Microeconomics, 10e, Global Edition (Parkin)

Chapter 12 Perfect Competition

1 What is Perfect Competition?

1) Perfect competition arises if the ________ efficient scale of a single producer is ________
relative to the demand for the good or service.
A) minimum; small
B) minimum; large
C) maximum; small
D) maximum; large
Answer: A
Topic: How Perfect Competition Arises
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

2) Which of the following is true regarding a perfectly competitive firm?

A) The firm can charge a lower price than its competitors and thereby sell more output and
increase its profits.
B) The firm always earns a normal profit.
C) The firm's marginal revenue continually decreases.
D) The firm's minimum efficient scale is small relative to the market demand.
Answer: D
Topic: How Perfect Competition Arises
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

3) The smallest quantity of output at which long-run average cost is at a minimum is a firm's
________.
A) maximum efficient scale
B) profit-maximizing output point
C) minimum efficient scale
D) efficient output point
Answer: C
Topic: How Perfect Competition Arises
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

1
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4) If the minimum efficient scale of a firm is small relative to the demand for the good, then
A) many small firms can compete in the market.
B) several large firms will enter the market thereby reducing competition.
C) there will be no economic profits for any small firms, so no new firms will ever enter the
market.
D) the firms already in the market have lower average total cost than any new firm entering the
market.
Answer: A
Topic: How Perfect Competition Arises
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

5) In perfect competition, the

A) market demand for the good or service is large relative to the minimum efficient scale of a
single producer.
B) market demand for the good or service is small relative to the minimum efficient scale of a
single producer.
C) market demand for the good or service can be small relative to the minimum efficient scale of
a single producer as long as the goods or services are not identical.
D) size of the market demand for the good or service relative to the minimum efficient scale of a
single producer does not affect competition.
Answer: A
Topic: How Perfect Competition Arises
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

6) In perfect competition, ________.

A) there are restrictions on entry into the market
B) firms in the market have advantages over firms that plan to enter the market
C) only firms know their competitors' prices
D) there are many firms that sell identical products
Answer: D
Topic: Perfect Competition
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

2
Copyright © 2012 Pearson Education
7) Perfect competition exists in a market if
A) there are many firms producing an identical product.
B) there are many firms producing a similar product, each of which may have unique features.
C) the firm is protected by a barrier to entry.
D) the firm is always at the break-even point where it is earning only a normal profit.
Answer: A
Topic: Perfect Competition
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

8) A market is perfectly competitive if

A) each firm in it can influence the price of its product.
B) there are many firms in it, each selling a slightly different product.
C) there are many firms in it, each selling an identical product.
D) there are few firms in the market.
Answer: C
Topic: Perfect Competition
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

9) In a perfectly competitive market, there are

A) many buyers and many sellers.
B) many buyers, but there might be only one or two sellers.
C) many sellers, but there might be only one or two buyers.
D) one firm that sets the price for the others to follow.
Answer: A
Topic: Perfect Competition
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

10) In perfect competition, the product of a single firm

A) has many perfect substitutes produced by other firms.
B) has many perfect complements produced by other firms.
C) is sold under many differing brand names.
D) is sold to different customers at different prices.
Answer: A
Topic: Perfect Competition
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

3
Copyright © 2012 Pearson Education
11) Which of the following is a defining characteristic of a perfectly competitive market?
A) advertisements by well known celebrities
B) persistent economic profits in the long run
C) no restrictions on entry into the industry
D) higher prices being charged for certain name brands
Answer: C
Topic: Perfect Competition
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

12) Which of the following is true regarding perfect competition?

I. The firms are price takers.
II. Marginal revenue equals the price of the product.
III. Established firms have no advantage over new firms.
A) I and II
B) II and III
C) I, II and III
D) I only
Answer: C
Topic: Perfect Competition
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

13) Perfect competition implies that

A) there are many firms in the market.
B) all firms are price takers.
C) all firms are producing the same identical product.
D) All of the above answers are correct.
Answer: D
Topic: Perfect Competition
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

14) A perfectly competitive market is characterized by

A) high barriers to entry.
B) firms that are price setters.
C) firms facing a downward sloping demand curve.
D) no restrictions on entry into the market.
Answer: D
Topic: Perfect Competition
Skill: Recognition
Question history: Modified 10th edition
AACSB: Reflective Thinking

4
Copyright © 2012 Pearson Education
15) In perfect competition, restrictions on entry into an market
A) apply to both capital and labor.
B) apply to labor but not to capital.
C) apply to capital but not to labor.
D) do not exist.
Answer: D
Topic: Perfect Competition
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

16) Which of the following is NOT an assumption of perfect competition?

A) many firms
B) many buyers
C) restrictions on entry into the market
D) each firm sells an identical product
Answer: C
Topic: Perfect Competition
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

17) Which of the following is NOT an assumption of perfect competition?

A) Firms compete by making their product different from products produced by other firms.
B) There are no restrictions on entry into the market.
C) Established firms have no advantage over new firms.
D) Sellers and buyers are well informed about prices.
Answer: A
Topic: Perfect Competition
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

18) Which of the following is NOT an assumption of perfectly competitive markets?

A) many buyers and many sellers
B) no restriction on entry
C) complete information about prices
D) new entrants have higher costs
Answer: D
Topic: Perfect Competition
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

5
Copyright © 2012 Pearson Education
19) Which of the following is NOT an assumption of perfect competition?
A) There are many firms, each selling an identical product.
B) There are many buyers.
C) The price each firm sets differs from the prices set by the other firms.
D) There are no restrictions on entry into the market.
Answer: C
Topic: Perfect Competition
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

20) Which of the following is NOT a defining characteristic of perfectly competitive industries?
A) many buyers and sellers
B) unrestricted entry and exit
C) consumer knowledge about prices charged by each firm
D) higher prices being charged for certain name brands
Answer: D
Topic: Perfect Competition
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

21) Which of the following is NOT a characteristic of a perfectly competitive industry?

A) There are many firms.
B) There are no restrictions on entry into the market.
C) Each firm produces a slightly differentiated product.
D) Each firm takes price as given, determined by the equilibrium of industry supply and industry
demand.
Answer: C
Topic: Perfect Competition
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

22) An example of a perfectly competitive industry is

A) a big city police department.
B) the market for corn in the United States.
C) the market for French impressionists' paintings.
D) the National Football League.
Answer: B
Topic: Perfect Competition
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

6
Copyright © 2012 Pearson Education
23) An example of a perfectly competitive firm is
A) an oat farmer in the United States.
B) the local cable TV company.
C) a U.S. automobile producer.
D) a big city newspaper.
Answer: A
Topic: Perfect Competition
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

24) In perfect competition,

A) each firm can influence the price of the good.
B) there are few buyers.
C) there are significant restrictions on entry.
D) all firms in the market sell their product at the same price.
Answer: D
Topic: Price Takers
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

25) In perfect competition, each firm ________.

A) can influence the price that it charges
B) produces as much as it can
C) is a price taker
D) faces a perfectly inelastic demand for its product
Answer: C
Topic: Price Takers
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

26) In a perfectly competitive industry

A) each firm sets its own price so that it is different from the prices of its competitors.
B) earning an economic profit is certain.
C) each firm is a price taker.
D) consumers band together to demand the lowest price possible.
Answer: C
Topic: Price Takers
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

7
Copyright © 2012 Pearson Education
27) The assumption that a perfectly competitive industry has many sellers, each selling an
identical product, leads to the conclusion that
A) consumers get to see a variety of outputs.
B) there are many buyers.
C) the economic profit will be positive in the long run.
D) firms are price takers.
Answer: D
Topic: Price Takers
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

28) When a firm is considered to be a "price taker" that means that the firm
A) can charge any price that it wants to charge, that is, "take" any price it wants.
B) pays a fixed price for all of its inputs.
C) will accept ("take") the lowest price that its customers offer.
D) cannot influence the market price of the good that it sells.
Answer: D
Topic: Price Takers
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

29) Individual firms in perfectly competitive industries are price takers because
A) the government sets all prices.
B) buyers set prices.
C) firms decide together on the best price to charge.
D) each individual firm is too small to affect the market price.
Answer: D
Topic: Price Takers
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

30) In a perfectly competitive market,

A) each firm sets its own price so that it is different from its competitors.
B) an economic profit is certain.
C) each firm takes the good's price as given to it by the market.
D) consumers are persuaded by advertising.
Answer: C
Topic: Price Takers
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

8
Copyright © 2012 Pearson Education
31) Price taking behavior exists in
A) perfectly competitive markets.
B) markets with a monopolist, where consumers have to take price as it is given to them by the
monopolist.
C) automobile markets where consumers have to take the price set by the dealer.
D) Both answers B and C are correct.
Answer: A
Topic: Price Takers
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

32) In perfect competition, the market demand for the good ________ perfectly elastic and the
demand for the output of one firm ________ perfectly elastic.
A) is; is
B) is; is not
C) is not; is
D) is not; is not
Answer: C
Topic: Price Takers
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

33) Firms in perfectly competitive industries have a ________ individual demand curve when
the price is on the vertical axis and the quantity is on the horizontal axis. The shape of the curve
is result of the firm being a ________.
A) horizontal; price taker
B) downward sloping; price maker
C) vertical; price taker
D) downward sloping; price taker
Answer: A
Topic: Price Takers
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

34) In perfect competition, an individual firm

A) sets the price and determines the quantity it sells in the marketplace.
B) sets the price but does not determine the quantity it sells in the marketplace.
C) determines the quantity it sells in the marketplace but has no influence over its price.
D) can not affect its price nor determine the quantity it sells in the marketplace.
Answer: C
Topic: Price Takers
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking
9
Copyright © 2012 Pearson Education
35) The market for lawn services is perfectly competitive. Larry's Lawn Service cannot increase
its total revenue by raising its price because ________.
A) Larry's supply of lawn services is perfectly inelastic
B) the demand for Larry's services is perfectly inelastic
C) Larry's supply of lawn services is inelastic
D) the demand for Larry's services is perfectly elastic
Answer: D
Topic: Price Takers
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

36) The price elasticity of demand for any particular perfectly competitive firm's output is
A) less than 1.
B) 1.
C) equal to zero.
D) infinite.
Answer: D
Topic: Price Takers
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

37) The demand for wheat from farm A is perfectly elastic because wheat from farm A is
A) a perfect complement for wheat from farm B.
B) a normal good.
C) a perfect substitute for wheat from farm B.
D) an inferior good.
Answer: C
Topic: Price Takers
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

38) In a perfectly competitive industry, the demand for a single firm's product is perfectly elastic
A) because this firm's output is a perfect substitute for any other firm's output.
B) because this firm is a price maker.
C) only in the long run.
D) because there are many buyers in this market.
Answer: A
Topic: Price Takers
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

10
Copyright © 2012 Pearson Education
39) In perfect competition, the elasticity of demand for the product of a single firm is
A) 0.
B) between 0 and 1.
C) 1.
D) infinite.
Answer: D
Topic: Price Takers
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

40) In perfect competition, the elasticity of demand for the product of a single firm is
A) zero because the firm produces a unique product.
B) zero because many other firms produce identical products.
C) infinite because the firm produces a unique product.
D) infinite because many other firms produce identical products.
Answer: D
Topic: Price Takers
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

41) Because each perfectly competitive firm sells a product identical to that of the other firms,
A) each firm tries to cut prices to increase its market share.
B) each firm's output is a perfect substitute for the output of any other firm.
C) each firm expects to earn some economic profit.
D) the demand for each firm's product is perfectly inelastic.
Answer: B
Topic: Price Takers
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

42) In perfect competition, each individual firm faces ________ demand curve.
A) an inelastic
B) an upward sloping
C) a perfectly elastic
D) a downward sloping
Answer: C
Topic: Price Takers
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

11
Copyright © 2012 Pearson Education
43) In perfect competition, an individual firm
A) faces unitary elasticity of demand.
B) has a price elasticity of supply equal to one.
C) faces a perfectly elastic demand.
D) has perfectly elastic supply.
Answer: C
Topic: Price Takers
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

44) In a perfectly competitive market, which of the following determines the market price?
A) market demand and a firm's supply
B) market supply and a firm's demand
C) a firm's demand and its supply
D) market demand and market supply
Answer: D
Topic: Price Takers
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

45) In perfect competition, the price of the product is determined where the market
A) elasticity of supply equals the market elasticity of demand.
B) supply curve and market demand curve intersect.
C) average variable cost equals the market average total cost.
D) fixed cost is zero.
Answer: B
Topic: Market Demand/Firm Demand
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

46) The goal of a perfectly competitive firm is to maximize its

A) normal profit.
B) revenue.
C) output.
D) economic profit.
Answer: D
Topic: Economic Profit and Revenue
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

12
Copyright © 2012 Pearson Education
47) Economic profit is ________.
A) included in the firm's total opportunity cost
B) equal to normal profit minus total opportunity cost
C) equal to total revenue minus marginal cost
D) equal to total revenue minus total opportunity cost
Answer: D
Topic: Economic Profit and Revenue
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

48) The difference between a firm's total revenue and its total opportunity cost is the firm's
A) normal profit.
B) economic profit.
C) marginal profit.
D) marginal revenue.
Answer: B
Topic: Economic Profit and Revenue
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

49) A competitive firm's total revenue minus its total opportunity cost equals its ________.
A) marginal revenue
B) economic profit
C) opportunity cost
D) normal profit
Answer: B
Topic: Economic Profit and Revenue
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

50) Total economic profit is

A) total revenue minus total opportunity cost.
B) total revenue divided by total cost.
C) marginal revenue minus marginal cost.
D) marginal revenue divided by marginal cost.
Answer: A
Topic: Economic Profit and Revenue
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

13
Copyright © 2012 Pearson Education
51) The economic profit of a perfectly competitive firm
A) is less than its total revenue.
B) equals its total revenue.
C) is greater than its total revenue.
D) is less than its total revenue if its supply curve is inelastic and is greater than its total revenue
if its supply curve is elastic.
Answer: A
Topic: Economic Profit and Revenue
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

52) In perfect competition, a firm that maximizes its economic profit will sell its good at a price
that is
A) below the market price.
B) at the market price.
C) above the market price.
D) below the market price if its supply curve is inelastic and above the market price if its supply
curve is elastic.
Answer: B
Topic: Economic Profit and Revenue
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

53) The return that the entrepreneur can obtain in the best alternative business is called the
A) normal profit.
B) economic profit.
C) marginal profit.
D) marginal revenue.
Answer: A
Topic: Normal Profit
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

54) A perfectly competitive firm has a total revenue curve that is

A) upward sloping with an increasing slope.
B) downward sloping with a constant slope.
C) upward sloping with a decreasing slope.
D) upward sloping with a constant slope.
Answer: D
Topic: Total Revenue
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

14
Copyright © 2012 Pearson Education
55) The above figure shows a firm's total revenue line. The firm must be in a market with
A) perfect competition.
B) monopolistic competition.
C) monopoly.
D) oligopoly.
Answer: A
Topic: Total Revenue
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

56) For a perfectly competitive firm, curve A in the above figure is the firm's
A) total fixed cost curve.
B) average fixed cost curve.
C) average variable cost curve.
D) total revenue curve.
Answer: D
Topic: Total Revenue
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

15
Copyright © 2012 Pearson Education
57) The figure above portrays a total revenue curve for a perfectly competitive firm. Curve A is
straight because the firm
A) is a price taker.
B) faces constant returns to scale.
C) wants to maximize its profits.
D) has perfect information.
Answer: A
Topic: Total Revenue
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

58) The figure above portrays a total revenue curve for a perfectly competitive firm. The firm's
marginal revenue from selling a unit of output
A) equals $0.50.
B) equals $1.00.
C) equals $2.00.
D) cannot be determined.
Answer: C
Topic: Total Revenue
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

59) The figure above portrays a total revenue curve for a perfectly competitive firm. The price of
the product in this industry
A) equals $0.50.
B) equals $1.00.
C) equals $2.00.
D) cannot be determined.
Answer: C
Topic: Total Revenue
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

60) In the above figure showing a perfectly competitive firm's total revenue line, the firm's
marginal revenue
A) falls as output increases.
B) does not change as output increases.
C) rises as output increases.
D) cannot be determined.
Answer: B
Topic: Marginal Revenue
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills
16
Copyright © 2012 Pearson Education
Quantity sold Price
5 $15
6 $15
7 $15

61) In the above table, if the firm sells 5 units of output, its total revenue is
A) $15.
B) $30.
C) $75.
D) $90.
Answer: C
Topic: Total Revenue
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

62) In the above table, if the quantity sold by the firm rises from 5 to 6, its marginal revenue is
A) $15.
B) $30.
C) $75.
D) $90.
Answer: A
Topic: Marginal Revenue
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

63) In the above table, if the quantity sold by the firm rises from 6 to 7, its marginal revenue is
A) $15.
B) $30.
C) $90.
D) $105.
Answer: A
Topic: Marginal Revenue
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

17
Copyright © 2012 Pearson Education
64) In a perfectly competitive industry, the demand for a single firm's product is
A) perfectly inelastic.
B) perfectly elastic.
C) as elastic as the market demand.
D) inelastic, but not perfectly inelastic.
Answer: B
Topic: Market Demand/Firm Demand
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

65) The market demand for wheat is ________ and the demand for wheat produced by an
individual farm is ________.
A) perfectly elastic; perfectly inelastic
B) not perfectly elastic; perfectly elastic
C) not perfectly inelastic; inelastic
D) elastic; unit elastic
Answer: B
Topic: Market Demand/Firm Demand
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

66) If Steve's Apple Orchard, Inc. is a perfectly competitive firm, the demand for Steve's apples
has
A) zero elasticity.
B) unitary elasticity.
C) elasticity equal to the price of apples.
D) infinite elasticity.
Answer: D
Topic: Market Demand/Firm Demand
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

67) In a perfectly competitive market, the price elasticity of demand for the market demand is
________ and the price elasticity of demand for an individual firm's demand is ________.
A) infinite; infinite
B) less than infinite; infinite
C) infinite; less than infinite
D) less than infinite; less than infinite
Answer: B
Topic: Market Demand/Firm Demand
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

18
Copyright © 2012 Pearson Education
68) The market for fish is perfectly competitive. So, the price elasticity of demand for fish from a
single fishing boat
A) is less than the elasticity of demand for fish overall.
B) equals the elasticity of demand for fish overall.
C) is greater than the elasticity of demand for fish overall.
D) is sometimes greater than and sometimes less than the elasticity of demand for fish overall.
Answer: C
Topic: Market Demand/Firm Demand
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

69) Marginal revenue is equal to

A) total revenue divided by price.
B) the change in total revenue divided by total output.
C) the change in total revenue divided by the change in quantity sold.
D) price divided by quantity sold.
Answer: C
Topic: Marginal Revenue
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

70) Marginal revenue is defined as

A) the value of a firm's sales.
B) the total revenue from the total amount the firm sells.
C) the change in total revenue that results from a one-unit increase in the quantity sold.
D) total revenue divided by the total quantity sold.
Answer: C
Topic: Marginal Revenue
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

71) In perfect competition, the marginal revenue of an individual firm

A) is zero.
B) is positive but less than the price of the product.
C) equals the price of the product.
D) exceeds the price of the product.
Answer: C
Topic: Marginal Revenue
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

19
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72) In perfect competition, at al levels of output the market price is the same as the firm's
________.
A) marginal revenue
B) normal profit
C) average variable cost
D) fixed cost
Answer: A
Topic: Marginal Revenue
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

73) For a perfectly competitive firm, price is the same as

A) marginal revenue.
B) average variable cost.
C) total revenue.
D) Both answers A and B are correct.
Answer: A
Topic: Marginal Revenue
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

74) A perfectly competitive firm's marginal revenue

A) increases as the firm produces more output.
B) decreases as the firm produces more output.
C) is less than the market price of its product.
D) equals the market price of its product.
Answer: D
Topic: Marginal Revenue
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

75) Because the demand for a perfectly competitive firm's product is perfectly elastic, marginal
revenue is equal to
A) one.
B) zero.
C) the price of the product.
D) negative one.
Answer: C
Topic: Marginal Revenue
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

20
Copyright © 2012 Pearson Education
76) For a perfectly competitive firm, no matter how much the firm produces, price ALWAYS
equals
A) marginal product.
B) average total cost.
C) minimum average total cost.
D) marginal revenue.
Answer: D
Topic: Marginal Revenue
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

77) Which of the following is always true for a perfectly competitive firm?
A) P = MR
B) P = ATC
C) MR = ATC
D) P = AVC
Answer: A
Topic: Marginal Revenue
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

78) In perfect competition, the firm's marginal revenue curve

A) cuts its demand curve from below, going from left to right.
B) cuts its demand curve from above, going from left to right.
C) always lies below its demand curve.
D) is the same as its demand curve.
Answer: D
Topic: Marginal Revenue
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

79) The marginal revenue curve for a perfectly competitive firm is

A) an upward sloping curve.
B) a downward sloping curve.
C) a horizontal line.
D) None of the above answers is correct.
Answer: C
Topic: Marginal Revenue
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

21
Copyright © 2012 Pearson Education
 Quantity Price Total revenue
(units) (dollars per unit) (dollars)
9 10 90
10 10 100
11 10 110

80) Based on the table above, what is the marginal revenue of the tenth unit of output?
A) $190
B) $100
C) $10
D) $9
Answer: C
Topic: Marginal Revenue
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

81) In the above figure, if the milk industry is perfectly competitive, then the firm's marginal
revenue curve is represented by
A) curve F.
B) curve G.
C) curve H.
D) curve I.
Answer: C
Topic: Marginal Revenue
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills
22
Copyright © 2012 Pearson Education
82) Which of the following characterizes a perfectly competitive market?
A) The market demand curve is vertical.
B) The demand for each individual firm's product is perfectly elastic.
C) Each firm sets a different price.
D) Each firm produces a product slightly different from that of its competitors.
Answer: B
Topic: Study Guide Question, Perfect Competition
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

83) The above figure shows the total revenue curve for Dizzy Discs. The demand curve for CD's
sold by Dizzy Discs
A) has negative slope.
B) has positive slope.
C) is horizontal.
D) is vertical.
Answer: C
Topic: Parallel MyEconLab Questions
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

23
Copyright © 2012 Pearson Education
2 The Firm's Output Decision

1) At a firm's break-even point, its

A) total revenue equals its total opportunity cost.
B) marginal revenue exceeds its marginal cost.
C) marginal revenue equals its average variable cost.
D) marginal revenue equals its average fixed cost.
Answer: A
Topic: Break-Even Point
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

2) When Sidney's Sweaters, Inc. makes exactly zero economic profit, Sidney, the owner,
A) is taking a loss.
B) will shut down in the short run.
C) makes an income equal to his best alternative forgone income.
D) will boost output.
Answer: C
Topic: Break-Even Point
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

3) The break-even point is defined as occurring at an output rate at which

A) total revenue equals total opportunity cost.
B) economic profit is maximized.
C) marginal revenue equals marginal cost.
D) total cost is minimized.
Answer: A
Topic: Break-Even Point
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

4) A perfectly competitive firm that is producing a positive quantity of a good maximizes its
economic profit if it produces so that
A) total revenue = total cost.
B) marginal revenue = marginal cost.
C) average revenue = average total cost.
D) average total cost = average variable cost.
Answer: B
Topic: Profit-Maximizing Output
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

24
Copyright © 2012 Pearson Education
5) The difference between a perfectly competitive firm's total revenue and its total cost is
A) always positive.
B) always negative.
C) always zero.
D) greatest at the profit-maximizing level of output.
Answer: D
Topic: Profit-Maximizing Output
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

6) A perfectly competitive firm maximizes its profit by

A) setting its price so that it exceeds the marginal revenue.
B) choosing to produce the quantity that sets MC equal to MR.
C) cutting wages.
D) manipulating demand.
Answer: B
Topic: Profit-Maximizing Output
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

7) A firm is producing the profit-maximizing amount of output when it is producing where its
________ curve intersects its ________ curve.
A) MC; MR
B) MC; AVC
C) MC; ATC
D) MC; TR
Answer: A
Topic: Profit-Maximizing Output
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

8) A perfectly competitive firm's economic profit is maximized by producing the amount of

output such that
A) total revenue equals total variable cost.
B) marginal revenue equals marginal cost.
C) total revenue equals total cost.
D) marginal revenue is equal to total revenue.
Answer: B
Topic: Profit-Maximizing Output
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

25
Copyright © 2012 Pearson Education
9) A perfectly competitive firm maximizes its profits by producing the amount of output such
that
A) MR = P.
B) MR = MC.
C) P = AVC.
D) P = ATC.
Answer: B
Topic: Profit-Maximizing Output
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

10) When marginal revenue equals marginal cost, a perfectly competitive firm is
A) determining the price it will set.
B) maximizing its revenues.
C) maximizing its profit.
D) establishing its shutdown point.
Answer: C
Topic: Profit-Maximizing Output
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

11) As long as it does not shut down, a perfectly competitive firm earns the maximum profit as
long as it operates so that
A) its price exceeds its average total cost.
B) market demand is inelastic.
C) its price exceeds its marginal revenue.
D) its marginal revenue equals its marginal cost.
Answer: D
Topic: Profit-Maximizing Output
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

12) As long as it does not shut down, a profit-maximizing perfectly competitive firm will
A) always earn an economic profit.
B) produce so that marginal revenue equals marginal cost.
C) produce so that price equals average cost.
D) never set its price equal to its marginal revenue.
Answer: B
Topic: Profit-Maximizing Output
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

26
Copyright © 2012 Pearson Education
13) Charlie's Chimps is a perfectly competitive firm that produces cuddly chimps for children.
The market price of a chimp is $10, and Charlie's produces 100 chimps at a marginal cost of $9 a
chimp. Charlie's ________.
A) is maximizing its profit
B) will maximize its profit if it produces more than 100 chimps
C) will maximize its profit if it lowers the price to $9 a chimp
D) will maximize its profit if it produces fewer than 100 chimps
Answer: B
Topic: Profit-Maximizing Output
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

14) For a perfectly competitive firm, as its output increases its marginal revenue ________ and
its marginal cost ________.
A) changes; changes
B) changes; does not change
C) does not change; changes
D) does not change; does not change
Answer: C
Topic: Marginal Analysis
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

Output Total Revenue Total Cost

0 $0 $25
1 $30 $49
2 $60 $69
3 $90 $91
4 $120 $117
5 $150 $147
6 $180 $180

15) In the above table, the price of the product is

A) $30.
B) $147.
C) $150.
D) $180.
Answer: A
Topic: Total Revenue
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

27
Copyright © 2012 Pearson Education
16) In the above table, the firm
A) must be in a perfectly competitive market because its marginal revenue is constant.
B) must be in a perfectly competitive market because its marginal cost curve eventually rises.
C) cannot be in a perfectly competitive market because its short-run economic profits are greater
than zero.
D) cannot be in a perfectly competitive market because its long-run economic profits are greater
than zero.
Answer: A
Topic: Total Revenue
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

17) In the above table, the marginal revenue from the fourth unit of output is
A) $30.
B) $147.
C) $150.
D) $180.
Answer: A
Topic: Marginal Revenue
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

18) In the above table, if the firm produces 2 units of output, it will
A) make an economic profit of $9.
B) make an economic profit of $60.
C) incur an economic loss of $9.
D) incur an economic loss of $60.
Answer: C
Topic: Profit-Maximizing Output
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

28
Copyright © 2012 Pearson Education
 Price Quantity demanded
(dollars per CD) (CDs per week)
8.00 30,000
8.50 25,000
9.00 20,000
9.50 15,000
10.00 10,000

Quantity Marginal cost

(CDs per week) (dollars per CD)
50 8.50
100 9.00
150 9.50
200 10.00
250 10.20

19) The first table shows the market demand schedule for CDs, and the second table shows the
cost structure of each firm. The CD market is perfectly competitive and there are 100 identical
firms. The market price of a CD is ________, and ________ CDs are produced and sold.
A) $9.00; 20,000
B) $9.50; 15,000
C) $10.00; 10,000
D) $8.50; 24,000
Answer: B
Topic: Profit-Maximizing Output
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

29
Copyright © 2012 Pearson Education
 Output
(balloons per Total Cost
hour) (dollars per hour)
0 $4.00
1 $7.00
2 $8.00
3 $12.50
4 $17.20
5 $22.00
6 $29.00

20) In the above table, the firm's total fixed cost of production is
A) $3.00.
B) $4.00.
C) $7.00.
D) $29.00.
Answer: B
Topic: Firm's Decisions in Perfect Competition, Fixed Cost
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

21) In the above table, the average fixed cost at 4 units of output is
A) $1.00.
B) $4.50.
C) $4.70.
D) $4.80.
Answer: A
Topic: Firm's Decisions in Perfect Competition, Average Fixed Cost
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

22) In the above table, the average variable cost at 2 units of output is
A) $1.00.
B) $2.00.
C) $4.00.
D) $4.80.
Answer: B
Topic: Firm's Decisions in Perfect Competition, Average Variable Cost
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

30
Copyright © 2012 Pearson Education
23) In the above figure, by increasing its output from Q1 to Q2, the firm
A) reduces its marginal revenue.
B) increases its marginal revenue.
C) decreases its profit.
D) increases its profit.
Answer: D
Topic: Total Revenue, Total Cost, and Economic Profit
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

24) In the above figure, by increasing its output from Q2 to Q3, the firm
A) reduces its marginal revenue.
B) increases its marginal revenue.
C) decreases its profit.
D) increases its profit.
Answer: C
Topic: Total Revenue, Total Cost, and Economic Profit
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

31
Copyright © 2012 Pearson Education
25) The above figure illustrates a firm's total revenue and total cost curves. Which one of the
following statements is FALSE?
A) Economic profit is the vertical distance between the total revenue curve and the total cost
curve.
B) At output Q1 the firm makes zero economic profit.
C) At an output above Q3 the firm incurs an economic loss.
D) At output Q2 the firm incurs an economic loss.
Answer: D
Topic: Total Revenue, Total Cost, and Economic Profit
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

26) The feature of the above figure that indicates that the firm is a perfectly competitive firm is
the
A) shape of the total cost curve.
B) shape of the total revenue curve.
C) fact that the total cost and total revenue curves are farthest apart at output is Q 2.
D) fact that the total cost and total revenue curves cross twice.
Answer: B
Topic: Total Revenue, Total Cost, and Economic Profit
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

32
Copyright © 2012 Pearson Education
27) Given the total cost and total revenue curves in the above figure, what are the output levels at
which the perfect competitor will earn a positive economic profit?
A) from 0 to 30,000 bushels
B) from 0 to 60,000 bushels
C) between 30,000 and 80,000 bushels
D) over 80,000 bushels
Answer: C
Topic: Total Revenue, Total Cost, and Economic Profit
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

28) Given the total cost and total revenue curves in the above figure, what are the output levels at
which the perfect competitor will incur economic losses?
A) below 80,000 bushels
B) from 30,000 to 80,000 bushels
C) below 30,000 bushels and over 80,000 bushels
D) at 30,000 bushels and at 80,000 bushels
Answer: C
Topic: Total Revenue, Total Cost, and Economic Profit
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

33
Copyright © 2012 Pearson Education
29) Given the total cost and total revenue curves in the figure above, what is the profit-
maximizing output level?
A) 30,000 bushels
B) 60,000 bushels
C) 80,000 bushels
D) All output levels occur between 30,000 and 80,000 bushels are profit-maximizing output
levels.
Answer: B
Topic: Profit-Maximizing Output
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

30) In the above figure, the firm is incurring an economic loss at

A) point a.
B) point c.
C) points b and d.
D) points a, b, and d.
Answer: A
Topic: Total Revenue, Total Cost, and Economic Profit
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

34
Copyright © 2012 Pearson Education
31) In the above figure, the firm is breaking even at points
A) a and c.
B) b and d.
C) c and d.
D) a and d.
Answer: B
Topic: Total Revenue, Total Cost, and Economic Profit
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

32) In the above figure, when the firm produces output corresponding to point c, the firm's
marginal cost
A) is less than its marginal revenue.
B) equals its marginal revenue.
C) exceeds its marginal revenue.
D) equals its average revenue.
Answer: B
Topic: Total Revenue, Total Cost, and Economic Profit
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

33) A perfectly competitive firm maximizes its profit by producing the output at which its
marginal cost equals its
A) marginal revenue.
B) average total cost.
C) average variable cost.
D) average fixed cost.
Answer: A
Topic: Marginal Analysis
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

34) For a firm in perfect competition, a diagram shows quantity on the horizontal axis and both
the firm's marginal cost (MC) and its marginal revenue (MR) on the vertical axis. The firm's
profit-maximizing quantity occurs at the point where the
A) slope of the MC curve is zero.
B) MC and MR curves are parallel.
C) MC curve intersects the MR curve from below, going from left to right.
D) MC curve intersects the MR curve from above, going from left to right.
Answer: C
Topic: Marginal Analysis
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills
35
Copyright © 2012 Pearson Education
35) A firm will expand the amount of output it produces as long as its
A) average total revenue exceeds its average total cost.
B) average total revenue exceeds its average variable cost.
C) marginal cost exceeds its marginal revenue.
D) marginal revenue exceeds its marginal cost.
Answer: D
Topic: Marginal Analysis
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

36) A perfectly competitive firm is producing at the point where its marginal cost equals its
marginal revenue. If the firm boosts its output, its total revenue will ________ and its profit will
________
A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall
Answer: B
Topic: Marginal Analysis
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

37) A perfectly competitive firm is producing at the point where its marginal cost equals its
marginal revenue. If the firm boosts its output, its total revenue will
A) rise and its total variable cost will rise even more.
B) rise and its total variable cost will rise, but not by as much.
C) fall but its total variable cost will rise.
D) fall and its total variable cost will fall, but not by as much.
Answer: A
Topic: Marginal Analysis
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

38) A perfectly competitive firm's marginal revenue exceeds its marginal cost at its current
output. To increase its profit, the firm will
A) lower its price.
B) raise its price.
C) decrease its output.
D) increase its output.
Answer: D
Topic: Marginal Analysis
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills
36
Copyright © 2012 Pearson Education
39) A perfectly competitive firm's marginal cost exceeds its marginal revenue at its current
output. To increase its profit, the firm will
A) lower its price.
B) raise its price.
C) decrease its output.
D) increase its output.
Answer: C
Topic: Marginal Analysis
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

40) A perfectly competitive firm is producing more than the profit-maximizing amount of its
product. You can conclude that its
A) total cost exceeds its total revenue.
B) average total cost exceeds the price of the product.
C) marginal revenue is less than the price of the product.
D) marginal cost exceeds the price of the product.
Answer: D
Topic: Marginal Analysis
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

41) If a perfectly competitive firm finds that it is producing an amount of output such that MR >
MC and P > AVC, it will
A) leave the industry.
B) decrease its output.
C) increase its output.
D) not change its behavior.
Answer: C
Topic: Marginal Analysis
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

42) If marginal revenue exceeds marginal cost, to increase its profit the firm will
A) decrease its output.
B) increase its output.
C) keep its output the same.
D) shut down.
Answer: B
Topic: Marginal Analysis
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

37
Copyright © 2012 Pearson Education
43) If the price exceeds the average variable cost, by producing the level of output such that
marginal revenue equals marginal cost, the firm ensures that it will
A) earn an economic profit.
B) not suffer any losses.
C) earn the largest profit possible.
D) survive in the long run.
Answer: C
Topic: Marginal Analysis
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

44) In a perfectly competitive market, if a firm finds it is producing an amount of output such
that its marginal cost exceeds its price, it will
A) immediately shut down for the short run.
B) be maximizing profits.
C) increase its output to increase its profit.
D) decrease its output to increase its profit.
Answer: D
Topic: Marginal Analysis
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

45) Jane's Garage Cleaning is a perfectly competitive firm that currently cleans 40 garages a
week. Jane's marginal cost is less than the price she charges. Jane can increase her profit if she
A) charges a higher price.
B) charges a lower price.
C) cleans fewer than 40 garages a week.
D) cleans more than 40 garages a week.
Answer: D
Topic: Marginal Analysis
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

46) Bob's Lawn Care Services is a perfectly competitive firm that currently mows 22 lawns a
week. Bob's marginal cost exceeds the price he charges. Bob can increase his profit if he
A) charges a higher price.
B) charges a lower price.
C) moves fewer than 22 lawns a week.
D) moves more than 22 lawns a week.
Answer: C
Topic: Marginal Analysis
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills
38
Copyright © 2012 Pearson Education
 Quantity
Total revenue Total cost,
(pounds of
(dollars) (dollars)
cookies)
1 15 13
2 30 24
3 45 39
4 60 58
5 75 81

47) The table above gives the total revenue and total cost for a perfectly competitive firm
producing chocolate chip cookies. If the firm increases its output from 2 pounds of cookies to 3
pounds, the marginal revenue is ________ per pound of cookies.
A) $11
B) $15
C) $30
D) $45
Answer: B
Topic: Marginal Revenue
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

48) The table above gives the total revenue and total cost for a perfectly competitive firm
producing chocolate chip cookies. If the firm increases its output from 2 pounds of cookies to 3
pounds, the marginal cost is ________ per pound of cookies.
A) $11
B) $15
C) $24
D) $39
Answer: B
Topic: Marginal Cost
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

39
Copyright © 2012 Pearson Education
49) The table above gives the total revenue and total cost for a perfectly competitive firm
producing chocolate chip cookies. If the firm is producing 1 pound of cookies, to maximize its
profit it will
A) increase its output.
B) decrease its output.
C) continue producing 1 pound of cookies.
D) shut down.
Answer: A
Topic: Marginal Analysis
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

50) The table above gives the total revenue and total cost for a perfectly competitive firm
producing chocolate chip cookies. If the firm is producing 4 pounds of cookies, to maximize its
profit it will
A) increase its output.
B) decrease its output.
C) continue producing 4 pounds of cookies.
D) shut down.
Answer: B
Topic: Marginal Analysis
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

40
Copyright © 2012 Pearson Education
 Total fixed Total variable
Quantity cost, TFC cost, TVC
(dollars) (dollars)
0 500 0
1 500 100
2 500 180
3 500 220
4 500 300
5 500 390
6 500 500
7 500 640
8 500 800
9 500 1000
10 500 1250

51) The table above shows some of the costs for a perfectly competitive firm. The firm will
produce 9 units of output if the price per unit is
A) $1750.
B) $200.
C) $300.
D) $500.
Answer: B
Topic: Marginal Analysis
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

52) The table above shows some of the costs for a perfectly competitive firm. If the price is $160
per unit, how many units of output will the firm produce?
A) 8
B) 9
C) 10
D) more than 10
Answer: A
Topic: Marginal Analysis
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

41
Copyright © 2012 Pearson Education
53) The table above provides cost data for a perfectly competitive firm producing toy cars. The
firm is producing non-divisible goods. If the market price is $70 and the firm is a profit
maximizer, the firm can earn a maximum economic profit of ________.
A) a loss of $500
B) a loss of $10
C) a loss of $510
D) $210
Answer: A
Topic: Shutdown Point
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

54) In the above figure, the line represented by the "2" is the
A) average fixed cost.
B) average variable cost.
C) total cost.
D) average total cost.
Answer: B
Topic: Marginal Analysis
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

42
Copyright © 2012 Pearson Education
55) In the above figure, the line represented by the "1" is the
A) average fixed cost.
B) marginal revenue.
C) total cost.
D) average total cost.
Answer: B
Topic: Marginal Analysis
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

56) In the above figure, the line represented by the "4" is the
A) average fixed cost.
B) marginal revenue.
C) average total cost.
D) marginal cost.
Answer: D
Topic: Marginal Analysis
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

Quantity
(coats per Total cost
day) (dollars per coat)
7 1,410
8 1,640
9 1,910
10 2,210
11 2,560

57) The table above shows the total cost incurred by Sue's Coat Shop, a perfectly competitive
firm. If the market price of a coat is $285, Sue's will maximize economic profit by selling
________ coats a day.
A) 7
B) 11
C) 8
D) 9
Answer: D
Topic: Profit-Maximizing Output
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

43
Copyright © 2012 Pearson Education
58) Tammy sells woolen hats in a perfectly competitive market. The marginal cost of producing
1 hat is $24. The marginal cost of producing a second hat is $26 and the marginal cost of
producing a third hat is $28. The market price of a hat is $26. To maximize profit, Tammy
produces ________ per day.
A) 1 hat
B) 3 hats
C) 2 hats
D) as many hats as possible
Answer: C
Topic: Profit-Maximizing Output
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

59) In the above figure, the firm will produce

A) 0 units.
B) 5 units.
C) 15 units
D) 20 units.
Answer: D
Topic: Profit-Maximizing Output
Skill: Analytical
Question history: Modified 10th edition
AACSB: Analytical Skills

44
Copyright © 2012 Pearson Education
60) In the above figure, the marginal cost of the last unit produced by the profit maximizing firm
is
A) $5.
B) $10.
C) $15.
D) $20.
Answer: B
Topic: Profit-Maximizing Output
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

61) In the above figure, the firm's total economic profit is equal to
A) $60.
B) $200.
C) $150.
D) MR - MC.
Answer: A
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Analytical
Question history: Modified 10th edition
AACSB: Analytical Skills

62) By producing less, a firm can reduce

A) its fixed costs and its variable costs.
B) its fixed costs but not its variable costs.
C) its variable costs but not its fixed costs.
D) neither its variable costs nor its fixed costs.
Answer: C
Topic: Shutdown Point
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

63) The costs incurred even when no output is produced are called
A) fixed costs.
B) variable costs.
C) external costs.
D) marginal costs.
Answer: A
Topic: Shutdown Point
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

45
Copyright © 2012 Pearson Education
64) A firm's shutdown point is the quantity and price at which the firm's total revenue just equals
its
A) total cost.
B) total variable cost.
C) total fixed cost.
D) marginal cost.
Answer: B
Topic: Shutdown Point
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

65) A perfectly competitive firm shuts down if the price of its product is
A) greater than its minimum average variable cost.
B) less than its minimum average variable cost.
C) greater than its maximum variable cost.
D) less than its minimum total cost.
Answer: B
Topic: Shutdown Point
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

66) The owners will shut down a perfectly competitive firm if the price of its good falls below its
minimum
A) average total cost.
B) average marginal cost.
C) average variable cost.
D) wage rate.
Answer: C
Topic: Shutdown Point
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

67) A firm's shutdown point is the output and price at which the firm just covers its
A) total fixed cost.
B) total variable cost.
C) total cost.
D) marginal cost.
Answer: A
Topic: Shutdown Point
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

46
Copyright © 2012 Pearson Education
68) For a perfectly competitive firm, the shutdown point is the
A) amount of output at which price equals minimum average variable cost.
B) amount of output at which price equals minimum average total cost.
C) price at which economic profit is zero.
D) price at which total opportunity cost is zero.
Answer: A
Topic: Shutdown Point
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

69) A perfectly competitive firm's short-run shutdown point is the level of output at which
A) price equals average total cost.
B) price equals average fixed cost.
C) price equals the minimum average variable cost.
D) price is above the minimum average total cost but below the minimum average fixed cost.
Answer: C
Topic: Shutdown Point
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

70) In the short run a perfectly competitive firm will

A) never shut down.
B) shut down if P < ATC.
C) shut down if P < AVC.
D) shut down if P > AFC.
Answer: C
Topic: Shutdown Point
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

71) A perfectly competitive firm will shut down rather than produce if its
A) price is less than average variable cost.
B) price is less than total variable cost.
C) total revenue is less than total cost.
D) price is less than marginal cost.
Answer: A
Topic: Shutdown Point
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

47
Copyright © 2012 Pearson Education
72) In the short run, a perfectly competitive firm will shut down if
A) it incurs any economic loss.
B) price equals average cost.
C) total revenue is less than total variable cost.
D) total revenue is less than total fixed cost.
Answer: C
Topic: Shutdown Point
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

73) In the short run, a perfectly competitive firm will shut down if at the profit maximizing
quantity the
A) P < AVC.
B) AVC < ATC.
C) P > ATC.
D) P > MC.
Answer: A
Topic: Shutdown Point
Skill: Recognition
Question history: Modified 10th edition
AACSB: Reflective Thinking

74) If a perfectly competitive firm decides to shut down in the short run, its loss will equal its
A) minimum average variable cost, AVC.
B) total variable cost, TVC.
C) total fixed cost, TFC.
D) average total cost, ATC.
Answer: C
Topic: Shutdown Point
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

75) A firm that shuts down and produces no output incurs a loss equal to its
A) total fixed costs.
B) total variable costs.
C) marginal costs.
D) marginal revenue.
Answer: A
Topic: Shutdown Point
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

48
Copyright © 2012 Pearson Education
76) In the short run, a firm will
A) not produce if its total revenue does not cover its total cost.
B) produce and incur an economic loss if its total revenue covers its total variable cost but not its
total cost.
C) produce and break even if its total revenue covers its total fixed cost but not its total variable
cost.
D) produce and earn an economic profit if its total revenue is equal to its total cost.
Answer: B
Topic: Shutdown Point
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

77) The shutdown point occurs at the level of output for which the ________ is at its minimum.
A) marginal cost
B) average variable cost
C) average fixed cost
D) total cost
Answer: B
Topic: Shutdown Point
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

78) A perfectly competitive firm is more likely to shut down during a recession, when the
demand for its product declines, than during an economic expansion, because during the
recession it might be unable to cover its
A) fixed costs.
B) variable costs.
C) external costs.
D) depreciation due to machinery becoming obsolete.
Answer: B
Topic: Shutdown Point
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

49
Copyright © 2012 Pearson Education
79) If the price of its product falls below the minimum point on the AVC curve, the best a
perfectly competitive firm can do is to
A) keep producing and incur an economic loss equal to its total variable cost.
B) keep producing and incur an economic loss equal to its total fixed cost.
C) shut down and incur an economic loss equal to its total variable cost.
D) shut down and incur an economic loss equal to its total fixed cost.
Answer: D
Topic: Shutdown Point
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

80) When a perfectly competitive firm produces the profit-maximizing output and it is at its
shutdown point, the firm's ________.
A) marginal revenue equals its average fixed cost
B) total revenue equals its total variable cost
C) marginal cost is less than its average variable cost
D) total revenue is less than its total variable cost
Answer: B
Topic: Shutdown Point
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

81) At its shutdown point, a perfectly competitive firm earns total revenue that
A) exceeds its total cost.
B) generates a normal profit.
C) just equals its total variable cost.
D) exceeds its total variable cost.
Answer: C
Topic: Shutdown Point
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

82) If the market price of a perfectly competitive firm's product is below its average variable
cost, then the firm's
A) marginal revenue is zero.
B) total revenue is as large as possible.
C) total revenue if it stayed open would be less than its total variable costs.
D) total revenue if it stayed open is less than its total cost but greater than its total fixed costs.
Answer: C
Topic: Shutdown Point
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

50
Copyright © 2012 Pearson Education
83) In the short run, a perfectly competitive firm NEVER
A) earns an economic profit.
B) incurs a loss greater than its total fixed costs.
C) produces where MR = MC.
D) earns a normal profit.
Answer: B
Topic: Shutdown Point
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

84) In the short run, a perfectly competitive firm might

A) set its price above marginal cost.
B) set its price above marginal revenue.
C) adjust the size of its fixed inputs.
D) operate even though it is incurring an economic loss.
Answer: D
Topic: Shutdown Point
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

85) In the short run, a perfectly competitive firm

A) shuts down if it incurs any economic loss.
B) incurs an economic loss if it shuts down.
C) does not consider total revenue in its shut down decision.
D) can earn a small economic profit while being shut down.
Answer: B
Topic: Shutdown Point
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

86) A perfectly competitive firm will operate and incur an economic loss in the short run if
A) the loss is smaller than its total fixed costs.
B) it knows it can recoup the loss in the long run.
C) shareholders do not know about the loss.
D) the loss can offset future profits.
Answer: A
Topic: Shutdown Point
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

51
Copyright © 2012 Pearson Education
87) If the price of its product just equals the average variable cost of production for a competitive
firm,
A) total revenue equals total fixed cost and the firm's loss equals total variable cost.
B) total revenue equals total variable cost and the firm's loss equals total fixed cost.
C) total fixed cost is zero.
D) total variable cost equals total fixed cost.
Answer: B
Topic: Shutdown Point
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

88) If the market price in a perfectly competitive market is less than a firm's minimum average
variable cost, then the firm's total revenue will always ________.
A) exceed its total fixed cost
B) be less than its total economic loss
C) equal its total cost
D) be less than its total variable cost
Answer: D
Topic: Shutdown Point
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

52
Copyright © 2012 Pearson Education
 Output Total cost
(tons of rice (dollars per
per year) ton)
0 $1,000
1 $1,200
2 $1,600
3 $2,200
4 $3,000
5 $4,000

89) Based on the table above which shows Chip's costs, if rice sells for $600 a ton, Chip's profit-
maximizing output is
A) less than one ton.
B) between two and three tons.
C) between three and four tons.
D) between one and two tons.
Answer: B
Topic: Profit-Maximizing Output
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

90) Based on the table above which shows Chip's costs, if rice sells for $600 a ton, Chip will
A) shut down because he incurs an economic loss.
B) shut down because the price is below his minimum average variable cost.
C) stay open because he makes an economic profit.
D) stay open because the price is above his minimum average variable cost.
Answer: D
Topic: Profit-Maximizing Output
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

91) Based on the table above which shows Chip's costs, if rice sells for $600 a ton, Chip
A) makes an economic profit and should stay open in the short run.
B) makes an economic profit, but should shut down in the short run.
C) incurs an economic loss, but should stay open in the short run.
D) incurs an economic loss and should shut down in the short run.
Answer: C
Topic: Shutdown Point
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

53
Copyright © 2012 Pearson Education
92) Based on the table above which shows Chip's costs, if Chip shuts down in the short run, his
total cost will be
A) $0.
B) $1,000.
C) $1,200.
D) $4,000.
Answer: B
Topic: Shutdown Point
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

93) Based on the table above which shows Chip's costs, if Chip shuts down in the short run, his
economic loss will be
A) $0.
B) $1,000.
C) $1,200.
D) $4,000.
Answer: B
Topic: Shutdown Point
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

Quantity Total cost, TC

(pizzas per (dollars per
hour) hour)
0 10
1 18
2 30
3 48
4 70
5 98
6 120

94) Giuseppe's Pizza is a perfectly competitive firm. The firm's costs are shown in the table
above. If the market price is $15, what is Giuseppe's profit-maximizing output?
A) 2 pizzas per hour
B) 3 pizzas per hour
C) 4 pizzas per hour
D) 0 pizzas per hour
Answer: A
Topic: Profit-Maximizing Output
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills
54
Copyright © 2012 Pearson Education
95) Giuseppe's Pizza is a perfectly competitive firm. The firm's costs are shown in the table
above. If the market price is $20, what is Giuseppe's profit-maximizing output?
A) 2 pizzas per hour
B) 3 pizzas per hour
C) 4 pizzas per hour
D) 0 pizzas per hour
Answer: B
Topic: Profit-Maximizing Output
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

96) Giuseppe's Pizza is a perfectly competitive firm. The firm's costs are shown in the table
above. The firm's shutdown point is
A) $12.
B) $17.
C) $8.
D) $2.
Answer: C
Topic: Shutdown Point
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

55
Copyright © 2012 Pearson Education
 Quantity Total cost, TC
(tattoos per (dollars per
hour) hour)
0 10
1 25
2 35
3 50
4 70
5 95
6 125

97) Archibald's Tattoos is a perfectly competitive firm. The firm's costs are shown in the table
above. If the market price of a tattoo is $12.50 and if Archibald's does not shut down, what is the
firm's profit-maximizing output?
A) 2 tattoos per hour
B) 3 tattoos per hour
C) 4 tattoos per hour
D) 5 tattoos per hour
Answer: A
Topic: Profit-Maximizing Output
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

98) Archibald's Tattoos is a perfectly competitive firm. The firm's costs are shown in the table
above. What is Archibald's shut-down point?
A) $10.00
B) $16.67
C) $15.00
D) $12.50
Answer: D
Topic: Shutdown Point
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

56
Copyright © 2012 Pearson Education
99) Archibald's Tattoos is a perfectly competitive firm. The firm's costs are shown in the table
above. If the market price of a tattoo is $12.50 what is the firm's economic profit?
A) zero
B) $10 per hour
C) -$10 per hour
D) $20 per hour
Answer: C
Topic: Shutdown Point
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

100) Archibald's Tattoos is a perfectly competitive firm. The firm's costs are shown in the table
above. If the market price of a tattoo is $12 the firm
A) incurs an economic loss, but will not shut down.
B) will not shut down in the short run, but will leave the industry in the long run.
C) will shut down.
D) is breaking even.
Answer: C
Topic: Shutdown Point
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

101) Archibald's Tattoos is a perfectly competitive firm. The firm's costs are shown in the table
above. If the market price of a tattoo is $17.50 what is the firm's profit-maximizing output?
A) 2 tattoos per hour
B) 3 tattoos per hour
C) 4 tattoos per hour
D) 5 tattoos per hour
Answer: B
Topic: Profit-Maximizing Output
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

57
Copyright © 2012 Pearson Education
 Output Average total cost
(sandwiches per hour) ($ per sandwich)
1 17.00
2 10.00
3 8.00
4 8.00
5 8.80
6 10.00

102) The table above shows output and costs of Evan's Subs, a typical perfectly competitive firm
in a local market for sandwiches. Evan's fixed cost is $9 per hour. The current market price of a
sandwich is $6. What is Evan's marginal revenue from the 2nd sandwich sold?
A) $10.00
B) $13.50
C) $3.00
D) $6.00
Answer: D
Topic: Marginal Revenue
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

103) The table above shows output and costs of Evan's Subs, a typical perfectly competitive firm
in a local market for sandwiches. Evan's fixed cost is $9 per hour. The current market price of a
sandwich is $6. If Evan's sells the 5th sandwich, the marginal cost is ________ the marginal
revenue, so the firm's profit ________.
A) greater than; decreases
B) greater than; increases
C) less than; increases
D) less than; decreases
Answer: A
Topic: Marginal Analysis
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

58
Copyright © 2012 Pearson Education
104) The table above shows output and costs of Evan's Subs, a typical perfectly competitive firm
in a local market for sandwiches. Evan's fixed cost is $9 per hour. The current market price of a
sandwich is $6. What quantity of sandwiches produced will maximize Evan's economic profit in
the short run?
A) 2 sandwiches per hour
B) 3 sandwiches per hour
C) 4 sandwiches per hour
D) 5 sandwiches per hour
Answer: B
Topic: Profit-Maximizing Output
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

105) The table above shows output and costs of Evan's Subs, a typical perfectly competitive firm
in a local market for sandwiches. Evan's fixed cost is $9 per hour. The current market price of a
sandwich is $6. What is Evan's maximum short-run economic profit?
A) $6 per hour
B) $1 per hour
C) -$6 per hour
D) zero
Answer: C
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

106) The table above shows output and costs of Evan's Subs, a typical perfectly competitive firm
in a local market for sandwiches. Evan's fixed cost is $9 per hour. The current market price of a
sandwich is $6. What is Evan's shut-down price?
A) $6 per sandwich
B) $4 per sandwich
C) $3 per sandwich
D) $5 per sandwich
Answer: D
Topic: Shutdown Point
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

59
Copyright © 2012 Pearson Education
107) The table above shows output and costs of Evan's Subs, a typical perfectly competitive firm
in a local market for sandwiches. Evan's fixed cost is $9 per hour. The current market price of a
sandwich is $6. If the market price does not change, Evan's will
A) continue to operate in the short run, but will exit the industry in the long run.
B) continue to operate in the short run and in the long run.
C) shut down.
D) increase its production in the long run.
Answer: A
Topic: Shutdown Point
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

108) In the above figure, if the price is P1, the firm will produce
A) nothing.
B) where MC equals ATC.
C) where MC equals P1.
D) where ATC equals P1.
Answer: C
Topic: Profit-Maximizing Output
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

60
Copyright © 2012 Pearson Education
109) In the above figure, if the price is P1, the firm maximizes its profit by producing
A) nothing.
B) where MC equals ATC.
C) where MC equals P1.
D) where ATC equals P1.
Answer: C
Topic: Profit-Maximizing Output
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

110) In the above figure, if the firm increases its output from Q1 to Q2, it will
A) reduce its marginal revenue.
B) increase its marginal revenue.
C) decrease its profit.
D) increase its profit.
Answer: D
Topic: Profit-Maximizing Output
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

111) In the above figure, if the firm increases its output from Q2 to Q3, it will
A) reduce its marginal revenue.
B) increase its marginal revenue.
C) decrease its profit.
D) increase its profit.
Answer: C
Topic: Profit-Maximizing Output
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

61
Copyright © 2012 Pearson Education
112) The figure above shows a perfectly competitive firm. In the short run, the firm will shut
down
A) only if the AVC of producing 10 units is less than $20.
B) only if the AVC of producing 10 units is more than $20.
C) only if the AVC curve reaches its minimum before 10 units are produced.
D) always.
Answer: B
Topic: Shutdown Point
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

113) The figure above shows a perfectly competitive firm. The firm will shut down in the short
run if total fixed costs
A) are between $201 and $400.
B) exceed $401.
C) are less than $200.
D) exceed total costs.
Answer: C
Topic: Shutdown Point
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

62
Copyright © 2012 Pearson Education
114) Consider the perfectly competitive firm in the above figure. The profit maximizing level of
output for the firm is equal to
A) 0 units.
B) 14 units.
C) 17 units.
D) 19 units.
Answer: C
Topic: Profit-Maximizing Output
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

115) Consider the perfectly competitive firm in the above figure. At the profit maximizing level
of output, the firm is
A) incurring an economic loss equal to $119.00.
B) incurring an economic loss equal to $123.50.
C) incurring an economic loss equal to $187.00.
D) making zero economic profit.
Answer: A
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Analytical
Question history: Modified 10th edition
AACSB: Analytical Skills

63
Copyright © 2012 Pearson Education
116) Consider the perfectly competitive firm in the above figure. The shutdown point occurs at a
price of
A) $11.00.
B) $12.00.
C) $16.00.
D) $22.00.
Answer: A
Topic: Shutdown Point
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

117) Consider the perfectly competitive firm in the above figure. What will the firm choose to do
in the short-run and why?
A) shut down because the firm incurs an economic loss
B) stay in business because the firm is making an economic profit
C) stay in business because the firm's economic loss is less than fixed costs
D) stay in business because it is making zero economic profit
Answer: C
Topic: Shutdown Point
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

118) A perfectly competitive firm's short-run supply curve is the same as its
A) ATC curve.
B) MR curve.
C) AVC curve.
D) MC curve above the minimum of the AVC curve.
Answer: D
Topic: The Firm's Short-Run Supply Curve
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

119) The short-run supply curve for a perfectly competitive firm is its
A) marginal cost curve above the horizontal axis.
B) marginal cost curve above its shutdown point.
C) average cost curve above the horizontal axis.
D) average cost curve above its shutdown point.
Answer: B
Topic: The Firm's Short-Run Supply Curve
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

64
Copyright © 2012 Pearson Education
120) The short-run supply curve for a perfectly competitive firm is its marginal cost curve
A) above the horizontal axis.
B) above its shutdown point.
C) below its shutdown point.
D) everywhere.
Answer: B
Topic: The Firm's Short-Run Supply Curve
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

121) The short-run supply curve for a perfectly competitive firm is its marginal cost curve above
the minimum point on the
A) average fixed cost curve.
B) average variable cost curve.
C) average total cost curve.
D) demand curve.
Answer: B
Topic: The Firm's Short-Run Supply Curve
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

122) The firm's supply curve is its

A) marginal cost curve, at all points above the minimum average variable cost curve.
B) marginal cost curve, at all points above the minimum average fixed cost curve.
C) marginal cost curve, at all points above the minimum average total cost curve.
D) marginal revenue curve, at all points above the minimum average total cost curve.
Answer: A
Topic: The Firm's Short-Run Supply Curve
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

123) A perfectly competitive firm's short-run supply curve is

A) its marginal cost curve above the shutdown point.
B) its marginal revenue curve above the shutdown point.
C) its demand curve.
D) horizontal at the going price.
Answer: A
Topic: The Firm's Short-Run Supply Curve
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

65
Copyright © 2012 Pearson Education
124) The section of the marginal cost curve that lies above the average variable cost curve is
A) a perfectly competitive firm's supply curve.
B) a perfectly competitive firm's average total cost curve.
C) a perfectly competitive firm's total fixed costs curve.
D) irrelevant to the firm because it never produces at any point along this curve.
Answer: A
Topic: The Firm's Short-Run Supply Curve
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

125) A perfectly competitive firm's supply curve

A) shows the relationship between the price and the quantity the firm will produce.
B) is the portion of the marginal cost curve above the average variable cost curve.
C) is upward sloping.
D) All of the above are correct.
Answer: D
Topic: The Firm's Short-Run Supply Curve
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

126) A perfectly competitive firm's short-run supply curve is

A) its marginal cost curve above the shutdown point.
B) its average total cost curve above the minimum of the average variable cost.
C) its average variable cost curve above the breakeven point.
D) horizontal at the market price.
Answer: A
Topic: The Firm's Short-Run Supply Curve
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

127) The firm's short run supply curve is equal to the

A) entire marginal cost curve.
B) marginal cost curve above the AVC curve.
C) marginal cost curve above the ATC curve.
D) marginal cost curve above the AFC curve.
Answer: B
Topic: The Firm's Short-Run Supply Curve
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

66
Copyright © 2012 Pearson Education
128) Which of the following best describes the short-run supply curve for an individual perfectly
competitive firm?
A) It is the firm's marginal cost curve.
B) It is the upward-sloping part of the firm's marginal cost curve.
C) It is the vertical axis at prices less than minimum average variable cost and is the firm's
marginal cost curve at prices above minimum average variable cost.
D) It is the vertical axis at prices less than minimum average total cost and is the firm's marginal
cost curve at prices above minimum average total cost.
Answer: C
Topic: The Firm's Short-Run Supply Curve
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

129) An individual perfectly competitive firm has a supply curve

A) with a positive slope.
B) with a negative slope.
C) that is parallel to the quantity axis.
D) that has a positive slope at lower output levels and a negative slope at higher output levels.
Answer: A
Topic: The Firm's Short-Run Supply Curve
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

67
Copyright © 2012 Pearson Education
130) The figure above shows short-run cost curves for a perfectly competitive firm. If the price
of the product is $8, in the short run the firm will
A) make zero economic profit.
B) make an economic profit.
C) incur an economic loss.
D) None of the above answers is correct because more information is needed to determine the
firm's economic profit or loss.
Answer: C
Topic: The Firm's Short-Run Supply Curve
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

131) The figure above shows short-run cost curves for a perfectly competitive firm. If the price
of the product is $8 and the firm does not shut down, the firm's output in the short run
A) will be 0.
B) will be between 0 and 10.
C) will be 10 or higher.
D) cannot be determined without more information.
Answer: B
Topic: The Firm's Short-Run Supply Curve
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

68
Copyright © 2012 Pearson Education
132) The donut market is perfectly competitive. The figure shows the costs of a typical donut
producer. In the short run, the donut producer's supply curve is the curve running from point
________ to point E.
A) A
B) B
C) C
D) D
Answer: B
Topic: The Firm's Short-Run Supply Curve
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

69
Copyright © 2012 Pearson Education
133) In the above figure, the perfectly competitive firm's shutdown point is at a price of
A) $4 per unit.
B) $8 per unit.
C) $12 per unit.
D) $16 per unit.
Answer: B
Topic: Shutdown Point
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

134) In the above figure, if the price is $16 per unit, how many units will a profit maximizing
perfectly competitive firm produce?
A) 0
B) 20
C) 30
D) 35
Answer: D
Topic: The Firm's Short-Run Supply Curve
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

70
Copyright © 2012 Pearson Education
135) In the above figure, if the price is $12 per unit, how many units will a profit maximizing
perfectly competitive firm produce?
A) 0
B) 20
C) 30
D) 35
Answer: C
Topic: The Firm's Short-Run Supply Curve
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

136) In the above figure, if the price is $8 per unit, how many units will a profit maximizing
perfectly competitive firm produce?
A) 5
B) 20
C) 30
D) 35
Answer: B
Topic: The Firm's Short-Run Supply Curve
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

137) In the above figure, if the price is $4 per unit, how many units will a profit maximizing
perfectly competitive firm produce?
A) 0
B) 5
C) 20
D) 30
Answer: A
Topic: The Firm's Short-Run Supply Curve
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

71
Copyright © 2012 Pearson Education
138) The figure above shows a firm in a perfectly competitive market. The firm will shut down if
price falls below
A) P1.
B) P2.
C) P3.
D) P4.
Answer: B
Topic: Shutdown Point
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

139) The figure above shows a firm in a perfectly competitive market. If the firm does not shut
down, the least amount of output that it will produce is
A) less than 5 units.
B) 5 units.
C) 8 units.
D) 10 units.
Answer: C
Topic: Shutdown Point
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

72
Copyright © 2012 Pearson Education
140) The figure above shows a firm in a perfectly competitive market. If the price rises from P3
to P4 then output will increase by
A) 0 units.
B) 1 unit.
C) 2 units.
D) 3 units.
Answer: B
Topic: The Firm's Short-Run Supply Curve
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

141) The figure above shows a firm in a perfectly competitive market. The firm's supply curve is
the curved line linking
A) point a to point c and stopping at point c.
B) point b to point d and continuing on past point d along the MC curve.
C) point b to point f and stopping at point f.
D) point c to point e and continuing on past point e along the ATC curve.
Answer: B
Topic: The Firm's Short-Run Supply Curve
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

73
Copyright © 2012 Pearson Education
142) In the above figure, the vertical distance between the ATC and AVC curves is
A) the marginal cost.
B) the total cost.
C) the average fixed costs.
D) None of the above answers are correct.
Answer: C
Topic: Output, Price and Profit
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

143) In the above figure, if the price is $16, a profit-maximizing perfectly competitive firm will
A) produce 50 units.
B) produce 35 units.
C) produce 10 units.
D) choose not to produce.
Answer: B
Topic: Profit-Maximizing Output
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

74
Copyright © 2012 Pearson Education
144) In the above figure, if the price is $12, a profit-maximizing perfectly competitive firm will
have an economic profit
A) of less than $100 but more than $0.
B) of more than $100.
C) that is negative, that is, it will have an economic loss.
D) of zero, that is, it will break even with a normal profit.
Answer: D
Topic: Profit-Maximizing Output
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

145) In the above figure, if the price is $10, a profit-maximizing perfectly competitive firm will
A) produce 40 units.
B) produce 25 units.
C) produce 10 units.
D) choose not to produce.
Answer: C
Topic: Profit-Maximizing Output
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

146) Using the above figure, of the prices below, which price enables a perfectly competitive
firm to earn the maximum economic profit?
A) $4 per unit.
B) $10 per unit.
C) $12 per unit.
D) $16 per unit.
Answer: D
Topic: Output, Price and Profit
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

75
Copyright © 2012 Pearson Education
147) In the above figure, at any price between $8 per unit to $12 per unit, how many units will a
profit-maximizing perfectly competitive firm produce?
A) None, because the producer will never choose to operate at a loss.
B) Less than 20 because this will reduce marginal cost.
C) Between 20 and 30, because variable costs are covered so the firm's losses will be minimized
by producing rather than shutting down.
D) More than 30, because variable costs are covered so that the producer can earn economic
profits.
Answer: C
Topic: The Firm's Short-Run Supply Curve
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

148) In the above figure, below what minimum price will a perfectly competitive firm shut down
rather than produce?
A) for any price less than $16 per unit
B) for any price less than $12 per unit
C) for any price less than $8 per unit
D) for any price less than $4 per unit
Answer: A
Topic: The Firm's Short-Run Supply Curve
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

149) In the above figure, at a price of $4 per unit, a profit-maximizing perfectly competitive firm
will
A) shut down because its total revenue is less than its variable costs.
B) incur an economic loss.
C) produce 5 units.
D) Both answers A and B are correct.
Answer: D
Topic: Shutdown Point
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

76
Copyright © 2012 Pearson Education
150) Bubba's BBQ has fallen on some hard times. Bubba has analyzed his past revenue and cost
information and knows that if he shuts down, he will incur an economic loss equal to $20,000 in
remaining lease payments. Apparently, Bubba's current planning horizon is
A) the short run because he still faces some fixed costs.
B) the long run because he faces only variable costs.
C) the short run because he faces only variable costs.
D) neither the short run nor the long run because lease payments do not figure into cost
determinations.
Answer: A
Topic: Short-Run versus Long-Run Decisions
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

151) Homer's Holesome Donuts has determined that its profit-maximizing quantity is 10,000
donuts per year. Homer's earns $12,000 in revenue from the sale of those donuts. Homer's has
two costs. First he pays $16,000 in annual rental payments for its five-year lease on its store.
Second Homer incurs an additional cost of $5,000 for ingredients. Homer's fixed cost is equal to
A) 0.
B) $5,000.
C) $16,000.
D) $21,000.
Answer: C
Topic: Fixed Cost
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

152) Homer's Holesome Donuts has determined that its profit-maximizing quantity is 10,000
donuts per year. Homer's earns $12,000 in revenue from the sale of those donuts. Homer's has
two costs. First he pays $16,000 in annual rental payments for its five-year lease on its store.
Second Homer incurs an additional cost of $5,000 for ingredients. Homer's variable cost is equal
to
A) 0.
B) $5,000.
C) $16,000.
D) $21,000.
Answer: B
Topic: Variable Cost
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

77
Copyright © 2012 Pearson Education
153) Homer's Holesome Donuts has determined that its profit-maximizing quantity is 10,000
donuts per year. Homer's earns $12,000 in revenue from the sale of those donuts. Homer's has
two costs. First he pays $16,000 in annual rental payments for its five-year lease on its store.
Second Homer incurs an additional cost of $5,000 for ingredients. Homer's economic profit is
equal to
A) -$16,000, that is, an economic loss of $16,000.
B) -$9,000, that is, an economic loss of $9,000.
C) +$9,000.
D) +$12,000.
Answer: B
Topic: Shutdown Point
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

154) Homer's Holesome Donuts has determined that its profit-maximizing quantity is 10,000
donuts per year. Homer's earns $12,000 in revenue from the sale of those donuts. Homer's has
two costs. First he pays $16,000 in annual rental payments for its five-year lease on its store.
Second Homer incurs an additional cost of $5,000 for ingredients. Should Homer's shut down in
the short run?
A) Yes, because he is incurring an economic loss.
B) Yes, because he cannot cover all of his fixed costs.
C) No, because is making positive economic profit.
D) No, because he can cover all of his variable costs.
Answer: D
Topic: Shutdown Point
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

155) Paul runs a shop that sells printers. Paul is a perfect competitor and can sell each printer for
a price of $300. The marginal cost of selling one printer a day is $200; the marginal cost of
selling a second printer is $250; and the marginal cost of selling a third printer is $350. To
maximize his profit, Paul should sell
A) one printer a day.
B) two printers a day.
C) three printers a day.
D) more than three printers a day.
Answer: B
Topic: Study Guide Question, Profit-Maximizing Output
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

78
Copyright © 2012 Pearson Education
156) Because of a decrease in the wage rate it must pay, a perfectly competitive firm's marginal
costs decrease but its demand curve stays the same. As a result, the firm
A) decreases the amount of output it produces and raises its price.
B) increases the amount of output it produces and lowers it price.
C) increases the amount of output it produces and does not change its price.
D) decreases the amount of output it produces and lowers its price.
Answer: C
Topic: Study Guide Question, Profit-Maximizing Output
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

157) For prices above the minimum average variable cost, a perfectly competitive firm's supply
curve is
A) horizontal at the market price.
B) vertical at zero output.
C) the same as its marginal cost curve.
D) the same as its average variable cost curve.
Answer: C
Topic: Study Guide Question, The Firm's Short-Run Supply Curve
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

158) A perfectly competitive firm is definitely making an economic profit when

A) MR < MC.
B) P > ATC.
C) P < ATC.
D) P > AVC.
Answer: B
Topic: Study Guide Question, Economic Profits & Economic Losses in the Short Run
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

79
Copyright © 2012 Pearson Education
159) In the figure above, a firm is operating at point A on the graph. At point A, the firm's
average cost curve
A) has negative slope.
B) has positive slope.
C) is horizontal.
D) is vertical.
Answer: C
Topic: Parallel MyEconLab Questions
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

80
Copyright © 2012 Pearson Education
160) Carol's Candies is producing 150 boxes of candy a day. Carol's marginal revenue and
marginal cost curves are shown in the figure above. To increase her profit, Carol should
A) increase her output.
B) decrease her output.
C) maintain the current level of output because it gives her the maximum profit.
D) Not enough information is given to determine if Carol should increase, decrease, or not
change her level of output.
Answer: B
Topic: Parallel MyEconLab Questions
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

81
Copyright © 2012 Pearson Education
3 Output, Price, and Profit in the Short Run

1) If there are 1,000 rutabaga farms, all perfectly competitive, an increase in the price of fertilizer
used for growing rutabagas will
A) have no effect on the total quantity of rutabagas supplied, because no farm has enough market
power to raise the price.
B) have no effect on the total quantity of rutabagas supplied, because each farm's supply curve is
a vertical line.
C) decrease the total quantity of rutabagas supplied, because each farm's supply curve shifts
leftward.
D) reduce the total quantity of rutabagas supplied, because each farm's supply curve is a
horizontal line and will shift upward.
Answer: C
Topic: Change in Industry Costs
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

2) The short-run market supply curve for a perfectly competitive market is obtained by summing
the part of each firm's
A) AVC curve that lies above its MC curve.
B) MC curve that lies above its AVC curve.
C) AVC curve that lies below the MC curve.
D) MC curve that lies below the AVC curve.
Answer: B
Topic: The Short-Run Market Supply Curve
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

3) In a perfectly competitive market, the market supply curve is the sum of the
A) supply curves of all the individual firms.
B) average variable cost curves of all the individual firms.
C) average total cost curves of all the individual firms.
D) average fixed cost curves of all the individual firms.
Answer: A
Topic: The Short-Run Market Supply Curve
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

82
Copyright © 2012 Pearson Education
4) In the short run, a perfectly competitive firm's economic profits
A) must equal zero, that is, the firm earns a normal profit.
B) must be positive.
C) might be positive, negative (an economic loss), or zero (a normal profit).
D) must be negative, that is the firm must incur an economic loss.
Answer: C
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

5) In the short run, a perfectly competitive firm

A) can either make an economic profit, incur an economic loss, or make zero economic profit.
B) never incurs an economic loss larger than its average fixed costs.
C) produces at any price.
D) always makes an economic profit.
Answer: A
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Conceptual
Question history: Modified 10th edition
AACSB: Reflective Thinking

6) In the short run, a perfectly competitive firm

A) cannot shut down.
B) must make zero economic profit.
C) can make an economic profit, incur an economic loss, or make zero economic profit.
D) will not incur an economic loss if it shuts down.
Answer: C
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Conceptual
Question history: Modified 10th edition
AACSB: Reflective Thinking

7) In the short run, a perfectly competitive firm

A) might not make an economic profit greater than zero.
B) will always make an economic profit greater than zero.
C) chooses its optimal plant size.
D) is in equilibrium only when its economic profit is positive.
Answer: A
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

83
Copyright © 2012 Pearson Education
8) In the short run, a perfectly competitive firm will make an economic profit as long as
A) it maximizes its profit.
B) P > AVC.
C) P > AFC.
D) P > ATC.
Answer: D
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

9) A perfectly competitive firm is making an economic profit when

A) its total revenue is greater than its total cost.
B) the price is greater than the minimum of its average total cost.
C) the price is greater than the minimum of its average variable cost.
D) Both answers A and B are correct.
Answer: D
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

10) A perfectly competitive firm will have an economic profit of zero if, at its profit-maximizing
output, its marginal revenue equals its
A) average total cost.
B) marginal cost.
C) average variable cost.
D) average fixed cost.
Answer: A
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

11) In a perfectly competitive market, which of the following will increase the economic profit
the firms make in the short run?
A) a decrease in market demand
B) an increase in market demand
C) an increase in labor costs
D) an increase in the number of firms
Answer: B
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

84
Copyright © 2012 Pearson Education
12) In a perfectly competitive market in the short run, as the market demand increases, the firms
________ their output and their economic profit ________.
A) increase; increases
B) increase; decreases
C) decrease; decreases
D) decrease; increases
Answer: A
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

13) In the short run, an increase in demand for a good that is sold in a perfectly competitive
market
A) increases the number of firms in the market.
B) increases the economic profits of existing firms in the market.
C) has no effect on the price.
D) causes more firms to shut down.
Answer: B
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

14) Which of the following statements is TRUE?

A) The presence of positive economic profit in a perfectly competitive market is consistent with
the characteristics of a long-run competitive equilibrium.
B) When firms in a perfectly competitive market incur economic losses, some will exit in the
long run, thereby shifting the industry supply curve rightward.
C) If a profit-maximizing firm in a perfectly competitive market is making an economic profit,
then it must be producing at a level of output where price is greater than average total cost.
D) If a profit-maximizing firm in a perfectly competitive market is incurring an economic loss,
then it must be producing at a level of output where price is greater than average total cost.
Answer: C
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

85
Copyright © 2012 Pearson Education
 Quantity Total cost, TC
(tattoos per (dollars per
hour) hour)
0 10
1 25
2 35
3 50
4 70
5 95
6 125

15) Archibald's Tattoos is a perfectly competitive firm. The firm's costs are shown in the table
above. If the market price of a tattoo is $17.50 what is the firm's economic profit?
A) zero
B) $2.50 per hour
C) $12.50 per hour
D) -$10.00 per hour
Answer: B
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

86
Copyright © 2012 Pearson Education
 Quantity Total cost
(gloves per day) (dollars)
0 80
1 100
2 105
3 135
4 170
5 210
6 270
7 350
8 450

16) The above table shows the per day total cost for Kiley's Baseball Glove Company. Each
glove is priced at $50 and Kiley's Baseball Glove Company is a perfectly competitive firm. At
which of the following amounts of output is the economic profit maximized for Kiley's Baseball
Glove Company?
A) 0
B) 2
C) 5
D) 8
Answer: C
Topic: Profit-Maximizing Output
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

17) The above table shows the per day total cost for Kiley's Baseball Glove Company. Each
glove is priced at $50 and Kiley's Baseball Glove Company is a perfectly competitive firm.
Between which two amounts of output does Kiley's Baseball Glove Company earn an economic
profit?
A) 0 and 8
B) 1 and 8
C) 2 and 7
D) 3 and 6
Answer: D
Topic: Economic Profit
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

87
Copyright © 2012 Pearson Education
 Quantity Total cost, TC
(pizzas per (dollars per
hour) hour)
0 10
1 18
2 30
3 48
4 70
5 98
6 120

18) Giuseppe's Pizza is a perfectly competitive firm. The firm's costs are shown in the table
above. If the market price is $15, how much economic profit does the firm make?
A) $0
B) $30
C) -$10
D) -$15
Answer: A
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

19) Giuseppe's Pizza is a perfectly competitive firm. The firm's costs are shown in the table
above. If the market price is $20, how much economic profit does the firm make?
A) $0
B) $12
C) -$20
D) -$10
Answer: B
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

88
Copyright © 2012 Pearson Education
20) In the above figure, if the price is P1, the firm is
A) making an economic profit.
B) incurring an economic loss.
C) making zero economic profit.
D) earning enough revenue to pay all of its opportunity costs.
Answer: B
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

89
Copyright © 2012 Pearson Education
21) If the price is $12 per pizza, the perfectly competitive firm in the above figure is
A) making an economic profit.
B) making zero economic profit.
C) incurring an economic loss.
D) More information about the firm's total cost is needed to determine if the firm has a positive
economic profit, zero economic profit, or an economic loss.
Answer: B
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Analytical
Question history: Modified 10th edition
AACSB: Analytical Skills

90
Copyright © 2012 Pearson Education
22) The figure above shows Mollie's Mugs' costs of producing mugs. The mug market is
perfectly competitive. If the market price of a mug falls to $5 and Mollie's shuts down
temporarily, its total variable cost is ________ an hour and it incurs an economic loss of
________ an hour.
A) $160; $280
B) $8; $14
C) $0; $120
D) $0; $6
Answer: C
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

91
Copyright © 2012 Pearson Education
23) The figure illustrates the short-run costs of Paul's Picture Frames Inc. The picture frame
market is perfectly competitive and the market price is $30 a frame. Paul produces ________
frames each week, makes ________ of total revenue, and makes zero ________ profit.
A) 200; $4,000; economic
B) 300; $9,000; normal
C) 200; $4,000; normal
D) 300; $9,000; economic
Answer: D
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

92
Copyright © 2012 Pearson Education
24) The figure above shows a perfectly competitive firm. The firm is operating; that is, the firm
has not shut down. The firm is
A) making an economic profit of $200.
B) incurring a economic loss of $200.
C) incurring an economic loss of $600.
D) making zero economic profit.
Answer: B
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

25) The figure above shows a perfectly competitive firm. The firm is operating; that is, it has not
shut down. The firm produces
A) 20 units of output and makes zero economic profit.
B) 20 units of output and incurs an economic loss.
C) 10 units of output and makes zero economic profit.
D) 10 units of output and incurs an economic loss.
Answer: D
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

93
Copyright © 2012 Pearson Education
26) The figure above shows the costs for a grower in the perfectly competitive turnip market. If
the price is $1,000 for a ton of turnips, the firm is
A) making an economic profit.
B) making zero economic profit.
C) incurring an economic loss.
D) More information is needed to determine if the firm is making a positive economic profit,
zero economic profit, or incurring an economic loss.
Answer: C
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Analytical
Question history: Modified 10th edition
AACSB: Analytical Skills

27) The figure above shows the costs for a grower in the perfectly competitive turnip market. If
the price is $1,200 for a ton of turnips, the firm is
A) making an economic profit.
B) making zero economic profit.
C) incurring an economic loss.
D) More information is needed to determine if the firm is making a positive economic profit,
zero economic profit, or incurring an economic loss.
Answer: B
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Analytical
Question history: Modified 10th edition
AACSB: Analytical Skills

94
Copyright © 2012 Pearson Education
28) The figure above shows the costs for a grower in the perfectly competitive turnip industry. If
the price is $1,400 for a ton of turnips, the firm is
A) making an economic profit.
B) making zero economic profit.
C) incurring an economic loss.
D) More information is needed to determine if the firm is making a positive economic profit,
zero economic profit, or incurring an economic loss.
Answer: A
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Analytical
Question history: Modified 10th edition
AACSB: Analytical Skills

29) In the above figure, at a price of $8, a perfectly competitive firm produces ________ and it
________.
A) 0; incurs an economic loss
B) 0; makes zero economic profit
C) some output; makes zero economic profit
D) some output; makes an economic profit
Answer: C
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

95
Copyright © 2012 Pearson Education
30) In the above figure, at a price of $6, a perfectly competitive firm produces ________ and it
________.
A) some output; incurs an economic loss
B) 0; incurs an economic loss
C) 0; does not incur an economic loss or make an economic profit
D) 0; makes an economic profit
Answer: A
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

31) In the above figure, at what price does a perfectly competitive firm make zero economic
profit?
A) $4 per unit
B) $8 per unit
C) $12 per unit
D) $16 per unit
Answer: C
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

96
Copyright © 2012 Pearson Education
32) In the above figure, if the price is $16 per unit, a profit maximizing perfectly competitive
firm will
A) shut down.
B) incur an economic loss but continue to operate.
C) make zero economic profit.
D) make an economic profit.
Answer: D
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

33) The figure above shows a perfectly competitive firm. To maximize its profit, the firm will
produce ________ units of output and the price will be ________ for a unit.
A) 30; $40
B) 30; $30
C) 20; $40
D) 20; $30
Answer: A
Topic: Profit-Maximizing Output
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

97
Copyright © 2012 Pearson Education
34) The figure above shows a perfectly competitive firm. When the firm maximizes its profit, its
total revenue is
A) $1,200.
B) $900.
C) $600.
D) unable to be determined without more information.
Answer: A
Topic: Profit-Maximizing Output
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

35) The figure above shows a perfectly competitive firm. When the firm maximizes its profit, its
total cost is
A) $1,200.
B) less than $1,200 but more than zero.
C) more than $1,200.
D) zero.
Answer: A
Topic: Profit-Maximizing Output
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

36) The figure above shows a perfectly competitive firm. When the firm maximizes its profit, its
economic profit
A) is more than $300.
B) is $300.
C) is less than $300.
D) The premise of the question is wrong because the firm is incurring an economic loss.
Answer: C
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

37) The figure above shows a perfectly competitive firm. The figure shows a firm
A) in the short run.
B) in the long run.
C) at its shutdown point.
D) Both answers A and C are correct.
Answer: A
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

98
Copyright © 2012 Pearson Education
38) In the above figure, if the price is P1 and the firm produces Q2, it is
A) making an economic profit.
B) incurring an economic loss.
C) breaking even.
D) More information is needed to determine if the firm is earning a positive economic profit,
zero economic profit, or is incurring an economic loss.
Answer: A
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

39) In the above figure, if the price is P1 and the firm produced Q1, the firm's economic profit is
________ than if it produced Q2 and ________ than if it produced Q3.
A) less; less
B) less; more
C) more; less
D) more; more
Answer: B
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

99
Copyright © 2012 Pearson Education
40) In the above figure, if the price is P1 and the firm produced Q3, the firm's economic profit is
________ than if it produced Q1 and ________ than if it produced Q2.
A) less; less
B) less; more
C) more; less
D) more; more
Answer: A
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

41) Consider the perfectly competitive firm in the figure above. At the profit maximizing level of
output, the firm will
A) make an economic profit equal to the area ABCD.
B) incur an economic loss equal to the area ABCD.
C) make zero economic profit.
D) make an economic profit equal to the area AECD.
Answer: A
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

100
Copyright © 2012 Pearson Education
42) The figure above shows the marginal revenue and costs of a perfectly competitive firm. The
firm's profit is maximized when the firm produces
A) 90 units of output.
B) 130 units of output.
C) 170 units of output.
D) 210 units of output.
Answer: C
Topic: Profit-Maximizing Output
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

43) The figure above shows the marginal revenue and costs of a perfectly competitive firm.
When the firm produces 170 units,
A) marginal cost is less than marginal revenue.
B) marginal revenue equals marginal cost.
C) total revenue is less than total cost.
D) total revenue equals total cost.
Answer: B
Topic: Profit-Maximizing Output
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

101
Copyright © 2012 Pearson Education
44) The figure above shows the marginal revenue and costs of a perfectly competitive firm. The
marginal cost of the last unit produced is
A) $4 per unit.
B) $8 per unit.
C) $16 per unit.
D) None of the above answers is correct.
Answer: C
Topic: Profit-Maximizing Output
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

45) The figure above shows depicts the marginal revenue and costs of a perfectly competitive
firm. The price the firm charges is
A) $4 per unit.
B) $8 per unit.
C) $16 per unit.
D) None of the above answers is correct.
Answer: C
Topic: Marginal Analysis
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

46) The figure above shows the marginal revenue and costs of a perfectly competitive firm.
When 170 units are produced, the
A) firm has total revenue of $2,720.
B) firm's total costs are less than $2,720.
C) firm is making an economic profit.
D) All of the above are true.
Answer: D
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

47) The figure above shows depicts the marginal revenue and costs of a perfectly competitive
firm. When 170 units are produced, the firm
A) would definitely shut down.
B) would incur an economic loss.
C) would increase its price.
D) has total costs less than $2,720.
Answer: D
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills
102
Copyright © 2012 Pearson Education
48) The short-run market supply curve is
A) the sum of the quantities supplied by all the firms.
B) undefined because the number of firms is constant in the short run.
C) vertical at the total level of output being produced by all firms.
D) horizontal at the current market price.
Answer: A
Topic: Study Guide Question, Perfectly Competitive Firm in the Short Run
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

49) In the short run, a perfectly competitive firm can

A) only make an economic profit.
B) only make zero economic profit.
C) only incur an economic loss.
D) make an economic profit, zero economic profit, or incur an economic loss.
Answer: D
Topic: Study Guide Question, Perfectly Competitive Firm in the Short Run
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

50) A perfectly competitive firm is definitely making an economic profit when

A) MR = MC.
B) P = ATC.
C) P < ATC.
D) P > ATC.
Answer: D
Topic: Study Guide Question, Perfectly Competitive Firm in the Short Run
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

103
Copyright © 2012 Pearson Education
4 Output, Price, and Profit in the Long Run

1) If firms in a perfectly competitive industry are making zero economic profit, then
A) some of those firms will leave the industry, because firms cannot persistently go without
making economic profit.
B) new firms will enter the industry, because the new entrants would be ensured of doing as well
as in their best foregone alternative.
C) there is no incentive for either entry or exit.
D) some of the firms will temporarily shut down.
Answer: C
Topic: Long-Run Adjustments
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

2) Today, firms in a perfectly competitive market are making an economic profit. In the long run,
firms will ________ the market until all firms in the market are ________.
A) exit; covering only their total fixed costs
B) enter; making zero economic profit
C) exit; producing at the minimum point on their long-run average cost curve
D) enter; making zero normal profit
Answer: B
Topic: Long-Run Adjustments; Entry
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

3) The firms in a perfectly competitive are making an economic profit when new firms enter.
The entry shifts the short-run market supply curve ________, the market price ________, and
each firm's economic profit ________.
A) leftward; rises; decreases
B) rightward; rises; increases
C) rightward; falls; decreases
D) leftward; falls; decreases
Answer: C
Topic: Long-Run Adjustments; Entry
Skill: Conceptual
Question history: Modified 10th edition
AACSB: Reflective Thinking

104
Copyright © 2012 Pearson Education
4) Suppose firms in a perfectly competitive industry are making economic profits. As a result,
I. new firms enter the industry.
II. the market price falls.
III. the economic profits of the existing firms decrease.
A) I, II and III
B) I and II
C) II and III
D) I and III
Answer: A
Topic: Long-Run Adjustments; Entry
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

5) Economic profit sends a signal to entrepreneurs by telling them where

A) price exceeds marginal cost.
B) there are many buyers and many sellers.
C) the shutdown point is.
D) an above normal return on investment can be earned.
Answer: D
Topic: Long-Run Adjustments; Entry
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

6) In the long run, for a perfectly competitive market, if economic profit is

A) less than zero then some firms will exit the market and the market supply curve will shift
leftward.
B) greater than zero then some firms will enter the market and the market supply curve will shift
rightward.
C) equal to zero then there is no entry or exit of firms into or out of the market.
D) All of the above answers are correct.
Answer: D
Topic: Long-Run Adjustments; Entry
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

105
Copyright © 2012 Pearson Education
7) Entry in a perfectly competitive market
A) shifts the market supply curve rightward.
B) decreases the market price.
C) shifts the market supply curve leftward.
D) Both answers A and B are correct.
Answer: D
Topic: Long-Run Adjustments; Entry
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

8) Suppose firms in a perfectly competitive market are earning an economic profit. As new firms
enter, the price ________ and the economic profit of each existing firm ________.
A) rises; increases
B) rises; decreases
C) falls; increases
D) falls; decreases
Answer: D
Topic: Long-Run Adjustments; Entry
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

106
Copyright © 2012 Pearson Education
 Quantity Total cost, TC
(pizzas per (dollars per
hour) hour)
0 10
1 18
2 30
3 48
4 70
5 98
6 120

9) Giuseppe's Pizza is a perfectly competitive firm. The firm's costs are shown in the table above.
If the market price is $15, the firm will
A) shut down.
B) leave the market in the long run.
C) stay in the market in the long run.
D) make an economic profit.
Answer: C
Topic: Long-Run Adjustments; Entry
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

10) Giuseppe's Pizza is a perfectly competitive firm. The firm's costs are shown in the table
above. If the market price is $22, the firm will
A) shut down.
B) leave the market in the long run.
C) stay in the market in the long run.
D) incur an economic loss.
Answer: C
Topic: Long-Run Adjustments; Entry
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

107
Copyright © 2012 Pearson Education
 Quantity Total variable
(dozens of sea cost
shells per day) (dollars)
200 60.00
201 61.00
202 62.50
203 64.00
204 66.00
205 68.50
206 72.00

11) Sue's Sea Shells by the Sea Shore is a perfectly competitive firm selling sea shells at the
market price of $2 per dozen. Sue's Sea Shells by the Sea Shore has fixed costs of $40 per day
and a variable cost schedule in the table above. The profit-maximizing level of output for Sue's
Sea Shells by the Sea Shore is
A) 202 dozen sea shells by the sea shore per day.
B) 204 dozen sea shells by the sea shore per day.
C) 205 dozen sea shells by the sea shore per day.
D) 206 dozen sea shells by the sea shore per day.
Answer: B
Topic: Profit-Maximizing Output
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

12) Sue's Sea Shells by the Sea Shore is a perfectly competitive firm selling sea shells at the
market price of $2 per dozen. Sue's Sea Shells by the Sea Shore has fixed costs of $40 per day
and a variable cost schedule in the table above. The maximum profit attainable by Sue's Sea
Shells by the Sea Shore is
A) $262.00 per day.
B) $262.50 per day.
C) $302.00 per day.
D) $302.50 per day.
Answer: C
Topic: Profit-Maximizing Output
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

108
Copyright © 2012 Pearson Education
13) Sue's Sea Shells by the Sea Shore is a perfectly competitive firm selling sea shells at the
market price of $2 per dozen. Sue's Sea Shells by the Sea Shore has fixed costs of $40 per day
and a variable cost schedule in the table above. Based on this information, we can expect the
number of firms in the sea shell market to
A) decrease.
B) increase.
C) remain constant.
D) It is impossible to say.
Answer: B
Topic: Long-Run Adjustments; Entry
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

14) The above figure shows the cost curves for a perfectly competitive firm. If all firms in the
market have the same cost curves and the price equals $16 per unit,
A) the market is in its long-run equilibrium.
B) over time, firms will leave this market.
C) the firm is making zero economic profit.
D) over time, the price will fall as new firms enter the market.
Answer: D
Topic: Long-Run Adjustments; Entry
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

109
Copyright © 2012 Pearson Education
15) The apple market is perfectly competitive and is in long-run equilibrium. Now a disease kills
50 percent of the apple orchards. In the short run, the price of a bag of apples ________ and the
remaining apple growers make ________ economic profit. In the long run, the ________.
A) increases; zero; price of apples will return to their original level
B) remains the same; zero; orchards will be replanted and growers will make normal profits
C) increases; zero; orchards will be replanted and economic profit will return to zero
D) increases; positive; orchards will be replanted and economic profit will return to zero
Answer: D
Topic: Long-Run Adjustments; Entry
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

16) Homer's Holesome Donuts has determined that its profit-maximizing quantity is 10,000
donuts per year. Homer's earns $12,000 in revenue from the sale of those donuts. Homer's has
two costs. First he pays $16,000 in annual rental payments for its five-year lease on its store.
Second Homer incurs an additional cost of $5,000 for ingredients. Should Homer's exit the
market in the long run?
A) Yes, because he is incurring an economic loss.
B) Yes, because all costs are fixed in the long run.
C) No, because he is making an economic profit.
D) No, because all costs are variable in the long run.
Answer: A
Topic: Long-Run Adjustments; Exit
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

17) If firms in a competitive market are ________ then there is ________ for firms to ________
the industry.
A) incurring economic losses; an incentive; exit
B) incurring economic losses; no incentive; exit
C) making economic profits; no incentive; enter
D) making zero economic profit; an incentive; exit
Answer: A
Topic: Long-Run Adjustments; Exit
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

110
Copyright © 2012 Pearson Education
18) Suppose some firms in a perfectly competitive market are incurring an economic loss. As a
result,
A) all the firms will eventually incur an economic loss.
B) some firms will leave the market and the price of the good will rise.
C) some firms will leave the market and the remaining firms' quantity will decrease.
D) the total market economic profit must equal $0.
Answer: B
Topic: Long-Run Adjustments; Exit
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

19) Suppose firms in a perfectly competitive market are incurring an economic loss. As firms
exit, the price ________ and the economic loss of the surviving firms ________.
A) rises; increases
B) rises; decreases
C) falls; increases
D) falls; decreases
Answer: B
Topic: Long-Run Adjustments; Exit
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

20) In the long-run, if firms in a perfectly competitive market are incurring persistent economic
losses, some firms will
A) exit and the price will fall.
B) exit and the price will rise.
C) enter and the price might either rise or fall.
D) exit and the price might either rise or fall.
Answer: B
Topic: Long-Run Adjustments; Exit
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

21) In the long run, if firms in a perfectly competitive market are incurring economic losses, then
A) new firms will enter the market and the price will rise.
B) some firms will leave the market and the price will fall.
C) some firms will leave the market and the price will rise.
D) new firms will enter the market and the price will fall.
Answer: C
Topic: Long-Run Adjustments; Exit
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

111
Copyright © 2012 Pearson Education
22) If perfectly competitive firms exit a market, the
A) market supply curve shifts leftward.
B) price of the good or service falls.
C) profits of the remaining firms decrease.
D) output of the industry increases.
Answer: A
Topic: Long-Run Adjustments; Exit
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

23) As perfectly competitive firms leave a market because they are incurring an economic loss,
the price of the good ________ and the economic loss of each remaining firm ________.
A) rises; increases
B) rises; decreases
C) falls; increases
D) falls; decreases
Answer: B
Topic: Long-Run Adjustments; Exit
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

24) In the long run, a perfectly competitive firm will exit a market when
A) its total revenue is less than its total cost.
B) its marginal revenue curve is below the minimum of its average total cost curve.
C) the price is greater than the minimum of its average total cost curve.
D) Both answers A and B are correct.
Answer: D
Topic: Long-Run Adjustments; Exit
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

25) A perfectly competitive firm initially is earning zero economic profit. Then, a decrease in
demand for the firm's product occurs. Of the following, in the long run which action listed below
is the firm most likely to take?
A) Increase the quantity it produces.
B) Increase its advertising to increase the demand for its product.
C) Exit the market.
D) Increase the size of its plant.
Answer: C
Topic: Long-Run Adjustments; Exit
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

112
Copyright © 2012 Pearson Education
26) Suppose that newspaper companies are now required to use recycled paper, which is more
expensive than new paper. Which of the following is most likely to result if the newspaper
industry is highly competitive?
A) The firms' costs rise, resulting in positive economic profit in the short run and, hence, the
industry supply curve shifts rightward in the long run.
B) The firms' costs rise, resulting in economic losses in the short run and, hence, the industry
supply curve shifts rightward in the long run.
C) The firms' costs rise, resulting in economic losses in the short run and, hence, the industry
supply curve shifts leftward in the long run.
D) The industry supply curve shifts leftward in the short run, causing permanent long-run
economic losses.
Answer: C
Topic: Long-Run Adjustments; Exit
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

27) Suppose the cost curves in the above figure apply to all firms in the market. Then, if the
initial price is P1, in the long run the market
A) demand will increase.
B) demand will decrease.
C) supply will increase.
D) supply will decrease.
Answer: D
Topic: Long-Run Adjustments; Exit
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

113
Copyright © 2012 Pearson Education
28) Suppose the cost curves in the above figure apply to all firms in the market. If the initial
price is P1, firms are ________ and some firms will ________ the industry.
A) making an economic profit; leave
B) making an economic profit; enter
C) incurring an economic loss; leave
D) incurring an economic loss; enter
Answer: C
Topic: Long-Run Adjustments; Exit
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

29) The figure above shows the costs for the typical grower in the perfectly competitive turnip
market. Currently, the price is $1,000 for a ton of turnips. In the long run, the market supply of
turnips will ________.
A) decrease and the price of a ton of turnips will fall to $600
B) increase and the turnip grower's economic profit will increase
C) increase and the turnip grower's economic profit will decrease
D) decrease and the price of a ton of turnips will rise to $1,200
Answer: D
Topic: Long-Run Adjustments; Exit
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

114
Copyright © 2012 Pearson Education
30) The figure above shows the costs for the typical grower in the perfectly competitive turnip
market. Currently, the price of a ton of turnips is $1,200. The demand for turnips increases
permanently. The turnip industry experiences neither external economies nor external
diseconomies. In the long run, the price of a ton of turnips ________.
A) increases so it is above $1,200
B) is $1,200 and turnip growers will make normal profit
C) decreases so it is below $1,200, and turnip growers will make normal profit
D) decreases so it is below $1,200 and the turnip growers make an economic profit
Answer: B
Topic: Long-Run Adjustments; Entry
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

31) In the long run, fixed costs are

A) zero and variable costs are zero.
B) zero and variable costs are positive.
C) positive and variable costs are zero.
D) positive and variable costs are positive.
Answer: B
Topic: Long-Run Equilibrium
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

32) In the long run, the economic profit of a firm in a perfectly competitive market
A) will be above zero.
B) will be below zero.
C) will equal zero.
D) can be above, below, or equal to zero.
Answer: C
Topic: Long-Run Equilibrium
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

33) In the long run, the firms in a perfectly competitive market

A) maximize their profit.
B) make an economic profit.
C) display price setting behavior.
D) are protected by barriers to entry.
Answer: A
Topic: Long-Run Equilibrium
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

115
Copyright © 2012 Pearson Education
34) In the long run, which of the following is present in a perfectly competitive market?
A) barriers to entry
B) many firms in the market
C) firms incurring an economic loss in the long run
D) firms making an economic profit in the long run
Answer: B
Topic: Long-Run Equilibrium
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

35) In the long-run equilibrium in a perfectly competitive market, the economic profit of the
firms is
A) positive.
B) negative.
C) zero.
D) increasing.
Answer: C
Topic: Long-Run Equilibrium
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

36) In the long-run equilibrium in a perfectly competitive market,

A) the firms make an economic profit.
B) the firms' owners make a normal profit.
C) the average total cost is maximized.
D) marginal cost is at a minimum.
Answer: B
Topic: Long-Run Equilibrium
Skill: Recognition
Question history: Modified 10th edition
AACSB: Reflective Thinking

37) In the short run, perfectly competitive firms ________ but in the long run, perfectly
competitive firms ________.
A) can incur an economic loss; incur an economic loss
B) can incur economic losses; make an economic profit
C) must make an economic profit; make an economic profit
D) can incur an economic loss; make zero economic profit
Answer: D
Topic: Long-Run Equilibrium
Skill: Conceptual
Question history: Modified 10th edition
AACSB: Reflective Thinking

116
Copyright © 2012 Pearson Education
38) In the long-run equilibrium, perfectly competitive firms make zero economic profit because
of
A) government regulations.
B) the ability of firms to enter and exit.
C) inefficient production processes.
D) high fixed costs.
Answer: B
Topic: Long-Run Equilibrium
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

39) In the long run, perfectly competitive firms make zero economic profit. This result is due
mainly to which of the following assumptions?
A) few buyers and sellers
B) unrestricted entry and exit
C) firms must act as price takers
D) demand for the firm's output is perfectly elastic
Answer: B
Topic: Long-Run Equilibrium
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

40) Which of the following is NOT present in a perfectly competitive market?

A) profit maximizing firms
B) an economic profit in the long run
C) price taking behavior
D) identical products
Answer: B
Topic: Long-Run Equilibrium
Skill: Recognition
Question history: Modified 10th edition
AACSB: Reflective Thinking

41) In the long run, perfectly competitive firms make zero economic profit. This result is due
mainly to the point that a perfectly competitive market has
A) few buyers and sellers.
B) no barriers to entry and exit.
C) price taking by the firms.
D) firms with perfectly elastic market demand.
Answer: B
Topic: Long-Run Equilibrium
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

117
Copyright © 2012 Pearson Education
42) For a perfectly competitive firm, in the long-run equilibrium,
A) P = MC = ATC = MR.
B) MR = MC = AFC.
C) MR = P = ATC = AFC.
D) P = MC > ATC.
Answer: A
Topic: Long-Run Equilibrium
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

43) In the long run, perfectly competitive firms earn just enough revenue to
A) pay all fixed costs.
B) pay all accounting costs.
C) pay all opportunity costs.
D) attract entry.
Answer: C
Topic: Long-Run Equilibrium
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

44) If the market for maple syrup is perfectly competitive, then in the long-run equilibrium, firms
are
A) entering the market.
B) exiting the market.
C) making zero economic profit.
D) temporarily shutting down.
Answer: C
Topic: Long-Run Equilibrium
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

118
Copyright © 2012 Pearson Education
45) Consider the perfectly competitive firm in the above figure. At what price will long-run
equilibrium occur?
A) $11
B) $12
C) $22
D) $23
Answer: C
Topic: Long-Run Equilibrium
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

119
Copyright © 2012 Pearson Education
46) Fast Copy is a perfectly competitive firm. The figure above shows Fast Copy's cost curves. If
the market price is 4 cents per page, what is Fast Copy's profit maximizing level of output?
A) 16 pages per hour
B) 32 pages per hour
C) 48 pages per hour
D) 64 pages per hour
Answer: C
Topic: Profit-Maximizing Output
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

47) Fast Copy is a perfectly competitive firm. The figure above shows Fast Copy's cost curves. If
the market price is 4 cents per page, what is Fast Copy's economic profit?
A) zero
B) between 0 and $0.50 per hour
C) between $0.51 and $1.00 per hour
D) more than $1.00 per hour
Answer: C
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

120
Copyright © 2012 Pearson Education
48) Fast Copy is a perfectly competitive firm. The figure above shows Fast Copy's cost curves.
The current market price is 4 cents per page. With no change in demand and technology, in the
long run, the price will
A) remain unchanged.
B) rise to 5 cents per page.
C) fall to 2 cents per page.
D) fall to 1 cent per page.
Answer: C
Topic: Long-Run Equilibrium
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

49) Fast Copy is a perfectly competitive firm. The figure above shows Fast Copy's cost curves. If
the market price is 2 cents per page, what is Fast Copy's profit maximizing level of output?
A) 16 pages per hour
B) 32 pages per hour
C) 48 pages per hour
D) 64 pages per hour
Answer: B
Topic: Profit-Maximizing Output
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

50) Fast Copy is a perfectly competitive firm. The figure above shows Fast Copy's cost curves. If
the market price is 2 cents per page, what is Fast Copy's economic profit?
A) zero
B) between 0 and $0.50 per hour
C) between $0.51 and $1.00 per hour
D) more than $1.00 per hour
Answer: A
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

121
Copyright © 2012 Pearson Education
51) Fast Copy is a perfectly competitive firm. The figure above shows Fast Copy's cost curves.
The current market price is 2 cents per page. With no change in demand and technology, in the
long run, the price will
A) remain unchanged.
B) rise to 5 cents per page.
C) rise to 4 cents per page.
D) fall to 1 cent per page.
Answer: A
Topic: Long-Run Equilibrium
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

52) Suppose firms in a perfectly competitive market are incurring an economic loss. Over time,
A) other firms enter the market, so the price rises and the economic loss decreases.
B) some firms leave the market, so the price rises and the economic loss decreases.
C) other firms enter the market, so the price falls and the economic loss decreases.
D) some firms leave the market, so the price falls and the economic loss decreases.
Answer: B
Topic: Study Guide Question, Long-Run Adjustments
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

53) As firms enter a perfectly competitive market, the price

A) falls and the existing firms' economic profits do not change.
B) rises and the existing firms' economic profits decrease.
C) falls and the existing firms' economic profits decrease.
D) falls and the existing firms' economic losses do not change.
Answer: C
Topic: Study Guide Question, Long-Run Adjustments
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

54) In the long run, a perfectly competitive firm can

A) only make an economic profit.
B) only make zero economic profit.
C) only incur an economic loss.
D) make an economic profit, make zero economic profit, or incur an economic loss.
Answer: B
Topic: Study Guide Question, Long-Run Equilibrium
Skill: Conceptual
Question history: Modified 10th edition
AACSB: Reflective Thinking

122
Copyright © 2012 Pearson Education
5 Changing Tastes and Advancing Technology

1) If a perfectly competitive market is in long-run equilibrium and there is a permanent decrease

in demand, then
A) some firms will incur economic losses.
B) firms are no longer maximizing profits.
C) some firms must immediately exit.
D) each firm must produce less output in the new long run equilibrium and earn less economic
profit.
Answer: A
Topic: A Permanent Decrease in Demand
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

2) If there is a permanent decrease in demand in a perfectly competitive market, then there is an

initial ________ in price and existing firms ________.
A) rise; make an economic profit
B) rise; incur an economic loss
C) fall; make an economic profit
D) fall; incur an economic loss
Answer: D
Topic: A Permanent Decrease in Demand
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

3) Suppose a perfectly competitive market is in a long-run equilibrium when a permanent

decrease in the market demand occurs. In the long run, which of the following definitely occurs?
A) the price decreases.
B) the number of firms decreases.
C) the firms' marginal cost increases.
D) marginal revenue increases.
Answer: B
Topic: A Permanent Decrease in Demand
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

123
Copyright © 2012 Pearson Education
4) A perfectly competitive market is in long-run equilibrium. Then demand decreases. The
decrease in demand leads to
A) a rise in the price in the short run.
B) the firms' incurring an economic loss in the short run.
C) firms entering the market in the long run.
D) none of the above
Answer: B
Topic: A Permanent Decrease in Demand
Skill: Analytical
Question history: Modified 10th edition
AACSB: Analytical Skills

5) In a perfectly competitive market, a permanent decrease in demand initially brings a lower

price, economic
A) loss, and entry into the market.
B) loss, and exit from the market.
C) profit, and entry into the market.
D) profit, and exit from the market.
Answer: B
Topic: A Permanent Decrease in Demand
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

6) In a perfectly competitive market that is in long-run equilibrium, a permanent leftward shift in

the market demand curve
A) raises the price in the short run.
B) raises profits in the short run.
C) leads to new firms entering the market in the long run.
D) lowers the price at first but then raises it as firms leave the market.
Answer: D
Topic: A Permanent Decrease in Demand
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

7) In a perfectly competitive market that is in long-run equilibrium, a permanent leftward shift in

the market demand curve
A) raises the price in the short run.
B) raises profits in the short run.
C) leads to firms leaving the market in the long run.
D) raises the price at first but then returns it to its original level in the long run.
Answer: C
Topic: A Permanent Decrease in Demand
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills
124
Copyright © 2012 Pearson Education
8) New reports indicate that eating turnips helps people remain healthy. The news shifts the
demand curve for turnips rightward. In response, new farms enter the turnip industry. During the
period in which the new farms are entering, the price of a turnip ________ and the economic
profit of each existing firm ________.
A) rises; rises
B) rises; falls
C) falls; rises
D) falls; falls
Answer: D
Topic: A Permanent Increase in Demand
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

9) In a perfectly competitive market that is in long-run equilibrium, a rightward shift in the

market demand curve results in
A) the price falling in the short run.
B) the firms' economic profits falling in the short run.
C) firms leaving the industry in the long run.
D) None of the events listed above.
Answer: D
Topic: A Permanent Increase in Demand
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

10) Suppose a perfectly competitive market is in long-run equilibrium. If there is a permanent

increase in demand,
A) at least in the short run, some firms will increase their output.
B) at least in the short run, the price will increase initially.
C) new firms will enter the market.
D) All of the above answers are correct.
Answer: D
Topic: A Permanent Increase in Demand
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

125
Copyright © 2012 Pearson Education
11) The market for maple syrup is perfectly competitive. Suppose that the market is in long-run
equilibrium when the market demand for maple syrup increases. What happens in the short run?
A) Firms will enter the market.
B) Some of the existing firms shut down.
C) The firms decrease production.
D) The firms increase production.
Answer: D
Topic: A Permanent Increase in Demand
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

12) The market for maple syrup is perfectly competitive. Suppose that the market is in long-run
equilibrium when the market demand for maple syrup increases. After the demand increases, a
typical firm will
A) make zero economic profit.
B) make an economic profit.
C) incur an economic loss.
D) exit the market.
Answer: B
Topic: A Permanent Increase in Demand
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

13) The market for maple syrup is perfectly competitive. Suppose that the market is in long-run
equilibrium when the market demand for maple syrup increases. In the long run, firms will
________ the market and the market ________ will ________.
A) leave; supply; decrease
B) enter; supply; increase
C) leave; demand; decrease
D) enter; supply; decrease
Answer: B
Topic: A Permanent Increase in Demand
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

126
Copyright © 2012 Pearson Education
14) In a perfectly competitive market, a permanent increase in demand initially brings a higher
price, economic
A) loss, and entry into the market.
B) loss, and exit from the market.
C) profit, and entry into the market.
D) profit, and exit from the market.
Answer: C
Topic: A Permanent Increase in Demand
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

15) In a perfectly competitive market that is in long-run equilibrium, which of the following will
NOT occur?
A) Firms make only zero economic profit.
B) Firms' owners earn a normal profit.
C) The price equals the minimum average total cost.
D) Entrepreneurs want to enter this industry.
Answer: D
Topic: Long-Run Equilibrium
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

16) In the long run, perfectly competitive firms make zero economic profit (their owners earn a
normal profit) because
A) any economic profit would attract newcomers to the industry.
B) the firms are incompetent.
C) any economic loss would increase the demand for the good, thereby raising its price.
D) there are many buyers and sellers.
Answer: A
Topic: Long-Run Equilibrium
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

17) When a perfectly competitive market is in its long-run equilibrium, the fact that the firms
make zero economic profit will
A) encourage new firms to enter the market.
B) cause existing firms to shut down.
C) cause existing firms to leave the market.
D) mean that the firms' owners earn a normal return.
Answer: D
Topic: Long-Run Equilibrium
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking
127
Copyright © 2012 Pearson Education
18) External economies are factors beyond the control of an individual firm that ________ as the
total market output increases.
A) lower its costs
B) raise its costs
C) raise its marginal revenue
D) lower its profit
Answer: A
Topic: External Economies and Diseconomies
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

19) Factors beyond the control of an individual firm that lower the firm's costs as the market
output increases are called
A) external economies.
B) internal economies.
C) external diseconomies.
D) internal diseconomies.
Answer: A
Topic: External Economies and Diseconomies
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

20) External economies and diseconomies explain the shape of the

A) short-run average total cost curve of a firm.
B) long-run average total cost curve of a firm.
C) long-run market supply curve.
D) supply curve of the firm.
Answer: C
Topic: External Economies and Diseconomies
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

21) If a perfectly competitive market has external diseconomies, then the long-run market supply
curve is
A) positively sloped.
B) negatively sloped.
C) perfectly elastic.
D) perfectly inelastic.
Answer: A
Topic: External Economies and Diseconomies
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

128
Copyright © 2012 Pearson Education
22) In a perfectly competitive market, you observe that after a permanent increase in demand in
the long run price increases. You can conclude that this market exhibits ________.
A) external diseconomies
B) external economies
C) diseconomies of scale
D) economies of scale
Answer: A
Topic: Long-Run Supply Curve
Skill: Conceptual
Question history: New 10th edition
AACSB: Reflective Thinking

23) A long-run supply curve for a perfectly competitive market can slope upward because of
A) external economies.
B) external diseconomies.
C) diminishing marginal returns.
D) economic profit.
Answer: B
Topic: External Economies and Diseconomies
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

24) In a market with external economies, the long-run supply curve is negatively sloped because
A) in the long run a decrease in demand results in a lower price.
B) the firms' costs fall as the market output increases.
C) when demand increases, more firms join the market thereby driving up the cost of inputs.
D) of diseconomies of scale.
Answer: B
Topic: External Economies and Diseconomies
Skill: Conceptual
Question history: Modified 10th edition
AACSB: Reflective Thinking

25) Congestion of airports and airspace causes the airline industry to experience external
A) economies and have a long-run supply curve with negative slope.
B) economies and have a long-run supply curve with positive slope.
C) diseconomies and have a long-run supply curve with negative slope.
D) diseconomies and have a long-run supply curve with positive slope.
Answer: D
Topic: External Economies and Diseconomies
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

129
Copyright © 2012 Pearson Education
26) Assuming long-run external economies exist, when demand increases in a perfectly
competitive market, in the long run the average total cost curve for a typical firm
A) shifts downward.
B) shifts upward.
C) stays the same.
D) is no longer U-shaped.
Answer: A
Topic: External Economies and Diseconomies
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

27) If the long-run supply curve for a perfectly competitive market has a positive slope, the
market experiences
A) external economies.
B) external diseconomies.
C) internal economies.
D) internal diseconomies.
Answer: B
Topic: External Economies and Diseconomies
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

28) If the long-run supply curve for a perfectly competitive market has a negative slope, the
market experiences
A) external economies.
B) external diseconomies.
C) internal economies.
D) internal diseconomies.
Answer: A
Topic: External Economies and Diseconomies
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

130
Copyright © 2012 Pearson Education
29) Assuming long-run external diseconomies exist, when demand increases in a perfectly
competitive market, in the long run the price of the product ________ the initial price (before the
increase in demand) and the quantity ________.
A) equals; increases
B) equals; decreases
C) rises above; increases
D) falls below; decreases
Answer: C
Topic: A Permanent Change in Demand with External Diseconomies
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

30) Assuming long-run external economies exist, when demand increases in a perfectly
competitive market, in the long run, the price of the product ________ the initial price (before
the increase in demand) and the quantity ________.
A) equals; increases
B) equals the; decreases
C) rises above; increases
D) falls below; increases
Answer: D
Topic: A Permanent Change in Demand with External Economies
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

31) If there are external economies, as demand increases,

A) the price falls in the long run.
B) the price rises in the long run.
C) firms exit from the industry in the long run.
D) output decreases in the long run.
Answer: A
Topic: A Permanent Change in Demand with External Economies
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

131
Copyright © 2012 Pearson Education
32) In a perfectly competitive market, if there are no external economies or diseconomies, an
increase in demand
A) raises the price in the long run.
B) leaves the price the same in the long run.
C) lowers the price in the long run.
D) raises average cost in the long run.
Answer: B
Topic: A Permanent Change in Demand with No External Diseconomies or Economies
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

33) In a perfectly competitive market with no external economies or diseconomies, the market
demand permanently increases. The long-run price
A) increases compared to the initial price, and in the long run economic profits are zero.
B) is the same as the initial price, and in the long run the firms can earn an economic profit.
C) is the same as the initial price because new firms enter the industry.
D) is the same as the initial price because the supply curve shifts back to its original position.
Answer: C
Topic: A Permanent Change in Demand with No External Diseconomies or Economies
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

34) In a perfectly competitive market with no external economies or diseconomies, an increase in

market demand
A) raises the price in the short run and attracts new firms in the long run.
B) raises the price in the short run and the long run.
C) lowers the price in the short run and in the long run.
D) has no effect on the price in either the short run or the long run because the firms are price
takers.
Answer: A
Topic: A Permanent Change in Demand with No External Diseconomies or Economies
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

132
Copyright © 2012 Pearson Education
35) The curve LS0 in the above figure is the long-run supply curve in a perfectly competitive
market. The short-run market supply curve shifts from S0 to S2 as the
A) number of firms decreases.
B) number of firms increases.
C) external economies rise.
D) wage rate falls.
Answer: B
Topic: A Permanent Increase in Demand
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

36) The curve LS0 in the above figure is the long-run supply curve in a perfectly competitive
market. As the demand curve shifts rightward, the market exhibits
A) external economies.
B) external diseconomies.
C) neither external economies nor external diseconomies.
D) technological advancement.
Answer: B
Topic: A Permanent Change in Demand with External Diseconomies
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

133
Copyright © 2012 Pearson Education
37) The figure above shows a typical perfectly competitive corn farm, whose marginal cost curve
is MC and average total cost curve is ATC. The market is initially in a long-run equilibrium,
where the price is $3.00 per bushel. Then, the market demand for corn decreases and, in the short
run, the price falls to $2.50 per bushel. Corn production has no external economies or external
diseconomies. In the new short-run equilibrium, the farm produces ________ bushels of corn
and sells corn at ________ per bushel.
A) 250,000; $3.00
B) 250,000; $2.50
C) 300,000; $2.50
D) 200,000; $2.50
Answer: B
Topic: A Permanent Decrease in Demand
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

134
Copyright © 2012 Pearson Education
38) The figure above shows a typical perfectly competitive corn farm, whose marginal cost curve
is MC and average total cost curve is ATC. The market is initially in a long-run equilibrium,
where the price is $3.00 per bushel. Then, the market demand for corn decreases and, in the short
run, the price falls to $2.50 per bushel. Corn production has no external economies or external
diseconomies. In the new short-run equilibrium, the farm
A) incurs an economic loss of between $1 and $40,000.
B) receives zero economic profit.
C) incurs an economic loss of between $40,001 and $130,000.
D) incurs an economic loss of more than $130,001.
Answer: C
Topic: A Permanent Decrease in Demand
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

39) The figure above shows a typical perfectly competitive corn farm, whose marginal cost curve
is MC and average total cost curve is ATC. The market is initially in a long-run equilibrium,
where the price is $3.00 per bushel. Then, the market demand for corn decreases and, in the short
run, the price falls to $2.50 per bushel. Corn production has no external economies or external
diseconomies. In the long run, the price of corn is ________ and a typical farm produces
________ bushels of corn.
A) $2.00; 200,000
B) $3.50; 250,000
C) $2.50; 250,000
D) $3.00; 300,000
Answer: D
Topic: A Permanent Change in Demand with No External Diseconomies or Economies
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

40) The figure above shows a typical perfectly competitive corn farm, whose marginal cost curve
is MC and average total cost curve is ATC. Assuming there are no changes in technology, in the
long run the lowest possible price for corn is ________ per bushel.
A) $2.50
B) $2.00
C) $3.00
D) $3.50
Answer: C
Topic: A Permanent Change in Demand with No External Diseconomies or Economies
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

135
Copyright © 2012 Pearson Education
41) In a perfectly competitive market, technological advances bring ________ economic profits
for producers and ________ lower prices for consumers.
A) permanent; permanently
B) permanent; temporarily
C) temporary; permanently
D) temporary; temporarily
Answer: C
Topic: Technological Change
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

42) The demand for a product produced in a perfectly competitive market permanently increases.
In the short run the price
A) rises and each firm produces less output.
B) rises and each firm produces more output.
C) does not change as new firms enter the industry.
D) does not change because each firm produces more output.
Answer: B
Topic: Study Guide Question, A Permanent Change in Demand
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

43) If there are external diseconomies in a market, in the long run, after a permanent increase in
demand, the price
A) will be higher than it was initially before the increase in demand.
B) will be lower than it was initially before the increase in demand.
C) will be the same as it was initially before the increase in demand.
D) may be higher or lower than it was initially before the increase in demand, depending on
whether or not the firms are making an economic profit.
Answer: A
Topic: Study Guide Question, A Permanent Change in Demand
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

44) To which of the following situations does the term "external diseconomies" apply?
A) The firm's MC curve falls as more output is produced.
B) The firm's ATC curve slopes upward as the firm produces more output.
C) Increases in an market's output reduce the costs of the firms in a market.
D) Increases in an market's output raise the costs of the firms in a market.
Answer: D
Topic: Study Guide Question, External Economies and Diseconomies
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking
136
Copyright © 2012 Pearson Education
45) The presence of external economies ________ each firm's total costs as the market output
________ and the presence of external diseconomies ________ each firm's total costs as market
output ________.
A) lower; increases; lower; decreases
B) lower; increases; lower; increases
C) lower; decreases; lower; increases
D) raise; increases; lower; increases
Answer: A
Topic: External Economies and Diseconomies
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

46) The ________ how the quantity supplied in a market changes as the price changes when
firms have made all possible adjustments.
A) individual firms' supply curves show
B) individual firms' marginal cost curves show
C) long-run market supply curve shows
D) short-run market supply curve shows
Answer: C
Topic: Long-Run Supply Curve
Skill: Recognition
Question history: Modified 10th edition
AACSB: Reflective Thinking

47) The industry that produces zangs is in long-run equilibrium. Then the demand for zangs
increases permanently. As a result, firms in the industry will ________. Some firms will
________ the industry, and the industry supply curve will shift ________.
A) make economic an profit; enter; rightward
B) make zero economic profit; exit; leftward
C) incur economic losses; exit; rightward
D) incur economic losses; exit; leftward
Answer: A
Topic: Permanent Change in Demand
Skill: Conceptual
Question history: Previous edition, Chapter 12
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48) If the long-run industry supply in a perfectly competitive industry is downward sloping, then
the industry experiences ________ and as the industry expands the price ________.
A) external diseconomies; falls
B) external economies; falls
C) external diseconomies; rises
D) external economies; rises
Answer: B
Topic: External Economies and Diseconomies
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

49) Initially, a perfectly competitive industry that has 1,000 firms is in long-run equilibrium.
Then 100 firms in the industry adopt a new technology that reduces the average cost of
producing the good. In the short run, the price ________, firms with the new technology make
________ economic profit, and firms with the old technology ________.
A) remains the same; zero; incur economic losses
B) falls; positive; incur economic losses
C) remains the same; positive; make normal profit
D) remains the same; positive; incur economic losses
Answer: B
Topic: Technological Change
Skill: Conceptual
Question history: Modified 10th edition
AACSB: Reflective Thinking

50) A perfectly competitive industry is in long-run equilibrium. Some firms in the industry adopt
new technology that reduces the average total cost of producing the good. In the long run, the
price is ________, firms with the new technology make ________ economic profit, and firms
with the old technology ________.
A) lower; zero; exit the industry
B) constant; a positive; make normal profit
C) lower; zero; switch to the new technology or exit the industry
D) constant; zero; exit the industry
Answer: C
Topic: Technological Change
Skill: Conceptual
Question history: Modified 10th edition
AACSB: Reflective Thinking

138
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6 Competition and Efficiency

1) In the long-run equilibrium for a perfectly competitive market,

A) the firms' economic profits are zero.
B) there is no incentive for entry or exit.
C) average total costs of production are minimized.
D) All of the above are correct.
Answer: D
Topic: Efficiency of Perfect Competition
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

2) If the donut industry is perfectly competitive and is in long-run equilibrium, then the price of a
donut
A) is greater than marginal cost.
B) is greater than short-run average cost.
C) is greater than long-run average cost.
D) equals long-run average cost.
Answer: D
Topic: Efficiency of Perfect Competition
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

3) In the long-run equilibrium, perfectly competitive firms produce the level of output such that
A) marginal cost is minimized.
B) average total cost is minimized.
C) marginal cost equals the price.
D) Both answers B and C are correct.
Answer: D
Topic: Efficiency of Perfect Competition
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

4) In the long-run equilibrium, perfectly competitive firms produce where

A) marginal cost is minimized.
B) average total cost is minimized.
C) average revenue is zero.
D) All of the above are correct.
Answer: B
Topic: Efficiency of Perfect Competition
Skill: Conceptual
Question history: Previous edition, Chapter 12
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5) The figure above shows the marginal revenue and long-run cost curves for a perfectly
competitive firm. Which of the following statements is true?
A) The firm is producing at minimum long-run average cost.
B) Over time, this firm will leave this industry.
C) The firm is earning positive economic profit.
D) The firm will eventually decrease its production.
Answer: A
Topic: Efficiency of Perfect Competition
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

6) The figure above shows the marginal revenue and long-run cost curves for a perfectly
competitive firm. All other firms in the industry have identical curves. Which of the following
statements is true?
A) The firm's average cost exceeds the price.
B) Over time, firms will enter this industry.
C) The firm is earning economic profit.
D) None of the above is true.
Answer: D
Topic: Efficiency of Perfect Competition
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

140
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7) Consumer surplus ________.
A) equals total revenue minus marginal cost
B) is maximized when the market outcome is efficient
C) equals total revenue minus opportunity cost
D) plus producer surplus is maximized when resources are used efficiently
Answer: D
Topic: Efficiency of Perfect Competition
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

8) In the long-run equilibrium in a perfectly competitive market, the firms produce at the
________ possible average total cost and the price equals the ________ possible average total
cost.
A) highest; highest
B) lowest; lowest
C) highest; lowest
D) lowest; highest
Answer: B
Topic: Study Guide Question, Efficiency of Perfect Competition
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

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7 News Based Questions

1) Which of the following four firms would most likely be part of a perfectly competitive
market?
A) Village Pizza sells NY style pizza and hard-to-find microbrews in a college town
B) The WaveHouse is the only place in San Diego where you can ride an indoor 10 foot wave
C) Mark sells his tomatoes he grew in his backyard at the local farmers market
D) Amara Massage specializes in pre- and post-natal massage
Answer: C
Topic: Perfect Competition
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

2) Which of the following four firms would most likely NOT be part of a perfectly competitive
market?
A) Mark sells his tomatoes at the local farmers market
B) The WaveHouse is the only place in San Diego where you can ride an indoor 10 foot wave
C) Village Pizza sells pizza in a college town
D) Space Age Fuel is a gas station in Bend, Oregon
Answer: B
Topic: Perfect Competition
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

3) Fresno County, California is the largest agricultural producing county in the country and
almonds are an important crop with more than 99,000 acres harvested. Each acre produces about
a ton of almonds and sold at a price of $4300 a ton. The Sagardia Brothers grew 600 acres of
almonds that year. In what type of market does the Sagardia Brother operate?
A) Perfect Competition
B) Monopoly
C) Oligopoly
D) Monopolistic Competition
Answer: A
Topic: Perfect Competition
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Communication

142
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4) Fresno County, California is the largest agricultural producing county in the country and
almonds are an important crop with more than 99,000 acres harvested. Each acre produces about
a ton of almonds and sold at a price of $4300 a ton. The Sagardia Brothers grew 600 acres of
almonds that year and they are price takers. What is the Brother's total revenue?
A) $4300
B) $4900
C) $59.4 million
D) $2.58 million
Answer: D
Topic: Total Revenue
Skill: Analytical
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

5) Fresno County, California is the largest agricultural producing county in the country and
almonds are an important crop with more than 99,000 acres harvested. Each acre produces about
a ton of almonds and sold at a price of $4300 a ton. The Sagardia Brothers grew 600 acres of
almonds. What would happen if the Sagardia Brothers priced their almonds at $4500 a ton?
A) Profits will be higher than when they sell them at the lower price
B) The quantity sold will be higher
C) They will not sell any almonds
D) They will sell fewer almonds, but profits will be higher
Answer: C
Topic: Firm's Demand in Perfect Competition
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

6) Fresno County, California is the largest agricultural producing county in the country and
almonds are an important crop with more than 99,000 acres harvested. Each acre produces about
a ton of almonds and sold at a price of $4300 a ton. The Sagardia Brothers grew 600 acres of
almonds . What would happen if the Sagardia Brothers priced their almonds at $4000 a ton?
A) Profits will be higher than when they sell them at the higher price
B) They will sell the same amount of almonds, but profits will be lower
C) The quantity sold will be higher
D) They will not sell any almonds
Answer: B
Topic: Firm's Demand in Perfect Competition
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

143
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7) Fresno County, California is the largest agricultural producing county in the country and
almonds are an important crop with more than 99,000 acres harvested. Each acre produces about
a ton of almonds and sold at a price of $4300 a ton. The Sagardia Brothers grew 600 acres of
almonds . How many tons would the brothers sell if they priced the almonds at $4500 a ton?
A) 0 tons
B) 600 tons
C) 400 tons
D) 200 tons
Answer: A
Topic: Firm's Demand in Perfect Competition
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

8) All along the beach in San Diego, California are shops which rent boogie boards by the hour.
Tourists perceive that all rental boogie boards are identical, all prices are clearly listed on signs
in front of the shops, and there are no restrictions on entry and exit in the boogie board market.
What type of market is the boogie board market?
A) Monopoly
B) Oligopoly
C) Monopolistic Competition
D) Perfect Competition
Answer: D
Topic: Perfect Competition
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

9) All along the beach in San Diego, California are shops which rent boogie boards by the hour.
Tourists perceive that all rental boogie boards are identical, all prices are clearly listed on signs
in front of the shops, and there are no restrictions on entry and exit in the boogie board market.
Suppose Surf's Up is a boogie board rental shop. What is the shape of Surf's Up's demand curve
as compared to the market demand curve?
A) Surf's Up's demand curve is vertical and the market demand curve is downward sloping
B) Surf's Up's demand curve is horizontal and the market demand curve is upward sloping
C) Surf's Up's demand curve is horizontal and the market demand curve is downward sloping
D) Surf's Up's demand curve is vertical and the market demand curve is upward sloping
Answer: C
Topic: Firm's Demand in Perfect Competition
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

144
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10) All along the beach in San Diego, California are shops which rent boogie boards for $3 per
hour. Tourists perceive that all rental boogie boards are identical and there are no restrictions on
entry and exit in the boogie board market. Suppose Surf's Up is a boogie board rental shop. To
maximize profits, Surf's Up would produce a quantity where:
A) Marginal revenue is greater than marginal cost
B) Marginal revenue is equal to marginal cost
C) Marginal revenue is less than marginal cost
D) Price is maximized
Answer: B
Topic: Profit Maximization
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

11) A worldwide hops (a flowers used in brewing) shortage will make stouts, ales and other
specialty microbrews more pricy in 2008. A triple whammy of bad weather in Europe, an
increase in the price of barley and a decrease in hops production in the U.S. has lead to a price
increase of 20 percent for the most widely grown varieties, to 80 percent for specialty hops.
What is the effect of this hops shortage on a microbrewery's cost curves?
A) Short run fixed costs would increase
B) Short run total costs would decrease
C) Short run average variable costs would decrease
D) Short run variable costs would increase
Answer: D
Topic: Variable Cost
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

12) A worldwide hops (a flowers used in brewing) shortage will make stouts, ales and other
specialty microbrews more pricy in 2008. Gayle Goshie, a hops farmer, blames overproduction
for hops' previously cheap place on the agricultural market. The glut pushed many hop farmers
out business, which gradually helped hop prices recover. Suppose farming hops is a perfectly
competitive market. Why would some hop farmers go out of business?
A) Because the price of hops was below the minimum of average fixed cost
B) Because the price of hops was lower than the minimum of average variable cost
C) Because the price of hops was higher than the minimum of average variable cost
D) Because the price of hops was lower than the minimum of average total cost
Answer: B
Topic: Long-Run Adjustments; Exit
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

145
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13) A worldwide hops (a flowers used in brewing) shortage will make stouts, ales and other
specialty microbrews more pricy in 2008. Gayle Goshie, a hops farmer, blames overproduction
for hops' previously cheap place on the agricultural market. The glut pushed many hop farmers
out business, which gradually helped hop prices recover. Suppose farming hops is a perfectly
competitive market. How did farmers going out of business help hop prices recover?
A) Fewer farmers cause the market supply curve to shift leftward causing price to rise
B) Fewer farmers cause an increase in market demand causing price to rise
C) Fewer farmers cause an increase in the surviving firms' costs causing higher prices
D) Fewer farmers cause the individual firms' supply curves to decrease causing higher prices
Answer: A
Topic: Long-Run Adjustments; Exit
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Analytical Skills

14) The USDA maintains ethanol has an impact on food prices. "Higher ethanol production
definitely and directly raises the price of corn," said USDA economist Ephraim Leibtag. In the
short run, what is true if the production of ethanol increases?
A) The demand for corn will increase
B) The supply of ethanol will decrease
C) The supply of corn will increase
D) The demand for ethanol will increase
Answer: A
Topic: Demand
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Communication

15) The USDA maintains ethanol has an impact on food prices. "Higher ethanol production
definitely and directly raises the price of corn," said USDA economist Ephraim Leibtag. In the
short run in the corn market, what is true if the production of ethanol increases?
A) The demand curve for individual corn farmers will shift upward
B) The price individual corn farmers receive will decrease
C) The total cost curve for individual corn farmers will shift upward
D) The marginal cost curve for individual corn farmers will shift downward
Answer: A
Topic: Firm's Demand in Perfect Competition
Skill: Conceptual
Question history: Previous edition, Chapter 12
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16) The USDA maintains ethanol has an impact on food prices. "Higher ethanol production
definitely and directly raises the price of corn," said USDA economist Ephraim Leibtag. In the
short run in the corn market, what is true if the production of ethanol increases?
A) Individual corn farmers will incur an economic loss in the short run and will shut down
B) Individual corn farmers will make an economic profit in the short run
C) Individual corn farmers will incur an economic loss in the short run, but they will still
produce
D) Individual corn farmers will make zero economic profit in the short run
Answer: B
Topic: A Permanent Increase in Demand
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

17) The USDA maintains ethanol has an impact on food prices. "Higher ethanol production
definitely and directly raises the price of corn," said USDA economist Ephraim Leibtag. In the
long run in the corn market, what is true if the production of ethanol increases?
A) Existing corn farmers will exit the market and decrease the market price
B) New corn farmers will enter the market and increase the market price
C) Existing corn farmers will exit the market and increase the market price
D) New corn farmers will enter the market and decrease the market price
Answer: D
Topic: Long-Run Adjustments; Entry
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

18) The USDA maintains ethanol has an impact on food prices. "Higher ethanol production
definitely and directly raises the price of corn," said USDA economist Ephraim Leibtag. In the
long run in the corn market, what is true if the production of ethanol increases?
A) Individual corn farmers will make zero economic profit in the long run
B) Individual corn farmers will make an economic profit in the long run
C) Individual corn farmers will incur an economic loss in the long run, but they will still produce
D) Individual corn farmers will incur an economic loss in the long run and will shut down
Answer: A
Topic: Long-Run Equilibrium
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

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19) What is one reason why would corn production, which takes place in a perfectly competitive
market, achieve an efficient use of resources?
A) Because a perfectly competitive firm produces at the lowest possible long run average total
cost
B) Because a perfectly competitive firm produces where marginal revenue exceeds marginal cost
C) Because a perfectly competitive firm is a price maker
D) Because the goal of a perfectly competitive firm is to profit maximize
Answer: A
Topic: Efficiency of Perfect Competition
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

10 True or False

1) In a perfectly competitive market, many firms sell an identical product.

Answer: TRUE
Topic: Perfect Competition
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

2) Perfectly competitive firms are price takers.

Answer: TRUE
Topic: Price Takers
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

3) A perfectly competitive firm produces so that its marginal cost equals the price.
Answer: TRUE
Topic: Price Takers
Skill: Recognition
Question history: Previous edition, Chapter 12
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148
Copyright © 2012 Pearson Education
4) A perfectly competitive firm maximizes its profit by producing the level of output so that its
average total cost equals the market price.
Answer: FALSE
Topic: Profit-Maximizing Output
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

5) If a firm is maximizing profits, the extra revenue it receives from selling its last unit of output
exceeds the extra cost of producing that unit.
Answer: FALSE
Topic: Marginal Analysis
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

6) In perfect competition, firms enter the market whenever the market price exceeds the
minimum average variable cost.
Answer: FALSE
Topic: Entry and Exit
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

7) A perfectly competitive firm definitely will shut down in the short run if its price is below its
average total cost.
Answer: FALSE
Topic: Shutdown Point
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

8) A firm's shutdown point is the output and price at which the firm's total revenue just equals its
total variable cost.
Answer: TRUE
Topic: Shutdown Point
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

9) Perfectly competitive firms will sometimes operate even though they incur an economic loss
in the short run.
Answer: TRUE
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking
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10) The supply curve for a perfectly competitive firm is the portion of its marginal cost curve
that lies above its marginal revenue curve.
Answer: FALSE
Topic: The Firm's Short-Run Supply Curve
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

11) The supply curve for a perfectly competitive firm is the portion of its marginal cost curve
that lies above the average variable cost curve.
Answer: TRUE
Topic: The Firm's Short-Run Supply Curve
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

12) In the long run, a perfectly competitive firm can make an economic profit because its
marginal cost equals its average total cost.
Answer: FALSE
Topic: Long-Run Equilibrium
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

13) In the long run, perfectly competitive firms cannot earn an economic profit.
Answer: TRUE
Topic: Long-Run Equilibrium
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

14) Entry of new firms into a perfectly competitive market raises the product's price.
Answer: FALSE
Topic: Long-Run Adjustments; Entry
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

15) Entry of new firms into a perfectly competitive market lowers the profits of the existing
firms.
Answer: TRUE
Topic: Long-Run Adjustments; Entry
Skill: Conceptual
Question history: Previous edition, Chapter 12
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16) In the long run, a perfectly competitive firm leaves the market if the market price is less than
the firm's average total cost.
Answer: TRUE
Topic: Long-Run Adjustments; Exit
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

17) Easy entry and exit ensure that perfectly competitive firms cannot make a long-run economic
profit.
Answer: TRUE
Topic: Long-Run Equilibrium
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

18) In the long run, perfectly competitive firms make zero economic profit, that is, their owners
make a normal profit.
Answer: TRUE
Topic: Long-Run Equilibrium
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

19) A long-run market supply curve shows how the quantity supplied by a market varies as the
price varies after all the possible adjustments have been made, including changes in plant size
and the number of firms in the market.
Answer: TRUE
Topic: Long-Run Supply Curve
Skill: Recognition
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

20) In a perfectly competitive market, in the long run a permanent decrease in the market
demand results in a smaller number of firms.
Answer: TRUE
Topic: A Permanent Change in Demand
Skill: Conceptual
Question history: Previous edition, Chapter 12
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151
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21) When the market demand increases in a perfect competition, the long-run result is a larger
number of firms, a higher price, and a permanent economic profit for the firms.
Answer: FALSE
Topic: A Permanent Change in Demand
Skill: Conceptual
Question history: Previous edition, Chapter 12
AACSB: Reflective Thinking

152
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