Microeconomics Practice Problems Chapter 12

A perfectly competitive firm will have an economic profit of zero if, at its profit-maximizing output, its marginal revenue equals its A) average total cost. B) marginal cost. C) average variable cost. D) average fixed cost.

A

At a firm's break-even point, its A) total revenue equals its total opportunity cost. B) marginal revenue exceeds its marginal cost. C) marginal revenue equals its average variable cost. D) marginal revenue equals its average fixed cost.

A

Firms in perfectly competitive industries have a ________ individual demand curve when the price is on the vertical axis and the quantity is on the horizontal axis. The shape of the curve is result of the firm being a ________. A) horizontal; price taker B) downward sloping; price maker C) vertical; price taker D) downward sloping; price taker

A

For a perfectly competitive firm, in the long-run equilibrium, A) P = MC = ATC = MR. B) MR = MC = AFC. C) MR = P = ATC = AFC. D) P = MC > ATC.

A

Homer's Holesome Donuts has determined that its profit-maximizing quantity is 10,000 donuts per year. Homer's earns $12,000 in revenue from the sale of those donuts. Homer's has two costs. First he pays $16,000 in annual rental payments for its five-year lease on its store. Second Homer incurs an additional cost of $5,000 for ingredients. Should Homer's exit the market in the long run? A) Yes, because he is incurring an economic loss. B) Yes, because all costs are fixed in the long run. C) No, because he is making an economic profit. D) No, because all costs are variable in the long run

A

If a perfectly competitive market is in long-run equilibrium and there is a permanent decrease in demand, then A) some firms will incur economic losses. B) firms are no longer maximizing profits. C) some firms must immediately exit. D) each firm must produce less output in the new long run equilibrium and earn less economic profit

A

If perfectly competitive firms exit a market, the A) market supply curve shifts leftward. B) price of the good or service falls. C) profits of the remaining firms decrease. D) output of the industry increases.

A

In a perfectly competitive market in the short run, as the market demand increases, the firms ________ their output and their economic profit ________. A) increase; increases B) increase; decreases C) decrease; decreases D) decrease; increases

A

In a perfectly competitive market, an increase in market demand A) raises the price in the short run and attracts new firms in the long run. B) raises the price in the short run and the long run. C) lowers the price in the short run and in the long run. D) has no effect on the price in either the short run or the long run because the firms are price takers.

A

In perfect competition, the product of a single firm A) has many perfect substitutes produced by other firms. B) has many perfect complements produced by other firms. C) is sold under many differing brand names. D) is sold to different customers at different prices

A

In the short run, the firm makes zero economic profit when the price is ________ minimum average total cost, makes an economic profit when the price is ________ minimum average total cost, and incurs an economic loss when the price is ________ minimum average total cost. A) equal to; higher than; lower than B) equal to; lower than; higher than C) higher than; equal to; lower than D) lower than; equal to; higher than

A

Perfect competition arises if the ________ efficient scale of a single producer is ________ relative to the demand for the good or service. A) minimum; small B) minimum; large C) maximum; small D) maximum; large

A

The economic profit of a perfectly competitive firm A) is less than its total revenue. B) equals its total revenue. C) is greater than its total revenue. D) is less than its total revenue if its supply curve is inelastic and is greater than its total revenue if its supply curve is elastic.

A

Total economic profit is A) total revenue minus total opportunity cost. B) total revenue divided by total cost. C) marginal revenue minus marginal cost. D) marginal revenue divided by marginal cost.

A

A firm's shutdown point is the quantity and price at which the firm's total revenue just equals its A) total cost. B) total variable cost. C) total fixed cost. D) marginal cost

B

A perfectly competitive firm is definitely making an economic profit when A) MR < MC. B) P > ATC. C) P < ATC. D) P > AVC.

B

A perfectly competitive firm maximizes its profit by A) setting its price so that it exceeds the marginal revenue. B) choosing to produce the quantity that sets MC equal to MR. C) cutting wages. D) manipulating demand.

B

A perfectly competitive firm shuts down if the price of its product is A) greater than its minimum average variable cost. B) less than its minimum average variable cost. C) greater than its maximum variable cost. D) less than its minimum total cost.

B

A perfectly competitive firm that is producing a positive quantity of a good maximizes its economic profit if it produces so that A) total revenue = total cost. B) marginal revenue = marginal cost. C) average revenue = average total cost. D) average total cost = average variable cost.

B

Charlie's Chimps is a perfectly competitive firm that produces cuddly chimps for children. The market price of a chimp is $10, and Charlie's produces 100 chimps at a marginal cost of $9 a chimp. Charlie's ________. A) is maximizing its profit B) will maximize its profit if it produces more than 100 chimps C) will maximize its profit if it lowers the price to $9 a chimp D) will maximize its profit if it produces fewer than 100 chimps

B

Homer's Holesome Donuts has determined that its profit-maximizing quantity is 10,000 donuts per year. Homer's earns $12,000 in revenue from the sale of those donuts. Homer's has two costs. First he pays $16,000 in annual rental payments for its five-year lease on its store. Second Homer incurs an additional cost of $5,000 for ingredients. Homer's economic profit is equal to A) -$16,000, that is, an economic loss of $16,000. B) -$9,000, that is, an economic loss of $9,000. C) +$9,000. D) +$12,000

B

Homer's Holesome Donuts has determined that its profit-maximizing quantity is 10,000 donuts per year. Homer's earns $12,000 in revenue from the sale of those donuts. Homer's has two costs. First he pays $16,000 in annual rental payments for its five-year lease on its store. Second Homer incurs an additional cost of $5,000 for ingredients. Homer's variable cost is equal to A) 0. B) $5,000. C) $16,000. D) $21,000.

B

In a perfectly competitive market, which of the following will increase the economic profit the firms make in the short run? A) a decrease in market demand B) an increase in market demand C) an increase in labor costs D) an increase in the number of firms

B

In perfect competition, a firm that maximizes its economic profit will sell its good at a price that is A) below the market price. B) at the market price. C) above the market price. D) below the market price if its supply curve is inelastic and above the market price if its supply curve is elastic.

B

In the long-run equilibrium, perfectly competitive firms make zero economic profit because of A) government regulations. B) the ability of firms to enter and exit. C) inefficient production processes. D) high fixed costs.

B

In the short run, an increase in demand for a good that is sold in a perfectly competitive market A) increases the number of firms in the market. B) increases the economic profits of existing firms in the market. C) has no effect on the price. D) causes more firms to shut down.

B

Paul runs a shop that sells printers. Paul is a perfect competitor and can sell each printer for a price of $300. The marginal cost of selling one printer a day is $200; the marginal cost of selling a second printer is $250; and the marginal cost of selling a third printer is $350. To maximize his profit, Paul should sell A) one printer a day. B) two printers a day. C) three printers a day. D) more than three printers a day

B

The short-run market supply curve for a perfectly competitive market is obtained by summing the part of each firm's A) AVC curve that lies above its MC curve. B) MC curve that lies above its AVC curve. C) AVC curve that lies below the MC curve. D) MC curve that lies below the AVC curve

B

The short-run supply curve for a perfectly competitive firm is its A) marginal cost curve above the horizontal axis. B) marginal cost curve above its shutdown point. C) average cost curve above the horizontal axis. D) average cost curve above its shutdown point.

B

Today, firms in a perfectly competitive market are making an economic profit. In the long run, firms will ________ the market until all firms in the market are ________. A) exit; covering only their total fixed costs B) enter; making zero economic profit C) exit; producing at the minimum point on their long-run average cost curve D) enter; making zero normal profit

B

A market is perfectly competitive if A) each firm in it can influence the price of its product. B) there are many firms in it, each selling a slightly different product. C) there are many firms in it, each selling an identical product. D) there are few firms in the market

C

A perfectly competitive firm initially is earning zero economic profit. Then, a decrease in demand for the firm's product occurs. Of the following, in the long run which action listed below is the firm most likely to take? A) Increase the quantity it produces. B) Increase its advertising to increase the demand for its product. C) Exit the market. D) Increase the size of its plant.

C

Because of a decrease in the wage rate it must pay, a perfectly competitive firm's marginal costs decrease but its demand curve stays the same. As a result, the firm A) decreases the amount of output it produces and raises its price. B) increases the amount of output it produces and lowers it price. C) increases the amount of output it produces and does not change its price. D) decreases the amount of output it produces and lowers its price.

C

Because the demand for a perfectly competitive firm's product is perfectly elastic, marginal revenue is equal to A) one. B) zero. C) the price of the product. D) negative one.

C

For a perfectly competitive firm, as its output increases its marginal revenue ________ and its marginal cost ________. A) changes; changes B) changes; does not change C) does not change; changes D) does not change; does not change

C

For prices above the minimum average variable cost, a perfectly competitive firm's supply curve is A) horizontal at the market price. B) vertical at zero output. C) the same as its marginal cost curve. D) the same as its average variable cost curve

C

Homer's Holesome Donuts has determined that its profit-maximizing quantity is 10,000 donuts per year. Homer's earns $12,000 in revenue from the sale of those donuts. Homer's has two costs. First he pays $16,000 in annual rental payments for its five-year lease on its store. Second Homer incurs an additional cost of $5,000 for ingredients. Homer's fixed cost is equal to A) 0. B) $5,000. C) $16,000. D) $21,000.

C

If firms in a perfectly competitive industry are making zero economic profit, then A) some of those firms will leave the industry, because firms cannot persistently go without making economic profit. B) new firms will enter the industry, because the new entrants would be ensured of doing as well as in their best foregone alternative. C) there is no incentive for either entry or exit. D) some of the firms will temporarily shut down.

C

If the price exceeds the average variable cost, by producing the level of output such that marginal revenue equals marginal cost, the firm ensures that it will A) earn an economic profit. B) not suffer any losses. C) earn the largest profit possible. D) survive in the long run.

C

If there are 1,000 rutabaga farms, all perfectly competitive, an increase in the price of fertilizer used for growing rutabagas will A) have no effect on the total quantity of rutabagas supplied, because no farm has enough market power to raise the price. B) have no effect on the total quantity of rutabagas supplied, because each farm's supply curve is a vertical line. C) decrease the total quantity of rutabagas supplied, because each farm's supply curve shifts leftward. D) reduce the total quantity of rutabagas supplied, because each farm's supply curve is a horizontal line and will shift upward.

C

In perfect competition, an individual firm A) sets the price and determines the quantity it sells in the marketplace. B) sets the price but does not determine the quantity it sells in the marketplace. C) determines the quantity it sells in the marketplace but has no influence over its price. D) can not affect its price nor determine the quantity it sells in the marketplace.

C

In perfect competition, each firm ________. A) can influence the price that it charges B) produces as much as it can C) is a price taker D) faces a perfectly inelastic demand for its product

C

In perfect competition, the marginal revenue of an individual firm A) is zero. B) is positive but less than the price of the product. C) equals the price of the product. D) exceeds the price of the product

C

In perfect competition, the market demand for the good ________ perfectly elastic and the demand for the output of one firm ________ perfectly elastic. A) is; is B) is; is not C) is not; is D) is not; is not

C

In the long run, perfectly competitive firms earn just enough revenue to A) pay all fixed costs. B) pay all accounting costs. C) pay all opportunity costs. D) attract entry.

C

In the short run, a perfectly competitive firm's economic profits A) must equal zero, that is, the firm earns a normal profit. B) must be positive. C) might be positive, negative (an economic loss), or zero (a normal profit). D) must be negative, that is the firm must incur an economic loss.

C

Marginal revenue is defined as A) the value of a firm's sales. B) the total revenue from the total amount the firm sells. C) the change in total revenue that results from a one-unit increase in the quantity sold. D) total revenue divided by the total quantity sold

C

Suppose that newspaper companies are now required to use recycled paper, which is more expensive than new paper. Which of the following is most likely to result if the newspaper industry is highly competitive? A) The firms' costs rise, resulting in positive economic profit in the short run and, hence, the industry supply curve shifts rightward in the long run. B) The firms' costs rise, resulting in economic losses in the short run and, hence, the industry supply curve shifts rightward in the long run. C) The firms' costs rise, resulting in economic losses in the short run and, hence, the industry supply curve shifts leftward in the long run. D) The industry supply curve shifts leftward in the short run, causing permanent long-run economic losses.

C

The demand for wheat from farm A is perfectly elastic because wheat from farm A is A) a perfect complement for wheat from farm B. B) a normal good. C) a perfect substitute for wheat from farm B. D) an inferior good.

C

The firms in a perfectly competitive are making an economic profit when new firms enter. The entry shifts the short-run market supply curve ________, the market price ________, and each firm's economic profit ________. A) leftward; rises; decreases B) rightward; rises; increases C) rightward; falls; decreases D) leftward; falls; decreases

C

The marginal revenue curve for a perfectly competitive firm is A) an upward sloping curve. B) a downward sloping curve. C) a horizontal line. D) None of the above answers is correct.

C

The market for fish is perfectly competitive. So, the price elasticity of demand for fish from a single fishing boat A) is less than the elasticity of demand for fish overall. B) equals the elasticity of demand for fish overall. C) is greater than the elasticity of demand for fish overall. D) is sometimes greater than and sometimes less than the elasticity of demand for fish overall

C

When Sidney's Sweaters, Inc. makes exactly zero economic profit, Sidney, the owner, A) is taking a loss. B) will shut down in the short run. C) makes an income equal to his best alternative forgone income. D) will boost output.

C

A perfectly competitive firm has a total revenue curve that is A) upward sloping with an increasing slope. B) downward sloping with a constant slope. C) upward sloping with a decreasing slope. D) upward sloping with a constant slope.

D

A perfectly competitive firm is making an economic profit when A) its total revenue is greater than its total cost. B) the price is greater than the minimum of its average total cost. C) the price is greater than the minimum of its average variable cost. D) Both answers A and B are correct

D

A perfectly competitive market is characterized by A) high barriers to entry. B) firms that are price setters. C) firms facing a downward sloping demand curve. D) no restrictions on entry into the market.

D

Entry in a perfectly competitive market A) shifts the market supply curve rightward. B) decreases the market price. C) shifts the market supply curve leftward. D) Both answers A and B are correct.

D

Homer's Holesome Donuts has determined that its profit-maximizing quantity is 10,000 donuts per year. Homer's earns $12,000 in revenue from the sale of those donuts. Homer's has two costs. First he pays $16,000 in annual rental payments for its five-year lease on its store. Second Homer incurs an additional cost of $5,000 for ingredients. Should Homer's shut down in the short run? A) Yes, because he is incurring an economic loss. B) Yes, because he cannot cover all of his fixed costs. C) No, because is making positive economic profit. D) No, because he can cover all of his variable costs.

D

If Steve's Apple Orchard, Inc. is a perfectly competitive firm, the demand for Steve's apples has A) zero elasticity. B) unitary elasticity. C) elasticity equal to the price of apples. D) infinite elasticity.

D

In perfect competition, A) each firm can influence the price of the good. B) there are few buyers. C) there are significant restrictions on entry. D) all firms in the market sell their product at the same price.

D

In perfect competition, restrictions on entry into an market A) apply to both capital and labor. B) apply to labor but not to capital. C) apply to capital but not to labor. D) do not exist.

D

In the long run, for a perfectly competitive market, if economic profit is A) less than zero, then some firms will exit the market and the market supply curve will shift leftward. B) greater than zero, then some firms will enter the market and the market supply curve will shift rightward. C) equal to zero, then there is no entry or exit of firms into or out of the market. D) All of the above answers are correct.

D

Jane's Garage Cleaning is a perfectly competitive firm that currently cleans 40 garages a week. Jane's marginal cost is less than the price she charges. Jane can increase her profit if she A) charges a higher price. B) charges a lower price. C) cleans fewer than 40 garages a week. D) cleans more than 40 garages a week

D

New reports indicate that eating turnips helps people remain healthy. The news shifts the demand curve for turnips rightward. In response, new farms enter the turnip industry. During the period in which the new farms are entering, the price of a turnip ________ and the economic profit of each existing firm ________. A) rises; rises B) rises; falls C) falls; rises D) falls; falls

D

Perfect competition implies that A) there are many firms in the market. B) all firms are price takers. C) all firms are producing the same identical product. D) All of the above answers are correct.

D

The apple market is perfectly competitive and is in long-run equilibrium. Now a disease kills 50 percent of the apple orchards. In the short run, the price of a bag of apples ________ and the remaining apple growers make ________ economic profit. In the long run, the ________. A) increases; zero; price of apples will return to their original level B) remains the same; zero; orchards will be replanted and growers will make normal profits C) increases; zero; orchards will be replanted and economic profit will return to zero D) increases; positive; orchards will be replanted and economic profit will return to zero

D

The difference between a perfectly competitive firm's total revenue and its total cost is A) always positive. B) always negative. C) always zero. D) greatest at the profit-maximizing level of output.

D

The market for lawn services is perfectly competitive. Larry's Lawn Service cannot increase its total revenue by raising its price because ________. A) Larry's supply of lawn services is perfectly inelastic B) the demand for Larry's services is perfectly inelastic C) Larry's supply of lawn services is inelastic D) the demand for Larry's services is perfectly elastic

D