question
1. Assume for a competitive firm that MC = AVC at $12, MC = ATC at $20, and MC = MR at $16. This firm will:
A. realize a profit of $4 per unit of output.
B. maximize its profit by producing in the short run.
C. minimize its losses by producing in the short run.
D. shut down in the short run.
A. realize a profit of $4 per unit of output.
B. maximize its profit by producing in the short run.
C. minimize its losses by producing in the short run.
D. shut down in the short run.
answer
C. minimize its losses by producing in the short run.
question
2. In which of the following market structures is there clear-cut mutual interdependence with respect to price-output policies?
A. pure monopoly
B. oligopoly
C. monopolistic competition
D. pure competition
A. pure monopoly
B. oligopoly
C. monopolistic competition
D. pure competition
answer
B. oligopoly
question
3. An industry comprised of a very large number of sellers producing a standardized product is known as:
A. monopolistic competition.
B. oligopoly.
C. pure monopoly.
D. pure competition.
A. monopolistic competition.
B. oligopoly.
C. pure monopoly.
D. pure competition.
answer
D. pure competition.
question
4. An industry comprised of a small number of firms, each of which considers the potential reactions of its rivals in making price-output decisions is called:
A. monopolistic competition.
B. oligopoly.
C. pure monopoly.
D. pure competition.
A. monopolistic competition.
B. oligopoly.
C. pure monopoly.
D. pure competition.
answer
B. oligopoly.
question
5. A purely competitive seller is:
A. both a "price maker" and a "price taker."
B. neither a "price maker" nor a "price taker."
C. a "price taker."
D. a "price maker."
A. both a "price maker" and a "price taker."
B. neither a "price maker" nor a "price taker."
C. a "price taker."
D. a "price maker."
answer
C. a "price taker."
question
6. Which of the following is not a basic characteristic of pure competition?
A. considerable nonprice competition
B. no barriers to the entry or exodus of firms
C. a standardized or homogeneous product
D. a large number of buyers and sellers
A. considerable nonprice competition
B. no barriers to the entry or exodus of firms
C. a standardized or homogeneous product
D. a large number of buyers and sellers
answer
A. considerable nonprice competition
question
7. The demand schedule or curve confronted by the individual purely competitive firm is:
A. relatively elastic, that is, the elasticity coefficient is greater than unity.
B. perfectly elastic.
C. relatively inelastic, that is, the elasticity coefficient is less than unity.
D. perfectly inelastic.
A. relatively elastic, that is, the elasticity coefficient is greater than unity.
B. perfectly elastic.
C. relatively inelastic, that is, the elasticity coefficient is less than unity.
D. perfectly inelastic.
answer
B. perfectly elastic.
question
8. Which of the following is characteristic of a purely competitive seller's demand curve?
A. Price and marginal revenue are equal at all levels of output.
B. Average revenue is less than price.
C. Its elasticity coefficient is 1 at all levels of output.
D. It is the same as the market demand curve.
A. Price and marginal revenue are equal at all levels of output.
B. Average revenue is less than price.
C. Its elasticity coefficient is 1 at all levels of output.
D. It is the same as the market demand curve.
answer
A. Price and marginal revenue are equal at all levels of output.
question
9. If a firm in a purely competitive industry is confronted with an equilibrium price of $5, its marginal revenue:
A. may be either greater or less than $5.
B. will also be $5.
C. will be less than $5.
D. will be greater than $5.
A. may be either greater or less than $5.
B. will also be $5.
C. will be less than $5.
D. will be greater than $5.
answer
B. will also be $5.
question
10. Price is constant or given to the individual firm selling in a purely competitive market because:
A. the firm's demand curve is downsloping.
B. of product differentiation reinforced by extensive advertising.
C. each seller supplies a negligible fraction of total supply.
D. there are no good substitutes for its product.
A. the firm's demand curve is downsloping.
B. of product differentiation reinforced by extensive advertising.
C. each seller supplies a negligible fraction of total supply.
D. there are no good substitutes for its product.
answer
C. each seller supplies a negligible fraction of total supply.
question
11. The demand curve in a purely competitive industry is ______, while the demand curve to a single firm in that industry is ______.
A. perfectly inelastic, perfectly elastic
B. downsloping, perfectly elastic
C. downsloping, perfectly inelastic
D. perfectly elastic, downsloping
A. perfectly inelastic, perfectly elastic
B. downsloping, perfectly elastic
C. downsloping, perfectly inelastic
D. perfectly elastic, downsloping
answer
B. downsloping, perfectly elastic
question
12. A perfectly elastic demand curve implies that the firm:
A. must lower price to sell more output.
B. can sell as much output as it chooses at the existing price.
C. realizes an increase in total revenue which is less than product price when it sells an extra unit.
D. is selling a differentiated (heterogeneous) product.
A. must lower price to sell more output.
B. can sell as much output as it chooses at the existing price.
C. realizes an increase in total revenue which is less than product price when it sells an extra unit.
D. is selling a differentiated (heterogeneous) product.
answer
B. can sell as much output as it chooses at the existing price.
question
13. Marginal revenue is the:
A. change in product price associated with the sale of one more unit of output.
B. change in average revenue associated with the sale of one more unit of output.
C. difference between product price and average total cost.
D. change in total revenue associated with the sale of one more unit of output.
A. change in product price associated with the sale of one more unit of output.
B. change in average revenue associated with the sale of one more unit of output.
C. difference between product price and average total cost.
D. change in total revenue associated with the sale of one more unit of output.
answer
D. change in total revenue associated with the sale of one more unit of output.
question
14. A competitive firm in the short run can determine the profit-maximizing (or loss-minimizing) output by equating:
A. price and average total cost.
B. price and average fixed cost.
C. marginal revenue and marginal cost.
D. price and marginal revenue.
A. price and average total cost.
B. price and average fixed cost.
C. marginal revenue and marginal cost.
D. price and marginal revenue.
answer
C. marginal revenue and marginal cost.
question
15. A firm reaches a break-even point (normal profit position) where:
A. marginal revenue cuts the horizontal axis.
B. marginal cost intersects the average variable cost curve.
C. total revenue equals total variable cost.
D. total revenue and total cost are equal.
A. marginal revenue cuts the horizontal axis.
B. marginal cost intersects the average variable cost curve.
C. total revenue equals total variable cost.
D. total revenue and total cost are equal.
answer
D. total revenue and total cost are equal.
question
16. The MR = MC rule applies:
A. to firms in all types of industries.
B. only when the firm is a "price taker."
C. only to monopolies.
D. only to purely competitive firms.
A. to firms in all types of industries.
B. only when the firm is a "price taker."
C. only to monopolies.
D. only to purely competitive firms.
answer
A. to firms in all types of industries.
question
17. In the short run the individual competitive firm's supply curve is that segment of the:
A. average variable cost curve lying below the marginal cost curve.
B. marginal cost curve lying above the average variable cost curve.
C. marginal revenue curve lying below the demand curve.
D. marginal cost curve lying between the average total cost and average variable cost curves.
A. average variable cost curve lying below the marginal cost curve.
B. marginal cost curve lying above the average variable cost curve.
C. marginal revenue curve lying below the demand curve.
D. marginal cost curve lying between the average total cost and average variable cost curves.
answer
B. marginal cost curve lying above the average variable cost curve.
question
18. The MR = MC rule can be restated for a purely competitive seller as P = MC because:
A. each additional unit of output adds exactly its price to total revenue.
B. the firm's average revenue curve is downsloping.
C. the market demand curve is downsloping.
D. the firm's marginal revenue and total revenue curves will coincide.
A. each additional unit of output adds exactly its price to total revenue.
B. the firm's average revenue curve is downsloping.
C. the market demand curve is downsloping.
D. the firm's marginal revenue and total revenue curves will coincide.
answer
A. each additional unit of output adds exactly its price to total revenue.
question
19. A purely competitive firm's short-run supply curve is:
A. perfectly elastic at the minimum average total cost.
B. upsloping and equal to the portion of the marginal cost curve that lies above the average variable cost curve.
C. upsloping and equal to the portion of the marginal cost curve that lies above the average total cost curve.
D. upsloping only when the industry has constant costs.
A. perfectly elastic at the minimum average total cost.
B. upsloping and equal to the portion of the marginal cost curve that lies above the average variable cost curve.
C. upsloping and equal to the portion of the marginal cost curve that lies above the average total cost curve.
D. upsloping only when the industry has constant costs.
answer
B. upsloping and equal to the portion of the marginal cost curve that lies above the average variable cost curve.
question
20. Suppose you find that the price of your product is less than minimum AVC. You should:
A. minimize your losses by producing where P = MC.
B. maximize your profits by producing where P = MC.
C. close down because, by producing, your losses will exceed your total fixed costs.
D. close down because total revenue exceeds total variable cost.
A. minimize your losses by producing where P = MC.
B. maximize your profits by producing where P = MC.
C. close down because, by producing, your losses will exceed your total fixed costs.
D. close down because total revenue exceeds total variable cost.
answer
C. close down because, by producing, your losses will exceed your total fixed costs.
question
21. A purely competitive firm should produce in the short run if its total revenue is sufficient to cover its:
A. total variable costs.
B. total costs.
C. total fixed costs.
D. marginal costs.
A. total variable costs.
B. total costs.
C. total fixed costs.
D. marginal costs.
answer
A. total variable costs.
question
22. In the short run a purely competitive firm will always make an economic profit if:
A. P = ATC.
B. P > AVC.
C. P = MC.
D. P > ATC.
A. P = ATC.
B. P > AVC.
C. P = MC.
D. P > ATC.
answer
D. P > ATC.
question
23. A firm finds that at its MR = MC output, its TC = $1,000, TVC = $800, TFC = $200, and total revenue is $900. This firm should:
A. shut down in the short run.
B. produce because the resulting loss is less than its TFC.
C. produce because it will realize an economic profit.
D. liquidate its assets and go out of business.
A. shut down in the short run.
B. produce because the resulting loss is less than its TFC.
C. produce because it will realize an economic profit.
D. liquidate its assets and go out of business.
answer
B. produce because the resulting loss is less than its TFC.
question
24. The lowest point on a purely competitive firm's short-run supply curve corresponds to:
A. the minimum point on its ATC curve.
B. the minimum point on its AVC curve.
C. the minimum point on its AFC curve.
D. the minimum point on its MC curve.
A. the minimum point on its ATC curve.
B. the minimum point on its AVC curve.
C. the minimum point on its AFC curve.
D. the minimum point on its MC curve.
answer
B. the minimum point on its AVC curve.
question
25. On a per unit basis economic profit can be determined as the difference between:
A. marginal revenue and product price.
B. product price and average total cost.
C. marginal revenue and marginal cost.
D. average fixed cost and product price.
A. marginal revenue and product price.
B. product price and average total cost.
C. marginal revenue and marginal cost.
D. average fixed cost and product price.
answer
B. product price and average total cost.
question
26. If a purely competitive firm is producing at some level less than the profit-maximizing output, then:
A. price is necessarily greater than average total cost.
B. fixed costs are large relative to variable costs.
C. price exceeds marginal revenue.
D. marginal revenue exceeds marginal cost.
A. price is necessarily greater than average total cost.
B. fixed costs are large relative to variable costs.
C. price exceeds marginal revenue.
D. marginal revenue exceeds marginal cost.
answer
D. marginal revenue exceeds marginal cost.
question
27. If at the MC = MR output, AVC exceeds price:
A. new firms will enter this industry.
B. the firm should produce the MC = MR output and realize an economic profit.
C. the firm should shut down in the short run.
D. the firm should expand its plant.
A. new firms will enter this industry.
B. the firm should produce the MC = MR output and realize an economic profit.
C. the firm should shut down in the short run.
D. the firm should expand its plant.
answer
C. the firm should shut down in the short run.
question
30. In a purely competitive industry:
A. there will be no economic profits in either the short run or the long run.
B. economic profits may persist in the long run if consumer demand is strong and stable.
C. there may be economic profits in the short run, but not in the long run.
D. there may be economic profits in the long run, but not in the short run.
A. there will be no economic profits in either the short run or the long run.
B. economic profits may persist in the long run if consumer demand is strong and stable.
C. there may be economic profits in the short run, but not in the long run.
D. there may be economic profits in the long run, but not in the short run.
answer
C. there may be economic profits in the short run, but not in the long run.
question
31. The short-run supply curve for a purely competitive industry can be found by:
A. multiplying the AVC curve of the representative firm by the number of firms in the industry.
B. adding horizontally the AVC curves of all firms.
C. summing horizontally the segments of the MC curves lying above the AVC curve for all firms.
D. adding horizontally the immediate market period supply curves of each firm.
A. multiplying the AVC curve of the representative firm by the number of firms in the industry.
B. adding horizontally the AVC curves of all firms.
C. summing horizontally the segments of the MC curves lying above the AVC curve for all firms.
D. adding horizontally the immediate market period supply curves of each firm.
answer
C. summing horizontally the segments of the MC curves lying above the AVC curve for all firms.
question
32. In the short run, a purely competitive firm will earn a normal profit when:
A. P = AVC.
B. P > MC.
C. that firm's MR = market equilibrium price.
D. P = ATC.
A. P = AVC.
B. P > MC.
C. that firm's MR = market equilibrium price.
D. P = ATC.
answer
D. P = ATC.
question
33. If a purely competitive firm is producing at the MR = MC output level and earning an economic profit, then:
A. the selling price for this firm is above the market equilibrium price.
B. new firms will enter this market.
C. some existing firms in this market will leave.
D. there must be price fixing by the industry's firms.
A. the selling price for this firm is above the market equilibrium price.
B. new firms will enter this market.
C. some existing firms in this market will leave.
D. there must be price fixing by the industry's firms.
answer
B. new firms will enter this market.
question
34. Long-run competitive equilibrium:
A. is realized only in constant-cost industries.
B. will never change once it is realized.
C. is not economically efficient.
D. results in zero economic profits.
A. is realized only in constant-cost industries.
B. will never change once it is realized.
C. is not economically efficient.
D. results in zero economic profits.
answer
D. results in zero economic profits.
question
35. Which of the following statements is correct?
A. Economic profits induce firms to enter an industry; losses encourage firms to leave.
B. Economic profits induce firms to leave an industry; profits encourage firms to leave.
C. Economic profits and losses have no significant impact on the growth or decline of an industry.
D. Normal profits will cause an industry to expand.
A. Economic profits induce firms to enter an industry; losses encourage firms to leave.
B. Economic profits induce firms to leave an industry; profits encourage firms to leave.
C. Economic profits and losses have no significant impact on the growth or decline of an industry.
D. Normal profits will cause an industry to expand.
answer
A. Economic profits induce firms to enter an industry; losses encourage firms to leave.
question
36. When a purely competitive firm is in long-run equilibrium:
A. marginal revenue exceeds marginal cost.
B. price equals marginal cost.
C. total revenue exceeds total cost.
D. minimum average total cost is less than the product price.
A. marginal revenue exceeds marginal cost.
B. price equals marginal cost.
C. total revenue exceeds total cost.
D. minimum average total cost is less than the product price.
answer
B. price equals marginal cost.
question
37. Allocative efficiency is achieved when the production of a good occurs where:
A. P = minimum ATC.
B. P = MC.
C. P = minimum AVC.
D. total revenue is equal to TFC.
A. P = minimum ATC.
B. P = MC.
C. P = minimum AVC.
D. total revenue is equal to TFC.
answer
B. P = MC.
question
38. Resources are efficiently allocated when production occurs where:
A. marginal cost equals average variable cost.
B. price is equal to average revenue.
C. price is equal to marginal cost.
D. price is equal to average variable cost.
A. marginal cost equals average variable cost.
B. price is equal to average revenue.
C. price is equal to marginal cost.
D. price is equal to average variable cost.
answer
C. price is equal to marginal cost.
question
39. The term productive efficiency refers to:
A. any short-run equilibrium position of a competitive firm.
B. the production of the product-mix most desired by consumers.
C. the production of a good at the lowest average total cost.
D. fulfilling the condition P = MC.
A. any short-run equilibrium position of a competitive firm.
B. the production of the product-mix most desired by consumers.
C. the production of a good at the lowest average total cost.
D. fulfilling the condition P = MC.
answer
C. the production of a good at the lowest average total cost.
question
40. If for a firm P = minimum ATC = MC, then:
A. neither allocative efficiency nor productive efficiency is being achieved.
B. productive efficiency is being achieved, but allocative efficiency is not.
C. both allocative efficiency and productive efficiency are being achieved.
D. allocative efficiency is being achieved, but productive efficiency is not.
A. neither allocative efficiency nor productive efficiency is being achieved.
B. productive efficiency is being achieved, but allocative efficiency is not.
C. both allocative efficiency and productive efficiency are being achieved.
D. allocative efficiency is being achieved, but productive efficiency is not.
answer
C. both allocative efficiency and productive efficiency are being achieved.
question
42. Which of the following conditions is true for a purely competitive firm in long-run equilibrium?
A. P > MC = minimum ATC.
B. P > MC > minimum ATC.
C. P = MC = minimum ATC.
D. P < MC < minimum ATC.
A. P > MC = minimum ATC.
B. P > MC > minimum ATC.
C. P = MC = minimum ATC.
D. P < MC < minimum ATC.
answer
C. P = MC = minimum ATC.
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