CHAPTER 9—PERFECT COMPETITION
MULTIPLE CHOICE
1) Knowing the number of firms in a market is the only information needed to identify the
structure of that market.
a. True
b. False
Answer: B
2) Which of the following factors would be the most useful in determining the structure of a
market?
a. the number of firms in the market
b. the price of the product sold in the market
c. the size of the physical structure
d. the geographical dispersion of the market
e. the age of the market
Answer: A
3) The characteristics of a market that influence the behavior of market participants is (are)
known as
a. perfect competition
b. market power
c. barriers to entry
d. market structure
e. monopolistic competition
Answer: D
4) All of the following help define market structure, except one. Which is the exception?
a. number of sellers
b. barriers to entry
c. barriers to exit
d. standardization of product
e. how firms are organized (i.e., as proprietorships, partnerships, or corporations)
Answer: E
5) The number of sellers in an industry, in part, defines its market
a. performance
b. standard
c. demand curve
d. structure
e. profile
Answer: D
6) Which of the following helps to classify an industry's market structure?
a. the long-run equilibrium price
b. the impact of industry expansion on input prices
c. the existence of barriers to entry
d. the shape of the short-run average total cost curve
e. the existence of economic profit in the short run
Answer: C
7) The distinguishing characteristics of different market structures include
a. how frequently the product is purchased
b. the extent of capitalization in the industry
c. the presence or absence of technological innovation
d. the presence or absence of collusion
e. both the number of sellers and the number of buyers
Answer: E
8) Market structure is determined by the
a. volume of discounts, the quantity of foreign exchange, and the effects of Federal Reserve
policy
b. influence of government policy, the number of qualified buyers, and the effect of generally
accepted accounting principles
c. number of buyers and sellers, whether the product is standardized, whether there is free
entry and exit, and how well informed the buyers and sellers are about the market
d. volume of discounts, the effect of generally accepted accounting principles, and Federal
Reserve policy
e. influence of government policy, the quantity of foreign exchange, and the effects of
Federal Reserve policy
Answer: C
9) In a perfectly competitive market, the good or service cannot differ substantially among
sellers.
a. True
b. False
Answer: A
10) The automobile market is an example of a perfectly competitive market.
a. True
b. False
Answer: B
11) All of the following are characteristics of a perfectly competitive market, except one.
Which is the exception?
a. a large number of sellers
b. a standardized product
c. no barriers to entry
d. sellers can easily exit the market
e. an intensive rivalry among the sellers
Answer: E
12) The number of sellers in a market is considered to be large when
a. the total exceeds 100
b. no single buyer can affect the price through his or her demand for the product
c. they cannot be easily counted
d. no single seller can affect the price by changing its level of output
e. no seller controls more than 20 percent of the total market supply
Answer: D
13) One of the defining characteristics of a perfectly competitive market is
a. a small number of sellers
b. a large number of buyers and a small number of sellers
c. a standardized product
d. significant nonprice competition among firms
e. an inefficient information system
Answer: C
14) Which of the following is not a basic characteristic of a perfectly competitive market?
a. a large number of buyers and sellers
b. significant nonprice competition among firms
c. a standardized product produced by firms
d. no barriers to entry
e. no barriers to exit
Answer: B
15) Of the following products, which is most standardized?
a. pizza
b. concrete
c. automobiles
d. clothing
e. paintings
Answer: B
16) Which of the following is the closest to being a perfectly competitive firm?
a. a hot dog vendor in New York
b. Microsoft Corporation
c. Ford Motor Company
d. the campus bookstore
e. a public university
Answer: A
17) Barriers to entry into a market could include all of the following, except one. Which is
the exception?
a. government restrictions
b. brand loyalty
c. large marginal costs
d. licensing fees
e. large fixed costs
Answer: C
18) Firms in a perfectly competitive market cannot influence
a. the quantity of the good that they produce
b. how much labor to use in production
c. how much capital to employ in production
d. the level of advertising that they use
e. the price of the product they sell
Answer: E
19) Firms are assumed to be price takers in a perfectly competitive market because
a. they are not allowed by law to charge any price other than the market price
b. they must accept any price offered by consumers
c. they earn high enough profits at the market price, so they do not want to hurt consumers by
raising their prices
d. each firm is too small to influence the market price
e. there are too few buyers in the market to absorb price changes
Answer: D
20) Which of the following is a characteristic of perfect competition?
a. easy entry into or exit from the market
b. a small number of buyers
c. a high degree of government regulation
d. a differentiated product
e. a high degree of collusion
Answer: A
21) Which of the following would prevent a market from being classified as perfectly
competitive?
a. there are many buyers and sellers in the market
b. it is easy for new firms to enter the market
c. it is easy for existing firms to exit the market
d. buyers perceive significant differences among the products of different sellers
e. each buyer purchases only a tiny fraction of the total market quantity
Answer: D
22) Which of the following products is most likely to be produced by a perfectly competitive
firm?
a. color televisions
b. breakfast cereal
c. legal services
d. corn
e. notebook computers
Answer: D
23) Perfect competition is characterized by a(n)
a. large number of buyers and sellers, each one a price taker
b. single seller and many buyers
c. small number of sellers offering differentiated products
d. intense rivalry among several competitors
e. small number of buyers and sellers who negotiate the market price
Answer: A
24) Under perfect competition
a. the only major difference between firms is the mark-up they use to determine prices
b. a single seller sets the price
c. a small number of sellers offer a differentiated product
d. sellers offer a standardized product
e. a small number of buyers and sellers negotiate the market price
Answer: D
25) Under perfect competition,
a. a single seller sets the price
b. sellers can easily enter or exit the market
c. a small number of sellers offer differentiated products
d. a government franchise protects sellers
e. an intense rivalry between two powerful firms determines the market price
Answer: B
26) If one firm sets the market price
a. the market is perfectly competitive
b. the market is not perfectly competitive
c. there are a large number of buyers who can buy from a wide range of competitors
d. there is free entry into the market
e. its product must be a standardized commodity, produced by many competitors
Answer: B
27) The model of perfect competition is most likely to apply to a market where
a. it is difficult for existing firms to exit the market
b. there are a few buyers, and they are uninformed about the degree of product
standardization
c. there are many existing sellers, but it is difficult for new sellers to enter the market
d. one dominant seller must negotiate with one dominant buyer
e. there are many sellers, and they produce a standardized product
Answer: E
28) A firm in a perfectly competitive market can increase total revenue by raising the price of
its product.
a. True
b. False
Answer: B
29) In a perfectly competitive market, the market demand curve is horizontal.
a. True
b. False
Answer: B
30) The demand curve facing a typical firm in a perfectly competitive market is horizontal.
a. True
b. False
Answer: A
31) The term price taker is used to describe a situation in which consumers have no influence
over the market price for a good or service and must take whatever price is set by the
economically powerful firms.
a. True
b. False
Answer: B
32) A perfectly competitive firm
a. can increase total revenue by raising its price
b. can sell more goods by lowering its price
c. can sell more goods by raising its price
d. cannot increase sales or total revenue by changing its price
e. typically tries to offer lower prices than rival firms
Answer: D
33) Which of the following is true about perfect competition?
a. Each firm faces a downward-sloping demand curve.
b. Each firm must face a horizontal demand curve.
c. Firms are price-makers.
d. Marginal cost equals average cost.
e. Firms can increase sales by lowering their price.
Answer: B
34) In perfect competition, no individual producer can significantly affect the market price
because
a. the market is regulated by the government
b. each producer is ignorant of the market price
c. each producer provides a very small portion of the total market supply
d. strictly enforced collusion prevents any producer from acting independently
e. each firm's product is so different that there is no market price
Answer: C
35) Under conditions of perfect competition, if any one buyer increases her purchases, the
market price
a. rises
b. remains unchanged
c. falls
d. either rises or falls
e. will change, but in an unpredictable fashion
Answer: B
36) In perfect competition,
a. there are typically two or three equally powerful firms
b. a large number of sellers offer a differentiated product
c. the firm is a price taker
d. marginal revenue cannot be calculated because the firm's demand is perfectly elastic
e. the market demand and the firm's demand are perfectly elastic
Answer: C
37) Java Joe sells 200 cups of coffee each day in a perfectly competitive market at the market
price of $2.00 per cup. If Java Joe independently decreased its price per cup to $1.50,
a. its sales would rise to 250 cups
b. its revenue would decrease
c. its revenue would rise
d. its total revenue would equal $200
e. the market price will fall to $0.75 as other coffee sellers match the price cut
Answer: B
38) In a perfectly competitive market, the
a. market demand curve is horizontal
b. short-run market supply curve is horizontal
c. short-run market demand curve slopes upward
d. short-run market supply curve slopes downward
e. market demand curve slopes downward
Answer: E
39) Ken's Lawn Service Co. operates in a perfectly competitive market. Why doesn't Ken try
to increase his revenue by lowering his price below the prevailing market price?
a. He can sell as much as he wishes to at the market price.
b. He faces a perfectly inelastic demand curve, so a price change will have no impact on
revenue.
c. Government regulations prevent it.
d. If he lowers his price, he will lose all his sales since he faces a horizontal demand curve.
e. Agreements with other lawn service companies require him to sell at the market price.
Answer: A
40) A firm that operates in a perfectly competitive market
a. controls its own price, but accepts its output level as given
b. controls both its own price and its own output level
c. controls its own output level, but accepts its price as given
d. accepts both its output level and its price as given
e. controls its own price, its own output level, and its own costs
Answer: C
41) In order for a firm to face a perfectly elastic demand curve, it must
a. be a large firm selling a standardized product
b. be a small producer selling a standardized product
c. be a small producer; its product may or may not be standardized
d. be a large producer selling a non-standardized product
e. sell a standardized product, but the size of the firm is irrelevant
Answer: B
42) In perfect competition
a. the demand curve facing the firm is a horizontal line at the market price
b. marginal revenue equals total revenue
c. total revenue always exceeds variable cost
d. price always exceeds average total cost
e. marginal cost always equals average cost
Answer: A
43) In perfect competition, the demand curve facing a firm is a horizontal line at the market
price because
a. marginal revenue equals total revenue
b. of the law of demand
c. price always exceeds average total cost
d. marginal cost equals average cost
e. the firm is a price taker
Answer: E
44) If a firm is a price taker, then the demand curve it faces is perfectly
a. elastic and above its marginal revenue curve
b. elastic and lies on top of its marginal revenue curve
c. elastic and below its marginal revenue curve
d. inelastic and above its marginal revenue curve
e. inelastic and the same as its marginal revenue curve
Answer: B
45) Firms are assumed to
a. maximize profit per unit of output
b. maximize total revenue
c. maximize assets
d. produce at the lowest point on their average total cost curve
e. maximize profit
Answer: E
46) When marginal revenue equals price for all levels of output, the firm is operating in a
perfectly competitive market.
a. True
b. False
Answer: A
47) For a perfectly competitive firm,
a. marginal revenue is the same as the market price
b. marginal revenue equals total revenue
c. to earn an economic profit, it must be larger than its competitors
d. price always exceeds average total cost
e. marginal cost is always equal to average cost
Answer: A
48) For a perfectly competitive firm,
a. marginal revenue equals total revenue
b. total revenue always exceeds total cost
c. price always exceeds average total cost
d. marginal cost always equals average cost
e. the marginal revenue curve and the demand curve lie on top of each other
Answer: E
49) The change in a firm's total revenue due to selling an additional unit of output is known
as
a. marginal revenue
b. average revenue
c. price
d. marginal cost
e. marginal revenue product
Answer: A
50) Which of the following is always true for a perfectly competitive firm?
a. Marginal revenue is below price.
b. Marginal revenue exceeds price.
c. The market demand curve is a horizontal line.
d. Price equals marginal revenue.
e. The market supply curve is a horizontal line.
Answer: D
51) A perfectly competitive firm's total revenue curve
a. is a horizontal line
b. is a vertical line
c. is constant
d. has a negative slope
e. has a constant positive slope
Answer: E
52) A perfectly competitive firm's marginal revenue
a. curve is a vertical line
b. equals price
c. rises at a constant rate
d. rises at an increasing rate
e. falls at a constant rate
Answer: B
53) Jim's Shoe Shine Shop operates in a perfectly competitive market. If its marginal revenue
is $5 per shine, then
a. the next shine will bring in less than $5 in additional revenue
b. the next shine will bring in more than $5 in additional revenue
c. the market price per shine is $5
d. price is less than $5
e. price is equal to total revenue at all output levels
Answer: C
54) Under perfect competition, the demand curve facing a firm and the firm's marginal
revenue curve are
a. vertical at the firm's chosen output level
b. both vertical, but the demand curve is further to the right than the marginal revenue curve
c. both vertical, but the marginal revenue curve is further to the right than the demand curve
d. both horizontal at the level of the market price
e. both horizontal, but the demand curve is above the marginal revenue curve
Answer: D
55) If a firm is operating in a perfectly competitive market in which the market price equals
$12, then its
a. marginal revenue is $12
b. marginal revenue is less than $12
c. marginal revenue is greater than $12
d. marginal cost is less than $12
e. marginal cost is greater than $12
Answer: A
56) Figure 9-1 shows the marginal cost and average total cost curves for a perfectly
competitive firm. If the market price is $10, then
a. the firm earns $10 profit on each unit sold
b. the firm earns $8 profit on each unit sold
c. marginal revenue equals $10
d. the firm is losing money in the short run
e. marginal cost always equals marginal revenue
Answer: C
57) Figure 9-1 shows the marginal cost and average total cost curves for a perfectly
competitive firm. If the market price is $10, and the firm produces more than 200
a. the firm earns less profit per unit than if it produced 200 but more total profit.
b. the firm earns more profit per unit than if it produced 200 and more total profit.
c. the firm earns less profit per unit than if it produced 200 and less total profit.
d. the firm earns more profit per unit than if it produced 200 but may make a loss.
e. the firm will instantly go from making a profit to making a loss
Answer: C
58) In the short run under perfect competition, an individual firm should increase output as
long as
a. marginal revenue exceeds marginal cost
b. total revenue exceeds total cost
c. price exceeds marginal revenue
d. total revenue is rising
e. marginal revenue is rising
Answer: A
59) Suppose that a firm chose an output level where the total cost and total revenue curves
intersect. At this level of output,
a. the firm is maximizing profits
b. the firm is minimizing losses
c. profit is zero
d. total revenue is maximized
e. total cost is minimized
Answer: C
60) A firm can maximize profits in the short run by producing output where
a. MC = MR and the MC curve crosses the MR curve from above (as long as P>AVC)
b. TC = TR
c. MR - MC = TR - TC
d. MC = MR and the MC curve crosses the MR curve from below (as long as P>AVC)
e. TR = TC and the TC curve crosses the TR curve from below
Answer: D
61) A firm maximizes its profit by producing that quantity of output for which
a. marginal revenue equals total revenue
b. marginal revenue exceeds marginal cost by the greatest amount
c. price is the greatest distance above average total cost
d. the difference between total revenue and total cost is the greatest
e. marginal cost equals average cost
Answer: D
62) As long as price is greater than average variable cost, a firm maximizes its profit by
producing that quantity of output for which
a. average revenue equals average total cost
b. the price is the highest
c. marginal revenue equals marginal cost
d. average total cost is minimized
e. average variable cost is minimized
Answer: C
63) If a firm's marginal revenue exceeds its marginal cost, it should
a. raise its price
b. advertise more
c. lay off a few employees
d. cut back its overhead
e. increase its output
Answer: E
64) Figure 9-2 shows the total revenue and total cost data for a perfectly competitive firm. At
what output level will the firm break even?
a. 1
b. 2
c. 3
d. 4
e. 5
Answer: D
65) Figure 9-2 shows the total revenue and total cost data for a perfectly competitive firm. To
maximize profits, how many units of output should it produce?
a. 1
b. 3
c. 4
d. 5
e. 6
Answer: D
66) Figure 9-2 shows the total revenue and total cost data for a perfectly competitive firm.
The marginal revenue of producing the sixth unit of output is
a. $0
b. less than $20
c. $20
d. more than $20
e. $120
Answer: C
67) Carla's Candy Store is maximizing profits by producing 1,000 pounds of candy per day.
If Carla's fixed costs unexpectedly increase and the market price remains constant, then the
profit-maximizing level of output
a. is less than 1,000 pounds
b. is still 1,000 pounds
c. is more than 1,000 pounds
d. will increase
e. cannot be determined without more information
Answer: B
68) In order to maximize profit, a perfectly competitive firm should select the level of output
where
a. marginal revenue equals price
b. marginal cost equals marginal revenue
c. price exceeds marginal cost
d. price exceeds marginal revenue
e. total revenue equals total cost
Answer: B
69) In short-run equilibrium, the perfectly competitive firm of Figure 9-3 will produce
a. zero units of output
b. 200 units of output
c. 275 units of output
d. 475 units of output
e. 575 units of output
Answer: D
70) In short-run equilibrium, the perfectly competitive firm of Figure 9-3 will charge
a. $5
b. $7
c. $8
d. $10
e. more than $10
Answer: D
71) If a perfectly competitive firm like the one depicted in Figure 9-3 produces 575 units
a. its profit will be larger than if it produces only 475
b. its profit will be exactly the same as if it produces 475
c. its profit will be smaller than if it produces only 475
d. it will be forced to shutdown
e. its profit will be smaller than if it produced 475 but it will still make a profit.
Answer: C
72) If a perfectly competitive firm like the one depicted in Figure 9-3 produces 275 units
a. its profit will be larger than if it produces only 475
b. its profit will be exactly the same as if it produces 475
c. its profit will be smaller than if it produces only 475
d. it will be forced to shutdown
e. its profit will be smaller than if it produced 475 but it will still make a profit.
Answer: C
73) The firm will do best if it produces that quantity of output for which
a. marginal cost equals average cost
b. profit per unit is greatest
c. marginal revenue equals total revenue
d. marginal revenue equals marginal cost
e. marginal revenue exceeds marginal cost
Answer: D
74) Figure 9-4 shows marginal cost for a firm in a perfectly competitive market. Suppose that
the market price is $20. What is the profit-maximizing level of output?
a. 0
b. 1
c. 4
d. 5
e. 6
Answer: D
75) If average variable cost exceeds price for a perfectly competitive firm in the short run,
then it could increase profits by raising its price.
a. True
b. False
Answer: B
76) Which of the following defines total profit?
a. average revenue minus average cost
b. marginal cost times output
c. marginal revenue minus marginal cost
d. total revenue minus total cost
e. average cost divided by output
Answer: D
77) A perfectly competitive firm produces in a market where the prevailing price is $25. At
its current output level of 10,000 units, its average total cost equals $15. The firm is earning
a. a total money profit of $100,000
b. a total economic profit of $100,000
c. a total money profit of $250,000
d. a total economic profit of $250,000
e. both a total money profit and a total economic profit of $100,000
Answer: B
78) If average cost rises as a firm increases its output level,
a. profits are not being maximized
b. marginal cost is greater than average cost
c. profits are maximized
d. marginal revenue is positive
e. total cost is minimized
Answer: B
79) Figure 9-5 shows the total revenue and total cost data for a perfectly competitive firm.
The profit earned at the profit-maximizing output level is
a. $80
b. $10
c. $0
d. $20
e. $15
Answer: E
80) Which of the following expressions equals profit per unit of output?
a. MR - MC
b. P - AVC
c. MR - P
d. P - ATC
e. MR - ATC
Answer: D
81) Bennie's Top Factory produces 1,000 tops per day for a total daily revenue of $2,000.
Bennie's total costs would rise by $2 if it produced the 1,001st top. Because marginal revenue
and price are equal and constant,
a. profit would rise by $2 if Bennie produced one additional top
b. profit would fall by $2 if Bennie produced one additional top
c. profit would not change if Bennie produced one additional top
d. profit will fall by some unknown amount if Bennie produced one additional top
e. the total cost curve must have shifted to the left
Answer: C
82) If P > ATC for a perfectly competitive firm, then
a. the firm could increase profit by lowering its price
b. the firm could increase profit by raising its price
c. the firm is producing too much output
d. the firm is making a profit
e. profits are zero in the short run
Answer: D
83) Which of the following is true regarding the cost curves faced by a firm?
a. when MC > ATC, AVC must be falling
b. when MC > AVC, ATC must be rising
c. when MC > ATC, ATC must be rising
d. MC and ATC are the same for a perfectly competitive firm
e. when MC is a horizontal line, price is constant
Answer: C
84) Figure 9-6 shows the marginal cost and average total cost curves for a perfectly
competitive firm. This firm will
a. earn an economic profit
b. suffer an economic loss in this long-run situation
c. suffer an economic loss in the short run and close
d. break even if it expands to 180 units of output
e. suffer an economic loss and continue producing in the short run
Answer: E
85) The perfectly competitive firm shown in Figure 9-6 is currently producing 80 units of
output. To maximize profit (or minimize loss), the firm should
a. increase output to 180 units
b. not change its output level
c. raise its price and hold output constant
d. raise its price and raise output
e. increase output to 140 units
Answer: E
86) The perfectly competitive firm shown in Figure 9-6 is currently producing 180 units of
output. To maximize profit, it should
a. increase output until ATC is maximized
b. reduce output to 140 units
c. reduce output to 100 units
d. raise its price and lower its output
e. raise its price and raise its output
Answer: B
87) For the perfectly competitive firm shown in Figure 9-6,
a. profit rises when the firm raises its price and lowers its output
b. the profit-maximizing output level is 180 units
c. an economic loss occurs at the profit-maximizing output level
d. the profit-maximizing output level is 100 units
e. the firm will earn short-run profits
Answer: C
88) Which of the following formulas represents total profit for a perfectly competitive firm?
a. MR - MC
b. AR - ATC
c. P - ATC
d. Q ´ (MR - MC)
e. Q ´ (P - ATC)
Answer: E
89) If price equals average total cost at the profit-maximizing output level, then in the short
run,
a. profit is positive
b. profit is negative
c. the firm will go out of business
d. the firm will earn zero profit
e. the firm's supply curve is horizontal
Answer: D
90) Joe's Garage operates in a perfectly competitive market. At the point where marginal cost
equals marginal revenue, ATC = $20, AVC = $15, and the price per unit is $10. In this
situation,
a. Joe's Garage will break even
b. Joe's Garage will shut down immediately
c. the market price will fall in the long run
d. Joe's supply curve will shift to the left
e. Joe's Garage will suffer a loss in the short run, but stay in business
Answer: B
91) Flora's Flowers operates in a perfectly competitive market. At the point where marginal
cost equals marginal revenue, ATC = $10, AVC = $5, and the price per unit is $15. In this
situation,
a. Flora earns positive profits in the short run
b. Flora will shut down in the short run
c. Flora's supply curve will shift to the left
d. Flora's supply curve will shift to the right
e. the market price will rise in the long run
Answer: A
92) Flora's Flowers operates in a perfectly competitive market. At the point where marginal
cost equals marginal revenue, ATC = $10, AVC = $5, and the price per unit is $7.50. In this
situation,
a. Flora earns positive profits in the short run
b. Flora will shut down in the short run
c. Flora's supply curve will shift to the left
d. Flora's supply curve will shift to the right
e. Flora earns negative profits in the short run but will remain open
Answer: E
93) Figure 9-7 shows cost curves for Penny's Parasols, a perfectly competitive firm. At which
of the points would Penny's Parasols be certain to close down?
a. A
b. B
c. C
d. D
e. E
Answer: A
94) Figure 9-7 shows cost curves for Penny's Parasols, a perfectly competitive firm. At which
point(s) would Penny's Parasols endure economic losses, but continue to produce in the short
run?
a. D
b. F
c. A
d. C
e. E
Answer: D
95) Which point in Figure 9-7 represents a break-even situation for a perfectly competitive
firm?
a. A
b. B
c. C
d. D
e. E
Answer: D
96) At which point in Figure 9-7 would a perfectly competitive firm earn the same profit, or
suffer the same loss, by producing rather than by shutting down?
a. A
b. B
c. C
d. D
e. F
Answer: B
97) In short-run equilibrium, the perfectly competitive firm of Figure 9-8 will earn a total
economic profit of
a. zero
b. $950
c. $825
d. $1,425
e. $575
Answer: B
98) In short-run if this firm produced 275 units of output, the perfectly competitive firm of
Figure 9-8 will earn a total economic profit of
a. zero
b. $950
c. $825
d. $1,425
e. $575
Answer: C
99) The minimum short-run average total cost for Tony's Barbecue equals $8.50 at an output
level of 100 meals per day. The market price of each meal is $8. In short-run equilibrium,
Tony
a. will suffer an economic loss of $50 per day, serving 100 meals per day
b. cannot avoid an economic loss and should produce where the difference between average
total cost and the price is minimized
c. cannot avoid an economic loss and should serve no meals per day
d. will suffer an economic loss greater than $50 per day, serving more than 100 meals per day
e. will suffer an economic loss greater than $50 per day, serving less than 100 meals per day
Answer: C
100) Profit per unit of output is
a. price minus average total cost
b. marginal revenue minus marginal cost
c. average total cost minus average variable cost
d. total revenue minus total cost
e. demand minus average variable cost
Answer: A
101) The difference between price and average total cost is
a. a tax write off
b. total economic profit (or loss)
c. fixed cost
d. the profit (or loss) per unit of output
e. average variable cost
Answer: D
102) The firm earns an economic profit whenever
a. price is less than average total cost
b. marginal revenue exceeds total revenue
c. average variable cost exceeds total revenue
d. marginal cost minus average cost is positive
e. price is greater than average total cost
Answer: E
103) If price exceeds average total cost
a. the firm earns an economic profit
b. there are a large number of buyers and sellers
c. the firm suffers an economic loss
d. the firm closes down
e. the firm should reduce its production
Answer: A
104) A firm suffers an economic loss whenever
a. price exceeds average total cost
b. price is less than average total cost
c. total revenue exceeds variable cost
d. marginal cost is greater than marginal revenue
e. marginal cost exceeds average cost
Answer: B
105) If price is less than average total cost, a firm
a. earns an economic profit
b. hires additional workers
c. moves its factory offshore
d. fires the marginal worker
e. suffers an economic loss
Answer: E
106) If there is an increase in market demand in a perfectly competitive market, then in the
short run
a. there will be no change in the demand curves faced by individual firms in the market
b. the demand curves for firms will shift downward
c. the demand curves for firms will become more elastic
d. market supply will fall
e. profits will rise
Answer: E
107) All of the following conditions, except one, will necessarily be satisfied when a
perfectly competitive firm is in short-run equilibrium. Which condition is the exception?
a. marginal revenue equals average total cost
b. marginal cost crosses marginal revenue from below
c. marginal revenue equals price
d. price equals marginal revenue
e. profit is maximized or loss is minimized
Answer: A
108) If a perfectly competitive firm cannot avoid economic losses, it should continue to
operate in the short run as long as
a. marginal revenue exceeds average fixed cost
b. price exceeds average total cost
c. the market price exceeds average total cost
d. the marginal revenue is less than the average variable cost
e. price exceeds average variable cost
Answer: E
109) Teddy's Bear Shop operates in a perfectly competitive market where the prevailing price
is $15. Teddy's marginal cost curve crosses his average total cost curve at $20. The marginal
cost curve crosses his average variable cost curve at $17. In the short run, Teddy's Bear Shop
a. should operate at a lower output level where it can suffer less of an economic loss
b. will suffer an economic loss, but should continue to operate at the minimum of its average
variable costs
c. will just break even, with neither a profit nor a loss, and should operate
d. will suffer an economic loss and should shut down
e. should operate at a higher output level where it can suffer less of an economic loss
Answer: D
110) In the short run, a perfectly competitive firm is producing an output level where
marginal cost equals $10, average total cost equals $7, and marginal revenue equals $9.
Which of the following statements is correct?
a. The firm is earning an economic profit which could be increased by raising output.
b. The firm is earning an economic profit which could be increased by lowering output.
c. The firm is maximizing its economic profit.
d. The firm is suffering an economic loss which could be decreased by raising output.
e. The firm is suffering an economic loss which could be decreased by lowering output.
Answer: B
111) The All-the-Rage microbrewery is represented in Figure 9-9. If the market price is $2.50
per pint, then in the short run, the microbrewery will
a. earn the same profit by producing zero pints as by producing 50 pints per day
b. produce zero pints per day to avoid an economic loss
c. produce 50 pints per day and break even
d. produce between zero and 50 pints per day
e. produce more than 50 pints per day
Answer: A
112) A firm will shut down if
a. it earns too little economic profit
b. there are a large number of buyers and sellers
c. it suffers an economic loss
d. there is a change in tastes and preferences
e. price is everywhere less than average variable cost
Answer: E
113) The entire marginal cost curve for a perfectly competitive firm represents its short-run
supply curve.
a. True
b. False
Answer: B
114) Justina operates in a perfectly competitive market. Which of the following is her shortrun supply curve?
a. the MC curve above its point of intersection with the ATC curve
b. the market supply curve
c. the MC curve above its point of intersection with the AVC curve
d. the market demand curve
e. its MC curve
Answer: C
115) The perfectly competitive firm represented in Figure 9-10 has a short-run supply curve
that follows the
a. marginal cost curve
b. vertical axis for prices less than $4.00 and follows the marginal cost curve for prices above
$4.00
c. vertical axis for prices less than $2.50 and follows the marginal cost curve for prices above
$2.50
d. vertical axis for prices less than $5.50 and follows the marginal cost curve for prices above
$5.50
e. horizontal axis for quantities less than 50 and follows the marginal cost curve for quantities
above 50
Answer: C
116) In the short run, each firm in a perfectly competitive market is free to
a. increase its plant size
b. vary its output level within its existing capacity
c. exit the industry without losses
d. set a price above the market price
e. decrease its plant size
Answer: B
117) For market prices that are below the shut-down point of every firm in the market, the
short-run market supply curve
a. slopes upward
b. slope downward
c. follows the horizontal axis
d. rises at a 45-degree angle
e. follows the vertical axis
Answer: E
118) The perfectly competitive firm's supply curve includes
a. that portion of the marginal cost curve above the minimum point on the average variable
cost curve
b. its economic profit schedule
c. that portion of the marginal revenue curve above minimum average variable cost
d. that portion of the average total cost curve above minimum average variable cost
e. the firm's effective resource demand curve
Answer: A
119) The portion of the marginal cost curve above the minimum point on the average variable
cost curve is part of the perfectly competitive firm's
a. average revenue curve
b. effective demand curve
c. average variable cost curve
d. supply curve
e. total revenue curve
Answer: D
120) In the short run,
a. economic profit is always zero
b. economic loss is always zero
c. some inputs are fixed
d. the number of firms in an industry can vary
e. technology is indeterminate
Answer: C
121) In the short run, perfectly competitive firms
a. always earn an economic profit
b. never earn an economic profit
c. always invest more in order to earn more
d. never suffer an economic loss
e. can earn an economic profit
Answer: E
122) All of the following conditions, except one, are satisfied when a perfectly competitive
market is in short-run equilibrium. Which is the exception?
a. No firm is suffering an economic loss.
b. Each buyer purchases the quantity he wants at the market price.
c. Each seller produces the quantity she wants at the market price.
d. Suppliers want to sell the same quantity that buyers want to purchase.
e. The market coordinates the independent decisions of all the participants.
Answer: A
123) In a perfectly competitive market, the equilibrium price
a. is determined by all the buyers in the market but no single buyer is able to influence it
b. is determined by all the sellers in the market but no single seller is able to influence it
c. adjusts until the quantity supplied by all sellers is equal to the quantity demanded by all
buyers
d. is not influenced by the cost structure of the firms in the market
e. is not influenced by the preferences of the consumers in the market
Answer: C
124) In the short run, the perfectly competitive market supply curve
a. is indeterminate
b. shows the total quantities of resources used by all firms in that market, given the market
price of resources
c. is the same as the individual supply curve of the dominant firm
d. shows the sum of the quantities of output supplied by all firms in the market at each price
e. is irrelevant to potential entrants
Answer: D
125) In the short run, the horizontal sum of all of the marginal cost curves (above minimum
average variable cost) of individual firms in a competitive market defines the
a. average variable cost curve
b. market demand curve
c. market supply curve
d. average total cost curve
e. total quantity demanded
Answer: C
126) The short-run market supply curve in a perfectly competitive industry
a. shows the total quantity supplied by all firms at each possible price
b. is perfectly inelastic at the market price
c. is perfectly elastic at the market price
d. shows how much output each individual firm will supply at various possible prices
e. is usually downward sloping
Answer: A
127) If demand increases in a perfectly competitive market,
a. the market price will fall
b. firms already in the market will supply more output
c. new firms will enter the market
d. the short-run market supply curve will shift to the right
e. each firm's marginal cost curve will shift to the right
Answer: B
128) In the short run in a perfectly competitive industry,
a. each firm's supply curve is horizontal, but the market supply curve is upward sloping
b. the marginal cost curve equals the marginal revenue curve
c. the market supply curve is upward sloping because each firm's supply curve is upward
sloping
d. the market demand curve is the sum of each consumer's marginal revenue curve
e. each firm earns only a normal profit
Answer: C
129) If demand increases in a perfectly competitive market,
a. then, in the short run, existing firms will find their profits diminishing, or their losses
increasing
b. existing firms will earn an economic profit
c. the market price will decrease
d. each firm will produce more along its short-run supply curve and total output will increase
along the short-run market supply curve
e. quantity demanded will increase and quantity supplied will decrease
Answer: D
130) Perfectly competitive firms can earn an economic profit in the short run because
a. entry of new firms does not occur instantaneously
b. competitive firms always invest more to earn more
c. competitive firms never suffer an economic loss
d. price always equals average variable cost
e. price always equals average total cost
Answer: A
131) In a perfectly competitive industry,
a. the market price is determined at the intersection of the market supply and demand curves
b. the typical firm will just break even in the short run
c. a rise in the market price will attract new entrants
d. economics profits are a signal for new consumers to enter
e. each firm faces the downward sloping market demand curve
Answer: A
132) In a perfectly competitive market,
a. no firm can earn an economic profit
b. it is possible for each firm to earn an economic profit in the short run
c. firms determine the market price and consumers determine the market quantity
d. consumers determine the market price, and firms decide how much to produce at that price
e. the market demand curve is a horizontal line at the market price
Answer: B
133) In a perfectly competitive market,
a. each firm faces a perfectly elastic supply curve
b. each consumer faces a perfect elastic demand curve
c. the market sums up the buying and selling preferences and determines the market price
d. the market price is determined by firms and the market quantity is determined by
consumers
e. price equals marginal cost equals average total cost in the short run
Answer: C
134) In a perfectly competitive market equilibrium,
a. each firm's marginal cost is equal to the market price
b. each consumer's marginal utility is equal to the market price
c. each firm's marginal cost is equal to each consumer's marginal utility
d. price equals minimum marginal cost
e. price equals minimum average total cost
Answer: E
135) In short-run equilibrium in a perfectly competitive market,
a. each firm earns an economic profit
b. each firm earns a normal profit
c. firms shut down if price exceeds average total cost
d. each firm takes consumers' marginal utility as given
e. peach firm takes the market price as given
Answer: E
136) In the short run in perfect competition,
a. each firm can sell whatever quantity it wishes to sell at the market price
b. the market demand curve cannot shift
c. new firms will enter the market if existing firms are earning economic profits
d. new firms will enter the market if existing firms are earning normal profits
e. existing firms will exit the market if they are suffering losses
Answer: A
137) In short-run equilibrium in a perfectly competitive market,
a. the price varies along the market supply curve
b. each consumer can buy whatever quantity he wishes to buy at the market price
c. the price varies along the market demand curve
d. the market demand curve is horizontal
e. the market demand curve is vertical
Answer: B
138) To say that a perfectly competitive market is in short-run equilibrium is to say that
a. at least one firm is earning an economic profit
b. at least one firm is earning a normal profit
c. no consumer wishes to buy any more or any fewer units at the market price
d. each firm is earning an economic profit
e. every consumer is purchasing a positive amount of output
Answer: C
139) In short-run equilibrium in perfect competition,
a. each firm's profit is measured by P - ATC
b. each firm's profit is measured by ATC - P
c. each firm's (economic) profit is positive
d. the amount sold by existing firms at the market price is exactly equal to the quantity
consumers demand at that price
e. no firm wishes to enter the market
Answer: D
140) Tommy's Tires operates in a perfectly competitive market. If tires sell for $50 each and
ATC = $40 per tire at the profit-maximizing output level, then in the long run
a. more firms will enter the market
b. some firms will exit from the market
c. the equilibrium price per tire will rise
d. average total costs must fall
e. marginal revenue will rise
Answer: A
141) Tommy's Tires operates in a perfectly competitive market. If the market price equals
$50 per tire and ATC = $60 per tire at the profit-maximizing level of output, then in the long
run
a. more firms will enter the market
b. the market supply curve will shift to the right
c. the equilibrium price per tire will fall
d. average total costs will rise
e. the market supply curve will shift to the left
Answer: E
142) Suppose the market price exceeds the typical perfectly competitive firm's short-run
average total cost. What will happen to this market in the long run?
a. The market demand curve will shift to the left as firms exit.
b. The market supply curve will shift to the left as firms exit.
c. The market demand curve will shift to the right as firms enter.
d. Both the market demand and supply curves will shift to the left as firms exit.
e. The market supply curve will shift to the right as firms enter.
Answer: E
143) In the long run, the movement of firms into and out of a perfectly competitive market
will influence price by
a. shifting the market demand curve
b. shifting the market supply curve
c. making the market supply curve less elastic
d. making the market demand curve less elastic
e. shifting the supply curve for each firm in the market
Answer: B
144) In a perfectly competitive market, a given short-run equilibrium cannot persist into the
long run unless the firms are earning (suffering)
a. above-normal profits
b. below-normal profits
c. economic losses
d. economic profits
e. just enough profit to cover all the owners' opportunity costs
Answer: E
145) If the firms in a perfectly competitive market are continually operating where their total
costs exceed their total revenue in the short run, then in the long run
a. the number of firms in the market will remain unchanged
b. the number of firms in the market will increase
c. the number of firms in the market will decrease
d. existing firms will increase their plant sizes
e. existing firms will increase their output
Answer: C
146) The entry of new firms into a perfectly competitive market in the long run is most likely
the result of
a. temporarily above-normal profit, despite the presence of barriers to entry
b. continued above-normal profit, despite the presence of barriers to entry
c. temporarily above-normal profit, combined with the absence of barriers to entry
d. continued above-normal profit, combined with the absence of barriers to entry
e. either temporarily or continued above-normal profit, despite the presence of barriers to
entry
Answer: D
147) Consider a perfectly competitive market in which the firms are earning above-normal
profit in the short run. In the long run, forces will come into play to
a. decrease market supply
b. shift the horizontal demand curve facing each firm downward
c. increase the market price
d. encourage existing firms to increase output
e. decrease the number of sellers in the market
Answer: B
148) Consider a perfectly competitive firm whose minimum average total cost is $100. This
firm is representative of all the firms in the market. If the market price is $80, then in the long
run
a. new, more-efficient firms will be attracted into the industry
b. market supply will fall
c. the firm's average revenue will fall
d. all the firms currently operating will increase output
e. total market output will rise
Answer: B
149) In a perfectly competitive market, firms will exit in the
a. short run if they are suffering economic losses
b. short run if they are earning below-normal profit
c. short run if price exceeds average total cost
d. long run if they are earning above-normal profit
e. long run if they are suffering economic losses
Answer: E
150) In a perfectly competitive market, the price is currently above the minimum of each
firm's long-run average total cost curve. Which of the following statements is correct?
a. The long-run average total cost curve will shift upward in the long run.
b. Firms will alter their plant size in the short run.
c. The market price will fall in the long run.
d. The firms must be producing at an output level where price exceeds short-run marginal
cost.
e. The firms will earn above-normal profit in the long run.
Answer: C
151) A perfectly competitive firm is operating where its total revenue equals its total cost. In
the short run, if market demand increases, this firm will have an economic
a. loss and reduce output
b. loss while expanding output
c. profit and reduce output
d. profit while expanding output
e. profit, but will not change output
Answer: D
152) In a perfectly competitive market, the driving force behind long-run economic change is
a. government intervention
b. employment
c. economic profit or loss
d. management
e. altruism
Answer: C
153) In the long run in a perfectly competitive market, economic profit or loss is
a. the main determinant of total cost
b. the main driving force determining consumer preferences
c. the basis of all government policy
d. the main driving force behind economic change
e. expected to persist indefinitely
Answer: D
154) In perfect competition, as the long run approaches, economic profit will cause
a. the entry of new firms, shifting the market supply curve to the right
b. the emergence of powerful monopolistic corporations
c. inflation
d. technological innovation
e. government regulation
Answer: A
155) In the long run, the entry of new firms into a competitive market is typically caused by
a. government regulation
b. technological innovation
c. inflation
d. economic losses
e. economic profit
Answer: E
156) In perfect competition, as the long run approaches, economic losses will cause
a. the exit of existing firms, shifting the market supply curve to the left
b. government regulation
c. technological innovation
d. inflation
e. a favorable shift in tastes and preferences
Answer: A
157) In the long run, the exit of firms from a perfectly competitive market is caused by
a. a steeper demand curve constraining the firm
b. normal profits
c. economic losses
d. antitrust enforcement
e. government policy
Answer: C
158) In the long run, perfectly competitive firms typically do not earn any economic profit.
a. True
b. False
Answer: A
159) In the long run, an entrepreneur who owns a perfectly competitive firm will earn no
income from that firm.
a. True
b. False
Answer: B
160) In the long run, an entrepreneur who owns a perfectly competitive firm will earn an
income just equal to what she could earn in the next best alternative use of her time.
a. True
b. False
Answer: A
161) In the long run, a typical perfectly competitive firm will produce at the minimum point
of its long-run average total cost curve and the minimum point of its short-run average total
cost curve.
a. True
b. False
Answer: A
162) Which of the following statements about perfectly competitive markets is not correct?
a. In the short run, firms can earn economic profits or suffer economic losses.
b. The market demand curve is downward sloping.
c. The demand curve facing an individual firm is perfectly elastic.
d. In the long run, firms can earn economic profits or suffer economic losses.
e. In the long run, firms can enter or exit the market.
Answer: D
163) In the long-run equilibrium for a perfectly competitive market, firms will choose the
level of output where
a. profit is minimized
b. short-run average total cost is minimized
c. long-run average total cost is minimized
d. short-run profit is maximized
e. long-run average fixed cost is minimized
Answer: C
164) When a perfectly competitive market is in long-run equilibrium, each firm's price equals
a. both marginal cost and average total cost
b. marginal cost, but exceeds average total cost
c. marginal cost, but falls below average total cost
d. average total cost, but exceeds marginal cost
e. average total cost, but falls below marginal cost.
Answer: A
165) In the long run under perfect competition, all firms in the same market
a. earn the same money profit
b. have the same opportunity costs
c. earn the same economic profit
d. face the same explicit costs
e. earn the same money profit and the same economic profit
Answer: C
166) A perfectly competitive firm can continue to earn above-normal profit in the long run
a. if it has a continued technical advantage over other firms in the market and it is able to
keep that advantage a secret
b. if it has employees that are substantially more efficient than other firms' workers
c. if its centralized location reduces its transportation costs below those of other firms
d. if it has easier access to necessary raw materials
e. under no circumstances
Answer: A
167) In the long run, each perfectly competitive firm produces at the lowest point on
a. its short-run average total cost curve
b. its long-run average total cost curve
c. its marginal cost curve
d. both its short-run and long-run average total cost curves
e. both its short-run average cost curve and its marginal cost curve
Answer: D
168) In a long-run perfectly competitive equilibrium,
a. the typical firm will earn an economic profit
b. price exceeds marginal cost
c. barriers to entry are established by entrenched firms
d. the typical firm will earn a normal profit
e. marginal cost exceeds average cost
Answer: D
169) In a long-run perfectly competitive equilibrium,
a. marginal cost and marginal revenue are the greatest distance apart
b. barriers to entry are established by entrenched firms
c. the typical firm will earn an economic profit
d. average total cost is rising
e. price and marginal cost are equal to minimum short-run and long-run average total cost
Answer: E
170) The long-run market supply curve in a perfectly competitive market shows
a. the effects of all short-run price fluctuations
b. how the market supply curve shifts in the short run in response to entry and exit of firms
c. the relationship between market price and market quantity
d. the relationship between average total costs and output in the long run
e. the level of output produced by each firm, and how the market price affects this output
level
Answer: C
171) Figure 9-11 illustrates the long-run average total cost curve for a perfectly competitive
firm and the short-run average total cost curve (ATC*) for the firm's current plant size. In the
long run, this
a. firm's plant size is too large to allow it to earn a normal profit
b. firm's plant size is too small to allow it to earn a normal profit
c. firm will be able to stay in operation with the same plant size
d. firm will suffer an economic loss
e. firm will earn an economic profit
Answer: A
172) In the long run in a competitive market,
a. existing firms can increase their plant size, and new firms can enter the market
b. existing firms can increase their plant size, but the number of firms is the market is fixed
c. new firms can enter the market, but existing firms cannot vary their plant size
d. new firms can enter the market, but only if existing firms decrease their plant size in the
short run
e. existing firms can increase their plant size, only if some other firms exit
Answer: A
173) In long-run equilibrium, every perfectly competitive firm
a. maximizes its output
b. chooses its plant size and output level to operate at minimum long-run marginal cost
c. chooses its plant size and output level to operate at minimum long-run average total cost
d. earns an economic profit
e. suffers an economic loss
Answer: C
174) If price exceeds average total cost in the short run, then in the long run the market
demand curve will shift to the right.
a. True
b. False
Answer: B
175) In a perfectly competitive, decreasing-cost industry, the long-run market supply curve
slopes downward.
a. True
b. False
Answer: A
176) The long-run supply curve of a perfectly competitive industry is horizontal
a. in an increasing-cost industry
b. in a decreasing-cost industry
c. if the short-run supply curves for firms are upward-sloping
d. if the short-run market supply curve is negatively sloped
e. in a constant-cost industry
Answer: E
177) When the average total cost curves for firms are unaffected by the entry of other firms,
a. it is an increasing-cost industry
b. it is a decreasing-cost industry
c. the market's equilibrium price will eventually be restored after the market demand
increases
d. firms will charge a higher price when demand rises
e. the long-run supply curve is positively sloped
Answer: C
178) The key assumption that distinguishes a constant cost industry from other types of
industries is that
a. firms can earn only a normal profit in the long run
b. each firm's ATC curve is unaffected by changes in industry output
c. each firm has a horizontal long-run average total cost curve
d. there are no economies of scale available to the firms in the industry
e. each firm faces a horizontal demand curve for its output
Answer: B
179) Assume that a constant-cost, perfectly competitive market is initially in long-run
equilibrium. After all long-run adjustments are made, which of the following would occur as
a result of an increase in the price of a complement to this industry's product?
a. The market price would remain unchanged; the market quantity would rise.
b. The market price would rise; the market quantity would fall.
c. The market price would remain unchanged; the market quantity would fall.
d. Both the market price and the market quantity would fall.
e. Both the market price and the market quantity would rise.
Answer: C
180) Suppose that entry of new firms into an industry significantly increases the market
demand for a key input. If supply of the key input is very price inelastic, then, for each firm
in the industry in the long run,
a. external diseconomies shift its entire ATC curve upward
b. external economies shift its entire ATC curve downward
c. external diseconomies move it to the left along its original ATC curve
d. diseconomies of scale shift its entire ATC curve upward
e. economies of scale shift its entire ATC curve downward
Answer: A
181) Assume that an inferior good is produced in a perfectly competitive, increasing-cost
industry with external diseconomies. The market is initially in long-run equilibrium. After all
long-run adjustments are made, which of the following would occur in this market as a result
of an increase in consumers' incomes?
a. The market price would remain unchanged; the market quantity would rise.
b. The market price would rise; the market quantity would fall.
c. The market price would remain unchanged; the market quantity would fall.
d. Both the market price and the market quantity would fall.
e. Both the market price and the market quantity would rise.
Answer: D
182) Assume that the producers of an input have substantial economies of scale in their
production process. This input is purchased mainly by a group of firms in a perfectly
competitive market that is initially in long-run equilibrium. After all long-run adjustments are
made, which of the following would occur in the competitive output market as a result of
shift in consumer tastes toward that market's product?
a. The market price would fall; the market quantity would rise.
b. The market price would rise; the market quantity would fall.
c. The market price would remain unchanged; the market quantity would fall.
d. Both the market price and the market quantity would fall.
e. Both the market price and the market quantity would rise.
Answer: A
183) Figure 9-12 shows three possible long-run supply curves for an industry that is currently
in equilibrium with price (P*) and quantity (Q*). Which of the following statements is
correct?
a. The long-run supply curve would be F for a decreasing-cost industry, H for an increasingcost industry, and G for a constant-cost industry.
b. All three long-run supply curves indicate that the firms' LRATC curves shift as industry
output expands.
c. If the industry uses a significant portion of a scarce input, the long-run supply curve would
likely be curve H.
d. An industry that moves along long-run supply curve F earns above-normal profits in the
long run.
e. If an increase in market output leads to lower prices for a key input, the long-run supply
curve would likely be curve H.
Answer: E
184) In a constant-cost industry, the long-run market supply curve is
a. horizontal
b. vertical
c. upward sloping
d. downward sloping
e. the same slope as the typical firm's supply curve
Answer: A
185) The long-run supply curve is horizontal in a(n)
a. increasing-cost industry
b. constant-cost industry
c. decreasing-cost industry
d. labor-intensive industry
e. capital-intensive industry
Answer: B
186) In an increasing-cost industry, the long-run market supply curve is
a. horizontal
b. vertical
c. upward sloping
d. downward sloping
e. nonexistent
Answer: C
187) The long-run supply curve is upward sloping in a(n)
a. decreasing-cost industry
b. increasing-cost industry
c. constant-cost industry
d. labor-intensive industry
e. capital-intensive industry
Answer: B
188) In a decreasing-cost industry, the long-run industry supply curve is
a. horizontal
b. vertical
c. upward sloping
d. downward sloping
e. the sum of the individual firm's marginal cost curves
Answer: D
189) The long-run supply curve is downward sloping in a(n)
a. decreasing-cost industry
b. increasing-cost industry
c. constant-cost industry
d. labor-intensive industry
e. capital-intensive industry
Answer: A
190) If expansion of an industry's output causes a downward shift of firms' average total cost
curves,
a. each firm earns a long-run economic profit
b. all of the following are correct
c. there will be long-run economic profits
d. it is a decreasing-cost industry
e. it is an increasing-cost industry
Answer: D
191) In a competitive market, a decrease in consumer demand leads to
a. a decrease in output
b. an increase in output
c. economic profits
d. higher prices
e. technological innovation
Answer: A
192) In a decreasing cost industry, the
a. long-run supply curve is horizontal
b. short-run supply curve slopes downward
c. long-run demand curve slopes upward
d. long-run supply curve slopes downward
e. long-run supply curve slopes upward
Answer: D
193) In a perfectly competitive market, a decrease in output could be caused by
a. an increase in consumer demand
b. a technological innovation
c. a decrease in input prices
d. a decrease in consumer demand
Answer: D
194) In a competitive constant-cost industry, an increase in consumer demand leads to
a. a decrease in output
b. high interest rates
c. an increase in output
d. inflation
e. a decrease in resource employment
Answer: C
195) In a perfectly competitive market, an increase in output could be caused by
a. decrease in consumer demand
b. an unavoidable increase in fixed costs
c. higher input prices
d. an increase in consumer demand
Answer: D
196) In a market economy, the main market signal to competitive suppliers is
a. the number of consumers
b. consumers' income
c. the rate of inflation
d. the price of the product
e. the unemployment rate
Answer: D
197) In Figure 9-13, a movement of long-run equilibrium from point A to point C could be
caused by a(n)
a. decrease in supply from S2 to S1 in response to economic profits following a decrease in
demand from D2 to D1
b. increase in short-run supply from S1 to S2
c. increase in supply from S1 to S2 in response to economic profits following an increase in
demand from D1 to D2
d. increase in demand from D1 to D2 in the short run
Answer: C
198) In Figure 9-13, a movement of equilibrium from point D to point C could be caused by
a(n)
a. decrease in supply from S2 to S1 in response to economic profits following a decrease in
demand from D2 to D1
b. increase in short-run supply from S1 to S2
c. increase in supply from S1 to S2 in response to economic profits caused by an increase in
demand from D1 to D2
d. an increase in demand from D1 to D2 in the short run
Answer: D
199) In Figure 9-13, assume the initial equilibrium at point A is disturbed by an increase in
demand. If long-run equilibrium is established at point C, this is a(n)
a. constant cost industry
b. increasing-cost industry
c. decreasing-cost industry
Answer: A
200) Assume the initial equilibrium is at point D in Figure 9-13. If the market demand curve
shifts from D1 to D2, and this results in entry of new firms in the long-run, the new
equilibrium in this increasing-cost industry will be
a. both C and E
b. both D and E
c. at a price less than P1
d. at a price higher than P1
e. at an output greater than Q1
Answer: B
201) In Figure 9-13, the movement of equilibrium from point D to point C could be caused
by
a. a decrease in supply from S2 to S1 in response to economic profits following a decrease in
demand from D2 to D1
b. a short-run increase in supply from S1 to S2
c. an increase in supply from S1 to S2 in response to economic profits following an increase
in demand from D1 to D2
d. external economies
e. in the short run, by an increase in demand from D1 to D2
Answer: E
202) Assume that one firm in a perfectly competitive market adopts a technological
innovation that enables it to produce at a lower cost per unit than competing firms in the short
run. Which of the following statements is correct?
a. The innovating firm will earn above-normal profit in the long run.
b. All the competing firms will be forced to exit the market in the long run.
c. This is an example of a decreasing cost industry.
d. Competing firms will need to adopt the new technology in the long run in order to survive.
e. Only new firms entering the industry with new-technology plants will be able to compete
with the innovating firm.
Answer: D
203) Which of the following would result from a technological advance in a perfectly
competitive market?
a. The market demand curve will shift rightward.
b. Consumers will benefit as the price declines.
c. Producers will benefit as long-run profits rise.
d. The market supply curve will shift leftward.
e. In a constant-cost industry, the price will not change in the long run.
Answer: B
204) Under perfect competition, a technological advance
a. shifts the market demand curve leftward, decreasing market price
b. shifts the market supply curve rightward, decreasing market price
c. shifts the market demand curve rightward, increasing market price
d. shifts the market supply curve leftward, increasing market price
e. causes unpredictable shifts in supply and demand
Answer: B
205) Under perfect competition, a rightward shift of the market supply curve could be caused
by
a. decrease in consumer demand
b. technological advance
c. high rate of inflation
d. high interest rate
e. increase in consumers' income for a normal good
Answer: B
206) In a perfectly competitive market, the first firm to adopt a new cost-saving technological
advance will
a. buy more resources
b. suffer an economic loss
c. earn an economic profit until other competitors adopt the technology
d. export to foreign markets
e. supply low income neighborhoods
Answer: C
207) In a perfectly competitive market, transient economic profit can be earned by
a. the firms that hire the most employees
b. the last firm to enter the market
c. those firms that supply low-income neighborhoods
d. the first firm to adopt a new technological advance
e. those firms that use the most capital-intensive methods of production
Answer: D
208) Which of the following is not a characteristic of market structure?
a. The number of sellers in the industry.
b. The ease with which firms may enter or exit the industry.
c. The existence of differences among sellers' products.
d. The presence or absence of government taxation in the market.
Answer: D
209) Which of the following is a characteristic of perfect competition?
a. Individual firms have the power to set prices.
b. Firms produce differentiated products.
c. New firms can easily enter the market.
d. There are only a few very large firms producing all output in the market.
Answer: C
210) A firm in a perfectly competitive market faces a demand curve that is
a. perfectly elastic.
b. relatively elastic.
c. perfectly inelastic.
d. relatively inelastic.
Answer: A
211) Which of the following is not a characteristic of perfect competition?
a. Many small buyers.
b. Different firms sell products with different features.
c. Ease of entry into and exit from the market.
d. Many small sellers.
Answer: B
212) In a perfectly competitive market, the number of sellers must be large enough that
a. none of them ever earns positive economic profits.
b. none of them can significantly alter the price of the product.
c. they each end up selling a slightly different product.
d. it is easy for a particular firm to leave the market.
Answer: B
213) In a perfectly competitive market, a new firm can enter without any cost.
a. True
b. False
Answer: B
214) Which of the following markets most closely matches the description of perfect
competition?
a. Fast-food hamburgers.
b. Subcompact cars.
c. Grain.
d. Personal computers.
Answer: C
215) Which of the following is a barrier to entry?
a. Zoning laws preventing the establishment of new businesses in a certain area.
b. The cost of buying a building in which to establish a new business.
c. A sales-tax law.
d. Inspection requirements for agricultural products.
Answer: A
216) Because perfectly competitive markets rarely exist in the real world, the model has
limited usefulness.
a. True
b. False
Answer: B
217) The model of perfect competition can be fruitfully used to analyze markets that don't
perfectly fit the description of this market type.
a. True
b. False
Answer: A
218) The model of perfect competition cannot be fruitfully used to analyze markets that don't
perfectly fit the description of this market type.
a. True
b. False
Answer: B
219) Which of the following is true of a perfectly competitive firm?
a. It can exert slight control over the market price of its output.
b. It can exert significant control over the market price of its output.
c. It can exert no control over the market price of its output.
d. It can work with competitors to exert control over the market price of its output.
Answer: C
220) A perfectly competitive firm's marginal revenue is
a. slightly higher than it's selling price.
b. slightly lower than it's selling price.
c. higher than selling price when reducing output, lower than selling price when increasing
output.
d. exactly equal to selling price.
Answer: D
221) In the short run, a perfectly competitive firm will shut down if
a. its total costs exceed its revenues.
b. its total variable costs exceed its revenues.
c. its total fixed costs exceed its revenues.
d. it can't earn a positive economic profit.
Answer: B
222) The price at which a firm is indifferent between producing and shutting down is called
the
a. shutdown price.
b. lockdown price.
c. marginal cost.
d. minimum supply price.
Answer: A
Figure 9-14
223) Figure 9-14 shows the cost curves for a perfectly competitive firm. This firm's shutdown
price is
a. $5.
b. $7.
c. $10.
d. $14.
Answer: B
Figure 9-15
224) Figure 9-15 depicts the cost curves for a perfectly competitive firm. This firm's short run
supply curve is the section of the MC curve between points
a. A and D.
b. B and D.
c. C and D.
d. B and C.
Answer: B
225) The perfectly competitive firm's goal is to
a. maximize the price of its output.
b. minimize its total cost.
c. maximize its profits.
d. eliminate its competition.
Answer: C
226) The demand curve facing a perfectly competitive firm is
a. vertical.
b. horizontal.
c. positively sloped.
d. negatively sloped.
Answer: B
Figure 9-16
227) Figure 9-16 shows that the profit-maximizing output level is
a. 0.
b. 25.
c. 75.
d. 200.
Answer: D
Figure 9-17
228) Figure 9-17 shows that for this perfectly competitive firm, the profit-maximizing output
level is
a. 0.
b. 25.
c. 75.
d. 200.
Answer: D
Figure 9-18
229) If the perfectly competitive firm pictured in Figure 9-18 is maximizing profits, it is
currently earning profit per unit of
a. $0.
b. $125.
c. $5.
d. $10.
Answer: D
Figure 9-19
230) The perfectly competitive firm pictured in Figure 9-19 will maximize profits by
producing
a. 0 units.
b. 100 units.
c. 140 units.
d. 220 units.
Answer: D
Figure 9-20
231) If the perfectly competitive firm pictured in Figure 9-20 is maximizing profits, it is
currently selling output at a price of
a. $0.
b. $5.
c. $7.
d. $10.
Answer: D
Figure 9-21
232) If the perfectly competitive firm in Figure 9-21 is maximizing profits, it is currently
earning profits of
a. $500.
b. $300.
c. $660.
d. $2200
Answer: C
Figure 9-22
233) The perfectly competitive firm in Figure 9-22 faces the same costs and demand as other
firms in this market. Which of the following will occur in this market?
a. Some firms will exit.
b. Some firms will enter.
c. The number of firms will remain constant.
d. Some firms will go bankrupt.
Answer: B
234) In Figure 9-23, the minimum price at which this firm will supply output is
a. $5.
b. $6.
c. $10.
d. $14.
Answer: B
235) If the typical firm in a perfectly competitive market is earning positive economic profits
then which of the following would be expected to happen?
a. Firms will exit the market.
b. New firms will enter the market.
c. There will be neither entry nor exit in this market.
d. There will soon be a depression in the market.
Answer: B
236) In the short run, a perfectly competitive firm may earn economic profits that are
a. positive.
b. positive but very small.
c. negative.
d. all of the above.
Answer: D
237) In the short run,
a. new firms may enter a market, but existing firms cannot exit.
b. firms may exit a market, but new firms may not enter.
c. firms may enter or exit a market.
d. firms may neither enter nor exit a market.
Answer: D
238) A perfectly competitive firm in long run equilibrium will earn
a. zero economic profit.
b. a small positive economic profit.
c. a large positive economic profit.
d. zero accounting profit.
Answer: A
239) As new firms enter a market, the equilibrium price will
a. rise.
b. fall.
c. stay the same.
d. impossible to predict.
Answer: B
240) In the long run, a perfectly competitive firm earn _______ economic profits.
a. positive.
b. negative.
c. zero.
d. positive or negative.
Answer: C
241) If the typical firm in a perfectly competitive market is currently earning a 5% economic
profit, what will happen in this market in the long run?
a. new firms will enter until the economic profits have disappeared.
b. firms will exit until the economic profit reaches 10%.
c. firms will neither enter nor exit, since 5% economic profit is enough to maintain the
existing number of firms in the market.
d. It depends on the rate of normal profit in this market.
Answer: A
242) In the long run, perfectly competitive firms earn zero economic profit; this means that
each firm is
a. always trying to move into a more profitable market.
b. content to stay in its market.
c. always facing new entrants to its market.
d. earning negative accounting profit.
Answer: B
243) In the long run in perfect competition, firms will operate at
a. minimum average total cost.
b. an average total cost that is just slightly above the minimum.
c. an average total cost that is about 10% above the minimum.
d. an average total cost that is below price.
Answer: A
244) In the long run in perfectly competitive markets, individual firms will operate at very
different output levels.
a. True
b. False
Answer: B
245) A perfectly competitive firm may earn economic profits in
a. only the short run.
b. only the long run.
c. the short run and the long run.
d. neither the short run nor the long run.
Answer: A
246) If new firms are currently entering a perfectly competitive market, which of the
following is true?
a. Existing firms are losing money.
b. Existing firms are earning positive economic profits.
c. Existing firms are just breaking even.
d. Impossible to predict.
Answer: B
247) After an increasing cost industry responds to an increase in demand, in the long run the
equilibrium price will be ______ than before the demand increase.
a. higher
b. lower
c. the same as
d. impossible to predict
Answer: A
248) In an increasing cost industry, the long-run supply curve is
a. positively sloped.
b. negatively sloped.
c. horizontal.
d. vertical.
Answer: A
249) If an industry's long-run supply curve is negatively-sloped, the industry has
a. increasing costs.
b. decreasing costs.
c. constant costs.
d. impossible to predict.
Answer: B
250) When entry of new firms decreases input prices in an industry, it is a(n)
a. increasing cost industry.
b. decreasing cost industry.
c. constant cost industry.
d. input elastic industry.
Answer: B
Test Bank for Microeconomics: Principles and Applications
Robert E. Hall, Marc Lieberman
9781111822569, 9781478405238, 9781478498056
