Question 1

How are sunk costs and fixed costs related?

Accepted Answer

A)  They are not related in any way. 
B)  Sunk costs cannot be recovered and fixed costs can be avoided by shutting down. 
C)  In the short run they are equal to each other. 
D)  In the long run they are equal to each other. 
A)  They are not related in any way. 
B)  Sunk costs cannot be recovered and fixed costs can be avoided by shutting down. 
C)  In the short run they are equal to each other. 
D)  In the long run they are equal to each other.

Question 2

A perfectly competitive firm in long-run equilibrium produces output at the lowest possible average total cost.

Accepted Answer

A) True 
 B)False

Question 3

In the long run, a perfectly competitive market will

Accepted Answer

A)  produce only the quantity of output that yields a long-run profit for the typical firm. 
B)  supply whatever amount consumers will buy at a price which earns the market an economic profit. 
C)  supply whatever amount consumers demand at a price determined by the minimum point on the typical firm's average total cost curve. 
D)  generate a long-run equilibrium where the typical firm operates at a loss. 
A)  produce only the quantity of output that yields a long-run profit for the typical firm. 
B)  supply whatever amount consumers will buy at a price which earns the market an economic profit. 
C)  supply whatever amount consumers demand at a price determined by the minimum point on the typical firm's average total cost curve. 
D)  generate a long-run equilibrium where the typical firm operates at a loss.

Question 4

Which of the following is a characteristic of an oligopolistic market structure?

Accepted Answer

A)  There are few dominant sellers. 
B)  Each firm sells a unique product. 
C)  It is easy for new firms to enter the industry. 
D)  Each firm need not react to the actions of rivals. 
A)  There are few dominant sellers. 
B)  Each firm sells a unique product. 
C)  It is easy for new firms to enter the industry. 
D)  Each firm need not react to the actions of rivals.

Question 5

Figure 12-7   Figure 12-7 illustrates the cost curves of a perfectly competitive firm.
-Refer to Figure 12-7. If the market price is P1,

Accepted Answer

A)  the firm will experience a loss and raise its price to P2. The firm will then break even. 
B)  the firm will break even by producing a quantity of Q2. 
C)  the firm will experience a loss since price is less than ATC. 
D)  the firm may make a profit if it can increase the demand for its product. 
A)  the firm will experience a loss and raise its price to P2. The firm will then break even. 
B)  the firm will break even by producing a quantity of Q2. 
C)  the firm will experience a loss since price is less than ATC. 
D)  the firm may make a profit if it can increase the demand for its product.

Question 6

Which of the following arguments could be made as evidence that the market for produce sold at a farmers' market is perfectly competitive?

Accepted Answer

A)  The U.S. Department of Agriculture has established standards for the labeling of organic produce sold at farmers' markets. 
B)  Sales of organically grown food have increased at a rate of 20 percent per year. 
C)  As more farmers began selling their products at farmers' markets, the increase in supply has driven down prices to the point where they just cover the cost of production. 
D)  The profits earned by farmers who sell their products at farmers' markets have continued to grow, despite the increasing number of farmers entering this market. 
A)  The U.S. Department of Agriculture has established standards for the labeling of organic produce sold at farmers' markets. 
B)  Sales of organically grown food have increased at a rate of 20 percent per year. 
C)  As more farmers began selling their products at farmers' markets, the increase in supply has driven down prices to the point where they just cover the cost of production. 
D)  The profits earned by farmers who sell their products at farmers' markets have continued to grow, despite the increasing number of farmers entering this market.

Question 7

The supply curve of a perfectly competitive firm in the short run is

Accepted Answer

A)  the firm's average variable cost curve. 
B)  the portion of the firm's marginal cost curve below the minimum point of the average variable cost curve. 
C)  the portion of the firm's marginal cost curve above the minimum point of the average variable cost curve. 
D)  the portion of the firm's marginal cost curve above the minimum point of the average total cost curve. 
A)  the firm's average variable cost curve. 
B)  the portion of the firm's marginal cost curve below the minimum point of the average variable cost curve. 
C)  the portion of the firm's marginal cost curve above the minimum point of the average variable cost curve. 
D)  the portion of the firm's marginal cost curve above the minimum point of the average total cost curve.

Question 8

Figure 12-7   Figure 12-7 illustrates the cost curves of a perfectly competitive firm.
-Refer to Figure 12-7. If the market price is P2, the firm

Accepted Answer

A)  will break even and produce a quantity of Q2. 
B)  will make a profit and produce a quantity of Q2. 
C)  will make a profit and produce a quantity of Q1. 
D)  will make a profit and produce a quantity of Q3. 
A)  will break even and produce a quantity of Q2. 
B)  will make a profit and produce a quantity of Q2. 
C)  will make a profit and produce a quantity of Q1. 
D)  will make a profit and produce a quantity of Q3.

Question 9

Being a price-taker, a perfectly competitive firm cannot receive a producer surplus in the short run.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following is not a characteristic of a perfectly competitive market structure?

Accepted Answer

A)  There are a very large number of firms that are small compared to the market. 
B)  All firms sell identical products. 
C)  There are no restrictions to entry by new firms. 
D)  There are restrictions on exit of firms. 
A)  There are a very large number of firms that are small compared to the market. 
B)  All firms sell identical products. 
C)  There are no restrictions to entry by new firms. 
D)  There are restrictions on exit of firms.

Question 11

Letters are used to represent the terms used to answer this question: price (P), quantity of output (Q), total cost (TC) and average total cost (ATC). Which of the following equations is equal to a firm's average profit?

Accepted Answer

A)  P - ATC 
B)  (P - AT
C)  × Q 
C)  (P × Q) - TC 
D)  P - TC 
A)  P - ATC 
B)  (P - AT
C)  × Q 
C)  (P × Q) - TC 
D)  P - TC

Question 12

Which of the following describes a situation in which every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it?

Accepted Answer

A)  productive efficiency 
B)  allocative efficiency 
C)  marginal efficiency 
D)  profit maximization 
A)  productive efficiency 
B)  allocative efficiency 
C)  marginal efficiency 
D)  profit maximization

Question 13

If, for the last unit of a good produced by a perfectly competitive firm, MR > MC, then in producing it, the firm

Accepted Answer

A)  added more to total costs than it added to total revenue. 
B)  added more to total revenue than it added to total cost. 
C)  is maximizing marginal profit. 
D)  has minimized its losses. 
A)  added more to total costs than it added to total revenue. 
B)  added more to total revenue than it added to total cost. 
C)  is maximizing marginal profit. 
D)  has minimized its losses.

Question 14

The market demand curve for a perfectly competitive industry is the horizontal summation of each individual firm's demand curve.

Accepted Answer

A) True 
 B)False

Question 15

Assume that the personal computer industry is perfectly competitive. The fact that the price of personal computers over the last decade has fallen despite increases in demand signifies that the industry is a decreasing-cost industry.

Accepted Answer

A) True 
 B)False

Question 16

When a perfectly competitive firm finds that its market price is below its minimum average variable cost, it will sell

Accepted Answer

A)  the output where marginal revenue equals marginal cost. 
B)  any positive output the entrepreneur decides upon because all of it can be sold. 
C)  nothing at all; the firm shuts down. 
D)  the output where average total cost equals price. 
A)  the output where marginal revenue equals marginal cost. 
B)  any positive output the entrepreneur decides upon because all of it can be sold. 
C)  nothing at all; the firm shuts down. 
D)  the output where average total cost equals price.

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

Assume that the medical screening industry is perfectly competitive. Consider a typical firm that is making short-run losses. Suppose the medical screening industry runs an effective advertising campaign which convinces a large number of people that yearly CT scans are critical for good health. How will this affect a typical firm that remains in the industry?

Accepted Answer

A)  The firm's supply curve shifts right and its marginal revenue curve shifts upward as the market price rises and ultimately the firm starts making profits. 
B)  The firm's marginal revenue curve and average cost curve shift upward in response to the increase in market price and advertising expenditure. The firm increases output until it starts breaking even. 
C)  The marginal revenue curve shifts upward, the firm's output increases along its marginal cost curve, it expands production and eventually starts making profits. 
D)  The marginal revenue curve shifts upward, the firm's output increases along its marginal cost curve, it expands production until it breaks even. 
A)  The firm's supply curve shifts right and its marginal revenue curve shifts upward as the market price rises and ultimately the firm starts making profits. 
B)  The firm's marginal revenue curve and average cost curve shift upward in response to the increase in market price and advertising expenditure. The firm increases output until it starts breaking even. 
C)  The marginal revenue curve shifts upward, the firm's output increases along its marginal cost curve, it expands production and eventually starts making profits. 
D)  The marginal revenue curve shifts upward, the firm's output increases along its marginal cost curve, it expands production until it breaks even.

Exam 12: Firms in Perfectly Competitive Markets

How are sunk costs and fixed costs related?

A perfectly competitive firm in long-run equilibrium produces output at the lowest possible average total cost.

In the long run, a perfectly competitive market will

Which of the following is a characteristic of an oligopolistic market structure?

Figure 12-7 Figure 12-7 illustrates the cost curves of a perfectly competitive firm. -Refer to Figure 12-7. If the market price is P1,

Which of the following arguments could be made as evidence that the market for produce sold at a farmers' market is perfectly competitive?

The supply curve of a perfectly competitive firm in the short run is

Figure 12-7 Figure 12-7 illustrates the cost curves of a perfectly competitive firm. -Refer to Figure 12-7. If the market price is P2, the firm

Being a price-taker, a perfectly competitive firm cannot receive a producer surplus in the short run.

Which of the following is not a characteristic of a perfectly competitive market structure?

Letters are used to represent the terms used to answer this question: price (P), quantity of output (Q), total cost (TC) and average total cost (ATC). Which of the following equations is equal to a firm's average profit?

Which of the following describes a situation in which every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it?

If, for the last unit of a good produced by a perfectly competitive firm, MR > MC, then in producing it, the firm

The market demand curve for a perfectly competitive industry is the horizontal summation of each individual firm's demand curve.

Assume that the personal computer industry is perfectly competitive. The fact that the price of personal computers over the last decade has fallen despite increases in demand signifies that the industry is a decreasing-cost industry.

When a perfectly competitive firm finds that its market price is below its minimum average variable cost, it will sell

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

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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