Question 1

If P > AC in a given industry, then:

Accepted Answer

A)  there are too many resources in that industry. 
B)  there are too few resources in that industry. 
C)  the industry has the optimal amount of resources. 
D)  it is not possible to know whether the industry has the optimal amount of resources. 
A)  there are too many resources in that industry. 
B)  there are too few resources in that industry. 
C)  the industry has the optimal amount of resources. 
D)  it is not possible to know whether the industry has the optimal amount of resources.

Question 2

Table: Profit Margins   This table shows that silver, copper, and gold were some of the most profitable industries in July 2011. (For each dollar of sales, profit for these industries is 35.1, 23.5, and 22.0 cents, respectively.) According to the elimination principle, what do you expect to happen to these profit margins in the long run?

Accepted Answer

A)  Profit margins will increase because of increased entry. 
B)  Profit margins will increase because of increased exit. 
C)  Profit margins will decrease because of increased entry. 
D)  Profit margins will decrease because of increased exit. 
A)  Profit margins will increase because of increased entry. 
B)  Profit margins will increase because of increased exit. 
C)  Profit margins will decrease because of increased entry. 
D)  Profit margins will decrease because of increased exit.

Question 3

The invisible hand works well, even if markets are not competitive.

Accepted Answer

A) True 
 B)False

Question 4

In markets with externalities, the invisible hand concept does not work in society's best interest.

Accepted Answer

A) True 
 B)False

Question 5

Since all competitive firms produce wherever marginal cost equals the market price for the product, we can conclude that:
I. all competitive firms produce at the same marginal cost level.
II. all competitive firms produce the same quantity.
III. all competitive firms make normal profit.

Accepted Answer

A)  I only 
B)  I and II only 
C)  II and III only 
D)  All of the answers are correct. 
A)  I only 
B)  I and II only 
C)  II and III only 
D)  All of the answers are correct.

Question 6

The invisible hand dictates that all companies will make the same profit margins in the short run.

Accepted Answer

A) True 
 B)False

Question 7

In a competitive market, the incentives that entrepreneurs have to seek profit and avoid losses align with the social incentive to move labor and capital out of low-value industries and into high-value industries.

Accepted Answer

A) True 
 B)False

Question 8

If every firm knows its marginal cost but a central planner cannot know every firm's marginal cost, then:

Accepted Answer

A)  central planners will outperform competitive markets. 
B)  competitive markets will outperform central planners. 
C)  central planners and competitive markets will perform equally well. 
D)  it is impossible to say whether central planners or competitive markets will perform better. 
A)  central planners will outperform competitive markets. 
B)  competitive markets will outperform central planners. 
C)  central planners and competitive markets will perform equally well. 
D)  it is impossible to say whether central planners or competitive markets will perform better.

Question 9

In a competitive market with four firms (indicated as Firm 1, Firm 2, Firm 3, and Firm 4), which of the following is the condition that enables all sellers to maximize profit?

Accepted Answer

A)  P = ATC for all firms 
B)  Profit = Total Revenue - Total Cost for all firms 
C)  P = MC1 = MC2 = MC3 = MC4 
D)  MC is minimized in all firms. 
A)  P = ATC for all firms 
B)  Profit = Total Revenue - Total Cost for all firms 
C)  P = MC1 = MC2 = MC3 = MC4 
D)  MC is minimized in all firms.

Question 10

Oligopolists earn ______ profits in the long run.

Accepted Answer

A)  normal 
B)  above-normal 
C)  below-normal 
D)  abnormal 
A)  normal 
B)  above-normal 
C)  below-normal 
D)  abnormal

Question 11

A free market can allocate production across two farms to minimize total costs even when an ideal central planner could not.

Accepted Answer

A) True 
 B)False

Question 12

When the size of the production is the most efficient:

Accepted Answer

A)  total cost is at the minimum. 
B)  average cost is at the minimum. 
C)  marginal cost is at the minimum. 
D)  fixed cost is at the minimum. 
A)  total cost is at the minimum. 
B)  average cost is at the minimum. 
C)  marginal cost is at the minimum. 
D)  fixed cost is at the minimum.

Question 13

Which of the following best illustrates a market in which the invisible hand may not automatically minimize costs?

Accepted Answer

A)  oil 
B)  automobiles 
C)  toilet paper 
D)  eggs 
A)  oil 
B)  automobiles 
C)  toilet paper 
D)  eggs

Question 14

According to the elimination principle:

Accepted Answer

A)  above-normal profits are eliminated by exit. 
B)  below-normal profits are eliminated by entry. 
C)  there is a uniform rate of profit above the normal level in all competitive industries. 
D)  resources are always moving toward an increase in consumer welfare. 
A)  above-normal profits are eliminated by exit. 
B)  below-normal profits are eliminated by entry. 
C)  there is a uniform rate of profit above the normal level in all competitive industries. 
D)  resources are always moving toward an increase in consumer welfare.

Question 15

The pursuit of profits in a competitive market:

Accepted Answer

A)  minimizes total industry costs. 
B)  minimizes total value of production. 
C)  leads to higher prices. 
D)  maximizes producer surplus at the expense of consumer surplus. 
A)  minimizes total industry costs. 
B)  minimizes total value of production. 
C)  leads to higher prices. 
D)  maximizes producer surplus at the expense of consumer surplus.

Question 16

According to Adam Smith and other economists, the minimization of total costs in a competitive industry:

Accepted Answer

A)  results from the conscious actions of well-intentioned central planners. 
B)  results from resources being effectively allocated by trade boards. 
C)  is neither planned nor intended but results from individuals pursuing their own self-interest. 
D)  arises from a high level of cooperation among businesses, in terms of input and output plans. 
A)  results from the conscious actions of well-intentioned central planners. 
B)  results from resources being effectively allocated by trade boards. 
C)  is neither planned nor intended but results from individuals pursuing their own self-interest. 
D)  arises from a high level of cooperation among businesses, in terms of input and output plans.

Question 17

The elimination principle states that ______ normal profits are eliminated by ______, and ______ normal profits are eliminated by ______.

Accepted Answer

A)  above-; prices; below-; costs 
B)  below-; prices; above-; costs 
C)  below-; entry; above-; exit 
D)  above-; entry; below-; exit 
A)  above-; prices; below-; costs 
B)  below-; prices; above-; costs 
C)  below-; entry; above-; exit 
D)  above-; entry; below-; exit

Question 18

In a competitive industry, entry and exit decisions:

Accepted Answer

A)  allow some firms to earn above-normal profits in the long run. 
B)  ensure that labor and capital move across industries to optimally balance production. 
C)  rely on demand signals, not price signals. 
D)  move capital and labor away from profitable industries in order to maximize the total value of production. 
A)  allow some firms to earn above-normal profits in the long run. 
B)  ensure that labor and capital move across industries to optimally balance production. 
C)  rely on demand signals, not price signals. 
D)  move capital and labor away from profitable industries in order to maximize the total value of production.

Question 19

In competitive markets,:

Accepted Answer

A)  firms will earn zero economic profits in the long run. 
B)  free markets may not always minimize total industry costs. 
C)  firms with the lowest marginal costs will earn above normal profits even in the long run. 
D)  firms will earn positive economic profits in the long run. 
A)  firms will earn zero economic profits in the long run. 
B)  free markets may not always minimize total industry costs. 
C)  firms with the lowest marginal costs will earn above normal profits even in the long run. 
D)  firms will earn positive economic profits in the long run.

Question 20

If a competitive market has three firms with marginal costs of MC1 = Q1, MC2 = 0.50Q2, and MC3 = 2Q3 and faces a market price of $10, the total quantity supplied by all three firms is:

Accepted Answer

A)  15. 
B)  20. 
C)  25. 
D)  35. 
A)  15. 
B)  20. 
C)  25. 
D)  35.

Exam 12: Competition and the Invisible Hand

If P > AC in a given industry, then:

The invisible hand works well, even if markets are not competitive.

In markets with externalities, the invisible hand concept does not work in society's best interest.

Since all competitive firms produce wherever marginal cost equals the market price for the product, we can conclude that: I. all competitive firms produce at the same marginal cost level. II. all competitive firms produce the same quantity. III. all competitive firms make normal profit.

The invisible hand dictates that all companies will make the same profit margins in the short run.

In a competitive market, the incentives that entrepreneurs have to seek profit and avoid losses align with the social incentive to move labor and capital out of low-value industries and into high-value industries.

If every firm knows its marginal cost but a central planner cannot know every firm's marginal cost, then:

In a competitive market with four firms (indicated as Firm 1, Firm 2, Firm 3, and Firm 4), which of the following is the condition that enables all sellers to maximize profit?

Oligopolists earn ______ profits in the long run.

A free market can allocate production across two farms to minimize total costs even when an ideal central planner could not.

When the size of the production is the most efficient:

Which of the following best illustrates a market in which the invisible hand may not automatically minimize costs?

According to the elimination principle:

The pursuit of profits in a competitive market:

According to Adam Smith and other economists, the minimization of total costs in a competitive industry:

The elimination principle states that ______ normal profits are eliminated by ______, and ______ normal profits are eliminated by ______.

In a competitive industry, entry and exit decisions:

In competitive markets,:

If a competitive market has three firms with marginal costs of MC1 = Q1, MC2 = 0.50Q2, and MC3 = 2Q3 and faces a market price of $10, the total quantity supplied by all three firms is:

The Big Ideas

The Power of Trade and Comparative

Supply and Demand

Equilibrium

Elasticity and Its Applications

Taxes and Subsidies

The Price System

Price Ceilings and Floors

International Trade

Externalities- When the Price Is Not Right

Costs and Profit Maximization Under Competition

Monopoly

Price Discrimination

Oligopoly and Game Theory

Competing for Monopoly

Monopolistic Competition and Advertising

Labor Markets

Public Goods and the Tragedy of the Commons

Political Economy and Public Choice

Economics, Ethics, and Public Policy

Managing Incentives

Stock Markets and Personal Finance

Price Discrimination

Consumer Choice

Filters

The elimination principle states that normal profits are eliminated by , and normal profits are eliminated by .

If a competitive market has three firms with marginal costs of MC₁ = Q₁, MC₂ = 0.50Q₂, and MC₃ = 2Q₃ and faces a market price of $10, the total quantity supplied by all three firms is: