Economics 12th Edition Arnold Test Bank Download

Economics 12th Edition Arnold
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True / False
1. For a perfectly competitive firm, the demand curve it faces is horizontal at the price determined in the market.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
NATIONAL STANDARDS: United States - BUSPROG: Analytic
LOCAL STANDARDS: United States - OH - Default City - DISC: Perfect competition
KEYWORDS: Bloom's: Comprehension
2. If the firm is producing a quantity of output for which MC > MR, then the firm should increase production to increase
its profits.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Moderate
3. A perfectly competitive firm should shut down production in the short run if price is less than average fixed cost at the
loss-minimizing level of output.
a. True
b. False
ANSWER: False
POINTS: 1
4. In long-run competitive equilibrium, no firm has an incentive to change its plant size.
a. True
b. False
ANSWER: True
POINTS: 1
5. A decreasing-cost industry has a long-run supply curve that is upward sloping.

a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
6. In a perfectly competitive market, the market demand curve is perfectly elastic.

a. True
b. False
ANSWER: False
POINTS: 1
7. One of the assumptions upon which the theory of perfect competition is built is that each firm produces and sells a
heterogeneous product.
a. True
b. False
ANSWER: False
POINTS: 1
8. For the perfectly competitive firm, the demand curve and the marginal revenue curve are one and the same.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
9. In order for a firm to earn economic profits, price must exceed average total cost.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
10. A perfectly competitive firm is a price taker.

a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
11. The perfectly competitive firm's short-run supply curve is that portion of its MC curve that lies above its AFC curve.
a. True
b. False
ANSWER: False
POINTS: 1
12. In a perfectly competitive market, firms face no barriers to entry or exit.

a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
13. When a firm produces the quantity of output where price equals marginal cost, it has achieved resource allocative
efficiency.
a. True
b. False
ANSWER: True
POINTS: 1
14. A perfectly competitive firm will always maximize short-run profits by producing the level of output where average
total cost is minimized.
a. True
b. False
ANSWER: False
POINTS: 1
15. The horizontal demand curve faced by the perfectly competitive firm implies that the firm can sell an infinite amount
of the product at the equilibrium price.
a. True
b. False
ANSWER: False
POINTS: 1
16. When the government imposes taxes on firms that are earning high profits, there could be an unintended effect of
reducing the supply of goods in that market compared to what the supply would be if the profits were not taxed.
a. True
b. False
ANSWER: True
POINTS: 1
17. Profit helps to indicate where resources are best allocated.

a. True
b. False
ANSWER: True
POINTS: 1
18. Popular online publications that have no close substitutes will be more likely to be able to charge for those
publications than will a local newspaper.
a. True
b. False
ANSWER: True
POINTS: 1
OTHER: Economics 24/7
NOTES: New
Multiple Choice
19. Which of the following is not an assumption of the theory of perfect competition?
a. There are many sellers and many buyers, none of which is large in relation to total sales or purchases.
b. Each firm produces and sells a differentiated product.
c. Buyers and sellers have all relevant information with respect to prices, product quality, and sources of supply.
d. There is easy entry and exit.
ANSWER: b
POINTS: 1
20. Real-world markets that approximate the four assumptions of the theory of perfect competition include
a. some agricultural markets.
b. the soft drink market.
c. the stock market.
d. a and c
e. a, b, and c
ANSWER: d
POINTS: 1
DIFFICULTY: Easy
KEYWORDS: Bloom's: Application
21. The theory of perfect competition generally assumes that

a. sellers act independently of other sellers, but buyers do not act independently of other buyers.
b. buyers act independently of other buyers, but sellers do not act independently of other sellers.
c. buyers and sellers act independently of other buyers and sellers.
d. neither buyers nor sellers act independently of other buyers and sellers.
ANSWER: c
POINTS: 1
22. In the theory of perfect competition,

a. sellers of the product are not influenced by other sellers and therefore have virtually complete control over the
production and pricing of their product.
b. buyers of the product may have a preference as to whom they purchase from based on brand loyalty.
c. buyers and sellers of the product know everything that there is to know about the product.
d. it can be quite expensive for a firm to enter this type of market, but once the firm is established, it will be a
profitable venture.
ANSWER: c
POINTS: 1
23. Does a real-world market have to meet all the assumptions of the theory of perfect competition before it is considered
a perfectly competitive market?
a. No, probably no real-world market meets all the assumptions of the theory of perfect competition. All that is
necessary is that a real-world market behave as if it satisfies all the assumptions.
b. Yes, if a real-world market does not meet the assumptions, then it cannot be considered a perfectly
competitive market.
c. Yes, unless it is a new market such as the computer market. New markets are not held to the same assumptions
as old, more established markets.
d. No, but it does have to meet the assumption of producing and selling a homogeneous product. It does not have
to fully meet the other assumptions.
ANSWER: a
POINTS: 1
24. Perfectly competitive industries are

a. difficult to enter because there are already so many producers in the industry.
b. not particularly appealing or attractive to enter because there tend to be so many buyers that it is difficult to
deal with them.
c. relatively easy to enter but not so easy to exit from.
d. a and b
e. none of the above
ANSWER: e
POINTS: 1
25. A "price taker" is a firm that

a. does not have the ability to control the price of the product it sells.
b. does have the ability, although limited, to control the price of the product it sells.
c. can raise the price of the product (above the market price) and still sell some units of its product.
d. sells a differentiated product.
ANSWER: a
POINTS: 1
DIFFICULTY: Easy
26. Perfectly competitive firms are price takers for all of the following reasons except that
a. each firm is quite small relative to the total market supply.
b. buyers and sellers have all the necessary information about prices, etc.
c. the product is homogeneous.
d. barriers to exit force firms to sell at the market price.
ANSWER: d
POINTS: 1
27. The demand curve facing a perfectly competitive firm

a. is downward sloping.
b. is upward sloping.
c. is perfectly horizontal.
d. is perfectly vertical.
e. may be downward or upward sloping, depending upon the type of product offered for sale.
ANSWER: c
POINTS: 1
28. The market demand curve in a perfectly competitive market is
a. downward sloping.
b. upward sloping.
c. perfectly horizontal.
d. perfectly vertical.
e. downward or upward sloping depending upon the type of product offered for sale.
ANSWER: a
POINTS: 1
29. In the theory of perfect competition,

a. the market demand curve is horizontal.
b. the single firm faces a horizontal demand curve.
c. the single firm faces a downward-sloping demand curve.
d. the market demand curve is downward sloping.
e. b and d
ANSWER: e
POINTS: 1
30. Which of the following statements is false?

a. The perfectly competitive firm's demand curve is horizontal at the market price.
b. The theory of perfect competition is completely and accurately descriptive of most real-world firms.
c. If Firm X does not strictly meet all the assumptions of the theory of perfect competition, but behaves as if it
does, then the theory of perfect competition is relevant to it.
d. In perfect competition, the market price is established at the intersection of the market demand and market
supply curves.
ANSWER: b
POINTS: 1
31. The price at which a perfectly competitive firm sells its product is determined by
a. the individual seller based on his costs of production and his profit margin.
b. all sellers and buyers of the product.
c. the buyers of the product, because there are so many sellers that they cannot agree on a price.
d. the government, because there are so many buyers and sellers of the product that together they cannot agree on
the price.
ANSWER: b
POINTS: 1
32. The perfectly competitive firm will seek to produce the level of output for which
a. average variable cost is at a minimum.
b. average total cost is at a minimum.
c. average fixed cost is at a minimum.
d. marginal cost equals marginal revenue.
ANSWER: d
POINTS: 1
DIFFICULTY: Easy
33. Marginal revenue is

a. total revenue divided by the quantity of output.
b. total profit minus total costs.
c. the change in total output brought about by using an additional unit of a variable input.
d. the change in total revenue brought about by selling an additional unit of the good.
e. the change in total revenue minus the change in total costs.
ANSWER: d
POINTS: 1
DIFFICULTY: Easy
34. For a perfectly competitive firm,

a. the marginal revenue curve and the demand curve are the same.
b. the marginal revenue curve and the marginal cost curve are the same.
c. the supply curve and the marginal revenue curve are the same.
d. the demand curve and the marginal cost curve are the same.
ANSWER: a
POINTS: 1
DIFFICULTY: Easy
Exhibit 23-1
(1) (2) (3)
Quantity Marginal
Price Sold Revenue
$12 100
$12 101 (A)
$12 102 (B)
$12 103 (C)
$12 104 (D)
35. Refer to Exhibit 23-1. The dollar amounts that go in blanks (A) and (B) are, respectively,
a. $1 and $12.
b. $12 and $12.
c. $8.42 and $8.50.
d. $12 and $6.
ANSWER: b
POINTS: 1
NOTES: New
36. Refer to Exhibit 23-1. The dollar amounts that go in blanks (C) and (D) are, respectively,
a. $1 and $12.
b. $12 and $12.
c. $8.58 and $8.67.
d. $4 and $3.
ANSWER: b
POINTS: 1
NOTES: New
37. Refer to Exhibit 23-1. The data in this table are relevant to a perfectly competitive firm because
a. its total revenue is different at different levels of quantities sold.
b. its total revenue is the same at all levels of quantities sold.
c. it doesn't have to lower price to sell additional units of the product.
d. marginal revenue is greater than price.
ANSWER: c
POINTS: 1
38. Refer to Exhibit 23-1. The demand curve facing the firm represented by the information in this table is
a. downward-sloping.
b. upward-sloping.
c. horizontal.
d. vertical.
ANSWER: c
POINTS: 1
NOTES: New
39. Refer to Exhibit 23-1. The marginal revenue curve represented by the information in this table is
b. upward-sloping.
c. horizontal.
d. vertical.
ANSWER: c
POINTS: 1
NOTES: New
40. Refer to Exhibit 23-1. The marginal revenue curve represented by the information in this table is
b. upward-sloping.
c. horizontal.
d. vertical.
ANSWER: c
POINTS: 1
NOTES: New
41. A perfectly competitive firm should increase its level of production as long as
a. total revenue is less than total cost.
b. the total revenue curve is rising.
c. marginal revenue is greater than marginal cost.
d. the marginal revenue curve is rising.
ANSWER: c
POINTS: 1
42. For a perfectly competitive firm, profit maximization (or loss minimization) occurs at the level of output at which
a. MR = MC.
b. MR = AVC.
c. P = ATC.
d. MR = ATC.
ANSWER: a
POINTS: 1
DIFFICULTY: Easy
43. If MR > MC, then

a. profits are being maximized.
b. the firm is producing too much of the good to be maximizing profits.
c. the firm can increase its profits (or minimize its losses) by increasing output.
d. the firm must be incurring losses.
ANSWER: c
POINTS: 1
44. If, for the last unit of a good produced by a perfectly competitive firm, MR > MC, then in producing that unit the firm
a. added more to total costs than it added to total revenue.
b. added more to total revenue than it added to total costs.
c. added an equal amount to both total revenue and total costs.
d. maximized profits or minimized losses.
ANSWER: b
POINTS: 1
Exhibit 23-2
45. Refer to Exhibit 23-2. What quantity of output does the profit-maximizing (or loss-minimizing) firm produce?
a. Q1, where marginal cost is less than marginal revenue.
b. Q2, where marginal cost is equal to marginal revenue.
c. Q3, where marginal cost is greater than marginal revenue.
d. Q4, which maximizes the difference between marginal cost and marginal revenue.
ANSWER: b
POINTS: 1
46. Refer to Exhibit 23-2. If the firm produces the quantity of output at which marginal revenue (MR) equals marginal
cost (MC), is it guaranteed maximum profit or minimized loss?
a. Yes, when MR = MC, it follows that MR - MC = 0, and thus the firm maximizes profit and minimizes losses.
b. No, at the quantity of output at which MR = MC, it could be the case that average variable cost is greater than
price and the firm would do better to shut down.
c. Yes, when the firm produces the quantity at which MR = MC, it has maximized both revenue and profit.
d. Yes, because if the MC curve is rising, the average total cost curve always lies below it and thus profit is
earned.
ANSWER: b
POINTS: 1
DIFFICULTY: Challenging
47. Refer to Exhibit 23-2. For the firm that faces the demand curve in the exhibit,
a. marginal revenue is constant.
b. price equals marginal revenue.
c. if the firm maximizes profits, it produces the quantity of output at which price equals marginal cost.
d. a and c
e. a, b, and c
ANSWER: e
POINTS: 1
Exhibit 23-3
(1) (2) (3)
Price Quantity Sold Total Cost
$8 40 $274
$8 41 $276
$8 42 $280
$8 43 $285
$8 44 $293
$8 45 $302
$8 46 $312
$8 47 $325
48. Refer to Exhibit 23-3. What quantity of output should the profit-maximizing firm produce?
a. 41 units
b. 42 units
c. 44 units
d. 45 units
e. 46 units
ANSWER: c
POINTS: 1
NOTES: New
49. Refer to Exhibit 23-3. What is the increase in profit that would result from producing 43 units of the product rather
than producing 40 units?
a. $60
b. $48
c. $28
d. $16
e. $13
ANSWER: e
POINTS: 1
NOTES: New
50. Refer to Exhibit 23-3. What is the maximum profit?
a. $65
b. $59
c. $20
d. $376
ANSWER: b
POINTS: 1
NOTES: New
51. Refer to Exhibit 23-3. Is it possible for this firm to produce "too much" in the short-run?
a. Any quantity above 42 units is too much.
b. Any quantity above 44 units is too much.
c. Any quantity above 40 units is too much.
d. none of the above
ANSWER: b
POINTS: 1
NOTES: New
52. Consider the following data: equilibrium price = $9, quantity of output produced = 1,000 units, average total cost =
$7, and average variable cost $5. Given this, total revenue is __________, total cost is __________, and total fixed cost is
__________.
a. $6,000; $8,000; $1,000
b. $9,000; $7,000; $5,000
c. $10,000; $8,000; $3,000
d. $9,000; $7,000; $2,000
ANSWER: d
POINTS: 1
NOTES: New
53. In the short-run, if P < ATC, a perfectly competitive firm should

a. increase production to the output level at which P = ATC.
b. continue producing at a loss.
c. shut down.
d. continue producing at a profit.
e. There is not enough information to answer the question.
ANSWER: e
POINTS: 1
54. Consider the following data: equilibrium price = $10, quantity of output produced = 100 units, average total cost =
$13, and average variable cost = $7. What will the firm do and why?
a. Shut down in the short run, because it is taking a loss of $200.
b. Continue to produce in the short run, because price is greater than average variable cost.
c. Shut down in the short run, because average variable cost is less than average total cost.
d. Continue to produce in the short run, because firms are always stuck with having to produce in the short run.
ANSWER: b
POINTS: 1
55. The perfectly competitive firm should produce in the

a. short run if price is below average variable cost.
b. long run if price is below average variable cost.
c. short run if price is below average total cost but above average variable cost.
d. long run if price is below average total cost but above average variable cost.
ANSWER: c
POINTS: 1
56. Consider the following data: equilibrium price = $8.50, quantity of output produced = 100 units, average total cost =
$10, and average variable cost = $9. What will the firm do and why?
a. Shut down in the short run, because price is below average variable cost.
b. Shut down in the short run, because it will be taking a loss of $100.
c. Continue to produce in the short run, because price is greater than average variable cost.
d. Continue to produce in the short run, because firms are always stuck with having to produce in the short run.
ANSWER: a
POINTS: 1
57. In order for a firm to continue producing, price must exceed __________ and total revenue must exceed __________.
a. marginal cost; total cost
b. ATC; total cost
c. AFC; total fixed cost
d. AVC; total variable costs
e. price; total cost
ANSWER: d
POINTS: 1
58. The perfectly competitive firm's short-run supply curve is the

a. upward-sloping portion of its average total cost curve.
b. horizontal portion of its marginal revenue curve.
c. portion of its average variable cost curve that lies above the average fixed cost curve.
d. upward-sloping portion of its marginal cost curve.
e. portion of its marginal cost curve that lies above its average variable cost curve.
ANSWER: e
POINTS: 1
Exhibit 23-4
59. Refer to Exhibit 23-4. The market equilibrium price is P1 and the firm produces Q1. At this level of output, average
variable cost and average total cost are indicated by the dots. Given this situation, the firm is
a. receiving a profit equal to area 3.
b. taking a loss equal to area 2 + area 3.
c. earning total revenue equal to area 1 + area 2.
d. receiving a profit equal to area 2.
ANSWER: b
POINTS: 1
60. Refer to Exhibit 23-4. The firm sells its product at P1 and produces Q1. Given this situation,
a. total variable cost is equal to area 1 + area 2.
b. total revenue is equal to area 1.
c. total cost is equal to area 2 + area 3.
d. a and b
e. a, b, and c
ANSWER: d
POINTS: 1
61. Refer to Exhibit 23-4. The firm sells its product at P1 and produces Q1. Given this situation,
a. total variable cost is equal to area 2 + area 3.
b. total revenue is equal to area 1 + area 2.
c. total cost is equal to area 1 + area 2 + area 3.
d. profit equals area 1.
ANSWER: c
POINTS: 1
62. Refer to Exhibit 23-4. Where can you find the lowest price that will motivate the firm to produce Q1 in the short run?
a. at the horizontal line running to "ATC"
b. at the horizontal line running to "AVC"
c. P1
d. $0
ANSWER: b
POINTS: 1
63. Firm X is producing the quantity of output at which marginal revenue equals marginal cost. It is earning
a. a positive economic profit.
b. an economic loss.
c. a normal profit.
d. There is not enough information to answer the question.
ANSWER: d
POINTS: 1
64. The short-run industry supply curve is the

a. horizontal summation of the short-run supply curves for all firms in the industry.
b. vertical summation of the short-run supply curves for all firms in the industry.
c. average of the short-run supply curves for all firms in the industry.
d. same as that of the typical firm in the industry.
ANSWER: a
POINTS: 1
65. Which of the following conditions does not characterize long-run competitive equilibrium?
a. Economic profit is zero.
b. Price is greater than marginal cost.
c. No firm has an incentive to change its plant size.
d. No firm has an incentive to produce more or less output.
ANSWER: b
POINTS: 1
66. If firms are earning zero economic profits, they must be producing at an output level at which
a. price equals marginal cost.
b. price equals average total cost.
c. price equals average variable cost.
d. marginal revenue equals marginal cost.
ANSWER: b
POINTS: 1
67. When the perfectly competitive firm produces the quantity of output at which marginal revenue equals marginal cost,
it naturally
a. produces the quantity of output at which marginal cost equals price, since for the perfectly competitive firm
price equals marginal revenue.
b. produces the quantity of output at which short-run average total cost equals price, since for the perfectly
competitive firm short-run average total cost equals marginal revenue.
c. earns a profit, since equating marginal revenue and marginal cost guarantees profit.
d. takes a loss.
ANSWER: a
POINTS: 1
68. Assume the following for a certain industry: (l) there is no incentive for firms to enter or exit the industry; (2) for
some firms in the industry, short-run average total cost is greater than long-run average total cost at the level of output
where marginal revenue equals marginal cost; (3) all firms in the industry are currently producing the quantity of output at
which marginal revenue equals marginal cost. Is the industry in long-run competitive equilibrium?
a. Yes.
b. No, because of number 2.
c. No, because of numbers 2 and 3.
d. No, because of numbers 1 and 2.
e. No, because of numbers 1, 2, and 3.
ANSWER: b
POINTS: 1
69. Why must profits be zero in long-run competitive equilibrium?

a. If profits are not zero, firms will enter or exit the industry.
b. If profits are not zero, firms will produce higher-quality goods.
c. If profits are not zero, marginal revenue will rise.
d. If profits are not zero, marginal cost will rise.
ANSWER: a
POINTS: 1
70. If the perfectly competitive firm is producing an output level at which price equals marginal cost, it is
a. earning profits.
b. taking losses.
c. earning normal profit.
ANSWER: d
POINTS: 1
71. Assume a constant-cost industry that is initially in long-run competitive equilibrium. An increase in demand will cause
a(n) __________ in prices and profits, and as a result, firms will __________ the industry, causing the market supply
curve to shift __________, which, in turn, will eventually cause the equilibrium price to be __________ before.
a. decrease; exit; leftward; lower than
b. increase; enter; rightward; higher than
c. decrease; exit; rightward; higher than
d. increase; enter; rightward; the same as
e. increase; exit; leftward; lower than
ANSWER: d
POINTS: 1
72. Demand increases in an increasing-cost industry that is initially in long-run competitive equilibrium. After full
adjustment, price will be
a. equal to its original level.
b. below its original level.
c. above its original level.
ANSWER: c
POINTS: 1
73. A constant-cost industry has a long-run (industry) supply curve that is

a. upward sloping.
b. downward sloping.
c. horizontal.
d. U-shaped.
ANSWER: c
POINTS: 1
DIFFICULTY: Easy
74. Assume a decreasing-cost industry that is initially in long-run competitive equilibrium. A decrease in demand will
cause a(n) __________ in prices and profits, and as a result, firms will __________ the industry, causing the market
supply curve to shift __________,which, in turn, will eventually cause the equilibrium price to be __________ before.
a. a decrease; exit; rightward; lower than
b. an increase; enter; rightward; higher than
c. a decrease; exit; leftward; higher than
d. an increase; enter; rightward; the same as
e. an increase; exit; leftward; lower than
ANSWER: c
POINTS: 1
75. If an industry is in long-run competitive equilibrium and experiences a decrease in demand, then as a result the
equilibrium price will __________, which will cause the representative firm's __________ curve to shift downward and
some firms will __________ the industry.
a. rise; marginal cost; enter
b. fall; marginal cost; enter
c. rise; marginal revenue; enter
d. fall; demand; exit
e. fall; marginal cost; exit
ANSWER: d
POINTS: 1
76. As firms exit an industry, the industry supply curve shifts __________ and the equilibrium price __________ until
long-run competitive equilibrium is established and the surviving firms are earning __________ economic profits.
a. leftward; rises; zero
b. leftward; falls; positive
c. leftward; rises; positive
d. rightward; falls; negative
e. rightward; rises; positive
ANSWER: a
POINTS: 1
77. Resource allocative efficiency occurs when a firm

a. minimizes costs of production yet charges the highest possible price.
b. produces the quantity of output at which price exceeds average total cost by the greatest amount.
c. produces the quantity of output at which price equals marginal cost.
d. produces the quantity of output at which price equals average total cost.
e. produces the quantity of output at which price equals average variable cost.
ANSWER: c
POINTS: 1
78. Resources are allocated efficiently when

a. the exchange value of the resources to demanders equals the opportunity cost of the resources.
b. the marginal benefit to demanders of the resources in the goods they purchase is equal to the marginal cost to
suppliers of the resources they use in producing the goods.
c. firms produce the quantity of output at which price is equal to marginal cost.
d. a and b
e. a, b, and c
ANSWER: e
POINTS: 1
79. Is it possible for a perfectly competitive firm to be maximizing profits, but not achieving resource allocative
efficiency?
a. Definitely yes, because it is impossible to achieve both at the same time.
b. Yes, it is possible, but it is not possible to minimize losses without also achieving resource allocative
efficiency.
c. No, it is not possible, because the output at which MR = MC is also the output at which P = MC.
d. There is not enough information to answer this question.
ANSWER: c
POINTS: 1
80. Suppose one firm in a perfectly competitive industry experiences an increase in its costs of production. Which of the
following best describes the most likely long run adjustment to this situation?
a. Eventually, all firms in the industry will also experience this same increase in costs.
b. Eventually, the price of the product will increase, and consumers will pay for the increase in costs.
c. The firm in question may suffer losses and exit the industry.
d. none of the above
ANSWER: c
POINTS: 1
81. In a perfectly competitive industry, there is a motive for __________ to advertise in order to induce a rightward shift
of the demand curve.
a. the typical firm
b. the industry as a whole
c. both the typical firm and the industry as a whole
d. neither the typical firm nor the industry as a whole
ANSWER: b
POINTS: 1
82. If an industry advertises, then it

a. is definitely not a perfectly competitive industry.
b. must be a perfectly competitive industry.
c. may or may not be a perfectly competitive industry.
d. is not using its resources wisely.
e. will surely be able to increase its sales.
ANSWER: c
POINTS: 1
83. Which of the following is a characteristic of perfect competition?

a. many sellers and few buyers
b. many buyers and few sellers
c. a heterogeneous product
d. buyers and sellers having all relevant information
e. high barriers to entry and exit
ANSWER: d
POINTS: 1
DIFFICULTY: Easy
84. Which of the following is not a characteristic of perfect competition?

a. buyers and sellers having no influence on price
b. there are no barriers to entry or exit
c. sellers produce and sell a heterogeneous product
d. buyers and sellers have access to all relevant information
ANSWER: c
POINTS: 1
DIFFICULTY: Easy
85. Which of the following is the best example of a homogeneous good?

a. new cars
b. ice cream
c. soft drinks
d. wheat
ANSWER: d
POINTS: 1
DIFFICULTY: Easy
86. A perfectly competitive firm faces a __________ demand curve.

a. nonlinear
b. downward-sloping
c. perfectly elastic
d. perfectly inelastic
e. unit-elastic
ANSWER: c
POINTS: 1
87. Which of the assumptions below assures us that economic profit will be zero in long-run equilibrium for perfectly
competitive firms?
a. buyers and sellers having all relevant information
b. firms producing heterogeneous goods
c. too few buyers
d. easy entry and exit
e. smallness of firms with respect to the market
ANSWER: d
POINTS: 1
88. The price charged by a perfectly competitive firm is determined by

a. the firm's demand curve alone.
b. the firm's cost curves alone.
c. market demand and market supply, together.
d. market demand alone.
e. market supply alone.
ANSWER: c
POINTS: 1
89. At the quantity of output for which total revenue equals total cost,
a. economic profit is zero.
b. cost is minimized.
c. cost is maximized.
d. quantity is minimized.
e. profit is maximized.
ANSWER: a
POINTS: 1
DIFFICULTY: Easy
90. Marginal revenue is defined as

a. the difference between costs and revenues.
b. the change in total revenue caused by selling one additional unit of output.
c. price times quantity.
d. total revenue divided by the level of output.
e. total revenue minus the level of output.
ANSWER: b
POINTS: 1
DIFFICULTY: Easy
91. In the long run, a firm earns zero economic profit, given the condition that
a. P = MR.
b. P = AVC.
c. P = ATC.
d. (P - MC) = 0.
ANSWER: c
POINTS: 1
92. In the theory of perfect competition, the assumptions of many buyers and sellers, the production of a homogeneous
product, and the possession of all relevant information by buyers and sellers imply that the perfectly competitive firm
a. sets the price it wishes.
b. has a demand curve that is downward sloping.
c. has a demand curve that is perfectly elastic.
d. a and b
e. a and c
ANSWER: c
POINTS: 1
93. If a firm is a price taker, its demand curve is

a. downward sloping.
b. upward sloping.
c. perfectly inelastic.
d. perfectly elastic.
ANSWER: d
POINTS: 1
DIFFICULTY: Easy
94. In the theory of perfect competition, the market demand curve is __________ and the firm faces a demand curve that
is __________.
a. perfectly elastic; perfectly elastic
b. downward sloping; downward sloping
c. perfectly elastic; downward sloping
d. downward sloping; perfectly elastic
e. perfectly inelastic; downward sloping
ANSWER: d
POINTS: 1
95. In the theory of perfect competition, the assumption of easy entry into and exit from the market implies
a. positive economic profits in the long run.
b. losses in the long-run equilibrium.
c. zero economic profits in the long run.
d. zero economic profits in both the short run and the long run.
e. positive economic profits in both the short run and the long run.
ANSWER: c
POINTS: 1
96. In perfect competition, the firm's marginal revenue curve is

a. perfectly elastic.
b. the same as the firm's demand curve.
c. the same as the firm's total revenue curve.
d. a and b
e. a and c
ANSWER: d
POINTS: 1
97. The perfectly competitive firm will shut down in the short run if price is
a. less than average variable cost.
b. greater than average variable cost but less than average total cost.
c. greater than average total cost.
d. equal to average total cost.
e. a and b
ANSWER: a
POINTS: 1
98. In short-run equilibrium, the perfectly competitive firm may be making __________ economic profits.
a. positive
b. zero
c. negative
d. a or b
e. any of the above
ANSWER: e
POINTS: 1
99. In long-run equilibrium, the perfectly competitive firm earns __________ economic profits.
a. positive
b. zero
c. negative
d. any of the above
ANSWER: b
POINTS: 1
DIFFICULTY: Easy
100. A decreasing-cost industry is characterized by

a. an upward-sloping long-run supply curve.
b. a downward-sloping long-run supply curve.
c. a perfectly elastic long-run supply curve.
d. perfectly elastic short-run and long-run supply curves.
e. a perfectly elastic short-run supply curve and an upward-sloping long-run supply curve.
ANSWER: b
POINTS: 1
101. An increasing-cost industry is characterized by

ANSWER: a
POINTS: 1
102. A constant-cost industry is characterized by

ANSWER: c
POINTS: 1
103. A perfectly competitive firm that maximizes profit exhibits resource allocative efficiency because it produces where
price
a. equals minimum average total cost.
b. equals marginal revenue.
c. equals marginal cost.
d. is greater than minimum average variable cost.
ANSWER: c
POINTS: 1
104. Which of the following is not a condition of long-run competitive equilibrium?

a. Economic profits are zero.
b. Marginal revenue is greater than marginal cost.
c. Price is equal to marginal cost.
d. Firms do not have an incentive to change plant size.
ANSWER: b
POINTS: 1
105. Assume that a decreasing-cost industry experiences an increase in demand. In the short run, this will
a. lead to a price increase.
b. lead to a price decrease.
c. have no influence on price.
d. a or b, depending on the marginal cost curve
ANSWER: a
POINTS: 1
106. Assume that a decreasing-cost industry experiences an increase in demand. In the long run, this will
a. lead to a price increase.
b. lead to a price decrease.
c. have no influence on price.
d. a or b, depending on the marginal cost curve
ANSWER: b
POINTS: 1
107. Assume that a constant-cost industry experiences an increase in demand. In the long run, this will
a. exceed its original equilibrium level.
b. equal its original level.
c. be lower than its original level.
d. any of the above, depending on the elasticity of demand
ANSWER: b
POINTS: 1
108. A firm operating in a perfectly competitive market finds itself producing a level of output for which marginal
revenue is less than marginal cost. In order to maximize profits (or minimize losses), the firm should
a. increase its level of output.
b. decrease its level of output.
c. shut down operations.
d. lower its price.
e. raise its price.
ANSWER: b
POINTS: 1
109. Which of the following statements about a perfectly competitive firm is necessarily false?
a. There are few substitutes for the firm's product.
b. There are few complements to the firm's product.
c. The firm produces the quantity at which marginal revenue equals marginal cost.
d. The firm sells a product that is identical in the eyes of buyers to any other product sold in the industry.
ANSWER: a
POINTS: 1
Exhibit 23-6
110. Refer to Exhibit 23-6. A perfectly competitive firm operating in the market depicted in graph (1) faces the demand
curve depicted in
a. graph (1)-the same as the market demand curve.
b. graph (2).
c. graph (3).
d. graph (4).
ANSWER: c
POINTS: 1
DIFFICULTY: Easy
111. Refer to Exhibit 23-6. A perfectly competitive firm operating in the market depicted in graph (1) is producing 311
units of output at the profit-maximizing level. What is the marginal revenue of the 312th unit?
a. $0.312
b. $1
c. $10
d. $312
e. This cannot be determined based on the information provided.
ANSWER: c
POINTS: 1
Exhibit 23-7
112. Refer to Exhibit 23-7. The perfectly competitive, profit-maximizing firm will produce __________ units of output.
a. 10
b. 30
c. 50
d. 60
e. 70
ANSWER: d
POINTS: 1
113. Refer to Exhibit 23-7. At the profit-maximizing level of output, marginal cost is
a. $60.00.
b. $4.50.
c. $5.00.
d. $6.00.
ANSWER: d
POINTS: 1
114. Refer to Exhibit 23-7. At the profit-maximizing output level, average total cost is
a. $2.00.
b. $4.50.
c. $5.00.
d. $6.00.
ANSWER: c
POINTS: 1
115. Refer to Exhibit 23-7. At the profit-maximizing output level, the firm's total revenue is
a. $60.00.
b. $225.00.
c. $300.00.
d. $360.00.
e. $420.00.
ANSWER: d
POINTS: 1
116. Refer to Exhibit 23-7. What is the profit at 60 units of output?

a. $360
b. $90
c. $75
d. $60
ANSWER: d
POINTS: 1
Exhibit 23-8
117. Refer to Exhibit 23-8. Which of the following is true in the short run of firms A and B, two perfectly competitive
firms?
a. Both firm A and firm B will continue to produce in the short run.
b. Firm A will continue to produce and firm B will shut down.
c. Firm A will shut down and firm B will continue to produce.
d. Firm A will continue to produce in the short run and shut down in the long run.
e. a and d
ANSWER: a
POINTS: 1
118. Refer to Exhibit 23-8. What is the profit (loss) of firm A at the profit-maximizing (or loss-minimizing) level of
production?
a. $300
b. $270
c. $600
d. $400
e. -$300
ANSWER: a
POINTS: 1
119. Refer to Exhibit 23-8. What is the total fixed cost of firm A at the profit-maximizing (or loss-minimizing) level of
output?
a. $3
b. $300
c. $90
d. $400
e. There is not enough information provided to answer this question.
ANSWER: b
POINTS: 1
120. Refer to Exhibit 23-8. What is the total revenue of Firm A at the profit-maximizing (or loss-minimizing) level of
output?
a. $300
b. $700
c. $1,000
d. $400
ANSWER: c
POINTS: 1
121. Refer to Exhibit 23-8. What is the total variable cost of firm A at the profit-maximizing (or loss-minimizing) level of
production?
a. $300
b. $700
c. $1,000
d. $400
ANSWER: d
POINTS: 1
122. Refer to Exhibit 23-8. What is the total cost for firm A at the profit-maximizing (or loss-minimizing) level of
production?
a. $300
b. $700
c. $1,000
d. $400
ANSWER: b
POINTS: 1
123. Refer to Exhibit 23-8. What is the profit (loss) of firm B at the profit-maximizing (or loss-minimizing) level of
production?
a. -$600
b. $270
c. $600
d. $400
e. -$400
ANSWER: a
POINTS: 1
124. Refer to Exhibit 23-8. What is the total fixed cost of firm B at the profit-maximizing (or loss-minimizing) level of
output?
a. $5
b. $750
c. $90
d. $400
e. There is not enough information provided to answer this question.
ANSWER: b
POINTS: 1
125. Refer to Exhibit 23-8. What is the total revenue of firm B at profit-maximizing (or loss-minimizing) level of output?
a. $300
b. $700
c. $1,050
d. $400
ANSWER: c
POINTS: 1
126. Refer to Exhibit 23-8. What is the total variable cost of firm B at the profit-maximizing (or loss-minimizing) level of
production?
a. $6
b. $750
c. $1,650
d. $900
ANSWER: d
POINTS: 1
127. Refer to Exhibit 23-8. What is the total cost of firm B at the profit-maximizing (or loss-minimizing) level of
production?
a. $11
b. $750
c. $1,650
d. $400
ANSWER: c
POINTS: 1
Exhibit 23-9
128. Refer to Exhibit 23-9. Suppose that the market starts out at long-run competitive equilibrium with price equal to P1
and producing Q1 output, and then demand increases from D1 to D2. As a consequence, the typical profit-maximizing
firm will
a. increase quantity produced by (q2 - q1).
b. decrease quantity produced by (q2 - q1).
c. decrease quantity produced by (q1 - q3).
d. not change its output level because the demand curve it is facing did not change.
ANSWER: a
POINTS: 1
129. Refer to Exhibit 23-9. Following an increase in market demand from D1 to D2, the firm's profits in the short run will
a. remain the same at P1 times q1.
b. remain the same at zero.
c. increase by less than (P2 - P1) times q2.
d. increase by (P2 - P1) times q3.
ANSWER: c
POINTS: 1
130. Refer to Exhibit 23-9. Assume that demand increases from D1 to D2; in the new long run equilibrium, price settles at
a level between P1 and P2 This means that the industry in question is a(n) __________-cost industry.
a. decreasing
b. increasing
c. constant
d. marginal
e. low
ANSWER: b
POINTS: 1
131. Which of the following is inconsistent with long-run industry equilibrium?

a. upward-sloping marginal cost curves for all of the firms in the industry
b. zero economic profits
c. P = minimum ATC
d. SRATC = LRATC
ANSWER: e
POINTS: 1
132. If a seller is a price taker it means that the seller sells his product at the price
a. he chooses.
b. determined in the market.
c. determined by the biggest firm in the market.
d. determined by the largest consumer in the market.
ANSWER: b
POINTS: 1
DIFFICULTY: Easy
133. A firm that is a price taker can sell

a. any quantity of product it wants at any price.
b. less of its product at a higher price than at a lower price.
c. any quantity of product it can produce at the market equilibrium price.
d. more of its product at a higher price than at a lower price.
ANSWER: c
POINTS: 1
DIFFICULTY: Easy
134. A firm that is a price taker will not sell any of its product for less than the equilibrium price because
a. it is against the law to do this.
b. it can sell all it can produce at the equilibrium price.
c. this would invite competition from outside the market and end up reducing the profits of the firm.
d. this would be breaking the cartel agreement that price-taker firms often enter into.
ANSWER: b
POINTS: 1

a. The market demand curve in a perfectly competitive market is downward sloping.
b. The firm's demand curve in a perfectly competitive market is horizontal.
c. The firm's demand curve in a perfectly competitive market is perfectly elastic.
d. Marginal revenue is equal to the change in total revenue divided by the change in quantity of output.
ANSWER: e
POINTS: 1

a. marginal revenue is equal to price.
b. price is equal to marginal cost at the output level that maximizes profit.
c. selling an additional unit of the good it produces increases total revenue by the price of the good.
d. a and b
e. a, b, and c
ANSWER: e
POINTS: 1

a. price equals marginal revenue only for the first unit of the good produced and sold.
b. only at a lower price can more units of a good be sold.
c. demand is perfectly inelastic.
d. a and b
ANSWER: e
POINTS: 1
138. If a market comes close to meeting (but does not perfectly meet) all the assumptions of the theory of perfect
competition, it follows that
a. the market is not perfectly competitive.
b. the theory of perfect competition still may be able to predict behavior in the market.
c. firms in the market cannot be price takers.
d. firms in the market do not try to maximize profit.
e. a and c
ANSWER: b
POINTS: 1
139. The profit-maximization rule is as follows:

a. Produce the quantity of output at which price equals average total cost (unit cost).
b. Produce as much output as can be sold.
c. Produce the quantity of output at which marginal revenue equals marginal cost.
d. Produce the quantity of output at which marginal revenue equals unit cost.
e. Produce the quantity of output at which total cost is minimized.
ANSWER: c
POINTS: 1
140. A perfectly-competitive firm produces 2,000 units of a good during some period of time. For the 2,000th unit,
marginal cost is equal to marginal revenue. The difference between marginal revenue and marginal cost is greater for the
first unit the firm produces than the second, and greater for the second than the third, and so on. Furthermore, marginal
revenue is greater than marginal cost for every unit from the first to the 1,999th. It follows that the
a. marginal cost curve for the firm has a downward-sloping portion and an upward-sloping portion.
b. marginal cost curve for the firm is downward-sloping.
c. marginal cost curve for the firm is upward-sloping.
d. marginal revenue curve is downward-sloping.
e. c and d
ANSWER: c
POINTS: 1
141. If, for a perfectly competitive firm, marginal cost is greater than marginal revenue for the 100th unit, then it follows
that
a. producing the 100th unit adds more to total revenue than it does to total cost.
b. producing the 100th unit adds more to total cost than it does to total revenue.
c. marginal cost equals marginal revenue for the 99th unit.
d. the firm is not maximizing profit, or minimizing losses, if it produces the 100th unit.
e. b and d
ANSWER: e
POINTS: 1
142. For a price taker, market equilibrium price is $100. At 50 units, MR = MC, ATC = $80, and AVC = $70. This price
taker will
a. earn $100 profits if it produces 50 units of the good.
b. earn $1,000 profits if it produces 50 units.
c. shut down its operation and by doing this minimize its losses.
d. maximize its profits if it produces fewer than 50 units.
e. maximize its profits if it produces more than 50 units.
ANSWER: b
POINTS: 1
143. In the short run, the best policy for a perfectly competitive firm is to
a. shut down its operation if price ever falls below average total cost.
b. produce and sell its product as long as price is greater than average variable cost.
c. shut down its operation if price falls between average total cost and average variable cost.
d. a and c
ANSWER: b
POINTS: 1
144. When a perfectly competitive firm incurs losses, it follows that price
a. must be below average total cost.
b. must be below average variable cost.
c. is less than marginal cost.
d. is less than marginal revenue.
ANSWER: a
POINTS: 1
145. A perfectly competitive firm that wants to maximize profits or minimize losses will produce in the short run as long
as
a. customers are buying its product.
b. price is above average variable cost.
c. price is above marginal revenue.
d. average variable cost is above price.
e. average total cost is above price.
ANSWER: b
POINTS: 1
146. If, for a perfectly competitive firm, price is greater than average variable cost, then it follows that
a. total revenue is greater than total cost.
b. total revenue is greater than total variable cost.
c. the firm will lose more or earn less by shutting down in the short run than by continuing to produce.
d. b and c
ANSWER: d
POINTS: 1
147. Equilibrium price is $10 in a perfectly competitive market. For a perfectly competitive firm, MR = MC at 233 units
of output. At 233 units, ATC is $12, and AVC is $9. The best policy for this firm is to __________ in the short run. Also,
total fixed cost equals __________ for this firm.
a. continue to produce; $3
b. shut down; $699
c. continue to produce; $699
d. shut down; $2,796
e. continue to produce; $2,796
ANSWER: c
POINTS: 1
148. Equilibrium price is $8 in a perfectly competitive market. For a perfectly competitive firm, MR = MC at 150 units of
output. At 150 units, ATC is $11, and AVC is $10. The best policy for this firm is to __________ in the short run. Also,
total fixed cost equals __________ and total variable cost equals __________ for this firm.
a. continue to produce; $125; $1,375
b. shut down; $150; $1,500
c. shut down; $1,375; $1,250
d. continue to produce; $150; $1,500
e. There is not enough information to answer all parts of the question.
ANSWER: b
POINTS: 1
of output. At 120 units, ATC is $11, and AVC is $8. The best policy for this firm is to __________ in the short run. Also,
this firm earns __________ of __________ if it produces and sells 120 units. Finally, the difference between total revenue
and total fixed cost for this firm is __________.
a. continue to produce; profits; $960; $1,920
b. continue to produce; losses; $960; $1,000
c. shut down; losses; $1,200; $2,300
d. continue to produce; profits; $1,920; $1,960
ANSWER: a
POINTS: 1
150. For a perfectly competitive firm, MR = MC at 250 units of output. At 250 units, ATC is greater than AVC. It
necessarily follows that
a. the firm should shut down its operation.
b. the marginal cost curve must have an upward-sloping portion and a downward-sloping portion.
c. the firm should continue to produce.
d. b and c
ANSWER: e
POINTS: 1
of output. At 200 units, ATC is $23, and AVC is $18. The best policy for this firm is to __________ in the short run.
Also, this firm earns __________ of __________ if it produces and sells 200 units. Finally, the difference between total
variable cost and total fixed cost for this firm is __________.
a. continue to produce, profits, $1800, $3,600
b. shut down, losses, $200, $3,600
c. continue to produce, losses, $200, $2,600
d. shut down, profits, $200, $1,800
ANSWER: c
POINTS: 1
152. Equilibrium price is $10 in a perfectly competitive market. For a perfectly competitive firm, MR = MC at 1,200 units
of output. At 1,200 units, ATC is $23, and AVC is $18. The best policy for this firm is to __________ in the short run.
Also, this firm earns __________ of __________ if it produces and sells 1,200 units.
a. shut down; losses; $15,600
b. shut down; losses; $9,600
c. continue to produce; losses; $15,600
d. continue to produce; profits; $15,600
ANSWER: a
POINTS: 1
153. Ultimately, market supply curves are upward sloping because of

a. the law of diminishing marginal returns.
b. economies of scale.
c. average fixed cost falling continually as more output is produced.
d. the law of the short run marginal cost curve.
e. specialization.
ANSWER: a
POINTS: 1

a. If a perfectly competitive firm produces the quantity of output at which MR = MC, it follows that the firm may
or may not be earning a profit.
b. The firm's supply curve is that portion of its AVC curve that lies above its MC curve.
c. If price is above ATC at the quantity of output at which MR = MC, the firm will be earning a profit.
d. In long-run competitive equilibrium, price is equal to marginal cost.
ANSWER: b
POINTS: 1
155. There are 200 firms in a perfectly competitive industry. Half of the firms supply 100 units at $3 per unit and the other
half of the firms supply 130 units at $3 per unit. One point on the market supply curve is
a. 23,000 units at $3.
b. 10,000 units at $3.
c. 13,000 units at $3.
d. 23,000 units at $6.
ANSWER: a
POINTS: 1
156. In long-run competitive equilibrium P = SRATC, because if P > SRATC

a. losses in the industry would cause some existing firms to exit the industry.
b. positive economic profit would attract firms to the industry in order to obtain the profits.
c. firms would not be producing the quantity of output at which MR = MC.
d. firms would not be covering total fixed costs.
ANSWER: b
POINTS: 1
157. In long-run competitive equilibrium SRATC = LRATC, because if SRATC > LRATC (at the quantity of output at
which MR = MC) firms would
a. have an incentive to change their plant size to produce their current output.
b. not be covering their total fixed costs.
c. not be covering their total variable costs.
d. a and b
e. b and c
ANSWER: a
POINTS: 1
158. In long-run competitive equilibrium, firms

a. earn positive economic profits.
b. have no incentive to make any changes.
c. earn losses on some units of the good they produce and sell.
d. do not produce the quantity of output at which MR = MC.
e. b and c
ANSWER: b
POINTS: 1
159. Which of the following is not a condition of long-run competitive equilibrium?

a. There is no incentive for firms to enter the industry.
b. There is no incentive for firms to exit the industry.
c. There is no incentive for firms to produce more or less output.
d. There is no incentive for firms to change plant size.
e. None of the above; that is, all are conditions of long-run competitive equilibrium.
ANSWER: e
POINTS: 1
160. In long-run competitive equilibrium, the market equilibrium price equals

a. marginal cost.
b. short-run average total cost.
c. long-run average total cost.
d. a and c
e. a, b, and c
ANSWER: e
POINTS: 1
161. A perfectly competitive market is initially in long-run competitive equilibrium. Then, market demand increases. As a
result,
a. the marginal revenue curve for each firm shifts upward.
b. the demand curve for each firm shifts upward.
c. marginal cost for each firm falls.
d. average total cost for each firm rises.
e. a and b
ANSWER: e
POINTS: 1
162. A perfectly competitive market is initially in long-run competitive equilibrium. Then, market demand increases. This
causes existing firms in the market to __________ and __________. As a result of the latter, the market supply curve
shifts __________.
a. produce more output; some existing firms to exit the market; leftward
b. produce less output; new firms to enter the market; rightward
c. produce more output; new firms to enter the market; rightward
d. expand their plant size; some existing firms to exit the market; leftward
ANSWER: c
POINTS: 1
163. A perfectly competitive market is initially in long-run competitive equilibrium. Then, market demand falls. This
causes the marginal revenue curves for existing firms to shift __________ and for these firms to produce __________
output. Some of the existing firms will end up __________.
a. upward, more, increasing their plant size
b. downward, less, exiting the market
c. downward, more, purchasing more capital equipment
d. upward, less, cutting fixed costs
ANSWER: b
POINTS: 1
164. A perfectly competitive market is initially in long-run competitive equilibrium. Then, market demand increases. As a
result, existing firms in the market begin to __________. By the time all adjustments have been made, profits will
__________.
a. earn positive economic profit, rise even higher
b. earn positive economic profit; be back at zero
c. produce more output; be less than zero
d. produce less output; rise
e. earn positive economic profit; turn into losses
ANSWER: b
POINTS: 1
165. A perfectly competitive market is initially in long-run competitive equilibrium. Then, market demand increases. By
the time all adjustments have been made, price will be __________ its original level if the industry is a(n) __________
cost industry.
a. below; constant
b. above; increasing
c. at; decreasing
d. at; increasing
e. above; decreasing
ANSWER: b
POINTS: 1
166. A perfectly competitive market is initially in long-run competitive equilibrium. Then, market demand falls. By the
time all adjustments have been made, price will be __________ its original level if the industry is a(n) __________ costs
industry.
a. above; decreasing
b. at; constant
c. at; increasing
d. below; increasing
e. a and d
ANSWER: e
POINTS: 1
167. The long-run industry supply curve is the graphic representation of the quantity of output that the industry is
prepared to
a. supply at different prices after the entry and exit of firms is completed.
b. supply at a single price after the entry and exit of firms is completed.
c. purchase at different prices after the entry and exit of firms is completed.
d. purchase at different prices after the entry of firms is completed.
e. supply at different prices after the exit of firms is completed.
ANSWER: a
POINTS: 1
168. If the long-run industry supply curve is downward-sloping, it follows that there are __________ costs in the industry.
a. increasing
b. constant
c. decreasing
d. a or b
ANSWER: c
POINTS: 1
169. When an industry is described as a decreasing-cost, increasing-cost, or constant-cost industry, the "cost" that is being
referred to is
a. marginal cost.
b. average total cost.
c. average variable cost.
d. sunk cost.
e. fixed cost.
ANSWER: b
POINTS: 1
170. In a perfectly competitive market, if a resource that one firm utilizes is superior to resources used by other firms, and,
as a result, lowers unit costs for the firm, that firm is likely to earn __________ in the short run. In time, however, the
firm's __________ curve will rise to reflect the superior-quality of the resource it employs and the firm will then earn
__________.
a. normal profit; ATC; positive economic profit
b. positive economic profit; ATC; normal profit
c. positive economic profit; marginal revenue; zero profit
d. losses; ATC; positive economic profit
ANSWER: b
POINTS: 1
171. A perfectly competitive market is initially in long-run competitive equilibrium. Each firm in the market is earning
zero economic profit. The owner of one firm decides to discriminate against employees of race X by not hiring them, or
by firing those employees of race X who currently work for him. If employees of race X are high-quality employees, and
other firms hire them, then the owner of the discriminating firm will soon find that his costs rise (above that of other
firms) and he will begin earning
a. below normal profits.
b. normal profits.
c. positive economic profits.
d. losses.
e. a and d
ANSWER: e
POINTS: 1
172. If all firms in an industry sell their product for the same price it is a result of
a. collusion.
b. perfect competition.
c. a government law that specifies all firms must charge the same price.
d. a or b
ANSWER: e
POINTS: 1
173. Resource allocative efficiency exists for a perfectly competitive firm because
a. price equals marginal revenue and the firm equates marginal revenue and marginal cost to maximize profits.
b. price equals average total cost and the firm equates marginal revenue and average total cost to maximize
profits.
c. price is greater than marginal revenue and the firm equates marginal revenue with average total cost to
maximize profits.
d. price is less than marginal revenue and the firm equates marginal cost and marginal revenue to maximize
profits.
ANSWER: a
POINTS: 1
174. Which of the following statements is true?

a. A perfectly competitive firm that seeks to maximize profits will not be resource-allocative efficient.
b. If the demand curve and the marginal revenue curve weren't the same curve for a perfectly competitive firm,
then the firm would not be resource-allocative efficient.
c. Resource allocative efficiency exists when a firm produces its output at the lowest possible per unit cost
(lowest ATC).
d. Productive efficiency exists when firms produce the quantity of output at which price equals marginal cost.
e. c and d
ANSWER: b
POINTS: 1
175. A firm produces the quantity of output at which P = MC and P = ATC. It follows that the firm is
a. resource allocative efficient, but not necessarily productive efficient.
b. productive efficient, but not necessarily resource allocative efficient.
c. both resource allocative and productive efficient.
d. neither resource allocative nor productive efficient.
ANSWER: a
POINTS: 1
Exhibit 23-10
Output (Q) Total Revenue Total Cost

0 $0 $10
1 25 40
2 50 60
3 75 70
4 100 75
5 125 85
6 150 110
7 175 140
8 200 180
176. Refer to Exhibit 23-10. What quantity of output should the profit-maximizing firm produce?
a. 0
b. 4
c. 6
d. 7
e. 8
ANSWER: c
POINTS: 1
NOTES: New
177. Refer to Exhibit 23-10. What price does this firm charge for its product?
a. $10
b. $20
c. $25
d. $30
e. There is not enough information to answer this question.
ANSWER: c
POINTS: 1
NOTES: New
178. Refer to Exhibit 23-10. What is the marginal revenue and marginal cost, respectively, of the 7th unit of output?
a. $25 and $25
b. $30 and $20
c. $25 and $15
d. $25 and $30
e. There is not enough information to answer this question.
ANSWER: d
POINTS: 1
NOTES: New
179. Refer to Exhibit 23-10. Is it possible for this firm to produce “too much” output?
a. Yes, any quantity above 2 units is too much output.
b. Yes, any quantity above 4 units is too much output.
c. Yes, any quantity above 6 units is too much output.
d. No, it is not possible for this firm to produce too much output.
ANSWER: c
POINTS: 1
NOTES: New
180. Refer to Exhibit 23-10. Is the firm depicted here a perfectly competitive firm?
a. Yes, because marginal revenue is constant.
b. Yes, because total revenue increases as output increases.
c. No, because marginal cost is not constant.
d. No, because marginal cost falls for some levels of output and rises for other levels of output.
ANSWER: a
POINTS: 1
181. A perfectly competitive firm can produce its current level of output at an average total cost of $10 and a marginal
cost of $8. If the market price of the product is currently $8, what should the firm do?
a. The firm should definitely shut down since average total cost exceeds price.
b. The answer depends upon the relationship between price and average variable cost. The firm should shut
down if average variable cost is $8 or greater, but the firm should continue to produce the current level of
output if average variable cost is less than $8.
c. The firm should increase production in order to increase profit.
d. The firm should continue to produce, but they should decrease production in order to increase profit.
ANSWER: b
POINTS: 1
Essay
182. Explain the difference between resource allocative efficiency and productive efficiency.
ANSWER: A firm that produces the quantity of output at which price equals marginal cost is said to
exhibit resource allocative efficiency. This means that the marginal benefit to demanders of
the resources in the goods they purchase is equal to the marginal cost to suppliers of the
resources they use in producing the goods. Therefore, at the point where P=MC, all units of
the good are produced that are of greater value to demanders than the foregone alternative
goods. Productive efficiency occurs when a firm produces its output at the lowest possible per
unit cost (where ATC is minimized). It is desirable from society's standpoint because it means
that firms are economizing society's scarce resources. In perfect competition, productive
efficiency occurs in long-run equilibrium.
POINTS: 1
183. List and describe the four assumptions that underlie the theory of perfect competition.
ANSWER: 1) There are many sellers and buyers, each of which is so small a part of the market that he or
she has no influence on price. 2) Each firm produces and sells a homogeneous product. 3)
Buyers and sellers have all relevant information about prices, product quality, etc. 4) Firms
have easy entry and exit, no barriers to entry or exit exist.
POINTS: 1
184. Why is profit maximized at the level of output where marginal revenue equals marginal cost?
ANSWER: If the firm produces units for which marginal cost exceeds marginal revenue, the extra cost to
the firm of producing those units will exceed the extra benefit to the firm and profits will
decline. If the firm fails to produce any units for which marginal revenue exceeds marginal
cost, they are foregoing additional profit and therefore the firm can not be maximizing profit.
It follows then that profit is maximized at the level of output where marginal revenue equals
marginal cost.
POINTS: 1
185. What is the shape of the demand curve faced by the perfectly competitive firm? Why does it have this shape?
ANSWER: In perfect competition, the seller faces a horizontal demand curve at the equilibrium market
price. If a perfectly competitive seller tries to charge a price above the market-determined
equilibrium price, no one will purchase from him. This is because he is selling a
homogeneous product, his supply is small in relation to the total market supply and buyers are
informed about where they could purchase the product at the lower price. The seller also has
no incentive to charge a lower price than the equilibrium price because it can sell all it wants
at the market-determined equilibrium price. A single perfectly competitive seller's supply is
so small in relation to the overall market supply that whether he produces nothing, or all that
he possibly can, he cannot perceptibly influence price and he must charge the going market
price.
POINTS: 1
186. In the short run, if price (P) is less than average total cost (ATC) will a perfectly competitive firm necessarily shut
down? Explain why or why not using a hypothetical numerical example.
ANSWER: While it is true that a firm would be losing money if P<ATC, it may be that producing with a
loss would be preferable to shutting down. In the short run, a perfectly competitive firm will
shut down when P < average variable cost (AVC). Suppose that P = $9, ATC = $12, and
AVC = $8. In this situation the firm would be losing $3 on each unit produced. However,
since P>AVC the firm can cover its variable costs and generate at least some money (in this
case $1 per unit) that it can use to help pay its fixed costs. Therefore, producing at a loss
would be preferable to shutting down (where the firm would still have to pay its fixed costs).
POINTS: 1
187. Describe how profit serves as both an incentive for individuals to produce and as a signal.
ANSWER: Profit is an incentive because it motivates sellers to take on certain behaviors. A seller who
believes that he will make a profit by producing a given product will be motivated to pursue
that activity. Profit also acts as a signal, encouraging producers to allocate resources in the
direction of those goods and services that are profitable.
POINTS: 1

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5. A decreasing-cost industry has a long-run supply curve that is upward sloping.

6. In a perfectly competitive market, the market demand curve is perfectly elastic.

10. A perfectly competitive firm is a price taker.

12. In a perfectly competitive market, firms face no barriers to entry or exit.

17. Profit helps to indicate where resources are best allocated.

21. The theory of perfect competition generally assumes that

22. In the theory of perfect competition,

24. Perfectly competitive industries are

25. A "price taker" is a firm that

27. The demand curve facing a perfectly competitive firm

29. In the theory of perfect competition,

30. Which of the following statements is false?

33. Marginal revenue is

34. For a perfectly competitive firm,

43. If MR > MC, then

53. In the short-run, if P < ATC, a perfectly competitive firm should

55. The perfectly competitive firm should produce in the

58. The perfectly competitive firm's short-run supply curve is the

64. The short-run industry supply curve is the

69. Why must profits be zero in long-run competitive equilibrium?

73. A constant-cost industry has a long-run (industry) supply curve that is

77. Resource allocative efficiency occurs when a firm

78. Resources are allocated efficiently when

82. If an industry advertises, then it

83. Which of the following is a characteristic of perfect competition?

84. Which of the following is not a characteristic of perfect competition?

85. Which of the following is the best example of a homogeneous good?

86. A perfectly competitive firm faces a __________ demand curve.

88. The price charged by a perfectly competitive firm is determined by

90. Marginal revenue is defined as

93. If a firm is a price taker, its demand curve is

96. In perfect competition, the firm's marginal revenue curve is

100. A decreasing-cost industry is characterized by

101. An increasing-cost industry is characterized by

102. A constant-cost industry is characterized by

104. Which of the following is not a condition of long-run competitive equilibrium?

116. Refer to Exhibit 23-7. What is the profit at 60 units of output?

131. Which of the following is inconsistent with long-run industry equilibrium?

133. A firm that is a price taker can sell

135. Which of the following statements is false?

136. For a perfectly competitive firm,

137. For a perfectly competitive firm,

139. The profit-maximization rule is as follows:

153. Ultimately, market supply curves are upward sloping because of

154. Which of the following statements is false?

156. In long-run competitive equilibrium P = SRATC, because if P > SRATC

158. In long-run competitive equilibrium, firms

159. Which of the following is not a condition of long-run competitive equilibrium?

160. In long-run competitive equilibrium, the market equilibrium price equals

174. Which of the following statements is true?

Output (Q) Total Revenue Total Cost

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