Test Bank for Microeconomics and Behavior, 10th Edition, Robert Frank

Test Bank for Microeconomics and Behavior, 10th

Edition, Robert Frank

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Student name:__________
MULTIPLE CHOICE - Choose the one alternative that best completes the statement or
answers the question.
1) Which of the following is not a condition for perfect competition?

A) Firms take prices as given.

B) Firms sell a standardized product.
C) Firms are protected by barriers to entry.
D) Firms have perfect information.

2) The profit maximizing output level for a perfectly competitive firm is always where

A) P = MC.
B) P = AVC.
C) MC = ATC.
D) MC = AVC.

3) In the graph below at a price of P*, the profit maximizing level of output is

A) Q*.
B) above Q*.
C) below Q* but above zero.
D) zero.

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4) In the graph below at P*, the firm is making __________ economic profits.

A) positive
B) negative
C) zero
D) an indeterminate level of

5) Which statement is true of the graph shown?

A) The marginal cost curve should not cross the AFC while it is falling.
B) If an ATC curve was drawn in the graph it would intersect the MC curve but not any
other curve.
C) The shutdown point of the firm would be at an output more than Q*.
D) The marginal cost curve crosses the AFC curve at the lowest point of the AFC curve.

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6) In the graph below if the price persists at P*, the profit maximizing firm will

A) shut down immediately.

B) shut down in the long run.
C) operate indefinitely.
D) have a strategy that cannot be predicted without an ATC curve.

7) When the perfectly competitive firm maximizes profits the price of its product always
equals

A) average revenue.
B) marginal revenue.
C) marginal costs.
D) All answer choices are correct.

8) If a firm’s demand curve falls below its AVC curve, then the firm should

A) shut down now.

B) operate in the short run but not the long run.
C) set price = marginal cost.
D) shutdown in the long run.

9) The demand curve facing a perfectly competitive firm is

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 A) infinitely elastic.
B) perfectly inelastic.
C) downward sloping.
D) perfectly elastic.

10) Say a competitive firm is producing at point where ATC = $10, AVC = $2. If the firm
charges $5 for its output, then in the short run this firm should

A) shutdown production.
B) exit the industry.
C) continue to operate.
D) try to reduce its fixed costs.

11) Say a competitive firm is producing at point where ATC = $5, AVC = $1. If the firm
charges $3 for its output, then in the short run this firm should

A) try to reduce its fixed costs.

B) continue to operate.
C) exit the industry.
D) shutdown production.

12) If the demand curve falls below the ATC curve but lies above AVC, then the firm should

A) shut down.
B) operate in the short run but not the long run.
C) set price = marginal cost.
D) operate in the short run and the long run.

13) In general, economists assume that firms

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 A) maximize accounting profit.
B) maximize economic profit.
C) maximize sales.
D) maximize revenue.

14) Jasmine is self-employed in a store that has a rental value of $500 a month which she
pays, but she can vacate the building without giving notice. Her other expenses are $100 a month
for maintenance. She makes $25,000 a year on net sales (total revenue minus the wholesale cost
of the product). If she quit her job and worked the same number of hours elsewhere at a job she
liked equally well, she estimates that she could make $20,000 a year. No one else can be hired to
work in the store. Jasmine should

A) quit her job.

B) keep the job.
C) work part-time.
D) It cannot be determined from the information given.

15) Jasmine is self-employed in a store that has a rental value of $250 a month which she
pays, but she can vacate the building without giving notice. Her other expenses are $50 a month
for maintenance. She makes $22,500 a year on net sales (total revenue minus the wholesale cost
of the product). If she quit her job and worked the same number of hours elsewhere at a job she
liked equally well, she estimates that she could make $20,000 a year. No one else can be hired to
work in the store. Jasmine should

A) work part time.

B) keep running her business.
C) close her business and take the job.
D) It cannot be determined from the information given.

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16) Jasmine is self-employed in a store that has a rental value of $500 a month which she
pays, but she can vacate the building without giving notice. Her other expenses are $100 a month
for maintenance. She makes $25,000 a year on net sales (total revenue minus the wholesale cost
of the product). If she quit her job and worked the same number of hours elsewhere at a job she
liked equally well, she estimates that she could make $20,000 a year. No one else can be hired to
work in the store. Suppose that the store owner gave Jasmine the store. What should she do?

A) close her business and take the job.

B) keep running her business.
C) work part time.
D) It cannot be determined from the information given.

17) Jasmine is self-employed in a store that has a rental value of $250 a month which she
pays, but she can vacate the building without giving notice. Her other expenses are $100 a month
for maintenance. She makes $25,000 a year on net sales (total revenue minus the wholesale cost
of the product). If she quit her job and worked the same number of hours elsewhere at a job she
liked equally well, she estimates that she could make $22,500 a year. No one else can be hired to
work in the store. Suppose that the store owner gave Jasmine the store. What should she do?

A) Keep running her business.

B) Work part time.
C) Close her business and take the job.
D) It cannot be determined from the information given.

18) Jasmine is self-employed in a store that has a rental value of $500 a month which she
pays, but she can vacate the building without giving notice. Her other expenses are $100 a month
for maintenance. She makes $25,000 a year on net sales (total revenue minus the wholesale cost
of the product). If she quit her job and worked the same number of hours elsewhere at a job she
liked equally well, she estimates that she could make $20,000 a year. No one else can be hired to
work in the store. Suppose that Jasmine had a long-term lease which requires her to pay the rent
even if she doesn’t operate the store. What should Jasmine do?

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 A) Immediately close her business and take the job.
B) Continue running her business permanently.
C) Run her business until the lease expires, then take the job.
D) It cannot be determined from the information given.

19) Jasmine is self-employed in a store that has a rental value of $1,000 a month which she
pays, but she can vacate the building without giving notice. Her other expenses are $100 a month
for maintenance. She makes $30,000 a year on net sales (total revenue minus the wholesale cost
of the product). If she quit her job and worked the same number of hours elsewhere at a job she
liked equally well, she estimates that she could make $25,000 a year. No one else can be hired to
work in the store. Suppose that Jasmine had a long-term lease which requires her to pay the rent
even if she doesn't operate the store. What should Jasmine do?

A) Run her business until the lease expires, then take the job.
B) Immediately close her business and take the job.
C) It cannot be determined from the information given.
D) Continue running her business permanently.

20) In a decreasing cost industry, as output grows over time,

A) prices will fall.

B) prices will rise.
C) prices will stay the same.
D) prices are zero.

21) The output where MC = AVC is called the

A) shutdown point.
B) break-even point.
C) profit maximizing point.
D) revenue maximizing point.

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22) At the output where MC = ATC = P, the firm

A) should shutdown.
B) has no economic profit.
C) is profit maximizing.
D) should raise output.

23) A standardized product is a product

A) that has many perfect substitutes.

B) that is unique to one producer.
C) which is produced according to government regulations.
D) where the demand function is downward sloping for both the firm and the industry.

24) If firms are price takers this implies that

A) in the short-run economic profits will be zero.

B) the demand curve facing the firm is perfectly elastic.
C) the total revenue curve is horizontal.
D) the marginal revenue curve is upward sloping.

25) In the diagram below, profit is maximized at point

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 A) A.
B) B.
C) C.
D) D.

26) At point D, the firm is

A) maximizing its profit.

B) losing money.
C) breaking even.
D) making money.

27) In a competitive industry, the industry’s short-run supply curve is

A) the horizontal sum of the marginal cost curves.

B) the vertical sum of the marginal cost curves.
C) determined by the average total cost curve.
D) determined by the average variable cost curve.

28) Aggregate producer surplus is given by the area

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 A) above the supply curve but below the equilibrium price.
B) below the supply curve.
C) below the demand curve but above the equilibrium price.
D) below the demand curve.

29) In the long run for a competitive firm,

A) the firm is at the bottom of its short run average cost curve.
B) the firm is at the top of its long run average cost curve.
C) the marginal cost is greater price.
D) the firm is making economic profits.

30) If free entry and exit were not possible,

A) in the long run firms would lose money.

B) in the long run firms would make money.
C) in the long run firms would break even.
D) It is impossible to tell what would happen without more cost and revenue
information.

31) When the price is P1, in order to maximize profits this firm must produce a quantity equal
to

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 A) q 1.
B) q 2.
C) q 3.
D) Q 1.

32) In the long run, the typical firm in this market will produce a quantity equal to

A) q 1.
B) q 2.
C) q 3.
D) Q 1.

33) In the long run, the price in this market will be

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 A) P 1.
B) higher than P 1.
C) lower than P 1.
D) It cannot be determined from the information given.

34) A pecuniary diseconomy occurs when

A) supply exceeds demand.

B) an expansion of industry output increases the price of an input.
C) higher output levels results in lower unit costs.
D) higher output levels results in the same unit costs.

35) The elasticity of supply is given by

A)
B)

C)
D) All answer choices are correct.

36) Suppose that the supply curve is given by P = Q. What is the elasticity of supply?

A) 10
B) 1/10
C) 1
D) It cannot be determined from the information given.

37) Other things remaining the same, in the short-run as compared to the long-run

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 A) supply elasticity will be positive.
B) supply elasticity will negative.
C) supply elasticity will be zero.
D) one cannot tell.

38) Ceteris paribus, in the long run, a tax placed on a perfectly competitive industry will

A) increase the price of the good by an amount equal to the tax.

B) increase the price of the good by an amount less than the tax.
C) be borne entirely by the firm.
D) never be passed to the consumer.

39) In the long run, a tax placed on a perfectly competitive industry should

A) increase the number of firms.

B) decrease the number of firms.
C) not affect the number of firms.
D) One cannot tell.

40) In the short run, a tax placed on a perfectly competitive industry should

A) increase the total amount of the good sold.

B) decrease the total amount of the good sold.
C) not affect the total amount of the good sold.
D) always increase the price.

41) In the long run, a tax placed on a perfectly competitive industry should have what effect
on the entire market?

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 A) Increase the total amount of the good sold.
B) Decrease the total amount of the good sold.
C) Not affect the total amount of the good sold.
D) One cannot tell.

42) In a competitive industry in the long run, it is likely that

A) firms with the advantage of location or an especially skilled work crew will be the
lone survivors in equilibrium.
B) all firms giving their best effort will have the same LAC regardless of location or the
unique skills of some workers.
C) the firms with the poorest location will be the lone survivors in equilibrium because
their location cost will be lowest.
D) only one large efficient firm can survive.

43) If a firm is producing where its LMC = price and the LMC is equal to LAC, then it would
do better in the long run by

A) increasing output with its existing plant until LMC equals price.
B) increasing plant size until LMC and SAC are identical and equal to price.
C) decreasing plant size until LAC, SAC and price are equal.
D) changing nothing because it is already at the long run profit maximizing point.

44) At market equilibrium, the total benefit that results from all the transactions is

A) the consumer surplus minus the producer surplus.

B) the producer surplus minus the consumer surplus.
C) the sum of the producer surplus and the consumer surplus.
D) the entire area under the demand curve up to the quantity exchanged.

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45) You get $200 revenue from the sale of your product each day. You rent the factory that
you use for $90 a day. The raw materials of the operation cost $115 a day. You do all the work
yourself. Both jobs are equally attractive as far as the work is concerned. Recently, a competitor
offered you $30 a day to work for her. Your accounting profit is ________, and your economic
profit is ________.

A) −5; −35
B) −35; −35
C) 25; −5
D) 110; −30

46) You get $100 revenue from the sale of your product each day. You rent the factory that
you use for $25 a day. The raw materials of your operation cost $50 a day. You do all the work
yourself. Recently, a competitor offered you $30 a day to work for them. Your accounting profit
is $________ and your economic profit is $________, so you ________ take the job offer if
money is your only concern.

A) −5, −5, will

B) 25, 30, will not
C) 25, −5, will
D) 50, 20, will not

47) In the long run, any perfectly competitive firm that produces will choose a quantity such
that

A) long run average cost is minimized.

B) long run total cost is minimized.
C) long run marginal cost is less than short run marginal cost.
D) price is greater marginal cost.

48) Which is not true of a perfectly competitive market?

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 A) The typical industry demand curve is downward sloping.
B) There is no incentive to innovate since economic profit is zero in the long run.
C) If the long-run average total cost curve is horizontal in the relevant range of
production, perfectly competitive firms can be various sizes in long-run equilibrium.
D) At long-run equilibrium, economic profit is less than accounting profit.

49) A firm is currently selling its product at $20 each. It estimates that its average total cost
of production is $100 and its average fixed cost is $40. In the short run the firm should

A) shutdown.
B) continue production at a point where P = MC.
C) hire more employees.
D) buy more capital.

50) Suppose an industry has 100 firms, each with supply curve P = 50 + 10Q. What is the
industry supply curve?

A) P = 500 + Q
B) P = 50 + 0.1Q
C) P = −500 + 10P
D) P = 50 + 10 Q

51) When a profit-maximizing firm is at its short-run optimum point,

A) the average cost of the product is at its lowest possible point whether a profit is being
made or not.
B) the firm will be shut down if its price is less than the average fixed cost.
C) the profit per unit of output will be at its maximum possible level.
D) None of the answer choices are correct.

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52) The expansion of the car manufacturing industry causes an improvement in the assembly
line system, thus reducing costs to each firm in that industry. This is an example of

A) constant returns to scale.

B) a decreasing-cost industry.
C) a decreasing returns to scale.
D) an increasing-cost industry.

53) Competitive markets result in allocative efficiency because they

A) exhaust all possibilities for mutually beneficial trade.

B) exhaust all possible benefits for the consumer.
C) generate all possible benefits for the consumers.
D) distribute resources in the most equitable way.

54) Which statement is true of the short-run market supply curve?

A) It is the vertical summation of all the individual supply curves.

B) It is the horizontal summation of the upward sloping portion of the AVC function of
all firms in the industry.
C) One must know the marginal cost information of firms in order to construct a supply
function.
D) In perfect competition the slope of the curve is horizontal.

55) Assume a perfectly competitive economy would use an assortment of nails that weighs a
total of 100 tons. However, the economy is controlled by the government and it sets a ton limit of
100 tons. When production is complete there is only one nail that weighs 100 tons. Which of the
following describes what was wrong when government did the planning?

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 A) Producers did not follow their personal interest in planning production.
B) The wishes of consumers were not represented in the producer’s actions.
C) The government miscalculated the correct tonnage that the economy needed.
D) All answer choices are correct.

56) If an increase in market demand disturbs a long-run equilibrium situation that has a U-
shaped LAC, and resources flowing into the industry stay constant in price, then

A) the long-run supply curve will be downward sloping.

B) the long-run supply curve will be upward sloping.
C) the long-run supply curve will be horizontal, and more plants will be built at the
optimal size to accommodate expansion.
D) the long-run supply could be upward or downward sloping, with additional
information needed to determine the final outcome.

57) A supply curve is linear with a slope of 3. If, at a price of $21, there are 7 units demanded
in the marketplace, then the elasticity of supply is

A) elastic.
B) inelastic.
C) unitary elastic.
D) indeterminate with the information given.

58) A supply curve is linear with a slope of 2. If, at a price of $14, there are 7 units demanded
in the marketplace, then the elasticity of supply is

A) unitary elastic.
B) elastic.
C) inelastic.
D) indeterminate with the information given.

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59) In a constant cost industry where the long-run supply curve is horizontal and the LAC
curve is U-shaped, an increase in demand, will in the long run,

A) increase the size of each firm and decrease the number of firms in the industry.
B) increase the number of firms in the industry, but not the size of the existing firms.
C) lead to a lower price, larger firms, and more of them.
D) lead to any one of these because the outcome is indeterminate.

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Answer Key

Test name: Unnamed Test10

1) C
2) A
3) A
4) B
5) B
6) B
7) D
8) A
9) A
10) C
11) B
12) B
13) B
14) A
15) C
16) A
17) C
18) C
19) A
20) A
21) A
22) B
23) A
24) B
25) C
26) C

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27) A
28) A
29) A
30) D
31) A
32) C
33) C
34) B
35) D
36) C
37) A
38) A
39) B
40) B
41) B
42) B
43) D
44) C
45) A
46) C
47) A
48) B
49) A
50) B
51) D
52) B
53) A
54) B
55) B
56) C

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Test Bank for Microeconomics and Behavior, 10th Edition, Robert Frank

57) C
58) A
59) B

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