Question 1

Which of the following statements is correct?

Accepted Answer

A)  The demand curve of the perfectly competitive industry is elastic as are the demand curves facing the individual firms. 
B)  The market demand curve of perfect competition is inelastic because the individual consumers are buying a homogeneous product. 
C)  The market demand curve of the perfectly competitive industry is downward sloping while the demand curve of an individual firm is horizontal with a height equal to the product price. 
D)  The market demand curve of the perfectly competitive industry is downward sloping, so the demand curves of the individual firms are also downward sloping. 
A)  The demand curve of the perfectly competitive industry is elastic as are the demand curves facing the individual firms. 
B)  The market demand curve of perfect competition is inelastic because the individual consumers are buying a homogeneous product. 
C)  The market demand curve of the perfectly competitive industry is downward sloping while the demand curve of an individual firm is horizontal with a height equal to the product price. 
D)  The market demand curve of the perfectly competitive industry is downward sloping, so the demand curves of the individual firms are also downward sloping. C

Question 2

Suppose the price of an item in a perfectly competitive market is $2. For a firm in this market, MC = MR at an output of 100 units. The average total cost at this output level is $4 per unit, and TVC is $80. We may conclude that

Accepted Answer

A)  the firm should shut down because TC > TR. 
B)  the firm should continue to produce because P>AVC. 
C)  the firm should shut down because its TFC is $320 and its TC is $400. 
D)  the firm should shut down because other firms will enter the industry as the market is perfectly competitive. 
A)  the firm should shut down because TC > TR. 
B)  the firm should continue to produce because P>AVC. 
C)  the firm should shut down because its TFC is $320 and its TC is $400. 
D)  the firm should shut down because other firms will enter the industry as the market is perfectly competitive. B

Question 3

In a perfectly competitive market, a firm in long-run equilibrium will be operating

Accepted Answer

A)  to the right of the minimum of the long-run average cost curve. 
B)  to the left of the minimum of the long-run average cost curve. 
C)  at the minimum of the long-run average cost curve. 
D)  at the minimum of the marginal cost curve. 
A)  to the right of the minimum of the long-run average cost curve. 
B)  to the left of the minimum of the long-run average cost curve. 
C)  at the minimum of the long-run average cost curve. 
D)  at the minimum of the marginal cost curve. C

Question 4

"An industry's short-run supply curve is constructed by adding horizontally all the average variable cost curves of firms in that industry." Do you agree or disagree? Why?

Accepted Answer

Disagree. An industry's short-run supply

Question 5

-Refer to the above table. The table represents information on the costs for Ajax Corporation. Ajax operates in a perfectly competitive market and the price of the product is $9. What does profit equal when quantity equals 3?

Accepted Answer

A)  $13 
B)  $10 
C)  $6 
D)  $2 
A)  $13 
B)  $10 
C)  $6 
D)  $2

Question 6

If the long-run supply curve slopes upward, we know that this is

Accepted Answer

A)  a decreasing-cost industry. 
B)  a constant-cost industry. 
C)  an increasing-cost industry. 
D)  a situation in which no input prices change as firms enter and exit the industry. 
A)  a decreasing-cost industry. 
B)  a constant-cost industry. 
C)  an increasing-cost industry. 
D)  a situation in which no input prices change as firms enter and exit the industry.

Question 7

A perfectly competitive firm will maximize profits when

Accepted Answer

A)  average cost is greater than marginal revenue. 
B)  marginal cost is greater than marginal revenue. 
C)  marginal cost is equal to marginal revenue. 
D)  average cost is equal to average revenue. 
A)  average cost is greater than marginal revenue. 
B)  marginal cost is greater than marginal revenue. 
C)  marginal cost is equal to marginal revenue. 
D)  average cost is equal to average revenue.

Question 8

If a firm in a perfectly competitive market raises its price

Accepted Answer

A)  it will sell more products. 
B)  it will sell fewer products. 
C)  its sales will remain unchanged. 
D)  it will sell nothing. 
A)  it will sell more products. 
B)  it will sell fewer products. 
C)  its sales will remain unchanged. 
D)  it will sell nothing.

Question 9

If the long-run supply curve is upward sloping, we know that

Accepted Answer

A)  entrepreneurs are earning higher profits as output expands. 
B)  some input prices are increasing as the industry expands. 
C)  firms are getting larger as the industry contracts. 
D)  the law of diminishing marginal returns has set in. 
A)  entrepreneurs are earning higher profits as output expands. 
B)  some input prices are increasing as the industry expands. 
C)  firms are getting larger as the industry contracts. 
D)  the law of diminishing marginal returns has set in.

Question 10

A firm that shuts down in the short run experiences losses equal to its

Accepted Answer

A)  total fixed costs. 
B)  average variable costs. 
C)  total variable costs. 
D)  total variable costs minus its total fixed costs. 
A)  total fixed costs. 
B)  average variable costs. 
C)  total variable costs. 
D)  total variable costs minus its total fixed costs.

Question 11

The owner of a perfectly competitive firm is currently earning an economic profit of zero. This owner

Accepted Answer

A)  should shut down since profits of zero are not good. 
B)  should raise the price of the product to increase profits. 
C)  is covering all of his fixed costs. 
D)  will continue producing in the short-run but will shut down in the long run if profits do not increase. 
A)  should shut down since profits of zero are not good. 
B)  should raise the price of the product to increase profits. 
C)  is covering all of his fixed costs. 
D)  will continue producing in the short-run but will shut down in the long run if profits do not increase.

Question 12

Can a firm make losses by producing the rate of output at which marginal revenue equals marginal cost? Why?

Accepted Answer

Even when a firm is producing the output

Question 13

A firm is a price taker if

Accepted Answer

A)  seeks to maximize revenue rather than profit. 
B)  cannot influence the market price. 
C)  searches for the best price and then takes the highest profits possible. 
D)  buys inputs for firms. 
A)  seeks to maximize revenue rather than profit. 
B)  cannot influence the market price. 
C)  searches for the best price and then takes the highest profits possible. 
D)  buys inputs for firms.

Question 14

Which of the following is a characteristic of perfect competition?

Accepted Answer

A)  easy entry and exit 
B)  few firms 
C)  differentiated products 
D)  none of the above 
A)  easy entry and exit 
B)  few firms 
C)  differentiated products 
D)  none of the above

Question 15

Accounting profits at a firm's break-even point are

Accepted Answer

A)  positive. 
B)  negative. 
C)  zero. 
D)  indeterminate since we need to know what demand is. 
A)  positive. 
B)  negative. 
C)  zero. 
D)  indeterminate since we need to know what demand is.

Question 16

When a firm is at its short-run break-even point

Accepted Answer

A)  economic profits are positive. 
B)  economic profits equal zero and the firm should shut down. 
C)  economic profits equal zero and the firm is earning a nominal rate of return on investment. 
D)  economic profits are negative but the firm should continue to produce because accounting profits are positive. 
A)  economic profits are positive. 
B)  economic profits equal zero and the firm should shut down. 
C)  economic profits equal zero and the firm is earning a nominal rate of return on investment. 
D)  economic profits are negative but the firm should continue to produce because accounting profits are positive.

Question 17

If a perfect competitor faces P = ATC in the long run, the firm will

Accepted Answer

A)  earn economic profits. 
B)  earn economic losses. 
C)  leave the industry. 
D)  remain in the industry. 
A)  earn economic profits. 
B)  earn economic losses. 
C)  leave the industry. 
D)  remain in the industry.

Question 18

The perfectly competitive firm's demand curve has

Accepted Answer

A)  a negative slope. 
B)  a positive slope. 
C)  a slope of infinity. 
D)  a slope of 0. 
A)  a negative slope. 
B)  a positive slope. 
C)  a slope of infinity. 
D)  a slope of 0.

Question 19

Suppose a perfectly competitive firm faces the following short-run cost and revenue conditions: ATC = $700; AVC = $500; MC = $600; MR = $600. The firm should

Accepted Answer

A)  increase output. 
B)  decrease output. 
C)  continue to produce its current output. 
D)  shut down. 
A)  increase output. 
B)  decrease output. 
C)  continue to produce its current output. 
D)  shut down.

Question 20

Economic profits at the short-run break-even point are

Accepted Answer

A)  positive. 
B)  negative. 
C)  equal to zero. 
D)  indeterminate since they also depend on the size of the fixed costs. 
A)  positive. 
B)  negative. 
C)  equal to zero. 
D)  indeterminate since they also depend on the size of the fixed costs.

Exam 23: Perfect Competition

Which of the following statements is correct?

Suppose the price of an item in a perfectly competitive market is $2. For a firm in this market, MC = MR at an output of 100 units. The average total cost at this output level is $4 per unit, and TVC is $80. We may conclude that

In a perfectly competitive market, a firm in long-run equilibrium will be operating

"An industry's short-run supply curve is constructed by adding horizontally all the average variable cost curves of firms in that industry." Do you agree or disagree? Why?

-Refer to the above table. The table represents information on the costs for Ajax Corporation. Ajax operates in a perfectly competitive market and the price of the product is $9. What does profit equal when quantity equals 3?

If the long-run supply curve slopes upward, we know that this is

A perfectly competitive firm will maximize profits when

If a firm in a perfectly competitive market raises its price

If the long-run supply curve is upward sloping, we know that

A firm that shuts down in the short run experiences losses equal to its

The owner of a perfectly competitive firm is currently earning an economic profit of zero. This owner

Can a firm make losses by producing the rate of output at which marginal revenue equals marginal cost? Why?

A firm is a price taker if

Which of the following is a characteristic of perfect competition?

Accounting profits at a firm's break-even point are

When a firm is at its short-run break-even point

If a perfect competitor faces P = ATC in the long run, the firm will

The perfectly competitive firm's demand curve has

Suppose a perfectly competitive firm faces the following short-run cost and revenue conditions: ATC = $700; AVC = $500; MC = $600; MR = $600. The firm should

Economic profits at the short-run break-even point are

The Nature of Economics

Scarcity and the World of Trade-Offs

Demand and Supply

Extensions of Demand and Supply Analysis

Public Spending and Public Choice

Funding the Public Sector

The Macroeconomy: Unemployment, Inflation, and Deflation

Measuring the Economys Performance

Global Economic Growth and Development

Real GDP and the Price Level in the Long Run

Classical and Keynesian Macro Analyses

Consumption, Real GDP, and the Multiplier

Fiscal Policy

Deficit Spending and the Public Debt

Money, Banking, and Central Banking

Domestic and International Dimensions of Monetary Policy

Stabilization in an Integrated World Economy

Policies and Prospects for Global Economic Growth

Demand and Supply Elasticity

Consumer Choice

Rents, Profits, and the Financial Environment of Business

The Firm: Cost and Output Determination

Monopoly

Monopolistic Competition

Oligopoly and Strategic Behavior

Regulation and Antitrust Policy in a Globalized Economy

The Labor Market: Demand, Supply and Outsourcing

Unions and Labor Market Monopoly Power

Income, Poverty, and Health Care

Environmental Economics

Comparative Advantage and the Open Economy

Exchange Rates and the Balance of Payments

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