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1 Practice for Perfect Competition Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following is a defining characteristic of a perfectly competitive industry? 1) A) advertisements by well known celebrities B) persistent economic profits in the long run C) higher prices being charged for certain name brands D) no restrictions on entry into the industry 2) Which of the following is true regarding perfect competition? 2) 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) II and III B) I only C) I and II D) I, II and III 3) Which of the following is NOT an assumption of perfect competition? 3) A) Firms compete by making their product different from products produced by other firms. B) Sellers and buyers are well informed about prices. C) Established firms have no advantage over new firms. D) There are no restrictions on entry into the industry. 4) Perfect competition implies that 4) A) all firms are price takers. B) there are many firms in the industry. C) all firms are producing the same identical product. D) All of the above answers are correct. 5) A perfectly competitive industry is characterized by 5) A) firms that are price setters. B) high barriers to entry. C) easy entry into the industry. D) firms facing a downward sloping demand curve. 1

2 6) Perfect competition exists in an industry if 6) A) there are many firms producing a similar product, each of which may have unique features. B) the firm is always at the break-even point where it is earning only a normal profit. C) the firm chooses price to maximize profit. D) there are many firms producing an identical product. 7) n industry is perfectly competitive if 7) A) there are many firms in it, each selling an identical product. B) there are many firms in it, each selling a slightly different product. C) each firm in it can influence the price of its product. D) there are few firms in the industry. 8) Which of the following is NOT an assumption of perfect competition? 8) A) fixed prices B) many buyers C) no restrictions on entry into the industry D) There are many firms, each selling an identical product. 9) Which of the following is NOT a defining characteristic of perfectly competitive industries? 9) A) consumer knowledge about prices charged by each firm B) many buyers and sellers C) unrestricted entry and exit D) higher prices being charged for certain name brands 10) Which of the following is NOT a characteristic of a perfectly competitive industry? 10) A) Each firm takes price as given, determined by the equilibrium of industry supply and industry demand. B) There are no restrictions on entry into the industry. C) Each firm produces a slightly differentiated product. D) There are many firms. 2

3 11) An example of a perfectly competitive industry is 11) A) GSM operators B) the National Football League. C) the market for French impressionists' paintings. D) the market for corn in Turkey. 12) An example of a perfectly competitive firm is 12) A) a big city newspaper. B) a U.S. automobile producer. C) the local cable TV company. D) an oat farmer in the United States. 13) The difference between a firm's total revenue and its total opportunity cost is the firm's 13) A) marginal revenue. B) normal profit. C) marginal profit. D) economic profit. 14) In a perfectly competitive industry 14) A) each firm is a price taker. B) each firm sets its own price so that it is different from the prices of its competitors. C) earning an economic profit is certain. D) consumers band together to demand the lowest price possible. 15) If a firm is in a perfectly competitive industry, then 15) A) the demand for its product is perfectly elastic. B) it cannot survive in the long run. C) it cannot earn an economic profit in the short run. D) it will have no fixed costs in the short run. 16) When a firm is considered to be a "price taker" that means that it 16) A) can charge any price that it wants to charge, that is, "take" any price it wants. B) will accept ("take") the lowest price that its customers offer. C) cannot influence the market price of the good that it sells. D) pays a fixed price for all of its inputs. 3

4 17) Individual firms in perfectly competitive industries are price takers because 17) A) each individual firm is too small to affect the market price. B) firms decide together on the best prices to charge. C) buyers set prices. D) the government sets all prices. 18) In perfect competition, 18) A) the market demand for the good is not perfectly elastic but the demand for the output of one firm is perfectly elastic. B) both the market demand for the good and the demand for the output of one firm are perfectly elastic. C) the market demand for the good is perfectly elastic but the demand for the output of one firm is not perfectly elastic. D) neither the market demand for the good nor the demand for the output of one firm is perfectly elastic. 19) In a perfectly competitive market, 19) A) an economic profit is certain. B) consumers are persuaded by advertising. C) each firm takes the good's price as given to it by the market. D) each firm sets its own price so that it is different from its competitors. 20) Price taking behavior exists in 20) A) automobile markets where consumers have to take the price set by the dealer. B) perfectly competitive markets. C) markets with a monopolist, where consumers have to take price as it is given to them by the monopolist. D) Both answers B and C are correct. 21) In a perfectly competitive industry, which of the following determines the market price? 21) A) market demand and a firm's supply B) market demand and market supply C) a firm's demand and supply D) market supply and a firm's demand 4

5 22) Because each perfectly competitive firm sells a product identical to that of the other firms, 22) A) each firm can expect to earn some economic profit. B) each firm's output is a perfect substitute for the output of any other firm. C) the demand for each firm's product is perfectly inelastic. D) each firm will try to cut prices to increase its market share. 23) The assumption that a perfectly competitive industry has many sellers, each selling an identical 23) product, leads to the conclusion that A) firms are price takers. B) there are many buyers. C) consumers get to see a variety of outputs. D) the economic profit will be positive in the long run. 24) In perfect competition 24) A) 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. B) demand for the good or service is small relative to the minimum efficient scale of a single producer. C) demand for the good or service is large relative to the minimum efficient scale of a single producer. D) the size of demand for the good or service relative to the minimum efficient scale of a single producer does not affect competition. 25) If the minimum efficient scale of a firm is small relative to the demand for the good, then 25) A) many small firms can enter the market. B) several large firms will enter the market thereby reducing competition. C) firms have a minimum efficiency and could do better by producing more. D) there will be no economic profits for any small firms, so no new firms will enter. 26) In perfect competition, an individual firm sets 26) A) determines the quantity it sells in the marketplace but has no influence over its price. B) sets the price but does not determine the quantity it sells in the marketplace. C) the price and determines the quantity it sells in the marketplace. D) can not affect its price nor determine the quantity it sells in the marketplace. 5

6 27) In a perfectly competitive industry, the demand for a single firm's product is 27) A) inelastic, but not perfectly inelastic. B) as elastic as the market demand. C) perfectly inelastic. D) perfectly elastic. 28) Perfectly competitive firms have a total revenue curve that is 28) A) upward sloping with a decreasing slope. B) upward sloping with a constant slope. C) downward sloping with a constant slope. D) upward sloping with an increasing slope. 29) For a perfectly competitive firm, price is the same as 29) A) marginal revenue. B) total revenue. C) average variable cost. D) Both answers A and B are correct. 30) The marginal revenue curve for perfectly competitive firms is 30) A) a downward sloping curve. B) an upward sloping curve. C) a horizontal line. D) None of the above answers is correct. 31) A perfectly competitive firm's marginal revenue 31) A) increases as the firm produces more output. B) decreases as the firm produces more output. C) equals the market price of its product. D) is less than the market price of its product. 32) Because the demand for a perfectly competitive firm's product is perfectly elastic, marginal revenue 32) is equal to A) the price of the product. B) negative one. C) zero. D) one. 33) Which of the following is always true for a perfectly competitive firm? 33) A) P = ATC B) P = MR C) P = AVC D) MR = ATC 6

7 34) A perfectly competitive firm can in the short run. 34) A) determine what quantity to produce B) enter or exit an industry C) change its plant size D) determine the market price 35) In the short run, a perfectly competitive firm will decide 35) A) both the price and the quantity produced. B) only the quantity produced because the price is taken as given. C) to enter or exit an industry. D) only its price because the quantity produced is fixed by its plant size. 36) If a firm has a fixed plant and equipment stock, and it is deciding on its best output level, the firm 36) must be A) in the short-run. B) at the shutdown point. C) in the business cycle. D) in the long-run. 37) Which of the following is NOT a decision firms must make in the short run? 37) A) whether to enter or leave an industry B) what quantity to produce C) whether to produce or shut down D) None of the above answers is correct because all are decisions firms must make in the short run. 38) A perfectly competitive firm maximizes its economic profit if it produces so that 38) A) total revenue = total cost. B) marginal revenue = marginal cost. C) average total cost = average variable cost. D) average revenue = average total cost. 39) A perfectly competitive firm maximizes its profit by 39) A) cutting wages. B) setting its price so that it exceeds the marginal revenue. C) choosing the right level of output. D) manipulating demand. 7

8 40) When marginal revenue equals marginal cost, a perfectly competitive firm is 40) A) determining the price it will set. B) maximizing its profit. C) maximizing its revenues. D) establishing its shutdown point. 41) As long as it does not shut down, a perfectly competitive firm earns the maximum profit possible 41) as long as it operates so that A) its price exceeds its marginal revenue. B) its price exceeds its average total cost. C) its marginal revenue equals its marginal cost. D) market demand is inelastic. Quantity (gloves per day) Total cost (dollars) ) The above table shows the per day total cost for Kiley's Baseball Glove Company. Each glove is 42) priced at $50 and Kiley's Baseball Glove Company is a perfectly competitive firm. At which of the following output levels is the economic profit maximized for Kiley's Baseball Glove Company? A) 8 B) 5 C) 0 D) 2 43) The above table shows the per day total cost for Kiley's Baseball Glove Company. Each glove is 43) priced at $50 and Kiley's Baseball Glove Company is a perfectly competitive firm. Between which two output levels does Kiley's Baseball Glove Company earn an economic profit? A) 1 and 8 B) 3 and 6 C) 2 and 7 D) 0 and 8 8

9 Quantity (dozens of sea shells per day) Total variable cost (dollars) ) Sue's Sea Shells by the Sea Shore is a perfectly competitive firm selling sea shells at the market price 44) of $2/dozen. Sue's Sea Shells by the Sea Shore has fixed costs of $40/day and a daily variable cost schedule in the table above. The profit-maximizing level of output for Sue's Sea Shells by the Sea Shore is A) 206 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) 202 dozen sea shells by the sea shore per day. 45) Sue's Sea Shells by the Sea Shore is a perfectly competitive firm selling sea shells at the market price 45) of $2/dozen. Sue's Sea Shells by the Sea Shore has fixed costs of $40/day and a daily variable cost schedule in the table above. The maximum profit attainable by Sue's Sea Shells by the Sea Shore is A) $ per day. B) $ per day. C) $ per day. D) $ per day. 46) Sue's Sea Shells by the Sea Shore is a perfectly competitive firm selling sea shells at the market price 46) of $2/dozen. Sue's Sea Shells by the Sea Shore has fixed costs of $40/day and a daily 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) increase. B) remain constant. C) decrease. D) It is impossible to say. 47) For a perfectly competitive firm, as its output increases its marginal revenue and its 47) marginal cost. A) changes; does not change B) does not change; changes C) changes; changes D) does not change; does not change 9

10 48) If a perfectly competitive firm finds that it is producing an amount of output such that MR > MC 48) and P > AVC, it will A) leave the industry. B) decrease its output. C) not change its behavior. D) increase its output. 49) If marginal revenue exceeds marginal cost, to increase its profit the firm will 49) A) decrease its output. B) shut down. C) increase its output. D) keep its output the same. 50) If the price exceeds the average variable cost, by producing the level of output such that marginal 50) revenue equals marginal cost, the firm ensures that A) it will survive in the long run. B) it will not suffer any losses. C) it will earn the largest profit possible. D) it will earn economic profits. 51) In a perfectly competitive market, if a firm finds it is producing at a level of output such that its 51) marginal cost exceeds its price, it will A) increase its output to increase its profit. B) decrease its output to increase its profit. C) immediately shut down for the short run. D) be maximizing profits. 52) Sarah's Garage Cleaning is a perfectly competitive firm that currently cleans 40 garages a week. 52) Sarah's short-run marginal cost is lower than the price she charges. Sarah will increase her profit if she A) cleans more than 40 garages a week. B) cleans fewer than 40 garages a week. C) charges a lower price. D) charges a higher price. 53) Bob's Lawn Care Services is a perfectly competitive firm that currently mows 22 lawns a week. 53) Bob's short-run marginal cost is higher than the price he charges and increasing. Bob will increase his profit if he A) moves more than 22 lawns a week. B) charges a lower price. C) moves fewer than 22 lawns a week. D) charges a higher price. 10

11 Quantity (pounds of cookies) Total revenue (dollars) Total cost, (dollars) ) The table above gives the total revenue and total cost for a perfectly competitive firm producing 54) 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) $45 C) $15 D) $30 55) The table above gives the total revenue and total cost for a perfectly competitive firm producing 55) 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) $24 B) $39 C) $11 D) $15 56) The table above gives the total revenue and total cost for a perfectly competitive firm producing 56) chocolate chip cookies. If the firm is producing 1 pound of cookies, to maximize its profit it will A) decrease its output. B) increase its output. C) shut down. D) continue producing 1 pound of cookies. 57) The table above gives the total revenue and total cost for a perfectly competitive firm producing 57) chocolate chip cookies. If the firm is producing 4 pounds of cookies, to maximize its profit it will A) decrease its output. B) increase its output. C) shut down. D) continue producing 4 pounds of cookies. 11

12 58) The figure above depicts the marginal revenue and costs of a perfectly competitive firm. The firm's 58) profit is maximized when the firm produces A) 210 units of output. B) 90 units of output. C) 170 units of output. D) 130 units of output. 59) The figure above depicts the marginal revenue and costs of a perfectly competitive firm. When the 59) firm produces 170 units, A) total revenue equals total cost. B) marginal revenue equals marginal cost. C) total revenue is less than total cost. D) marginal cost is less than marginal revenue. 60) The figure above depicts the marginal revenue and costs of a perfectly competitive firm. The 60) marginal cost of the last unit produced A) $16 per unit. B) $4 per unit. C) $8 per unit. D) None of the above answers is correct. 12

13 61) The figure above depicts the marginal revenue and costs of a perfectly competitive firm. The price 61) the firm charges is A) $8 per unit. B) $4 per unit. C) $16 per unit. D) None of the above answers is correct. 62) The figure above depicts the marginal revenue and costs of a perfectly competitive firm. When ) units are produced, the A) firm's total costs are less than $2,720. B) firm is earning an economic profit. C) firm has total revenue of $2,720. D) All of the above are true. 63) The figure above depicts the marginal revenue and costs of a perfectly competitive firm. When ) units are produced, the firm A) would incur an economic loss. B) has total costs less than $2,720. C) would definitely shut down. D) would increase its price. Quantity Total fixed cost, TFC (dollars) Total variable cost, TVC (dollars) ) The table above shows some of the costs for a perfectly competitive firm. The firm will produce 9 64) units of output if the price per unit is A) $500. B) $1750. C) $300. D) $ ) The table above shows some of the costs for a perfectly competitive firm. If the price is $160 per 65) unit, how many units of output will the firm produce? A) 10 B) 9 C) more than 10 D) 8 13

14 66) In the short run, a perfectly competitive firm 66) A) will always earn an economic profit. B) might not earn an economic profit. C) will be in equilibrium only when its economic profit is positive. D) chooses its optimal plant size. 67) In the short run, a perfectly competitive firm will earn an economic profit as long as 67) A) P > AFC. B) P > ATC. C) it maximizes its profit. D) P > AVC. 68) The figure above shows a perfectly competitive firm. To maximize its profit, the firm will 68) A) produce 20 units of output and the price will be $40 each. B) produce 20 units of output and the price will be $30 each. C) produce 30 units of output and the price will be $40 each. D) produce 30 units of output and the price will be $30 each. 14

15 69) The figure above shows a perfectly competitive firm. The firm's total revenue is 69) A) $1200. B) $600. C) $900. D) unable to be determined without more information. 70) The figure above shows a perfectly competitive firm. The firm's economic profit 70) A) is $300. B) is more than $300. C) is less than $300. D) The premise of the question is wrong because the firm is incurring an economic loss. 71) The figure above shows a perfectly competitive firm. The figure shows a firm 71) A) in the short run. B) at its shutdown point. C) in the long run. D) Both answers A and C are correct. 72) The figure above shows a perfectly competitive firm. In the short run, the firm will shut down if the 72) price is A) above $40. B) below $40. C) below $30. D) More information is needed to answer the question. 73) A firm's shutdown point is the output and price at which the firm just covers its 73) A) total variable cost. B) total fixed cost. C) marginal cost. D) total cost. 74) A perfectly competitive firm will shut down in the short run when the price is less than 74) A) average variable cost. B) marginal cost. C) average fixed cost. D) average total cost. 15

16 75) If a perfectly competitive firm decides to shut down in the short run, its loss will equal its 75) A) minimum average variable cost, AVC. B) total fixed cost, TFC. C) average total cost, ATC. D) total variable cost, TVC. 76) At its shutdown point, a perfectly competitive firm earns total revenue that 76) A) exceeds its total cost. B) generates a normal profit. C) exceeds its total variable cost. D) just equals its total variable cost. 77) In the short run, a perfectly competitive firm NEVER 77) A) earns a normal profit. B) produces where MR = MC. C) earns an economic profit. D) incurs a loss greater than its total fixed costs. 78) In the short run, a perfectly competitive firm might 78) A) set its price above marginal revenue. B) set its price above marginal cost. C) adjust the size of its fixed inputs. D) operate even though it is incurring an economic loss. Quantity (pizzas per hour) Total cost, TC (dollars per hour) ) Giuseppe's Pizza is a perfectly competitive firm. The firm's costs are shown in the table above. If 79) the market price is $15, what is Giuseppe's profit-maximizing output? A) 3 pizzas per hour B) 2 pizzas per hour C) 0 pizzas per hour D) 4 pizzas per hour 16

17 80) Giuseppe's Pizza is a perfectly competitive firm. The firm's costs are shown in the table above. If 80) the market price is $20, what is Giuseppe's profit-maximizing output? A) 2 pizzas per hour B) 0 pizzas per hour C) 3 pizzas per hour D) 4 pizzas per hour 81) Giuseppe's Pizza is a perfectly competitive firm. The firm's costs are shown in the table above. If 81) the market price is $15, how much economic profit does the firm make? A) $30 B) $0 C) -$10 D) -$15 82) Giuseppe's Pizza is a perfectly competitive firm. The firm's costs are shown in the table above. If 82) the market price is $20, how much economic profit does the firm make? A) -$20 B) -$10 C) $12 D) $0 83) Giuseppe's Pizza is a perfectly competitive firm. The firm's costs are shown in the table above. If 83) the market price is $15, the firm will A) leave the industry in the long run. B) stay in the industry in the long run. C) make an economic profit. D) shut down. 84) Giuseppe's Pizza is a perfectly competitive firm. The firm's costs are shown in the table above. If 84) the market price is $22, the firm will A) shut down. B) incur an economic loss. C) stay in the industry in the long run. D) leave the industry in the long run. 85) Giuseppe's Pizza is a perfectly competitive firm. The firm's costs are shown in the table above. The 85) firm's shutdown point is A) $8. B) $12. C) $17. D) $2. 17

18 86) The figure above shows a perfectly competitive firm. In the short run, the firm will shut down 86) A) only if the AVC of producing 10 units is less than $20. B) only if the AVC curve reaches its minimum before 10 units are produced. C) only if the AVC of producing 10 units is more than $20. D) always. 87) The figure above shows a perfectly competitive firm. The firm is operating; that is, the firm has not 87) shut down. The firm is A) earning an economic profit of $200. B) incurring an economic loss of $600. C) earning a normal profit. D) incurring a economic loss of $ ) The figure above shows a perfectly competitive firm. The firm is operating; that is, it has not shut 88) down. The firm produces A) 20 units of output and incurs an economic loss. B) 20 units of output and earns a normal profit. C) 10 units of output and incurs an economic loss. D) 10 units of output and earns a normal profit. 18

19 89) Which of the following statements is TRUE? 89) A) The presence of positive economic profit in a perfectly competitive industry is consistent with the characteristics of a long-run competitive equilibrium. B) If a profit-maximizing firm in a perfectly competitive industry is incurring an economic loss, then it must be producing at a level of output where price is greater than average total cost. C) If a profit-maximizing firm in a perfectly competitive industry is earning positive economic profit, then it must be producing at a level of output where price is greater than average total cost. D) When firms in a perfectly competitive industry earn economic losses, some will exit in the long run, thereby shifting the industry supply curve rightward. 90) A perfectly competitive firm is earning an economic profit when 90) A) the price is greater than the minimum of its average total cost. B) its total revenue is greater than its total cost. C) the price is greater than the minimum of its average variable cost. D) Both answers A and B are correct. 19

20 91) In the above figure, at a price of $6, a perfectly competitive firm would produce and it 91) would. A) 0; earn an economic profit B) some output; incur an economic loss C) 0; not incur an economic loss or earn an economic profit D) 0; incur an economic loss 92) The short-run market supply curve for a perfectly competitive industry is obtained by summing 92) A) each firm's MC curve that lies below the AVC curve. B) the part of each firm's MC curve that lies above its AVC curve. C) each firm's AVC curve that lies below the MC curve. D) the part of each firm's AVC curve that lies above its MC curve. 93) The short-run supply curve for a perfectly competitive firm is equal to the 93) A) marginal cost curve for prices greater than average variable cost. B) marginal cost curve at all prices. C) marginal cost curve for prices greater than average total cost. D) marginal cost curve for prices less than average variable cost. 20

21 94) In the above figure, the perfectly competitive firm's shutdown point is at a price of 94) A) $16 per unit. B) $12 per unit. C) $4 per unit. D) $8 per unit. 95) In the above figure, if the price is $16 per unit, how many units will a profit maximizing perfectly 95) competitive firm produce? A) 20 B) 30 C) 0 D) 35 96) In the above figure, if the price is $12 per unit, how many units will a profit maximizing perfectly 96) competitive firm produce? A) 20 B) 0 C) 35 D) 30 97) In the above figure, if the price is $8 per unit, how many units will a profit maximizing perfectly 97) competitive firm produce? A) 20 B) 35 C) 5 D) 30 98) In the above figure, if the price is $4 per unit, how many units will a profit maximizing perfectly 98) competitive firm produce? A) 30 B) 5 C) 0 D) 20 21

22 99) In the above figure, if the price is $16 per unit, the profit maximizing perfectly competitive firm will 99) A) shut down. B) earn an economic profit. C) earn a normal profit. D) incur an economic loss but continue to operate. 100) The above figure shows the cost curves for a perfectly competitive firm. If all firms in the industry 100) have the same cost curves and the price equals $16 per unit, A) over time, the price will fall as new firms enter the industry. B) over time, firms will leave this industry. C) the industry is in its long-run equilibrium. D) the firm is earning zero economic profit. 101) In the short run, which of the following can occur in a perfectly competitive market? 101) A) Firms can earn an economic profit. B) Firms can adjust the size of their plant. C) Firms can charge a price above the market price. D) Firms can enter or exit the industry. 102) In a perfectly competitive market, which of the following will increase the profits the firms earn in 102) the short run? A) an increase in market demand B) a decrease in market demand C) an increase in the number of firms D) an increase in labor costs 103) If firms in a perfectly competitive industry are presently earning zero economic profit, then 103) A) there will be no incentive for either entry or exit. B) some of those firms will leave the industry, because firms cannot persistently go without making economic profit. C) new firms will enter the industry, because the new entrants would be ensured of doing as well as in their best foregone alternative. D) some of the firms will temporarily shut down. 22

23 104) Homer's Holesome Donuts has determined that its profit-maximizing quantity is 10,000 donuts per 104) 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) $21,000. B) $16,000. C) $5,000. D) ) Homer's Holesome Donuts has determined that its profit-maximizing quantity is 10,000 donuts per 105) 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) $21,000. C) $5,000. D) $16, ) Homer's Holesome Donuts has determined that its profit-maximizing quantity is 10,000 donuts per 106) 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) +$9,000. B) +12,000. C) -$9,000, that is, an economic loss of $9,000. D) -$16,000, that is, an economic loss of $16, ) Homer's Holesome Donuts has determined that its profit-maximizing quantity is 10,000 donuts per 107) 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 earning an economic loss. B) No, because is earning positive economic profit. C) No, because he can cover all of his variable costs. D) Yes, because he cannot cover all of his fixed costs. 23

24 108) Homer's Holesome Donuts has determined that its profit-maximizing quantity is 10,000 donuts per 108) 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 industry in the long run? A) No, because he is earning an economic profit. B) No, because all costs are variable in the long run. C) Yes, because he is earning an economic loss. D) Yes, because all costs are fixed in the long run. 109) Suppose firms in a perfectly competitive industry are earning economic profits. As a result, 109) I. new firms enter the industry. II. the market price falls. III. the economic profits of the existing firms eventually decreases. A) I and II B) I and III. C) I, II and III D) II and III 110) In a perfectly competitive market in the short run, as the market demand increases, the firms 110) their output and their profit. A) decrease; decreases B) increase; increases C) decrease; increases D) increase; decreases 111) In the short run, an increase in demand for a product that is sold in a perfectly competitive market 111) will A) increase the number of firms in the market. B) increase the profits of existing firms in the market. C) cause more firms to shut down. D) have no effect on the price. 112) In the long run, for a perfectly competitive market, 112) A) if economic profit is greater than zero then some firms will enter the market and the market supply curve will shift rightward. B) if economic profit is equal to zero then there is no entry or exit of firms into or out of the market. C) if economic profit is less than zero then some firms will exit the market and the industry supply curve will shift leftward. D) All of the above answers are correct. 24

25 113) Entry in a perfectly competitive market 113) 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. 114) Suppose firms in a perfectly competitive market are earning an economic profit. As new firms 114) enter, the price and the economic profit of each existing firm. A) falls; increases B) rises; increases C) rises; decreases D) falls; decreases 115) Suppose some firms in a perfectly competitive industry are incurring an economic loss. As a result, 115) A) the total industry economic profit must equal $0. B) some firms will leave the industry and the remaining firms' quantity will decrease. C) some firms will leave the industry and the price of the good will rise. D) all the firms will eventually incur an economic loss. 116) Suppose firms in a perfectly competitive industry are incurring an economic loss. As firms exit, the 116) price and the economic loss of the surviving firms. A) rises; increases B) falls; decreases C) rises; decreases D) falls; increases 117) In the long-run, if firms in a perfectly competitive industry are incurring persistent economic 117) losses, some firms will A) enter and the price might either rise or fall. B) exit and the price might either rise or fall. C) exit and the price will rise. D) exit and the price will fall. 118) A perfectly competitive firm initially is making no economic profit. Then, a decrease in demand for 118) 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 its advertising to increase the demand for its product. B) Exit the market. C) Increase the price it charges for its product. D) Increase the quantity it produces. 25

26 119) In the long-run equilibrium in a perfectly competitive industry, the economic profit of the firms is 119) A) negative. B) positive. C) zero. D) increasing. 120) Which of the following is NOT present in a perfectly competitive market? 120) A) identical products B) profit maximizing firms C) price taking behavior D) long-run economic profits 121) If the donut industry is perfectly competitive and is in long-run equilibrium, then the price of a 121) donut A) is greater than long-run average cost. B) is greater than short-run average cost. C) is greater than marginal cost. D) equals long-run average cost. 122) In the long run, perfectly competitive firms earn zero economic profit. This result is due mainly to 122) the assumption of A) few buyers and sellers. B) price taking by the firms. C) a perfectly elastic market demand. D) unrestricted entry and exit. 123) For a perfectly competitive firm, in the long-run equilibrium, 123) A) MR = MC = AFC. B) P = MC > ATC. C) P = MC = ATC = MR. D) MR = P = ATC = AFC. 124) In the long-run equilibrium, perfectly competitive firms produce the level of output such that 124) 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. 125) In the long-run equilibrium, perfectly competitive firms produce 125) A) where average revenue is zero. B) where marginal cost is minimized. C) where average total cost is minimized. D) All of the above are correct. 26

27 126) If there is a permanent decrease in demand in a perfectly competitive industry, then there is an 126) initial A) increase in price and existing firms earn an economic profit. B) decrease in price and existing firms earn an economic profit. C) increase in price and existing firms earn an economic loss. D) decrease in price and existing firms earn an economic loss. 127) In a perfectly competitive market that is in long-run equilibrium, a rightward shift in the market 127) demand curve results in A) the price falling in the short run. B) firms leaving the industry in the long run. C) the firms' economic profits falling in the short run. D) None of the events listed above. 128) Suppose a perfectly competitive industry is in a long-run equilibrium when a permanent decrease 128) in the market demand occurs. In the long run, which of the following definitely occurs? A) the price decreases. B) the firms' marginal cost increases. C) the number of firms decreases. D) marginal revenue increases. 129) Suppose a perfectly competitive industry is in long-run equilibrium. If there is a permanent 129) increase in demand, A) new firms will enter the market. B) at least in the short run, the price will increase initially. C) at least in the short run, some firms will increase their output. D) All of the above answers are correct. 130) The market for maple syrup is perfectly competitive. Suppose that the market is in long-run 130) 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 increase production. D) The firms decrease production. 27

28 131) The market for maple syrup is perfectly competitive. Suppose that the market is in long-run 131) equilibrium when the market demand for maple syrup increases. After the demand increases, a typical firm will A) earn a normal profit. B) incur an economic loss. C) earn an economic profit. D) exit the market. 132) The market for maple syrup is perfectly competitive. Suppose that the market is in long-run 132) equilibrium when the market demand for maple syrup increases. In the long run, firms will the market and the market will. A) enter; supply; decrease B) leave; supply; decrease C) enter; supply; increase D) leave; demand; decrease 28

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