Question 1

The perfectly competitive firm:

Accepted Answer

A)  makes its profit-maximizing decision only on the basis of output.
B)  faces a downward-sloping demand function.
C)  can influence market price only in a downward direction.
D)  cannot earn any economic profits because it faces a horizontal demand curve.E) A) and B)
F) A) and C)

Question 2

Which of the following statements is correct?

Accepted Answer

A)  Economic profit is the difference between total revenue and the full opportunity cost of all the resources used in production.
B)  Economic profit is the difference between total revenue and explicit costs.
C)  Economic profit is generally greater than accounting profit.
D)  Economic profit is the difference between total revenue and implicit costs.E) A) and B)
F) All of the above

Question 3

Assume the price elasticity of supply for grade wheat has been estimated to be +0.82.This means that when the price of wheat increases by 10 percent, the quantity of wheat supplied to the market increases by 82 percent.

Accepted Answer

A) True 
 B)False

Question 4

Assume a perfectly competitive firm is producing 500 units of output, P = $7, ATC of the 500ᵗʰ unit is $6, marginal cost of the 500ᵗʰ unit = $7, and AVC of the 500ᵗʰ unit = $5.Based on this information, the firm is:

Accepted Answer

A)  earning an economic profit of $500.
B)  earning an economic profit of $1,000.
C)  incurring a loss of $500.
D)  incurring a loss of $1,000.E) None of the above
F) A) and C)

Question 5

If farmers operating in the competitive wheat industry are incurring losses, and are not kept in business with government subsidies, which of the following will result?

Accepted Answer

A)  Price and quantity produced will both increase in the long run.
B)  Resources will be reallocated out of the wheat industry into more productive uses.
C)  Farmers will run economic losses indefinitely, if they are rational.
D)  The supply of wheat will fall to near zero and the U.S. will become dependent on foreign suppliers of food.E) All of the above
F) None of the above

Question 6

The characteristic of ease of entry and exit ensures that perfectly competitive firms will be able to earn positive economic profits over the long run.

Accepted Answer

A) True 
 B)False

Question 7

Assume a firm is currently producing 800 units of output, P = $10, MC = $10, ATC = $8, and AVC = $6.In this case, the firm is maximizing its profit, which equals $1,600.

Accepted Answer

A) True 
 B)False

Question 8

If a market is perfectly competitive and is in long-run equilibrium, which of the following conditions does not hold?

Accepted Answer

A)  Price is equal to the minimum long-run average cost of production.
B)  Economic profit equals zero.
C)  The value of the last unit of output produced is equal to the value of the resources used to produce it.
D)  There is an incentive for additional firms to enter the market because existing firms are earning revenues in excess of the explicit costs of production.E) B) and C)
F) A) and C)

Question 9

Assume that at the current level of output, price equals marginal revenue, but is less than average total cost.So long as price is greater than average variable cost, the firm should continue to operate in the short run to minimize its losses.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following is not a characteristic of the broiler chicken industry?

Accepted Answer

A)  A significant degree of industry concentration, with the four largest firms producing 40 percent of the industry's output.
B)  A significant degree of real and subjective product differentiation.
C)  An inability of individual firms to have any influence market price.
D)  A significant amount of advertising.E) C) and D)
F) A) and B)

Question 11

When a firm is producing at the profit maximizing level of out put and P > ATC, the firm is:

Accepted Answer

A)  breaking even.
B)  incurring an economic loss.
C)  earning an economic profit.
D)  earning a profit or incurring a loss depending on the level of total fixed costs.E) C) and D)
F) A) and D)

Question 12

The market structure that is most different from the model of perfect competition is:

Accepted Answer

A)  monopolistic competition.
B)  monopsony
C)  oligopoly.
D)  monopoly.E) C) and D)
F) A) and B)

Question 13

Which of the following is not a characteristic of perfect competition?

Accepted Answer

A)  Large number of firms in the industry.
B)  Outputs of the firms are perfect substitutes for one another.
C)  Firms face downward-sloping demand functions.
D)  No barriers to entry or exit.E) A) and C)
F) C) and D)

Question 14

Assume the market price is greater than average total cost at the perfectly competitive firm's profit-maximizing level of output.In this case, the firm is earning positive economic profits, which act as an incentive for new firms to enter the market.

Accepted Answer

A) True 
 B)False

Question 15

When the percentage change in quantity supplied is greater than the percentage change in price, supply is said to be elastic.

Accepted Answer

A) True 
 B)False

Question 16

Suppose a perfectly competitive firm, which is initially in long-run equilibrium experiences a decrease in the wages it must pay its employees.In the short run, which of the following will occur?

Accepted Answer

A)  ATC will shift up and MC will shift down, causing the firm to incur a loss.
B)  ATC will shift down and MC will shift up, causing the firm to earn a positive economic profit.
C)  ATC and MC will shift down, causing the firm to earn a positive economic profit.
D)  ATC and MC will shift up, causing the firm to incur a loss.E) C) and D)
F) A) and B)

Question 17

When price is less than average variable cost at the profit-maximizing level of output, a firm should:

Accepted Answer

A)  continue to produce the level of output at which marginal revenue equals marginal cost if it is operating in the short run.
B)  continue to produce the level of output at which marginal revenue equals marginal cost if it is operating in the long run.
C)  shutdown, because it will lose nothing in that case.
D)  shutdown, because it cannot even cover all of its variable costs let alone its fixed costs if it stays in business.E) A) and B)
F) C) and D)

Question 18

Which of the following statements regarding the trucking industry is correct?

Accepted Answer

A)  The recession of 2007 -2009 caused many trucking firms to exit with many firms filing for bankruptcy.
B)  The trucking industry most closely resembles an oligopoly.
C)  Even though there is a high degree of competition, firms in the trucking industry are able to sustain positive economic profits as a result of a substantial degree of product differentiation.
D)  The trucking industry was largely unaffected by the recession of 2007-2009 mainly because the industry is comprised by large firms with significant market power.E) All of the above
F) B) and C)

Question 19

Assume there is an increase in the number of consumers in the market for a good sold by perfectly competitive firms that are initially producing the profit-maximizing level of output.For the individual firm, this would result in:

Accepted Answer

A)  a decrease in both price and the profit-maximizing quantity of output.
B)  a decrease in price and increase in the profit-maximizing quantity of output.
C)  an increase in both price and the profit-maximizing quantity of output.
D)  an increase in price and decrease in profit-maximizing quantity of output.E) B) and D)
F) None of the above

Question 20

Assume a perfectly competitive firm is producing 300 units of output, P = $10, ATC of the 300ᵗʰ unit is $8, marginal cost of the 300ᵗʰ unit = $10, and AVC of the 300ᵗʰ unit = $6.Based on this information, the firm is:

Accepted Answer

A)  earning an economic profit of $600.
B)  earning an economic profit of $1,200.
C)  incurring a loss of $600.
D)  incurring a loss of $1,200.E) A) and D)
F) B) and D)

Exam 7: Market Structure: Perfect Competition

The perfectly competitive firm:

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Which of the following statements regarding the trucking industry is correct?

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Which of the following statements is correct?

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When price is less than average variable cost at the profit-maximizing level of output, a firm should:

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If a market is perfectly competitive and is in long-run equilibrium, which of the following conditions does not hold?

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When the percentage change in quantity supplied is greater than the percentage change in price, supply is said to be elastic.

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Which of the following is not a characteristic of the broiler chicken industry?

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When a firm is producing at the profit maximizing level of out put and P > ATC, the firm is:

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Assume a perfectly competitive firm is producing 500 units of output, P = $7, ATC of the 500ᵗʰ unit is $6, marginal cost of the 500ᵗʰ unit = $7, and AVC of the 500ᵗʰ unit = $5.Based on this information, the firm is:

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The characteristic of ease of entry and exit ensures that perfectly competitive firms will be able to earn positive economic profits over the long run.

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Assume a perfectly competitive firm is producing 300 units of output, P = $10, ATC of the 300ᵗʰ unit is $8, marginal cost of the 300ᵗʰ unit = $10, and AVC of the 300ᵗʰ unit = $6.Based on this information, the firm is:

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Assume a firm is currently producing 800 units of output, P = $10, MC = $10, ATC = $8, and AVC = $6.In this case, the firm is maximizing its profit, which equals $1,600.

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Assume there is an increase in the number of consumers in the market for a good sold by perfectly competitive firms that are initially producing the profit-maximizing level of output.For the individual firm, this would result in:

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Which of the following is not a characteristic of perfect competition?

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Suppose a perfectly competitive firm, which is initially in long-run equilibrium experiences a decrease in the wages it must pay its employees.In the short run, which of the following will occur?

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Assume the price elasticity of supply for grade wheat has been estimated to be +0.82.This means that when the price of wheat increases by 10 percent, the quantity of wheat supplied to the market increases by 82 percent.

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If farmers operating in the competitive wheat industry are incurring losses, and are not kept in business with government subsidies, which of the following will result?

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Assume that at the current level of output, price equals marginal revenue, but is less than average total cost.So long as price is greater than average variable cost, the firm should continue to operate in the short run to minimize its losses.

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The market structure that is most different from the model of perfect competition is:

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Assume the market price is greater than average total cost at the perfectly competitive firm's profit-maximizing level of output.In this case, the firm is earning positive economic profits, which act as an incentive for new firms to enter the market.

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