Unit 11 Review

Multiple Choice

Identify the choice that best completes the statement or answers the question.

____ 1. The demand curve for a perfectly competitive firm is:

a. / perfectly inelastic.
b. / perfectly elastic.
c. / downward-sloping.
d. / relatively, but not perfectly elastic.
e. / non-existent.

____ 2.

Output / Total Cost
0 / $10
1 / 60
2 / 80
3 / 110
4 / 170
5 / 245
Table: Total Cost and Output

The table describes Bart's perfectly competitive ice cream-producing firm. If the market price is $67.50, how many units of output will the firm produce?

a. / one
b. / two
c. / three
d. / four
e. / five

____ 3. Suppose a perfectly competitive firm can increase its profits by increasing its output. Then it must be the case that the firm's:

a. / marginal revenue exceeds its marginal cost.
b. / price exceeds its average variable cost, but is less than average total cost.
c. / marginal cost exceeds its marginal revenue.
d. / price exceeds its marginal revenue.
e. / price is less than marginal revenue.

____ 4. In the short run, a perfectly competitive firm produces output and earns an economic profit if:

a. / P > ATC.
b. / P = ATC.
c. / P < AVC.
d. / AVC > P > ATC.
e. / AVC < P < ATC.

____ 5. In the short run, a perfectly competitive firm produces output and earns zero economic profit if:

a. / P > ATC.
b. / AVC < P < ATC.
c. / P < AVC.
d. / AVC > P > ATC.
e. / P = ATC.

____ 6. A perfectly competitive firm maximizes profit by producing the quantity at which:

a. / TR = TC.
b. / MR = MC.
c. / Q*(P – ATC) = 0.
d. / P >= AVC.
e. / P = ATC.
Quantity
of Apples
(bushels) / VC
0 / $ 0
1 / 40
2 / 70
3 / 80
4 / 130
5 / 190
6 / 260
7 / 340
8 / 430
Table 58-2: Lilly's Apple Orchard

____ 7. (Table 58-2: Lilly's Apple OrcharD. Lilly is the price-taking owner of an apple orchard; its variable costs are given in the table. Her orchard has fixed costs of $30. If the price of a bushel of apples is $25, how many bushels will Lilly produce to maximize profit?

a. / 0
b. / 1
c. / 2
d. / 3
e. / 4
Quantity
per Period / Total Cost
0 / $10
1 / 16
2 / 20
3 / 22
4 / 24
5 / 25
6 / 27
7 / 30
8 / 34
9 / 39
10 / 45
Table 58-3: Total Cost for a
Perfectly Competitive Firm

____ 8. (Table 58-3: Total Cost for a Perfectly Competitive Firm) If the market price is $4.50, the profit-maximizing quantity of output is ______units.

a. / five
b. / seven
c. / eight
d. / nine
e. / ten

____ 9. If a perfectly competitive firm is producing a quantity that generates MC < MR, then profit:

a. / is maximized.
b. / can be increased by increasing production.
c. / can be increased by decreasing production.
d. / can be increased by decreasing the price.
e. / is negative and the firm should exit the market.

____ 10. If a perfectly competitive firm is producing a quantity that generates P < MC, then profit:

a. / is maximized.
b. / can be increased by decreasing the price.
c. / can be increased by increasing production.
d. / can be increased by decreasing production.
e. / is negative and less than total fixed cost.

____ 11. If a perfectly competitive firm is producing a quantity that generates P > MC, then profit:

a. / is maximized.
b. / can be decreased by increasing the price.
c. / can be increased by decreasing the price.
d. / can be increased by increasing production.
e. / is negative and less than total fixed cost.

____ 12. Many furniture stores run “Going out of Business” sales but never go out of business. In order for the shut-down decision to be the appropriate one, the price of furniture must be ______the ______average variable cost.

a. / higher than; maximum
b. / lower than; minimum
c. / higher than; minimum
d. / lower than; maximum
e. / the same as; maximum

____ 13. The lowest point on the perfectly competitive firm's short-run supply curve corresponds to the minimum point on the ______ curve.

a. / ATC
b. / AVC
c. / AFC
d. / MC
e. / MR

Figure 59-3 : Profit Maximizing

____ 14. (Figure 59-3: Profit Maximizing) The figure shows cost curves for a firm operating in a perfectly competitive market. If the market price is less than P2, the firm will ______in the short run.

a. / produce q1 and break even
b. / produce q1 and incur a loss
c. / produce q1 and make a profit
d. / produce q3 and make a profit
e. / shut down

Figure 59-4: A Perfectly Competitive Firm in the Short Run

____ 15. (Figure 59-4: A Perfectly Competitive Firm in the Short Run) The firm will shut down in the short run if the price falls below:

a. / G.
b. / F.
c. / E.
d. / P.
e. / N.

____ 16. (Figure 59-4: A Perfectly Competitive Firm in the Short Run) If market price is G, the firm's total cost of producing its most profitable level of output is:

a. / BS.
b. / DK.
c. / GHSE.
d. / 0ESB.
e. / 0FKD.

____ 17. A perfectly competitive firm will earn a profit and will continue producing the profit-maximizing quantity of output in the short run if price is:

a. / greater than marginal cost.
b. / less than marginal cost.
c. / less than average fixed cost.
d. / greater than average total cost.
e. / greater than average variable cost.

____ 18. A perfectly competitive firm will incur an economic loss but will continue producing the profit-maximizing quantity of output in the short run if price is:

a. / less than marginal cost.
b. / less than average variable cost.
c. / greater than average total cost.
d. / greater than average variable cost and less than average total cost.
e. / greater than average fixed cost.

____ 19. If price is greater than average variable cost and less than average total cost at the profit-maximizing quantity of output in the short run, a perfectly competitive firm will:

a. / incur economic losses that exceed total fixed cost.
b. / produce at an economic profit.
c. / shut down production.
d. / produce more than the profit-maximizing quantity.
e. / produce at an economic loss.

____ 20. The short-run supply curve for a perfectly competitive firm is:

a. / the average total cost curve above the break-even price.
b. / the average variable cost curve above the shut-down price.
c. / the marginal cost curve above the break-even price.
d. / the marginal cost curve above the shut-down price.
e. / the average total cost curve above the shut-down price.

____ 21. A perfectly competitive firm will incur an economic loss but will continue producing output in the short run if price is:

a. / less than marginal cost.
b. / greater than average fixed cost and less than average variable cost.
c. / greater than average total cost.
d. / greater than average variable cost but less than average total cost.
e. / less than average variable cost.

____ 22. A perfectly competitive firm will not produce any output in the short run and will shut down if price is:

a. / greater than marginal cost.
b. / less than marginal cost.
c. / less than average variable cost.
d. / greater than average variable cost and less than average total cost.
e. / less than marginal revenue.

____ 23. A perfectly competitive firm's short-run supply curve is its:

a. / average variable cost curve above the marginal cost curve.
b. / marginal cost curve above the average fixed cost curve.
c. / marginal cost curve above the average total cost curve.
d. / marginal cost curve above the average variable cost curve.
e. / marginal cost curve above the average variable cost curve and below the average total cost curve.

Figure 59-7: Perfectly Competitive Firm II

____ 24. (Figure 59-7: Perfectly Competitive Firm II) If this firm's MR curve is MR2, then this firm will profit-maximize by producing ______units of output and its economic profit will be ______.

a. / Q1; positive
b. / Q2; negative
c. / Q3; positive
d. / Q4; negative
e. / zero; negative

____ 25. The horizontal sum of individual firms' MC curves at and above the shut-down price is the:

a. / short-run industry demand curve.
b. / long-run industry supply curve.
c. / long-run fixed cost curve.
d. / long-run average variable cost curve.
e. / short-run industry supply curve.

Figure 59-2: Cost Curve and Profits

____ 26. (Figure 59-2: Cost Curves and Profits) In the figure, if market price is $12, this firm will:

a. / minimize its losses by shutting down.
b. / exit the market in the long run.
c. / break even.
d. / earn an economic profit.
e. / minimize its losses by continuing to produce.

____ 27. (Figure 59-2: Cost Curves and Profits) In the figure, the firm's short-run supply curve is the ______curve above a price of $______.

a. / average total cost; 14
b. / average variable cost; 10
c. / marginal cost; 5
d. / marginal cost; 14
e. / marginal cost; 10

____ 28. If firms are making positive economic profits in the short run, then in the long run:

a. / the short-run industry supply curve will shift leftward.
b. / firms will enter the industry.
c. / industry output will rise and price will rise.
d. / firms will leave the industry.
e. / the price will decrease to where price equals average variable cost.

____ 29. If firms are experiencing economic losses in the short run, firms will _____ the industry and industry output will ______and price will ______in the long run.

a. / exit; fall; rise
b. / exit; rise; fall
c. / enter; rise; rise
d. / enter; fall; rise
e. / exit; rise; rise

____ 30. Lilly is the price-taking owner of an apple orchard. Currently the price of apples is high enough that Lilly is earning positive economic profits. In the long run, Lilly should expect:

a. / lower apple prices due to entry of new firms.
b. / higher apple prices due to exit of existing firms.
c. / lower apple prices due to exit of existing firms.
d. / higher apple prices due to entry of new firms.
e. / no change in apple prices.

____ 31. A perfectly competitive industry is said to be efficient because the:

a. / marginal cost of production of the last unit of output is minimized.
b. / product is standardized across firms in the industry.
c. / average total cost of production of the industry's output is minimized.
d. / market price of the good is equal to economic profit for all firms in the industry.
e. / firms in the industry have price-setting ability.

____ 32. Hank operates a perfectly competitive firm in the long run. For several time periods, the market price has been $20 and he knows his break-even price is $22. Hank should:

a. / stay in the industry since he can cover his fixed costs.
b. / exit the industry since he is making losses.
c. / stay in the industry since he is a perfect competitor and must take the price as given.
d. / wait for the short-run time period.
e. / increase his price from $20 to $22.

____ 33. In the long run, firms in a perfectly competitive industry will:

a. / minimize average total cost.
b. / earn a positive economic profit.
c. / exit the industry if price is greater than average total cost.
d. / produce an output level at which price is greater than average total cost.
e. / produce a differentiated product.

____ 34. A perfectly competitive industry with constant costs is initially operating in long-run equilibrium. When demand increases, one will observe that in the long and short runs:

a. / positive economic profits will result for all firms.
b. / higher prices will result.
c. / output will remain constant.
d. / negative economic profits will result for some firms.
e. / output will increase.

____ 35. The ability of a monopolist to raise the price of a product above the competitive level by reducing the output is known as:

a. / product differentiation.
b. / barrier to entry.
c. / economies of scale.
d. / patents and copyrights.
e. / market power.

____ 36. Which of the following statements about monopoly equilibrium and perfectly competitive equilibrium is incorrect?

a. / Price is greater than marginal cost in monopoly, and price equals marginal cost in perfect competition.
b. / When a monopoly exists, the consumer surplus is less than if the market were perfectly competitive.
c. / Monopoly output will be less than the output of a comparable perfectly competitive industry.
d. / In the long run, economic profits are driven to zero in both a monopoly and a perfect competitive market.
e. / In the long run, entry of new firms is prevented in a monopoly.

____ 37. Marginal revenue for a monopolist is:

a. / equal to price.
b. / greater than price.
c. / less than price.
d. / equal to average revenue.
e. / greater than zero at all levels of output.

____ 38. A demand curve that is downward-sloping will ensure that:

a. / P = MR.
b. / P > MR.
c. / P < MR.
d. / P = MC.
e. / economic profit is zero.

____ 39. If a monopolist is producing a quantity that generates MC > MR, then profit:

a. / is maximized.
b. / is maximized only if MC = P.
c. / can be increased by increasing production to the point where MR = MC.
d. / can be increased by decreasing production to the point where MR = MC.
e. / can be increased by finding the output where MR = P = MC.

Figure 61-2: Computing Monopoly Profit

____ 40. (Figure 61-2: Computing Monopoly Profit) At the profit-maximizing output, total cost is: