Ch. 9 Practice MC
1.
If a purely competitive firm is producing at the MR = MC output level and earning an economic profit,
then:
A. the selling price for this firm is above the market equilibrium price.
B. new firms will enter this market.
C. some existing firms in this market will leave.
D. there must be price fixing by the industry's firms.
2.
Long-run competitive equilibrium:
A. is realized only in constant-cost industries.
B. will never change once it is realized.
C. is not economically efficient.
D. results in zero economic profits.
3.
We would expect an industry to expand if firms in that industry are:
A. earning normal profits.
B. earning economic profits.
C. breaking even.
D. earning accounting profits.
4.
Suppose a purely competitive, increasing-cost industry is in long-run equilibrium. Now assume that a
decrease in consumer demand occurs. After all resulting adjustments have been completed, the new
equilibrium price:
A. and industry output will be less than the initial price and output.
B. will be greater than the initial price, but the new industry output will be less than the original output.
C. will be less than the initial price, but the new industry output will be greater than the original output.
D. and industry output will be greater than the initial price and output.
5.
A constant-cost industry is one in which:
A. a higher price per unit will not result in an increased output.
B. if 100 units can be produced for $100, then 150 can be produced for $150, 200 for $200, and so forth.
C. the demand curve and therefore the unit price and quantity sold seldom change.
D. the total cost of producing 200 or 300 units is no greater than the cost of producing 100 units.
6.
Assume a purely competitive increasing-cost industry is initially in long-run equilibrium and that an
increase in consumer demand occurs. After all economic adjustments have been completed product price
will be:
A. lower, but total output will be larger than originally.
B. higher and total output will be larger than originally.
C. lower and total output will be smaller than originally.
D. higher, but total output will be smaller than originally.
7.
Assume a purely competitive, increasing-cost industry is in long-run equilibrium. If a decline in demand
occurs, firms will:
A. leave the industry, price will decrease, and quantity produced will increase.
B. enter the industry and price and quantity will both increase.
C. leave the industry and price and output will both increase.
D. leave the industry and price and output will both decline.
8.
A purely competitive firm:
A. must earn a normal profit in the short run.
B. cannot earn economic profit in the long run.
C. may realize either economic profit or losses in the long run.
D. cannot earn economic profit in the short run.
9.
Assume a purely competitive firm is maximizing profit at some output at which long-run average total
cost is at a minimum. Then:
A. the firm is earning an economic profit.
B. there is no tendency for the firm's industry to expand or contract.
C. allocative but not productive efficiency is being achieved.
D. other firms will enter this industry.
10. An increasing-cost industry is the result of:
A. higher resource prices which occur as the industry expands.
B. a change in the industry's minimum efficient scale.
C. X-inefficiency.
D. the law of diminishing returns.
11. A purely competitive firm is precluded from making economic profit in the long run because:
A. it is a "price taker."
B. its demand curve is perfectly elastic.
C. of unimpeded entry to the industry.
D. it produces a differentiated product.
12. Under what conditions would an increase in demand lead to a lower long-run equilibrium price?
A. The firms in the market are part of a decreasing-cost industry.
B. The firms in the market produce an inferior good.
C. Potential new firms in the market are not attracted by economic profits.
D. Increases in demand cannot lead to lower long-run equilibrium prices.
13. In a decreasing-cost industry:
A. there will be no firm entry because the increased supply will reduce the long-run equilibrium price.
B. the law of demand does not apply.
C. greater demand leads to higher long-run equilibrium prices.
D. lower demand leads to higher long-run equilibrium prices.
14. A decreasing-cost industry is one in which:
A. contraction of the industry will decrease unit costs.
B. input prices fall or technology improves as the industry expands.
C. the long-run supply curve is perfectly elastic.
D. the long-run supply curve is upsloping.
15. Suppose that an industry's long-run supply curve is downsloping. This suggests that:
A. it is an increasing-cost industry.
B. relevant inputs have become more expensive as the industry has expanded.
C. technology has become less efficient as a result of the industry's expansion.
D. it is a decreasing-cost industry.
16. Suppose an increase in product demand occurs in a decreasing-cost industry. As a result:
A. the new long-run equilibrium price will be lower than the original long-run equilibrium price.
B. equilibrium quantity will decline.
C. firms will eventually leave the industry.
D. the new long-run equilibrium price will be higher than the original price.
17. Suppose losses cause industry X to contract and, as a result, the prices of relevant inputs decline. Industry
X is:
A. a constant-cost industry.
B. a decreasing-cost industry.
C. an increasing-cost industry.
D. encountering X-inefficiency.
18. Refer to the above diagram showing the average total cost curve for a purely competitive firm. At the
long-run equilibrium level of output, this firm's total revenue:
A. is $10.
B. is $40.
C. is $400.
D. cannot be determined from the information provided.
19. Refer to the above diagram showing the average total cost curve for a purely competitive firm. At the
long-run equilibrium level of output, this firm's economic profit:
A. is zero.
B. is $400.
C. is $200.
D. cannot be determined from the information provided.
20. The MR = MC rule applies:
A. in the short run, but not in the long run.
B. in the long run, but not in the short run.
C. in both the short run and the long run.
D. only to a purely competitive firm.
21. If the long-run supply curve of a purely competitive industry slopes upward, this implies that the prices of
relevant resources:
A. will fall as the industry expands.
B. are constant as the industry expands.
C. rise as the industry contracts.
D. rise as the industry expands.
22. Refer to the above diagram. Line (1) reflects the long-run supply curve for:
A. a constant-cost industry.
B. a decreasing-cost industry.
C. an increasing-cost industry.
D. a technologically progressive industry.
23. Refer to the above diagram. Line (2) reflects the long-run supply curve for:
A. a constant-cost industry.
B. a decreasing-cost industry.
C. an increasing-cost industry.
D. a technologically progressive industry.
24. Refer to the above diagram. Line (1) reflects a situation where resource prices:
A. decline as industry output expands.
B. increase as industry output expands.
C. remain constant as industry output expands.
D. are unaffected by the level of output in the industry.
25. Allocative efficiency is achieved when the production of a good occurs where:
A. P = minimum ATC.
B. P = MC.
C. P = minimum AVC.
D. total revenue is equal to TFC.
26. A firm is producing an output such that the benefit from one more unit is more than the cost of producing
that additional unit. This means the firm is:
A. producing more output than allocative efficiency requires.
B. producing less output than allocative efficiency requires.
C. achieving productive efficiency.
D. producing an inefficient output, but we cannot say whether output should be increased or decreased.
27. The term productive efficiency refers to:
A. any short-run equilibrium position of a competitive firm.
B. the production of the product-mix most desired by consumers.
C. the production of a good at the lowest average total cost.
D. fulfilling the condition P = MC.
28. If the price of product Y is $25 and its marginal cost is $18:
A. Y is being produced with the least-cost combination of resources.
B. society will realize a net gain if less of Y is produced.
C. resources are being underallocated to Y.
D. resources are being overallocated to Y.
29. Under pure competition in the long run:
A. neither allocative efficiency nor productive efficiency are achieved.
B. both allocative efficiency and productive efficiency are achieved.
C. productive efficiency is achieved, but allocative efficiency is not.
D. allocative efficiency is achieved, but productive efficiency is not.
30. The above diagram portrays:
A. a competitive firm that should shut down in the short run.
B. the equilibrium position of a competitive firm in the long run.
C. a competitive firm that is realizing an economic profit.
D. the loss-minimizing position of a competitive firm in the short run.
31. Refer to the above diagram. If this competitive firm produces output Q, it will:
A. suffer an economic loss.
B. earn a normal profit.
C. earn an economic profit.
D. achieve productive efficiency, but not allocative efficiency.
32. Refer to the above diagram. By producing output level Q:
A. neither productive nor allocative efficiency are achieved.
B. both productive and allocative efficiency are achieved.
C. allocative efficiency is achieved, but productive efficiency is not.
D. productive efficiency is achieved, but allocative efficiency is not.
33. Refer to the above diagram. At output level Q1:
A. resources are overallocated to this product and productive efficiency is not realized.
B. resources are underallocated to this product and productive efficiency is not realized.
C. productive efficiency is achieved, but resources are underallocated to this product.
D. productive efficiency is achieved, but resources are overallocated to this product.
34. Assume that society places a higher value on the last unit of X produced than the value of the resources
used to produce that unit. With no spillovers, this information means that:
A. total cost is greater than total revenue.
B. price is greater than marginal cost.
C. marginal cost is greater than price.
D. resources are being overallocated to X.
35. If production is occurring where marginal cost exceeds price, the purely competitive firm will:
A. maximize profit, but resources will be underallocated to the product.
B. maximize profit, but resources will be overallocated to the product.
C. fail to maximize profit and resources will be overallocated to the product.
D. fail to maximize profit and resources will be underallocated to the product.
36. Which of the following conditions is true for a purely competitive firm in long-run equilibrium?
A. P > MC = minimum ATC.
B. P > MC > minimum ATC.
C. P = MC = minimum ATC.
D. P < MC < minimum ATC.
37. Which of the following would not be expected to occur in a purely competitive market in long-run
equilibrium?
A. consumer and producer surplus will be minimized.
B. P = MC = lowest ATC.
C. the maximum willingness to pay for the last unit equals the minimum acceptable price for that unit.
D. we would expect all of these to occur in the long run in a purely competitive market.
38. Which of the following outcomes is consistent with a purely competitive market in long-run equilibrium?
A.
B.
C.
D.
consumer and producer surplus will be maximized.
P = MC = lowest AVC.
the minimum willingness to pay equals the maximum acceptable price.
we would expect all of these to occur in the long run in a purely competitive market.
39. Entrepreneurs in purely competitive industries:
A. have no incentive to innovate because in the long run they will earn no economic profits.
B. innovate to lower operating costs and generate short-run economic profits.
C. utilize pricing strategies to generate short-run economic profits.
D. rarely try to innovate because of a lack of financial resources.
40. The process by which new firms and new products replace existing dominant firms and products is
called:
A. monopolistic competition.
B. mergers and acquisitions.
C. process innovation.
D. creative destruction.
41. The theory of creative destruction was advanced many years ago by:
A. Bill Gates.
B. Alfred Marshall.
C. Joseph Schumpeter.
D. Adam Smith.
42. (Consider This) The average life expectancy of a U.S. business is approximately:
A. 2 years.
B. 9.5 years.
C. 10.2 years.
D. 22 years.
43. (Consider This) Which of the following statements is true about U.S. firms?
A. Over half are bankrupt within the first two years after starting up.
B. Over half are bankrupt within the first five years after starting up.
C. Nearly 65 percent last 10 years or more.
D. The life expectancy of a U.S. firm is approximately 22 years.
44. (Last Word) When patents on new medications expire, the market for those drugs:
A. change from being monopolistic to being competitive.
B. change from being competitive to being monopolistic.
C. collapse.
D. encourage firms to leave the market.
45. (Last Word) Patents give pharmaceutical companies exclusive rights to produce and sell the patented
medications:
A. forever.
B. for a maximum of 12 years.
C. for a maximum of 20 years.
D. until someone is able to invent a generic equivalent.
46. The long-run supply curve for a decreasing-cost industry is downsloping.
True False
47. Refer to the above diagram. If this represents a typical firm in the industry and the firm is producing at
the profit-maximizing level of output in the short run, then in the long run we would expect more firms to
enter the market.
True False
48. Refer to the above diagram. If this represents a typical firm in the industry and the firm is producing at
the profit-maximizing level of output in the short run, then in the long run we would expect economic
profits in this market to rise.
True False
49. Refer to the above diagram. If this firm is producing at the profit-maximizing level of output in the short
run, then it is achieving productive and allocative efficiency.
True False
50. When entrepreneurs in competitive industries successfully innovate to lower production costs, it usually
results in long-run economic profits for the firm.
True False
Ch. 9 Practice MC Key
1. B
2. D
3. B
4. A
5. B
6. B
7. D
8. B
9. B
10. A
11. C
12. A
13. D
14. B
15. D
16. A
17. C
18. C
19. A
20. C
21. D
22. C
23. A
24. B
25. B
26. B
27. C
28. C
29. B
30. B
31. B
32. B
33. B
34. B
35. C
36. C
37. A
38. A
39. B
40. D
41. C
42. C
43. B
44. A
45. C
46. TRUE
47. TRUE
48. FALSE
49. FALSE
50. FALSE
Ch. 9 Practice MC Summary
Category
AACSB: Analytic
AACSB: Reflective Thinking
Blooms: Level 1 Remember
Blooms: Level 2 Understand
Blooms: Level 3 Apply
Blooms: Level 4 Analyze
Difficulty: 1 Easy
Difficulty: 2 Medium
Difficulty: 3 Hard
Learning Objective: 09-01 Explain how the long run differs from the short run in pure competition.
Learning Objective: 0902 Describe why profits encourage entry into a purely competitive industry and losses result in firms exiting the industry.
Learning Objective: 09-03 Explain how the entry and exit of firms affects resource flows and long-run profits and losses.
Learning Objective: 09-04 Explain the differences between constant-cost; increasing-cost; and decreasing-cost industries.
Learning Objective: 09-05 Show how long-run equilibrium in pure competition produces an efficient allocation of resources.
Learning Objective: 09-06 Discuss creative destruction and the profit incentives for innovation.
McConnell - Chapter 09
Status: New
Topic: Long run in pure competition
Topic: Pure competition and efficiency
Topic: Technological advance and competition
Type: Graph
# of Questions
15
35
9
26
7
8
9
33
8
2
4
8
16
14
6
54
8
27
17
6
12