Question 1

A constant-cost industry is an industry in which

Accepted Answer

A)  average costs fall as the industry expands output. 
B)  average costs rise as the industry expands output. 
C)  average costs remain constant as the industry expands output. 
D)  input prices rise at a constant rate as firms in the industry use more inputs. 
A)  average costs fall as the industry expands output. 
B)  average costs rise as the industry expands output. 
C)  average costs remain constant as the industry expands output. 
D)  input prices rise at a constant rate as firms in the industry use more inputs.

Question 2

Firms in perfect competition produce the productively efficient output level in the short run and in the long run.

Accepted Answer

A) True 
 B)False

Question 3

Firms in perfect competition are price takers because

Accepted Answer

A)  one firm determines the price that all other firms in the industry will charge. 
B)  consumers have enough market power to set prices. 
C)  firms accept the price determined by the government. 
D)  each firm is too small relative to the market to be able to influence price. 
A)  one firm determines the price that all other firms in the industry will charge. 
B)  consumers have enough market power to set prices. 
C)  firms accept the price determined by the government. 
D)  each firm is too small relative to the market to be able to influence price.

Question 4

Figure 12-6   Figure 12-6 shows the demand, marginal cost (MC) and average total cost (ATC) curves for Jason's House of Apples.
-Refer to Figure 12-6. Which of the following statements is true?

Accepted Answer

A)  Jason should produce where MC equals $3 (point d), where he will minimize his losses. 
B)  Jason should produce where the distance between MC and his demand curve is greatest (point b). 
C)  Jason cannot earn a profit from selling any number of apples. 
D)  Jason should produce where MC equals $3 (point d), where he will maximize his profit. 
A)  Jason should produce where MC equals $3 (point d), where he will minimize his losses. 
B)  Jason should produce where the distance between MC and his demand curve is greatest (point b). 
C)  Jason cannot earn a profit from selling any number of apples. 
D)  Jason should produce where MC equals $3 (point d), where he will maximize his profit.

Question 5

Figure 12-2  
-Refer to Figure 12-2. Why is the total revenue curve a ray from the origin?

Accepted Answer

A)  because revenue increases at an increasing rate 
B)  because revenue increases at a decreasing rate 
C)  because the firm can sell its product at a constant price 
D)  because the firm must lower its price to sell more 
A)  because revenue increases at an increasing rate 
B)  because revenue increases at a decreasing rate 
C)  because the firm can sell its product at a constant price 
D)  because the firm must lower its price to sell more

Question 6

In a perfectly competitive market the term "price taker" applies to

Accepted Answer

A)  sellers and buyers. 
B)  firms but not buyers. 
C)  buyers but not sellers. 
D)  only the smallest sellers and buyers. 
A)  sellers and buyers. 
B)  firms but not buyers. 
C)  buyers but not sellers. 
D)  only the smallest sellers and buyers.

Question 7

Figure 12-3  
-Refer to Figure 12-3. Suppose the prevailing price is P1 and the firm is currently producing its loss-minimizing quantity. Identify the area that represents the loss.

Accepted Answer

A)  P2 deP1 
B)  P3cbP1 
C)  P3caP0 
D)  0P1 bQ1 
A)  P2 deP1 
B)  P3cbP1 
C)  P3caP0 
D)  0P1 bQ1

Question 8

Figure 12-4   Figure 12-4 shows the cost and demand curves for a profit-maximizing firm in a perfectly competitive market.
-Refer to Figure 12-4. If the market price is $30, should the firm represented in the diagram continue to stay in business?

Accepted Answer

A)  No, it should shut down because it is making a loss. 
B)  No, it should shut down because it cannot cover its variable cost. 
C)  Yes, because it is covering part of its fixed cost. 
D)  Yes, because it is making a profit. 
A)  No, it should shut down because it is making a loss. 
B)  No, it should shut down because it cannot cover its variable cost. 
C)  Yes, because it is covering part of its fixed cost. 
D)  Yes, because it is making a profit.

Question 9

Marty's Bird House suffers a short-run loss. Marty can reduce his loss below the amount of his total fixed costs by continuing to produce if his revenue

Accepted Answer

A)  exceeds his implicit costs. 
B)  exceeds his nonmonetary opportunity costs. 
C)  exceeds his variable costs. 
D)  exceeds his marginal costs. 
A)  exceeds his implicit costs. 
B)  exceeds his nonmonetary opportunity costs. 
C)  exceeds his variable costs. 
D)  exceeds his marginal costs.

Question 10

After an increase in demand in a constant-cost industry, firms will find themselves with higher average cost curves.

Accepted Answer

A) True 
 B)False

Question 11

In a graph with output on the horizontal axis and total revenue on the vertical axis, what is the shape of the total revenue curve for a perfectly competitive seller?

Accepted Answer

A)  U-shaped 
B)  inverted U-shaped 
C)  a horizontal line 
D)  a ray from the origin 
A)  U-shaped 
B)  inverted U-shaped 
C)  a horizontal line 
D)  a ray from the origin

Question 12

Assume that the tuna fishing industry is perfectly competitive. Which of the following best characterizes the industry if, as demand for tuna increases, fishing boats have to go farther into the ocean to harvest tuna?

Accepted Answer

A)  a constant-cost industry 
B)  an increasing-cost industry 
C)  a decreasing-cost industry 
D)  a fixed-cost industry 
A)  a constant-cost industry 
B)  an increasing-cost industry 
C)  a decreasing-cost industry 
D)  a fixed-cost industry

Question 13

In the short run, a profit-maximizing firm will shut down if its total revenue is greater than its variable costs.

Accepted Answer

A) True 
 B)False

Question 14

In the short run, a firm might choose to produce rather than shut down even if its market price is less than its average total cost of production.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following is a characteristic of a firm in a perfectly competitive market?

Accepted Answer

A)  The firm cannot make a profit in the short run because it is too small a part of the total market. 
B)  The firm can make a profit in the long run but not in the short run. 
C)  The firm can sell as much as it wants without having to lower its price. 
D)  The firm must lower its price in order to increase quantity demanded. 
A)  The firm cannot make a profit in the short run because it is too small a part of the total market. 
B)  The firm can make a profit in the long run but not in the short run. 
C)  The firm can sell as much as it wants without having to lower its price. 
D)  The firm must lower its price in order to increase quantity demanded.

Question 16

Figure 12-9   Figure 12-9 shows cost and demand curves facing a profit-maximizing, perfectly competitive firm.
-If a firm shuts down in the short run,

Accepted Answer

A)  its loss equals zero. 
B)  its loss equals its fixed cost. 
C)  it makes zero economic profit. 
D)  its total revenue is not large enough to cover its fixed cost. 
A)  its loss equals zero. 
B)  its loss equals its fixed cost. 
C)  it makes zero economic profit. 
D)  its total revenue is not large enough to cover its fixed cost.

Question 17

Which of the following statements is correct?

Accepted Answer

A)  Economic profit takes into account all costs involved in producing a product. 
B)  Accounting profit is not relevant in preparing the firm's financial statement. 
C)  Economic profit always exceeds accounting profit. 
D)  Accounting profit is the same as economic profit. 
A)  Economic profit takes into account all costs involved in producing a product. 
B)  Accounting profit is not relevant in preparing the firm's financial statement. 
C)  Economic profit always exceeds accounting profit. 
D)  Accounting profit is the same as economic profit.

Question 18

Suppose Veronica sells teapots in the perfectly competitive teapot market. Her output per day and her costs are as follows:
   Suppose the current equilibrium price in the teapot market is $10. To maximize profit, how many teapots will Veronica produce, what price will she charge, and how much profit (or loss) will she make? Draw a graph to illustrate your answer. Your graph should include Veronica's demand, ATC, AVC, MC, and MR curves, the price she is charging, the quantity she is producing, and the area representing her profit (or loss).

Accepted Answer

Veronica will produce 2 teapot

Question 19

Table 12-4
   Table 12-4 shows the short-run cost data of a perfectly competitive firm. Assume that output can only be increased in batches of 20 units.
-Refer to Table 12-4. If the market price is $45, the firm

Accepted Answer

A)  will earn a profit of $3,600. 
B)  will suffer a loss of $200. 
C)  will break even. 
D)  will earn profit of $1,040. 
A)  will earn a profit of $3,600. 
B)  will suffer a loss of $200. 
C)  will break even. 
D)  will earn profit of $1,040.

Question 20

Figure 12-9   Figure 12-9 shows cost and demand curves facing a profit-maximizing, perfectly competitive firm.
-In the short run, a firm that is operating at a loss has two options. These options are

Accepted Answer

A)  to reduce output or reduce its variable costs. 
B)  to go out of business or declare bankruptcy. 
C)  to shut down temporarily or continue to produce. 
D)  to adopt new technology or change the size of its physical plant. 
A)  to reduce output or reduce its variable costs. 
B)  to go out of business or declare bankruptcy. 
C)  to shut down temporarily or continue to produce. 
D)  to adopt new technology or change the size of its physical plant.

Exam 12: Firms in Perfectly Competitive Markets

A constant-cost industry is an industry in which

Firms in perfect competition produce the productively efficient output level in the short run and in the long run.

Firms in perfect competition are price takers because

Figure 12-6 Figure 12-6 shows the demand, marginal cost (MC) and average total cost (ATC) curves for Jason's House of Apples. -Refer to Figure 12-6. Which of the following statements is true?

Figure 12-2 -Refer to Figure 12-2. Why is the total revenue curve a ray from the origin?

In a perfectly competitive market the term "price taker" applies to

Figure 12-3 -Refer to Figure 12-3. Suppose the prevailing price is P1 and the firm is currently producing its loss-minimizing quantity. Identify the area that represents the loss.

Figure 12-4 Figure 12-4 shows the cost and demand curves for a profit-maximizing firm in a perfectly competitive market. -Refer to Figure 12-4. If the market price is $30, should the firm represented in the diagram continue to stay in business?

Marty's Bird House suffers a short-run loss. Marty can reduce his loss below the amount of his total fixed costs by continuing to produce if his revenue

After an increase in demand in a constant-cost industry, firms will find themselves with higher average cost curves.

In a graph with output on the horizontal axis and total revenue on the vertical axis, what is the shape of the total revenue curve for a perfectly competitive seller?

Assume that the tuna fishing industry is perfectly competitive. Which of the following best characterizes the industry if, as demand for tuna increases, fishing boats have to go farther into the ocean to harvest tuna?

In the short run, a profit-maximizing firm will shut down if its total revenue is greater than its variable costs.

In the short run, a firm might choose to produce rather than shut down even if its market price is less than its average total cost of production.

Which of the following is a characteristic of a firm in a perfectly competitive market?

Figure 12-9 Figure 12-9 shows cost and demand curves facing a profit-maximizing, perfectly competitive firm. -If a firm shuts down in the short run,

Which of the following statements is correct?

Table 12-4 Table 12-4 shows the short-run cost data of a perfectly competitive firm. Assume that output can only be increased in batches of 20 units. -Refer to Table 12-4. If the market price is $45, the firm

Figure 12-9 Figure 12-9 shows cost and demand curves facing a profit-maximizing, perfectly competitive firm. -In the short run, a firm that is operating at a loss has two options. These options are

Economics: Foundations and Models

Trade-Offs, Comparative Advantage, and the Market System

Where Prices Come From: the Interaction of Demand and Supply

Economic Efficiency, Government Price Setting, and Taxes

Externalities, Environmental Policy, and Public Goods

Elasticity: the Responsiveness of Demand and Supply

The Economics of Health Care

Firms, the Stock Market, and Corporate Governance

Comparative Advantage and the Gains From International Trade

Consumer Choice and Behavioral Economics

Technology, Production, and Costs

Monopolistic Competition: the Competitive Model in a More Realistic Setting

Oligopoly: Firms in Less Competitive Markets

Monopoly and Antitrust Policy

Pricing Strategy

The Markets for Labor and Other Factors of Production

Public Choice, Taxes, and the Distribution of Income

GDP: Measuring Total Production and Income

Unemployment and Inflation

Economic Growth, the Financial System, and Business Cycles

Long-Run Economic Growth: Sources and Policies

Aggregate Expenditure and Output in the Short Run

Aggregate Demand and Aggregate Supply Analysis

Money, Banks, and the Federal Reserve System

Monetary Policy

Fiscal Policy

Inflation, Unemployment, and Federal Reserve Policy

Macroeconomics in an Open Economy

The International Financial System

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