ch 9 test prep prt 1
The market supply curve is the a.vertical sum of all of the individual firms' supply curves. b.horizontal sum of all the individual firms' supply curves. c.downward-sloping portion of the firm's marginal cost curve. d.upward-sloping portion of the firm's marginal cost curve.
b. horizontal sum of all the individual firms' supply curves.
Consider the following data: equilibrium price = $8, quantity of output produced = 120 units, average total cost = $10, average variable cost = $4. What will the firm do in the short run and why? a.Shut down, because price is less than average total cost. b.Shut down, because average variable cost is less than price. c.Continue to produce, because price is less than average total cost. d.Continue to produce, because price is greater than average variable cost. e.Shut down, because total revenue is less than total cost.
d.Continue to produce, because price is greater than average variable cost.
The theory of perfect competition assumes that a.each buyer and each seller may act independently of other buyers and sellers, respectively. b.each buyer acts independently of other buyers, but each seller does not act independently of other sellers. c.each seller acts independently of other sellers, but each buyer does not act independently of other buyers. d.neither buyers nor sellers act independently of other buyers and sellers.
a.each buyer and each seller may act independently of other buyers and sellers, respectively. Among the assumptions of the theory of perfect competition is that there are many buyers and sellers in the market. Each buyer and each seller in the market may act independently of other buyers and sellers, respectively.
The short-run industry or market supply curve is the a.same as that of the typical firm in the industry. b.average of the short-run supply curves for all the firms in the industry. c.part of the firm's marginal cost curve that is above its average variable cost curve. d.horizontal summation of the short-run supply curves for all the firms in the industry. e.none of the above
d.horizontal summation of the short-run supply curves for all the firms in the industry.
Assume the following for a perfectly competitive industry: (1) 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 at which 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.No, because of number 2.
Which of the following is the best example of a homogeneous product? a.pants b.shoes c.bread d.wheat
d.wheat A homogeneous product is a product for which one firm's product is indistinguishable from all other firms' products in a given industry. Wheat is a good example of a homogeneous product since it is unlikely that one farmer's wheat can be distinguished from any other farmer's wheat.
Why must firms earn zero economic profit in long-run competitive equilibrium? a.If firms are not earning zero economic profit, there will be entry into or exit from the market. b.If firms are not earning zero economic profit, marginal revenue must rise. c.If firms are not earning zero economic profit, marginal cost must fall. d.If firms are not earning zero economic profit, marginal revenue must fall.
a.If firms are not earning zero economic profit, there will be entry into or exit from the market. If firms are earning positive economic profits, those profits will signal other firms to enter the market. As more firms participate in the market, prices will fall and profits will be diminished. If firms are earning an economic loss, those losses will signal firms to exit the market. As fewer firms participate in the market, prices will rise and losses will be diminished for those firms that remain in the market. The only time that the market is stable is when firms are earning zero economic profit where there is no incentive to enter or exit the market.
An increasing-cost industry is characterized by _________________ long-run supply curve. a.an upward-sloping b.a perfectly inelastic c.a downward-sloping d.a perfectly elastic
a.an upward-sloping An increasing-cost industry is characterized by an upward-sloping long-run supply curve. In such an industry, average total costs increase as output increases and decrease as output decreases when firms enter and exit the industry, respectively.
Perfectly competitive firms are price takers for all of the following reasons except a.each firm produces and sells a differentiated product. b.each firm produces and sells a homogeneous product. c.each firm is very small in relation to the total market supply. d.buyers and sellers have all relevant information about prices, etc.
a.each firm produces and sells a differentiated product. In perfect competition, firms produce and sell a homogeneous product, the firm sells a very small portion of the total market supply, and market participants have access to all relevant information. These attributes of perfect competition contribute to the firm being a price taker.
The long-run (industry) supply curve in a constant-cost industry is a.horizontal. b.vertical. c.downward sloping. d.upward sloping. e.U-shaped.
a.horizontal. A constant-cost industry is one in which average total costs do not change as (industry) output increases or decreases when firms enter or exit the industry, respectively. The long-run supply curve in a constant-cost industry is horizontal.
That portion of the perfect competitive firm's ____________ that is above its ______________ is its ______________________. a.marginal cost curve, AVC curve, supply curve b.AVC curve, marginal cost curve, supply curve c.ATC curve, marginal revenue curve, demand curve d.marginal cost curve, ATC curve, supply curve
a.marginal cost curve, AVC curve, supply curve
If total revenue is increasing at a constant rate, what does this condition imply about marginal revenue? a.marginal revenue is positive and is constant b.marginal revenue is increasing c.marginal revenue is decreasing d.marginal revenue is negative and is constant
a.marginal revenue is positive and is constant
The situation in which firms produce the level of output at which price is equal to marginal cost is termed a.resource allocative efficiency. b.zero economic profit. c.price efficiency. d.productive efficiency.
a.resource allocative efficiency. Resource allocative efficiency is the situation in which a firm produces the level of output at which price equals marginal cost (P = MC). Profit-maximizing perfectly competitive firms exhibit resource allocative efficiency: price equals marginal revenue (P = MR) in perfect competition and MR = MC at the profit-maximizing level of output, so P = MC when perfectly competitive firms are maximizing profits.
As firms enter Industry ABC, the industry's supply curve shifts __________ and the equilibrium price of the good being produced__________ until long-run competitive equilibrium is established. This cycle will continue until the firms in Industry ABC are earning __________ economic profits. a.rightward, falls, zero b.leftward, rises, zero c.rightward, rises, positive d.leftward, falls, positive e.rightward, rises, zero
a.rightward, falls, zero Firms enter a perfectly competitive industry when economic profits exist. As firms enter the industry, the industry supply curve shifts rightward. As the supply curve shifts rightward, prices in the industry fall. As long as there are still economic profits, more firms will enter the industry and this chain-reaction will continue until firms are earning zero economic profit.
Due to the law of diminishing marginal returns, marginal cost curves are ________ and as a result market supply curves are __________. a.upward-sloping, upward-sloping b.upward-sloping, downward-sloping c.downward-sloping, downward-sloping d.downward-sloping, upward-sloping
a.upward-sloping, upward-sloping Market supply curves are derived by horizontally adding the short-run supply curves for all of the firms in that perfectly competitive market. The law of diminishing marginal returns dictates that marginal physical product eventually declines, causing marginal cost (MC) curves to have an upward-sloping portion. A firm's supply curve is the portion of its MC curve that lies above its average variable cost curve (which occurs in the upward-sloping portion of the MC curve).
Which of the following is an assumption of perfect competition? a.There are many buyers and few sellers. b.Each firm produces and sells a homogeneous product. c.There are few buyers and many sellers. d.There are high barriers to entry into the market. e.none of the above.
b.Each firm produces and sells a homogeneous product. The assumptions of perfect competition are: firms produce and sell a homogeneous product, there are many buyers and sellers in the market, the firm faces no barriers to entry or exit, and market participants have access to all relevant information.
Consider the following data: equilibrium price = $8, quantity of output where MR equals MC = 500 units, average total cost = $10, average variable cost = $9. What will the perfectly competitive firm do in the short run and why? a.Shut down, because price is less than average total cost. b.Shut down, because price is less than average variable cost. c.Continue to produce, because price is less than average total cost. d.Continue to produce, because price is less than average variable cost. e.Shut down, because total revenue is less than total cost.
b.Shut down, because price is less than average variable cost. If this firm produces, it will lose the difference between TR ($8 x 500) and TC ($10 x 500), which is $1,000. If this firm shuts down it will still have to pay its fixed costs in the short run. The fixed costs for this firm are $500 since average fixed cost must be $1 when ATC = $10 and AVC = $9. This firm would be better off from shutting down than from producing. The general shutdown rule in the short run for perfect competition is that the firm should shut down if price is less than average variable cost.
If market demand rises in a perfectly competitive market, it follows that a.a perfectly competitive firm's marginal cost will rise. b.a perfectly competitive firm's marginal revenue will rise. c.a perfectly competitive firm's average cost will rise. d.a perfectly competitive firm's demand curve will shift downward.
b.a perfectly competitive firm's marginal revenue will rise. If market demand rises, the equilibrium price in the market rises, and the demand curve (which is the same as the marginal revenue curve for the perfectly competitive firm) rises.
The price at which a perfectly competitive firm sells its product is determined by a.the government, because there are so many buyers and sellers of the product that together they cannot usually agree on the price. b.all sellers and buyers of the product, collectively. c.the individual seller based on his costs of production and his profit margin. d.the buyers of the product, because there are so many sellers that they cannot agree on the price.
b.all sellers and buyers of the product, collectively.
The market demand curve in a perfectly competitive market is ___________ while the individual firm's demand curve (that it faces) is _______________. a.upward-sloping, horizontal b.downward-sloping, horizontal c.horizontal, downward-sloping d.vertical, horizontal e.none of the above
b.downward-sloping, horizontal
Which of the following is not a condition of long-run competitive equilibrium? a.price is equal to short-run average total cost (SRATC) b.firms are producing a level of output at which price is greater than marginal cost c.no firm has an incentive to change its plant size to produce its current output d.P = MC = SRATC = LRATC
b.firms are producing a level of output at which price is greater than marginal cost The three conditions of long-run competitive equilibrium are: firms are earning zero economic profit (P = SRATC), price equals marginal cost (P = MC), and SRATC = LRATC. These three conditions taken together indicate that in long-run competitive equilibrium, P = MC = SRATC = LRATC
Assume an increasing-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 _____________. a.decrease, exit, leftward b.increase, enter, rightward c.decrease, enter, leftward d.decrease, exit, rightward e.increase, exit, leftward
b.increase, enter, rightward
A perfectly competitive firm's short run supply curve is that portion of the firm's ______________ curve that lies _________________________. a.marginal cost, below its average total cost curve b.marginal cost, above its average variable cost curve c.marginal cost, above its average total cost curve d.average variable cost, below its average total cost curve e.average total cost, below its marginal cost curve
b.marginal cost, above its average variable cost curve The perfectly competitive firm will choose to produce as long as the price of the product is greater than the average variable cost. The firm will shut down when price is less than average variable cost. The firm's supply curve is the portion of its marginal cost curve that lies above its average variable cost curve.
A profit-maximizing perfectly competitive firm will seek to produce the level of output at which a.price equals average variable cost. b.marginal revenue equals marginal cost. c.price equals average fixed cost. d.average variable cost is minimized.
b.marginal revenue equals marginal cost. A perfectly competitive firm will produce the quantity of output at which marginal revenue and marginal cost are equal. The firm will not produce units of output for which marginal revenue is less than marginal cost.
In the theory of perfect competition, the firm faces a demand curve that is __________ and the market demand curve is __________. a.perfectly inelastic, downward sloping b.perfectly elastic, downward sloping c.upward sloping, perfectly elastic d.unit elastic, perfectly elastic
b.perfectly elastic, downward sloping A perfectly competitive firm faces a horizontal demand curve, indicating that demand is perfectly elastic. The market demand curve is downward sloping: as price rises, quantity demanded falls.Consider the following data: equilibrium price = $8, quantity of output produced = 120 units, average total cost = $10, average variable cost = $4.
Which antitrust law declares illegal "unfair methods of competition in commerce"? a.the Sherman Act b.the Federal Trade Commission Act c.the Clayton Act d.the Robinson-Patman Act e.the Celler-Kefauver Antimerger Act
b.the Federal Trade Commission Act
If price is above AVC at the quantity of output at which MR = MC, then it follows that a.total revenue is greater than marginal revenue b.total revenue is greater than total variable cost c.total revenue is less than total variable cost d.total revenue is greater than total cost
b.total revenue is greater than total variable cost Total revenue is equal to P x Q and total variable cost is equal to AVX x Q. If P > AVC, then it holds that total revenue is greater than total variable cost.
A perfectly competitive firm that seeks to either maximize profit or minimize losses will produce the level of output at which a.ATC =C b.P = MC = AFC c.MR = MC d.Total revenue = Total cost e.P is greater than MC
c.MR = MC
______________ exists if a firm produces its output at the lowest per-unit cost. a.Resource allocative efficiency b.Perfectly competitive efficiency c.Productive efficiency d.Constant cost e.Increasing cost
c.Productive efficiency Productive efficiency exists if a firm produces its output at the lowest per-unit cost. #25
Suppose that a decreasing-cost industry is initially in long-run competitive equilibrium, and then demand increases. After full adjustment, the new equilibrium price will be a.the same as the initial equilibrium price. b.higher than the initial equilibrium price. c.lower than the initial equilibrium price. d.any of the above is possible.
c.lower than the initial equilibrium price. A decreasing-cost industry is one in which input costs fall as (industry) output increases in the long run. The long-run supply curve in a decreasing-cost industry is downward-sloping. The new equilibrium price will be lower than the initial equilibrium price.
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 is greater than average total cost. c.produces the quantity of output at which price equals marginal cost. d.produce the quantity of output at which average fixed cost is minimized. e.none of the above
c.produces the quantity of output at which price equals marginal cost.
In the short run, if a perfectly competitive firm's average variable cost curve lies above its demand curve at all levels of output, the firm should a.continue to produce its product since the firm is earning a profit. b.continue to produce its product, even though it is losing money. c.shut down since price is less than average variable cost. d.continue to produce its product since average variable cost is greater than marginal revenue.
c.shut down since price is less than average variable cost. When the firm's average variable cost curve lies above its demand curve at all levels of output, price is less than average variable cost. If price is below average variable cost, the perfectly competitive firm minimizes its loss by choosing to shut down rather than continue production.
Marginal revenue is a.the change in total cost resulting from the sale of one more unit of output. b.the difference between total revenue and the sum of explicit and implicit costs. c.the change in total revenue resulting from the sale of one more unit of output. d.the change in total output resulting from employing one more unit of a variable input.
c.the change in total revenue resulting from the sale of one more unit of output. Marginal revenue is the change in total revenue resulting from the sale of one more unit of output. In perfect competition, marginal revenue is equal to price since the firm faces a horizontal demand curve. For example, if the price of the product is constant at $4, then the marginal revenue from each additional unit sold will also be $4.
The assumption of easy entry into and exit from the market in the theory of perfect competition implies that firms will tend to earn ______________ in long-run equilibrium. a.positive economic profit b.economic losses c.zero economic profit d.positive economic profit or economic losses
c.zero economic profit
Positive economic profit serves as a.an incentive for individuals to produce. b.a signal identifying where resources are most welcome. c.a signal for firms to exit a market. d.a and b e.a, b, and c
d.a and b
Which of the following assumptions contributes to a perfectly competitive firm being a price taker? a.Each firm in the market supplies such a small part of the market that each firm has no influence over price. b.Firms sell a homogeneous product. c.Buyers and sellers have all relevant information about prices, product quality, and sources of supply. d.a, b, and c
d.a, b, and c A price taker is a seller that does not have the ability to control the price of the product it sells. Instead, the firm "takes" the price that has been determined in the market. The three listed assumptions all contribute to perfectly competitive firms being price takers.
In a perfectly competitive market, profit maximization __________ with resource allocative efficiency, which holds that __________________. a.is not consistent, P > MC. b.is consistent, MR = MC. c.is consistent, MR < MC. d.is consistent, P = MC.
d.is consistent, P = MC. In a perfectly competitive market, profit maximization holds that the firm produces that quantity of output at which MR = MC. Resource allocative efficiency holds that P = MC. Since, for a perfectly competitive market, P = MR, then MR = P = MC, which means that profit maximization in a perfectly competitive market is consistent with resource allocative efficiency.
A perfectly competitive firm will continue to increase its production as long as marginal a.cost is rising. b.revenue is rising. c.revenue is less than marginal cost. d.revenue is greater than marginal cost.
d.revenue is greater than marginal cost. In perfect competition, the marginal revenue curve is horizontal and is the same as the firm's demand curve. As long as marginal revenue is greater than marginal cost, the firm will benefit from increasing its level of output. These units produced and sold are contributing more to the firm's revenues than they are costing the firm. The profit-maximization rule tells us that the firm should continue to produce until MR = MC.
If a perfectly competitive firm is producing the level of output at which marginal revenue equals marginal cost, the firm is earning a.an economic profit. b.a normal profit. c.an accounting profit. d.an economic loss. e.There is not enough information provided to determine whether or not the firm is earning a profit or a loss.
e.There is not enough information provided to determine whether or not the firm is earning a profit or a loss. The level of output where MR = MC will maximize profits, if there is a level of output for which average total cost is less than price. If there is no level of output at which ATC is less than price, then the level of output where MR = MC will be the loss minimizing level of output. Since this question does not provide any information about the relationship between average total cost and price, we cannot determine whether the firm is earning a profit or incurring a loss.
