Profit Maximization in Perfectly – Complete Test Bank | Ch9 - Microeconomics Theory and Applications 13th Edition | Test Bank with Answer Key by Edgar K. Browning, Mark A. Zupan. DOCX document preview.
Package: Test Bank
Title: Microeconomics: Theory and Application, 13e
Chapter Number: 9
Question Type: Multiple Choice
1. Which one of the following is not an assumption of the competitive model?
a. Homogenous products
b. Unrestricted mobility of resources
c. Economies of scale
d. Perfect information
Learning Objective: Outline the conditions that characterize perfect competition.
2. Which of the following is an assumption in the model of perfect competition?
a. The firms in a competitive industry produce a homogeneous product.
b. The firms in a competitive industry actively compete with each other by advertising.
c. There are no natural impediments to entry in a competitive industry, but there may be artificial impediments such as licensing.
d. The firms in a competitive industry have a decreasing short-run marginal cost curve.
Learning Objective: Outline the conditions that characterize perfect competition.
3. Product homogeneity implies that consumers:
a. buy goods from the lowest-priced source.
b. know which seller produces the highest quality goods.
c. cannot easily decide which seller to buy from.
d. can judge quality easily by price.
Learning Objective: Outline the conditions that characterize perfect competition.
4. Which of the following will reduce the competitive nature of the agricultural industry?
a. Government involvement in the industry.
b. The output of the agricultural industry is more or less homogeneous.
c. The number of farms across the country is relatively large.
d. There are no import and export restrictions on agricultural products.
Learning Objective: Outline the conditions that characterize perfect competition.
5. Resources are not free to move into and out of an industry when:
a. there are no differential impediments across firms in the mobility of resources.
b. a firm experiences economies of scale.
c. an incumbent firm has an exclusive government patent.
d. firms are price takers.
Learning Objective: Outline the conditions that characterize perfect competition.
6. Which of the following is true of the economic model of perfect competition?
a. All the assumptions of a competitive model are satisfied in almost all real-world markets.
b. The efficient outcomes of competitive markets hold only in theory and not empirically.
c. Perfect competition is characterized by its impersonal nature.
d. The outcome of perfect competition is equitable.
Learning Objective: Outline the conditions that characterize perfect competition.
7. The model of perfect competition assumes that:
a. there is information asymmetry in the market.
b. individual suppliers face a downward sloping demand curve.
c. all goods in that market are homogeneous.
d. there are a small number of sellers in the market.
Learning Objective: Outline the conditions that characterize perfect competition.
8. The assumptions of perfect competition _____.
a. are satisfied in most real-world markets
b. do not readily apply to most real-world markets
c. are hardly ever satisfied and therefore make the study of perfect competition unwarranted
d. if satisfied, lead to equitable outcomes
Learning Objective: Outline the conditions that characterize perfect competition.
9. If firms in a perfectly competitive market produced dissimilar products:
a. the buyers in the market will be price takers.
b. price differentials will exist in equilibrium.
c. they will remain price takers.
d. price differentials between firms will be eliminated.
Learning Objective: Outline the conditions that characterize perfect competition.
10. Assume that coffee shops operate in a perfectly competitive industry. A single coffee shop, Brick & Mortar, decides to charge an entrance fee in addition to charges for its coffee and pastry. Which of the following is most likely to happen?
a. Brick & Mortar can continue to charge the entrance fee in the long-run since there is free entry into the coffee shop industry.
b. As long as the coffee shop industry is perfectly competitive, customers will be willing to pay the extra charges.
c. Brick & Mortar will not be able to sustain the extra charges as customers will move to coffee shops that are cheaper.
d. Brick & Mortar can charge their customers extra because there are a large number of buyers and sellers in the coffee shop industry.
Learning Objective: Outline the conditions that characterize perfect competition.
11. According to the _____ principle, firms that do not approximate profit maximization will not succeed in competitive markets.
a. equity
b. successor
c. survivor
d. winner-takes-all
Learning Objective: Explain why it is appropriate to assume profit maximization on the part of firms.
12. The survivor principle in competitive markets implies that:
a. the outcome of a competitive market will not be profit-maximizing.
b. profit maximization need not be the only objective of a firm.
c. all firms follow the objective of profit maximization.
d. firms that do not undertake profit maximization will be driven out of the market.
Learning Objective: Explain why it is appropriate to assume profit maximization on the part of firms.
13. The demand curve of a perfectly competitive firm is determined by:
a. the quality of the goods the firm produces.
b. the intersection of the market demand and supply curves.
c. the reputation of the firm.
d. the price taking behavior in the market.
Learning Objective: Show why the fact that a competitive firm is a price taker implies that the demand curve for the firm is perfectly horizontal.
14. The competitive firm is known as a price taker because:
a. it sets the highest price it can charge.
b. it can vary its price based on variations in its cost.
c. it produces output at a level that minimizes its marginal cost.
d. it accepts the market price as a given.
Learning Objective: Outline the conditions that characterize perfect competition.
15. A perfectly competitive firm is a price taker. This implies that:
a. price does not change in a perfectly competitive market.
b. price is not determined by supply and demand in a competitive market.
c. price only changes when market conditions change.
d. output of a firm is the only factor that can change prices.
Learning Objective: Show why the fact that a competitive firm is a price taker implies that the demand curve for the firm is perfectly horizontal.
16. For a perfectly competitive firm, the demand curve:
a. coincides with the marginal revenue curve.
b. is parallel to the vertical axis.
c. is upward sloping.
d. is convex to the origin.
Learning Objective: Show why the fact that a competitive firm is a price taker implies that the demand curve for the firm is perfectly horizontal.
17. The perfectly competitive firm's demand curve is horizontal because:
a. the firm faces a constant-cost supply curve.
b. the demand for its goods is infinitely elastic.
c. firms in competitive industries collude and set the same prices.
d. the firm can change prices by varying its output.
Learning Objective: Show why the fact that a competitive firm is a price taker implies that the demand curve for the firm is perfectly horizontal.
18. A perfectly competitive firm faces a horizontal demand curve, which implies that:
a. the price in the market never changes.
b. the firm cannot affect price by any action it takes.
c. the quantity of output produced by the firm is indeterminate.
d. the firm makes zero accounting profits.
Learning Objective: Show why the fact that a competitive firm is a price taker implies that the demand curve for the firm is perfectly horizontal.
19. The competitive firm's demand curve is:
a. unit elastic over the relevant range of output.
b. perfectly elastic over the relevant range of output.
c. perfectly inelastic over the relevant range of output.
d. elastic above the market price and inelastic below the market price.
Learning Objective: Show why the fact that a competitive firm is a price taker implies that the demand curve for the firm is perfectly horizontal.
20. The following figure shows the total cost and total revenue for a firm when it prices its products at $8 and $10.
At a price of $10, the profit maximizing level of output for the firm is _____.
a. OA
b. OC
c. OF
d. OG
Learning Objective: Explain a competitive firm’s optimal output choice in the short run and how the firm’s short-run supply curve may be derived through this output selection.
21. The following figure shows the total cost and total revenue for a firm when it prices its products at $8 and $10.
When the firm is producing the profit-maximizing level of output at a price of $10:
a. total fixed costs are OA.
b. economic profits equal BH.
c. average cost equals DG divided by OG.
d. total cost is minimized at B.
Learning Objective: Explain a competitive firm’s optimal output choice in the short run and how the firm’s short-run supply curve may be derived through this output selection.
22. The following figure shows the total cost and total revenue for a firm when it prices its products at $8 and $10.
If the market price fell to $8 the firm would:
a. decrease production to OJ and would be operating at a loss.
b. decrease production to OJ and would be earning a normal return.
c. decrease production to OF where it would break even.
d. incur losses and shut down.
Learning Objective: Explain a competitive firm’s optimal output choice in the short run and how the firm’s short-run supply curve may be derived through this output selection.
23. The following figure shows the total cost and total revenue curves for a firm.
At which of the following output levels is the firm incurring its highest loss?
a. 1 unit
b. 2 units
c. 3 units
d. 4 units
Learning Objective: Explain a competitive firm’s optimal output choice in the short run and how the firm’s short-run supply curve may be derived through this output selection.
24. The following figure shows the total cost and total revenue curves for a firm.
At which of the following levels of output is the firm maximizing profit?
a. 1 unit
b. 2 units
c. 3 units
d. 4 units
Learning Objective: Explain a competitive firm’s optimal output choice in the short run and how the firm’s short-run supply curve may be derived through this output selection.
25. The following figure shows the total cost and total revenue curves for a firm.
The firm’s profits are positive:
a. from output level 1 to 2.
b. only at output level 2.
c. from output level 2 to 4.
d. only at output level 1.
Learning Objective: Explain a competitive firm’s optimal output choice in the short run and how the firm’s short-run supply curve may be derived through this output selection.
26. A competitive firm maximizes profit at the output level where:
a. the difference between price and average total cost is the largest.
b. the slope of the total revenue curve equals the slope of the total cost curve.
c. the average total cost equals marginal cost.
d. the marginal revenue exceeds marginal cost by the greatest amount.
Learning Objective: Explain a competitive firm’s optimal output choice in the short run and how the firm’s short-run supply curve may be derived through this output selection.
27. The competitive firm maximizes its profit by operating at the point where _____ and price is greater than average variable cost.
a. average cost is at a minimum
b. total revenue is at a maximum
c. profit per unit is at a maximum
d. marginal cost equals price
Learning Objective: Explain a competitive firm’s optimal output choice in the short run and how the firm’s short-run supply curve may be derived through this output selection.
28. The perfectly competitive firm maximizes profits by producing at the rate of output where:
a. marginal revenue and marginal cost are equal.
b. marginal revenue exceeds marginal cost by the greatest amount.
c. the profit per unit is the highest.
d. marginal cost is at its minimum.
Learning Objective: Explain a competitive firm’s optimal output choice in the short run and how the firm’s short-run supply curve may be derived through this output selection.
29. The following figure shows the marginal cost curve, average total cost curve, average variable cost curve, and marginal revenue curve for a firm for different levels of output.
Assuming that price at 0R is $10, the profit maximizing level of output for the firm is _____.
a. OA where marginal cost just covers AVC
b. OB where average profit per unit is the greatest
c. OC where marginal cost equals the $10 price
d. OK where average cost equals marginal revenue and the firm earns a normal rate of return
Learning Objective: Explain a competitive firm’s optimal output choice in the short run and how the firm’s short-run supply curve may be derived through this output selection.
30. The following figure shows the marginal cost curve, average total cost curve, average variable cost curve, and marginal revenue curve for a firm for different levels of output.
At the profit-maximizing level of output:
a. the firm is earning economic profit.
b. profits per unit are the highest.
c. profit equals ZC.
d. costs exceed revenue.
Learning Objective: Explain a competitive firm’s optimal output choice in the short run and how the firm’s short-run supply curve may be derived through this output selection.
31. The following figure shows the marginal cost curve, average total cost curve, average variable cost curve, and marginal revenue curve for a firm for different levels of output.
At the profit-maximizing level of output, the profit of the firm is equal to the area given by _____.
a. RLMG
b. RGZW
c. RGCO
d. RGHS
Learning Objective: Explain a competitive firm’s optimal output choice in the short run and how the firm’s short-run supply curve may be derived through this output selection.
32. The following figure shows the marginal cost curve, average total cost curve, average variable cost curve, and marginal revenue curve for a firm for different levels of output.
At the output level of OC, average profit per unit of output is equal to _____.
a. GZ
b. MG
c. ZM
d. GC
Learning Objective: Explain a competitive firm’s optimal output choice in the short run and how the firm’s short-run supply curve may be derived through this output selection.
33. The following figure shows the marginal cost curve, average total cost curve, average variable cost curve, and marginal revenue curve for a firm for different levels of output.
Maximum profit per unit is equal to _____.
a. GZ
b. ZM
c. GM
d. FH
Learning Objective: Explain a competitive firm’s optimal output choice in the short run and how the firm’s short-run supply curve may be derived through this output selection.
34. The following figure shows the marginal cost curve, average total cost curve, average variable cost curve, and marginal revenue curve for a firm for different levels of output.
At the output level OB, total profits equal the area given by _____.
a. FTDE
b. GMLR
c. FHSR
d. FBOR
Learning Objective: Explain a competitive firm’s optimal output choice in the short run and how the firm’s short-run supply curve may be derived through this output selection.
35. The following figure shows the marginal cost curve, average total cost curve, average variable cost curve, and marginal revenue curve for a firm for different levels of output.
At the output level OC, average fixed cost is equal to _____.
a. ZM
b. GZ
c. GM
d. MC
Learning Objective: Explain a competitive firm’s optimal output choice in the short run and how the firm’s short-run supply curve may be derived through this output selection.
36. The following figure shows the marginal cost curve, average total cost curve, average variable cost curve, and marginal revenue curve for a firm for different levels of output.
If the market price is $10, average revenue _____.
a. is greater than $10
b. is less than $10
c. equals $10
d. is equal to $10 – GZ
Learning Objective: Explain a competitive firm’s optimal output choice in the short run and how the firm’s short-run supply curve may be derived through this output selection.
37. Profits are maximized at the output level where:
a. marginal revenue equals marginal cost.
b. price equals average total cost.
c. price is greater than marginal cost.
d. marginal cost equals average total cost.
Learning Objective: Explain a competitive firm’s optimal output choice in the short run and how the firm’s short-run supply curve may be derived through this output selection.
38. A profit-maximizing firm expands output until marginal revenue equals the _____ of producing the last unit.
a. marginal cost
b. average variable cost
c. average total cost
d. average fixed cost
Learning Objective: Explain a competitive firm’s optimal output choice in the short run and how the firm’s short-run supply curve may be derived through this output selection.
39. The following figure shows the marginal cost curve, the average cost curve, the average variable cost curve, and the demand curve for a firm over different levels of output. The market price is $P.
At a price of $P, the firm will produce the output level _____.
a. OA where marginal cost just covers AVC
b. OB where marginal cost equals the price
c. OC where marginal cost equals ATC
d. OD where the price just covers AVC
Learning Objective: Explain a competitive firm’s optimal output choice in the short run and how the firm’s short-run supply curve may be derived through this output selection.
40. The figure below shows the marginal cost curve, average cost curve, average variable cost curve, and demand curve for a firm over different levels of output and at a market price of $P.
The firm’s average fixed cost at the output level OB is _____.
a. KT
b. GT
c. GB
d. GK
Learning Objective: Explain a competitive firm’s optimal output choice in the short run and how the firm’s short-run supply curve may be derived through this output selection.
41. The figure below shows the marginal cost curve, average cost curve, average variable cost curve, and demand curve for a firm over different levels of output and at a market price of $P.
At the output level OB the total fixed cost is equal to _____.
a. TBOV
b. KTVP
c. GKPS
d. GTVS
Learning Objective: Explain a competitive firm’s optimal output choice in the short run and how the firm’s short-run supply curve may be derived through this output selection.
42. The figure below shows the marginal cost curve, average cost curve, average variable cost curve, and demand curve for a firm over different levels of output and at a market price of $P.
The firm’s average variable cost at the output level OB is _____.
a. BG
b. GT
c. BT
d. BK
Learning Objective: Explain a competitive firm’s optimal output choice in the short run and how the firm’s short-run supply curve may be derived through this output selection.
43. In the short-run, if a competitive firm finds itself operating at a loss, it will:
a. have to shut down and exit the market.
b. continue to operate as long as price is greater than average variable cost.
c. liquidate all its assets to ensure cash flow.
d. reduce the size of its plant to lower fixed costs.
Learning Objective: Explain a competitive firm’s optimal output choice in the short run and how the firm’s short-run supply curve may be derived through this output selection.
44. In the short-run, if the price falls, the firm will respond by:
a. liquidating its assets and shutting down.
b. producing at the output level where average variable cost is equal to marginal revenue.
c. reducing output along its marginal cost curve as long as marginal revenue exceeds average variable cost.
d. increasing its output in order to sell higher quantities.
Learning Objective: Explain a competitive firm’s optimal output choice in the short run and how the firm’s short-run supply curve may be derived through this output selection.
45. If market price is below a competitive firm’s average total cost, the firm should:
a. shut down only if the price is above its average variable cost.
b. shut down immediately.
c. remain open as long as its average revenue is greater than its average variable cost.
d. expand output in the short-run and expand its production capacity.
Learning Objective: Explain a competitive firm’s optimal output choice in the short run and how the firm’s short-run supply curve may be derived through this output selection.
46. The following figure shows the marginal cost curve, the average cost curve, the average variable cost curve, and the demand curve for a firm over different levels of output. The market price is $P.
Given that the market price is $P, the firm will be operating at a loss of _____.
a. TBOV
b. RZOA
c. KTVP
d. GKPS
Learning Objective: Explain a competitive firm’s optimal output choice in the short run and how the firm’s short-run supply curve may be derived through this output selection.
47. The following figure shows the marginal cost curve, the average cost curve, the average variable cost curve, and the demand curve for a firm over different levels of output. The market price is $P.
If the firm chooses to shut down when the market price is $P, what is the loss it would incur?
a. KTVP
b. GTVS
c. GKPS
d. TBOV
Learning Objective: Describe the firm’s short-run supply curve.
48. The following figure shows the marginal cost curve, the average cost curve, the average variable cost curve, and the demand curve for a firm over different levels of output. The market price is $P.
The total revenue for the firm at the output level OB is _____.
a. OVTB
b. OSGB
c. OPKB
d. GTVS
Learning Objective: Explain a competitive firm’s optimal output choice in the short run and how the firm’s short-run supply curve may be derived through this output selection.
49. The short-run supply curve for the firm operating in a perfectly competitive industry is:
a. its marginal cost curve.
b. its marginal cost curve above the minimum of average variable cost.
c. its marginal cost curve above the minimum of average total cost.
d. the average variable cost curve above average revenue curve.
Learning Objective: Describe the firm’s short-run supply curve.
50. The following figure shows the marginal cost curve, the average cost curve, the average variable cost curve, and the demand curve for a firm over different levels of output. The market price is $P.
The firm should shut down if the price falls to _____.
a. OP
b. OR
c. OS
d. OV
Learning Objective: Describe the firm’s short-run supply curve.
51. The following figure shows the marginal cost curve, the average cost curve, the average variable cost curve, and the demand curve for a firm over different levels of output. The market price is $P.
The total variable cost for the firm at output level OB is _____.
a. BT
b. BKPO
c. BK
d. BTVO
Learning Objective: Describe the firm’s short-run supply curve.
52. The perfectly competitive firm minimizes losses by shutting down whenever:
a. price is below average fixed costs.
b. price is below the minimum point of the average cost curve.
c. total variable costs are greater than total fixed costs.
d. price is below the minimum point of the average variable cost curve.
Learning Objective: Describe the firm’s short-run supply curve.
53. The supply curve of a competitive firm in the short-run is:
a. the marginal cost curve.
b. the marginal cost curve above the minimum of average variable cost.
c. the marginal cost curve above the minimum of average cost.
d. the negatively sloped portion of the marginal cost curve.
Learning Objective: Describe the firm’s short-run supply curve.
54. Abe’s Taxi Company operates in a perfectly competitive market. Gasoline is a variable input in the taxi services industry. As the price of gasoline decreases, the short-run marginal cost curve for Abe’s Taxi Company:
a. shifts up and to the left.
b. shifts down and to the right.
c. remains unchanged.
d. becomes flatter.
Learning Objective: Describe the firm’s short-run supply curve.
55. During the 1970s, oil prices reached historical highs, causing many competitive industries to reduce the supply of goods and services. Which of the following is the most likely explanation for this reduction in supply?
a. The total fixed cost of the firms would have increased due to the higher price of oil.
b. The marginal cost curves of the firms most likely shifted upward.
c. The supply curves of firms may have shifted downward.
d. The average total cost of these firms mostly likely shifted downward due to the high inflation.
Learning Objective: Describe the firm’s short-run supply curve.
56. In a perfectly competitive market, if the product price remains unchanged, a fall in the price of an input used by a firm will:
a. cause the firm to substitute away from this input.
b. reduce the quantity of output it produces.
c. shift the marginal cost curve downward.
d. reduce the price of the product.
Learning Objective: Describe the firm’s short-run supply curve.
57. Assume that labor is the variable input for a firm. Which of the following will occur if the wage rate increases?
a. Its average variable cost, average fixed cost, average total cost, and marginal costs will increase.
b. Its average variable cost and average total costs will increase and profits will decrease.
c. Its marginal cost, average total costs, and output will increase.
d. Its marginal cost and average variable costs will increase.
Learning Objective: Describe the firm’s short-run supply curve.
58. A significant decrease in the price of a variable input causes the:
a. marginal, average, and total cost curves to shift downward.
b. average total cost curve to shift downward, causing a fall in output.
c. average variable cost curve to shift downward while leaving the output level unchanged.
d. marginal cost curve to shift downward.
Learning Objective: Describe the firm’s short-run supply curve.
59. Following a significant decrease in the price of a variable input, at the initial output level:
a. marginal revenue is higher than average revenue.
b. marginal cost is higher than marginal revenue.
c. marginal cost is lower than average revenue.
d. marginal cost is still equal to marginal revenue.
Learning Objective: Describe the firm’s short-run supply curve.
60. The short-run supply curve for a perfectly competitive industry is:
a. downward sloping because of the law of diminishing marginal returns.
b. derived by summing the individual firms’ marginal cost curves horizontally.
c. perfectly elastic in the case of homogeneous products.
d. the negatively sloped portion of the marginal cost curve.
Learning Objective: Explain how the short-run industry supply curve is derived.
61. The short-run supply curve for a competitive industry is derived by summing the _____ for each firm in the industry.
a. portion of the marginal cost curves above average variable cost
b. upward sloping portion of the average variable cost curve
c. downward sloping portions of the marginal cost curve
d. upward sloping portion of the average total cost curve
Learning Objective: Explain how the short-run industry supply curve is derived.
62. The short-run supply curve for a perfectly competitive industry:
a. is less elastic than the long-run industry supply curve.
b. is derived by vertically summing the individual firms’ marginal cost curves.
c. reflects zero economic profits at all points on the curve.
d. is typically upward sloping.
Learning Objective: Explain how the short-run industry supply curve is derived.
63. The short-run supply curve for a competitive industry:
a. is subject to the law of diminishing returns.
b. is the industry’s marginal cost curve.
c. coincides with the marginal revenue curve.
d. is horizontal because there are many buyers and sellers.
Learning Objective: Explain how the short-run industry supply curve is derived.
64. The short-run supply curve for a competitive industry is upward-sloping because:
a. firms must pay more for inputs as more are hired. /firms must incur higher costs the more inputs they hire.
b. the efficiency of the variable inputs decreases as more such inputs are employed in production.
c. new firms enter the industry as product prices increase.
d. of the law of diminishing marginal utility.
Learning Objective: Explain how the short-run industry supply curve is derived.
65. Zero economic profit occurs when:
a. price equals minimum average variable cost.
b. a firm has existed for long enough to make normal profit.
c. price equals long-run average cost.
d. a firm operates at the minimum of its long-run marginal cost curve.
Learning Objective: Define the conditions characterizing long-run competitive equilibrium.
66. Which of the following is a condition for long-run equilibrium in a competitive industry?
a. Each firm in the industry is earning zero economic profit.
b. The inputs employed in the industry earn less than they would had they been used elsewhere.
c. Each firm in the industry will produce that level of output at which marginal cost is the lowest.
d. The number of new entrants into the industry is positive.
Learning Objective: Define the conditions characterizing long-run competitive equilibrium.
67. At the profit maximizing level of output in a competitive industry, the firm is:
a. making economic profit.
b. losing money on each unit sold.
c. making zero accounting profit.
d. making abnormal profits
Learning Objective: Define the conditions characterizing long-run competitive equilibrium.
68. In the long-run, firms in a competitive industry earn only a normal rate of return because:
a. decreasing returns to scale causes per unit costs to rise.
b. input prices will rise in the long-run and eliminate abnormal profits.
c. entry of new firms will eliminate abnormal profits.
d. profit per unit declines in the long-run.
Learning Objective: Define the conditions characterizing long-run competitive equilibrium.
69. Which of the following is true of a long-run competitive equilibrium?
a. The market has a horizontal long-run supply curve.
b. Inputs employed in the industry cannot earn more in other industries.
c. Firms in the market earn high abnormal profits.
d. Firms face constant input costs irrespective of the output level.
Learning Objective: Define the conditions characterizing long-run competitive equilibrium.
70. If price remains above the average total cost for firms in a competitive industry:
a. existing firms will exit that industry.
b. new firms will enter that industry.
c. the number of firms in the industry will neither increase nor decrease.
d. the existing firms will be making zero economic profit.
Learning Objective: Define the conditions characterizing long-run competitive equilibrium.
71. As long as there is free entry into a market:
a. firms in that market can sustain prices above average total cost.
b. firms in that market can maintain market power.
c. economic profits are not sustainable.
d. accounting profits will be zero.
Learning Objective: Define the conditions characterizing long-run competitive equilibrium.
72. Which of the following will occur in response to an unexpected increase in demand in a constant-cost, competitive industry?
a. Resources will move out of the industry.
b. The output of the industry will remain constant.
c. The output will increase with input prices remaining unchanged
d. The existing firms will not be able to expand output sufficiently without incurring huge costs.
Learning Objective: Understand how the long-run industry supply curve describes the relationship between price and industry output over the long run, taking into account how input prices may be affected by an industry’s expansion/contraction.
73. Which of the following is true of a constant cost industry?
a. Along the industry’s long-run supply curve, firms in the industry earn a positive economic profit.
b. The long-run supply curve for a constant cost industry is horizontal.
c. The industry’s long-run supply curve is derived by horizontally summing the long-run supply curves of the individual firms.
d. In the long run, the industry experiences an increase in the price of inputs.
Learning Objective: Understand how the long-run industry supply curve describes the relationship between price and industry output over the long run, taking into account how input prices may be affected by an industry’s expansion/contraction.
74. In an increasing-cost industry, the slope of the long-run supply curve is _____.
a. zero
b. negative
c. positive
d. infinity
Learning Objective: Understand how the long-run industry supply curve describes the relationship between price and industry output over the long run, taking into account how input prices may be affected by an industry’s expansion/contraction.
75. In a constant-cost industry, the slope of the long-run supply curve is _____.
a. zero
b. negative
c. positive
d. infinity
Learning Objective: Understand how the long-run industry supply curve describes the relationship between price and industry output over the long run, taking into account how input prices may be affected by an industry’s expansion/contraction.
76. Suppose a constant-cost competitive industry produces widgets using labor and capital in fixed proportions. A firm in the industry faces:
a. a vertical supply curve for labor and capital.
b. a downward sloping supply curve for labor and capital.
c. a horizontal supply curve for labor and capital.
d. an upward sloping supply curve for labor and capital.
Learning Objective: Understand how the long-run industry supply curve describes the relationship between price and industry output over the long run, taking into account how input prices may be affected by an industry’s expansion/contraction.
77. If a competitive industry is characterized by increasing cost, which of the following will occur in response to an unexpected increase in demand?
a. New firms will enter the industry.
b. Economic profit will remain zero.
c. Input prices will remain constant.
d. The price of the product will remain unchanged.
Learning Objective: Understand how the long-run industry supply curve describes the relationship between price and industry output over the long run, taking into account how input prices may be affected by an industry’s expansion/contraction.
78. In the long run, if the input procurement prices increase as the output supplied by firms in an industry rises:
a. the firms are operating in an increasing-cost industry.
b. the firms’ profit margins will increase.
c. the firms are making positive economic profits.
d. the firms’ cost curves shift will downward.
Learning Objective: Understand how the long-run industry supply curve describes the relationship between price and industry output over the long run, taking into account how input prices may be affected by an industry’s expansion/contraction.
79. In an increasing cost industry, as output increases:
a. firms’ cost curves shift downward.
b. input prices increase.
c. profit per unit increases.
d. the price of the product in the market increases.
Learning Objective: Understand how the long-run industry supply curve describes the relationship between price and industry output over the long run, taking into account how input prices may be affected by an industry’s expansion/contraction.
80. The slope of the long-run supply curve in a decreasing-cost industry is _____.
a. zero
b. negative
c. positive
d. infinite
Learning Objective: Understand how the long-run industry supply curve describes the relationship between price and industry output over the long run, taking into account how input prices may be affected by an industry’s expansion/contraction.
81. Which of the following is constant along the industry long-run supply curve?
a. Technology
b. Number of firms
c. Input prices
d. Price of output
Learning Objective: Understand how the long-run industry supply curve describes the relationship between price and industry output over the long run, taking into account how input prices may be affected by an industry’s expansion/contraction.
82. The demand for corn has increased over the past few decades to satisfy the increasing demand from the food and ethanol industries. The primary beneficiaries of an expansion in the output of corn are owners of farmland suitable for corn production. What can you conclude about the nature of the corn industry?
a. The corn industry is not competitive.
b. The corn industry is an increasing-cost industry.
c. The long-run corn supply curve is horizontal.
d. There are barriers to entry in the corn industry.
Learning Objective: Understand how the long-run industry supply curve describes the relationship between price and industry output over the long run, taking into account how input prices may be affected by an industry’s expansion/contraction.
83. The presence of a relatively large number of firms in an industry does not ensure perfect competition if:
a. they sell products that are standardized.
b. there are also a large number of consumers.
c. they collude to set prices in the market.
d. the industry is an increasing-cost industry.
Learning Objective: Analyze the extent to which the competitive market model applies.
84. Firms in an industry are unlikely to have pricing power if:
a. elasticity of demand for the product is high.
b. the product is not homogeneous.
c. the firms’ elasticity of supply is high.
d. there are barriers to entry in the market.
Learning Objective: Analyze the extent to which the competitive market model applies.
85. Eggs, which are standardized products, are sold within a city at higher prices than in the suburbs. Given that firms in the city are able to sustain the higher prices but do not make higher profits than firms in the suburbs, this means that:
a. the egg industry is a constant-cost industry.
b. the egg industry is not competitive as the prices of perfectly substitutable goods are different.
c. consumers do not have perfect information which leads to price differentials.
d. the convenience of buying eggs in the city weakens the homogeneous product assumption.
Learning Objective: Analyze the extent to which the competitive market model applies.
86. Which of the following correctly explains the effect of a price ceiling in a market?
a. The sales of the product will increase.
b. The demand for the product will exceed supply resulting in a shortage.
c. The number of new firms in the market will increase.
d. The output produced in the market will increase.
Learning Objective: Analyze the extent to which the competitive market model applies.
87. Assume a competitive industry produces widgets using labor and capital in fixed proportions. Both input supply curves slope upward. The government considers the equilibrium price of widgets to be too high and imposes a price ceiling that is below the equilibrium price. Which of the following is most likely to occur?
a. The sales of widgets will increase and the prices and employment of both inputs will rise.
b. The sales of widgets will decline and the prices and employment of both inputs will remain unchanged.
c. The sales of widgets will decline and the prices and employment of both inputs will fall.
d. The sales of widgets will increase and the prices and employment of both inputs will fall.
Learning Objective: Analyze the extent to which the competitive market model applies.
Question Type: True/False
88. All the assumptions of a competitive model are satisfied in almost all real-world markets.
Learning Objective: Outline the conditions that characterize perfect competition.
89. The efficient outcomes of competitive markets hold only in theory and not empirically.
Learning Objective: Outline the conditions that characterize perfect competition.
90. Perfect competition is characterized by its impersonal nature.
Learning Objective: Outline the conditions that characterize perfect competition.
91. Perfect competition is a very personal market.
Learning Objective: Outline the conditions that characterize perfect competition.
92. The outcome of perfect competition is equitable.
Learning Objective: Outline the conditions that characterize perfect competition.
93. A perfectly competitive firm is a price taker. This implies that price does not change in a perfectly competitive market.
Learning Objective: Show why the fact that a competitive firm is a price taker implies that the demand curve for the firm is perfectly horizontal.
94. In a market with many firms, each firm recognizes that its impact on the overall market is negligible, and consequently does not view other firms as personal rivals.
Learning Objective: Outline the conditions that characterize perfect competition.
95. Standard products are also known as heterogeneous products.
Learning Objective: Outline the conditions that characterize perfect competition.
96. We cannot assume profit maximization with small businesses because the owner-manager cannot have detailed knowledge of the cost and revenue associated with each action that could be taken to maximize profit.
Learning Objective: Explain why it is appropriate to assume profit maximization on the part of firms.
97. We cannot assume profit maximization with large businesses because stockholder-owners themselves do not make the day-to-day decisions about price, employment, advertising, and so on. Instead, salaried personnel of the corporation—managers—make these decisions.
Learning Objective: Explain why it is appropriate to assume profit maximization on the part of firms.
98. The survivor principle states that firms with higher levels of profits are more likely to survive economic downturns.
Learning Objective: Explain why it is appropriate to assume profit maximization on the part of firms.
99. A competitive firm is a price taker.
Learning Objective: Show why the fact that a competitive firm is a price taker implies that the demand curve for the firm is perfectly horizontal.
100. Marginal revenue is total revenue divided by output.
Learning Objective: Show why the fact that a competitive firm is a price taker implies that the demand curve for the firm is perfectly horizontal.
101. Maximizing average profit per unit is functionally the same as maximizing total profits.
Learning Objective: Show why the fact that a competitive firm is a price taker implies that the demand curve for the firm is perfectly horizontal.
102. Firms in a perfectly competitive market will always operate at a profit since the perfectly competitive market would not allow otherwise.
Learning Objective: Show why the fact that a competitive firm is a price taker implies that the demand curve for the firm is perfectly horizontal.
103. The shutdown point is where price falls below marginal cost.
Learning Objective: Describe the firm’s short-run supply curve.
104. The short-run industry supply curve is derived by simply adding the quantities produced by each firm.
Learning Objective: Explain how the short-run industry supply curve is derived.
105. In the short run an increase in market demand leads to a higher price and a higher output.
Learning Objective: Explain how the short-run industry supply curve is derived.
106. The zero economic profit point is the point at which total profit equals total marginal cost.
Learning Objective: Define the conditions characterizing long-run competitive equilibrium.
107. When all firms in a competitive industry have identical cost curves, every firm must be making zero economic profit in long-run equilibrium.
Learning Objective: Define the conditions characterizing long-run competitive equilibrium.
108. To derive the competitive industry’s short-run supply curve we horizontally sum individual firms’ supply curves.
Learning Objective: Understand how the long-run industry supply curve describes the relationship between price and industry output over the long run, taking into account how input prices may be affected by an industry’s expansion/contraction.
109. Most industries are decreasing-cost industries.
Learning Objective: Understand how the long-run industry supply curve describes the relationship between price and industry output over the long run, taking into account how input prices may be affected by an industry’s expansion/contraction.
110. A constant-cost competitive industry is characterized by a horizontal long-run supply curve.
Learning Objective: Understand how the long-run industry supply curve describes the relationship between price and industry output over the long run, taking into account how input prices may be affected by an industry’s expansion/contraction.
111. An increasing-cost competitive industry is characterized by an upward-sloping long-run supply curve.
Learning Objective: Understand how the long-run industry supply curve describes the relationship between price and industry output over the long run, taking into account how input prices may be affected by an industry’s expansion/contraction.
112. A decreasing-cost competitive industry is one that has a downward-sloping short-run supply curve.
Learning Objective: Understand how the long-run industry supply curve describes the relationship between price and industry output over the long run, taking into account how input prices may be affected by an industry’s expansion/contraction.
Question Type: Essay
113. Examine the following markets with respect to the assumptions of perfect competition. Explain your answer.
a) The market for U.S. dollars
b) The market for public utilities
c) The newspaper market
d) The healthcare market
e) The market for breakfast cereal
Learning Objective: Outline the conditions that characterize perfect competition.
114. Suppose the total revenue (TR) and total cost (Tc. curves of a perfectly competitive firm are given by the following set of equations: TR = 100Q and TC = Q2 + 4Q + 5, where Q is the output. Derive the firm’s profit maximizing output and calculate the total and average profit earned by the firm at this level of output.
Learning Objective: Explain a competitive firm’s optimal output choice in the short run and how the firm’s short-run supply curve may be derived through this output selection.
115. On the graphs below, demonstrate the circumstances that would prevail in a perfectly competitive market where the representative firm is experiencing economic losses. Draw the relevant cost curves (marginal, average total, and average variable costs; use U-shaped curves), the marginal revenue curve, and the market supply and demand curves. Shade in the area of total revenue and the area of economic loss. As you’ve drawn it, will the firm shut down in the short-run or choose to continue production? Explain your answer.
Learning Objective: Describe the firm’s short-run supply curve.
116. Answer the following:
a) Jack’s lawn-mowing service is a profit-maximizing, perfectly competitive firm. Jack mows lawns for $27 each. His total cost each day is $280, of which $30 is total fixed cost. He mows 10 lawns a day. Will Jack exit the industry in the short-run? Why or why not?
b) Will Jack exit the industry in the long-run? Why or why not?
Learning Objective: Describe the firm’s short-run supply curve.
117. The long-run cost function faced by each producer in a perfectly competitive industry is given by: MC(Q) = 20 - 6Q + Q2. The corresponding long-run average cost function is AC(Q) = 20 – 3Q + Q2/3. The market demand curve for the product is D(P) = 1100 – 50P.
a) What is the long-run equilibrium price in this industry? At this price, how much would an individual firm produce?
Learning Objective: Define the conditions characterizing long-run competitive equilibrium.
118. Explain the difference between diminishing marginal returns to factor and a decreasing-cost industry.
Learning Objective: Explain how the short-run industry supply curve is derived.
Learning Objective: Define the conditions characterizing long-run competitive equilibrium.
119. Fair trade coffee is a movement designed to increase the price coffee growers in developing countries receive for their output. Retailers such as supermarkets and coffee shops charge their customers extra for either brewed coffee or coffee beans, promising to remit the additional charge to coffee growers in developing countries.
a) Assuming entry costs for growing coffee are sufficiently low, which presumably they are, explain why the fair trade coffee program is not likely to benefit the growers, notwithstanding coffee retailers’ promises to do so.
b) Who would you predict benefits most from the fair trade subsidy that seeks to improve the living standards of coffee growers?
Learning Objective: Define the conditions characterizing long-run competitive equilibrium.
120. Answer the following:
a) Assume that the gold-mining industry is perfectly competitive. On the diagrams below, illustrate the long-run equilibrium in the overall gold market and for a representative gold mine. Draw the industry supply and demand curves as well as the firm’s marginal cost curve. Indicate the equilibrium prices and quantities in both markets (at the industry-level and at the firm-level).
b) Assume an increase in the demand for jewelry causes a surge in the demand for gold. Using your diagrams, show what happens in the short-run to the gold market and to each existing gold mine. Specifically, are individual firms earning positive, negative, or zero economic profits? Indicate their profit on your graph.
c) If the demand for gold remains high, what would happen to the price over time? Specifically, would the new long-run equilibrium price be above, below, or equal to the short-run equilibrium price in part (b)? What causes this change in price, if any?
d) Would the new long-run equilibrium price be above, below, or equal to the original long-run equilibrium price? That is, as you’ve drawn it, is the long-run supply curve in the gold industry upward-sloping, horizontal, or downward-sloping? Explain why it would have this shape.
Learning Objective: Define the conditions characterizing long-run competitive equilibrium.
121. Given below are the input supply curves for the housing and pencil industries, respectively. Graphically illustrate the long-run supply curve for the two industries and comment on the nature of the housing and pencil industries.
Learning Objective: Understand how the long-run industry supply curve describes the relationship between price and industry output over the long run, taking into account how input prices may be affected by an industry’s expansion/contraction.
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Microeconomics Theory and Applications 13th Edition | Test Bank with Answer Key
By Edgar K. Browning, Mark A. Zupan