Economics Chapter 23: Practice Test A and B
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.
