Question 1

In a perfectly competitive industry, in the long-run equilibrium

Accepted Answer

A)  the typical firm is producing at the output where its long-run average total cost is not minimised. 
B)  the typical firm is earning an accounting profit greater than its implicit costs. 
C)  the typical firm earns zero profit. 
D)  the typical firm is maximising its revenue.

Question 2

If the market price is $40 in a perfectly competitive market, the marginal revenue from selling the fifth unit is

Accepted Answer

A)  $8. 
B)  $20. 
C)  $40. 
D)  $200.

Question 3

A perfectly competitive firm produces 3000 units of a good at a total cost of $36 000. The fixed cost of production is $20 000. The price of each good is $10. Should the firm continue to produce in the short run?

Accepted Answer

A)  No, it should shut down because it is incurring a loss. 
B)  Yes, it should continue to produce because its price exceeds its average fixed cost. 
C)  Yes, it should continue to produce because it is minimising its loss. 
D)  There is insufficient information to answer the question.

Question 4

A firm's total profit can be calculated as all of the following except

Accepted Answer

A)  total revenue minus total cost. 
B)  average profit per unit times quantity sold. 
C)  (price minus average total cost) times quantity sold. 
D)  marginal profit times quantity sold.

Question 5

What is meant by allocative efficiency? How does a perfectly competitive firm achieve allocative efficiency?

Accepted Answer

The answer of What is meant by allocative efficiency? How...

Question 6

-Refer to Figure 8-5. If the market price is $20, what is the firm's profit-maximising output?

Accepted Answer

A)  750 units 
B)  1100 units 
C)  1350 units 
D)  1800 units

Question 7

If a firm's total variable cost exceeds its total revenue, the firm should stop production by shutting down temporarily.

Accepted Answer

A) True 
 B)False

Question 8

Perfectly competitive firms produce up to the point where the price of the good equals the marginal cost of producing the last unit. This condition is referred to as

Accepted Answer

A)  productive efficiency. 
B)  constant returns to scale. 
C)  allocative efficiency. 
D)  perfectly competitive efficiency.

Question 9

Assume that the LCD and plasma television sets industry is perfectly competitive. Suppose a producer develops a successful innovation that enables it to lower its cost of production. What happens in the short run and in the long run?

Accepted Answer

A)  Initially, the firm will be able to increase its profit significantly, but in the long run its profits will still be greater than zero but lower than its short run profits because other firms would also innovate. 
B)  The firm will probably incur losses temporarily because of the high cost of the innovation, but in the long run it will start earning positive profits. 
C)  This firm will be able to earn above normal profits indefinitely if it obtains a patent for its innovation. 
D)  The firm will be able to increase its profits temporarily, but in the long run its profits will be eliminated as other firms copy the innovation.

Question 10

A perfectly competitive industry achieves allocative efficiency in the long run. What does allocative efficiency mean?

Accepted Answer

A)  Each firm produces up to the point where the price of the good equals the marginal cost of producing the last unit. 
B)  Each firm produces up to the point where all scale economies are exhausted. 
C)  Production occurs at the lowest average total cost. 
D)  Firms use an input combination that minimises cost and maximises output.

Question 11

Ethan Nicholas, who developed the iShoot application for the iPhone 3G, found that to maintain sales in a profitable competitive market, the price of a product

Accepted Answer

A)  will usually rise. 
B)  will usually fall. 
C)  will usually remain stable. 
D)  will eventually fall to zero.

Question 12

In long-run competitive equilibrium, the perfectly competitive firm produces where price equals minimum average total cost.
a. What is this efficiency criterion called?
b. How does it benefit consumers?

Accepted Answer

The answer of In long-run competitive equilibrium, the perfectly competitive...

Question 13

If a firm shuts down in the short run it will

Accepted Answer

A)  break even. 
B)  declare bankruptcy. 
C)  suffer a loss equal to its variable costs. 
D)  suffer a loss equal to its fixed costs.

Question 14

-Refer to Figure 8-5. If the market price is $20, what is the average profit at the profit-maximising quantity?

Accepted Answer

A)  $5 
B)  $6 
C)  $9 
D)  $20

Question 15

A perfectly competitive market is in long-run equilibrium. At present there are 100 identical firms each producing 5000 units of output. The prevailing market price is $20. Assume that each firm faces increasing marginal cost. Now suppose there is a sudden increase in demand for the industry's product, which causes the price of the good to rise to $24. Which of the following describes the effect of this increase in demand on a typical firm in the industry?

Accepted Answer

A)  In the short run, the typical firm increases its output and makes an above normal profit. 
B)  In the short run, the typical firm's output remains the same but because of the higher price, its profit increases. 
C)  In the short run, the typical firm increases its output but its total cost also rises, resulting in no change in profit. 
D)  In the short run, the typical firm increases its output but its total cost also rises. Hence, the effect on the firm's profit cannot be determined without more information.

Question 16

What is meant by productive efficiency? How does a perfectly competitive firm achieve productive efficiency?

Accepted Answer

The answer of What is meant by productive efficiency? How...

Question 17

At the profit-maximising level of output for a perfectly competitive firm,

Accepted Answer

A)  price equals marginal cost. 
B)  average revenue equals average variable cost, and price equals marginal cost. 
C)  marginal revenue equals marginal cost, and average total cost equals average fixed cost. 
D)  price equals average revenue, and marginal cost equals average variable cost.

Question 18

Explain two different ways to determine the profit-maximising level of output for a firm in a perfectly competitive market.

Accepted Answer

The answer of Explain two different ways to determine the...

Question 19

In the short run, if a firm shuts down it avoids its variable cost but not its fixed cost.

Accepted Answer