learnsmart ch. 10 & 11

Which action would increase market price in a purely competitive market?

All firms reducing output simultaneously

Which of the following best describes pure competition?

An industry involving a very large number of firms producing identical products and in which new firms can enter or exit the industry very easily.

Which firm would be most likely to exit an industry first if demand were to decline?

An unproductive firm with high costs

A purely competitive firm's average revenue curve is equal to or coincides with which of the following?

Demand curve Price

Based on the information given in the table, which of the following statements are true?

Every unit of output up to and including the ninth unit represents greater marginal revenue than marginal cost. The ninth unit of output is the profit-maximizing level of output.

Which of the following improves as production increases?

Price-marginal cost relationship

The dominant position of wagons, ships, and barges was undermined by the railroad system, which in turn was undermined by trucks and later airplanes. This best exemplifies ______.

creative destruction

An unfavorable shift or ______ in demand will upset the original industry equilibrium and produce ______.

decrease; losses

If demand for the good decreases creating economic losses, firms will exit the industry in the long run. As firms exit in the long run, industry supply will ______ and market price will ______.

decrease; rise

Strategies attempted by firms for increasing their profits include:

developing a new product that is popular with consumers. lowering production costs through better technology. lowering production costs through improved business organization.

Match the market models based on the number of firms present in each model.

very large number matches pure competition relatively large number matches monopolistic competition few matches oligopoly one matches monopoly

In the table, total economic profits at the profit-maximizing level of output are calculated as a total revenue of $______ minus approximate total costs of $______.

1179; 880

In pure competition, if the first unit of output sold increases total revenue from $0 to $131, marginal revenue for that unit is $131. If the second unit sold increases total revenue from $131 to $262, marginal revenue is again $131. The third unit sold increases total revenue to $______ and marginal revenue is now $______.

393; 131

If there are losses in the long run, what adjustments will take place?

Firms will exit the industry until losses are eliminated.

Economic profit will fall to zero and firms will choose not to enter an industry when price is equal to which of the following factors?

Marginal cost Minimum average total cost

What are the effects of technology on the firm and its short-run supply curve?

Marginal costs decrease. Productivity increases. The short-run supply curve shifts downward (to the left).

Which of the following is a method of calculating economic profit in pure competition?

Price minus average total cost multiplied by quantity

Which of the following explains why technological progress reduces marginal cost?

Technological progress increases the productivity of labor.

Which of the following statements is true of the firm represented by this graph?

The firm incurs a loss but should continue to operate because price exceeds the lowest average variable cost.

Which of the following describes the individual competitive firm's supply curve?

The individual firm's supply curve represents a negligible fraction of total supply and therefore cannot affect price.

When will a firm earn an economic profit?

When price is greater than average total cost.

The MR = MC rule can be applied to ______ firms; however, the rule can be restated as P = MC only when applied to ______ firms.

all; purely competitive

In the personal-computer industry, increasing output drives up demand for computer parts. Suppliers of these parts respond by increasing production, and economies of scale eventually drive down the prices of the parts they produce, lowering the average cost of production for computer manufacturers. This is an example of a ____-cost industry.

decreasing

In the initial stages of production, where output is relatively low, marginal revenue will usually ______ marginal cost.

exceed

A constant-cost industry is one where ______ will not affect resource prices and production costs.

expansion or contraction

True or false: Quantity supplied increases as price decreases, and economic profit is usually higher at lower product prices and output.

false

A firm would not stop producing if the loss is less than its ______ costs.

fixed

The shape of the long-run supply curve for a constant-cost industry can best be described as:

horizontal

In pure competition the demand curve faced by an individual firm graphs as a(n) ______ line and the market demand in pure competition is graphed as a(n) ______ curve.

horizontal; downward sloping

A wage ______ would raise marginal cost and shift the supply curve _______.

increase; upward

An industry whose average total cost curve shifts upward as the industry expands and shifts downward as the industry contracts is known as a(n) ______ industry.

increasing-cost

If the market price exceeds the firm's minimum average total cost (ATC), then it will ______.

incur an economic profit

If price is initially less than minimum average total cost, resulting losses will cause firms to leave the industry eventually resulting in _____.

industry contraction that decreases supply until price rises again to equal minimum average total cost (ATC)

If market price initially exceeds minimum average total costs, the resulting economic profit will attract new firms to the industry which will eventually result in _____.

industry expansion that increases supply until price equals minimum average total cost (ATC)

Which of the following best describes the situation of a price-taking firm? A price-taking firm is one of a ______ number of firms producing a product that is identical to that of every other firm in the industry and providing ______ of total market supply.

large; only a fraction

In pure competition, marginal revenue and are equal. (Remember to type only one word per blank.)

price

This graph illustrates that a firm can minimize its losses by producing where ______.

price exceeds minimum average variable cost but is less than average total cost

In pure competition, society's resources are allocated efficiently when profit-motivated firms produce output to the point where ______.

price or marginal revenue (MR) and marginal cost (MC) are equal

The blue shaded area in this figure represents ___.

producer surplus

Competitive market economies generate ______.

productive efficiency allocative efficiency

In the long run, purely competitive firms will not survive if they do not use a least-cost production method because ______.

pure competition forces firms to produce at the minimum average total cost (ATC) and to charge a price that is consistent with that cost

The market structure in which individual firms have the least amount of control over price is ______, whereas in ______ a single firm has significant control over price.

pure competition; pure monopoly

In purely competitive markets, efficiency can be temporarily disrupted and then restored by changes in:

technological changes. consumer tastes. resource supplies.

A purely competitive firm will maximize its profits by producing up to the point where

the vertical distance between the total revenue and total cost curves is the greatest.

After all long-run adjustments are completed in a perfectly competitive market, output will occur at each firm's minimum average ______.

total cost where product price is equal to marginal revenue

The two ways to determine the level of output at which a firm will realize maximum profit or minimum loss are to compare total revenue to ______ and to compare marginal revenue to ______.

total cost; marginal cost

The market demand curve for a purely competitive industry:

slopes downward

A purely competitive market leads to the efficient use of:

society's scarce resources

In the short run, a competitive industry is composed of a ______ number of firms, each with a ______, unalterable plant size.

specific; fixed

Which of the following are conditions necessary to have pure competition?

standardized product free entry and exit very large number of firms or sellers

Match each market structure with the correct type of product that it produces.

standardized product matches purely competitive differentiated product matches monopolistically competitive standardized or differentiated matches oligopoly unique, no close substitute matches monopoly

True or false: Higher resource prices create lower ATC and cause an upward shift of the long-run ATC curve.

False

Assume that there are 100 identical firms in an industry that produces a product with a market price of $10. Each firm has an average total cost of $2 and an equilibrium output of 10 units. What is the industry's economic profit?

$8,000

Economists group industries into distinct market structures.

4

Which of the following does an increasing-cost industry experience?

A downward shifting average total cost (ATC) curve as the industry contracts. An upward shifting average total cost (ATC) curve as the industry expands.

Which of the following explains why a purely competitive firm is a price taker?

A purely competitive firm offers only a negligible fraction of total market supply and therefore must accept the price determined by the market

Which of the following market structures produces only a standardized product?

A purely competitive market

Which of the following is a characteristic of a monopolistically competitive market?

A relatively large number of sellers producing differentiated products

Which of the following would describe the personal computer industry as a decreasing-cost industry?

As demand for computers rose, producers of the components experienced economies of scale.

Which of the following best explains why the price-marginal cost relationship improves as production increases?

At the very early stages of production, marginal product is low, making marginal cost unusually high.

Which of the following best summarizes why firms in purely competitive industries do not differentiate their products?

Because there are so many of them selling a standardized product

What are two ways that a purely competitive firm can determine the level of output at which it will realize maximum profit or minimum losses?

By comparing total revenue to total costs By comparing marginal revenue to marginal costs

Why will firms choose not to enter an industry when marginal revenue, marginal cost, price, and average total cost are equal?

Existing firms are earning only normal profits.

True or false: A purely competitive firm in the short run will maximize profit by producing up to the point where marginal revenue is equal to marginal cost if the market price is less than minimum average variable cost.

False

True or false: Because of the law of diminishing returns, marginal costs eventually fall as more units of output are produced.

False

Which of the following best explains why a purely competitive firm would not stop producing if the loss is less than its fixed costs?

Fixed costs are paid regardless of whether something or nothing is produced, and the firm receives enough revenue per-unit to cover AVC and some FC.

In an increasing-cost industry, which of the following occur when an increase in product demand results in economic profits and attracts new firms to the industry?

Increased resource demand drives up resource prices. Each firm's ATC curve shifts upward.

Which of the following best describes oligopoly?

Involves only a few sellers of a standardized or differentiated product, so each firm is affected by the decisions of its rivals.

Which of the following statements are true about allocative efficiency?

It is impossible to produce net gains for society by altering the mix of goods and services produced. The marginal cost and marginal benefit of producing each unit of output is equal. The goods and services produced are those that society most wants to consume.

Which of the following describes producer surplus?

It is the difference between the actual price producers receive for a product and the minimum price producers are willing to accept for the product.

Which of the following does a decreasing-cost industry experience?

Lower costs as industry output expands.

There is no incentive for firms to enter or exit the industry in the long run when ______.

MR = MC price equals minimum average total cost firms earn a normal profit

Between P2 and P4, the firm will minimize its losses by producing and supplying the quantity at which:

MR=P=MC

Which of the following will cause new firms to enter an industry?

Market price exceeds minimum average total costs.

In the short run, a purely competitive firm will maximize profit by producing up to the point where marginal revenue is equal to marginal cost only if which of the following is true?

Market price exceeds minimum average variable cost.

How does a purely competitive market restore allocative efficiency when an increase in demand disrupts efficiency?

New firms enter and increase industry output until price and marginal cost are equal.

Which of the following best describes a pure monopoly? Multiple choice question.

One firm selling a single unique product, where entry of additional firms is blocked and there is considerable control over price

Based on the graph, what happens at a price of $131 and 7 units of output?

Per-unit profit is maximized but total profit is not.

In which scenario will production result in an economic profit?

Price exceeds average total cost.

In which scenario can a firm pay part, but not all, of its fixed costs and should therefore continue producing even though it is experiencing a loss?

Price exceeds average variable cost but is less than average total cost.

Which of the following conditions may or will cause firms to exit an industry?

Price is less than minimum average total cost.

Whether a purely competitive industry is a constant-cost industry or an increasing-cost industry, the final long-run equilibrium position of all competitive firms share which of the following characteristics?

Price or marginal revenue will settle where it is equal to minimum average total cost. In the long run, a multiple equality occurs where price equals marginal cost which equals the minimum average total cost. In the long run, an equality occurs where price equals marginal revenue, which equals minimum average total cost.

In maximizing profits at 9 units of output, the firm in this graph is adhering to which of the following rules?

Produce to the point where additional units of output add positively to total profit.

Which of the following explains why a firm would not produce a unit of output where MC exceeds MR?

Producing it would add more to costs than to revenue, and profit would decline or loss would increase

Which of the following are considered to be the four basic market structures?

Pure monopoly Monopolistic competition Pure competition Oligopoly

In purely competitive markets, an individual firm lacks control over which factor?

Product price

Which of the following is a given fact to the individual competitive firm, but a basic determinant of quantity supplied for the entire competitive industry?

Product price

The supply schedule for a purely competitive firm confirms that there is a direct relationship between which two factors?

Product price and quantity supplied

Which of the following statements about product price are true?

Product price is a given fact for the individual firm. All competitive producers as a group can influence product price with their supply plans.

Which market structure has the fewest obstacles to entry or exit?

Pure competition

In which type of market structure does a single firm produce a unique product with no close substitutes?

Pure monopoly

What are the effects of the "invisible hand" in a purely competitive economy?

Resource allocation that maximizes consumer satisfaction Maximum profits for individual producers

Which of the following features occur in a purely competitive market?

Sales in both national and international markets. Many independently acting sellers

Which of the following factors will alter costs and shift the marginal cost or short-run supply curve to a new location?

Technology Prices of variable inputs

In this figure, the equality of price (P), marginal cost (MC) and minimum average total cost (ATC) at output Qf, indicates which of the following?

That the firm is achieving productive and allocative efficiency

Which of the following occur only in the long-run?

The expansion or contraction of plant capacity The entry and exit of firms

Which factors illustrate that the demand curve for a purely competitive firm is perfectly elastic?

The firm does not need to lower its price to increase its sales volume. The firm cannot obtain a higher price by restricting its output.

What is the primary difference between the individual firm's supply curve and the industry supply curve?

The individual supply curve has no effect on price, whereas the industry supply curve has an important bearing on price.

Which of the following is downward-sloping?

The long-run supply curve of a decreasing-cost industry.

Which of the following best describes marginal revenue?

The revenue that an additional unit of output contributes to total revenue.

Which of the following are true about the profit-maximizing rule of MR = MC?

The rule applies only if producing is preferable to shutting down. The rule can be restated as P = MC when applied to a purely competitive firm because product price and MR are equal. The rule is an accurate guide to profit maximization for all firms regardless of their market structure.

Which of the following indicates the profit-maximizing level of output?

The vertical distance between the total revenue and total cost curves

Which statement about obstacles to selling in a purely competitive market is true?

There are no significant obstacles to selling.

This figure represents a constant-cost industry where the entry or exodus of firms does not affect resource prices or unit costs. Therefore, in the long run, a decrease in demand causes ______.

a contraction of output but no change in price

This figure represents a constant-cost industry where the entry or exodus of firms does not affect resource prices or unit costs. Therefore, an increase in demand causes ______.

an expansion in industry output but no alteration in price

This figure represents an increasing-cost industry where the entry of new firms in response to an increase in demand will bid up resource prices and thereby increase per-unit costs. As a result ______.

an increased industry output will be forthcoming only at higher prices

A purely competitive firm's demand schedule is equal to which of the following?

average revenue marginal revenue

In a purely competitive market, price per unit to a buyer equals:

average revenue to a seller

In this graph, the firm's short-run supply curve is represented as the portion above point ______.

b

A firm operating in a purely competitive market is a price taker because it ______.

cannot change the market price, it can only adjust to it

Pure ______ involves a very large number of firms.

competition

In a purely competitive industry, at the profit-maximizing or loss-minimizing level of output, marginal ______ is equal to ______.

cost; price revenue; price revenue; marginal cost

What is the shape of the long-run supply curve in a decreasing-cost industry?

downward-sloping

The shaded box in this graph represents the firm's _______,

economic profit calculated as (P-ATC)Q

Economists maintain that new firms are attracted into an industry due to:

economic profits

Whenever price is ______ average variable costs but is ______ average total costs, the firm can pay part, but not all, its fixed costs by producing.

greater than; less than

A purely competitive firm's total revenue curve will

have a constant slope because each extra unit of sales increases total revenue by a constant amount

Higher resource prices will result in ______ total costs.

higher average

In the figure, the equality of P, MC and minimum ATC ______.

illustrates the productive and allocative efficiency of pure competition

The entry of new firms entering an increasing-cost industry increase resource prices particularly:

in industries using specialized resources whose long-run supplies do not readily increase in response to increases in resource demand

The quantity of a product supplied by a firm in pure competition should _____ as long as price rises.

increase

Within pure competition, a supplier will ______ production as price rises, as long as marginal cost is less than marginal revenue.

increase

Because of the law of diminishing returns, marginal costs ______ at a(n) ______ rate at higher levels of output.

increase; increasing

A purely competitive industry has a very ______ number of sellers, whereas the other three market structures reflect a progressively ______ or ______ number of sellers.

large; smaller; decreasing

In this graph, a firm incurs a loss but continues to operate because price is ______ than the lowest average total cost but above the lowest average ______ cost.

less; variable

A decreasing-cost industry is one in which firms experience ______ costs as their industry ______. (Check all that apply.)

lower; expands higher; contracts

When long-run equilibrium is reached, firms will earn a(n) ______ profit.

normal

A firm would not produce a unit of output where ______.

marginal cost exceeds marginal revenue

In which market model do firms rely on product differentiation to distinguish themselves from the competition?

monopolistic competition

Match each market structure with the correct description of how price control is exerted.

none matches purely competitive some, but within narrow limits matches monopolistically competitive limited by mutual interdependence matches oligopoly considerable control matches monopoly

From an economic standpoint, the break-even point is the level of output at which a firm makes a(n) ______ profit.

normal

In the short run, a purely competitive firm can maximize its economic profit (or minimize its loss) by adjusting its ___.

output

At which point will a firm be indifferent whether to shut down or continue to produce?

point b

The market structures designated as "imperfect competition" are:

pure monopoly; oligopoly; monopolistic competition

The equation for determining economic profit or loss is ______ minus ______.

total revenue; total cost

A wage increase would increase marginal costs and shift the supply curve:

upward to the left

A firm should always stop producing if its average ______ cost is ______ price.

variable; greater than

Match each market structure with the description that best describes the conditions for exit and entry into that industry.

very easy, no obstacles matches purely competitive relatively easy matches monopolistically competitive significant obstacles matches oligopoly blocked matches monopoly

In this graph, the equilibrium price is $50 and is equal to a firm's average total cost. Therefore, the firm is earning ______ economic profits, or a(n) ______ profit.

zero; normal