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40 Cards in this Set

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All of the following characterize a perfectly competitive industry except:

a. there are many firms in the industry.


b. firms produce a homogeneous product; that is, any firm’s product is a perfect substitute for any other’s.


c. there is extreme price competition among the competitors in the industry


d. there is free entry and exit into and out of the industry


e. all of the above describe perfect competition.

A firm that is maximizing profits under short-run conditions of perfect competition will:

a. set average total cost equal to price.


b. produce the output for which its average cost is at the lowest attainable level.


c. produce the output for which average variable cost is just equal to market price.


d. make its total revenue just equal to its fixed cost.


e. take none of the above actions, necessarily.(short run none)

The profit-maximizing rule for a firm in perfect competition is “price equal to marginal cost.” This rulemeans that a firm should:

a. increase output until price has risen to equal marginal cost.


b. increase output until price has fallen to equal marginal cost.


c. increase output until marginal cost has fallen to equal price.


d. increase output until marginal cost has risen to equal price.


e. decrease price until price equals marginal cost.

A firm operates under conditions of perfect competition. At its present level of output, all thefollowing have a value of $1: the price it is charging, its marginal cost, and its average total cost.Marginal cost would rise with any increase in output. This firm:

a. is definitely at its maximum-profit position


b. is definitely not at its maximum-profit position.


c. may or may not be at its maximum-profit position; we need to know average variable cost.


d. may or may not be at its maximum-profit position; we need to know total cost and total revenue.


e. may or may not be at its maximum-profit position; we would need to know total fixed cost.

A firm operating in a perfectly competitive industry is producing a daily output which supports totalrevenue equal to $5000. That output is its profit-maximizing output. The firm’s average total cost is$8, its marginal cost is $10, and its average variable cost is $5. Its daily output is:

a. 200 units.


b. 500 units.


c. 625 units.


d. 1000 units.


e. impossible to tell from the information furnished.

The fixed cost for the firm described in question 5 is:

a. $10.


b. $100.


c. $500.


d. $1500.


e. impossible to tell from the information furnished.

The daily profit earned or loss incurred by the firm in question 5 must be:

a. a loss of $500.


b. neither profit nor loss; the firm just breaks even.


c. a profit of $500.


d. a profit of $1000.


e. impossible to tell from the information furnished

A firm operating in a perfectly competitive market produces and sells 200 units of output daily at aprice of $7.00. Its average cost is $4.99. If it were to increase output and sales to 201 units daily,average cost would rise to $5.00. To maximize its profit, and from the information supplied, this firmshould:

a. increase its output, since marginal cost (MC) is approximately $6.00.


b. reduce its output, since MC is approximately $6.00.


c. remain at its present output, since MC is approximately $7.00.


d. certainly not reduce its output, and probably increase it, since average cost is less than the price.


e. increase its output, since MC is approximately $5.01.

A firm must sell its product at a market price of $1.90. Its present operating figures are as follows:average cost, $2.00; marginal cost, $1.50; average variable cost, $1.50; total fixed costs, $500 perperiod. By the rules of maximum profit (or minimum loss) for a competitive firm, this firm would:

a. definitely increase its present output level.


b. definitely reduce its present output level.


c. remain at its present output position.


d. shut down.


e. perhaps increase or perhaps decrease its output—the one critical figure needed to make this decision is lacking.

Because of a city tax reduction, the total fixed cost a firm must pay is reduced by $500 monthly. Thefirm operates in conditions of perfect competition. If the firm seeks to maximize its profit, this costreduction should (at least in the short run) result in:

a. a reduction in price.


b. an increase in output.


c. an increase in price.


d. a reduction in output.


e. no change in output or in price.

The supply curve of a firm in perfect competition is the same thing as:

a. its entire marginal cost curve.


b. a part of its marginal cost curve.


c. its average cost curve.


d. the region of its average cost curve over which AC rises or remains constant as output increases.


e. none of these.

A firm operating in circumstances of perfect competition faces a market price of $10. It is producing2000 units of output daily at a total cost of $19,000. This firm:

a. should increase its output to improve its profit position.


b. should reduce its output to improve its profit position.


c. should shut down to minimize its loss.


d. may or may not be at the output level yielding maximum profit—the information furnished is not sufficient to cover this point.


e. is apparently now at its maximum-profit position.

Suppose that the firm described in question 12 sees its total cost climb to $19,010 as it increases itsoutput to 2001 units. Would this additional information change your answer to that question? Thecorrect alternative would now (or still) be:

a.


b.


c.


d.


e.

A firm operating in a perfectly competitive industry finds that its total revenue does not cover its totalcost at its best possible operating position (for any nonzero output). This revenue is, nonetheless, morethan sufficient to cover fixed cost. This firm:

a. is incurring a loss and would improve its position by shutting down.


b. is incurring a loss but minimizes that loss by continuing to operate at its present position in the short run.


c. is incurring a loss but could reduce or perhaps remove it by increasing its production and sales.


d. is incurring a loss but the information given is not sufficient to indicate whether it would minimize that loss by continuing to operate or by shutting down.


e. made be incurring a loss or earning a profit—the information furnished is insufficient to tell.

Which alternative in question 14 would have been correct had that question specified that the firm’stotal revenue (although still insufficient to cover total cost) was more than sufficient to cover its totalvariable cost?

a.


b.


c.


d.


e

A firm is operating in circumstances of perfect competition. It is producing that quantity of output atwhich average total cost is at its minimum level in the short run. This firm:

a. must be at its maximum-profit output level but may or may not be charging the best price it could get for that output.


b. must be at its maximum-profit output level and need not reconsider its price, since this is a market price over which it has no control.


c. is not at its maximum-profit position and should increase its output.


d. is not at its maximum-profit position and should decrease output.


e. may or may not be at its maximum-profit position—the information furnished is insufficient to tell.

Economists refer to the “break-even point” for a competitive firm. This break-even point occurs at theoutput level where:

a. marginal cost (MC) equals average cost (AC).


b. average variable cost (AVC) equals average fixed cost (AFC).


c. MC equals AVC.


d. AC equals AVC.


e. MC equals AFC.

Economists refer to the “shutdown point” for a competitive firm in the short run. This shutdown pointoccurs at the output level where:

a. marginal cost (MC) equals average cost (AC).


b. average variable cost (AVC) equals average fixed cost (AFC).


c. MC equals AVC.


d. AC equals AVC.


e. MC equals AFC.

If a firm is operating at the shutdown point in the short run, it is:

a. just covering all fixed cost.


b. just covering all cost.


c. just covering all variable cost.


d. just covering marginal cost.

If a firm is maximizing profits in the short run and total revenue is $1000, total cost is $1500, and totalfixed cost is $400, the firm should:

a. shut down.


b. continue to operate in the short run but shut down in the long run.


c. continue to operate both in the short and long run.


d. not enough information is given to answer this question.

Suppose Figure 8-2 represents a perfectly competitive firm’s cost structure. If the industry consists of100 identical firms, then the quantity supplied across the entire industry at a price of $10 is:

a. 0.


b. 150.


c. 1500.


d. 15,000.


e. none of the above

If the short-run marginal cost curve of a typical firm in a competitive industry should fall continuouslyover a substantial range of increasing outputs, then you should expect that:

a. new firms would enter that industry.


b. the profit earned by this typical firm could be expected to rise.


c. the marginal cost of this firm should exceed its average cost through the output range in question.


d. the total amount of fixed cost which this firm must pay should fall.


e. perfect competition is likely to give way to imperfect competition.

The long-run equilibrium condition, “price equal to minimum average total cost,” used in the theory ofperfect competition, is a rule that:

a. the firm need not consider in the short run but must obey in the long run if it wants to choose the output level that will maximize its profit.


b. the firm must obey in the short run only if it wants to choose the output level that will maximize its profit.


c. firms need not consider in either the short or the long run. The condition indicates a situation toward which all firms will be pushed in the long run.


d. any profit-maximizing firm must adhere to in both the short run and the long run.


e. is only relevant in markets for agricultural products.

Figure 8-3 represents the position of the perfectly competitive firm. In the long run, the firm canexpect to be producing:

a. Ql and charging a price of Pl.


b. Q2 and charging a price of Pl.


c. Q2 and charging a price of P2.


d. Q3 and charging a price of P2.


e. Q3 and charging a price of Pl.

Given the usual downward-sloping shape of a market demand curve, what should be the effect of a taxon inputs that increases the marginal cost schedule (at every output) of each firm in a competitive industryon the market price and total output?

a. Price up and quantity up.


b. Price up and quantity down.


c. Price down and quantity up.


d. Price down and quantity down.


e. Cannot tell from the information given

Assume that you have a competitive industry that uses a scarce factor of beachfront property in theproduction process. What is the shape of the long run supply curve?

a. Upward sloping.


b. Downward sloping.


c. Horizontal.


d. It could be any of the above.

An increase in supply will lower price unless:

a. supply is perfectly inelastic.


b. demand is perfectly elastic.


c. it is followed by an increase in quantity demanded.


d. demand is highly inelastic.


e. both demand and supply are highly inelastic.

If a good is produced under constant-cost conditions, the effect of a $1 tax on each unit sold wouldprobably be to:

a. raise price to consumers by $1.


b. raise price to consumers by less than $1 if demand is elastic.


c. require that the entire tax be paid by producers unless demand is perfectly elastic.


d. raise price to consumers by less than $1 if demand is inelastic.


e. none of these

Increasing costs” means:

a. the same thing as perfectly inelastic supply.


b. that as price increases, so does quantity supplied in the long run.


c. any shift to the right in a supply curve due to an increase in input prices.


d. any shift to the left in a supply curve following an increase in demand.


e. none of the above, necessarily.

If the revenue received by a factor of production is classed as a pure economic rent, and if the demandfor this factor declines, then the price of this factor will:

a. fall, but the quantity bought and sold will be unchanged.


b. fall, and the quantity bought and sold will fall.


c. be unchanged, but the quantity bought and sold will fall.


d. be unchanged, and the quantity bought and sold will be unchanged.


e. none of these is true.

Perfectly elastic supply indicates:

a. constant cost.


b. increasing cost.


c. decreasing cost.


d. that revenue received by suppliers is designated as economic rent.


e. that a certain fixed supply will be offered no matter what the price may be

If a commodity’s return is in the nature of a pure economic rent and a tax is imposed on thecommodity, then the:

a. incidence of the tax is borne wholly by the suppliers, and price to the buyers will not change.


b. incidence is borne wholly by the buyers.


c. incidence will be shared between the suppliers and the buyers.


d. output of the commodity will fall and its price will rise.


e. output of the commodity will not fall but its price will rise.

Allocative efficiency occurs when:

a. a consumer is on the boundary of the production-possibility frontier.


b. no possible reorganization of production can make anyone better off without making someone worse off.


c. any possible reorganization will improve welfare for all.


d. income is being redistributed through taxation.


e. marginal revenue is greater than marginal cost.

Suppose the U.S. government decides to place a $100 tax on all people in the economy who earn over$20,000 per year. This tax money would be redistributed to those who earn less than $20,000 per year.This policy would:

a. be allocatively efficient because it would take from the more wealthy and give to the less wealthy.


b. not be allocatively efficient because it is a redistribution that makes some people worse off.


c. not be allocatively efficient because $100 is not enough money to equalize incomes.


d. improve the distribution of income under any definition of equity or efficiency.


e. decrease the total utility of the society.

Market inefficiencies can come from:

a. externalities.


b. monopolies.


c. imperfect information.


d. all the above.


e. none of the above.

Producer surplus measures:

a. the excess of revenues over costs of production.


b. economic profits.


c. the difference between what consumers are willing to pay and what they actually pay for a good or service.


d. the output produced in a perfectly competitive market in excess of what is demanded.


e. none of the above.

Using Figure 8-4, producer surplus in this perfectly competitive market is:

a. $0


b. $100


c. $1,000


d. $1,250


e. none of the above

Using Figure 8-4, total surplus in this perfectly competitive market is:

a. $0


b. $100


c. $1,000


d. $1,250


e. $2,500

If the government imposes a price ceiling of $40 on the market illustrated in Figure 8-4, producersurplus in this perfectly competitive market will fall to:

a. $100


b. $500


c. $800


d. $1,000


e. none of the above, producer surplus is always zero in a perfectly competitive market

Allocative efficiency does not necessarily mean:

a. zero economic profits for firms.


b. a socially desirable distribution of resources.


c. price is equal to marginal cost.


d. price is equal to average costs.