Economics Chapter 23: Practice Test A and B

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A. Profits are maximized for the perfectly competitive firm when the firm produces the quantity where:

ALL OF THE ABOVE A. MC​ = MR. B. total revenue exceeds total cost by the greatest amount. C. P​ = MC. D. All of the above.

B. If a perfectly competitive firm sells the product for a​ profit-maximizing price of​ $4.76 and has average total cost per unit of​ $5.16, in the short run:

ALL OF THE ABOVE A. this firm should shut down if​ $4.76 is less than minimum AVC. B. this firm is losing money. C.this firm must hope the market price rises soon or exit the industry.

A. The efficient allocation of scarce and productive resources:

ALL OF THE ABOVE A.occurs when all resources are used in the most advantageous way possible. B.means that it is impossible to increase the production of one good without lowering the value of total output produced in the economy. C.occurs when the price of a good equals the cost to society of producing that​ quantity, rather than a larger quantity of some other good.

A. The​ short-run break-even price for the perfectly competitive firm occurs where price equals:

ATC

A. In the​ graph, if price is P1​, the​ profit-maximizing rate of output is:

Although the P or MR does equal the MC at this output​ level, the price is below the AVC so the firm will not produce any output. - zero

B. If a firm is making zero economic profits it should:

continue operating.

B. The decision making process for the perfectly competitive firm boils down to:

deciding how much to produce.

A. In the​ graph, the​ firm's supply curve is:

the marginal cost curve that lies above price P2. On the graph this is between ATC and ATV

A. The demand curve for the perfect competitor is horizontal because:

the market dictates each​ firm's price.

A. With marginal cost​ pricing:

the price charged is equal to the opportunity cost to society of producing one more unit of the good.

B. A perfectly competitive firm is charging ​$7 and selling 1475 units a month. The firm raises its price by a nickel above the market price. Its profit:

will go to zero

B. In​ long-run equilibrium, the perfectly competitive firm makes:

zero economic profits.

B. In the figure shown at the​ right, what is the profit at the profit maximizing output and​ price?:

- $414

A. In the figure shown at the​ right, what is the profit maximizing output and price in the short​ run?:

- 46, $50 on the graph; where marginal cost meets demand

A. The campus barber faces stiff competition from the large number of shops that surround the campus​ area, and for all practical purposes the market is perfectly competitive. He charges ​$12 for a haircut and cuts hair for 15 people a day. His shop is open 4 days a week:

- Calculate his weekly total ​revenue. $720. - Calculate his average revenue per haircut. ​$12. - Calculate his marginal revenue per haircut. ​$12

B. Consider the​ short-run cost curves shown on the graph. The​ U-shaped curve is a perfectly competitive​ firm's short-run average variable cost​ curve, and the​ upward-sloping curve is its marginal cost curve. The market price is equal to​ $30. What is the​ firm's profit-maximizing output in the short​ run?:

0

A. In the figure to the​ right, the firm should produce:

10 units since economic profits are the greatest. On Graph: where the two points for TC and TR align; 10 units is the output they both align with

B. Which of the following is not one of the assumptions of a perfectly competitive​ market?:

Better information for producers than consumers.

B. In the long​ run, all firms in a perfectly competitive industry:

Break even

B. If markets are perfectly competitive then the production of goods:

In perfect competition firms will produce at the minimum ATC in​ long-run equilibrium. - will use the least costly combination of resources.

B. The supply curve of the perfectly competitive firm in the short run is equal to:

In the short run the firm equates the price or marginal revenue to the marginal cost to determine the profit maximizing output. If the price is above the minimum of the​ ATC, the firm will earn an economic profit.​ However, it will still supply the product when the price is below the minimum of the ATC. - the marginal cost curve above minimum AVC.

B. In a perfectly competitive​ market, if P​ = ATC in the long​ run, the firm will:

NONE OF THE ABOVE A. leave the industry. B. make economic profits. C. suffer losses. D. None of the above.

A. A firm will continue to operate in the short​ run, even at an economic​ loss, as long as:

P is greater than minimum AVC.

A. The perfectly competitive firm in​ long-run equilibrium produces a level of output such that:

P​ = MC​ = MR​ = short-run ATC​ = long-run ATC.

B. In​ long-run equilibrium which of the following is true for the firms in a perfectly competitive​ industry?:

P​ = MR​ = MC​ = ATC.

B. In the figure to the​ right, at the output level between 5 units and 13 units:

Since the total revenue line is above the total cost​ line, there are positive economic profits. - the​ firm's economic profits are positive. On the graph; total cost is below total revenue

A. For each example​ below, identify which statement is not characteristic of a perfectly competitive industry:

The characteristics of a perfectly competitive industry​ include: 1. There are a large number of buyers and sellers. 2. The product sold by the firms in the industry is homogeneous. 3. Both buyers and sellers have equal access to information. 4. Any firm can enter or leave the industry without serious impediments. - One firm produces a large portion of the​ industry's total output. - The products differ slightly in quality from firm to firm. - The government also limits the number of taxicab companies that can operate within the​ city's boundaries.

B. Suppose that the market price in a perfectly competitive industry is ​$50 per unit. Using the line drawing tool​, plot a possible marginal revenue line given this price. Label this line​ 'MR':

This line is drawn horizontal for the $50 mark

B. Suppose that a perfectly competitive firm faces a market price of ​$7 per​ unit, and at this price the​ upward-sloping portion of the​ firm's marginal cost curve crosses its marginal revenue curve at an output level of 1,400 units. If the firm produces 1,400 ​units, its average variable costs equal ​$6.50 per​ unit, and its average fixed costs equal ​$0.80 per unit.

What is the​ firm's profit-maximizing​ (or loss-minimizing) output​ level? 1,400. What is the amount of its economic profits​ (or losses) at this output​ level? ​$ -420.

A. In a perfectly competitive​ market, if P​ > ATC in the short​ run, there is apt to be:

When P​ > ATC there are positive economic profits. Positive economic profits would attract new firms and the supply curve would shift outward. - entry of new firms into the market.

B. The lowest profit a firm should ever make in the short run is:

When the P​ = ATC, at the same output level where MR​ = MC, the firm will be earning zero economic profits or normal profits. ​ However, if the price is below the ATC the firm may still​ operate, but will have negative profits​ (losses) in the​ short-run. - the losses associated with the fixed costs of the firm.

A. In a competitive​ market, positive economic profits act to:

attract new entrants into the industry.

B. The demand curve for the perfectly competitive industry is:

downward sloping.

A. For a perfectly competitive​ firm, price:

equals both average revenue and marginal revenue.

B. When the perfect competitor earns less than normal profits in the long​ run, the firm will:

exit the industry.

B. A perfectly elastic​ long-run supply curve:

indicates that input prices do not change when firms enter or exit the industry.

A. In​ long-run equilibrium in perfect​ competition:

the firm produces at the minimum point of its​ long-run and​ short-run average total cost curves.

A. At the​ long-run equilibrium the​ firm's average total cost is:

minimized.

B. A perfectly competitive firm wants higher profits and has decided to raise the price of its product. As an economic consultant you would advise them to:

not do this since they would lose all of their sales to competitors.

A. The demand curve for the perfectly competitive firm is:

perfectly elastic.

B. Perfect competition is efficient because:

price equals marginal cost.

A. The perfectly competitive firm is said to be a:

price taker long dash it takes the price given by the market.

A. The role of profits in the model of perfect competition is to:

signal entrepreneurs to enter the industry.

A. Zero economic profits means:

the firm is covering all of its opportunity costs and will stay in business.


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