Chapter 11 Study Questions (

Refer to the diagram showing the average total cost curve for a purely competitive firm. At the long-run equilibrium level of output, this firm's economic profit: a. is zero. b. is $400. c. is $200. d. cannot be determined from the information provided.

a. is zero.

A purely competitive firm is precluded from making economic profits in the long run because: a. it is a "price taker." b. its demand curve is perfectly elastic. c. of unimpeded entry to the industry. d. it produces a differentiated product.

a. it is a "price taker."

Which of the following outcomes is consistent with a purely competitive market in long-run equilibrium? a. Consumer and producer surplus will be maximized. b. P = MC = lowest AVC. c. The minimum willingness to pay equals the maximum acceptable price. d. We would expect all of these to occur in the long run in a purely competitive market.

a. Consumer and producer surplus will be maximized.

Which of the following would not be expected to occur in a purely competitive market in long-run equilibrium? a. Consumer and producer surplus will be minimized. b. P = MC = lowest ATC. c. The maximum willingness to pay for the last unit equals the minimum acceptable price for that unit. d. We would expect all of these to occur in the long run in a purely competitive market.

a. Consumer and producer surplus will be minimized.

Which of the following statements is correct? a. Economic profits induce firms to enter an industry; losses encourage firms to leave. b. Economic profits induce firms to leave an industry; profits encourage firms to leave. c. Economic profits and losses have no significant impact on the growth or decline of an industry. d. Normal profits will cause an industry to expand.

a. Economic profits induce firms to enter an industry; losses encourage firms to leave.

Which of the following distinguishes the short run from the long run in pure competition? a. Firms can enter and exit the market in the long run but not in the short run. b. Firms attempt to maximize profits in the long run but not in the short run. c. Firms use the MR = MC rule to maximize profits in the short run but not in the long run. d. The quantity of labor hired can vary in the long run but not in the short run.

a. Firms can enter and exit the market in the long run but not in the short run.

Under what conditions would an increase in demand lead to a lower long-run equilibrium price? a. The firms in the market are part of a decreasing-cost industry. b. The firms in the market produce an inferior good. c. Potential new firms in the market are not attracted by economic profits. d. Increases in demand cannot lead to lower long-run equilibrium prices.

a. The firms in the market are part of a decreasing-cost industry.

Refer to the diagram. Line (2) reflects the long-run supply curve for: a. a constant-cost industry. b. a decreasing-cost industry. c. an increasing-cost industry. d. a technologically progressive industry.

a. a constant-cost industry.

Suppose a purely competitive, increasing-cost industry is in long-run equilibrium. Now assume that a decrease in consumer demand occurs. After all resulting adjustments have been completed, the new equilibrium price: a. and industry output will be less than the initial price and output. b. will be greater than the initial price, but the new industry output will be less than the original output. c. will be less than the initial price, but the new industry output will be greater than the original output. d. and industry output will be greater than the initial price and output.

a. and industry output will be less than the initial price and output.

Refer to the diagram. At output level Q1: a. neither productive nor allocative efficiency is achieved. b. both productive and allocative efficiency are achieved. c. allocative efficiency is achieved, but productive efficiency is not. d. productive efficiency is achieved, but allocative efficiency is not.

a. neither productive nor allocative efficiency is achieved.

Which of the following is an example of creative destruction? a. An economic recession forces firms out of business. b. Automobile production causes the wagon industry to shut down. c. Apple earns more economic profits than other manufacturers of MP3 players. d. Starbucks shuts down stores to create greater demand for its remaining outlets.

b. Automobile production causes the wagon industry to shut down.

Purely competitive industry X has constant costs and its product is an inferior good. The industry is currently in long-run equilibrium. The economy now goes into a recession and average incomes decline. The result will be: a. an increase in output and in the price of the product. b. an increase in output, but not in the price, of the product. c. a decrease in the output, but not in the price, of the product. d. a decrease in output and in the price of the product.

b. an increase in output, but not in the price, of the product.

An increasing-cost industry is associated with: a. a perfectly elastic long-run supply curve. b. an upsloping long-run supply curve. c. a perfectly inelastic long-run supply curve. d. an upsloping long-run demand curve.

b. an upsloping long-run supply curve.

Refer to the diagram. By producing at output level Q: a. neither productive nor allocative efficiency is achieved. b. both productive and allocative efficiency are achieved. c. allocative efficiency is achieved, but productive efficiency is not. d. productive efficiency is achieved, but allocative efficiency is not.

b. both productive and allocative efficiency are achieved.

Refer to the diagram. If this competitive firm produces output Q, it will: a. suffer an economic loss. b. earn a normal profit. c. earn an economic profit. d. achieve productive efficiency but not allocative efficiency.

b. earn a normal profit.

The primary force encouraging the entry of new firms into a purely competitive industry is: a. normal profits earned by firms already in the industry. b. economic profits earned by firms already in the industry. c. government subsidies for start-up firms. d. a desire to provide goods for the betterment of society.

b. economic profits earned by firms already in the industry.

Assume a purely competitive increasing-cost industry is initially in long-run equilibrium and that an increase in consumer demand occurs. After all economic adjustments have been completed, product price will be: a. lower, but total output will be larger than originally. b. higher and total output will be larger than originally. c. lower and total output will be smaller than originally. d. higher, but total output will be smaller than originally.

b. higher and total output will be larger than originally.

Refer to the diagram. Line (1) reflects a situation where resource prices: a. decline as industry output expands. b. increase as industry output expands. c. remain constant as industry output expands. d. are unaffected by the level of output in the industry.

b. increase as industry output expands.

A decreasing-cost industry is one in which: a. contraction of the industry will decrease unit costs. b. input prices fall or technology improves as the industry expands. c. the long-run supply curve is perfectly elastic. d. the long-run supply curve is upsloping.

b. input prices fall or technology improves as the industry expands.

If a purely competitive firm is producing at the MR = MC output level and earning an economic profit, then: a. the selling price for this firm is above the market equilibrium price. b. new firms will enter this market. c. some existing firms in this market will leave. d. there must be price fixing by the industry's firms.

b. new firms will enter this market.

A firm is producing an output such that the benefit from one more unit is more than the cost of producing that additional unit. This means the firm is: a. producing more output than allocative efficiency requires. b. producing less output than allocative efficiency requires. achieving productive efficiency. c. producing an inefficient output, but we cannot say d. whether output should be increased or decreased.

b. producing less output than allocative efficiency requires. achieving productive efficiency.

Refer to the diagram. At output level Q1: a. resources are overallocated to this product and productive efficiency is not realized. b. resources are underallocated to this product and productive efficiency is not realized. c. productive efficiency is achieved, but resources are underallocated to this product. d. productive efficiency is achieved, but resources are overallocated to this product.

b. resources are underallocated to this product and productive efficiency is not realized.

Refer to the diagram. At output level Q2: a. resources are overallocated to this product and productive efficiency is not realized. b. resources are underallocated to this product and productive efficiency is not realized. c.productive efficiency is achieved, but resources are underallocated to this product. d. productive efficiency is achieved, but resources are overallocated to this product.

b. resources are underallocated to this product and productive efficiency is not realized.

Creative destruction is: a. the process by which large firms buy up small firms. b. the process by which new firms and new products replace existing dominant firms and products. c. a term coined many years ago by Adam Smith. d. applicable to planned economies but not to market economies.

b. the process by which new firms and new products replace existing dominant firms and products.

Which of the following is true concerning purely competitive industries? a. There will be economic losses in the long run because of cut-throat competition. b. Economic profits will persist in the long run if consumer demand is strong and stable. c. In the short run, firms may incur economic losses or earn economic profits, but in the long run they earn normal profits. d. There are economic profits in the long run but not in the short run.

c. In the short run, firms may incur economic losses or earn economic profits, but in the long run they earn normal profits.

The theory of creative destruction was advanced many years ago by: a. Bill Gates. b. Alfred Marshall. c. Joseph Schumpeter. d. Adam Smith.

c. Joseph Schumpeter.

Refer to the diagrams, which pertain to a purely competitive firm producing output q and the industry in which it operates. Which of the following is correct? a. The diagrams portray neither long-run nor short-run equilibrium. b. The diagrams portray both long-run and short-run equilibrium. c. The diagrams portray short-run equilibrium but not long-run equilibrium. d. The diagrams portray long-run equilibrium but not short-run equilibrium.

c. The diagrams portray short-run equilibrium but not long-run equilibrium.

Refer to the diagrams, which pertain to a purely competitive firm producing output q and the industry in which it operates. The predicted long-run adjustments in this industry might be offset by: a. a decline in product demand. b. an increase in resource prices. c. a technological improvement in production methods. d. entry of new firms into the industry.

c. a technological improvement in production methods.

Suppose losses cause industry X to contract and, as a result, the prices of relevant inputs decline. Industry X is: a. a constant-cost industry. b. a decreasing-cost industry. c. an increasing-cost industry. d. encountering X-inefficiency.

c. an increasing-cost industry.

If production is occurring where marginal cost exceeds price, the purely competitive firm will: a. maximize profit, but resources will be underallocated to the product. b. maximize profit, but resources will be overallocated to the product. c. fail to maximize profit and resources will be overallocated to the product. d. fail to maximize profit and resources will be underallocated to the product.

c. fail to maximize profit and resources will be overallocated to the product.

Refer to the diagrams, which pertain to a purely competitive firm producing output q and the industry in which it operates. In the long run we should expect: a. firms to enter the industry, market supply to rise, and product price to fall. b. firms to leave the industry, market supply to rise, and product price to fall. c. firms to leave the industry, market supply to fall, and product price to rise. d. no change in the number of firms in this industry.

c. firms to leave the industry, market supply to fall, and product price to rise.

The MR = MC rule applies: a. in the short run but not in the long run. b. in the long run but not in the short run. c. in both the short run and the long run. d. only to a purely competitive firm.

c. in both the short run and the long run.

Refer to the diagram showing the average total cost curve for a purely competitive firm. At the long-run equilibrium level of output, this firm's total cost: a. is $10. b. is $40. c. is $400. d. cannot be determined from the information provided.

c. is $400.

Refer to the diagram showing the average total cost curve for a purely competitive firm. At the long-run equilibrium level of output, this firm's total revenue: a. is $10. b. is $40. c. is $400. d. cannot be determined from the information provided.

c. is $400.

A purely competitive firm: a. must earn a normal profit in the short run. b. cannot earn economic profit in the long run. c. may realize either economic profit or losses in the long run. d. cannot earn economic profit in the short run.

c. may realize either economic profit or losses in the long run.

A constant-cost industry is one in which: a. a higher price per unit will not result in an increased output. b. if 100 units can be produced for $100, then 150 can be produced for $150, 200 for $200, and so forth. c. the demand curve and therefore the unit price and quantity sold seldom change. d. the total cost of producing 200 or 300 units is no greater than the cost of producing 100 units.

c. the demand curve and therefore the unit price and quantity sold seldom change.

The term allocative efficiency refers to: a. the level of output that coincides with the intersection of the MC and AVC curves. b. minimization of the AFC in the production of any good. c. the production of the product mix most desired by consumers. d. the production of a good at the lowest average total cost.

c. the production of the product mix most desired by consumers. .

In a purely competitive industry: a. there will be no economic profits in either the short run or the long run. b. economic profits may persist in the long run if consumer demand is strong and stable. c. there may be economic profits in the short run but not in the long run. d. there may be economic profits in the long run but not in the short run.

c. there may be economic profits in the short run but not in the long run.

When a purely competitive firm is in long-run equilibrium: a. marginal revenue exceeds marginal cost. b. price equals marginal cost. c. total revenue exceeds total cost. d. minimum average total cost is less than the product price.

c. total revenue exceeds total cost.

Refer to the diagram. Line (1) reflects the long-run supply curve for: a. a constant-cost industry. b. a decreasing-cost industry. c. an increasing-cost industry. d. a technologically progressive industry.

d. a technologically progressive industry.

Suppose that an industry's long-run supply curve is downsloping. This suggests that:

d. it is a decreasing-cost industry.

Assume a purely competitive, increasing-cost industry is in long-run equilibrium. If a decline in demand occurs, firms will: a. leave the industry, price will decrease, and quantity produced will increase. b. enter the industry and price and quantity will both increase. c. leave the industry and price and output will both increase. d. leave the industry and price and output will both decline.

d. leave the industry and price and output will both decline.

Assume that a decline in consumer demand occurs in a purely competitive industry that is initially in long-run equilibrium. We can: a. predict that the new price will be greater than the original price. b. predict that the new price will be less than the original price. c. predict that the new price will be the same as the original price. d. not compare the original and the new prices without knowing what cost conditions exist in the industry.

d. not compare the original and the new prices without knowing what cost conditions exist in the industry.

Refer to the diagram. Line (2) reflects a situation where resource prices: a. decline as industry output expands. b. increase as industry output expands. c. rise and then decline as industry output expands. d. remain constant as industry output expands.

d. remain constant as industry output expands.

If the long-run supply curve of a purely competitive industry slopes upward, this implies that the prices of relevant resources: a. will fall as the industry expands. b. are constant as the industry expands. c. rise as the industry contracts. d. rise as the industry expands.

d. rise as the industry expands.