ECON 180 CH-15

8. Perfect competition is efficient because all the following conditions hold except ________. A. total product is maximized B. firms maximize profit and produce on their supply curves C. consumers get a real bargain and pay a price below the value of the good D. firms minimize their average total cost of producing the good

Answer: A Although perfectly competitive firms produce at the minimum average total cost, that result does not mean that the firm's total product is at its maximum. Each firm could produce more, albeit at a higher average total cost.

1. In perfect competition, all the following situations arise except ________. A. firms produce an identical good or service B. each firm chooses the price at which to sell the good it produces C. firms can sell any quantity they choose to produce at the market price D. buyers know each seller's price

Answer: B Firms in perfect competition are price takers so they "take" the price determined in the market.

7. A permanent increase in demand ______ economic profit in the short run and some firms will ____ in the long run. A. does not change; exit the market B. increases; enter the market C. increases; raise their price D. does not change; advertise their good

Answer: B The increase in demand leads to a higher price, which increases the firms' economic profit. The economic profit influences other firms to enter the market.

4. At the shutdown point, the firm ________. A. incurs an economic loss equal to total variable cost B. makes zero economic profit C. incurs a loss equal to total fixed cost D. stops production to decrease its economic loss

Answer: C At the shutdown point, the firm's economic loss is the same if it remains open or closes. If it closes, the economic loss is equal to the fixed cost, so the fixed cost is the economic loss at the shutdown point.

6. A firm's short-run supply curve is the same as _____ if it produces the good. A. its marginal revenue curve B. the upward-sloping part of its marginal cost curve C. its marginal cost curve above minimum average variable cost D. its marginal cost curve above minimum average total cost

Answer: C Figure 15.5 in the text illustrates that answer C is correct.

2. A firm that is producing the quantity at which marginal cost exceeds both average total cost and the market price will increase its economic profit by _______. A. producing a larger quantity B. raising the price to equal marginal cost C. producing a smaller quantity D. producing the quantity that minimizes average total cost

Answer: C The market price equals the firm's marginal revenue. When a firm's marginal cost exceeds its marginal revenue, the firm's profit increases if it decreases its production.

5. In the short run, the profit-maximizing firm will ________. A. break even if marginal revenue equals marginal cost B. make an economic profit if marginal cost is less than average total cost C. incur an economic loss if average fixed cost exceeds marginal revenue D. incur an economic loss if average total cost exceeds marginal revenue

Answer: D Because the firm's marginal revenue equals the price, if the average total cost exceeds marginal revenue, then average total cost exceeds price, which is the signal that the firm incurs an economic loss.

3. A firm will shut down in the short run if at the profit-maximizing quantity, ___________. A. total revenue is less than total cost B. marginal revenue is less than average fixed cost C. average total cost exceeds the market price D. marginal revenue is less than average variable cost

Answer: D The firm's shutdown point is when price equals the minimum average variable cost.