TBChap 011

Chapter 11
Pure Competition in the Long Run
Multiple Choice Questions
1. All of the following are long-run changes, except:
A. An industry expands as more firms enter it

B. A firm moves into larger production facilities to expand production
C. Some firms decide to leave an industry and the industry contracts
D. A firm produces more output by acquiring more raw materials for its existing factory
2. If the entry or exit of firms does not affect the resource prices in an industry, we refer to it as a:
A. Fixed-price industry
B. Price-controlled industry
C. Constant-cost industry
D. Price-taking industry
3. All of the following statements apply to a purely competitive market in the long run, except:
A. In the long run, all inputs are variable in quantity

B. Firms can expand their plant capacities in the long run
C. Total fixed costs remain constant even when output expands in the long run
D. Firms may enter or leave the industry in the long run
4. Which of the following is not an assumption that we make in analyzing pure competition in the long run?
A. Firms are free to enter into, or exit from, a purely competitive market
B. We may talk about a "representative" firm, by assuming that competitive firms all have identical cost
curves
C. Firms may increase output by expanding their plant sizes
D. Profits are not relevant to firm behavior anymore, because competitive firms earn zero profits in the
long run
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5. In pure competition, if the market price of the product is initially higher than the minimum average cost of
the firms, then:
A. Some firms will exit the industry and the industry supply will decrease
B. Other firms will enter the industry and the industry supply will increase
C. Some firms will exit the industry and the industry supply will increase
D. Other firms will enter the industry and the industry supply will decrease
6. If a purely competitive firm is currently facing a situation where the price of its product is lower than the
average variable cost, but it believes that the market demand for its product will increase soon, then:
A. The firm will produce a low level of output in the short run, and leave the industry in the long run
B. The firm will shut down in the short run, and leave the industry in the long run
C. The firm will produce a low level of output in the short run, but expand its plant in the long run as
demand increases soon
D. The firm will shut down in the short run, but stay in the industry in the long run if it expects the product
price to rise high enough soon
7. If a purely competitive firm is facing a situation where the price of its product is lower than the average
cost, then all of the following applies, except:
A. The firm is suffering losses, and if things are not expected to improve, the firm will leave the industry
B. The firm may be earning some accounting profits, but less than what it could earn elsewhere
C. Other firms will want to enter the industry because of the positive economic profits
D. The firm may earn economic profits in the long run if it expands its plant in order to exploit economies
of scale.
8. Assume that the market for soybeans is purely competitive. Currently, firms growing soybeans are
experiencing economic profits. In the long run, we can expect:
A. New firms to enter causing the market price of soybeans to fall

B. New firms to enter causing the market price of soybeans to rise
C. Some firms to exit causing the market price of soybeans to fall
D. Some firms to exit causing the market price of soybeans to rise
9. Assume that the market for corn is purely competitive. Currently, firms growing corn are suffering
economic losses. In the long run, we can expect:
A. New firms to enter causing the market price of corn to fall

B. New firms to enter causing the market price of corn to rise
C. Some firms to exit causing the market price of corn to fall
D. Some firms to exit causing the market price of corn to rise
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10. The representative firm in a purely competitive industry:
A. Will always earn a profit in the short run

B. May earn either an economic profit or a loss in the long run
C. Will always earn an economic profit in the long run
D. Will earn zero economic profit in the long run
11. Which of the following is true of normal profits?
A. They are necessary to keep a firm in the industry in the long run
B. They are zero under pure competition in the long run
C. They are excluded from a firm's costs of production
D. They are what attract other firms to enter an industry
12. All of the following statements are true about pure competition in the long run, except:
A. Entry and exit of firms will push economic profits of firms in the industry towards zero
B. Entry and exit of firms will shift the demand curve facing the representative firm in the industry
C. The long-run adjustment in pure competition happens through shifts in the industry supply curve
D. The long-run adjustment in pure competition happens through shifts in the industry demand curve
13. Which of the following is not a factor that automatically pushes firms in pure competition to earn only
normal profits in the long run?
A. Entry of new firms

B. Exit of some firms
C. Changes in the firms' plant size
D. Changes in the market demand
14. If the representative firm in a purely competitive industry is in short-run equilibrium and at its current
output level, its marginal cost exceeds its average total cost, then we can conclude that:
A. The firm is suffering economic losses

B. The firm is not maximizing profits in the short run
C. Some firms will exit the industry in the long run
D. Other firms will enter the industry in the long run
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15.
Refer to the graphs above for a purely competitive market in the short run. The graphs suggest that in the
long run, assuming no changes in the given information:
A. Some firms will exit from this industry

B. More buyers will come to the market
C. New firms will be attracted into the industry
D. Buyers will leave the industry
16.
long run, assuming no changes in the given information, the market:
A. Supply curve will shift to the left

B. Supply curve will shift to the right
C. Demand curve will shift to the left
D. Demand curve will shift to the right
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17.
long run, as automatic market adjustments occur, the demand curve facing the individual firm will:
A. Shift up
B. Shift down
C. Not shift
D. Slope downward
18.
Refer to the graphs above for a purely competitive market in the short run. The graphs suggest that as long
run adjustments consequently occur, the firms in the industry will find that:
A. Profits will increase

B. Profits will decrease
C. Profits will be unchanged
D. Cannot be decided from the information given
19. Suppose that the corn market is purely competitive. If the corn farmers are currently earning negative
economic profits, then we would expect that in the long run the market's:

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20. If firms enter a purely competitive industry, then in the long run this change will shift the industry:
A. Demand curve to the left, and the individual firm's demand curve will shift down
B. Demand curve to the right, and the individual firm's demand curve will shift up
C. Supply curve to the right, and the individual firm's demand curve will shift down
D. Supply curve to the left, and the individual firm's demand curve will shift up
21. If firms are losing money in a purely competitive industry, then the long run adjustments in this situation
will cause the market price to:
A. Increase, and the representative firm's profits will increase

B. Decrease, and the representative firm's profits will increase
C. Increase, and the representative firm's profits will decrease
D. Decrease, and the representative firm's profits will decrease
22. Assume the market for ball bearings is purely competitive. Currently, each of the firms in this market is
earning negative economic profits. In the long run, we can expect the market:
A. Supply to increase and firms' profits to decrease

B. Demand to increase and firms' profits to increase
C. Supply to decrease and firms' profits to increase
D. Demand to decrease and firms' profits to decrease
23.
Refer to the above graphs for a competitive market in the short run. Which of the following statements is
true?
A. The firm will increase production

B. The firm is experiencing economic losses
C. The firm is breaking even
D. The firm is making economic profits
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24.
Refer to the above graphs for a competitive market in the short run. What will happen in the long run to
industry supply and the equilibrium price P of the product?
A. S will decrease, P will decrease

B. S will increase, P will decrease
C. S will decrease, P will increase
D. S will increase, P will increase
25.
Refer to the above graphs for a competitive market in the short run. What will happen to the firm's
economic profits as long-run market adjustments occur?
A. Profits will increase to some positive value

B. Profits will decrease to some negative value
C. Profits will increase to zero
D. Profits will stay the same as they are now
26. The long-run supply curve under pure competition is derived by observing what happens to market price
and quantity when market:
A. Demand changes, and all consequent long-run adjustments have occurred

B. Supply changes, and all consequent long-run adjustments have occurred
C. Technology changes, and all consequent long-run adjustments have occurred
D. Regulation changes, and all consequent long-run adjustments have occurred
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27. The long-run supply curve under pure competition will be:
A. Downward-sloping in a decreasing-cost industry and upward-sloping in an increasing-cost industry

B. Horizontal in a constant-cost industry and downward-sloping in an increasing-cost industry
C. Vertical in a constant-cost industry and upward-sloping in a decreasing-cost industry
D. Upward-sloping in an increasing-cost industry and vertical in a constant-cost industry
28. The long-run supply curve would be perfectly elastic when:
A. An increase in demand does not cause a change in product price

B. An increase in demand causes an increase in product price
C. A decrease in demand causes an increase in short-run supply
D. A decrease in demand causes an increase in product price
29. The long-run supply curve for a purely competitive industry would be horizontal when:
A. An increase in product demand causes an increase in resource prices

B. An increase in product demand causes a decrease in resource prices
C. A decrease in product demand causes a decrease in the number of firms
D. A decrease in product demand causes no effect in resource prices
30. The long-run supply curve would be upward-sloping if:
A. Resource prices fall as industry production contracts

B. Resource prices rise as industry production contracts
C. Resource prices are not affected by changes in industry output-level
D. Resource prices are set by the government
31. The long-run market supply curve would be downward-sloping if the representative firms':
A. Demand curves shift up as the industry expands

B. ATC curves shift down as the industry expands
C. Supply curves shift left as the industry expands
D. Demand curves shift down as the industry expands
32. When a purely competitive industry is in long-run equilibrium, which statement is true?
A. Average total cost is less than marginal cost

B. Price and average total cost are equal
C. Marginal cost is at its maximum level
D. Marginal revenue is greater than price
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33. If there is a decrease in demand for a product in a purely competitive industry, it results in an industry
contraction that will end when the product price is:
A. Greater than its marginal cost

B. Equal to its marginal cost
C. Less than its marginal cost
D. Greater than its average cost
34. An industry where a change in the number of firms does not affect the prices of the resources used in the
industry will have a long run supply curve that is:
A. Vertical
B. Horizontal
C. Upsloping
D. Downsloping
35. If the long-run supply curve is upward-sloping, it indicates that resource prices fall when:
A. Production in the industry decreases in the long run

B. Production in the industry increases in the long run
C. New firms enter the industry
D. Short-run profits in the industry are positive
36. A long-run supply curve that is downward-sloping indicates that the firms' ATC curves:
A. Shift up when the industry expands

B. Shift down when the industry contracts
C. Shift down when the industry expands
D. Do not shift when the industry contracts
37. What happens in a decreasing-cost industry when some firms leave and the industry's output contracts?
A. The average cost will increase

B. The average cost will decrease
C. The total cost will decrease
D. The product price will decrease
38. Assume a purely competitive decreasing-cost industry is initially in long-run equilibrium but then there is a
decrease in consumer demand. After all economic adjustments to this new situation have taken place,
product price will be:
A. Higher, but total output will be lower

B. Lower, and total output will be lower
C. Higher, and total output will be higher
D. Lower, but total output will be higher
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39. Assume a purely competitive constant-cost industry is initially at long-run equilibrium. Now suppose that a
decrease in consumer demand occurs. After all the long-run adjustments have been completed, the new
equilibrium price:
A. And industry output will be less than the initial price and output
B. Will be the same as the initial price, and the output will be less
C. Will be greater than the initial, but the new output will be less
D. Will be less than the initial price, but the new output will be greater
40. Which statement is correct? The long-run supply curve for a purely competitive:
A. Decreasing-cost industry will be upward-sloping

B. Increasing-cost industry will be perfectly elastic
C. Increasing-cost industry will be upward-sloping
D. Increasing-cost industry will be less elastic than the short-run supply curve
41. One explanation for the existence of an increasing-cost industry is:
A. Increasing marginal returns to labor occur

B. Firms produce beyond the point of minimum long-run average total costs
C. Perfectly elastic long-run supply schedules are observed in the industry
D. As the industry expands, prices are bid up for some factors of production
42. Which of the following statements is true for a long-run supply curve that slopes upward?
A. If total market output is increased, unit costs of production increase

B. If total market output is unchanged, unit costs of production increase
C. The total cost of producing 15 units is no larger than the cost of producing 10 units
D. If total market output is decreased, total costs of production will remain unchanged
43. An industry that has increasing returns to scale and fixed factor prices will have a long-run supply curve
that is:
A. Vertical
B. Horizontal
C. Upward-sloping
D. Downward-sloping
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44.
The graph above represents a(n):
A. Decreasing-cost industry: Firms may be paying lower prices for their inputs when the industry expands
B. Increasing-cost industry: Firms may be paying higher prices for their inputs when the industry expands
C. Competitive industry with diseconomies of scale: The short-run supply curves are upward-sloping
D. Constant-cost industry: Prices of the inputs stay the same, and other production costs are constant as the
industry expands
45.
The graph above depicts long-run supply for:
A. A constant-cost industry
B. A decreasing-cost industry
C. An increasing-cost industry
D. None of these
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46.
The graph above depicts a situation where, if the market demand for the product increases, the prices of the
resources used by the firms in the industry would:
A. Increase
B. Decrease
C. Stay constant
D. Be set by the government
47.
The industry represented by the graph above must be one where:
A. Resource prices rise when the industry contracts

B. Resource prices fall when the industry expands
C. Resource prices fall when the industry contracts
D. Resource prices are unaffected by the industry's expansion
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48.
The industry indicated by the graphs above would be a(n):
A. Increasing-cost industry
B. Decreasing-cost industry
D. Monopoly industry
49.

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50. Productive efficiency refers to:
A. Cost minimization, where P = minimum ATC

B. Production at a level where P = MC
C. Maximizing profits by producing where MR = MC
D. Setting TR = TC
51. An industry is producing at the least-cost rate of production when:
A. Marginal cost is greater than average total cost

B. Marginal revenue is greater than price
C. Price and the minimum average cost are equal
D. Price and marginal revenue are equal
52. Allocative efficiency occurs when the:
A. Minimum of average total cost equals average revenue

B. Minimum of average total cost equals marginal revenue
C. Marginal cost equals the marginal benefit to society
D. Marginal revenue equals marginal benefit to society
53. In long-run equilibrium a purely competitive firm will operate where price is:
A. Greater than MR but equal to MC and minimum ATC

B. Greater than MR and MC, but equal to minimum ATC
C. Greater than MC and minimum ATC, but equal to MR
D. Equal to MR, MC, and minimum ATC
54. Which would indicate that a firm is operating under conditions of pure competition and is being
productively efficient?
A. It is making economic profits in the long run

B. Marginal cost equals average variable cost
C. It produces at the minimum average total cost
D. Its marginal revenue is less than average revenue
55. Which of the following statements about a competitive firm is correct?
A. To maximize profits a competitive firm should produce at that output at which total revenue is greatest
B. In long-run equilibrium a competitive firm will produce at the point of minimum average costs
C. A competitive firm will produce in the short run so long as total receipts are sufficient to cover total
fixed costs
D. A competitive firm will close down in the short run whenever price is less than the minimum attainable
average total cost
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56. In long-run equilibrium under pure competition, all firms will produce at minimum:
A. Average total cost

B. Marginal cost
C. Total cost
D. Average variable cost
57. In the context of analyzing economic efficiency, we can interpret the market demand curve to be showing:
A. The average cost of producing the product at each output level

B. The marginal revenue from extra each unit of the product
C. The marginal benefit that consumers place on each unit of the product
D. The average variable cost of producing the product
58. In the context of analyzing economic efficiency, we can interpret the market supply curve to be showing:

C. The average variable cost of producing the product
D. The marginal opportunity cost to produce each unit of the product
59. Pure competition produces a socially optimal allocation of resources in the long run because:
A. Marginal cost equals marginal revenue

B. Marginal cost equals average total cost
C. Marginal revenue equals price
D. Marginal cost equals price
60. When a purely competitive firm is in long-run equilibrium, it is said to achieve allocative efficiency
because:
A. Total revenue is at a maximum

B. Marginal cost equals marginal revenue
C. Average cost equals marginal cost
D. Average cost is at a minimum
61. Which is true of a purely competitive firm in the long-run equilibrium?
A. Average fixed cost equals price

B. Marginal cost equals marginal product
C. Price equals marginal cost
D. Average variable cost equals marginal cost
11-15
62. Resources are efficiently allocated when production occurs at that output at which:
A. P equals MR
B. P equals AVC
C. P exceeds MR
D. P equals MC
63. Resources are efficiently allocated when production occurs at that output level where price:
A. Equals marginal cost

B. Equals marginal revenue
C. Is greatest over average cost
D. Is equal to average total cost
64. When a purely competitive firm is in long-run equilibrium, price is equal to:
A. Marginal cost, but may be greater or less than average cost

B. Minimum average cost, and also to marginal cost
C. Minimum average cost, but may be greater or less than marginal cost
D. Marginal revenue, but may be greater or less than both average and marginal cost
65.
Refer to the graph above, showing the long-run supply and demand curves in a purely competitive market.
The curves suggest that this industry is:
B. Increasing-cost industry
C. Decreasing-cost industry
D. Not possible, because the supply curve always slopes up
11-16
66.
The curves suggest that in this industry, the marginal benefit to consumers of each unit of the product is:
A. Constant
B. Increasing
C. Decreasing
D. Not indicated in the graph
67.
The curves suggest that in this industry, the dollars' worth of other products that have to be sacrificed in
order to produce each unit of the output of this industry is:
A. Constant
B. Increasing
C. Decreasing
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68.
We know that in this market, the marginal:
A. Cost equals marginal benefit at P1Q1

B. Benefit exceeds marginal cost at the output level of Q2
C. Cost exceeds marginal benefit at the output level of Q2
D. Cost equals marginal benefit at all points on the supply curve
69.
We know that when this market reaches equilibrium, the marginal:
A. Cost equals marginal benefit

B. Benefit exceeds marginal cost
C. Cost exceeds marginal benefit
D. Cost equals zero
11-18
70. In a purely competitive industry, an optimal allocation of scarce resources occurs when:
A. P = AC
B. P = MC
C. MR = MC
D. TR = TC
71. The difference between the maximum price a consumer is willing to pay for a product and the actual price
the consumer pays is:
A. Allocative efficiency
B. Productive efficiency
C. The consumer surplus
D. The producer surplus
72. The difference between the actual price that a producer receives and the minimum acceptable price a
producer is willing to accept is:
A. The consumer surplus

B. The producer surplus
C. Allocative efficiency
D. Productive efficiency
73.
Refer to the graph above representing the purely competitive market for a product. When the market is at
equilibrium, the consumer surplus would be represented by the area:
A. a + b + c + d
B. a + b + c
C. a
D. b + c
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74.
equilibrium, the value of the total benefits derived by consumers from this product would be represented by
the area:
A. a + b + c + d
B. a + b + c
C. a
D. b + c
75.
equilibrium, the producer surplus would be represented by the area:
A. b + c
B. b
C. c
D. b + c + d
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76.
equilibrium, the total opportunity cost of producing the equilibrium output level would be represented by
the area:
A. b + c
B. b
C. c
D. a + b + c
77.
equilibrium, the total revenues from selling the equilibrium output level would be represented by the area:
A. a + b + c
B. b
C. b + c
D. b + c + d
11-21
78.
equilibrium, the deadweight loss would be:
A. Area a
B. Area b
C. Area d
D. Zero
79. If there is allocative efficiency in a purely competitive market for a product, the maximum price consumers
are willing to pay is:
A. Less than marginal benefit

B. Greater than marginal cost
C. Equal to the amount of efficiency or deadweight losses
D. Equal to the minimum price producers are willing to accept
80. When there is allocative efficiency in a purely competitive market for a product, the minimum price
producers are willing to accept is:

D. Equal to the maximum price consumers are willing to pay
81. When a purely competitive market is at its long-run equilibrium, then all of the following are true, except:
A. Price equals marginal cost, and they are equal to the lowest attainable average cost of production
B. Marginal benefit of the last unit of the product equals the marginal cost of producing that unit
C. Maximum willingness of buyers to pay for the last unit of the product equals the minimum acceptable
price for the seller of that unit
D. Combined amount of consumer and producer surpluses is at its minimum possible
11-22
82. If a competitive firm successfully adopts a better production technology ahead of the others, then:
A. Its product price will become lower than the others'

B. Its average cost will become higher than the others'
C. Its profits will become higher than the others'
D. Its marginal revenue will become higher than the others'
83. Competitive firms will always try to earn more than a normal profit by doing the following, except:
A. Adopting better production technology

B. Improving their business organization and operation
C. Developing new products
D. Raising the prices of their existing products
84. Creative destruction is most often associated with:
A. International trade
B. Technological advance
C. Government spending
D. Private consumption
85. Creative destruction is illustrated by which of the following pairs of products:
A. Bicycles and helmets

B. Digital cameras and film
C. DVD players and DVDs
D. Netflix and iPads
86. A patent is the legal right granted to a firm that allows it to:
A. Make copies of other firm's products

B. Be the sole buyer of a particular product or resource
C. Sell its new product exclusively for a set number of years
D. Be the exclusive distributor of a particular imported product
87. A patent gives a firm the power to charge a price that:
A. Is below equilibrium
B. Is higher than marginal cost
C. Increases the consumer surplus
D. Results in overproduction of a product
11-23
88. The plusses and minuses of the patent system include the following, except:
A. It could give inventors an incentive to bear the research and development costs of new products
B. It could allow stodgy old firms to survive longer than they should against innovative rivals
C. It would prevent the existence of "patent trolls" or firms whose main purpose is to sue companies
D. It may hinder creative destruction especially in complex products that encompass several patents
True / False Questions
89. In the long run for a purely competitive market, firms may enter or exit the industry but the firms that stay
in the industry will maintain their initial plant sizes.
True False
90. In the long run for a purely competitive market, firms will earn only normal profits.
True False
91. When a profit-maximizing competitive firm decides to produce at a loss because its price is below average
cost but above average variable cost, that is a long-run decision.
True False
92. In purely competitive market, the entry and exit of firms will push price towards equality with marginal
revenue.
True False
93. When a competitive firm is in long-run equilibrium, its accounting profits are greater than zero.
True False
94. When a competitive firm sees losses because the product falls below the minimum average cost of
production at its current plant, it may decide to expand if there are economies of scale.
True False
95. When a competitive firm sees the price fall below the minimum possible average total cost in the long run,
then it will decide that it could do better by moving to a different industry.
True False
96. Suppose that a competitive firm finds that in its short-run equilibrium situation, its marginal cost is higher
than its average total cost. If things are not expected to change and there are constant returns to scale, then
the firm will exit the industry in the long run.
True False
11-24
97. It is possible for a competitive firm that is maximizing profits in the short run to make its profits even
bigger in the long run by expanding its plant.
True False
98. In long-run equilibrium, a competitive firm produces where P = MR = MC = minimum ATC and the firm
earns normal economic profits.
True False
99. When firms in a purely competitive industry are earning profits that are greater than normal, the supply of
the product will tend to decrease in the long run.
True False
100. When new firms enter a purely competitive industry, the market supply curve will shift to the left.
True False
101. When some firms leave a purely competitive industry, the market supply curve will shift in such a way that
the remaining firms' profits will increase.
True False
102. In the long run, pure competition forces firms to produce at the minimum possible average total cost and
the firms will charge a product price equal to that cost.
True False
103. A purely competitive firm that is earning positive profits in its short-run equilibrium situation will continue
to earn positive profits at the long-run equilibrium.
True False
104. The short-run supply curve of a purely competitive industry tends to be steeper than the long-run supply
curve.
True False
105. The long-run supply curve for a competitive, decreasing-cost industry is downward-sloping.
True False
106. The reason why the long-run supply curve for a purely competitive industry may be upward-sloping is
because of diminishing marginal returns.
True False
107. An upward-sloping long-run supply curve indicates a constant-cost industry.
True False
108. Productive efficiency refers to a condition where marginal cost is equal to marginal revenue in the long
run.
True False
11-25
109. An under-allocation of resources is occurring in a purely competitive industry whenever the price of the
product is greater than marginal cost.
True False
110. In pure competition, resources are optimally allocated when production occurs at the output level where P
= MC.
True False
111. Consumer surplus is the difference between the maximum price a consumer is willing to pay for a good
and the market price of the product.
True False
112. Producer surplus is the difference between the market price a producer receives for a product and the
minimum price producers are willing to accept for a product.
True False
113. Competitive markets produce equilibrium prices and quantities that maximize the sum of consumer and
producer surpluses.
True False
114. If the price in a competitive market falls and goes below the equilibrium price, then consumer surplus
might increase, but producer surplus will definitely decrease.
True False
115. Efficiency or deadweight losses occur in purely competitive markets when P = MC = lowest ATC.
True False
116. The operation of the "invisible hand" means the pursuit of private interests promotes social interests in pure
competition.
True False
117. The transformative effects of competition that foster the development of new products or new production
methods benefit everyone in society.
True False
118. From the viewpoint of a firm, competition can come even from other firms that are not in the same
industry.
True False
119. Creative destruction is something that our society should try to avoid, through government regulation of
business.
True False
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120. Creative destruction entails both costs as well as benefits.
True False
121. The costs of competition's creative destruction are often widespread, while the benefits often accrue to only
a few.
True False
122. Some economists are now proposing that patents may be detrimental to technological advance in industries
with complicated multiple-component products.
True False
11-27
Chapter 11 Pure Competition in the Long Run Answer Key
Multiple Choice Questions
1. All of the following are long-run changes, except:
A. An industry expands as more firms enter it

B. A firm moves into larger production facilities to expand production
C. Some firms decide to leave an industry and the industry contracts
D. A firm produces more output by acquiring more raw materials for its existing factory
AACSB: Analytic
AACSB: Communication
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-01 Explain how the long run differs from the short run in pure competition.
Topic: The Long Run in Pure Competition
2. If the entry or exit of firms does not affect the resource prices in an industry, we refer to it as a:
A. Fixed-price industry
B. Price-controlled industry
D. Price-taking industry
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
3. All of the following statements apply to a purely competitive market in the long run, except:
A. In the long run, all inputs are variable in quantity

B. Firms can expand their plant capacities in the long run
C. Total fixed costs remain constant even when output expands in the long run
D. Firms may enter or leave the industry in the long run
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
11-28
4. Which of the following is not an assumption that we make in analyzing pure competition in the long
run?
A. Firms are free to enter into, or exit from, a purely competitive market
B. We may talk about a "representative" firm, by assuming that competitive firms all have identical
cost curves
C. Firms may increase output by expanding their plant sizes
D. Profits are not relevant to firm behavior anymore, because competitive firms earn zero profits in the
long run
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 11-02 Describe how profits and losses drive the long-run adjustment process of pure competition.
Topic: The Long-Run Adjustment Process in Pure Competition
5. In pure competition, if the market price of the product is initially higher than the minimum average cost
of the firms, then:
A. Some firms will exit the industry and the industry supply will decrease
B. Other firms will enter the industry and the industry supply will increase
C. Some firms will exit the industry and the industry supply will increase
D. Other firms will enter the industry and the industry supply will decrease
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
6. If a purely competitive firm is currently facing a situation where the price of its product is lower than
the average variable cost, but it believes that the market demand for its product will increase soon, then:
A. The firm will produce a low level of output in the short run, and leave the industry in the long run
B. The firm will shut down in the short run, and leave the industry in the long run
C. The firm will produce a low level of output in the short run, but expand its plant in the long run as
demand increases soon
D. The firm will shut down in the short run, but stay in the industry in the long run if it expects the
product price to rise high enough soon
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
11-29
7. If a purely competitive firm is facing a situation where the price of its product is lower than the average
cost, then all of the following applies, except:
A. The firm is suffering losses, and if things are not expected to improve, the firm will leave the
industry
B. The firm may be earning some accounting profits, but less than what it could earn elsewhere
C. Other firms will want to enter the industry because of the positive economic profits
D. The firm may earn economic profits in the long run if it expands its plant in order to exploit
economies of scale.
AACSB: Reflective Thinking

Blooms: Understand
Difficulty: 3 Hard
8. Assume that the market for soybeans is purely competitive. Currently, firms growing soybeans are
experiencing economic profits. In the long run, we can expect:
A. New firms to enter causing the market price of soybeans to fall

B. New firms to enter causing the market price of soybeans to rise
C. Some firms to exit causing the market price of soybeans to fall
D. Some firms to exit causing the market price of soybeans to rise
AACSB: Analytic
Blooms: Understand
9. Assume that the market for corn is purely competitive. Currently, firms growing corn are suffering
economic losses. In the long run, we can expect:
A. New firms to enter causing the market price of corn to fall

B. New firms to enter causing the market price of corn to rise
C. Some firms to exit causing the market price of corn to fall
D. Some firms to exit causing the market price of corn to rise
AACSB: Analytic
Blooms: Understand
11-30
10. The representative firm in a purely competitive industry:
A. Will always earn a profit in the short run

B. May earn either an economic profit or a loss in the long run
C. Will always earn an economic profit in the long run
D. Will earn zero economic profit in the long run
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
11. Which of the following is true of normal profits?
A. They are necessary to keep a firm in the industry in the long run
B. They are zero under pure competition in the long run
C. They are excluded from a firm's costs of production
D. They are what attract other firms to enter an industry
AACSB: Analytic
Blooms: Remember
12. All of the following statements are true about pure competition in the long run, except:
A. Entry and exit of firms will push economic profits of firms in the industry towards zero
B. Entry and exit of firms will shift the demand curve facing the representative firm in the industry
C. The long-run adjustment in pure competition happens through shifts in the industry supply curve
D. The long-run adjustment in pure competition happens through shifts in the industry demand curve
AACSB: Analytic
Blooms: Understand
13. Which of the following is not a factor that automatically pushes firms in pure competition to earn only
normal profits in the long run?
A. Entry of new firms

B. Exit of some firms
C. Changes in the firms' plant size
D. Changes in the market demand
AACSB: Analytic
Blooms: Understand
11-31
14. If the representative firm in a purely competitive industry is in short-run equilibrium and at its current
output level, its marginal cost exceeds its average total cost, then we can conclude that:
A. The firm is suffering economic losses

B. The firm is not maximizing profits in the short run
C. Some firms will exit the industry in the long run
D. Other firms will enter the industry in the long run
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
15.
Refer to the graphs above for a purely competitive market in the short run. The graphs suggest that in
the long run, assuming no changes in the given information:
A. Some firms will exit from this industry

B. More buyers will come to the market
C. New firms will be attracted into the industry
D. Buyers will leave the industry
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
11-32
16.
the long run, assuming no changes in the given information, the market:

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
17.
the long run, as automatic market adjustments occur, the demand curve facing the individual firm will:
A. Shift up
B. Shift down
C. Not shift
D. Slope downward
AACSB: Analytic
Blooms: Understand
11-33
18.
Refer to the graphs above for a purely competitive market in the short run. The graphs suggest that as
long run adjustments consequently occur, the firms in the industry will find that:
A. Profits will increase

B. Profits will decrease
C. Profits will be unchanged
D. Cannot be decided from the information given
AACSB: Analytic
Blooms: Understand
19. Suppose that the corn market is purely competitive. If the corn farmers are currently earning negative
economic profits, then we would expect that in the long run the market's:

AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
20. If firms enter a purely competitive industry, then in the long run this change will shift the industry:
A. Demand curve to the left, and the individual firm's demand curve will shift down
B. Demand curve to the right, and the individual firm's demand curve will shift up
C. Supply curve to the right, and the individual firm's demand curve will shift down
D. Supply curve to the left, and the individual firm's demand curve will shift up
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
11-34
21. If firms are losing money in a purely competitive industry, then the long run adjustments in this
situation will cause the market price to:
A. Increase, and the representative firm's profits will increase

B. Decrease, and the representative firm's profits will increase
C. Increase, and the representative firm's profits will decrease
D. Decrease, and the representative firm's profits will decrease
AACSB: Analytic
Blooms: Understand
22. Assume the market for ball bearings is purely competitive. Currently, each of the firms in this market is
earning negative economic profits. In the long run, we can expect the market:
A. Supply to increase and firms' profits to decrease

B. Demand to increase and firms' profits to increase
C. Supply to decrease and firms' profits to increase
D. Demand to decrease and firms' profits to decrease
AACSB: Analytic
Blooms: Understand
23.
Refer to the above graphs for a competitive market in the short run. Which of the following statements
is true?
A. The firm will increase production

B. The firm is experiencing economic losses
C. The firm is breaking even
D. The firm is making economic profits
AACSB: Analytic
Blooms: Understand
11-35
24.
Refer to the above graphs for a competitive market in the short run. What will happen in the long run to
industry supply and the equilibrium price P of the product?
A. S will decrease, P will decrease

B. S will increase, P will decrease
C. S will decrease, P will increase
D. S will increase, P will increase
AACSB: Analytic
Blooms: Understand
25.
Refer to the above graphs for a competitive market in the short run. What will happen to the firm's
economic profits as long-run market adjustments occur?
A. Profits will increase to some positive value

B. Profits will decrease to some negative value
C. Profits will increase to zero
D. Profits will stay the same as they are now
AACSB: Analytic
Blooms: Understand
11-36
26. The long-run supply curve under pure competition is derived by observing what happens to market price
and quantity when market:
A. Demand changes, and all consequent long-run adjustments have occurred

B. Supply changes, and all consequent long-run adjustments have occurred
C. Technology changes, and all consequent long-run adjustments have occurred
D. Regulation changes, and all consequent long-run adjustments have occurred
AACSB: Analytic
Blooms: Understand
Learning Objective: 11-03 Explain the differences between constant-cost; increasing-cost; and decreasing-cost industries.
Topic: The Long-Run Supply Curves
27. The long-run supply curve under pure competition will be:
A. Downward-sloping in a decreasing-cost industry and upward-sloping in an increasing-cost industry

B. Horizontal in a constant-cost industry and downward-sloping in an increasing-cost industry
C. Vertical in a constant-cost industry and upward-sloping in a decreasing-cost industry
D. Upward-sloping in an increasing-cost industry and vertical in a constant-cost industry
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
28. The long-run supply curve would be perfectly elastic when:
A. An increase in demand does not cause a change in product price

B. An increase in demand causes an increase in product price
C. A decrease in demand causes an increase in short-run supply
D. A decrease in demand causes an increase in product price
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
29. The long-run supply curve for a purely competitive industry would be horizontal when:
A. An increase in product demand causes an increase in resource prices

B. An increase in product demand causes a decrease in resource prices
C. A decrease in product demand causes a decrease in the number of firms
D. A decrease in product demand causes no effect in resource prices
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
11-37
30. The long-run supply curve would be upward-sloping if:
A. Resource prices fall as industry production contracts

B. Resource prices rise as industry production contracts
C. Resource prices are not affected by changes in industry output-level
D. Resource prices are set by the government
AACSB: Analytic
Blooms: Remember
31. The long-run market supply curve would be downward-sloping if the representative firms':
A. Demand curves shift up as the industry expands

B. ATC curves shift down as the industry expands
C. Supply curves shift left as the industry expands
D. Demand curves shift down as the industry expands
AACSB: Analytic
Blooms: Understand
32. When a purely competitive industry is in long-run equilibrium, which statement is true?
A. Average total cost is less than marginal cost

B. Price and average total cost are equal
C. Marginal cost is at its maximum level
D. Marginal revenue is greater than price
AACSB: Analytic
Blooms: Understand
11-38
33. If there is a decrease in demand for a product in a purely competitive industry, it results in an industry
contraction that will end when the product price is:
A. Greater than its marginal cost

B. Equal to its marginal cost
C. Less than its marginal cost
D. Greater than its average cost
AACSB: Analytic
Blooms: Understand
34. An industry where a change in the number of firms does not affect the prices of the resources used in
the industry will have a long run supply curve that is:
A. Vertical
B. Horizontal
C. Upsloping
D. Downsloping
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
35. If the long-run supply curve is upward-sloping, it indicates that resource prices fall when:
A. Production in the industry decreases in the long run

B. Production in the industry increases in the long run
C. New firms enter the industry
D. Short-run profits in the industry are positive
AACSB: Analytic
Blooms: Understand
36. A long-run supply curve that is downward-sloping indicates that the firms' ATC curves:
A. Shift up when the industry expands

B. Shift down when the industry contracts
C. Shift down when the industry expands
D. Do not shift when the industry contracts
AACSB: Analytic
11-39
Blooms: Remember
Difficulty: 1 Easy
37. What happens in a decreasing-cost industry when some firms leave and the industry's output contracts?
A. The average cost will increase

B. The average cost will decrease
C. The total cost will decrease
D. The product price will decrease
AACSB: Analytic
Blooms: Understand
38. Assume a purely competitive decreasing-cost industry is initially in long-run equilibrium but then there
is a decrease in consumer demand. After all economic adjustments to this new situation have taken
place, product price will be:
A. Higher, but total output will be lower

B. Lower, and total output will be lower
C. Higher, and total output will be higher
D. Lower, but total output will be higher
AACSB: Analytic
Blooms: Remember
39. Assume a purely competitive constant-cost industry is initially at long-run equilibrium. Now suppose
that a decrease in consumer demand occurs. After all the long-run adjustments have been completed, the
new equilibrium price:
A. And industry output will be less than the initial price and output
B. Will be the same as the initial price, and the output will be less
C. Will be greater than the initial, but the new output will be less
D. Will be less than the initial price, but the new output will be greater
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
11-40
40. Which statement is correct? The long-run supply curve for a purely competitive:
A. Decreasing-cost industry will be upward-sloping

B. Increasing-cost industry will be perfectly elastic
C. Increasing-cost industry will be upward-sloping
D. Increasing-cost industry will be less elastic than the short-run supply curve
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
41. One explanation for the existence of an increasing-cost industry is:
A. Increasing marginal returns to labor occur

B. Firms produce beyond the point of minimum long-run average total costs
C. Perfectly elastic long-run supply schedules are observed in the industry
D. As the industry expands, prices are bid up for some factors of production
AACSB: Analytic
Blooms: Remember
42. Which of the following statements is true for a long-run supply curve that slopes upward?
A. If total market output is increased, unit costs of production increase

B. If total market output is unchanged, unit costs of production increase
C. The total cost of producing 15 units is no larger than the cost of producing 10 units
D. If total market output is decreased, total costs of production will remain unchanged
AACSB: Analytic
Blooms: Apply
43. An industry that has increasing returns to scale and fixed factor prices will have a long-run supply curve
that is:
A. Vertical
B. Horizontal
C. Upward-sloping
D. Downward-sloping
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
11-41
44.
The graph above represents a(n):
A. Decreasing-cost industry: Firms may be paying lower prices for their inputs when the industry
expands
B. Increasing-cost industry: Firms may be paying higher prices for their inputs when the industry
expands
C. Competitive industry with diseconomies of scale: The short-run supply curves are upward-sloping
D. Constant-cost industry: Prices of the inputs stay the same, and other production costs are constant as
the industry expands
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
11-42
45.
The graph above depicts long-run supply for:
B. A decreasing-cost industry
C. An increasing-cost industry
D. None of these
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
46.
The graph above depicts a situation where, if the market demand for the product increases, the prices of
the resources used by the firms in the industry would:
A. Increase
B. Decrease
C. Stay constant
D. Be set by the government
AACSB: Analytic
Blooms: Understand
11-43
47.

AACSB: Analytic
Blooms: Understand
11-44
48.
The industry indicated by the graphs above would be a(n):
A. Increasing-cost industry
B. Decreasing-cost industry
D. Monopoly industry
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
49.

AACSB: Analytic
Blooms: Understand
11-45
50. Productive efficiency refers to:
A. Cost minimization, where P = minimum ATC

B. Production at a level where P = MC
C. Maximizing profits by producing where MR = MC
D. Setting TR = TC
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-04 Show how long-run equilibrium in pure competition produces an efficient allocation of resources.
Topic: Pure Competition and Efficiency
51. An industry is producing at the least-cost rate of production when:
A. Marginal cost is greater than average total cost

B. Marginal revenue is greater than price
C. Price and the minimum average cost are equal
D. Price and marginal revenue are equal
AACSB: Analytic
Blooms: Remember
52. Allocative efficiency occurs when the:
A. Minimum of average total cost equals average revenue

B. Minimum of average total cost equals marginal revenue
C. Marginal cost equals the marginal benefit to society
D. Marginal revenue equals marginal benefit to society
AACSB: Analytic
Blooms: Remember
11-46
53. In long-run equilibrium a purely competitive firm will operate where price is:
A. Greater than MR but equal to MC and minimum ATC

B. Greater than MR and MC, but equal to minimum ATC
C. Greater than MC and minimum ATC, but equal to MR
D. Equal to MR, MC, and minimum ATC
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
54. Which would indicate that a firm is operating under conditions of pure competition and is being
productively efficient?
A. It is making economic profits in the long run

B. Marginal cost equals average variable cost
C. It produces at the minimum average total cost
D. Its marginal revenue is less than average revenue
AACSB: Analytic
Blooms: Understand
55. Which of the following statements about a competitive firm is correct?
A. To maximize profits a competitive firm should produce at that output at which total revenue is
greatest
B. In long-run equilibrium a competitive firm will produce at the point of minimum average costs
C. A competitive firm will produce in the short run so long as total receipts are sufficient to cover total
fixed costs
D. A competitive firm will close down in the short run whenever price is less than the minimum
attainable average total cost
AACSB: Analytic
Blooms: Understand
11-47
56. In long-run equilibrium under pure competition, all firms will produce at minimum:
A. Average total cost

B. Marginal cost
C. Total cost
D. Average variable cost
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
57. In the context of analyzing economic efficiency, we can interpret the market demand curve to be
showing:

C. The marginal benefit that consumers place on each unit of the product
D. The average variable cost of producing the product
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
58. In the context of analyzing economic efficiency, we can interpret the market supply curve to be
showing:

C. The average variable cost of producing the product
D. The marginal opportunity cost to produce each unit of the product
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
59. Pure competition produces a socially optimal allocation of resources in the long run because:
A. Marginal cost equals marginal revenue

B. Marginal cost equals average total cost
C. Marginal revenue equals price
D. Marginal cost equals price
AACSB: Analytic
Blooms: Remember
11-48
Difficulty: 3 Hard
60. When a purely competitive firm is in long-run equilibrium, it is said to achieve allocative efficiency
because:
A. Total revenue is at a maximum

B. Marginal cost equals marginal revenue
C. Average cost equals marginal cost
D. Average cost is at a minimum
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
61. Which is true of a purely competitive firm in the long-run equilibrium?
A. Average fixed cost equals price

B. Marginal cost equals marginal product
C. Price equals marginal cost
D. Average variable cost equals marginal cost
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
62. Resources are efficiently allocated when production occurs at that output at which:
A. P equals MR
B. P equals AVC
C. P exceeds MR
D. P equals MC
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
11-49
63. Resources are efficiently allocated when production occurs at that output level where price:
A. Equals marginal cost

B. Equals marginal revenue
C. Is greatest over average cost
D. Is equal to average total cost
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
64. When a purely competitive firm is in long-run equilibrium, price is equal to:
A. Marginal cost, but may be greater or less than average cost

B. Minimum average cost, and also to marginal cost
C. Minimum average cost, but may be greater or less than marginal cost
D. Marginal revenue, but may be greater or less than both average and marginal cost
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
65.
Refer to the graph above, showing the long-run supply and demand curves in a purely competitive
market. The curves suggest that this industry is:
B. Increasing-cost industry
C. Decreasing-cost industry
D. Not possible, because the supply curve always slopes up
AACSB: Analytic
11-50
Blooms: Apply
Difficulty: 1 Easy
66.
market. The curves suggest that in this industry, the marginal benefit to consumers of each unit of the
product is:
A. Constant
B. Increasing
C. Decreasing
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
11-51
67.
market. The curves suggest that in this industry, the dollars' worth of other products that have to be
sacrificed in order to produce each unit of the output of this industry is:
A. Constant
B. Increasing
C. Decreasing
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
11-52
68.
market. We know that in this market, the marginal:
A. Cost equals marginal benefit at P1Q1

B. Benefit exceeds marginal cost at the output level of Q2
C. Cost exceeds marginal benefit at the output level of Q2
D. Cost equals marginal benefit at all points on the supply curve
AACSB: Analytic
Blooms: Apply
11-53
69.
market. We know that when this market reaches equilibrium, the marginal:
A. Cost equals marginal benefit

B. Benefit exceeds marginal cost
C. Cost exceeds marginal benefit
D. Cost equals zero
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
70. In a purely competitive industry, an optimal allocation of scarce resources occurs when:
A. P = AC
B. P = MC
C. MR = MC
D. TR = TC
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
71. The difference between the maximum price a consumer is willing to pay for a product and the actual
price the consumer pays is:
A. Allocative efficiency
B. Productive efficiency
C. The consumer surplus
D. The producer surplus
AACSB: Analytic
11-54
Blooms: Remember
Difficulty: 1 Easy
72. The difference between the actual price that a producer receives and the minimum acceptable price a
producer is willing to accept is:
A. The consumer surplus

B. The producer surplus
C. Allocative efficiency
D. Productive efficiency
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
73.
Refer to the graph above representing the purely competitive market for a product. When the market is
at equilibrium, the consumer surplus would be represented by the area:
A. a+b+c+d
B. a+b+c
C. a
D. b+c
AACSB: Analytic
Blooms: Apply
11-55
74.
at equilibrium, the value of the total benefits derived by consumers from this product would be
represented by the area:
A. a+b+c+d
B. a+b+c
C. a
D. b+c
AACSB: Analytic
Blooms: Apply
11-56
75.
at equilibrium, the producer surplus would be represented by the area:
A. b+c
B. b
C. c
D. b+c+d
AACSB: Analytic
Blooms: Apply
11-57
76.
at equilibrium, the total opportunity cost of producing the equilibrium output level would be represented
by the area:
A. b+c
B. b
C. c
D. a+b+c
AACSB: Analytic
Blooms: Apply
11-58
77.
at equilibrium, the total revenues from selling the equilibrium output level would be represented by the
area:
A. a+b+c
B. b
C. b+c
D. b+c+d
AACSB: Analytic
Blooms: Apply
11-59
78.
at equilibrium, the deadweight loss would be:
A. Area a
B. Area b
C. Area d
D. Zero
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
79. If there is allocative efficiency in a purely competitive market for a product, the maximum price
consumers are willing to pay is:

D. Equal to the minimum price producers are willing to accept
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
80. When there is allocative efficiency in a purely competitive market for a product, the minimum price
producers are willing to accept is:

D. Equal to the maximum price consumers are willing to pay
AACSB: Analytic
11-60
Blooms: Remember
Difficulty: 1 Easy
81. When a purely competitive market is at its long-run equilibrium, then all of the following are true,
except:
A. Price equals marginal cost, and they are equal to the lowest attainable average cost of production
B. Marginal benefit of the last unit of the product equals the marginal cost of producing that unit
C. Maximum willingness of buyers to pay for the last unit of the product equals the minimum
acceptable price for the seller of that unit
D. Combined amount of consumer and producer surpluses is at its minimum possible
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
82. If a competitive firm successfully adopts a better production technology ahead of the others, then:
A. Its product price will become lower than the others'

B. Its average cost will become higher than the others'
C. Its profits will become higher than the others'
D. Its marginal revenue will become higher than the others'
AACSB: Analytic
Blooms: Understand
Learning Objective: 11-05 Discuss creative destruction and the profit incentives for innovation.
Topic: Technological Advance and Competition
83. Competitive firms will always try to earn more than a normal profit by doing the following, except:
A. Adopting better production technology

B. Improving their business organization and operation
C. Developing new products
D. Raising the prices of their existing products
AACSB: Analytic
Blooms: Remember
11-61
84. Creative destruction is most often associated with:
A. International trade
B. Technological advance
C. Government spending
D. Private consumption
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
85. Creative destruction is illustrated by which of the following pairs of products:
A. Bicycles and helmets

B. Digital cameras and film
C. DVD players and DVDs
D. Netflix and iPads

Blooms: Understand
86. A patent is the legal right granted to a firm that allows it to:
A. Make copies of other firm's products

B. Be the sole buyer of a particular product or resource
C. Sell its new product exclusively for a set number of years
D. Be the exclusive distributor of a particular imported product
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
87. A patent gives a firm the power to charge a price that:
A. Is below equilibrium
B. Is higher than marginal cost
C. Increases the consumer surplus
D. Results in overproduction of a product
AACSB: Analytic
Blooms: Understand
11-62
88. The plusses and minuses of the patent system include the following, except:
A. It could give inventors an incentive to bear the research and development costs of new products
B. It could allow stodgy old firms to survive longer than they should against innovative rivals
C. It would prevent the existence of "patent trolls" or firms whose main purpose is to sue companies
D. It may hinder creative destruction especially in complex products that encompass several patents
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
True / False Questions
89. In the long run for a purely competitive market, firms may enter or exit the industry but the firms that
stay in the industry will maintain their initial plant sizes.
FALSE
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
90. In the long run for a purely competitive market, firms will earn only normal profits.
TRUE
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
91. When a profit-maximizing competitive firm decides to produce at a loss because its price is below
average cost but above average variable cost, that is a long-run decision.
FALSE
AACSB: Analytic
Blooms: Understand
11-63
92. In purely competitive market, the entry and exit of firms will push price towards equality with marginal
revenue.
FALSE
AACSB: Analytic
Blooms: Understand
93. When a competitive firm is in long-run equilibrium, its accounting profits are greater than zero.
TRUE
AACSB: Analytic
Blooms: Understand
94. When a competitive firm sees losses because the product falls below the minimum average cost of
production at its current plant, it may decide to expand if there are economies of scale.
TRUE
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
95. When a competitive firm sees the price fall below the minimum possible average total cost in the long
run, then it will decide that it could do better by moving to a different industry.
TRUE
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
96. Suppose that a competitive firm finds that in its short-run equilibrium situation, its marginal cost is
higher than its average total cost. If things are not expected to change and there are constant returns to
scale, then the firm will exit the industry in the long run.
TRUE

Blooms: Understand
11-64
97. It is possible for a competitive firm that is maximizing profits in the short run to make its profits even
bigger in the long run by expanding its plant.
TRUE
AACSB: Analytic
Blooms: Understand
98. In long-run equilibrium, a competitive firm produces where P = MR = MC = minimum ATC and the
firm earns normal economic profits.
TRUE
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
99. When firms in a purely competitive industry are earning profits that are greater than normal, the supply
of the product will tend to decrease in the long run.
FALSE
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
100. When new firms enter a purely competitive industry, the market supply curve will shift to the left.
FALSE
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
101. When some firms leave a purely competitive industry, the market supply curve will shift in such a way
that the remaining firms' profits will increase.
TRUE
AACSB: Analytic
Blooms: Understand
11-65
102. In the long run, pure competition forces firms to produce at the minimum possible average total cost and
the firms will charge a product price equal to that cost.
TRUE
AACSB: Analytic
Blooms: Understand
103. A purely competitive firm that is earning positive profits in its short-run equilibrium situation will
continue to earn positive profits at the long-run equilibrium.
FALSE
AACSB: Analytic
Blooms: Understand
104. The short-run supply curve of a purely competitive industry tends to be steeper than the long-run supply
curve.
TRUE
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
105. The long-run supply curve for a competitive, decreasing-cost industry is downward-sloping.
TRUE
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
106. The reason why the long-run supply curve for a purely competitive industry may be upward-sloping is
because of diminishing marginal returns.
FALSE
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
11-66
107. An upward-sloping long-run supply curve indicates a constant-cost industry.
FALSE
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
108. Productive efficiency refers to a condition where marginal cost is equal to marginal revenue in the long
run.
FALSE
AACSB: Analytic
Blooms: Remember
Difficulty: 3 Hard
109. An under-allocation of resources is occurring in a purely competitive industry whenever the price of the
product is greater than marginal cost.
TRUE
AACSB: Analytic
Blooms: Understand
Difficulty: 3 Hard
110. In pure competition, resources are optimally allocated when production occurs at the output level where
P = MC.
TRUE
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
111. Consumer surplus is the difference between the maximum price a consumer is willing to pay for a good
and the market price of the product.
TRUE
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
11-67
112. Producer surplus is the difference between the market price a producer receives for a product and the
minimum price producers are willing to accept for a product.
TRUE
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
113. Competitive markets produce equilibrium prices and quantities that maximize the sum of consumer and
producer surpluses.
TRUE
AACSB: Analytic
Blooms: Understand
114. If the price in a competitive market falls and goes below the equilibrium price, then consumer surplus
might increase, but producer surplus will definitely decrease.
TRUE
AACSB: Analytic
Blooms: Understand
115. Efficiency or deadweight losses occur in purely competitive markets when P = MC = lowest ATC.
FALSE
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
116. The operation of the "invisible hand" means the pursuit of private interests promotes social interests in
pure competition.
TRUE
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
11-68
117. The transformative effects of competition that foster the development of new products or new
production methods benefit everyone in society.
FALSE
AACSB: Analytic
Blooms: Understand
118. From the viewpoint of a firm, competition can come even from other firms that are not in the same
industry.
TRUE
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
119. Creative destruction is something that our society should try to avoid, through government regulation of
business.
FALSE
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
120. Creative destruction entails both costs as well as benefits.
TRUE
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
121. The costs of competition's creative destruction are often widespread, while the benefits often accrue to
only a few.
FALSE

Blooms: Understand
Difficulty: 1 Easy
11-69
122. Some economists are now proposing that patents may be detrimental to technological advance in
industries with complicated multiple-component products.
TRUE
AACSB: Analytic
Blooms: Understand
11-70

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Chapter 11

Pure Competition in the Long Run

Multiple Choice Questions

1. All of the following are long-run changes, except:

A. An industry expands as more firms enter it

A. In the long run, all inputs are variable in quantity

A. New firms to enter causing the market price of soybeans to fall

A. New firms to enter causing the market price of corn to fall

A. Will always earn a profit in the short run

11. Which of the following is true of normal profits?

A. Entry of new firms

A. The firm is suffering economic losses

A. Some firms will exit from this industry

A. Supply curve will shift to the left

A. Profits will increase

A. Supply curve will shift to the left

A. Increase, and the representative firm's profits will increase

A. Supply to increase and firms' profits to decrease

A. The firm will increase production

A. S will decrease, P will decrease

A. Profits will increase to some positive value

A. Demand changes, and all consequent long-run adjustments have occurred

A. Downward-sloping in a decreasing-cost industry and upward-sloping in an increasing-cost industry

28. The long-run supply curve would be perfectly elastic when:

A. An increase in demand does not cause a change in product price

A. An increase in product demand causes an increase in resource prices

30. The long-run supply curve would be upward-sloping if:

A. Resource prices fall as industry production contracts

A. Demand curves shift up as the industry expands

A. Average total cost is less than marginal cost

A. Greater than its marginal cost

A. Production in the industry decreases in the long run

A. Shift up when the industry expands

A. The average cost will increase

A. Higher, but total output will be lower

A. Decreasing-cost industry will be upward-sloping

41. One explanation for the existence of an increasing-cost industry is:

A. Increasing marginal returns to labor occur

A. If total market output is increased, unit costs of production increase

The graph above represents a(n):

The graph above depicts long-run supply for:

The industry represented by the graph above must be one where:

A. Resource prices rise when the industry contracts

The industry indicated by the graphs above would be a(n):

The industry represented by the graph above must be one where:

A. Resource prices rise when the industry contracts

A. Cost minimization, where P = minimum ATC

51. An industry is producing at the least-cost rate of production when:

A. Marginal cost is greater than average total cost

52. Allocative efficiency occurs when the:

A. Minimum of average total cost equals average revenue

A. Greater than MR but equal to MC and minimum ATC

A. It is making economic profits in the long run

55. Which of the following statements about a competitive firm is correct?

A. Average total cost

A. The average cost of producing the product at each output level

A. The average cost of producing the product at each output level

A. Marginal cost equals marginal revenue

A. Total revenue is at a maximum

61. Which is true of a purely competitive firm in the long-run equilibrium?

A. Average fixed cost equals price

A. Equals marginal cost

A. Marginal cost, but may be greater or less than average cost