Question 1

Stating that marginal revenue equals price is equivalent to saying that marginal revenue equals marginal cost at all levels of output.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following statements is TRUE?
I. A free market minimizes the total costs of producing output.
II. In a free market, P = MC1 = MC2 = . . . MCN.
III. Every firm faces the same price in a competitive market.

Accepted Answer

A)  I and II only 
B)  III only 
C)  I and III only 
D)  I, II, and III 
A)  I and II only 
B)  III only 
C)  I and III only 
D)  I, II, and III

Question 3

According to the elimination principle, above-normal profits will never occur.

Accepted Answer

A) True 
 B)False

Question 4

Consider the market for DVD players and HDTVs (high-definition televisions). A firm can produce DVD players at an average cost of $20 each, or HDTVs at a cost of $150 each. Which product should this firm produce if the price of DVD players is $15 and the price of HDTVs is $200? Why? Explain what you would expect other firms in both the markets for DVD players and HDTVs to do. Assume both markets are competitive.

Accepted Answer

The firm should produce HDTVs since P >

Question 5

The elimination principle illustrates the idea that:

Accepted Answer

A)  above-normal profits will be eliminated by decreases in demand due to high prices. 
B)  losses will be eliminated by the innovation of new products. 
C)  above-normal profits will be eliminated by the entry of new firms into the industry. 
D)  losses will be eliminated by firms decreasing their costs. 
A)  above-normal profits will be eliminated by decreases in demand due to high prices. 
B)  losses will be eliminated by the innovation of new products. 
C)  above-normal profits will be eliminated by the entry of new firms into the industry. 
D)  losses will be eliminated by firms decreasing their costs.

Question 6

If there are normal short run profits in an industry, there will be:

Accepted Answer

A)  entry. 
B)  exit. 
C)  no entry or exit. 
D)  below-normal profits in the next period. 
A)  entry. 
B)  exit. 
C)  no entry or exit. 
D)  below-normal profits in the next period.

Question 7

If markets are not competitive:

Accepted Answer

A)  prices will still send the correct signal in a free market. 
B)  the invisible hand does not work perfectly. 
C)  there will be an ideal balance between industries. 
D)  there will be significant externalities. 
A)  prices will still send the correct signal in a free market. 
B)  the invisible hand does not work perfectly. 
C)  there will be an ideal balance between industries. 
D)  there will be significant externalities.

Question 8

If all firms in an industry have the same marginal cost, then each firm in that industry is producing the same number of goods.

Accepted Answer

A) True 
 B)False

Question 9

If there are significant externalities present, then:

Accepted Answer

A)  prices will still send the correct signal in a free market. 
B)  the invisible hand still works perfectly. 
C)  there will not be an ideal balance of resources between industries. 
D)  creative destruction won't work. 
A)  prices will still send the correct signal in a free market. 
B)  the invisible hand still works perfectly. 
C)  there will not be an ideal balance of resources between industries. 
D)  creative destruction won't work.

Question 10

Under perfect competition, the rate of profit tends to be ______ in all industries, so the marginal value of resources is ______ in all industries.

Accepted Answer

A)  different; different 
B)  the same; the same 
C)  the same; different 
D)  different; the same 
A)  different; different 
B)  the same; the same 
C)  the same; different 
D)  different; the same

Question 11

Overall production costs will be minimized when the marginal costs of production across firms are equal.

Accepted Answer

A) True 
 B)False

Question 12

In a competitive industry:

Accepted Answer

A)  all firms will earn above-normal profits if demand is high. 
B)  the opportunity cost of production is zero. 
C)  profits are only attainable in the long run to those firms able to innovate at the lowest cost. 
D)  resources move across firms in such a way that the total value of production is maximized. 
A)  all firms will earn above-normal profits if demand is high. 
B)  the opportunity cost of production is zero. 
C)  profits are only attainable in the long run to those firms able to innovate at the lowest cost. 
D)  resources move across firms in such a way that the total value of production is maximized.

Question 13

We can write the Invisible Hand Property 1 as P = AC1 = AC2 = . . . = ACN.

Accepted Answer

A) True 
 B)False

Question 14

Invisible Hand Property 1 says that without any single person in charge, free markets will result in equal ______ and price will be set to it.

Accepted Answer

A)  average costs 
B)  marginal costs 
C)  fixed costs 
D)  demand curves 
A)  average costs 
B)  marginal costs 
C)  fixed costs 
D)  demand curves

Question 15

If a firm has revenues of $200, explicit costs of $100, and implicit costs of $100, then its accounting profit is:

Accepted Answer

A)  $0. 
B)  $50. 
C)  $100. 
D)  $500. 
A)  $0. 
B)  $50. 
C)  $100. 
D)  $500.

Question 16

In a competitive market, firms acting in their own interest will ______ total industry costs of production.

Accepted Answer

A)  maximize 
B)  minimize 
C)  eliminate 
D)  exaggerate 
A)  maximize 
B)  minimize 
C)  eliminate 
D)  exaggerate

Question 17

In a free market, if the profit rate in the car industry were higher than in the computer industry, this is a signal that:

Accepted Answer

A)  consumers should spend more on computers and less on cars. 
B)  consumers should spend more on cars and less on computers. 
C)  entrepreneurs should move resources from the computer industry to the car industry. 
D)  entrepreneurs should move resources from the car industry to the computer industry. 
A)  consumers should spend more on computers and less on cars. 
B)  consumers should spend more on cars and less on computers. 
C)  entrepreneurs should move resources from the computer industry to the car industry. 
D)  entrepreneurs should move resources from the car industry to the computer industry.

Question 18

The following are marginal cost curves for selling chicken in a Mom & Pop (MCM) store and in a Big-Box retailer (MCB).
MCM = 2 + 2QM
MCB = 4 + QB
If the price of a chicken is $12, how many chickens does each store supply?

Accepted Answer

A)  Mom & Pop: 5; Big-Box: 8 
B)  Mom & Pop: 1; Big-Box: 1 
C)  Mom & Pop: 26; Big-Box: 20 
D)  Mom & Pop: 8; Big-Box: 8 
A)  Mom & Pop: 5; Big-Box: 8 
B)  Mom & Pop: 1; Big-Box: 1 
C)  Mom & Pop: 26; Big-Box: 20 
D)  Mom & Pop: 8; Big-Box: 8

Question 19

In a perfectly competitive market, each firm produces:

Accepted Answer

A)  the same quantity. 
B)  a potentially different quantity. 
C)  as much quantity as possible. 
D)  as little quantity as possible. 
A)  the same quantity. 
B)  a potentially different quantity. 
C)  as much quantity as possible. 
D)  as little quantity as possible.

Question 20

In the long run, firms will exit industries where price is:

Accepted Answer

A)  greater than average cost. 
B)  equal to average cost. 
C)  less than average cost. 
D)  positive. 
A)  greater than average cost. 
B)  equal to average cost. 
C)  less than average cost. 
D)  positive.

Exam 12: Competition and the Invisible Hand

Stating that marginal revenue equals price is equivalent to saying that marginal revenue equals marginal cost at all levels of output.

Which of the following statements is TRUE? I. A free market minimizes the total costs of producing output. II. In a free market, P = MC1 = MC2 = . . . MCN. III. Every firm faces the same price in a competitive market.

According to the elimination principle, above-normal profits will never occur.

The elimination principle illustrates the idea that:

If there are normal short run profits in an industry, there will be:

If markets are not competitive:

If all firms in an industry have the same marginal cost, then each firm in that industry is producing the same number of goods.

If there are significant externalities present, then:

Under perfect competition, the rate of profit tends to be ______ in all industries, so the marginal value of resources is ______ in all industries.

Overall production costs will be minimized when the marginal costs of production across firms are equal.

In a competitive industry:

We can write the Invisible Hand Property 1 as P = AC1 = AC2 = . . . = ACN.

Invisible Hand Property 1 says that without any single person in charge, free markets will result in equal ______ and price will be set to it.

If a firm has revenues of $200, explicit costs of $100, and implicit costs of $100, then its accounting profit is:

In a competitive market, firms acting in their own interest will ______ total industry costs of production.

In a free market, if the profit rate in the car industry were higher than in the computer industry, this is a signal that:

The following are marginal cost curves for selling chicken in a Mom & Pop (MCM) store and in a Big-Box retailer (MCB). MCM = 2 + 2QM MCB = 4 + QB If the price of a chicken is $12, how many chickens does each store supply?

In a perfectly competitive market, each firm produces:

In the long run, firms will exit industries where price 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

Which of the following statements is TRUE? I. A free market minimizes the total costs of producing output. II. In a free market, P = MC₁= MC₂ = . . . MC_N. III. Every firm faces the same price in a competitive market.

Under perfect competition, the rate of profit tends to be in all industries, so the marginal value of resources is in all industries.

We can write the Invisible Hand Property 1 as P = AC₁ = AC₂ = . . . = AC_N.

The following are marginal cost curves for selling chicken in a Mom & Pop (MC_M) store and in a Big-Box retailer (MC_B). MC_M = 2 + 2Q_M MC_B = 4 + Q_B If the price of a chicken is $12, how many chickens does each store supply?