Question 1

In a constant cost industry, P = AC = $20. Which sequence of events follows an increase in demand?

Accepted Answer

A) P > AC, firms make an economic profit, existing firms expand output, new firms enter the industry, the short-run supply curve shifts right, price falls until profits return to $0 B) P > AC, firms make an economic profit, existing firms expand output, new firms enter the industry, the short-run supply curve shifts left, price falls until profits return to $0 C) P < AC, firms suffer an economic loss, existing firms reduce output, new firms enter the industry, the short-run supply curve shifts right, price falls until profits exceed $0 D) P = AC, firms make no economic profit, existing firms leave output unchanged, new firms enter the industry, profits remain normal, P = AC = $20 A) P > AC, firms make an economic profit, existing firms expand output, new firms enter the industry, the short-run supply curve shifts right, price falls until profits return to $0 B) P > AC, firms make an economic profit, existing firms expand output, new firms enter the industry, the short-run supply curve shifts left, price falls until profits return to $0 C) P < AC, firms suffer an economic loss, existing firms reduce output, new firms enter the industry, the short-run supply curve shifts right, price falls until profits exceed $0 D) P = AC, firms make no economic profit, existing firms leave output unchanged, new firms enter the industry, profits remain normal, P = AC = $20 A

Question 2

Because only greater quantities of oil can be produced by using more expensive production methods, the industry is:

Accepted Answer

A)  an increasing cost industry. 
B)  an economies of scale industry. 
C)  noncompetitive industry. 
D)  marginal cost industry. 
A)  an increasing cost industry. 
B)  an economies of scale industry. 
C)  noncompetitive industry. 
D)  marginal cost industry. A

Question 3

If a single supplier produces such a small portion of the total market output that changes in its production have no impact on the overall market price,:

Accepted Answer

A)  the firm will eventually be forced out of business. 
B)  demand for the firm's output is perfectly elastic. 
C)  the firm's supply curve is perfectly inelastic. 
D)  the market supply curve is horizontal. 
A)  the firm will eventually be forced out of business. 
B)  demand for the firm's output is perfectly elastic. 
C)  the firm's supply curve is perfectly inelastic. 
D)  the market supply curve is horizontal. B

Question 4

Profit is defined as total revenue minus total cost.

Accepted Answer

A) True 
 B)False

Question 5

Total cost equals fixed cost ______ variable cost.

Accepted Answer

A)  times 
B)  minus 
C)  plus 
D)  divided by 
A)  times 
B)  minus 
C)  plus 
D)  divided by

Question 6

A market is considered perfectly competitive if:
I. there is a lot of product differentiation among sellers.
II. there are many sellers, each small relative to the total market.
III. the product sold is similar across sellers.
IV. there are only a few buyers.

Accepted Answer

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

Question 7

Use the following to answer questions : 
Figure: Profits and Competitive Firms  
-(Figure: Profits and Competitive Firms) Refer to the four panels in the figure. Which panel shows a competitive firm making zero economic profits?

Accepted Answer

A)  Panel A 
B)  Panel B 
C)  Panel C 
D)  Panel D 
A)  Panel A 
B)  Panel B 
C)  Panel C 
D)  Panel D

Question 8

At the profit-maximizing output level P = MC, if P > AC then firms can earn above-normal profit, causing entry into the industry.

Accepted Answer

A) True 
 B)False

Question 9

In a constant cost industry, the market price and average cost are equal to $23. Therefore, which of the following is correct?

Accepted Answer

A)  An increase in demand will cause the short-run price to rise above $23, but in the long run, the price will return to $23. 
B)  An increase in demand will cause profits to rise and firms to enter the industry until profits return to normal. 
C)  A decrease in demand will cause market price to fall below average cost and thus firms will earn negative profits. 
D)  All of the answers are correct. 
A)  An increase in demand will cause the short-run price to rise above $23, but in the long run, the price will return to $23. 
B)  An increase in demand will cause profits to rise and firms to enter the industry until profits return to normal. 
C)  A decrease in demand will cause market price to fall below average cost and thus firms will earn negative profits. 
D)  All of the answers are correct.

Question 10

Table: Oil Production Costs
 
Refer to the table. If seven barrels of oil are produced, this firm is making:

Accepted Answer

A) a profit because P >AC. B) a loss because MC > AC. C) a profit because MR > MC. D) a loss because TR < TC. A) a profit because P >AC. B) a loss because MC > AC. C) a profit because MR > MC. D) a loss because TR < TC.

Question 11

Figure: AC   Refer to the set of four panels in the figure. Which panel shows the typical shape of the average cost curve in a competitive market?

Accepted Answer

A)  Panel A 
B)  Panel B 
C)  Panel C 
D)  Panel D 
A)  Panel A 
B)  Panel B 
C)  Panel C 
D)  Panel D

Question 12

To maximize profits, firms produce the level of output that:

Accepted Answer

A)  equates total revenue and total cost. 
B)  equates marginal revenue with marginal cost. 
C)  minimizes costs. 
D)  maximizes revenues. 
A)  equates total revenue and total cost. 
B)  equates marginal revenue with marginal cost. 
C)  minimizes costs. 
D)  maximizes revenues.

Question 13

Use the following to answer questions:
Figure: Maximizing Profit  
-(Figure: Maximizing Profit) What is the firm's profit-maximizing level of output?

Accepted Answer

A)  4 
B)  7 
C)  9 
D)  12 
A)  4 
B)  7 
C)  9 
D)  12

Question 14

Damien produces 400 gallons of milk a day in a very competitive industry. The market price for a gallon of milk is $2. Damien's marginal revenue per gallon of milk is:

Accepted Answer

A)  $200. 
B)  $800. 
C)  $2. 
D)  $0. 
A)  $200. 
B)  $800. 
C)  $2. 
D)  $0.

Question 15

Marginal revenue is always equal to the price of the product for a competitive firm.

Accepted Answer

A) True 
 B)False

Question 16

A firm should exit an industry if price is less than average cost.

Accepted Answer

A) True 
 B)False

Question 17

The typical average cost curve in a competitive market is:

Accepted Answer

A)  an upward-sloping straight line because fixed costs are constant, and variable costs are increasing with the level of output. 
B)  U-shaped because the firm's fixed costs are first spread over greater quantities, but then increasingly greater quantities will create production capacity constraints. 
C)  downward-sloping until fixed costs are eliminated and then it becomes a horizontal line. 
D)  U-shaped because increasing quantities of output cause a decrease in fixed costs but an offsetting increase in variable costs. 
A)  an upward-sloping straight line because fixed costs are constant, and variable costs are increasing with the level of output. 
B)  U-shaped because the firm's fixed costs are first spread over greater quantities, but then increasingly greater quantities will create production capacity constraints. 
C)  downward-sloping until fixed costs are eliminated and then it becomes a horizontal line. 
D)  U-shaped because increasing quantities of output cause a decrease in fixed costs but an offsetting increase in variable costs.

Question 18

The amount of money that the firm pays for its inputs is called:

Accepted Answer

A)  marginal cost. 
B)  total cost. 
C)  variable cost. 
D)  fixed cost. 
A)  marginal cost. 
B)  total cost. 
C)  variable cost. 
D)  fixed cost.

Question 19

Firms earn negative profit when price is:

Accepted Answer

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

Question 20

Total cost incorporates:

Accepted Answer

A)  implicit and explicit cost. 
B)  implicit cost only. 
C)  explicit cost only. 
D)  neither explicit nor implicit cost. 
A)  implicit and explicit cost. 
B)  implicit cost only. 
C)  explicit cost only. 
D)  neither explicit nor implicit cost.

Exam 11: Costs and Profit Maximization Under Competition

In a constant cost industry, P = AC = $20. Which sequence of events follows an increase in demand?

Because only greater quantities of oil can be produced by using more expensive production methods, the industry is:

If a single supplier produces such a small portion of the total market output that changes in its production have no impact on the overall market price,:

Profit is defined as total revenue minus total cost.

Total cost equals fixed cost ______ variable cost.

A market is considered perfectly competitive if: I. there is a lot of product differentiation among sellers. II. there are many sellers, each small relative to the total market. III. the product sold is similar across sellers. IV. there are only a few buyers.

Use the following to answer questions : Figure: Profits and Competitive Firms -(Figure: Profits and Competitive Firms) Refer to the four panels in the figure. Which panel shows a competitive firm making zero economic profits?

At the profit-maximizing output level P = MC, if P > AC then firms can earn above-normal profit, causing entry into the industry.

In a constant cost industry, the market price and average cost are equal to $23. Therefore, which of the following is correct?

Table: Oil Production Costs Refer to the table. If seven barrels of oil are produced, this firm is making:

Figure: AC Refer to the set of four panels in the figure. Which panel shows the typical shape of the average cost curve in a competitive market?

To maximize profits, firms produce the level of output that:

Use the following to answer questions: Figure: Maximizing Profit -(Figure: Maximizing Profit) What is the firm's profit-maximizing level of output?

Damien produces 400 gallons of milk a day in a very competitive industry. The market price for a gallon of milk is $2. Damien's marginal revenue per gallon of milk is:

Marginal revenue is always equal to the price of the product for a competitive firm.

A firm should exit an industry if price is less than average cost.

The typical average cost curve in a competitive market is:

The amount of money that the firm pays for its inputs is called:

Firms earn negative profit when price is:

Total cost incorporates:

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

Competition and the Invisible Hand

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

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