Question 1

A purely competitive firm

Accepted Answer

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. 
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.

Question 2

When entrepreneurs in competitive industries successfully innovate to lower production costs, it usually results in long-run economic profits for the firm.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following is true concerning purely competitive industries?

Accepted Answer

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. 
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.

Question 4

The costs of competition's creative destruction are often widespread, while the benefits often accrue to only a few.

Accepted Answer

A) True 
 B)False

Question 5

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

Accepted Answer

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. 
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.

Question 6

An industry is producing at the least-cost rate of production when

Accepted Answer

A)  marginal cost is greater than average total cost. 
B)  marginal revenue is greater than price. 
C)  price and the minimum average cost are equal. 
D)  price and marginal revenue are equal. 
A)  marginal cost is greater than average total cost. 
B)  marginal revenue is greater than price. 
C)  price and the minimum average cost are equal. 
D)  price and marginal revenue are equal.

Question 7

In a purely competitive industry, an optimal allocation of scarce resources occurs when

Accepted Answer

A)  P = AC. 
B)  P = MC. 
C)  MR = AC. 
D)  TR = TC. 
A)  P = AC. 
B)  P = MC. 
C)  MR = AC. 
D)  TR = TC.

Question 8

If for a firm P = minimum ATC = MC, then

Accepted Answer

A)  neither allocative efficiency nor productive efficiency is being achieved. 
B)  productive efficiency is being achieved, but allocative efficiency is not. 
C)  both allocative efficiency and productive efficiency are being achieved. 
D)  allocative efficiency is being achieved, but productive efficiency is not. 
A)  neither allocative efficiency nor productive efficiency is being achieved. 
B)  productive efficiency is being achieved, but allocative efficiency is not. 
C)  both allocative efficiency and productive efficiency are being achieved. 
D)  allocative efficiency is being achieved, but productive efficiency is not.

Question 9

Creative destruction is

Accepted Answer

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. 
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.

Question 10

Under what conditions would an increase in demand lead to a lower long-run equilibrium price?

Accepted Answer

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. 
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.

Question 11

If the price of bottled water is $2 and the marginal cost of producing it is $2.50,

Accepted Answer

A)  bottled water is being produced in an increasing-cost industry. 
B)  society will realize a net gain if more bottled water is produced. 
C)  resources are being overallocated to bottled water. 
D)  resources are being underallocated to all other goods. 
A)  bottled water is being produced in an increasing-cost industry. 
B)  society will realize a net gain if more bottled water is produced. 
C)  resources are being overallocated to bottled water. 
D)  resources are being underallocated to all other goods.

Question 12

Which of the following conditions is true for a purely competitive firm in long-run equilibrium?

Accepted Answer

A) P > MC = minimum ATC. B) P > MC > minimum ATC. C) P = MC = minimum ATC. D) P < MC < minimum ATC. A) P > MC = minimum ATC. B) P > MC > minimum ATC. C) P = MC = minimum ATC. D) P < MC < minimum ATC.

Question 13

When a profit-maximizing competitive firm decides to produce at a loss because its price is below average cost but above average variable cost, that is a long-run decision.

Accepted Answer

A) True 
 B)False

Question 14

An industry that has increasing returns to scale and fixed factor prices will have a long-run supply curve that is

Accepted Answer

A)  vertical. 
B)  horizontal. 
C)  upward-sloping. 
D)  downward-sloping. 
A)  vertical. 
B)  horizontal. 
C)  upward-sloping. 
D)  downward-sloping.

Question 15

Resources are efficiently allocated when production occurs at that output level where price

Accepted Answer

A)  equals marginal cost. 
B)  equals marginal revenue. 
C)  is greatest over average cost. 
D)  is equal to average total cost. 
A)  equals marginal cost. 
B)  equals marginal revenue. 
C)  is greatest over average cost. 
D)  is equal to average total cost.

Question 16

The representative firm in a purely competitive industry

Accepted Answer

A)  will always earn a profit in the short run. 
B)  may earn either an economic profit or a loss in the long run. 
C)  will always earn an economic profit in the long run. 
D)  will earn zero economic profit in the long run. 
A)  will always earn a profit in the short run. 
B)  may earn either an economic profit or a loss in the long run. 
C)  will always earn an economic profit in the long run. 
D)  will earn zero economic profit in the long run.

Question 17

Allocative efficiency occurs when the

Accepted Answer

A)  minimum of average total cost equals average revenue. 
B)  minimum of average total cost equals marginal revenue. 
C)  marginal cost equals the marginal benefit to society. 
D)  marginal revenue equals marginal benefit to society. 
A)  minimum of average total cost equals average revenue. 
B)  minimum of average total cost equals marginal revenue. 
C)  marginal cost equals the marginal benefit to society. 
D)  marginal revenue equals marginal benefit to society.

Question 18

The long-run supply curve under pure competition is derived by observing what happens to market price and quantity when market

Accepted Answer

A)  demand changes and all consequent long-run adjustments have occurred. 
B)  supply changes and all consequent long-run adjustments have occurred. 
C)  technology changes and all consequent long-run adjustments have occurred. 
D)  regulation changes and all consequent long-run adjustments have occurred. 
A)  demand changes and all consequent long-run adjustments have occurred. 
B)  supply changes and all consequent long-run adjustments have occurred. 
C)  technology changes and all consequent long-run adjustments have occurred. 
D)  regulation changes and all consequent long-run adjustments have occurred.

Question 19

In long-run equilibrium, purely competitive markets

Accepted Answer

A)  minimize total cost. 
B)  maximize the sum of consumer surplus and producer surplus. 
C)  yield economic profits to most sellers. 
D)  inevitably degenerate into monopoly in increasing-cost industries. 
A)  minimize total cost. 
B)  maximize the sum of consumer surplus and producer surplus. 
C)  yield economic profits to most sellers. 
D)  inevitably degenerate into monopoly in increasing-cost industries.

Question 20

Assume that the market for soybeans is purely competitive. Currently, firms growing soybeans are earning positive economic profits. In the long run, we can expect

Accepted Answer

A)  new firms to enter, causing the market price of soybeans to fall. 
B)  new firms to enter, causing the market price of soybeans to rise. 
C)  some firms to exit, causing the market price of soybeans to fall. 
D)  some firms to exit, causing the market price of soybeans to rise. 
A)  new firms to enter, causing the market price of soybeans to fall. 
B)  new firms to enter, causing the market price of soybeans to rise. 
C)  some firms to exit, causing the market price of soybeans to fall. 
D)  some firms to exit, causing the market price of soybeans to rise.

Exam 11: Pure Competition in the Long Run

A purely competitive firm

When entrepreneurs in competitive industries successfully innovate to lower production costs, it usually results in long-run economic profits for the firm.

Which of the following is true concerning purely competitive industries?

The costs of competition's creative destruction are often widespread, while the benefits often accrue to only a few.

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

An industry is producing at the least-cost rate of production when

In a purely competitive industry, an optimal allocation of scarce resources occurs when

If for a firm P = minimum ATC = MC, then

Creative destruction is

Under what conditions would an increase in demand lead to a lower long-run equilibrium price?

If the price of bottled water is $2 and the marginal cost of producing it is $2.50,

Which of the following conditions is true for a purely competitive firm in long-run equilibrium?

When a profit-maximizing competitive firm decides to produce at a loss because its price is below average cost but above average variable cost, that is a long-run decision.

An industry that has increasing returns to scale and fixed factor prices will have a long-run supply curve that is

Resources are efficiently allocated when production occurs at that output level where price

The representative firm in a purely competitive industry

Allocative efficiency occurs when the

The long-run supply curve under pure competition is derived by observing what happens to market price and quantity when market

In long-run equilibrium, purely competitive markets

Assume that the market for soybeans is purely competitive. Currently, firms growing soybeans are earning positive economic profits. In the long run, we can expect

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