Microeconomics, 12e (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: Conceptual
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
must sell at the market price
increase its profits.
B) The firm always earns a normal profit. sometimes earns profit and sometimes gain loss
C) The firm's marginal revenue continually decreases. stays the same
D) The firm's minimum efficient scale is small relative to the market demand.
Answer: D
Topic: How Perfect Competition Arises
Skill: Conceptual
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: Conceptual
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: Conceptual
AACSB: Reflective thinking
5) In perfect competition, the demand of good is small
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: Conceptual
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: Conceptual
AACSB: Reflective thinking
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: Conceptual
AACSB: Reflective thinking
2
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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: Definition
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: Definition
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: Definition
AACSB: Reflective thinking
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: Definition
AACSB: Reflective thinking
3
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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: Conceptual
AACSB: Reflective thinking
13) In perfect competition
A) many firms sell slightly different products to many buyers.
B) sellers are better informed about the prices than buyers.
C) firms face no restrictions on entry into market.
D) established firms have advantage over new ones.
Answer: C
Topic: Perfect Competition
Skill: Conceptual
AACSB: Reflective thinking
14) 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: Definition
AACSB: Reflective thinking
15) 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: Conceptual
AACSB: Reflective thinking
4
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16) 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: Definition
AACSB: Reflective thinking
17) 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: Definition
AACSB: Reflective thinking
18) 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: Conceptual
AACSB: Reflective thinking
19) 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: Conceptual
AACSB: Reflective thinking
5
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20) 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: Conceptual
AACSB: Reflective thinking
21) 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: Conceptual
AACSB: Reflective thinking
22) 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: Conceptual
AACSB: Reflective thinking
23) 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: Conceptual
AACSB: Reflective thinking
6
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24) 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: Conceptual
AACSB: Reflective thinking
25) 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: Conceptual
AACSB: Reflective thinking
26) 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: Conceptual
AACSB: Reflective thinking
27) 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: Conceptual
AACSB: Reflective thinking
7
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28) 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
AACSB: Reflective thinking
29) 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: Conceptual
AACSB: Reflective thinking
30) 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: Conceptual
AACSB: Reflective thinking
31) 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: Conceptual
AACSB: Reflective thinking
8
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32) 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: Conceptual
AACSB: Reflective thinking
33) 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: Conceptual
AACSB: Reflective thinking
34) 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
AACSB: Reflective thinking
35) 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
AACSB: Reflective thinking
9
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36) 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
AACSB: Reflective thinking
37) The price elasticity of demand for any particular perfectly competitive firm's output is
A) less than 1. inelastic
B) 1. unit elastic
demand is perfectly elastic so the elasticity is infinite
C) equal to zero.
perfectly inelastic is vertical
D) infinite.
Answer: D
Topic: Price Takers
Skill: Conceptual
AACSB: Reflective thinking
38) 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: Conceptual
AACSB: Reflective thinking
39) 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
AACSB: Reflective thinking
10
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40) 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
AACSB: Reflective thinking
41) 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
AACSB: Reflective thinking
42) 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
AACSB: Reflective thinking
43) 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
AACSB: Reflective thinking
11
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44) A perfectly competitive firm's demand curve is
A) upward sloping.
B) downward sloping.
C) a vertical line.
D) a horizontal line.
Answer: D
Topic: Perfect Competition
Skill: Conceptual
AACSB: Reflective thinking
45) 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: Conceptual
AACSB: Reflective thinking
46) 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
AACSB: Reflective thinking
47) 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
AACSB: Reflective thinking
12
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48) 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: Definition
AACSB: Reflective thinking
49) 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: Definition
AACSB: Reflective thinking
50) 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: Conceptual
AACSB: Reflective thinking
51) 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: Conceptual
AACSB: Reflective thinking
13
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52) 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: Conceptual
AACSB: Reflective thinking
53) 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
AACSB: Reflective thinking
54) 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
AACSB: Reflective thinking
55) 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: Conceptual
AACSB: Reflective thinking
14
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56) 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: Conceptual
AACSB: Reflective thinking
57) 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: Graphing
AACSB: Analytical thinking
58) 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: Graphing
AACSB: Analytical thinking
15
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59) 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: Graphing
AACSB: Analytical thinking
60) 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: Graphing
AACSB: Analytical thinking
61) 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: Graphing
AACSB: Analytical thinking
62) 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: Graphing
AACSB: Analytical thinking
16
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Quantity sold
5
6
7
Price
$15
$15
$15
63) 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
AACSB: Analytical thinking
64) 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.
does not change
D) $90.
Answer: A
Topic: Marginal Revenue
Skill: Analytical
AACSB: Analytical thinking
65) 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
AACSB: Analytical thinking
66) 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
AACSB: Reflective thinking
17
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67) 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
AACSB: Reflective thinking
68) 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
AACSB: Reflective thinking
69) 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: Conceptual
AACSB: Reflective thinking
70) 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
AACSB: Reflective thinking
18
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71) 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: Definition
AACSB: Reflective thinking
72) 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: Definition
AACSB: Reflective thinking
73) 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: Definition
AACSB: Reflective thinking
74) In perfect competition, at all 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: Definition
AACSB: Reflective thinking
19
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75) 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: Definition
AACSB: Reflective thinking
76) 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: Definition
AACSB: Reflective thinking
77) 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: Conceptual
AACSB: Reflective thinking
78) 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: Conceptual
AACSB: Reflective thinking
20
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79) 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: Definition
AACSB: Reflective thinking
80) 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
AACSB: Reflective thinking
81) 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: Definition
AACSB: Reflective thinking
Quantity
(units)
9
10
11
Price
Total revenue
(dollars per unit)
(dollars)
10
90
10
100
10
110
82) 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
AACSB: Analytical thinking
21
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perfectly inelastic
supply
perfectly elastic MR
demand
83) 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: Graphing
AACSB: Analytical thinking
84) 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
AACSB: Reflective thinking
22
Copyright © 2016 Pearson Education, Inc.
85) The above figure shows the total revenue curve for Dizzy Discs. The demand curve for CDs
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: Graphing
AACSB: Analytical thinking
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: Conceptual
AACSB: Reflective thinking
23
Copyright © 2016 Pearson Education, Inc.
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: Conceptual
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
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: Definition
AACSB: Reflective thinking
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
AACSB: Reflective thinking
24
Copyright © 2016 Pearson Education, Inc.
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
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
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
AACSB: Reflective thinking
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: Conceptual
AACSB: Reflective thinking
25
Copyright © 2016 Pearson Education, Inc.
10) A perfectly competitive firm maximizes its economic profit when it produces the quantity
that sets
A) MR = MC.
B) TR = TC.
C) MC =.AVC.
D) MC = ATC.
Answer: A
Topic: Economic Profit
Skill: Conceptual
AACSB: Reflective thinking
11) When the firm produces the quantity that sets marginal revenue equal to 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: Conceptual
AACSB: Reflective thinking
12) 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
AACSB: Reflective thinking
13) 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: Conceptual
AACSB: Reflective thinking
26
Copyright © 2016 Pearson Education, Inc.
14) 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. The marginal cost of the
100th chimp is $9. 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: Analytical
AACSB: Reflective thinking
15) 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: Conceptual
AACSB: Reflective thinking
Output
0
1
2
3
4
5
6
Total Revenue
$0
$30
$60
$90
$120
$150
$180
Total Cost
$25
$49
$69
$91
$117
$147
$180
16) 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
AACSB: Analytical thinking
27
Copyright © 2016 Pearson Education, Inc.
17) 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: Analytical
AACSB: Analytical thinking
18) 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
AACSB: Analytical thinking
19) 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
AACSB: Analytical thinking
28
Copyright © 2016 Pearson Education, Inc.
Price
(dollars per CD)
8.00
8.50
9.00
9.50
10.00
Quantity demanded
(CDs per week)
30,000
25,000
20,000
15,000
10,000
Quantity
(CDs per week)
50
100
150
200
250
Marginal cost
(dollars per CD)
8.50
9.00
9.50
10.00
10.20
20) 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
AACSB: Analytical thinking
29
Copyright © 2016 Pearson Education, Inc.
Output
(balloons per
hour)
0
1
2
3
4
5
6
Total Cost
(dollars per hour)
$4.00
$7.00
$8.00
$12.50
$17.20
$22.00
$29.00
21) 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
AACSB: Analytical thinking
22) 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
AACSB: Analytical thinking
23) 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
AACSB: Analytical thinking
30
Copyright © 2016 Pearson Education, Inc.
24) 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: Graphing
AACSB: Analytical thinking
25) 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: Graphing
AACSB: Analytical thinking
31
Copyright © 2016 Pearson Education, Inc.
26) 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: Graphing
AACSB: Analytical thinking
27) 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 Q2.
D) fact that the total cost and total revenue curves cross twice.
Answer: B
Topic: Total Revenue, Total Cost, and Economic Profit
Skill: Graphing
AACSB: Analytical thinking
32
Copyright © 2016 Pearson Education, Inc.
28) 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: Graphing
AACSB: Analytical thinking
29) 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: Graphing
AACSB: Analytical thinking
33
Copyright © 2016 Pearson Education, Inc.
30) Given the total cost and total revenue curves in the figure above, what is the profitmaximizing 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: Graphing
AACSB: Analytical thinking
31) 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: Graphing
AACSB: Analytical thinking
34
Copyright © 2016 Pearson Education, Inc.
32) 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: Graphing
AACSB: Analytical thinking
33) 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: Graphing
AACSB: Analytical thinking
34) 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
AACSB: Reflective thinking
35) 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
AACSB: Analytical thinking
35
Copyright © 2016 Pearson Education, Inc.
36) 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: Conceptual
AACSB: Reflective thinking
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 ________ and its profit will
________.
A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall
Answer: B
Topic: Marginal Analysis
Skill: Analytical
AACSB: Analytical thinking
38) 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
AACSB: Analytical thinking
39) 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
AACSB: Analytical thinking
36
Copyright © 2016 Pearson Education, Inc.
40) 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
AACSB: Reflective thinking
41) 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
AACSB: Reflective thinking
42) 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
AACSB: Reflective thinking
43) 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
AACSB: Reflective thinking
37
Copyright © 2016 Pearson Education, Inc.
44) 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
AACSB: Reflective thinking
45) 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
AACSB: Reflective thinking
46) 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
AACSB: Analytical thinking
47) 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) mows fewer than 22 lawns a week.
D) mows more than 22 lawns a week.
Answer: C
Topic: Marginal Analysis
Skill: Conceptual
AACSB: Analytical thinking
38
Copyright © 2016 Pearson Education, Inc.
Quantity
(pounds of
cookies)
1
2
3
4
5
Total revenue
(dollars)
Total cost,
(dollars)
15
30
45
60
75
13
24
39
58
81
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 revenue is ________ per pound of cookies.
A) $11
B) $15
C) $30
D) $45
Answer: B
Topic: Marginal Revenue
Skill: Analytical
AACSB: Analytical thinking
49) 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
AACSB: Analytical thinking
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 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
AACSB: Analytical thinking
39
Copyright © 2016 Pearson Education, Inc.
51) 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
AACSB: Analytical thinking
Quantity
0
1
2
3
4
5
6
7
8
9
10
Total fixed
cost, TFC
(dollars)
500
500
500
500
500
500
500
500
500
500
500
Total variable
cost, TVC
(dollars)
0
100
180
220
300
390
500
640
800
1000
1250
52) 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
AACSB: Analytical thinking
40
Copyright © 2016 Pearson Education, Inc.
53) 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
AACSB: Analytical thinking
54) 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
AACSB: Analytical thinking
41
Copyright © 2016 Pearson Education, Inc.
55) 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: Graphing
AACSB: Analytical thinking
56) 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: Graphing
AACSB: Analytical thinking
57) 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: Graphing
AACSB: Analytical thinking
42
Copyright © 2016 Pearson Education, Inc.
Quantity
Total cost
(coats per day) (dollars per coat)
7
1,410
8
1,640
9
1,910
10
2,210
11
2,560
58) 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
AACSB: Analytical thinking
59) 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
AACSB: Analytical thinking
43
Copyright © 2016 Pearson Education, Inc.
60) 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: Graphing
AACSB: Analytical thinking
61) 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: Graphing
AACSB: Analytical thinking
62) 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: Graphing
AACSB: Analytical thinking
44
Copyright © 2016 Pearson Education, Inc.
63) 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
AACSB: Reflective thinking
64) 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: Definition
AACSB: Reflective thinking
65) 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
AACSB: Reflective thinking
66) 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: Definition
AACSB: Reflective thinking
45
Copyright © 2016 Pearson Education, Inc.
67) 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: Definition
AACSB: Reflective thinking
68) 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: B
Topic: Shutdown Point
Skill: Definition
AACSB: Reflective thinking
69) 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: Definition
AACSB: Reflective thinking
70) 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: Definition
AACSB: Reflective thinking
46
Copyright © 2016 Pearson Education, Inc.
71) 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: Conceptual
AACSB: Reflective thinking
72) 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
AACSB: Reflective thinking
73) 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
AACSB: Reflective thinking
74) 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: Conceptual
AACSB: Reflective thinking
47
Copyright © 2016 Pearson Education, Inc.
75) 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: Conceptual
AACSB: Reflective thinking
76) 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: Conceptual
AACSB: Reflective thinking
77) 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
AACSB: Reflective thinking
78) 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
AACSB: Reflective thinking
48
Copyright © 2016 Pearson Education, Inc.
79) 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
AACSB: Reflective thinking
80) 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
AACSB: Reflective thinking
81) 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
AACSB: Reflective thinking
82) 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
AACSB: Reflective thinking
49
Copyright © 2016 Pearson Education, Inc.
83) 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
AACSB: Reflective thinking
84) 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
AACSB: Reflective thinking
85) 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
AACSB: Reflective thinking
86) 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
AACSB: Reflective thinking
50
Copyright © 2016 Pearson Education, Inc.
87) 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
AACSB: Reflective thinking
88) 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
AACSB: Reflective thinking
89) 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
AACSB: Reflective thinking
51
Copyright © 2016 Pearson Education, Inc.
Output
(tons of rice
per year)
0
1
2
3
4
5
Total cost
(dollars per
ton)
$1,000
$1,200
$1,600
$2,200
$3,000
$4,000
90) Based on the table above which shows Chip's costs, if rice sells for $600 a ton, Chip's profitmaximizing 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
AACSB: Analytical thinking
91) 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
AACSB: Analytical thinking
92) 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
AACSB: Analytical thinking
52
Copyright © 2016 Pearson Education, Inc.
93) 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
AACSB: Analytical thinking
94) 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
AACSB: Analytical thinking
Quantity
(pizzas per
hour)
0
1
2
3
4
5
6
Total cost, TC
(dollars per
hour)
10
18
30
48
70
98
120
95) 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
AACSB: Analytical thinking
53
Copyright © 2016 Pearson Education, Inc.
96) 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
AACSB: Analytical thinking
97) 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
AACSB: Analytical thinking
Quantity
(tattoos per
hour)
0
1
2
3
4
5
6
Total cost, TC
(dollars per
hour)
10
25
35
50
70
95
125
98) 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
AACSB: Analytical thinking
54
Copyright © 2016 Pearson Education, Inc.
99) 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
AACSB: Analytical thinking
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 $12.50 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
AACSB: Analytical thinking
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 $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
AACSB: Analytical thinking
102) 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 $17.50 what is the firm's profit-maximizing output?
A) 2 tattoos per hour
B) 3 tattoos per hour
C) 4 tattoos per hour
D) 5 tattoos per hour
Answer: B
Topic: Profit-Maximizing Output
Skill: Analytical
AACSB: Analytical thinking
55
Copyright © 2016 Pearson Education, Inc.
Output
Average total cost
(sandwiches per hour) ($ per sandwich)
1
17.00
2
10.00
3
8.00
4
8.00
5
8.80
6
10.00
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. 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
AACSB: Analytical thinking
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. 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
AACSB: Analytical thinking
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 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
AACSB: Analytical thinking
56
Copyright © 2016 Pearson Education, Inc.
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 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
AACSB: Analytical thinking
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. 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
AACSB: Analytical thinking
108) 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
AACSB: Analytical thinking
57
Copyright © 2016 Pearson Education, Inc.
109) 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: Graphing
AACSB: Analytical thinking
110) 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: Graphing
AACSB: Analytical thinking
111) 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: Graphing
AACSB: Analytical thinking
58
Copyright © 2016 Pearson Education, Inc.
112) 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: Graphing
AACSB: Analytical thinking
113) 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: Graphing
AACSB: Analytical thinking
59
Copyright © 2016 Pearson Education, Inc.
114) 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: Graphing
AACSB: Analytical thinking
115) 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: Graphing
AACSB: Analytical thinking
60
Copyright © 2016 Pearson Education, Inc.
116) 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: Graphing
AACSB: Analytical thinking
117) 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: Graphing
AACSB: Analytical thinking
118) 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: Graphing
AACSB: Analytical thinking
119) 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: Definition
AACSB: Reflective thinking
61
Copyright © 2016 Pearson Education, Inc.
120) 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: Definition
AACSB: Reflective thinking
121) 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
AACSB: Reflective thinking
122) 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
AACSB: Reflective thinking
123) 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: Definition
AACSB: Reflective thinking
62
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124) 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: Definition
AACSB: Reflective thinking
125) 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: Definition
AACSB: Reflective thinking
126) 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: Conceptual
AACSB: Reflective thinking
127) 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: Definition
AACSB: Reflective thinking
63
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128) 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: Definition
AACSB: Reflective thinking
129) 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: Conceptual
AACSB: Reflective thinking
130) 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
AACSB: Reflective thinking
64
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131) 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: Graphing
AACSB: Analytical thinking
132) 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: Graphing
AACSB: Analytical thinking
65
Copyright © 2016 Pearson Education, Inc.
133) 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: Graphing
AACSB: Analytical thinking
66
Copyright © 2016 Pearson Education, Inc.
134) 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: Graphing
AACSB: Analytical thinking
135) 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: Graphing
AACSB: Analytical thinking
67
Copyright © 2016 Pearson Education, Inc.
136) 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: Graphing
AACSB: Analytical thinking
137) 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: Graphing
AACSB: Analytical thinking
138) 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: Graphing
AACSB: Analytical thinking
68
Copyright © 2016 Pearson Education, Inc.
supply curve
139) 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: Graphing
AACSB: Analytical thinking
140) 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: Graphing
AACSB: Analytical thinking
69
Copyright © 2016 Pearson Education, Inc.
141) 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: Graphing
AACSB: Analytical thinking
142) 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: Graphing
AACSB: Analytical thinking
70
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143) 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 is correct.
Answer: C
Topic: Output, Price and Profit
Skill: Graphing
AACSB: Analytical thinking
144) 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: Graphing
AACSB: Analytical thinking
145) 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: Graphing
AACSB: Analytical thinking
71
Copyright © 2016 Pearson Education, Inc.
146) 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: Graphing
AACSB: Analytical thinking
147) 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: Graphing
AACSB: Analytical thinking
148) 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: Graphing
AACSB: Analytical thinking
149) 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: C
Topic: The Firm's Short-Run Supply Curve
Skill: Graphing
AACSB: Analytical thinking
72
Copyright © 2016 Pearson Education, Inc.
150) 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: Graphing
AACSB: Analytical thinking
151) 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
AACSB: Reflective thinking
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 fixed cost is equal to
A) 0.
B) $5,000.
C) $16,000.
D) $21,000.
Answer: C
Topic: Fixed Cost
Skill: Analytical
AACSB: Analytical thinking
73
Copyright © 2016 Pearson Education, Inc.
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 variable cost is equal
to
A) 0.
B) $5,000.
C) $16,000.
D) $21,000.
Answer: B
Topic: Variable Cost
Skill: Analytical
AACSB: Analytical thinking
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. 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
AACSB: Analytical thinking
155) 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
AACSB: Analytical thinking
74
Copyright © 2016 Pearson Education, Inc.
156) 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
AACSB: Analytical thinking
157) 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
AACSB: Analytical thinking
158) 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
AACSB: Reflective thinking
159) 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
AACSB: Reflective thinking
75
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160) 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: Graphing
AACSB: Analytical thinking
76
Copyright © 2016 Pearson Education, Inc.
161) 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: Graphing
AACSB: Analytical thinking
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
AACSB: Reflective thinking
77
Copyright © 2016 Pearson Education, Inc.
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: Conceptual
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: Definition
AACSB: Reflective thinking
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: Conceptual
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
AACSB: Reflective thinking
78
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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
AACSB: Reflective thinking
7) In the short run, a perfectly competitive firm
A) might not make an economic profit.
B) will always make an economic profit.
C) chooses its optimal plant size.
D) is in equilibrium only when its economic profit is zero.
Answer: A
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Conceptual
AACSB: Reflective thinking
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
AACSB: Reflective thinking
9) In the short run, the firm makes zero economic profit when the price is ________ minimum
average total cost, makes an economic profit when the price is ________ minimum average total
cost, and incurs an economic loss when the price is ________ minimum average total cost.
A) equal to; higher than; lower than
B) equal to; lower than; higher than
C) higher than; equal to; lower than
D) lower than; equal to; higher than
Answer: A
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Conceptual
AACSB: Reflective thinking
79
Copyright © 2016 Pearson Education, Inc.
10) 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
AACSB: Reflective thinking
11) 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: Definition
AACSB: Reflective thinking
12) 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
AACSB: Reflective thinking
13) 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
AACSB: Reflective thinking
80
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14) 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
AACSB: Reflective thinking
15) 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
AACSB: Reflective thinking
Quantity Total cost, TC
(tattoos per (dollars per
hour)
hour)
0
10
1
25
2
35
3
50
4
70
5
95
6
125
16) 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
AACSB: Analytical thinking
81
Copyright © 2016 Pearson Education, Inc.
Quantity
(gloves per day)
0
1
2
3
4
5
6
7
8
Total cost
(dollars)
80
100
105
135
170
210
270
350
450
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. 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
AACSB: Analytical thinking
18) 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 make 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
AACSB: Analytical thinking
82
Copyright © 2016 Pearson Education, Inc.
Quantity Total cost, TC
(pizzas per
(dollars per
hour)
hour)
0
10
1
18
2
30
3
48
4
70
5
98
6
120
19) 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
AACSB: Analytical thinking
20) 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
AACSB: Analytical thinking
83
Copyright © 2016 Pearson Education, Inc.
21) 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: Graphing
AACSB: Analytical thinking
84
Copyright © 2016 Pearson Education, Inc.
22) 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: Graphing
AACSB: Analytical thinking
85
Copyright © 2016 Pearson Education, Inc.
23) 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: Graphing
AACSB: Analytical thinking
86
Copyright © 2016 Pearson Education, Inc.
24) 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: Graphing
AACSB: Analytical thinking
87
Copyright © 2016 Pearson Education, Inc.
25) 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: Graphing
AACSB: Analytical thinking
26) 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: Graphing
AACSB: Analytical thinking
88
Copyright © 2016 Pearson Education, Inc.
27) 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: Graphing
AACSB: Analytical thinking
28) 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: Graphing
AACSB: Analytical thinking
89
Copyright © 2016 Pearson Education, Inc.
29) 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: Graphing
AACSB: Analytical thinking
30) 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: Graphing
AACSB: Analytical thinking
90
Copyright © 2016 Pearson Education, Inc.
31) 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: Graphing
AACSB: Analytical thinking
32) 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: Graphing
AACSB: Analytical thinking
91
Copyright © 2016 Pearson Education, Inc.
33) 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: Graphing
AACSB: Analytical thinking
34) 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: Graphing
AACSB: Analytical thinking
92
Copyright © 2016 Pearson Education, Inc.
35) 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: Graphing
AACSB: Analytical thinking
36) 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: Graphing
AACSB: Analytical thinking
37) 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: Graphing
AACSB: Analytical thinking
38) 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: Graphing
AACSB: Analytical thinking
93
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39) 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: Graphing
AACSB: Analytical thinking
40) 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: Graphing
AACSB: Analytical thinking
94
Copyright © 2016 Pearson Education, Inc.
41) 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: Graphing
AACSB: Analytical thinking
42) 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: Graphing
AACSB: Analytical thinking
95
Copyright © 2016 Pearson Education, Inc.
43) 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: Graphing
AACSB: Analytical thinking
44) 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: Graphing
AACSB: Analytical thinking
96
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45) 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: Graphing
AACSB: Analytical thinking
46) 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: Graphing
AACSB: Analytical thinking
47) 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: Graphing
AACSB: Analytical thinking
48) 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: Graphing
AACSB: Analytical thinking
97
Copyright © 2016 Pearson Education, Inc.
49) 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: Definition
AACSB: Reflective thinking
50) 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: Conceptual
AACSB: Reflective thinking
51) 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
AACSB: Reflective thinking
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
AACSB: Reflective thinking
98
Copyright © 2016 Pearson Education, Inc.
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
AACSB: Reflective thinking
3) Which of the following statements regarding the long-term equilibrium is TRUE?
A) As new firms enter a market, each existing firm increases the quantity it produces.
B) Firms leave a market if they are making zero economic profit.
C) Entry and exit stop when firms are making an economic profit.
D) Entry and exit stop when firms make zero economic profit.
Answer: D
Topic: Long-Run Equilibrium
Skill: Conceptual
AACSB: Reflective thinking
4) 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
AACSB: Reflective thinking
5) 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
AACSB: Reflective thinking
99
Copyright © 2016 Pearson Education, Inc.
6) 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
AACSB: Reflective thinking
7) 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: Definition
AACSB: Reflective thinking
8) 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
AACSB: Reflective thinking
9) 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
AACSB: Reflective thinking
100
Copyright © 2016 Pearson Education, Inc.
Quantity Total cost, TC
(pizzas per
(dollars per
hour)
hour)
0
10
1
18
2
30
3
48
4
70
5
98
6
120
10) 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
AACSB: Analytical thinking
11) 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
AACSB: Analytical thinking
101
Copyright © 2016 Pearson Education, Inc.
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
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 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
AACSB: Analytical thinking
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. 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
AACSB: Analytical thinking
102
Copyright © 2016 Pearson Education, Inc.
14) 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
AACSB: Analytical thinking
15) 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: Graphing
AACSB: Analytical thinking
103
Copyright © 2016 Pearson Education, Inc.
16) 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
AACSB: Analytical thinking
17) 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
AACSB: Analytical thinking
18) 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
AACSB: Reflective thinking
19) 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
AACSB: Reflective thinking
104
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20) 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
AACSB: Reflective thinking
21) 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
AACSB: Reflective thinking
22) 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
AACSB: Reflective thinking
23) 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
AACSB: Reflective thinking
105
Copyright © 2016 Pearson Education, Inc.
24) 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
AACSB: Reflective thinking
25) 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: Definition
AACSB: Reflective thinking
26) 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
AACSB: Reflective thinking
106
Copyright © 2016 Pearson Education, Inc.
27) 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
AACSB: Reflective thinking
28) 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: Graphing
AACSB: Analytical thinking
107
Copyright © 2016 Pearson Education, Inc.
29) 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: Graphing
AACSB: Analytical thinking
30) 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: Graphing
AACSB: Analytical thinking
108
Copyright © 2016 Pearson Education, Inc.
31) 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: Graphing
AACSB: Analytical thinking
32) 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
AACSB: Reflective thinking
33) 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
AACSB: Reflective thinking
34) 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: Definition
AACSB: Reflective thinking
109
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35) 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: Definition
AACSB: Reflective thinking
36) 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: Definition
AACSB: Reflective thinking
37) 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: Definition
AACSB: Reflective thinking
38) 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
AACSB: Reflective thinking
110
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39) 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
AACSB: Reflective thinking
40) 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
AACSB: Reflective thinking
41) 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: Conceptual
AACSB: Reflective thinking
42) 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
AACSB: Reflective thinking
111
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43) 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
AACSB: Reflective thinking
44) 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
AACSB: Reflective thinking
45) 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
AACSB: Reflective thinking
112
Copyright © 2016 Pearson Education, Inc.
46) 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: Graphing
AACSB: Analytical thinking
113
Copyright © 2016 Pearson Education, Inc.
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 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: Graphing
AACSB: Analytical thinking
48) 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: Graphing
AACSB: Analytical thinking
114
Copyright © 2016 Pearson Education, Inc.
49) 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: Graphing
AACSB: Analytical thinking
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 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: Graphing
AACSB: Analytical thinking
51) 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: Graphing
AACSB: Analytical thinking
52) 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: Graphing
AACSB: Analytical thinking
115
Copyright © 2016 Pearson Education, Inc.
53) 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
AACSB: Reflective thinking
54) 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
AACSB: Reflective thinking
55) 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
AACSB: Reflective thinking
5 Changes in Demand and Supply as Technology Advances
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: Conceptual
AACSB: Reflective thinking
116
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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
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
AACSB: Reflective thinking
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
AACSB: Analytical thinking
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
AACSB: Reflective thinking
117
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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
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
AACSB: Analytical thinking
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
AACSB: Analytical thinking
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
AACSB: Analytical thinking
118
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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
AACSB: Reflective thinking
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
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
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
AACSB: Reflective thinking
119
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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
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: Definition
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
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: Conceptual
AACSB: Reflective thinking
120
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18) In a perfectly competitive market, 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
Skill: Analytical
AACSB: Reflective thinking
19) 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. 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: Graphing
AACSB: Analytical thinking
121
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20) 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. In the new short-run equilibrium, the farm
A) incurs an economic loss of between $1 and $40,000.
B) makes 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: Graphing
AACSB: Analytical thinking
21) 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. 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
Skill: Graphing
AACSB: Analytical thinking
22) 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
Skill: Graphing
AACSB: Analytical thinking
122
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23) 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: Conceptual
AACSB: Reflective thinking
24) There is a technological advance in a perfectly market. Which of the following statements is
NOT true?
A) As more firms begin to use the new technology, the market supply increases and the price
falls.
B) Technological change brings permanent gains to producers and temporary gains to
consumers.
C) In the new long-run equilibrium, all the old-technology firms have exited.
D) In the long-run equilibrium, competition eliminates any short-run economic profit.
Answer: B
Topic: Technological Change
Skill: Conceptual
AACSB: Reflective thinking
25) 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
AACSB: Reflective thinking
26) 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
AACSB: Reflective thinking
123
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27) 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: Analytical
AACSB: Reflective thinking
28) 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 zero economic 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
AACSB: Reflective thinking
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: Conceptual
AACSB: Reflective thinking
124
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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
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
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
AACSB: Reflective thinking
125
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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: Graphing
AACSB: Analytical thinking
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: Graphing
AACSB: Analytical thinking
126
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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
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
AACSB: Reflective thinking
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 the 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
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
AACSB: Reflective thinking
127
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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
AACSB: Written and oral communication
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
AACSB: Analytical thinking
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
AACSB: Analytical thinking
128
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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
AACSB: Analytical thinking
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
AACSB: Analytical thinking
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
AACSB: Reflective thinking
129
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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
AACSB: Analytical thinking
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
AACSB: Reflective thinking
11) A worldwide hops (a flowers used in brewing) shortage made 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. led 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
AACSB: Analytical thinking
130
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12) A worldwide hops (a flowers used in brewing) shortage made 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
AACSB: Reflective thinking
13) A worldwide hops (a flower used in brewing) shortage made 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 hops farmers out
business, which gradually helped hops prices recover. Suppose farming hops is a perfectly
competitive market. How did farmers going out of business help hops 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
AACSB: Analytical thinking
14) "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
AACSB: Written and oral communication
131
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15) "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
AACSB: Analytical thinking
16) "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
AACSB: Reflective thinking
17) "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
AACSB: Reflective thinking
132
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18) "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
AACSB: Reflective thinking
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
AACSB: Reflective thinking
8 Essay Questions
1) What are the requirements for perfect competition?
Answer: The requirements are: many firms selling an identical product; many buyers; no
restrictions on entry into the market; established firms have no advantages over new entrants;
and sellers and buyers have good information about prices of each firm's product.
Topic: Perfect Competition
Skill: Conceptual
AACSB: Written and oral communication
2) "A perfectly competitive firm is called a price maker because all the firms together must make
the market price." Is the previous statement correct or incorrect? Briefly explain your answer.
Answer: The statement is false. A perfectly competitive firm is called a "price taker" because the
firm must take whatever price the market determines. Any single firm's actions cannot affect the
market price.
Topic: Price Takers
Skill: Conceptual
AACSB: Written and oral communication
133
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3) "Perfectly competitive firms have total control over the price they set for their product."
Explain why the previous statement is correct or incorrect.
Answer: The statement is incorrect. Perfectly competitive firms are price takers, which means
that they have no control over the price of their product. They must "take" the price given to
them by the market as a whole, that is, they must take the price determined by the market
demand and market supply.
Topic: Price Takers
Skill: Conceptual
AACSB: Written and oral communication
4) Does a perfectly competitive producer have any incentive to undercut the current market
price? Explain your answer
Answer: A perfectly competitive producer has no incentive to undercut the market price because
the producer can sell all he or she produces at the going market price. In this case, a producer
will not lower the price he or she charges because no additional sales can be garnered. Hence it is
nonsensical to undercut the market price because the lower price means lower revenue and hence
lower profit.
Topic: Price Takers
Skill: Conceptual
AACSB: Written and oral communication
5) Why are perfectly competitive ranchers in Montana price takers?
Answer: Because one farmer's beef is identical to another farmer's, each farmer's beef is a
perfect substitute for all other farmers' beef. In addition, there are over one million ranchers in
the United States. As a result, no individual rancher can impact the market price by increasing or
decreasing production. Therefore each rancher faces a perfectly elastic demand. Each can sell all
of the beef desired at the market price, but not one penny more. Once the market sets the price,
the rancher must take as given whatever the price might be.
Topic: Price Takers
Skill: Conceptual
AACSB: Written and oral communication
6) If a perfectly competitive firm manufacturing chairs decides to produce 100 more chairs, what
happens to the market price of a chair?
Answer: The price will not change. Any one perfectly competitive firm is such a small part of
the market that a change in its output has virtually no effect on the price. This result is why the
firm's marginal revenue equals its price: No matter how much (or how little) the firm produces,
the marginal revenue from one more unit always equals the price of the product.
Topic: Price Takers
Skill: Conceptual
AACSB: Written and oral communication
134
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7) Why is the demand for a perfectly competitive firm's good perfectly elastic even though the
market demand is not?
Answer: Each firm takes the market price as given. Because each firm's good can be perfectly
substituted with any other firm's product, consumers will only pay the market price. Hence, any
deviation above the market price causes the firm's sales to plunge to zero and any deviation
below causes the firm's sales to soar to the entire amount sold in the market.
Topic: Market Demand/Firm Demand
Skill: Conceptual
AACSB: Written and oral communication
8) Hubert's Copy Services is in perfect competition. Hubert currently charges 10 cents per page,
which is the going market price. He thinks that he can increase his profit by raising the price. Is it
possible? Why or why not?
Answer: If Hubert raises his price, his profit will not increase. As a perfectly competitive firm,
Hubert's is a price taker. It produces a tiny proportion of the copy services in the area, and buyers
are well informed about the prices charged by other firms. So, if the market price is 10 cents per
page and Hubert asks, say, 12 cents per page, his customers will go to the next copy service and
Hubert will lose all his sales.
Topic: Market Demand/Firm Demand
Skill: Conceptual
AACSB: Written and oral communication
9) Jane's Copy Services is in perfect competition. Jane currently charges 10 cents per page,
which is the going market price. Jane thinks that she can increase her profit if she lowers her
price to 8 cents per page to increase the demand for her service. Is Jane right? Why or why not?
Answer: If Jane lowers her price, her profit will not increase. As a perfectly competitive firm,
Jane can sell as much of her service as she wants at the going market price. And to maximize her
profit, she should choose the quantity at which her marginal cost equals the market price. If Jane
lowers the price, her total revenue, and hence profit, will fall.
Topic: Market Demand/Firm Demand
Skill: Conceptual
AACSB: Written and oral communication
10) Do firms in perfect competition advertise their products? Why or why not?
Answer: Firms in perfect competition do not advertise their product. The purpose of advertising
is to increase the demand for the firm's product by convincing consumers that it's better than that
of competitors. Perfectly competitive firms sell a standard product, so consumers won't believe
that, for example, wheat sold by Farm A is somehow better than wheat sold by Farm B. So if a
perfectly competitive firm advertised, this would only increase its costs, with no effect on
demand and price.
Topic: Market Demand/Firm Demand
Skill: Conceptual
AACSB: Written and oral communication
135
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11) What is a normal profit?
Answer: A normal profit is the return a firm's owner could obtain in the best alternative
business. As a result, it is an opportunity cost to the firm.
Topic: Normal Profit
Skill: Conceptual
AACSB: Written and oral communication
12) Why does the profit-maximizing level of production occur at the point where marginal
revenue equals marginal cost?
Answer: If a firm produces at a level where marginal revenue is greater than marginal cost, more
profit could be gained by increasing output. Why? Because the added revenue (the marginal
revenue) from producing another unit exceeds the added cost (the marginal cost) of producing
the unit. Therefore the firm should increase production until no more additional profit can be
earned, which occurs where marginal revenue equals marginal cost.
Similarly, if a firm produces at a level where marginal cost exceeds marginal revenue, the firm's
profit would rise by decreasing output. In this case, the saved costs (the marginal cost) exceed
the lost revenue (the marginal revenue). Therefore the firm should decrease production until the
point at which marginal cost equals marginal revenue.
Topic: Profit-Maximizing Output
Skill: Conceptual
AACSB: Written and oral communication
13) Martha's Cleaning Services is a perfectly competitive firm that currently cleans 30 offices a
week and charges $20 per office, which is the going market price. Martha's marginal cost is $15.
What should Martha do to increase her economic profit? Clean more offices? Raise her price?
Explain your answer.
Answer: Martha should increase the number of offices she cleans until her marginal cost equals
the market price. This way she will maximize her profit. As a perfectly competitive firm, Martha
is a price taker and cannot raise or lower her price without losing profit.
Topic: Marginal Analysis
Skill: Conceptual
AACSB: Written and oral communication
14) Ellen's Painting Services is a perfectly competitive firm that currently paints 10 houses a
month and charges $100 per house, which is the going market price. Ellen's marginal cost is
positively related with the quantity of service she provides and is currently $120. What should
Ellen do to increase her economic profit? Paint more houses? Raise her price? Explain your
answer.
Answer: Ellen should decrease the number of houses she paints until her marginal cost equals
the market price. This way she will maximize her profit. As a perfectly competitive firm, Ellen is
a price taker and cannot raise or lower her price without losing profit.
Topic: Marginal Analysis
Skill: Conceptual
AACSB: Written and oral communication
136
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15) "A perfectly competitive firm will shut down if the price falls below its average total cost."
Do you agree? Explain.
Answer: A perfectly competitive firm will not shut down as far as the price is above its average
variable cost. If the price is below the ATC but above the AVC, the firm can cover part of its
fixed cost if it continues to operate. If the firm shuts down, it incurs an economic loss equal to
total fixed cost. So as long as the price is above the AVC, the firm will have a smaller economic
loss if it continues to operate than if it shuts down.
Topic: Shutdown Point
Skill: Conceptual
AACSB: Written and oral communication
16) If the price received by a perfectly competitive firm is less than its average variable cost,
what will the firm do in the short run? Why?
Answer: If the price is less than the average variable cost, the firm will shut down in the short
run. By shutting down, the firm will incur an economic loss equal to its fixed cost, whereas if the
firm operated, its economic loss would be larger. The firm minimizes its loss by shutting down.
Topic: Shutdown Point
Skill: Conceptual
AACSB: Written and oral communication
17) Define the shutdown point. Explain why the firm shuts down in the short run if the price falls
below this point.
Answer: The shutdown point is the point at which the price equals minimum average variable
cost. If the price falls further, the firm does not even cover its variable costs if it operates. Its loss
if it operated thus exceeds the loss of shutting down and so the firm shuts down.
Topic: Shutdown Point
Skill: Conceptual
AACSB: Written and oral communication
18) Will a perfectly competitive firm ever produce in the short run even though it is incurring an
economic loss?
Answer: Yes, a perfectly competitive firm will continue to produce even though it is suffering
an economic loss if the price exceeds the minimum average variable cost. In this case, even
though the firm has an economic loss, if it shut down, its economic loss would be larger.
Topic: Shutdown Point
Skill: Conceptual
AACSB: Written and oral communication
19) What must be the case if a perfectly competitive firm's economic loss is less by shutting
down rather than by producing and selling some output?
Answer: If a firm's economic loss is greater when it produces and sells some output than when it
shuts down, it is the case that the price of the product is less than the average variable cost. When
the price is less than the average variable cost, the firm's economic loss is less if it shuts down
than if it produces and sells output.
Topic: Shutdown Point
Skill: Conceptual
AACSB: Written and oral communication
137
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20) Can a perfectly competitive firm make an economic profit in the short run? Can it incur an
economic loss?
Answer: In the short run, a perfectly competitive firm can make an economic profit or incur an
economic loss. Indeed, the firm also can make zero economic profit in the short run. Basically,
any profit or loss outcome is possible in the short run.
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Conceptual
AACSB: Written and oral communication
21) If the market price is less than a perfectly competitive firm's average total cost, what sort of
profit or loss is the firm making?
Answer: If the price is less than the average total cost, the firm is incurring an economic loss.
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Conceptual
AACSB: Written and oral communication
22) What is the relationship between the price, P, and the average total cost, ATC, for a firm in
perfect competition that makes an economic profit? That makes zero economic profit? That
incurs an economic loss?
Answer: If the price is greater than the average total cost, P > ATC, the firm makes an economic
profit. If the price equals the average total cost, P = ATC, the firm makes zero economic profit. If
the price is less than the average total cost, P < ATC, the firm incurs an economic loss.
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Conceptual
AACSB: Written and oral communication
23) What is a perfectly competitive firm's short-run supply curve?
Answer: A perfectly competitive firm's short-run supply curve is its marginal cost curve above
the minimum average variable cost.
Topic: The Firm's Short-Run Supply Curve
Skill: Conceptual
AACSB: Written and oral communication
24) If the market price faced by a perfectly competitive firm increases, in the short run how does
the firm respond?
Answer: If the market price rises, a perfectly competitive firm increases its output. The firm
moves upward along its marginal cost curve, thereby increasing the quantity the firm will supply.
Topic: The Firm's Short-Run Supply Curve
Skill: Conceptual
AACSB: Written and oral communication
138
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25) Explain the process that drives the economic profit to zero in the long run for a perfectly
competitive firm.
Answer: In the long run, new firms enter a perfectly competitive market if they can make an
economic profit. The increased supply causes the price to fall. As long as an economic profit
exists, new firms continue to enter, and the price continues to fall until eventually the economic
profit equals zero. In the long run, firms leave a perfectly competitive market if they are
incurring an economic loss. By exiting, the price rises and the economic loss of the surviving
firms shrinks. Eventually enough firms exit so that the price rises to the point that the survivors
no longer incur an economic loss, earning instead zero economic profit.
Topic: Long-Run Adjustments
Skill: Conceptual
AACSB: Written and oral communication
26) Describe the different possible profit outcomes for a perfectly competitive firm in the short
run versus the long run. Explain why they occur.
Answer: In the short run, a perfectly competitive firm can make an economic profit, zero
economic profit or economic loss. A firm makes an economic profit when P > ATC. It makes
zero economic profit (its owners earn a normal profit) when P=ATC. And incurs an economic
loss when P < ATC. If firms are making an economic profit, new firms will enter and compete
away the existing firms' economic profit until all firms make zero economic profit. At this point,
no new firms will enter the market and a long-run equilibrium occurs. If firms are already
making zero economic profit, no new firms will enter the market, and this condition continues
into the long run. And, if some firms are incurring an economic loss, some will exit the industry.
This exit decreases the supply and drives up the price, thereby allowing the remaining firms to
make zero economic profit. So, in the long run, a perfectly competitive firm will only make zero
economic profit.
Topic: Economic Profits and Losses in the Short Run and the Long Run
Skill: Conceptual
AACSB: Written and oral communication
27) When do new firms enter a perfectly competitive market? When does entry stop?
Answer: New firms enter a perfectly competitive market as long as the existing firms are
making an economic profit. Essentially the new firms enter in order to make an economic profit
themselves. Entry stops when it is no longer possible to make an economic profit, which occurs
when the existing firms are earning zero economic profit, that is, the owners are earning a normal
profit.
Topic: Long-Run Adjustments; Entry
Skill: Conceptual
AACSB: Written and oral communication
28) What role does economic profit play in a competitive market?
Answer: Economic profit acts as a signal to entrepreneurs telling them where above normal
returns are being earned. Economic profit serves society by directing resources to those activities
for which society is currently paying a premium.
Topic: Long-Run Adjustments; Entry
Skill: Conceptual
AACSB: Written and oral communication
139
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29) "For a perfectly competitive market, an economic profit attracts new firms. But when these
firms enter the market, the price falls and the economic profit is eliminated." Are the previous
statements correct or incorrect? What is the long-run profit or loss outcome for firms in a
perfectly competitive market?
Answer: The statements are correct. As the statements point out, in the long run the economic
profit of perfectly competitive firms is eliminated by entry. Similarly, an economic loss is
eliminated by exit. Therefore the long-run equilibrium profit for a perfectly competitive firm is
zero economic profit.
Topic: Long-Run Adjustments; Entry
Skill: Conceptual
AACSB: Written and oral communication
30) In the long run, perfectly competitive firms cannot make an economic profit. Why?
Answer: An economic profit attracts entry by new firms. As new firms enter the market, the
market supply increases and the market supply curve shifts rightward. The increase in supply
decreases the price. And, as the price falls, the economic profit is eliminated.
Topic: Long-Run Adjustments; Entry
Skill: Conceptual
AACSB: Written and oral communication
31) The U-pick berry market is perfectly competitive. Suppose that all U-pick blueberry farms
have the same cost curves and all are making an economic profit. What happens as time passes?
What is the long-run equilibrium outcome?
Answer: The presence of economic profit attracts new firms into the U-pick blueberry market.
As the new firms, that is, new farmers enter the market, the supply of U-pick blueberries
increases. The increase in the supply drives the price lower and decreases the economic profits of
the existing farmers. New farmers continue to enter the market as long as there is the possibility
of making an economic profit. Eventually enough new firms enter so that the price is driven so
low that the economic profit is eliminated. All the firms earn zero economic profit, which keeps
them in business but provides no incentive for new firms to enter the market. At this point, the
long-run equilibrium has been reached.
Topic: Long-Run Adjustments; Entry
Skill: Conceptual
AACSB: Written and oral communication
140
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32) During the first half of the 2000s, the price of pork rose. After that, within a couple of years
the price fell back to about the level before the initial increase. What might have led to these
events?
Answer: There are thousands upon thousands of hog farmers in the United States. In the first
half of the 2000s, a general decrease in the demand for beef led to a large increase in the demand
for pork. As a result of the increase in market demand, the price of pork increased dramatically.
Hog farmers were getting a high price and making large economic profits.
In the long run, the word got out that economic profit was possible in this arena. Over time, more
hog farmers entered the market, which led to a large increase in the supply of pork. As supply
increased, the price of pork dropped.
Thus the higher price was the short-run result of an increase in demand. The falling price
reflected the adjustment to the long-run equilibrium, as new hog farmers entered the market. The
long run was ultimately reached and the price of pork was more or less the same as before the
increase in demand.
Topic: Long-Run Adjustments; Entry
Skill: Conceptual
AACSB: Written and oral communication
33) Describe how economic losses are eliminated in a perfectly competitive industry.
Answer: If firms are incurring economic losses, some will exit in the long run. When firms exit,
the market supply decreases and the market supply curve shifts leftward. When supply decreases,
the price rises. As the price rises, the surviving firms increase production and their economic
losses are eliminated.
Topic: Long-Run Adjustments; Exit
Skill: Conceptual
AACSB: Written and oral communication
34) Pumpkin growing is a perfectly competitive industry. Suppose that pumpkin growers are all
incurring an economic loss. What happens as time passes? What is the long-run equilibrium
outcome?
Answer: Because the firms are experiencing economic losses, as time passes some firms exit the
market, perhaps by switching to other crops, or perhaps by closing entirely. As farmers leave the
market, the supply of pumpkins decreases. The supply curve shifts leftward and the price of a
pumpkin rises. As the price rises, the economic losses of the remaining firms decrease.
Eventually enough farmers leave the market so that the price rises sufficiently so that the
remaining firms make zero economic profit and no longer incur an economic loss. At that point,
the long-run equilibrium is reached because there is no further incentive for any firms to leave
the market.
Topic: Long-Run Adjustments; Exit
Skill: Conceptual
AACSB: Written and oral communication
141
Copyright © 2016 Pearson Education, Inc.
35) Suppose a farmer raising beef is making a normal profit. Then, because of a scare about mad
cow disease, the demand for beef decreases drastically. What happens to the profits of the beef
farmer in the short run and in the long run?
Answer: In the short run, the fall in beef prices will decrease the farmer's profits. With the fall in
price, the farmer incurs an economic loss. If the price is high enough to cover the farmer's
variable costs, the farmer continues to operate. In the long run, if demand continues to remain
depressed, some farmers exit the market until the remaining farmers earn a normal profit (zero
economic profit) once again.
Topic: Long-Run Adjustments; Exit
Skill: Conceptual
AACSB: Written and oral communication
36) How does a decrease in the demand for wheat ultimately lead to normal profits for wheat
growers in the long run?
Answer: If the demand for wheat decreases, the price of wheat falls and many wheat farmers
incur economic losses. These losses lead to some farmers shutting down their operations. As
these farmers exit the market, the supply of wheat decreases. A decrease in the supply of wheat
pushes wheat prices back up. The process of exit and rising prices continues until finally the
price of wheat rises enough so that the surviving wheat farmers are earning a normal profit. At
this time, which occurs in the long run, the economic losses have disappeared so that no further
exit occurs. The wheat market is back in its long-run equilibrium.
Topic: Long-Run Adjustments; Exit
Skill: Conceptual
AACSB: Written and oral communication
37) Entry by competitive firms decreases the market price, while exit by competitive firms
increases the market price. Explain why firms enter or exit an industry and why these price
changes occur.
Answer: Competitive firms will enter an industry where economic profits exist in an attempt to
make an economic profit. As new firms enter, the supply increases and the supply curve for the
product shifts rightward. The increase in supply drives the price lower. Firms exit an industry
when economic losses are incurred. As they leave, supply decreases and the supply curve shifts
leftward. The decrease in the supply forces the price higher. Entry and exit continue until the
remaining firms in the industry are making zero economic profit.
Topic: Long-Run Adjustments; Exit
Skill: Conceptual
AACSB: Written and oral communication
38) In the long run, a perfectly competitive firm makes zero economic profit. What incentive
does the firm have to stay in business if it is making zero economic profit?
Answer: Zero economic profits do not mean no profit whatsoever. The firm's owners are still
making a normal profit. A normal profit compensates the firm's owners enough to keep the firm
in business because it is equal to the owner's opportunity cost. Hence the firm has the incentive
to stay in business.
Topic: Long-Run Equilibrium
Skill: Conceptual
AACSB: Written and oral communication
142
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39) When a perfectly competitive firm is in long-run equilibrium, what is the relationship
between the firm's marginal cost, average total cost, marginal revenue, and price?
Answer: Marginal cost and average total cost equal the market price, which is also the marginal
revenue.
Topic: Long-Run Equilibrium
Skill: Conceptual
AACSB: Written and oral communication
40) With regard to its economic profits and economic losses, how is the short run different from
the long run for a perfectly competitive firm?
Answer: The firm can make an economic profit, incur an economic loss in the short run, or
make zero economic profit in the short run. In the long run, however, the only possible outcome
is zero economic profit. An economic profit attracts entry by new firms and economic losses lead
to exit by some firms. Thus, after entry or exit is complete in the long run, the remaining firms
will make zero economic profit.
Topic: Long-Run Equilibrium
Skill: Conceptual
AACSB: Written and oral communication
9 Numeric and Graphing Questions
Quantity
Price (dollars per
(dozens of roses a
dozen roses)
week)
1
12
2
12
3
12
4
12
1) Pete is a perfectly competitive rose grower. The above table gives quantities and the price for
which Pete can sell his roses.
a) What is Pete's total revenue if he sells 1 dozen roses? 2 dozen roses? 3 dozen roses? 4 dozen
roses?
b) What is the marginal revenue of the 2nd dozen roses sold? Of the 3rd dozen? Of the 4th
dozen?
Answer:
a) The total revenue when 1 dozen roses is sold is $12. When Pete sells 2 dozen roses, the total
revenue is $24. When 3 dozen roses are sold, the total revenue is $36. And the total revenue
when 4 dozen roses are sold is $48.
b) The marginal revenue is always $12 per dozen roses.
Topic: Total Revenue and Marginal Revenue
Skill: Analytical
AACSB: Analytical thinking
143
Copyright © 2016 Pearson Education, Inc.
2) Farmer Brown produces corn in a perfectly competitive market. Farmer Brown produces and
sells 500 bushels of corn. The market supply and demand curves are illustrated in the above
figure.
a) What is Farmer Brown's total revenue?
b) What is Farmer Brown's marginal revenue?
Answer:
a) Total revenue = price × quantity. The price is determined by the intersection of the demand
and supply curves, $6 a bushel. As a result, Farmer Brown's total revenue is $6 × 500 = $3,000.
b) For a perfectly competitive firm, the marginal revenue equals the price, so Farmer Brown's
marginal revenue is $6.
Topic: Total Revenue and Marginal Revenue
Skill: Graphing
AACSB: Analytical thinking
144
Copyright © 2016 Pearson Education, Inc.
Quantity
(wreaths)
0
1
2
3
4
5
6
7
8
9
Total cost
(dollars)
1
10
18
24
28
33
40
49
60
73
Total revenue Profit or loss
(dollars)
(dollars)
3) The above table gives Amy's total cost schedule for producing holiday wreaths. Amy is a
perfect competitor and can sell each wreath for $9.
a) Complete the table by calculating Amy's total revenue and her profit or loss schedule.
b) When Amy is producing 4 wreaths, what is her total cost? What is her total revenue? What is
her economic profit or economic loss?
c) What number of wreaths maximizes Amy's profit?
Answer:
Quantity
Total cost Total revenue Profit or loss
(wreaths)
(dollars)
(dollars)
(dollars)
0
1
0
-1
1
10
9
-1
2
18
18
0
3
24
27
3
4
28
36
8
5
33
45
12
6
40
54
14
7
49
63
14
8
60
72
12
9
73
81
8
a) The completed table is above.
b) When Amy is producing 4 wreaths, her total cost is $28, her total revenue is $36, and her
economic profit is $8.
c) Amy can produce 6 or 7 wreaths, with a maximum economic profit of $14.
Topic: Total Revenue, Total Cost, and Economic Profit
Skill: Analytical
AACSB: Analytical thinking
145
Copyright © 2016 Pearson Education, Inc.
Quantity
Total revenue
Total cost
(thousands of
(thousands of
(thousands of
bushels of corn a
dollars per week) dollars per week)
week)
0
0
50
10
30
70
20
60
80
30
90
90
40
120
110
50
150
140
60
180
200
70
210
280
80
240
400
4) Jimmy grows corn. His total revenue and total cost are in the above table. What quantity of
corn maximizes his profit and what is his profit? What is the marginal revenue and marginal cost
at this quantity?
Answer: Jimmy's profit is greatest if he grows either 40,000 or 50,000 bushels of corn. His
(economic) profit at either amount is $10,000 a week. Between 40,000 and 50,000 bushels of
corn, Jimmy's marginal revenue is $30,000, or $3 per bushel and his marginal cost is $30,000, or
$3 per bushel.
Topic: Profit-Maximizing Output
Skill: Analytical
AACSB: Analytical thinking
146
Copyright © 2016 Pearson Education, Inc.
Quantity
(units)
0
1
2
3
4
5
Total cost
(dollars)
3
6
12
21
33
49
5) The above table gives the quantity of output and the total cost for a perfectly competitive firm
that can sell all of its output at $9 per unit.
a) Find the profit maximizing level of output for this firm.
b) How much economic profit is the firm making?
Answer:
Quantity
Total cost Total revenue Profit or loss
(units)
(dollars)
(dollars)
(dollars)
0
3
0
-3
1
6
9
3
2
12
18
6
3
21
27
6
4
33
36
3
5
49
45
-4
a) Total revenue equals price times quantity sold. We can find the total revenue for this firm
because the market price is a constant $9. The total revenue schedule is given in the table above.
The total profit (or loss) equals total revenue minus total cost. The last column shows that the
total profit is largest if either 2 or 3 units are produced.
b) When the firm produces either 2 or 3 units of output, the total economic profit is $6.
Topic: Profit-Maximizing Output
Skill: Analytical
AACSB: Analytical thinking
147
Copyright © 2016 Pearson Education, Inc.
Quantity
(units)
0
1
2
3
4
5
6
7
8
9
Total cost
(dollars)
400
550
600
650
740
850
990
1,140
1,400
1,690
Total revenue Profit or loss
(dollars)
(dollars)
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
___
6) The above table shows the total cost schedule for a perfectly competitive firm. The market
price is $250 per unit. Complete the table.
Answer:
Quantity
Total cost Total revenue Profit or loss
(units)
(dollars)
(dollars)
(dollars)
0
400
0
-400
1
550
250
-300
2
600
500
-100
3
650
750
100
4
740
1,000
260
5
850
1,250
400
6
990
1,500
510
7
1,140
1,750
610
8
1,400
2,000
600
9
1,690
2,250
560
The completed table is above.
Topic: Profit-Maximizing Output
Skill: Analytical
AACSB: Analytical thinking
148
Copyright © 2016 Pearson Education, Inc.
Quantity
(units)
0
1
2
3
4
5
6
7
8
9
10
Total cost
(dollars)
12.00
20.00
26.00
30.00
32.00
36.00
42.00
49.80
64.00
87.60
124.00
7) Acme is a perfectly competitive firm. It has the total cost schedule given in the above table.
Acme's product sells for $8.00 per unit. What amount of output is the most profitable and what is
Acme's economic profit or economic loss?
Answer: Acme's profit-maximizing level of output is 7 units. Acme's total economic profit
equals its revenue, $56.00 ($8.00 per unit × 7 units), minus its total cost, $49.80 at this level of
output, or $56.00 - $49.80 = $6.20.
Topic: Profit-Maximizing Output
Skill: Analytical
AACSB: Analytical thinking
149
Copyright © 2016 Pearson Education, Inc.
Quantity
(cones per
day)
0
100
200
300
400
500
600
Total cost
(dollars per day)
100
250
350
500
700
950
1,2500
8) Cory's is one of many ice cream stands in town. Cory's costs are shown in the table above.
a) If the market price of ice cream is $1.75 per cone, what is Cory's profit-maximizing quantity
of cones?
b) If the market price of ice cream is $2.25 per cone, what is Cory's profit-maximizing quantity
of coins?
c) If the market price of ice cream is $2.75 per cone, what is Cory's profit-maximizing quantity
of coins?
d) Can you determine any points on Cory's supply curve?
Answer:
Quantity
Total cost
Marginal cost
(cones per
(dollars per day) (dollars per cone)
day)
0
100
1.50
100
250
1.00
200
350
1.50
300
500
2.00
400
700
2.50
500
950
3.00
600
1,2500
a) Cory's profit is maximized when his marginal cost is equal to the market price. Marginal cost
is the change in the total cost divided by the change in the quantity. Cory's marginal costs are
shown in the table above. Marginal cost equals the price of $1.75 when Cory sells 300 cones, so
300 cones maximizes Cory's profit.
b) Cory's profit is maximized when his marginal cost is equal to the market price. Marginal cost
equals the price of $2.25 when Cory sells 300 cones, so 400 cones maximizes Cory's profit.
c) Cory's profit is maximized when his marginal cost is equal to the market price. Marginal cost
equals the price of $2.75 when Cory sells 300 cones, so 500 cones maximizes Cory's profit.
150
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d) One point on Cory's supply curve is a price of $1.75, quantity of 300 cones; another point is a
price of $2.25, quantity of 400 cones; and a third point is price of $2.75, quantity of 500 cones.
Topic: Profit-Maximizing Output
Skill: Analytical
AACSB: Analytical thinking
Quantity
(units)
1
2
3
4
5
6
7
8
9
Average
Marginal cost
variable cost
(dollars)
(dollars)
8.00
6.00
7.00
4.00
6.00
2.00
5.00
4.00
4.80
6.00
5.00
7.80
5.40
14.20
6.50
23.60
8.40
36.40
9) Acme is a perfectly competitive firm. It has the cost schedules given in the above table and
has a fixed cost of $12.00. The price of Acme's product is $14.20. What is Acme's most
profitable amount of output? What is Acme's total economic profit or loss?
Answer: The profit maximizing level of output is either 7 or 8 units. Acme's total economic
profit is the economic profit per unit times the number of units produced. The economic profit
per unit equals the price minus the average total cost. To calculate average total cost, note that
when Acme produces 8 units, the average variable cost per unit is $6.50 and the average fixed
cost is $1.50, so Acme's aver-age total cost equals $8.00. Thus Acme makes an economic profit
of $14.20 - $8.00 = $6.20 per unit. Hence Acme's total economic profit is ($6.20) × (8 units) =
$49.60. Acme's total economic profit when it makes 7 units is (except for rounding) identical.
Topic: Profit-Maximizing Output
Skill: Analytical
AACSB: Analytical thinking
151
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Quantity
(units)
1
2
3
4
5
6
7
8
9
Average
Marginal cost
variable cost
(dollars)
(dollars)
8.00
6.00
7.00
4.00
6.00
2.00
5.00
4.00
4.80
6.00
5.00
7.80
5.40
14.20
6.50
23.60
8.40
36.40
10) Acme is a perfectly competitive firm. It has the cost schedules given in the above table and
has a fixed cost of $12.00. The price of Acme's product is $4.00. What is Acme's most profitable
amount of output? What is Acme's total economic profit or loss?
Answer: Acme's most profitable (which means, in this case, minimum loss) is output of 0 units.
The price is below Acme's minimum average variable cost, so Acme shuts down. Acme's
economic loss equals its fixed costs, $12.00.
Topic: Profit-Maximizing Output
Skill: Analytical
AACSB: Analytical thinking
152
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11) The above figure illustrates a perfectly competitive wheat farmer.
a) What will be the firm's profit-maximizing price and output?
b) When the farmer produces 25,000 bushels of wheat, the difference between the firm's
average total cost and the price is at its maximum. Explain why this amount of wheat either is or
is not the profit-maximizing quantity.
Answer:
a) The firm will maximize its profits by producing where its marginal revenue equals its
marginal cost, or 30,000 bushels of wheat. The price will equal the marginal revenue, $3.00 a
bushel.
b) At 25,000 bushels, the difference between average cost and price (which is the average
revenue) is indeed at the maximum, but choosing 25,000 will maximize the profit per bushel of
wheat, not the total profit. The firm is interested in maximizing the total profit not the profit per
bushel. At 30,000 bushels of wheat, the total profit is maximized because this is the amount of
output where the difference between total revenue and total cost is at a maximum.
Topic: Profit-Maximizing Output
Skill: Graphing
AACSB: Analytical thinking
153
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12) The above diagram shows the cost curves for a perfectly competitive wheat farmer. At what
price does the wheat farmer shut down?
Answer: The wheat farmer shuts down if the price is less than the minimum average variable
cost. So in the figure, the wheat farmer shuts down if the price is less than $2 per bushel.
Topic: Shutdown Point
Skill: Graphing
AACSB: Analytical thinking
13) John keeps beehives and sells 100 quarts of honey per month. The honey market is perfectly
competitive, and the price of a quart of honey is $10. John has an average variable cost of $5 and
an average fixed cost of $3. At 100 quarts per month, John's marginal cost is $10.
a) Is John maximizing his profit? If not, what should John do?
b) Calculate John's total revenue, total cost, and total economic profit or economic loss when he
produces 100 quarts of honey.
Answer:
a) Yes, John is maximizing his profit because marginal revenue (price) equals marginal cost.
b) Total revenue equals price times quantity = $10 × 100 = $1,000.
Total cost equals average total cost times quantity = ($5 + $3) × 100 = $800.
Economic profit equals total revenue minus total cost = $1,000 - $800 = $200.
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Analytical
AACSB: Analytical thinking
154
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14) The above diagram shows the cost curves for a perfectly competitive wheat farmer. At what
price(s) does the wheat farmer make an economic profit? Make zero economic profit? Incur an
economic loss? How many bushels of wheat does the farmer produce if the price is $3 per
bushel? If the price is $0.50 per bushel?
Answer: At any price that exceeds the minimum of the average total cost the farmer earns an
economic profit. So the farmer makes an economic profit if the price is greater than $2 per
bushel. The farmer makes zero economic profit if the price equals the minimum total cost. So the
farmer makes a normal profit if the price is $2 per bushel. Finally, the farmer incurs an economic
loss if the price is less than the minimum average total cost. So the farmer incurs an economic
loss if the price is less than $2 per bushel. If the price is $3 per bushel, the farmer produces
30,000 bushels of wheat per year. If the price is $0.50 per bushel, the farmer has shut down
because the price is less than the minimum average variable cost and so the farmer produces 0
bushels per year.
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Graphing
AACSB: Analytical thinking
155
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15) The above figure shows the cost curves of a profit-maximizing perfectly competitive firm. If
the price equals $7,
a) how much will the firm produce?
b) how much is the firm's average total, average variable, and marginal costs?
c) how much is the firm's total, total variable, and total fixed costs?
d) how much is the firm's total revenue and economic profit?
e) what will happen in this market in the long run?
Answer:
a) The firm will produce 40 units of output because that is where the marginal revenue equals
the marginal cost.
b) The firm's average total cost equals $4, its average variable cost equals $3, and its marginal
cost equals $7.
c) The firm's total cost is $160 (= $4 × 40), its total variable cost is $120 (= $3 × 40), and its
total fixed cost is $40 (= $160 - $120).
d) The firm's total revenue is $280 (= $7 × 40) and its economic profit is $120 (= $280 - $160).
e) In the long run, firms will enter the market in response to the economic profit. The market
supply curve will shift rightward, the price will fall, and the economic profit will be eliminated.
Topic: Long-Run Adjustments; Entry
Skill: Graphing
AACSB: Analytical thinking
156
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16) American restaurants receive their supply of baby back-ribs from American farms and from
farms in Denmark. In the figures above, the first diagram shows the perfectly competitive market
for baby back ribs in the United States. The second figure shows the situation at Premium
Standard Farm in Kansas, one of the many U.S. farms supplying these ribs.
Now assume that the United States imposes a ban on European meat in response to the foot-andmouth disease that has infected livestock in Europe. (Which the United States did several years
ago.) In particular, suppose that the U.S. ban decreases the supply by 40 tons a year. Using the
first figure, show the impact of this ban on the baby back rib market. Using the second figure,
show the impact on Premium Standard Farm in Kansas.
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Answer:
The ban on European meat decreases the supply of baby back ribs and shifts the supply curve
leftward, as shown by the shift from S0 to S1. The price rises to $4 a pound. As the figure on the
right shows, the MR curve for the Premium Standard Farm will shift upward, from MR0 to MR1.
As a result, the farm increases its production to 40,000 pounds of ribs. Because the price exceeds
the average total cost, the Premium Standard Farm makes an economic profit.
Topic: Long-Run Adjustments; Change in Price
Skill: Graphing
AACSB: Analytical thinking
158
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17) Suppose the bobby pin industry is perfectly competitive. The price of a packet of bobby pins
is $2.00. Pins and Needles, Inc. is a firm in this industry and is producing 1,000 packets of bobby
pins per day at the point where the MC = MR. The average cost of production at this output level
is $1.50 per packet.
a) What is the marginal cost of the 1,000th packet?
b) Is this firm making an economic profit, zero economical profit, or an economic loss? How
much?
c) Is the firm in long-run equilibrium? Why or why not?
Answer:
a) The price per packet is $2, which is also the Pins and Needle's marginal revenue. The
marginal cost of the 1,000th packet is equal to marginal revenue, so for Pins and Needles the
marginal cost is $2 per packet.
b) The firm is making a $0.50 economic profit per unit (which equals the price minus the
average total cost). Because Pins and Needles produces 1,000 packets, its total economic profit is
$500.
c) The firm is making an economic profit, so it is not in long-run equilibrium. In the long run, a
perfectly competitive firm cannot make an economic profit. The only outcome possible in the
long run is a normal profit.
Topic: Long-Run Equilibrium
Skill: Analytical
AACSB: Analytical thinking
10 True or False
1) In a perfectly competitive market, many firms sell an identical product.
Answer: TRUE
Topic: Perfect Competition
Skill: Conceptual
AACSB: Reflective thinking
2) Perfectly competitive firms are price takers.
Answer: TRUE
Topic: Price Takers
Skill: Conceptual
AACSB: Reflective thinking
3) A perfectly competitive firm produces so that its marginal cost equals the price.
Answer: TRUE
Topic: Price Takers
Skill: Conceptual
AACSB: Reflective thinking
159
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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: Conceptual
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
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: Conceptual
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
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: Conceptual
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
AACSB: Reflective thinking
160
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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: Conceptual
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: Conceptual
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
AACSB: Reflective thinking
13) In the long run, perfectly competitive firms cannot earn an economic profit.
Answer: TRUE
Topic: Long-Run Equilibrium
Skill: Conceptual
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
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
AACSB: Reflective thinking
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
AACSB: Reflective thinking
161
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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
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: Conceptual
AACSB: Reflective thinking
19) 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
AACSB: Reflective thinking
20) 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
AACSB: Reflective thinking
162
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11 Extended Problems
Quantity
(gallons per
day)
0
100
200
300
400
500
600
Total cost
(dollars per day)
500
713
800
838
900
1,063
1,400
1) Brennan's Farm produces and sells milk. The market for milk is perfectly competitive. The
market price of milk is $2.50 per gallon. The relationship between the farm's output and total
costs is shown in the table above.
a) Draw Brennan's average variable, average total, and marginal cost curves.
b) Use your graphs to find Brennan's profit-maximizing output.
c) If Brennan maximizes his profit, how much profit does he make?
d) Should Brennan stay in business? Will other farms with costs the same as Brennan's enter the
milk market? Explain.
Answer:
Quantity
TC
MC
TVC
AVC
ATC
(gallons (dollars (dollars (dollars (dollars (dollars
per day) per day) per day) per day) per day) per day)
0
500
2.13
100
713
213
2.13
7.13
0.87
200
800
300
1.50
4.00
0.38
300
838
338
1.13
2.79
0.62
400
900
400
1.00
2.25
1.63
500
1,063
563
1.13
2.13
3.37
600
1,400
900
1.50
2.33
163
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a) Brennan's cost schedules are shown in the table above and the cost curves are shown in the
figure above.
b) As the figure indicates, marginal cost equals the price when the farm produces 510 gallons of
milk per day. So Brennan's profit-maximizing output is 510 gallons per day.
c) At the profit maximizing level of output, the average total cost is (about) $2.13 per gallon.
Because the price is $2.50 per gallon, the economic profit per gallon is $2.50 - $2.13 = $0.37 and
so the total economic profit is $0.37 × 510 = $188.70 per day.
d) Brennan should stay in business because his economic profit is positive. Other firms,
attracted by economic profit, will enter the market.
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Analytical
AACSB: Analytical thinking
164
Copyright © 2016 Pearson Education, Inc.
Quantity
(gallons per
day)
0
100
200
300
400
500
600
Total cost
(dollars per day)
400
703
880
1,008
1,160
1,410
1,840
2) Petunia's Farm produces and sells milk. The market for milk is perfectly competitive. The
market price of milk is $2.50 per gallon. The relationship between the farm's output and total
costs is shown in the table above.
a) Draw Petunia's average variable, average total, and marginal cost curves.
b) Use your graphs to find Petunia's profit-maximizing output.
c) If Petunia maximizes her profit, how much profit does she make?
d) What is Petunia's shutdown point? What is her economic profit at the shut-down point?
e) Should Petunia shut down? Will farms with costs the same as Petunia's enter or exit the milk
market? Explain.
Answer:
Quantity
(gallons
per day)
0
TC
(dollars
per day)
400
100
703
MC
(dollars
per day)
TVC
(dollars
per day)
AVC
(dollars
per day)
ATC
(dollars
per day)
303
3.03
7.03
480
2.40
4.40
608
2.03
3.36
760
1.90
2.90
1,010
2.02
2.82
1,440
2.40
3.07
3.03
1.77
200
880
1.28
300
1,008
1.52
400
1,160
500
1,410
600
1,840
2.50
4.30
165
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a) Petunia's cost schedules are shown in the table above and the cost curves are shown in the
figure above.
b) As shown in the graph, marginal cost equals the price when the farm produces 450 gallons of
milk per day. So Petunia's profit-maximizing level of output is 450 gallons per day.
c) At the profit maximizing level of output, the average total cost is $2.86 per gallon. Because
the price is $2.50 per gallon, the economic profit per gallon is $2.50 - $2.86 = -$0.36 per gallon,
that is, an economic loss of $0.36 per gallon. The total economic loss is -$0.36 × 450 = -$162 per
day.
d) A firm's shut-down point is the output and price at which the firm just covers its variable
costs. As shown in the graph, Petunia can just cover her variable costs when the price falls to
$1.90 per gallon and the farm produces 400 gallons of milk per day. At the shut-down point, the
farm suffers an economic loss equal to the fixed costs. So Petunia's economic profit is negative
$400.
e) As soon as the market price is above the shut-down point, Petunia should not shut down. If
the farm continues to operate, it can cover part of the fixed costs and only loses $162 per day. If
the firm shuts down, the economic loss equals total fixed cost, i.e. $400 per day. But since
Petunia's profit is below normal, her farm and other farms with the same costs will exit the
market in the long run.
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Analytical
AACSB: Analytical thinking
166
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Price
(dollars per
gallon)
2.50
3.50
4.50
Quantity demanded
(thousands of gallons
per day)
600
500
400
3) The market for milk is perfectly competitive. There are 1,000 farms in the industry and the
relationship between a typical farm's output and total costs is the same as in Problem 2. The
market demand schedule for milk is shown in the table above.
a) What is a typical farm's supply schedule and what is the market supply schedule?
b) What is the market price? What quantity of milk is sold?
c) What is the output produced by each farm? What type of profit or loss is made by each farm?
d) Do farms enter or exit the market?
Answer:
Market quantity
Price
Firm quantity
supplied
(dollars per
supplied
(thousands of
gallon)
(gallons per day)
gallons per day)
2.50
450
450
4.50
550
550
a) A typical farm's supply schedule is the same as its marginal cost schedule for prices above
the minimum average variable cost, $1.90. The table above gives this schedule. Then the market
supply schedule is the sum of what 1,000 firms will supply, so the market supply schedule is
1,000 times the quantity supplied by an individual firm.
b) The equilibrium market price is $3.50, at which 500,000 gallons of milk per day are sold.
c) At the market price, each farm maximizes its profit by producing 500 gallons of milk per
day. At this level of output the price exceeds the average total cost, so the farms are earning an
economic profit.
d) Because the firms are earning an economic profit, new firms enter the market.
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Analytical
AACSB: Analytical thinking
167
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