Microeconomics 4th Edition Hubbard Test Bank

Microeconomics 4th Edition Hubbard
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Microeconomics, 4e (Hubbard/O’Brien)
Chapter 12 Firms in Perfectly Competitive Markets
12.1 Perfectly Competitive Markets
1) Assume the market for organic produce sold at farmers' markets is perfectly competitive. All
else equal, as more farmers choose to produce and sell organic produce at farmers' markets, what
is likely to happen to the equilibrium price of the produce and profits of the organic farmers in
the long run?
A) The equilibrium price is likely to increase and profits are likely to remain unchanged.
B) The equilibrium price is likely to remain unchanged and profits are likely to increase.
C) The equilibrium price is likely to decrease and profits are likely to decrease.
D) The equilibrium price is likely to increase and profits are likely to increase.
Answer: C
Diff: 2 Page Ref: 395/395
Topic: Characteristics of Perfectly Competitive Firms
Learning Outcome: Micro 13: Explain the relationship between production and profits under
perfect competition
AACSB: Analytic Skills
Special Feature: Chapter Opener: Perfect Competition Farmers' Markets
2) Assume the market for organically-grown produce is perfectly competitive. All else equal, as
farmers find it less profitable to produce and sell organic produce in this market,
A) the demand curve will shift to the left and the equilibrium price will decrease.
B) the supply curve will shift to the left and the equilibrium price will increase.
C) the supply curve will shift to the right, the demand curve will shift to the left, and the
equilibrium price will decrease.
D) the supply curve will shift to the left, the demand curve will shift to the left, and the
equilibrium price will increase.
Answer: B
Learning Outcome: Micro 4: Explain how supply and demand function in competitive markets
Special Feature: Chapter Opener: Perfect Competition Farmers' Markets
1
Copyright © 2013 Pearson Education, Inc.
3) Which of the following is not a characteristic of a perfectly competitive market structure?
A) There are a very large number of firms that are small compared to the market.
B) All firms sell identical products.
C) There are no restrictions to entry by new firms.
D) There are restrictions on exit of firms.
Answer: D
Topic: Market Structures
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perfect competition
AACSB: Reflective Thinking
Special Feature: None
4) Which of the following is not a characteristic of a monopolistically competitive market

structure?
A) There is a large number of independently acting small sellers.
B) All sellers sell products that are differentiated.
C) There are low barriers to entry of new firms.
D) Each firm must react to actions of other firms.
Answer: D
*: Recurring
Learning Outcome: Micro 15: Discuss the role of differentiation in monopolistic competition in
comparison to other market conditions
5) Which of the following is a characteristic of an oligopolistic market structure?

A) There are few dominant sellers.
B) Each firm sells a unique product.
C) It is easy for new firms to enter the industry.
D) Each firm need not react to the actions of rivals.
Answer: A
*: Recurring
Learning Outcome: Micro 16: Discuss the functions of cooperation, competition, and public
policies in oligopolies
2
6) Which of the following is a characteristic of a monopoly?
A) It is easy for new firms to enter the market.
B) There is only one seller in the market.
C) The product is not unique.
D) The firm has no control over price.
Answer: B
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Learning Outcome: Micro 14: Discuss production and pricing decisions within monopolies and
how public policies affect monopolies
7) Perfect competition is characterized by all of the following except

A) heavy advertising by individual sellers.
B) homogeneous products.
C) sellers are price takers.
D) a horizontal demand curve for individual sellers.
Answer: A
Diff: 1 Page Ref: 397-398/397-398
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perfect competition
8) A very large number of small sellers who sell identical products imply
A) a multitude of vastly different selling prices.
B) a downward sloping demand for each seller's product.
C) the inability of one seller to influence price.
D) chaos in the market.
Answer: C
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perfect competition
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9) Which of the following is the best example of a perfectly competitive industry?
A) wheat production
B) steel production
C) electricity production
D) airplane production
Answer: A
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perfect competition
10) The price of a seller's product in perfect competition is determined by

A) the individual seller.
B) a few of the sellers.
C) market demand and market supply.
D) the individual demander.
Answer: C
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perfect competition
11) Both individual buyers and sellers in perfect competition

A) can influence the market price by their own individual actions.
B) can influence the market price by joining with a few of their competitors.
C) have to take the market price as a given.
D) have the market price dictated to them by government.
Answer: C
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perfect competition
4
12) Both buyers and sellers are price takers in a perfectly competitive market because
A) the price is determined by government intervention and dictated to buyers and sellers.
B) each buyer and seller knows it is illegal to conspire to affect price.
C) both buyers and sellers in a perfectly competitive market are concerned for the welfare of
others.
D) each buyer and seller is too small relative to others to independently affect the market price.
Answer: D
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perfect competition
13) Suppose the equilibrium price in a perfectly competitive industry is $15 and a firm in the
industry charges $21. Which of the following will happen?
A) The firm's profits will increase.
B) The firm's revenue will increase.
C) The firm will not sell any output.
D) The firm will sell more output than its competitors.
Answer: C
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perfect competition
14) The demand curve for each seller's product in perfect competition is horizontal at the market
price because
A) each seller is too small to affect market price.
B) the price is set by the government.
C) all the sellers get together and set the price.
D) all the demanders get together and set the price.
Answer: A
Diff: 1 Page Ref: 398-399/398-399
Topic: Demand Curves in Perfectly Competitive Industries
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perfect competition
5
15) An individual seller in perfect competition will not sell at a price lower than the market price
because
A) demand for the product will exceed supply.
B) the seller would start a price war.
C) the seller can sell any quantity she wants at the prevailing market price.
D) demand is perfectly inelastic.
Answer: C
Diff: 2 Page Ref: 398-399/398-399
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perfect competition
16) Jason, a high-school student, mows lawns for families in his neighborhood. The going rate is
$12 for each lawn-mowing service. Jason would like to charge $20 because he believes he has
more experience mowing lawns than the many other teenagers who also offer the same service.
If the market for lawn mowing services is perfectly competitive, what would happen if Jason
raised his price?
A) He would lose some but not all his customers.
B) Initially, his customers might complain but over time they will come to accept the new rate.
C) If Jason raises his price he would lose all his customers.
D) If Jason raises his price, then all others supplying the same service will also raise their prices.
Answer: C
Diff: 2 Page Ref: 398-399/398-399
perfect competition
Special Feature: Economics in Your Life: Are You an Entrepreneur?
17) The demand curve for an individual seller's product in perfect competition is
A) the same as market demand.
B) downward sloping.
C) vertical.
D) horizontal.
Answer: D
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perfect competition
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18) In perfect competition
A) the market demand curve and the individual's demand are identical.
B) the market demand curve is perfectly inelastic while demand for an individual seller's product
is perfectly elastic.
C) the market demand curve is perfectly elastic while demand for an individual seller's product is
perfectly inelastic.
D) the market demand curve is downward sloping while demand for an individual seller's
product is perfectly elastic.
Answer: D
perfect competition
Special Feature: Don't Let This Happen to YOU!: Don't Confuse the Demand Curve for Farmer
Parker's Wheat with the Market Demand Curve for Wheat
19) A perfectly competitive firm's horizontal demand curve implies that the firm does not have to
lower its price to sell more output.
Answer: TRUE
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perfect competition
20) The market demand curve for a perfectly competitive industry is the horizontal summation of
each individual firm's demand curve.
Answer: FALSE
Diff: 2 Page Ref: 398-399/398-399
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7
21) Why are individual buyers and sellers in perfect competition called price takers?
Answer: They are called price takers because each firm and customer are too small to influence
the market price and has to take the market price as given.
*: Recurring
perfect competition
22) Consider the market for wheat which is a perfectly competitive market. Is the market demand
curve the same as the demand curve facing an individual producer? If not, explain how and why
they are different? Illustrate your answer graphically.
Answer: The market demand is downward sloping while the demand for an individual firm's
output is horizontal at the equilibrium market price. This is because an individual producer is too
small to influence the market price and must take the market price as given. At the market price,
the individual seller can sell all the output she desires. The figure below shows the market
demand curve and the demand curve for a single firm.

perfect competition
Special Feature: Don't Let This Happen to YOU!: Don't Confuse the Demand Curve for Farmer
Parker's Wheat with the Market Demand Curve for Wheat
8
12.2 How a Firm Maximizes Profit in a Perfectly Competitive Market
1) If the market price is $25, the average revenue of selling five units is
A) $5.
B) $12.50.
C) $25.
D) $125.
Answer: C
Topic: Average Revenue and Marginal Revenue
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perfect competition
2) If the market price is $25 in a perfectly competitive market, the marginal revenue from selling
the fifth unit is
A) $5.
B) $12.50.
C) $25.
D) $125.
Answer: C
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perfect competition
3) Which of the following is not true for a firm in perfect competition?

A) Profit equals total revenue minus total cost.
B) Price equals average revenue.
C) Average revenue is greater than marginal revenue.
D) Marginal revenue equals the change in total revenue from selling one more unit.
Answer: C
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perfect competition
9
Table 12-1
Total Cost Variable Cost

Quantity
(dollars) (dollars)
0 $1,000 $0
100 1,360 360
200 1,560 560
300 1,960 960
400 2,760 1,760
500 4,000 3,000
600 5,800 4,800
Table 12-1 shows the short-run cost data of a perfectly competitive firm that produces plastic
camera cases. Assume that output can only be increased in batches of 100 units.
4) Refer to Table 12-1. What is the fixed cost of production?

A) $0
B) $500
C) $1,000
D) It cannot be determined.
Answer: C
Diff: 3 Page Ref: 401-402/401-402
Topic: Profit-Maximizing Level of Output
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perfect competition
5) Refer to Table 12-1. If the market price of each camera case is $8, what is the profit-
maximizing quantity?
A) 300 units
B) 400 units
C) 500 units
D) 600 units
Answer: B
Diff: 2 Page Ref: 401-402/401-402
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perfect competition
10
6) Refer to Table 12-1. If the market price of each camera case is $8, what is the firm's total
revenue?
A) $2,400
B) $3,200
C) $4000
D) $4,800
Answer: B
Diff: 2 Page Ref: 401-402/401-402
Topic: Total Revenue
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perfect competition
7) Refer to Table 12-1. If the market price of each camera case is $8 and the firm maximizes
profit, what is the amount of the firm's profit or loss?
A) $0 (it breaks even)
B) loss of $1,000
C) profit of $440
D) loss of $440
Answer: C
Diff: 2 Page Ref: 401-402/401-402
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perfect competition
8) Refer to Table 12-1. Suppose the fixed cost of production rises by $500 and the price per unit
is still $8. What happens to the firm's profit-maximizing output level?
A) It must fall.
B) It must rise to offset the increased cost.
C) It will remain the same.
D) The firm will shut down.
Answer: C
Diff: 3 Page Ref: 401-402/401-402
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perfect competition
11
9) Refer to Table 12-1. The firm will not produce in the short run if the output price falls below
A) $8.
B) $4.
C) $3.20.
D) $2.80.
Answer: D
Diff: 2 Page Ref: 401-402/401-402
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perfect competition
Figure 12-1
10) Refer to Figure 12-1. If the firm is producing 700 units,

A) it is making a profit.
B) it is making a loss.
C) it should cut back its output to maximize profit.
D) it should increase its output to maximize profit.
Answer: C
Diff: 1 Page Ref: 401-402/401-402
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perfect competition
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11) Refer to Figure 12-1. If the firm is producing 700 units, what is the amount of its profit or
loss?
A) loss of $280
B) loss equivalent to the area A
C) profit equivalent to the area A
D) There is insufficient information to answer the question.
Answer: D
Diff: 1 Page Ref: 401-402/401-402
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perfect competition
12) Refer to Figure 12-1. If the firm is producing 200 units,

A) it breaks even.
B) it is making a loss.
C) it should cut back its output to maximize profit.
D) it should increase its output to maximize profit.
Answer: D
Diff: 1 Page Ref: 401-402/401-402
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perfect competition
13) A perfectly competitive firm produces 3,000 units of a good at a total cost of $36,000. The
price of each good is $10. Calculate the firm's short-run profit or loss.
A) loss of $6,000
B) profit of $6,000
C) profit of $30,000
Answer: A
Diff: 1 Page Ref: 401-402/401-402
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13
14) If, for the last unit of a good produced by a perfectly competitive firm, MR > MC, then in
producing it, 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 cost.
C) is maximizing marginal profit.
D) has minimized its losses.
Answer: B
Diff: 2 Page Ref: 401-402/401-402
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perfect competition
15) If, for a perfectly competitive firm, price exceeds the marginal cost of production, the firm
should
A) increase its output.
B) reduce its output.
C) keep output constant and enjoy the above normal profit.
D) lower the price.
Answer: A
Diff: 1 Page Ref: 401-402/401-402
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Figure 12-2
16) Refer to Figure 12-2. What is the amount of profit if the firm produces Q2 units?
A) It is equal to the vertical distance c to g.
B) It is equal to the vertical distance c to Q2.
C) It is equal to the vertical distance g to Q2.
D) It is equal to the vertical distance c to g multiplied by Q2 units.
Answer: A
Diff: 1 Page Ref: 401-402/401-402
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perfect competition
17) Refer to Figure 12-2. Suppose the firm is currently producing Q2 units. What happens if it
expands output to Q3 units?
A) Its profit increases by the size of the vertical distance df.
B) It makes less profit.
C) It incurs a loss.
D) It will be moving toward its profit maximizing output.
Answer: B
Diff: 1 Page Ref: 401-402/401-402
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18) Refer to Figure 12-2. The firm breaks even at an output level of
A) Q1 units.
B) Q2 units.
C) Q3 units.
D) Q4 units.
Answer: D
Diff: 1 Page Ref: 401-402/401-402
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perfect competition
19) Refer to Figure 12-2. What happens if the firm produces more than Q4 units?
A) Its profit increases.
B) It makes a loss.
C) Its total revenue is increasing faster than its total cost.
D) It could make a profit or a loss depending on what happens to demand.
Answer: B
Diff: 1 Page Ref: 401-402/401-402
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perfect competition
20) Refer to Figure 12-2. Why is the total revenue curve a ray from the origin?
A) because revenue increases at an increasing rate
B) because revenue increases at a decreasing rate
C) because the firm can sell its product at a constant price
D) because the firm must lower its price to sell more
Answer: C
Diff: 2 Page Ref: 401-402/401-402
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21) In a graph with output on the horizontal axis and total revenue on the vertical axis, what is
the shape of the total revenue curve for a perfectly competitive seller?
A) U-shaped
B) inverted U-shaped
C) a horizontal line
D) a ray from the origin
Answer: D
Diff: 2 Page Ref: 401-402/401-402
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perfect competition
22) For a perfectly competitive firm, which of the following is not true at profit maximization?
A) Market price is greater than marginal cost.
B) Marginal revenue equals marginal cost.
C) Total revenue minus total cost is maximized.
D) Price equals marginal cost.
Answer: A
Diff: 2 Page Ref: 401-402/401-402
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perfect competition
23) Assume that price is greater than average variable cost. If a perfectly competitive seller is
producing at an output where price is $11 and the marginal cost is $14.54, then to maximize
profits the firm should
A) continue producing at the current output.
B) produce a larger level of output.
C) produce a smaller level of output.
D) There is not enough information given to answer the question.
Answer: C
Diff: 2 Page Ref: 401-402/401-402
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perfect competition
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24) An increase in a firm's fixed cost will not change the firm's profit-maximizing output in the
short run.
Answer: TRUE
Diff: 1 Page Ref: 401-402/401-402
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perfect competition
25) A perfectly competitive firm's marginal revenue curve is downward sloping.

Answer: FALSE
Diff: 2 Page Ref: 401-402/401-402
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perfect competition
26) Assume that price is greater than average variable cost. If a perfectly competitive firm is
producing at an output where price is $114 and the marginal cost is $102, then the firm is
probably producing more than its profit-maximizing quantity.
Answer: FALSE
Diff: 2 Page Ref: 401-402/401-402
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perfect competition
27) How are market price, average revenue, and marginal revenue related for a perfectly
competitive firm and why?
Answer: They are all equal to each other. The market price for any firm equals average revenue.
This can be verified by noting that average revenue = total revenue ÷ quantity = (price ×
quantity) ÷ quantity. Further, a perfectly competitive firm faces a horizontal demand curve at the
market price which means that it does not need to reduce the price to sell more. Therefore, its
marginal revenue equals price.
*: Recurring
perfect competition
18
28) Assuming a market price of $4, fill in the columns in the following table. What is the profit-
maximizing level of production? What are the two ways to determine the profit-maximizing
level of production?
Total Total Marginal

Revenue Cost Revenue Marginal
Quantity (TR) (TC) Profit (MR) Cost (MC)
0 3
1 5
2 6
3 9
4 14
5 20
6 28
7 40
Answer:
Total Marginal
Revenue Total Cost Revenue Marginal
Quantity (TR) (TC) Profit (MR) Cost (MC)
0 0 3 -3 --- ---
1 4 5 -1 4 2
2 8 6 2 4 1
3 12 9 3 4 3
4 16 14 2 4 5
5 20 20 0 4 6
6 24 28 -4 4 8
7 28 40 -12 4 12
The profit-maximizing level of production is 3 units, which can be determined by the greatest
difference between total revenue and total cost, which is equal to profit, and can also be
determined where marginal revenue is equal to marginal cost (or marginal revenue is the closest
to marginal cost, without being below marginal cost).
Diff: 2 Page Ref: 401-402/401-402
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12.3 Illustrating Profit or Loss on the Cost Curve Graph
1) A firm's total profit can be calculated as all of the following except

A) total revenue minus total cost.
B) average profit per unit times quantity sold.
C) (price minus average total cost) times quantity sold.
D) marginal profit times quantity sold.
Answer: D
Topic: Profit
*: Recurring
Learning Outcome: Micro 20: Apply the concepts of opportunity cost, marginal analysis, and
present value to make decisions
2) If a perfectly competitive firm's price is above its average total cost, the firm
A) is earning a profit.
B) should shut down.
C) is incurring a loss.
D) is breaking even.
Answer: A
Topic: Profit
*: Recurring
perfect competition
20
Figure 12-3
3) Refer to Figure 12-3. Suppose the prevailing price is P1 and the firm is currently producing
its loss-minimizing quantity. Identify the area that represents the loss.
A) P2 deP1
B) P3cbP1
C) P3caP0
D) 0P1 bQ1
Answer: B
Topic: Profit and Loss
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perfect competition
4) If a perfectly competitive firm's price is less than its average total cost but greater than its
average variable cost, the firm
C) is incurring a loss.
D) is breaking even.
Answer: C
Topic: Profit and Loss
*: Recurring
perfect competition
21
Figure 12-4
Figure 12-4 shows the cost and demand curves for a profit-maximizing firm in a perfectly
competitive market.
5) Refer to Figure 12-4. If the market price is $30, the firm's profit-maximizing output level is
A) 0.
B) 130.
C) 180.
D) 240.
Answer: C
perfect competition
Special Feature: Making the Connection: Losing Money in the Medical Screening Industry
6) Refer to Figure 12-4. If the market price is $30 and if the firm is producing output, what is the
amount of its total variable cost?
A) $7,200
B) $6,480
C) $5,400
D) $3,960
Answer: D
Diff: 2 Page Ref: 406-407/406-407
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perfect competition
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7) Refer to Figure 12-4. What is the amount of its total fixed cost?
A) $1,080
B) $1,440
C) $2,520
Answer: C
Diff: 2 Page Ref: 406-407/406-407
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perfect competition
8) Refer to Figure 12-4. If the market price is $30 and the firm is producing output, what is the
amount of the firm's profit or loss?
A) loss of $1,080
B) profit of $1,440
C) loss of $2,520
D) profit of $1,300
Answer: A
Diff: 2 Page Ref: 406-407/406-407
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perfect competition
9) Refer to Figure 12-4. If the market price is $30, should the firm represented in the diagram
continue to stay in business?
A) No, it should shut down because it is making a loss.
B) No, it should shut down because it cannot cover its variable cost.
C) Yes, because it is covering part of its fixed cost.
D) Yes, because it is making a profit.
Answer: C
Diff: 2 Page Ref: 406-407/406-407
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10) A perfectly competitive firm earns a profit when price is
A) equal to minimum average total cost.
B) above minimum average total cost.
C) equal to minimum average variable cost.
D) equal to minimum average fixed cost.
Answer: B
Topic: Profit
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perfect competition
11) All of the following can be used to compute average profit except
A) marginal profit minus marginal cost.
B) total profit divided by quantity.
C) average revenue minus average total cost
D) price minus average total cost.
Answer: A
Topic: Profit
Special Feature: Don't Let This Happen to YOU!: Remember That Firms Maximize Their Total
Profits, Not Their Profits per Unit
12) An increase in demand for U.S. farm exports will ________ the market prices for these
exports and ________ economic profit in these markets.
A) increase; decrease
B) increase; decrease
C) increase; increase
D) decrease; decrease
Answer: C
Topic: Profit
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perfect competition
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13) Assume that after a banner year in U.S. farm exports in 2011, farmers are expected to break
even in 2012. This means that at the quantity being produced in 2012,
A) MC =AVC.
B) MR =MC.
C) MR =ATC.
D) AVC =ATC.
Answer: C
Topic: Profit
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perfect competition
Figure 12-5
Figure 12-5 shows cost and demand curves facing a typical firm in a constant-cost, perfectly
competitive industry.
14) Refer to Figure 12-5. If the market price is $20, what is the firm's profit-maximizing output?
A) 750 units
B) 1,100 units
C) 1,350 units
D) 1,800 units
Answer: C
Diff: 2 Page Ref: 404-405/404-405
perfect competition
Special Feature: Solved Problem: Determining Profit-Maximizing Price and Quantity
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15) Refer to Figure 12-5. If the market price is $20, what is the amount of the firm's profit?
A) $5,400
B) $6,750
C) $8,100
D) $16,200
Answer: B
Diff: 2 Page Ref: 404-405/404-405
perfect competition
16) Refer to Figure 12-5. If the market price is $20, what is the average profit at the profit-
maximizing quantity?
A) $5
B) $6
C) $9
D) $20
Answer: A
perfect competition
17) Refer to Figure 12-5. The firm's manager suggests that the firm's goal should be to
maximize average profit. In that case, what is the output level and what is the average profit that
will achieve the manager's goal?
A) Q = 1,350 units, average profit =$5
B) Q = 1,100 units, average profit =$6
C) Q = 1,350 units, average profit =$9
D) Q = 1,800 units, average profit =$20
Answer: B
perfect competition
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18) Refer to Figure 12-5. The firm's manager suggests that the firm's goal should be to
maximize average profit. If the firm does this, what is the amount of profit that it will earn?
A) $6,600
B) $6,750
C) $12,150
D) $36,000
Answer: A
perfect competition
19) Refer to Figure 12-5. What is the amount of the firm's fixed cost of production?
A) $5,400
B) $6,750
C) $8,100
Answer: A
Diff: 2 Page Ref: 406-407/406-407
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perfect competition
20) Refer to Figure 12-5. If the firm's fixed cost increases by $1,000 due to a new environmental
regulation, what happens in the diagram above?
A) All the cost curves shift upward.
B) Only the average variable cost and average total cost curves shift upward; marginal cost is not
affected.
C) Only the average total cost curve shifts upward; the marginal cost and average variable cost
curves are not affected.
D) None of the curves shifts; only the fixed cost curve, which is not shown here, is affected.
Answer: C
Diff: 2 Page Ref: 406-407/406-407
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21) Refer to Figure 12-5. The figure shows the cost structure of a firm in a perfectly competitive
market. If the firm's fixed cost increases by $1,000 due to a new environmental regulation, what
happens to its profit-maximizing output level?
A) It increases.
B) It decreases.
C) It remains the same.
D) It could increase, decrease or remain constant, depending on whether the firm is able to cut
costs somewhere else.
Answer: C
Diff: 2 Page Ref: 406-407/406-407
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perfect competition
22) Refer to Figure 12-5. What is the minimum price the firm requires to produce output?
A) $20
B) $14
C) $5
D) It cannot be determined
Answer: C
Diff: 2 Page Ref: 406-407/406-407
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perfect competition
23) A perfectly competitive firm breaks even at a price equal to its minimum average total cost.
Answer: TRUE
Topic: Break Even
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24) Maximizing average profit is equivalent to maximizing total profit.
Answer: FALSE
Topic: Profit
perfect competition
25) In the short run, if price falls below a firm's minimum average total cost, the firm should shut
down.
Answer: FALSE
perfect competition
29
26) Suppose Veronica sells teapots in the perfectly competitive teapot market. Her output per
day and her costs are as follows:
Output per
Day Total Cost
0 $20
1 32
2 37
3 48
4 61
5 75
6 92
7 113
8 136
Suppose the current equilibrium price in the teapot market is $20. To maximize profit, how many
teapots will Veronica produce, what price will she charge, and how much profit (or loss) will she
make? Draw a graph to illustrate your answer. Your graph should include Veronica's demand,
ATC, AVC, MC, and MR curves, the price she is charging, the quantity she is producing, and the
area representing her profit (or loss).
Answer: Veronica will produce 6 teapots per day. She will charge the market price of $20. She
will make a profit of $28.
Diff: 2 Page Ref: 404-405/404-405

perfect competition
30
27) Suppose Veronica sells teapots in the perfectly competitive teapot market. Her output per
day and her costs are as follows:
Output per
Day Total Cost
0 $20
1 32
2 37
3 48
4 61
5 75
6 92
7 113
8 136
Suppose the current equilibrium price in the teapot market is $15. To maximize profit, how many
teapots will Veronica produce, what price will she charge, and how much profit (or loss) will she
make? Draw a graph to illustrate your answer. Your graph should include Veronica's demand,
ATC, AVC, MC, and MR curves, the price she is charging, the quantity she is producing, and the
area representing her profit (or loss).
Answer: Veronica will produce 5 teapots per day. She will charge the market price of $15. She
will break even and make a profit of $0.
Diff: 2 Page Ref: 404-405/404-405

perfect competition
31
12.4 Deciding Whether to Produce or to Shut Down in the Short Run
1) If, for a given output level, a perfectly competitive firm's price is less than its average variable
cost, the firm
C) should increase output.
D) should increase price.
Answer: B
Topic: Shutting Down in the Short Run
*: Recurring
perfect competition
2) A perfectly competitive firm's supply curve is its

A) marginal cost curve.
B) marginal cost curve above its minimum average total cost.
C) marginal cost curve above its minimum average variable cost.
D) marginal cost curve above its minimum average fixed cost.
Answer: C
Topic: The Firm's Supply Curve
*: Recurring
perfect competition
3) When a perfectly competitive firm finds that its market price is below its minimum average
variable cost, it will sell
A) the output where marginal revenue equals marginal cost.
B) any positive output the entrepreneur decides upon because all of it can be sold.
C) nothing at all; the firm shuts down.
D) the output where average total cost equals price.
Answer: C
*: Recurring
perfect competition
32
4) Max Shreck, an accountant, quit his $80,000-a-year job and bought an existing tattoo parlor
from its previous owner, Sylvia Sidney. The lease has five years remaining and requires a
monthly payment of $4,000. The lease
A) is a fixed cost of operating the tattoo parlor.
B) is a variable cost of operating the tattoo parlor.
C) is an implicit cost of operating the tattoo parlor.
D) is part of the marginal cost of operating the tattoo parlor.
Answer: A
Diff: 2 Page Ref: 408-409/408-409
perfect competition
Special Feature: Solved Problem: When to Pull the Plug on a Movie
5) Max Shreck, an accountant, quit his $80,000-a-year job and bought an existing tattoo parlor
from its previous owner, Sylvia Sidney. The lease has five years remaining and requires a
monthly payment of $4,000. Max's explicit cost amounts to $3,000 per month more than his
revenue. Should Max continue operating his business?
A) Max's explicit cost exceeds his total revenue. He should shut down his tattoo parlor.
B) Max should continue to run the tattoo parlor until his lease runs out.
C) If Max's marginal revenue is greater than or equal to his marginal cost, then he should stay in
business.
D) This cannot be determined without information on his revenue.
Answer: B
Diff: 2 Page Ref: 408-409/408-409
perfect competition
Special Feature: Solved Problem: When to Pull the Plug on a Movie
33
Figure 12-6
Figure 12-6 shows cost and demand curves facing a profit-maximizing, perfectly competitive
firm.
6) Refer to Figure 12-6. At price P1, the firm would produce

A) Q1 units
B) Q3 units.
C) Q5 units.
D) zero units.
Answer: D
Diff: 2 Page Ref: 409-410/409-410
Topic: Short-Run Equilibrium
*: Recurring
perfect competition
34
7) Refer to Figure 12-6. At price P1, the firm would
A) lose an amount equal to its fixed cost.
B) lose an amount more than fixed cost.
C) lose an amount less than fixed cost.
D) break even.
Answer: B
Diff: 2 Page Ref: 409-410/409-410
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perfect competition

A) Q2 units.
B) Q3 units.
C) Q4 units.
D) zero units.
Answer: A
Diff: 2 Page Ref: 409-410/409-410
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perfect competition

D) break even.
Answer: C
Diff: 2 Page Ref: 409-410/409-410
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perfect competition
35
A) Q2 units
B) Q3 units.
C) Q4 units.
D) Q5 units.
Answer: B
Diff: 2 Page Ref: 409-410/409-410
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perfect competition

D) break even.
Answer: D
Diff: 2 Page Ref: 409-410/409-410
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perfect competition
A) Q3 units.
B) Q4 units.
C) Q5 units.
D) Q6 units.
Answer: B
Diff: 2 Page Ref: 409-410/409-410
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perfect competition
36
B) make a profit.
D) make a normal profit.
Answer: B
Diff: 2 Page Ref: 409-410/409-410
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perfect competition
14) Refer to Figure 12-6. Identify the short-run shut down point for the firm.
A) a
B) b
C) c
D) d
Answer: B
Diff: 2 Page Ref: 409-410/409-410
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perfect competition
15) Refer to Figure 12-6. Identify the firm's short-run supply curve.
A) the marginal cost curve
B) the marginal cost curve from a and above
C) the marginal cost curve from b and above
D) the marginal cost curve from d and above
Answer: C
Diff: 2 Page Ref: 409-410/409-410
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perfect competition
37
16) Market supply is found by
A) vertically summing the relevant part of each individual producer's marginal cost curve.
B) horizontally summing the relevant part of each individual producer's marginal cost curve.
C) vertically summing each individual producer's average total cost curve.
D) horizontally summing each individual producer's average total cost curve.
Answer: B
*: Recurring
perfect competition
17) If total variable cost exceeds total revenue at all output levels, a perfectly competitive firm
A) should produce in the short run.
B) is making short-run profits.
C) should shut down in the short run.
D) has covered its fixed cost.
Answer: C
*: Recurring
perfect competition
18) If total revenue exceeds fixed cost, a firm

A) should produce in the short run.
B) has covered its variable cost.
C) is making short-run profits.
D) may or may not produce in the short run, depending on whether total revenue covers variable
cost.
Answer: D
*: Recurring
perfect competition
38
19) If a firm shuts down in the short run,
A) its loss equals zero.
B) its loss equals its fixed cost.
C) is makes zero economic profit.
D) its total revenue is not large enough to cover its fixed cost.
Answer: B
*: Recurring
perfect competition
20) A perfectly competitive firm produces 3,000 units of a good at a total cost of $36,000. The
fixed cost of production is $20,000. The price of each good is $10. Should the firm continue to
produce in the short run?
A) No, it should shut down because it is making a loss.
B) Yes, it should continue to produce because its price exceeds its average fixed cost.
C) Yes, it should continue to produce because it is minimizing its loss.
Answer: C
Diff: 2 Page Ref: 409-410/409-410
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perfect competition
21) In the short run, a firm that incurs losses might choose to produce rather than shut down if
the amount of its revenue is less than its fixed cost.
Answer: FALSE
Diff: 1 Page Ref: 409-410/409-410
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perfect competition
39
22) In the short run, if a firm shuts down it avoids its variable cost but not its fixed cost.
Answer: TRUE
Diff: 2 Page Ref: 409-410/409-410
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perfect competition
23) In the short run, if a firm shuts down its maximum loss equals the amount of its fixed cost.
Answer: TRUE
Diff: 1 Page Ref: 409-410/409-410
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perfect competition
24) The minimum point on the average variable cost curve is called the loss-minimizing point.
Answer: FALSE
Diff: 1 Page Ref: 409-410/409-410
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perfect competition
25) If a firm's fixed cost exceeds its total revenue, the firm should stop production by shutting
down temporarily.
Answer: FALSE
Diff: 2 Page Ref: 409-410/409-410
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perfect competition
40
26) Under what conditions should a competitive firm shut down in the short run?
Answer: When market price is below average variable cost at the output where marginal
revenue equals marginal cost, the firm should shut down in the short run.
Diff: 2 Page Ref: 409-410/409-410
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perfect competition
AACSB: Reflective Thinking, Ethical Reasoning
27) Use a graph to show the demand, AVC, ATC, MC, and MR curves of a firm that should
temporarily shut down in the short run. Identify the shutdown point on the graph.
Answer:
Diff: 2 Page Ref: 409-410/409-410

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perfect competition
AACSB: Reflective Thinking, Ethical Reasoning
41
12.5 "If Everyone Can Do It, You Can't Make Money at It": The Entry and Exit of Firms in the
Long Run
1) Which of the following statements is correct?

A) Economic profit takes into account all costs involved in producing a product.
B) Accounting profit is not relevant in preparing the firm's financial statement.
C) Economic profit always exceeds accounting profit.
D) Accounting profit is the same as economic profit.
Answer: A
Topic: Profit
*: Recurring
Learning Outcome: Micro 1: Identify the basic principles of economics and explain how to think
like an economist
Figure 12-7
2) Refer to Figure 12-7. Suppose the prevailing price is $20 and the firm is currently producing
1,350 units. In the long-run equilibrium, the firm represented in the diagram
A) will continue to produce the same quantity.
B) will reduce its output to 1,100 units.
C) will reduce its output to 750 units.
D) will cease to exist.
Answer: B
Diff: 2 Page Ref: 412-413/412-413
Topic: Long-Run Equilibrium
*: Recurring
perfect competition
42
3) Refer to Figure 12-7. Suppose the prevailing price is $20 and the firm is currently producing
1,350 units. In the long-run equilibrium,
A) there will be fewer firms in the industry and total industry output decreases.
B) there will be more firms in the industry and total industry output increases.
C) there will be fewer firms in the industry but total industry output increases.
D) there will be more firms in the industry and total industry output remains constant.
Answer: B
Diff: 2 Page Ref: 412-413/412-413
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perfect competition
4) Refer to Figure 12-7. If this is a constant-cost industry, what is the market price in the long-
run equilibrium?
A) $5
B) $14
C) $15
D) $20
Answer: B
Diff: 2 Page Ref: 412-413/412-413
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perfect competition
5) If a typical firm in a perfectly competitive industry is earning profits, then

A) all firms will continue to earn profits.
B) new firms will enter in the long run causing market supply to decrease, market price to rise
and profits to increase.
C) new firms will enter in the long run causing market supply to increase, market price to fall
and profits to decrease.
D) the number of firms in the industry will remain constant in the long run.
Answer: C
*: Recurring
perfect competition
43
Figure 12-8
6) Refer to Figure 12-8. Consider a typical firm in a perfectly competitive industry that makes
short-run profits. Which of the diagrams in the figure shows the effect on the industry as it
transitions to a long-run equilibrium?
A) Panel A
B) Panel B
C) Panel C
D) Panel D
Answer: B
Diff: 3 Page Ref: 412-413/412-413
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perfect competition
44
7) If, in a perfectly competitive industry, the market price facing a firm is above its average total
cost at the output where marginal revenue equals marginal cost, then
A) firms are breaking even.
B) new firms are attracted to the industry.
C) existing firms will exit the industry.
D) market supply will remain constant.
Answer: B
Diff: 2 Page Ref: 412-413/412-413
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perfect competition
Figure 12-9
its loss-minimizing quantity. In the long-run equilibrium,
A) there will be fewer firms in the industry and total industry output decreases.
B) there will be more firms in the industry and total industry output increases.
C) there will be fewer firms in the industry but total industry output increases.
D) there will be more firms in the industry and total industry output remains constant.
Answer: A
Diff: 2 Page Ref: 413-415/413-415
*: Recurring
perfect competition
45
its loss-minimizing quantity. If the firm represented in the diagram continues to stay in business,
in the long-run equilibrium,
A) it will reduce its output to Q0 and face a price of P0.
B) it will continue to produce Q1 but faces the higher price of P2.
C) it will expand its output to Q2 and face a price of P2.
D) it will expand its output to Q3 and face a price of P1.
Answer: C
Diff: 2 Page Ref: 413-415/413-415
*: Recurring
perfect competition
10) If a typical firm in a perfectly competitive industry is incurring losses, then

A) all firms will continue to lose money.
B) some firms will exit in the long run, causing market supply to decrease and market price to
rise increasing profits for the remaining firms.
C) some firms will exit in the long run, causing market supply to decrease and market price to
fall increasing losses for the remaining firms.
D) some firms will enter in the long run, causing market supply to increase and market price to
rise increasing profit for all firms.
Answer: B
*: Recurring
perfect competition
46
11) A perfectly competitive market is in long-run equilibrium. At present there are 100 identical
firms each producing 5,000 units of output. The prevailing market price is $20. Assume that each
firm faces increasing marginal cost. Now suppose there is a sudden increase in demand for the
industry's product which causes the price of the good to rise to $24. Which of the following
describes the effect of this increase in demand on a typical firm in the industry?
A) In the short run, the typical firm increases its output and makes an above normal profit.
B) In the short run, the typical firm's output remains the same but because of the higher price, its
profit increases.
C) In the short run, the typical firm increases its output but its total cost also rises, resulting in no
change in profit.
D) In the short run, the typical firm increases its output but its total cost also rises. Hence, the
effect on the firm's profit cannot be determined without more information.
Answer: A
Diff: 3 Page Ref: 413-415/413-415
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perfect competition
12) In long-run perfectly competitive equilibrium, which of the following is false?

A) There is efficient, low-cost production at the minimum efficient scale.
B) Economic surplus is maximized.
C) Firms earn economic profit.
D) Economies of scale are exhausted.
Answer: C
*: Recurring
perfect competition
47
Figure 12-10
13) Refer to Figure 12-10. Consider a typical firm in a perfectly competitive industry which is
incurring short-run losses. Which of the diagrams in the figure shows the effect on the industry
as it transitions to a long-run equilibrium?
A) Panel A
B) Panel B
C) Panel C
D) Panel D
Answer: A
*: Recurring
perfect competition
48
14) If in a perfectly competitive industry, the market price facing a firm is below its average total
cost but above average variable cost at the output where marginal cost equals marginal revenue
A) the industry supply will not change.
B) new firms are attracted to the industry.
C) some existing firms will exit the industry.
D) firms are breaking even.
Answer: C
Topic: Entry and Exit
*: Recurring
perfect competition
49
Figure 12-11
15) Refer to Figure 12-11. Assume that the medical screening industry is perfectly competitive
and that some firms are making short-run losses. Suppose the medical screening industry runs an
effective advertising campaign which convinces a large number of people that yearly CT scans
are critical for good health. Which of the diagrams in the figure best describes what happens in
the industry?
A) Panel A
B) Panel B
C) Panel C
D) Panel D
Answer: D
Diff: 3 Page Ref: 415-416/415-416
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perfect competition
50
16) Refer to Figure 12-11. Suppose a typical firm in a perfectly competitive market is earning
economic profits in the short run. Which of the diagrams in the figure depicts what happens to in
the industry as it transitions to along run equilibrium?
A) Panel A
B) Panel B
C) Panel C
D) Panel D
Answer: B
Diff: 3 Page Ref: 415-416/415-416
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perfect competition
17) Assume that the medical screening industry is perfectly competitive. Consider a typical firm
that is making short-run losses. Suppose the medical screening industry runs an effective
advertising campaign which convinces a large number of people that yearly CT scans are critical
for good health. How will this affect a typical firm that remains in the industry?
A) The firm's supply curve shifts right and its marginal revenue curve shifts upwards as the
market price rises and ultimately the firm starts making profits.
B) The firm's marginal revenue curve and average cost curve shift upwards in response to the
increase in market price and advertising expenditure. The firm increases output until it starts
breaking even.
C) The marginal revenue curve shifts upwards, the firm's output increases along its marginal cost
curve, it expands production and eventually starts making profits.
D) The marginal revenue curve shifts upwards, the firm's output increases along its marginal cost
curve, it expands production until it breaks even.
Answer: D
Diff: 3 Page Ref: 415-416/415-416
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perfect competition
51
18) An industry's long-run supply curve shows
A) the relationship in the long run between market price and quantity supplied.
B) how the government determines the price of the product.
C) how average productivity is changing.
D) greater than normal profit.
Answer: A
Diff: 2 Page Ref: 415-416/415-416
Topic: Market Supply Curve
*: Recurring
perfect competition
19) In the long run, a perfectly competitive market will

A) produce only the quantity of output that yields a long-run profit for the typical firm.
B) supply whatever amount consumers will buy at a price which earns the market an economic
profit.
C) supply whatever amount consumers demand at a price determined by the minimum point on
the typical firm's average total cost curve.
D) generate a long-run equilibrium where the typical firm operates at a loss.
Answer: C
Diff: 2 Page Ref: 415-416/415-416
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perfect competition
20) A perfectly competitive wheat farmer in a constant-cost industry produces 3,000 bushels of
wheat at a total cost of $36,000. The prevailing market price is $15. What will happen to the
market price of wheat in the long run?
A) The price remains constant at $15.
B) The price falls to $12.
C) The price rises above $15.
Answer: B
Diff: 2 Page Ref: 413-415/413-415
Topic: Constant-Cost Industry
*: Recurring
perfect competition
52
21) A perfectly competitive wheat farmer in a constant-cost industry produces 1,000 bushels of
wheat at a total cost of $50,000. The prevailing market price is $48. What will happen to the
market price of wheat in the long run?
A) The price remains constant at $48.
B) The price falls below $48.
C) The price rises above $48.
Answer: C
Diff: 2 Page Ref: 413-415/413-415
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perfect competition
22) In August 2008, Ethan Nicholas developed the iShoot application for the apple iPhone 3G,
and within five months had earned $800,000 from this program. By May 2009, Nicholas had
dropped the price from $4.99 to $1.99 in an attempt to maintain sales. This example indicates
that in a competitive market,
A) earning an economic profit in the long run is extremely easy.
B) earning an economic profit in the long run is extremely difficult.
C) it is impossible to earn an economic profit in either the short run or the long run.
D) economic profits are only earned in the long run.
Answer: B
Diff: 2 Page Ref: 416-417/416-417
Topic: Profit
perfect competition
Special Feature: Making the Connection: Easy Entry Makes the Long Run Pretty Short in the
Apple iPhone Apps Store
23) Apple introduced its iPhone 3G in July 2008 and within a month sales had topped 3 million
units. By April 2009, more than 25,000 apps for the iPhone 3G were available in the iTunes
store, an indication that in a competitive market
A) the ease at which a new firm can enter a competitive market is low.
B) the ease at which a new firm can enter a competitive market is high.
C) entry into the market is blocked.
D) entry into the market is restricted in the short run, but becomes easier in the long run.
Answer: B
Diff: 2 Page Ref: 416-417/416-417
perfect competition
Special Feature: Making the Connection: Easy Entry Makes the Long Run Pretty Short in the
Apple iPhone Apps Store
53
24) Assume that the tuna fishing industry is perfectly competitive. Which of the following best
characterizes the industry if, as demand for tuna increases, fishing boats have to go farther into
the ocean to harvest tuna?
A) a constant-cost industry
B) an increasing-cost industry
C) a decreasing-cost industry
D) a fixed-cost industry
Answer: B
Topic: Increasing-Cost Industry
*: Recurring
perfect competition
25) If in the long run a firm makes zero profit, it should exit the industry.
Answer: FALSE
*: Recurring
Learning Outcome: Micro 9: Discuss the fundamental characteristics of firms
26) A perfectly competitive firm in a constant-cost industry produces 1,000 units of a good at a
total cost of $50,000. If the prevailing market price is $48, the number of firms and the
industry's output will decrease in the long run.
Answer: TRUE
Diff: 2 Page Ref: 413-415/413-415
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perfect competition
27) Suppose there are economies of scale in the production of a specialized memory chip that is
used in manufacturing microwaves. This suggests that the microwave industry is a decreasing-
cost industry.
Answer: TRUE
Topic: Decreasing-Cost Industry
*: Recurring
perfect competition
54
28) In an increasing-cost industry the long-run supply curve is upward sloping.
Answer: TRUE
Topic: Increasing-Cost Industry
*: Recurring
perfect competition
29) What is meant by the term "long-run competitive equilibrium?

Answer: Long-run competitive equilibrium refers to the situation in which the entry and exit of
firms to and from a market results in the typical firm breaking even.
*: Recurring
perfect competition
30) What is a long-run supply curve? What does a long-run supply curve look like on a perfectly
competitive market graph?
Answer: A long run supply curve shows the relationship in the long run between market price
and the quantity supplied. On a perfectly competitive market graph, the long run supply curve is
a horizontal line at the market price.
Topic: Market Supply Curve
*: Recurring
perfect competition
55
Figure 12-12
31) Use the figure above to answer the following questions.

a. How can you determine that the figure represents a graph of a perfectly competitive firm? Be
specific; indicate which curve gives you the information and how you use this information to
arrive at your conclusion.
b. What is the market price?
c. What is the profit-maximizing output?
d. What is total revenue at the profit-maximizing output?
e. What is the total cost at the profit-maximizing output?
f. What is the profit or loss at the profit-maximizing output?
g. What is the firm's total fixed cost?
h. What is the total variable cost?
i. Identify the firm's short-run supply curve.
j. Is the industry in a long-run equilibrium?
k. If it is not in long-run equilibrium, what will happen in this industry to restore long-run
equilibrium?
l. In long-run equilibrium, what is the firm's profit maximizing quantity?
Answer:
a. The perfectly competitive firm is a price taker and therefore faces a perfectly elastic demand
curve which is also the MR curve.
b. Market price = $40
c. Profit maximizing output = 200
d. Total revenue = $40 × 200 = $8,000
e. Total cost = ATC × total output = $24 × 200 = $4,800
f. Profit = Total revenue - total cost = $8,000 - 4,800 = $3,200
g. Total fixed cost = AFC × total output = (ATC - AVC) × 150 = $6 × 150 = $900. (Note: fixed
cost has the same value at all output rates)
h. The total variable cost at the profit maximizing output level = ($4,800 - 900) =$3,900
i. The firm's short run supply curve is its MC curve above minimum AVC (from point b and
above).
j. No, the industry is not in a long-run equilibrium because the firm earns an economic profit.
56
k. Some firms will enter the industry, causing the industry supply curve to shift rightward. This
causes market price to fall. Entry stops when economic profits are eliminated and all firms break
even.
l. In the long run equilibrium the firm's profit maximizing quantity = 150, where price will
equal marginal cost.
Diff: 3 Page Ref: 412-414/412-414
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perfect competition
12.6 Perfect Competition and Efficiency
1) Which of the following describes a situation in which a good or service is produced at the
lowest possible cost?
A) productive efficiency
B) allocative efficiency
C) marginal efficiency
D) profit maximization
Answer: A
Topic: Productive Efficiency
*: Recurring
Learning Outcome: Micro 19: Explain the concept of efficiency in the economy and obstacles to
achieving it
2) What is productive efficiency?

A) a situation in which resources are allocated to their highest profit use
B) a situation in which resources are allocated such that goods can be produced at their lowest
possible average cost
C) a situation in which resources are allocated such the last unit of output produced provides a
marginal benefit to consumers equal to the marginal cost of producing it
D) a situation in which firms produce as much as possible
Answer: B
*: Recurring
achieving it
57
3) The perfectly competitive market structure benefits consumers because
A) firms do not produce goods at the lowest possible price in the long run.
B) firms are forced by competitive pressure to be as efficient as possible.
C) firms add a much smaller markup over average cost than firms in any other type of market
structure.
D) firms produce high quality goods at low prices.
Answer: B
Topic: Efficiency
*: Recurring
perfect competition
4) If the long-run average cost curve is U-shaped, the optimal scale of production from society's
viewpoint is
A) the minimum efficient scale.
B) where maximum economic profit is earned by producers.
C) where firm profit is large enough to finance research and development.
D) one which guarantees economic profit.
Answer: A
Topic: Efficiency
*: Recurring
achieving it
5) Which of the following describes a situation in which every good or service is produced up to
the point where the last unit provides a marginal benefit to consumers equal to the marginal cost
of producing it?
A) productive efficiency
B) allocative efficiency
C) marginal efficiency
D) profit maximization
Answer: B
Topic: Allocative Efficiency
*: Recurring
achieving it
58
6) What is allocative efficiency?
A) It refers to a situation in which resources are allocated to their highest profit use.
B) It refers to a situation in which resources are allocated such that goods can be produced at
their lowest possible average cost.
C) It refers to a situation in which resources are allocated such that the last unit of output
produced provides a marginal benefit to consumers equal to the marginal cost of producing it.
D) It refers to a situation in which resources are allocated fairly to all consumers in a society.
Answer: C
*: Recurring
achieving it
7) A perfectly competitive industry achieves allocative efficiency because

A) goods and services are produced at the lowest possible cost.
B) goods and services are produced up to the point where the last unit provides a marginal
benefit to consumers equal to the marginal cost of producing it.
C) it produces where market price equals marginal production cost.
D) firms carry production surpluses.
Answer: B
*: Recurring
achieving it
59
Figure 12-13
8) Refer to Figure 12-13. If the market price is P1, what is the allocatively efficient output
level?
A) Q0
B) Q1
C) Q2
D) There is no allocatively efficient output level because the firm is making a loss.
Answer: B
*: Recurring
achieving it
60
9) Assume that the LCD and plasma television sets industry is perfectly competitive. Suppose a
producer develops a successful innovation that enables it to lower its cost of production. What
happens in the short run and in the long run?
A) Initially, the firm will be able to increase its profit significantly, but in the long run its profits
will still be greater than zero but lower than its short run profits because other firms would also
innovate.
B) The firm will probably incur losses temporarily because of the high cost of the innovation, but
in the long run it will start earning positive profits.
C) This firm will be able to earn above normal profits indefinitely if it obtains a patent for its
innovation.
D) The firm will be able to increase its profits temporarily, but in the long run its profits will be
eliminated as other firms copy the innovation.
Answer: D
Diff: 3 Page Ref: 418-419/418-419
perfect competition
Special Feature: Solved Problem: How Productive Efficiency Benefits Consumers
10) In early 2007, Pioneer and JVC, two Japanese electronics firms, each announced that their
profits were going to be lower than expected because they both had to cut prices for LCD and
plasma television sets. Which of the following could explain why these firms did not simply
raise their prices and increase their profits?
A) The move to cut prices is probably just a temporary one to gain market share. In the long run
the firms will raise prices and be able to increase their profits.
B) Most likely, intense competition between these two major producers probably pushed prices
down. Thereafter, each feared that it would lose its customers to the other if it raised its prices.
C) In perfect competition, prices are determined by the market and firms will keep lowering
prices until there are no profits to be earned.
D) The firms are still making profits, just not as high as expected so there is room to lower prices
until one can force the other out of business.
Answer: B
Diff: 3 Page Ref: 418-419/418-419
Learning Outcome: Micro 1: Identify the basic principles of economics and explain how to think
like an economist
61
11) Writing in the New York Times on the technology boom of the late 1990s, Michael Lewis
argues, "The sad truth, for investors, seems to be that most of the benefits of new technologies
are passed right through to consumers free of charge." What does Lewis means by the benefits of
new technology being "passed right through to consumers free of charge"?
A) Firms in perfect competition are price takers. Since they cannot influence price, they cannot
dictate who benefits from new technologies, even if the benefits of new technology are being
"passed right through to consumers free of charge."
B) In perfect competition, price equals marginal cost of production. In this sense, consumers
receive the new technology "free of charge."
C) In the long run, price equals the lowest possible average cost of production. In this sense,
consumers receive the new technology "free of charge."
D) In perfect competition, consumers place a value on the good equal to its marginal cost of
production and since they are willing to pay the marginal valuation of the good, they are
essentially receiving the new technology "free of charge."
Answer: C
Diff: 3 Page Ref: 418-419/418-419
Learning Outcome: Micro 7: Discuss the effects of consumer and producer surpluses in a market
12) Without government subsidization, the conversion of farmland in the United Kingdom from
conventional to organic production will generally cause a farmer's
A) marginal cost and average total cost to decrease.
B) marginal cost and average total cost to increase.
C) average total cost to increase and marginal cost to decrease.
D) marginal cost to increase and average total cost to remain unchanged.
Answer: B
Diff: 2 Page Ref: 422-423/422-423
Topic: Costs of Production
Special Feature: An Inside LOOK: Organic Farming on the Decline in the United Kingdom
13) A decrease in demand for organic products will ________ a firm's economic profit, and the
increase in costs to produce organic produce will ________ a firm's economic profit.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Answer: D
Diff: 1 Page Ref: 422-423/422-423
Topic: Profit
Learning Outcome: Micro 9: Discuss the fundamental characteristics of firms
Special Feature: An Inside LOOK: Organic Farming on the Decline in the United Kingdom
62
14) If a firm in a perfectly competitive industry introduces a lower-cost way of producing an
existing product, the firm will be able to earn economic profits in the long run.
Answer: FALSE
*: Recurring
perfect competition
15) Firms in perfect competition produce the productively efficient output level in the short run
and in the long run.
Answer: FALSE
*: Recurring
perfect competition
16) Firms in perfect competition produce the allocatively efficient output in the short run and in
the long run.
Answer: TRUE
*: Recurring
achieving it
17) What is meant by productive efficiency? How does a perfectly competitive firm achieve
productive efficiency?
Answer: Productive efficiency refers to a the situation in which a good or service is produced at
the lowest possible cost, in particular, every good or service is produced up to the point where
the last unit is produced where the market price is equal to minimum average total cost.
*: Recurring
achieving it
63
18) Using two graphs, illustrate how a positive technological change in the market for notebook
computers could eliminate short-run economic profit for a firm in that market. On the first graph,
use a supply and demand graph to illustrate the positive technological change. On the second
graph, use demand, ATC, MC and MR curves to illustrate the elimination of economic profit
resulting from the positive technological change. Explain what is taking place in each graph.
Answer: On the first graph, supply shifts to the right as a result of the positive technological
change, lowering the equilibrium price and increasing the equilibrium quantity. On the second
graph, the lower price shifts the demand curve down to where it intersects the ATC curve at its
minimum point, eliminating economic profit.
Diff: 2 Page Ref: 418-419/418-419

perfect competition
64

Microeconomics 4th Edition Hubbard Test Bank

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Microeconomics 4th Edition Hubbard

12.1 Perfectly Competitive Markets

4) Which of the following is not a characteristic of a monopolistically competitive market

5) Which of the following is a characteristic of an oligopolistic market structure?

7) Perfect competition is characterized by all of the following except

10) The price of a seller's product in perfect competition is determined by

11) Both individual buyers and sellers in perfect competition

Diff: 2 Page Ref: 398/398

3) Which of the following is not true for a firm in perfect competition?

Total Cost Variable Cost

4) Refer to Table 12-1. What is the fixed cost of production?

10) Refer to Figure 12-1. If the firm is producing 700 units,

12) Refer to Figure 12-1. If the firm is producing 200 units,

25) A perfectly competitive firm's marginal revenue curve is downward sloping.

Total Total Marginal

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

Diff: 2 Page Ref: 404-405/404-405

Diff: 2 Page Ref: 404-405/404-405

2) A perfectly competitive firm's supply curve is its

6) Refer to Figure 12-6. At price P1, the firm would produce

8) Refer to Figure 12-6. At price P2, the firm would produce

9) Refer to Figure 12-6. At price P2, the firm would

11) Refer to Figure 12-6. At price P3, the firm would

18) If total revenue exceeds fixed cost, a firm

Diff: 2 Page Ref: 409-410/409-410

1) Which of the following statements is correct?

5) If a typical firm in a perfectly competitive industry is earning profits, then

10) If a typical firm in a perfectly competitive industry is incurring losses, then

12) In long-run perfectly competitive equilibrium, which of the following is false?

19) In the long run, a perfectly competitive market will

29) What is meant by the term "long-run competitive equilibrium?

31) Use the figure above to answer the following questions.

12.6 Perfect Competition and Efficiency

2) What is productive efficiency?

7) A perfectly competitive industry achieves allocative efficiency because

Diff: 2 Page Ref: 418-419/418-419

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