Department of Economics
University of Lethbridge
Econ 1010A
Practice Questions – Chapter 10
1. The firms in the oat industry are currently receiving a price of $2 per bushel for their
product and there are constant returns to scale. The minimum possible average total
cost of producing oats in the long-run is $1 per bushel. Other things being equal, it
follows that
A) the price of oats will be $2 in the long-run.
B) the price of oats will be somewhere between $1 and $2 in the long-run.
C) the price of oats will be $1 in the long-run.
D) it is not possible to determine the price of oats in the long-run from the information
given.
2. To maximize profits, a perfectly competitive firm should produce until
A) price is greater than average total cost.
B) marginal cost is equal to price.
C) average total cost is minimized.
D) per unit profits are maximized.
Use the following to answer question 3:
Price, Costs
MC
ATC
P4
P3
P2
AVC
P1
0
Q1 Q2 Q3 Q4
Output
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3. Refer to the graph above. If the market price is P4, the maximum profit that the firm can
earn is
A) Q4 multiplied by P4.
B) Q3 multiplied by P3.
C) Q4 multiplied by the difference between P4 and P3.
D) Q3 multiplied by the difference between P3 and P2.
Use the following to answer question 4:
Quantity
1
2
3
4
5
6
7
8
9
Marginal
Cost
$24
18
15
13
15
20
26
35
40
Total
Cost
$68
75
90
103
118
138
164
199
239
Total
Revenue
$35
70
105
140
175
210
245
280
315
4. Refer to the table above. If a firm is producing 5 units of output, then its marginal
revenue is
A) less than its marginal cost and it should reduce output to increase profits.
B) less than its marginal cost and it should increase output to increase profits.
C) is greater than its marginal cost and it should reduce output to increase profits.
D) is greater than its marginal cost and it should increase output to increase profits.
5. Long-run market supply is an upward-sloping line in a(n)
A) decreasing-cost industry.
B) constant-cost industry.
C) increasing-cost industry.
D) perfectly competitive industry.
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6. In an increasing-cost industry
A) factor prices do not change as industry output increases.
B) factor prices rise as industry output increases.
C) factor prices fall as industry output increases.
D) there is no way to predict what will happen to factor prices as industry output
increases.
7. If the long-run market supply curve is perfectly elastic, a fall in demand would cause the
final equilibrium to be
A) at the same price but a lower output.
B) at a lower price and a lower output.
C) at a lower price but the same output.
D) at the same price and the same output.
8. A perfectly competitive firm facing a price of $50 decides to produce 500 widgets. Its
marginal cost of producing the last widget is $50. If the firm's goal is maximize profit, it
should
A) produce more widgets.
B) produce fewer widgets.
C) continue producing 500 widgets.
D) shut down.
Use the following to answer question 9:
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9. Refer to the graph above. If market demand increases from D0 to D1, then the firm will
A) lower the price it charges.
B) earn negative economic profit in the short run.
C) earn positive economic profit in the short run.
D) earn positive economic profit in the long run.
10. A perfectly competitive firm will be profitable if price at the profit-maximizing quantity
is
A) above MC.
B) above AVC.
C) above ATC.
D) above AFC.
11. If the retailing industry is perfectly competitive and Wal-Mart opens five new stores,
output must be such that
A) price equals marginal cost.
B) price exceeds average variable cost.
C) marginal cost equals average total cost.
D) price exceeds average total cost.
Use the following to answer question 12:
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12. Refer to the graph above. If market demand is D0, then
A) the firm shown in the graph will produce q0, but all of the firms in the market will
produce a total of Q0.
B) the firm shown in the graph will produce q1, but all of the firms in the market will
produce a total of Q1.
C) the output of the firm shown in the graph is the same as quantity supplied in the
market.
D) the firm is not producing where profit is maximized.
Supply
Price
Price
Use the following to answer question 13:
MC
ATC
P0
MR0
P1
MR1
D0
D1
Q3 Q2 Q1 Q0
Market Quantity
q0 q1
q2
Firm Quantity
13. Refer to the graph above. If market demand decreases from D0 to D1, then market
supply will
A) shift to the right in the long run as new firms enter this market.
B) shift to the right in the short run as new firms enter this market.
C) shift to the left in the long run as some firms exit this market.
D) shift to the left in the short run as some firms exit this market.
14. If market demand increases in a decreasing-cost industry
A) new firms will enter the industry, factor prices will rise, and the price at which each
firm earns zero economic profit will increase.
B) new firms will enter the industry, factor prices will fall, and the price at which each
firm earns zero economic profit will fall.
C) some firms will exit the industry, factor prices will rise, and the price at which each
firm earns zero economic profit will increase.
D) some firms will exit the industry, factor prices will fall, and the price at which each
firm earns zero economic profit will fall.
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Price
Supply
Price
Use the following to answer question 15:
MC
ATC
P0
MR0
P1
MR1
D0
D1
Q3 Q2 Q1 Q0
Market Quantity
q0 q1
q2
Firm Quantity
15. Refer to the graph above. If market demand is D0, then
A) the firm shown in the graph will produce q0, but all of the firms in the market will
produce a total of Q0.
B) the firm shown in the graph will produce q1, but all of the firms in the market will
produce a total of Q1.
C) the output of the firm shown in the graph is the same as quantity supplied in the
market.
D) the firm is not producing where profit is maximized.
Use the following to answer question 16:
Cost
marginal
cost
$7.00
E
$6.00
D
$5.00
C
$4.00
B
$3.00
A
$2.00
$1.00
$0.00
0
450 550 650 750 850
Quantity
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16. Refer to the graph above. If market price is currently $3.00 per unit, this firm will
maximize profit by producing
A) 450 units of output.
B) 650 units of output.
C) 850 units of output.
D) between 550 and 650 units of output.
17. The demand curve for a perfect competitor is equal to
A) its marginal cost curve.
B) its marginal revenue curve.
C) its average total cost curve.
D) its average fixed cost curve.
Use the following to answer question 18:
Quantity
10
20
30
40
Total Cost
$25
60
105
160
Total Revenue
50
100
150
200
18. Based on the above information, a profit-maximizing firm would produce
A) 10 units of output.
B) 20 units of output.
C) 30 units of output.
D) 40 units of output.
19. Suppose there are 200 firms in a perfectly competitive market and each maximizes
profit at 120 units of output when market price is $5.00 per unit. One of the points on
the market supply curve must be at
A) price = $5 and quantity supplied = 320.
B) price = $5 and quantity supplied = 24,000.
C) price = $1,000 and quantity supplied = 320.
D) price = $1,000 and quantity supplied = 24,000.
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20. In a perfectly competitive market
A) price does more of the adjusting in the long run and quantity does more of the
adjusting in the short run.
B) price does more of the adjusting in the short run and quantity does more of the
adjusting in the long run.
C) only price adjusts in both the short run and the long run.
D) only quantity adjusts in both the short run and the long run.
21. As long as marginal cost is below marginal revenue, a competitive firm should
A) increase production.
B) hold production constant.
C) decrease production.
D) reconsider past production decisions.
22. Perfectly competitive firms
A) maximize market share.
B) maximize total sales.
C) minimize total costs.
D) maximize profits.
Use the following to answer question 23:
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23. Refer to the graph above. If market demand increases from D0 to D1, then
A) market price rises from P0 to P1 and the firm's output rises from q0 to q1.
B) market price rises from P0 to P1 and the firm's output rises from Q0 to Q1.
C) market price remains at P0, because perfectly competitive firms can't earn positive
economic profit.
D) the firm's output remains at q0, because perfectly competitive firms can't earn
positive economic profit.
24. A firm is a price taker if
A) it sets its own price.
B) it sets its own price, but only after consulting with other companies.
C) it sells its output at the market-determined price.
D) it sets its price based on the demand curve it faces.
Price
Use the following to answer question 25:
8
7
6
5
4
3
2
1
0
0
120
MC
ATC
LRAC
20 40
60
80
100 120
Output per day
25. Refer to the graph above. When the industry is in long-run competitive equilibrium
A) the price of the product will be $6.
B) the firm will produce 100 units of output.
C) the firm will earn economic profits of $300 per day.
D) the marginal cost of production will be $3.
Use the following to answer question 26:
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Quantity
1
2
3
4
5
6
7
8
9
Marginal
Cost
$24
18
15
13
15
20
26
35
40
Total
Cost
$68
75
90
103
118
138
164
199
239
Total
Revenue
$35
70
105
140
175
210
245
280
315
26. Refer to the table above. The total variable cost of producing 8 units is
A) $199.
B) $155.
C) $280.
D) $25.
Use the following to answer question 27:
$12.50
MC
Price , Cost
ATC
$10.00
P=M R
$7.50
$5.00
$2.50
$0.00
10 20 30 40 50 60 70 80 90 100 110 120 130
Quantity
27. Refer to the graph above. In order to maximize profit, the firm represented will produce
A) 40 units of output.
B) 90 units of output.
C) 110 units of output.
D) 130 units of output.
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28. The firms in the oat industry are currently receiving a price of $2 per bushel for their
product. The minimum possible average total cost of producing oats in the long-run is
$1 per bushel. It follows that
A) the oat industry is in equilibrium.
B) new firms will enter the oat industry.
C) the price of oats will remain $2 per bushel in the long-run.
D) firms in the oat industry will earn economic profits in both the long-run and in the
short-run.
29. If the marginal revenue of the last widget the firm produces is $50 and its marginal cost
is $35, a firm should
A) reconsider past production decisions.
B) decrease production.
C) increase production.
D) hold production constant.
Use the following to answer question 30:
Quantity
1
2
3
4
5
6
7
8
9
Marginal
Cost
$24
18
15
13
15
20
26
35
40
Total
Cost
$68
75
90
103
118
138
164
199
239
Total
Revenue
$35
70
105
140
175
210
245
280
315
30. Refer to the table above. How many units should the firm produce to maximize its
profits?
A) 3 units.
B) 5 units.
C) 7 units.
D) 8 units.
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