IPFW E201 CH.8

2. Examples of perfect competition include a. some agricultural markets. b. the soft drink market. c. the stock market. d. a and c e. a, b, and c

d

74. Refer to Exhibit 9-6. The firm is a. earning positive economic profits. b. earning negative economic profits, i.e., losses. c. just breaking even. d. This cannot be determined without the average variable cost curve.

a

10. The demand curve for a perfectly competitive firm 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.

c

102. 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 $11, 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; $2 b. shut down; $450 c. continue to produce; $466 d. shut down; $2,097 e. continue to produce; $2,097

c

132. Refer to Exhibit 9-9. What quantity of output should the firm produce? a. 0 b. 5 c. 6 d. 7 e. 8

c

95. 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 the a. 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

c

104. 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; $1,920 b. continue to produce; losses; $960; $1,000 c. shut down; losses; $1,200; $2,300 d. continue to produce; profits; $1,920; $1,960 e. none of the above

a

107. 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; $15,600 b. shut down; losses; $9,600 c. continue to produce; losses; $15,600 d. continue to produce; profits; $15,600

a

108. Ultimately, market supply curves are upward sloping because of a. 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.

a

11. The market demand curve in a perfectly competitive market is a. 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.

a

110. 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 is a. 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

a

79. Refer to Exhibit 9-7. What is the profit of Firm A? a. $300 b. $270 c. $600 d. $400

a

96. If, for a perfectly competitive firm, marginal cost is greater than marginal revenue for the 100th unit, then it follows that a. 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

e

22. For a perfectly competitive firm, profit maximization or loss minimization occurs at the output at which a. MR = MC. b. MR = AVC. c. P = ATC. d. MR = ATC.

a

30. Refer to Exhibit 9-3. What is the maximum profit? a. $50 b. $40 c. $20 d. $378

a

15. The perfectly competitive firm will seek to produce the output level for which a. 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.

d

17. 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

a

112. In long-run competitive equilibrium SRATC = LRATC, because if SRATC > LRATC (at the quantity of output at which MR = MC) firms would a. 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 b e. b and c

a

122. The long-run industry supply curve is the graphic representation of the quantity of output that the industry is prepared to a. 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.

a

129. Resource allocative efficiency exists for a perfectly competitive firm because a. 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 revenue to maximize profits. e. none of the above

a

131. A firm produces the quantity of output at which P = MC and P = ATC. It follows that the firm is a. 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.

a

136. Refer to Exhibit 9-9. 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. c. No, because marginal cost is not constant. d. No, because marginal cost falls for some levels of output and rises for other levels of output.

a

139. Use the following data to answer this question: Data for Firm X: Total cost (TC) = $1,000; Total variable cost (TVC) = $400 Data for Firm Y: Total cost (TC) = $1,000; Total variable cost (TVC) = $800 Ceteris paribus, which of the two firms is more likely to shut down in the short run and why? a. Firm Y, because it has a lower TFC/TC ratio than Firm X. b. Firm Y, because it has a higher TFC/TC ratio than Firm X. c. Firm X, because it has a higher TFC/TC ratio than Firm Y. d. Firm X, because it has a lower TFC/TC ratio than Firm Y. e. It is impossible to determine the total fixed cost-total cost ratio for these two firms with the information that is given.

a

141. A common assumption in economics is that a firm's main objective is to: a. maximize profit b. maximize the income the firm's managers can make c. keep price low d. hire as many workers as possible

a

36. Consider the following data: equilibrium price = $7.50, quantity of output produced = 100 units, average total cost = $9, and average variable cost = $8. 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 $50. 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 produce in the short run. e. none of the above

a

44. The short-run industry supply curve is the a. 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.

a

47. When the perfectly competitive firm produces the quantity of output at which marginal revenue equals marginal cost, it naturally a. 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.

a

49. 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.

a

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.

a

56. 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; zero b. leftward; falls; positive c. leftward; rises; positive d. rightward; falls; negative e. rightward; rises; positive

a

7. A "price taker" is a firm that a. 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 it sells and still sell some units of its product. d. sells a differentiated product. e. none of the above

a

76. Refer to Exhibit 9-6. The situation of the firm will prompt __________ the industry, pushing the firm's demand curve __________. a. entry into; down b. entry into; up c. exit from; down d. exit from; up

a

78. Refer to Exhibit 9-7. 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

a

81. Refer to Exhibit 9-8. 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 profitmaximizing firm will a. 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.

a

99. When a perfectly competitive firm takes losses, it follows that price is a. necessarily below average total cost. b. necessarily below average variable cost. c. below marginal cost. d. below marginal revenue.

a

100. A perfectly competitive firm that wants to maximize profits or minimize losses will produce in the short run as long as a. 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.

b

20. Refer to Exhibit 9-1. The data are relevant to a perfectly competitive firm because a. its total revenue is different at different levels of quantities sold. b. its marginal revenue is the same at all quantities sold. c. it must lower price to sell additional units of its product. d. marginal revenue is greater than price.

b

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.

b

103. Equilibrium price is $9 in a perfectly competitive market. For a perfectly competitive firm, MR = MC at 125 units of output. At 125 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; $1,375 b. shut down; $125; $1,250 c. shut down; $1,375; $1,250 d. continue to produce; $125; $1,250 e. There is not enough information to answer all parts of the question.

b

111. In long-run competitive equilibrium P = SRATC, because if P > STRATC a. 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

b

113. In long-run competitive equilibrium, firms a. 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

b

118. 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 size b. downward, less, exiting the market c. downward, more, purchasing more capital equipment d. upward, less, cutting fixed costs e. none of the above

b

119. 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 higher b. earn positive economic profit; be back at zero c. produce more output; be less than zero d. produce less output; rise e. earn positive economic profit; turn into losses

b

12. 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. a and b e. a and c

b

120. 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; constant b. above; increasing c. at; decreasing d. at; increasing e. above; decreasing

b

124. When an industry is described as a decreasing-cost, increasing-cost, or constant-cost industry, the "cost" that is being referred to is a. marginal cost. b. unit cost. c. average variable cost. d. sunk cost. e. fixed cost.

b

125. 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 profit b. positive economic profit; ATC; normal profit c. positive economic profit; marginal revenue; zero profit d. losses; ATC; positive economic profit e. none of the above

b

13. 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 realworld 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 demand and market supply curves.

b

130. Which of the following statements is true? a. A perfectly competitive firm that seeks to maximize profits will not be resourceallocative 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 equals marginal cost. e. c and d

b

133. Refer to Exhibit 9-9. What price does this firm charge for its product? a. $10 b. $20 c. $15 d. $30 e. There is not enough information to answer this question.

b

135. Refer to Exhibit 9-9. Is it possible for this firm to produce "too much" output? a. Any quantity above 4 units is too much. b. Any quantity above 6 units is too much. c. Any quantity above 8 units is too much. d. It is not possible in the range of 0-8 units to produce too much. e. There is not enough information to answer this question.

b

137. 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 increase profit.

b

14. The price at which a perfectly competitive firm sells its product is determined by a. the individual seller based on his costs of production and his profit margin. b. all sellers and buyers of the product, collectively. 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 they cannot agree on the price.

b

18. Refer to Exhibit 9-1. The dollar amounts that go in blanks A and B are, respectively, a. $1 and $12. b. $12 and $12. c. $12 and $10. d. $12 and $11.

b

24. If, for the last unit of a good produced by a perfectly competitive firm, MR > MC, then in producing that unit the firm a. 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.

b

25. Refer to Exhibit 9-2. What quantity does the profit-maximizing or loss-minimizing firm produce? 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.

b

26. Refer to Exhibit 9-2. 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 and thus profit is earned.

b

34. Consider the following data: equilibrium price = $10, quantity of output produced = 100 units, average total cost = $8, 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 produce in the short run.

b

39. Refer to Exhibit 9-4. 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 is a. 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

b

42. Refer to Exhibit 9-4. 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 d. $0

b

45. 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. d. No firm has an incentive to produce more or less output.

b

46. If firms are earning zero economic profits, they must be producing at an output level at which a. 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

b

48. 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.

b

61. 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 firm b. the industry as a whole c. both the typical firm and the industry as a whole d. neither the typical firm nor the industry as a whole

b

77. One of the economic reasons for the U.S. postal service issuing and selling collector's stamps is that a. 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 b e. none of the above

b

80. Refer to Exhibit 9-7. What is the total fixed cost of Firm A at the point where it produces in the short run? a. $3 b. $300 c. $90 d. $400

b

83. Refer to Exhibit 9-8. 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. decreasing b. increasing c. constant d. marginal e. low

b

85. In a constant-cost industry, positive profits are eliminated through a. 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.

b

87. A seller is a price taker. This means that the seller sells his product at the price a. 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

b

89. A price-taker firm will not sell any of its product at less than equilibrium price because a. it is against the law to do this. b. it can sell all it wants at 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

b

9. Which of the following is probably the worst example of a perfectly competitive market? a. the market for corn b. the market for automobiles c. the stock market d. the market for wheat

b

93. A market comes close to meeting (but does not perfectly meet) all the assumptions of the theory of perfect competition. It follows that a. 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

b

97. For a price taker, market equilibrium price is $100. At 100 units, MR = MC, ATC = $90, and AVC = $60. This price taker will a. earn $10 profits if it produces 100 units of the good. b. earn $1,000 profits if it produces 100 units. c. shut down its operation and by doing this minimize its losses. d. maximize its profits if it produces fewer than 100 units. e. maximize its profits if it produces more than 100 units.

b

98. In the short run, the best policy for a perfectly competitive firm is to a. 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. d. a and c e. none of the above

b

106. 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, $3,600 b. shut down, losses, $200, $3,600 c. continue to produce, losses, $200, $2,600 d. shut down, profits, $200, $1,800 e. none of the above

c

117. 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; leftward b. produce less output; new firms to enter the market; rightward c. produce more output; new firms to enter the market; rightward d. expand their plant size; some existing firms to exit the market; leftward e. none of the above

c

123. If the long-run industry supply curve is downward-sloping, it follows that there are __________ costs in the industry. a. increasing b. constant c. decreasing d. a or b e. There is not enough information to answer the question.

c

140. In order to maximize its profit, a perfectly competitive firm should increase production as long as a. 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

c

19. Refer to Exhibit 9-1. The data are relevant to a perfectly competitive firm because a. 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.

c

21. A perfectly competitive firm will increase its production as long as a. 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.

c

23. If MR > MC, then a. 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.

c

29. Refer to Exhibit 9-3. What is the gain in profit from producing 45 units of the product rather than producing 42 units? a. $40 b. $30 c. $10 d. $20 e. $0

c

3. The theory of perfect competition generally assumes that a. 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.

c

31. Refer to Exhibit 9-3. Is it possible for the firm to produce "too much"? a. Any quantity above 42 units is too much. b. Any quantity above 44 units is too much. c. Any quantity above 45 units is too much. d. It is not possible in the range of 40-47 units shown.

c

32. Consider the following data: equilibrium price = $9, quantity of output produced = 100 units, average total cost = $8, and average variable cost $6. Given this, total revenue is __________, total cost is __________, and fixed cost is __________. a. $600; $800; $100 b. $900; $700; $800 c. $900; $800; $200 d. $900; $800; $600 e. none of the above

c

35. The perfectly competitive firm will produce in the a. 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.

c

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 established, it will be a profitable venture.

c

41. Refer to Exhibit 9-4. 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

c

52. Demand increases in an increasing-cost industry that is initially in long-run competitive equilibrium. After full adjustment, price will be a. 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.

c

53. A constant-cost industry has a long-run (industry) supply curve that is a. upward sloping. b. downward sloping. c. horizontal. d. U-shaped.

c

138. The smaller a firm's total fixed cost-total cost ratio (TFC/TC), a. the higher its profit at the profit-maximizing output. b. the lower its profit at the profit-maximizing output. c. the more likely it is to operate in the short run. d. the less likely it is to operate in the short run.

d

54. 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 than c. a decrease; exit; leftward; higher than d. an increase; enter; rightward; the same as e. an increase; exit; leftward; lower than

c

57. Resource allocative efficiency occurs when a firm a. 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.

c

59. 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.

c

60. 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

c

62. If an industry advertises, then it a. 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.

c

64. In the long run a firm earns a zero economic profit, given the condition that a. P = MR. b. P = AVC. c. P = ATC. d. (P - MC) = 0. e. none of the above

c

66. Refer to Exhibit 9-5. A perfectly competitive firm operating in the market depicted in graph (1) faces the demand curve depicted in a. graph (1)-the same as the market demand curve. b. graph (2). c. graph (3). d. graph (4).

c

67. Refer to Exhibit 9-5. The change in total revenue resulting from the sale of one additional unit of output beyond the profit-maximizing level of a firm operating in the perfectly competitive market depicted in graph (1) equals a. -$10. b. $0. c. $10. d. $50.

c

68. Refer to Exhibit 9-5. 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. $0.312 b. $1 c. $10 d. $312 e. This cannot be determined based on the information provided.

c

72. Refer to Exhibit 9-6. At the profit-maximizing output level, average total cost is a. $2.00. b. $4.50. c. $5.00. d. $6.00. e. This cannot be determined based on the information provided.

c

82. Refer to Exhibit 9-8. Following an increase in market demand from D1 to D2, the firm's profits in the short run will a. 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.

c

88. A price-taker firm can sell a. 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

c

94. 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.

c

101. If, for a perfectly competitive firm, price is greater than average variable cost, then it follows that a. 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 c e. There is not enough information to answer the question.

d

134. Refer to Exhibit 9-9. What is the marginal revenue and marginal cost, respectively, of the 7th unit of output? a. $20 and $20 b. $30 and $20 c. $20 and $17.50 d. $20 and $30 e. There is not enough information to answer this question.

d

16. Marginal revenue is a. 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.

d

28. Refer to Exhibit 9-3. What quantity of output would the profit-maximizing firm produce? a. 41 units b. 42 units c. 43 units d. 45 units e. none of the above

d

37. In order for a firm to continue producing, price must exceed __________ and total revenue must exceed __________. a. marginal cost, total cost b. ATC; total cost c. AFC; total fixed cost d. AVC; total variable costs e. price; total cost

d

40. Refer to Exhibit 9-4. 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. d. a and b e. a, b, and c

d

43. Firm X is producing the quantity of output at which marginal revenue equals marginal cost. It is a. receiving a positive economic profit. b. taking a loss. c. earning a normal profit. d. There is not enough information to answer the question.

d

50. If the perfectly competitive firm is producing an output level at which price equals marginal cost, it is a. earning profits. b. taking losses. c. earning normal profit. d. There is not enough information to answer the question.

d

51. 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 than b. increase; enter; rightward; higher than c. decrease; exit; rightward; higher than d. increase; enter; rightward; the same as e. increase; exit; leftward; lower than

d

55. 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; enter b. fall; marginal cost; enter c. rise; marginal revenue; enter d. fall; demand; exit e. fall; marginal cost; exit

d

63. Which of the following is the best example of a homogeneous good? a. new cars b. ice cream c. soda d. wheat

d

65. In the theory of perfect competition, the market demand curve is __________ and the firm's demand curve is __________. a. perfectly elastic; perfectly elastic b. downward sloping; downward sloping c. perfectly elastic; downward sloping d. downward sloping; perfectly elastic e. perfectly inelastic; downward sloping

d

69. Refer to Exhibit 9-6. The perfectly competitive, profit-maximizing firm will produce __________ units of output. a. 10 b. 30 c. 50 d. 60 e. 70

d

70. Refer to Exhibit 9-6. At the profit-maximizing level of output, marginal cost is a. $60.00. b. $4.50. c. $5.00. d. $6.00. e. This cannot be determined based on the information provided.

d

73. Refer to Exhibit 9-6. At the profit-maximizing output level, the firm's total revenue is a. $60.00. b. $225.00. c. $300.00. d. $360.00. e. $420.00.

d

75. Refer to Exhibit 9-6. What is the profit at 60 units of output? a. $360 b. $90 c. $75 d. $60

d

8. Perfectly competitive firms are price takers for all of the following reasons except that a. 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.

d

105. For a perfectly competitive firm, MR = MC at 250 units of output. At 250 units, ATC is greater than AVC. It necessarily follows that a. 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 c e. none of the above

e

109. Which of the following is false? a. If a firm produces the quantity of output at which MR = MC, it follows that the firm will earn 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, a firm will earn profit. d. In long-run competitive equilibrium, price is equal to marginal cost. e. a and b are both false

e

114. 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.

e

115. In long-run competitive equilibrium, the market equilibrium price equals a. marginal cost. b. short-run average total cost. c. long-run average total cost. d. a and c e. a, b, and c

e

116. 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

e

121. 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; decreasing b. at; constant c. at; increasing d. below; increasing e. a and d

e

126. 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 earning a. subnormal profits. b. normal profits. c. positive economic profits. d. losses. e. a and d

e

127. Which of the following statements is false? a. If one firm in a perfectly competitive industry witnesses higher costs, the market price in the industry will rise. b. In a perfectly competitive market, higher costs for firms necessarily means higher prices for consumers. c. Each firm in a perfectly competitive industry has an incentive to advertise the product it produces and sells. d. a and c e. a, b, and c

e

128. All firms in an industry sell their product for the same price. This is a result of a. collusion. b. perfect competition. c. a government law that specifies all firms must charge the same price. d. a or b e. There is not enough information to answer the question.

e

27. Refer to Exhibit 9-2. 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 marginal cost. d. a and c e. a, b, and c

e

33. In the short-run, if P < ATC, a perfectly competitive firm should a. 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.

e

38. The perfectly competitive firm's short-run supply curve is the a. 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.

e

58. Resources are allocated efficiently when a. the exchange value of the resources to demanders equals the opportunity cost of the resources. b. 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. c. firms produce the quantity of output at which price is equal to marginal cost. d. a and b e. a, b, and c

e

6. Perfectly competitive industries are a. 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 b e. none of the above

e

71. Refer to Exhibit 9-6. At the profit-maximizing output level, average fixed cost is a. $2.00. b. $4.00. c. $5.00. d. $6.00. e. This cannot be determined based on the information provided.

e

84. Firms with a ________ total fixed cost-total cost ratio are _____ likely to operate in the short run. a. greater; more b. greater; less c. lower; more d. lower; less e. a and d

e

86. Which of the following is inconsistent with a long-run industry equilibrium? a. upward-sloping marginal cost curves for all the firms in the industry b. zero economic profits c. P = minimum ATC d. SRATC = LRATC e. none of the above

e

90. 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 of output. e. none of the above

e

91. 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 good. d. a and b e. a, b, and c

e

92. 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 b e. none of the above

e