Subject: Economics    / General Economics    

Question

Question 12

 


Assume a perfectly competitive firm is producing the profit-maximizing level of output and price is less than average total cost, but greater than average variable cost. Which of the following statements is correct?

Answer

 

The firm should raise its price enough to cover its losses.


The firm should continue to produce in the short run in order to minimize its losses.


The firm should shutdown in order to minimize its losses.


The firm should move its resources to another industry.

 

Question 13

 


By continuing to operate when price is greater than average variable cost but less than average total cost, a firm limits its losses to:

Answer

 

$0.


the difference between its total fixed cost and the amount by which total revenue exceeds total variable costs.


its total fixed costs.


its total variable costs.

 

 


Question 14

 


The perfectly competitive firm's supply curve:

Answer

 

is the firm's average total cost curve above the shutdown point.


is the firm's marginal cost curve above the minimum point on the AVC curve.


coincides with its perfectly elastic demand curve.


is perfectly inelastic at the market price.

 

Question 15

 


Assume that as the firms in a perfectly competitive industry expand output, the prices of productive inputs increase. All else constant, this would cause the individual firms' marginal cost curves to ________ and the market supply curve to become ________.

Answer

 

shift down; flatter


shift up; steeper


shift up; flatter


shift down; steeper

 

Question 16

 


Assume there is a decrease in the market demand for a good sold by price-taking firms that are initially producing the profit-maximizing level of output. How will the market adjust over time?

Answer

 

Firms will exit the market, causing price to rise until losses are eliminated.


Firms will exit the market, causing price to fall until positive profits are eliminated.


Firms will enter the market, causing price to fall until positive profits are eliminated.


Firms will enter the market, causing price to rise until losses are eliminated.


Question 17

 


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

Answer

 

a decrease in price and increase in the profit-maximizing quantity of output.


an increase in both price and the profit-maximizing quantity of output.


an increase in price and decrease in profit-maximizing quantity of output.


a decrease in both price and the profit-maximizing quantity of output.


Question 18

 

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

Answer

 

Resources will be reallocated out of the wheat industry into more productive uses.


Farmers will run economic losses indefinitely, if they are rational.


Price and quantity produced will both increase in the long run.


The supply of wheat will fall to near zero and the U.S. will become dependent on foreign suppliers of food.

 

Question 19

 

Assume the firms in a perfectly competitive industry are initially in long-run equilibrium and the cost of labor increases. In the short run, this will cause firms in the industry to:

Answer

 

increase output and earn a positive economic profit.


reduce output and incur a loss.


increase output and incur a loss.


reduce output and earn a positive economic profit.

 

 

Question 20

 


Assume perfectly competitive firm Z is in long-run equilibrium and consumers' tastes and preferences for the type of good produced by Z increase. Which of the following will not happen in the long run?

Answer

 

The market will return to long-run equilibrium when profits return to their normal level.


The firms that were already in the industry will return to a situation in which they earn zero economic profit.


Price will be lower at the new long-run equilibrium as a result of entry into the market.


New firms will enter, causing market price to fall.

 

Question 21

 

 

Industry X, which is perfectly competitive, is in long-run equilibrium. Assume a new law is passed that requires employers in industry X to provide health insurance to previously uninsured employees. As a result of this new requirement we would expect to observe:

Answer

 

an increase in price and a decrease in total output in industry X.


an increase in price and total output in industry X.


a decrease in price and total output in industry X.


a decrease in price and an increase in total output in industry X.

 

Question 22

 


Assume that there is an improvement in the technology used by firms in a perfectly competitive industry. After all adjustments have taken place, we would expect to see:

Answer

 

an increase in equilibrium price and a decrease in quantity.


a decrease in equilibrium price and quantity.


a decrease in equilibrium price and an increase in quantity.


an increase in equilibrium price and quantity.

 

Question 23

 


Assume that goods X and Y are complements and are produced in perfectly competitive markets. All else constant, a decrease in demand for good X would cause:

Answer

 

an increase in the number of firms that produce good X.


an increase in the number of firms that produce good Y.


no effect on the number of firms that produce either good.


a decrease in the number of firms that produce good Y.


Question 24

 

What is the "most efficient capacity" for the perfectly competitive firm?

Answer

 

The plant size for which Price = AR.


The plant size at which LRAC is at its minimum.


The plant size at which MR = MC.


The plant size at which any of the SRATC curves are tangent to the LRAC curve.

 

Question 25

 


The term "industry concentration:"

Answer

 

is a measure of how many firms produce the total output of an industry.


is a measure of how many customers purchase the total output of an industry.


refers to how capital or labor intensive a particular industry is.


refers to the degree of product differentiation in an industry.