms to exit the industry.b. positive economic profit would attract firms to the industry in order to obtain the profits.c. firms would not be producing the quantity of output at which MR = MC.d. firms would not be covering total fixed costs.e. none of the above
141. In long-run competitive equilibrium SRATC = LRATC, because if SRATC > LRATC (at the quantity of output at which MR = MC) firms woulda. have an incentive to change their plant size to produce their current output.b. not be covering their total fixed costs.c. not be covering their total variable costs.d. a and be. b and c
142. In long-run competitive equilibrium, firmsa. earn positive economic profits.b. have no incentive to make any changes.c. earn losses on some units of the good they produce and sell.d. do not produce the quantity of output at which MR = MC.e. b and c
143. Which of the following is not a condition of long-run competitive equilibrium?a. There is no incentive for firms to enter the industry.b. There is no incentive for firms to exit the industry.c. There is no incentive for firms to produce more or less output.d. There is no incentive for firms to change plant size.e. None of the above; that is, all are conditions of long-run competitive equilibrium.
144. In long-run competitive equilibrium, the market equilibrium price equalsa. marginal cost.b. short-run average total cost.c. long-run average total cost.d. a and c
145. A perfectly competitive market is initially in long-run competitive equilibrium. Then, market demand increases. As a result,a. the marginal revenue curve for each firm shifts upward.b. the demand curve for each firm shifts upward.c. marginal cost for each firm falls.d. average total cost for each firm rises.e. a and b
146. A perfectly competitive market is initially in long-run competitive equilibrium. Then, market demand increases. This causes existing firms in the market to __________ and __________. As a result of the latter, the market supply curve shifts __________.a. produce more output; some existing firms to exit the market; leftwardb. produce less output; new firms to enter the market; rightwardc. produce more output; new firms to enter the market; rightwardd. expand their plant size; some existing firms to exit the market; leftwarde. none of the above
147. A perfectly competitive market is initially in long-run competitive equilibrium. Then, market demand falls. This causes the marginal revenue curves for existing firms to shift __________ and for these firms to produce __________ output. Some of the existing firms will end up __________.a. upward, more, increasing their plant sizeb. downward, less, exiting the marketc. downward, more, purchasing more capital equipmentd. upward, less, cutting fixed costse. none of the above
148. A perfectly competitive market is initially in long-run competitive equilibrium. Then, market demand increases. As a result, existing firms in the market begin to __________. By the time all adjustments have been made, profits will __________.a. earn positive economic profit, rise even higherb. earn positive economic profit; be back at zeroc. produce more output; be less than zerod. produce less output; risee. earn positive economic profit; turn into losses
149. A perfectly competitive market is initially in long-run competitive equilibrium. Then, market demand increases. By the time all adjustments have been made, price will be __________ its original level if the industry witnesses __________ costs.a. below; constantb. above; increasingc. at; decreasingd. at; increasinge. above; decreasing
150. A perfectly competitive market is initially in long-run competitive equilibrium. Then, market demand falls. By the time all adjustments have been made, price will be __________ its original level if the industry witnesses __________ costs.a. above; decreasingb. at; constantc. at; increasingd. below; increasinge. a and d
151. The long-run industry supply curve is the graphic representation of the quantity of output that the industry is prepared toa. supply at different prices after the entry and exit of firms is completed.b. supply at a single price after the entry and exit of firms is completed.c. purchase at different prices after the entry and exit of firms is completed.d. purchase at different prices after the entry of firms is completed.e. supply at different prices after the exit of firms is completed.
152. If the long-run industry supply curve is downward-sloping, it follows that there are __________ costs in the industry.a. increasingb. constantc. decreasingd. a or be. There is not enough information to answer the question.
153. When an industry is described as a decreasing-cost, increasing-cost, or constant-cost industry, the "cost" that is being referred to isa. marginal cost.b. average total cost.c. average variable cost.d. sunk cost.e. fixed cost.
154. In a perfectly competitive market, if a resource that one firm utilizes is superior to resources used by other firms, and, as a result, lowers unit costs for the firm, that firm is likely to earn __________ in the short run. In time, however, the firm's __________ curve will rise to reflect the superior-quality of the resource it employs and the firm will then earn __________.a. normal profit; ATC; positive economic profitb. positive economic profit; ATC; normal profitc. positive economic profit; marginal revenue; zero profitd. losses; ATC; positive economic profite. none of the above
155. A perfectly competitive market is initially in long-run competitive equilibrium. Each firm in the market is earning zero economic profit. The owner of one firm decides to discriminate against employees of race X by not hiring them, or by firing those employees of race X who currently work for him. If employees of race X are high-quality employees, and other firms hire them, then the owner of the discriminating firm will soon find that his costs rise (above that of other firms) and he will begin earninga. below normal profits.b. normal profits.c. positive economic profits.d. losses.e. a and d
156. All firms in an industry sell their product for the same price. This is a result ofa. collusion.b. perfect competition.c. a government law that specifies all firms must charge the same price.d. a or be. There is not enough information to answer the question.
157. Resource allocative efficiency exists for a perfectly competitive firm becausea. price equals marginal revenue and the firm equates marginal revenue and marginal cost to
maximize profits.b. price equals average total cost and the firm equates marginal revenue and average total
cost to maximize profits.c. price is greater than marginal revenue and the firm equates marginal revenue with average
total cost to maximize profits.d. price is less than marginal revenue and the firm equates marginal cost and marginal
158. Which of the following statements is true?a. A perfectly competitive firm that seeks to maximize profits will not be resource-allocative
efficient.b. If the demand curve and the marginal revenue curve weren't the same curve for a perfectly
competitive firm, then the firm would not be resource-allocative efficient.c. Resource allocative efficiency exists when a firm produces its output at the lowest
possible per unit cost (lowest ATC).d. Productive efficiency exists when firms produce the quantity of output at which price
159. A firm produces the quantity of output at which P = MC and P = ATC. It follows that the firm isa. resource allocative efficient, but not necessarily productive efficient.b. productive efficient, but not necessarily resource allocative efficient.c. both resource allocative and productive efficient.d. neither resource allocative nor productive efficient.
160. Refer to Exhibit 23-10. What quantity of output should the profit-maximizing firm produce?a. 0b. 4c. 6d. 7e. 8
ANS: C PTS: 1 DIF: Difficulty: ModerateNAT: BUSPROG: Analytic LOC: DISC: Perfect competitionKEY: Bloom's: Application NOT: New
161. Refer to Exhibit 23-10. What price does this firm charge for its product?a. $10b. $20c. $25d. $30e. There is not enough information to answer this question.
ANS: C PTS: 1 DIF: Difficulty: ModerateNAT: BUSPROG: Analytic LOC: DISC: Perfect competitionKEY: Bloom's: Application NOT: New
162. Refer to Exhibit 23-10. What is the marginal revenue and marginal cost, respectively, of the 7th unit of output?a. $25 and $25b. $30 and $20c. $25 and $15d. $25 and $30e. There is not enough information to answer this question.
ANS: D PTS: 1 DIF: Difficulty: ModerateNAT: BUSPROG: Analytic LOC: DISC: Perfect competitionKEY: Bloom's: Application NOT: New
163. Refer to Exhibit 23-10. Is it possible for this firm to produce “too much” output?a. Any quantity above 2 units is too much.b. Any quantity above 4 units is too much.c. Any quantity above 6 units is too much.d. none of the above
ANS: C PTS: 1 DIF: Difficulty: ModerateNAT: BUSPROG: Analytic LOC: DISC: Perfect competitionKEY: Bloom's: Application NOT: New
164. Refer to Exhibit 23-10. Is the firm depicted here a perfectly competitive firm?a. Yes, because marginal revenue is constant.b. Yes, because total revenue increases as output increases.
165. A perfectly competitive firm can produce its current level of output at an average total cost of $10 and a marginal cost of $8. If the market price of the product is currently $8, what should the firm do?a. The firm should definitely shut down since average total cost exceeds price.b. The answer depends upon the relationship between price and average variable cost. The
firm should shut down if average variable cost is $8 or greater, but the firm should continue to produce the current level of output if average variable cost is less than $8.
c. The firm should increase production in order to increase profit.d. The firm should continue to produce, but they should decrease production in order to
166. The U.S. Postal Service earns a __________________ profit per unit on its commemorative stamps than it does on its standard stamps because the ________________ cost is lower on the commemorative stamps.a. higher; average variableb. lower; average variablec. higher; average fixedd. lower; average fixed
16. The horizontal demand curve faced by the perfectly competitive firm implies that the firm can sell an infinite amount of the product at the equilibrium price.
17. When the government imposes taxes on firms that are earning high profits, there could be an unintended effect of reducing the supply of goods in that market compared to what the supply would be if the profits were not taxed.
1. Explain the difference between resource allocative efficiency and productive efficiency.
ANS:A firm that produces the quantity of output at which price equals marginal cost is said to exhibit resource allocative efficiency. This means that the marginal benefit to demanders of the resources in the goods they purchase is equal to the marginal cost to suppliers of the resources they use in producing the goods. Therefore, at the point where P=MC, all units of the good are produced that are of greater value to demanders than the foregone alternative goods. Productive efficiency occurs when a firm produces its output at the lowest possible per unit cost (where ATC is minimized). It is desirable from society's standpoint because it means that firms are economizing society's scarce resources. In perfect competition, productive efficiency occurs in long-run equilibrium.
2. List and describe the four assumptions that underlie the theory of perfect competition.
ANS:1) There are many sellers and buyers, each of which is so small a part of the market that he or she has no influence on price. 2) Each firm produces and sells a homogeneous product. 3) Buyers and sellers have all relevant information about prices, product quality, etc. 4) Firms have easy entry and exit, no barriers to entry or exit exist.
3. Why is profit maximized at the level of output where marginal revenue equals marginal cost?
ANS:If the firm produces units for which marginal cost exceeds marginal revenue, the extra cost to the firm of producing those units will exceed the extra benefit to the firm and profits will decline. If the firm fails to produce any units for which marginal revenue exceeds marginal cost, they are foregoing additional profit and therefore the firm can not be maximizing profit. It follows then that profit is maximized at the level of output where marginal revenue equals marginal cost.
In perfect competition, the seller faces a horizontal demand curve at the equilibrium market price. If a perfectly competitive seller tries to charge a price above the market-determined equilibrium price, no one will purchase from him. This is because he is selling a homogeneous product, his supply is small in relation to the total market supply and buyers are informed about where they could purchase the product at the lower price. The seller also has no incentive to charge a lower price than the equilibrium price because it can sell all it wants at the market-determined equilibrium price. A single perfectly competitive seller's supply is so small in relation to the overall market supply that whether he produces nothing, or all that he possibly can, he cannot perceptibly influence price and he must charge the going market price.
5. In the short run, if price (P) is less than average total cost (ATC) will a perfectly competitive firm necessarily shut down? Explain why or why not using a hypothetical example.
ANS:While it is true that a firm would be losing money if P<ATC, it may be that producing with a loss would be preferable to shutting down. In the short run, a perfectly competitive firm will shut down when P < average variable cost (AVC). Suppose that P = $9, ATC = $12, and AVC = $8. In this situation the firm would be losing $3 on each unit produced. However, since P>AVC the firm can cover its variable costs and generate at least some money (in this case $1 per unit) that it can use to help pay its fixed costs. Therefore, producing at a loss would be preferable to shutting down (where the firm would still have to pay its fixed costs).
6. Explain why the U.S. Postal Service (USPS) would be expected to earn a higher profit per unit on its commemorative stamps than on its standard stamps. Be sure to incorporate the concepts of profit per unit, average variable cost (AVC) and average total cost (ATC) into your answer.
ANS:Profit per unit = Price - (AVC + AFC). The use of commemorative stamps helps the USPS to reduce its unit variable costs, thereby raising its profit per unit. When a stamp is placed on a letter, the USPS is required to deliver the letter to the address on the envelope, thus incurring a cost. The AVC of each stamp is made up in part by the cost of producing the stamp and also by the cost of delivering the letter. Since many people purchase commemorative stamps to collect them (with no intention of ever using them to mail a letter), the AVC of those stamps is only equal to the stamp’s production costs and thus the AVC of commemorative stamps tends to be lower than for standard stamps resulting in higher profit per unit.
Profit is an incentive because it motivates sellers to take on certain behaviors. A seller who believes that he will make a profit by producing a given product will be motivated to pursue that activity. Profit also acts as a signal, encouraging producers to allocate resources in the direction of those goods and services that are profitable.
