question
Which of the following explains why the law of diminishing marginal returns occurs?
a) per-units costs for a firm increase as the firm builds successively larger plant sizes
b) successive units of a good yield lesser amounts of satisfaction to consumers
c) additional variable resources crowd fixed resources
d) when a firm reduces price to increase sales, additional revnue to the firm is less than the price
a) per-units costs for a firm increase as the firm builds successively larger plant sizes
b) successive units of a good yield lesser amounts of satisfaction to consumers
c) additional variable resources crowd fixed resources
d) when a firm reduces price to increase sales, additional revnue to the firm is less than the price
answer
c) additional variable resources crowd fixed resources
question
In the short run, all of the follow are true for a perfectly competitive firm producing at the profit-maximizing output, regardless of whether it is earning an economic profit or suffering an economic loss, EXCEPT:
a) P = minimum ATC
b) P = MR
c) P = MC
d) MR = MC
a) P = minimum ATC
b) P = MR
c) P = MC
d) MR = MC
answer
a) P = minimum ATC
question
Which of the following correcly describes the price-setting power of a perfectly competitive firm?
a) perfectly competitive firms have complete control over the prices of their products
b) perfectly competitive firms charge different prices to individuals based on the elasticity of each person's demand
c) the amount of price-setting power a perfectly competitive firm has depends on the elasticity of its demand curve
d) perfectly competitive firms have no price-setting power
a) perfectly competitive firms have complete control over the prices of their products
b) perfectly competitive firms charge different prices to individuals based on the elasticity of each person's demand
c) the amount of price-setting power a perfectly competitive firm has depends on the elasticity of its demand curve
d) perfectly competitive firms have no price-setting power
answer
d) perfectly competitive firms have no price-setting power
question
Which of the following products is most likely ot be produced in a perfectly competitive market?
a) custom-designed jewelry produced by specially trained professionals
b) oranges produced by many different small orchard farmers
c) chicken nuggets sold by a few large producers
d) bread products that are differentiated based on the method of processing flour
a) custom-designed jewelry produced by specially trained professionals
b) oranges produced by many different small orchard farmers
c) chicken nuggets sold by a few large producers
d) bread products that are differentiated based on the method of processing flour
answer
b) oranges produced by many different small orchard farmers
question
What is the optimal output rule?
answer
MR = MC = min ATC
(recall that this is just another form of when Supply and Demand intersect since MR = Demand and MC = Supply)
(recall that this is just another form of when Supply and Demand intersect since MR = Demand and MC = Supply)
question
In a perfectly competitive market, can a firm change the market price?
answer
NO!
question
Where does MC intersect ATC and AVC?
answer
At their minimums
question
If MR = minimum ATC, what is that point called?
answer
Break even point
question
If MR = minimum AVC, what is that point called?
answer
Shut down point
question
How can we change fixed cost?
answer
In the long run! Firms can expand
question
What is the industry supply curve?
answer
It is the relationship between price and total output of an industry
question
T/F: Firms can enter and exit the industry in the short run.
answer
False! Only in the long run
question
Assuming it should produce, if a perfectly competitive firm is currently producing output such that the price of the last unit produced is $15 and the marginal cost of the last unit is $10, that firm could increase its profit by
a) increasing output
b) decreasing output
c) leaving output unchanged
d) increasing price
a) increasing output
b) decreasing output
c) leaving output unchanged
d) increasing price
answer
a) increasing output (you want to reach MR = MC)
question
T/F: In the long run, firms will be earning a return on investments that is just enough to cover economic costs
answer
True
question
In which of the following situations will a perfectly competitive firm produce the productively efficient output?
a) earning positive economic profits in the short run
b) suffering economic losses in the short run
c) earning positive economic profits in the long run
d) earning normal profits in the long run
a) earning positive economic profits in the short run
b) suffering economic losses in the short run
c) earning positive economic profits in the long run
d) earning normal profits in the long run
answer
d) earning normal profits in the long run
question
Which of the following statements can be said of a perfectly competitive firm in long-run equilibrium?
a) the firm is producing goods using the most efficient production techniques possible
b) P = MC = min ATC
c) firm is profitable
d) a and b
e) a, b, and c
a) the firm is producing goods using the most efficient production techniques possible
b) P = MC = min ATC
c) firm is profitable
d) a and b
e) a, b, and c
answer
d) a and b
question
If a firm shuts down in the short-run, its losses will equal
answer
Its total fixed costs
question
T/F: Resources are efficiently allocated when a firm produces at the output where P = MC
answer
True
question
T/F: Resources are efficiently allocated when positive externalities exist in a perfectly competitive market
answer
False
question
When should a firm shut down?
answer
When market price is below AVC
question
The demand curve for a perfectly competitive firm is
a) perfectly inelastic
b) perfectly elastic
c) downward sloping
d) relatively but not perfectly elastic
a) perfectly inelastic
b) perfectly elastic
c) downward sloping
d) relatively but not perfectly elastic
answer
b) perfectly elastic
question
A perfectly competitive firm is definitely earning an economic profit when
a) MR > MC
b) P > ATC
c) P > MC
d) P > AVC
a) MR > MC
b) P > ATC
c) P > MC
d) P > AVC
answer
P > ATC
question
If the price is currently between AVC and ATC, then in the short run, a perfectly competitive firm should
answer
Produce at a loss
question
During the summer, Alex runs a lawn-mowing service (in a perfectly-competitive industry). When should Alex shut down his service?
answer
When total revenue can't cover is total variable costs
question
The horizontal sum of individual firms' MC curves at and above the shut-down price is the
answer
e) short run industry supply curve
question
If firms are making positive economic profits in the short run, then in the long run
a) the short-run industry supply curve will shirt leftwards
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 P = min AVC
a) the short-run industry supply curve will shirt leftwards
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 P = min AVC
answer
b) firms will enter the industry
question
In perfectly competitive long-run equilibrium:
a) all firms make positive economic profits
b) all firms produce at the minimum point of their average total cost curves
c) the industry supply curve must be upward-sloping
d) all firms face the same price, but the value of marginal cost will vary directly with firm size
e) the price will equal average variable cost
a) all firms make positive economic profits
b) all firms produce at the minimum point of their average total cost curves
c) the industry supply curve must be upward-sloping
d) all firms face the same price, but the value of marginal cost will vary directly with firm size
e) the price will equal average variable cost
answer
b) all firms produce at the minimum point of their average total cost curves
question
Provided that there are no external benefits or costs, resources are efficiently allocated when:
a) P = MR
b) P = AVC
c) P = MC
d) MC = AVC
e) P = ATC
a) P = MR
b) P = AVC
c) P = MC
d) MC = AVC
e) P = ATC
answer
c) P = MC
question
In the long run, firms in a perfectly competitive industry will:
a) minimize ATC
b) earn a positive economic profit
c) exit the industry if price is greater than ATC
d) produce an output level at which price is greater than ATC
e) produce a differentiated product
a) minimize ATC
b) earn a positive economic profit
c) exit the industry if price is greater than ATC
d) produce an output level at which price is greater than ATC
e) produce a differentiated product
answer
a) minimize ATC
question
A perfectly competitive industry with constant costs is initially operating in long-run equilibrium. When demand increases, one will observe that:
a) in the short run, prices and profits will be higher, but in the long run, price will fall back to its original level and firms will incur economic losses
b) in the long and short runs, prices and profits will be higher relative to what they have been before the demand increase
c) in the short run, prices and profits will fall, but in the long run price will rise back to its initial level
d) in the long and short runs, prices and profits will be lower relationship to what they were before the demand increases
e) in the short run, prices and profits will be higher, but in the long run, price will fall back to its original level and firms will again earn a normal profit
a) in the short run, prices and profits will be higher, but in the long run, price will fall back to its original level and firms will incur economic losses
b) in the long and short runs, prices and profits will be higher relative to what they have been before the demand increase
c) in the short run, prices and profits will fall, but in the long run price will rise back to its initial level
d) in the long and short runs, prices and profits will be lower relationship to what they were before the demand increases
e) in the short run, prices and profits will be higher, but in the long run, price will fall back to its original level and firms will again earn a normal profit
answer
e) in the short run, prices and profits will be higher, but in the long run, price will fall back to its original level and firms will again earn a normal profit
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