Exam

Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1) If a firm shuts down in the short run,
A) is makes zero economic profit.
B) its total revenue is not large enough to cover its fixed cost.
C) its loss equals zero.
D) its loss equals its fixed cost.

1)

2) A firm's total profit can be calculated as all of the following except

A) marginal profit times quantity sold.
B) total revenue minus total cost.
C) (price minus average total cost) times quantity sold.
D) average profit per unit times quantity sold.

2)

3) If a perfectly competitive firm's price is above its average total cost, the firm
A) is earning a profit.
B) is incurring a loss.
C) should shut down.
D) is breaking even.

3)

4) If total revenue exceeds fixed cost, a firm

A) should produce in the short run.
B) is making short-run profits.
C) has covered its variable cost.
D) may or may not produce in the short run, depending on whether total revenue covers
variable cost.

4)

5) An increase in demand for U.S. farm exports will ________ the market prices for these exports and
________ economic profit in these markets.
A) decrease; decrease
B) increase; increase
C) increase; decrease
D) decrease; increase

5)

6) Apple introduced its iPhone 3G in July 2008 and within a month sales had topped 3 million units.
By April 2009, more than 25,000 apps for the iPhone 3G were available in the iTunes store, an
indication that in a competitive market
A) the ease at which a new firm can enter a competitive market is low.
B) entry into the market is restricted in the short run, but becomes easier in the long run.
C) the ease at which a new firm can enter a competitive market is high.
D) entry into the market is blocked.

6)

Table 9-1
Quantity

Total Cost
(dollars)

Variable Cost
(dollars)

$1,000

$0

100

1,360

360

200

1,560

560

300

1,960

960

400

2,760

1,760

500

4,000

3,000

600

5,800

4,800

Table 9-1 shows the short-run cost data of a perfectly competitive firm that produces plastic camera cases. Assume that
output can only be increased in batches of 100 units.

7) Refer to Table 9-1. If the market price of each camera case is $8, what is the profit-maximizing
quantity?
A) 300 units
B) 400 units
C) 500 units
D) 600 units

7)

Figure 9-7

8) Refer to Figure 9-7. Suppose the prevailing price is $20 and the firm is currently producing 1,350
units. In the long-run equilibrium,
A) there will be fewer firms in the industry but total industry output increases.
B) there will be more firms in the industry and total industry output increases.
C) there will be fewer firms in the industry and total industry output decreases.
D) there will be more firms in the industry and total industry output remains constant.

8)

9) In early 2007, Pioneer and JVC, two Japanese electronics firms, each announced that their profits
were going to be lower than expected because they both had to cut prices for LCD and plasma
television sets. Which of the following could explain why these firms did not simply raise their
prices and increase their profits?
A) Most likely, intense competition between these two major producers probably pushed prices
down. Thereafter, each feared that it would lose its customers to the other if it raised its
prices.
B) The firms are still making profits, just not as high as expected so there is room to lower prices
until one can force the other out of business.
C) In perfect competition, prices are determined by the market and firms will keep lowering
prices until there are no profits to be earned.
D) The move to cut prices is probably just a temporary one to gain market share. In the long run
the firms will raise prices and be able to increase their profits.

9)

10) What is productive efficiency?

A) a situation in which resources are allocated such that goods can be produced at their lowest
possible average cost
B) a situation in which firms produce as much as possible
C) a situation in which resources are allocated to their highest profit use
D) a situation in which resources are allocated such the last unit of output produced provides a
marginal benefit to consumers equal to the marginal cost of producing it

10)

11) A perfectly competitive industry achieves allocative efficiency because

A) goods and services are produced at the lowest possible cost.
B) firms carry production surpluses.
C) goods and services are produced up to the point where the last unit provides a marginal
benefit to consumers equal to the marginal cost of producing it.
D) it produces where market price equals marginal production cost.

11)

12) A perfectly competitive firm produces 3,000 units of a good at a total cost of $36,000. The price of
each good is $10. Calculate the firm's short-run profit or loss.
A) profit of $30,000
B) loss of $6,000
C) profit of $6,000
D) There is insufficient information to answer the question.

12)

13) A perfectly competitive firm's supply curve is its

A) marginal cost curve above its minimum average variable cost.
B) marginal cost curve above its minimum average fixed cost.
C) marginal cost curve above its minimum average total cost.
D) marginal cost curve.

13)

Table 9-1
Quantity

Total Cost
(dollars)

Variable Cost
(dollars)

$1,000

$0

100

1,360

360

200

1,560

560

300

1,960

960

400

2,760

1,760

500

4,000

3,000

600

5,800

4,800

Table 9-1 shows the short-run cost data of a perfectly competitive firm that produces plastic camera cases. Assume that
output can only be increased in batches of 100 units.

14) Refer to Table 9-1. What is the fixed cost of production?

A) $0
B) $500
C) $1,000
D) It cannot be determined.

14)

15) Which of the following describes a situation in which every good or service is produced up to the
point where the last unit provides a marginal benefit to consumers equal to the marginal cost of
producing it?
A) allocative efficiency
B) profit maximization
C) marginal efficiency
D) productive efficiency

15)

16) Writing in the New York Times on the technology boom of the late 1990s, Michael Lewis argues,
"The sad truth, for investors, seems to be that most of the benefits of new technologies are passed
right through to consumers free of charge." What does Lewis means by the benefits of new
technology being "passed right through to consumers free of charge"?
A) In the long run, price equals the lowest possible average cost of production. In this sense,
consumers receive the new technology "free of charge."
B) In perfect competition, consumers place a value on the good equal to its marginal cost of
production and since they are willing to pay the marginal valuation of the good, they are
essentially receiving the new technology "free of charge."
C) In perfect competition, price equals marginal cost of production. In this sense, consumers
receive the new technology "free of charge."
D) Firms in perfect competition are price takers. Since they cannot influence price, they cannot
dictate who benefits from new technologies, even if the benefits of new technology are being
"passed right through to consumers free of charge."

16)

17) In the long run, a perfectly competitive market will

A) supply whatever amount consumers will buy at a price which earns the market an economic
profit.
B) produce only the quantity of output that yields a long-run profit for the typical firm.
C) supply whatever amount consumers demand at a price determined by the minimum point on
the typical firm's average total cost curve.
D) generate a long-run equilibrium where the typical firm operates at a loss.

17)

18) The perfectly competitive market structure benefits consumers because

A) firms add a much smaller markup over average cost than firms in any other type of market
structure.
B) firms produce high quality goods at low prices.
C) firms do not produce goods at the lowest possible price in the long run.
D) firms are forced by competitive pressure to be as efficient as possible.

18)

19) If a typical firm in a perfectly competitive industry is earning profits, then

A) the number of firms in the industry will remain constant in the long run.
B) new firms will enter in the long run causing market supply to increase, market price to fall
and profits to decrease.
C) all firms will continue to earn profits.
D) new firms will enter in the long run causing market supply to decrease, market price to rise
and profits to increase.

19)

20) All of the following can be used to compute average profit except
A) total profit divided by quantity.
B) marginal profit minus marginal cost.
C) average revenue minus average total cost.
D) price minus average total cost.

20)

21) If total variable cost exceeds total revenue at all output levels, a perfectly competitive firm
A) is making short-run profits.
B) should produce in the short run.
C) should shut down in the short run.
D) has covered its fixed cost.

21)

22) Which of the following is a characteristic of a monopoly?

A) There is only one seller in the market.
B) It is easy for new firms to enter the market.
C) The product is not unique.
D) The firm has no control over price.

22)

Figure 9-5

Figure 9-5 shows cost and demand curves facing a typical firm in a constant-cost, perfectly competitive industry.

23) Refer to Figure 9-5. If the firm's fixed cost increases by $1,000 due to a new environmental
regulation, what happens in the diagram above?
A) Only the average variable cost and average total cost curves shift upward; marginal cost is not
affected.
B) Only the average total cost curve shifts upward; the marginal cost and average variable cost
curves are not affected.
C) All the cost curves shift upward.
D) None of the curves shifts; only the fixed cost curve, which is not shown here, is affected.

23)

24) An individual seller in perfect competition will not sell at a price lower than the market price
because
A) demand is perfectly inelastic.
B) demand for the product will exceed supply.
C) the seller can sell any quantity she wants at the prevailing market price.
D) the seller would start a price war.

24)

Figure 9-1

25) Refer to Figure 9-1. If the firm is producing 700 units,

A) it is making a loss.
B) it should increase its output to maximize profit.
C) it is making a profit.
D) it should cut back its output to maximize profit.

25)

26) Refer to Figure 9-1. If the firm is producing 200 units,

A) it should cut back its output to maximize profit.
B) it breaks even.
C) it is making a loss.
D) it should increase its output to maximize profit.

26)

Figure 9-6

Figure 9-6 shows cost and demand curves facing a profit-maximizing, perfectly competitive firm.

27) Refer to Figure 9-6. Identify the firm's short-run supply curve.
A) the marginal cost curve
B) the marginal cost curve from a and above
C) the marginal cost curve from b and above
D) the marginal cost curve from d and above

27)

28) Assume the market for organically-grown produce is perfectly competitive. All else equal, as
farmers find it less profitable to produce and sell organic produce in this market,
A) the demand curve will shift to the left and the equilibrium price will decrease.
B) the supply curve will shift to the left and the equilibrium price will increase.
C) the supply curve will shift to the left, the demand curve will shift to the left, and the
equilibrium price will increase.
D) the supply curve will shift to the right, the demand curve will shift to the left, and the
equilibrium price will decrease.

28)

29) Assume that the tuna fishing industry is perfectly competitive. Which of the following best
characterizes the industry if, as demand for tuna increases, fishing boats have to go farther into the
ocean to harvest tuna?
A) an increasing-cost industry
B) a fixed-cost industry
C) a decreasing-cost industry
D) a constant-cost industry

29)

30) Which of the following is not a characteristic of a monopolistically competitive market structure?
A) All sellers sell products that are differentiated.
B) Each firm must react to actions of other firms.
C) There is a large number of independently acting small sellers.
D) There are low barriers to entry of new firms.

30)

Table 9-1
Quantity

Total Cost
(dollars)

Variable Cost
(dollars)

$1,000

$0

100

1,360

360

200

1,560

560

300

1,960

960

400

2,760

1,760

500

4,000

3,000

600

5,800

4,800

Table 9-1 shows the short-run cost data of a perfectly competitive firm that produces plastic camera cases. Assume that
output can only be increased in batches of 100 units.

31) Refer to Table 9-1. If the market price of each camera case is $8 and the firm maximizes profit, what
is the amount of the firm's profit or loss?
A) $0 (it breaks even)
B) loss of $1,000
C) profit of $440
D) loss of $440

31)

Figure 9-6

Figure 9-6 shows cost and demand curves facing a profit-maximizing, perfectly competitive firm.

32) Refer to Figure 9-6. At price P1 , the firm would produce

A) Q1 units

B) Q3 units.

C) Q5 units.

32)
D) zero units.

Figure 9-2

33) Refer to Figure 9-2. Suppose the firm is currently producing Q2 units. What happens if it expands

33)

output to Q3 units?

A) It makes less profit.

B) Its profit increases by the size of the vertical distance df.
C) It will be moving toward its profit maximizing output.
D) It incurs a loss.

34) When a perfectly competitive firm finds that its market price is below its minimum average
variable cost, it will sell
A) the output where marginal revenue equals marginal cost.
B) the output where average total cost equals price.
C) nothing at all; the firm shuts down.
D) any positive output the entrepreneur decides upon because all of it can be sold.

34)

35) Which of the following is a characteristic of an oligopolistic market structure?

A) There are few dominant sellers.
B) It is easy for new firms to enter the industry.
C) Each firm need not react to the actions of rivals.
D) Each firm sells a unique product.

35)

10

Figure 9-5

Figure 9-5 shows cost and demand curves facing a typical firm in a constant-cost, perfectly competitive industry.

36) Refer to Figure 9-5. The firm's manager suggests that the firm's goal should be to maximize average
profit. If the firm does this, what is the amount of profit that it will earn?
A) $6,600
B) $6,750
C) $12,150
D) $36,000

36)

37) If a perfectly competitive firm's price is less than its average total cost but greater than its average
variable cost, the firm
A) is incurring a loss.
B) is earning a profit.
C) is breaking even.
D) should shut down.

37)

38) For a perfectly competitive firm, which of the following is not true at profit maximization?
A) Market price is greater than marginal cost.
B) Price equals marginal cost.
C) Marginal revenue equals marginal cost.
D) Total revenue minus total cost is maximized.

38)

11

Figure 9-2

39) Refer to Figure 9-2. The firm breaks even at an output level of
A) Q1 units.
B) Q2 units.
C) Q3 units.

D) Q4 units.

39)

40) Market supply is found by

A) horizontally summing each individual producer's average total cost curve.
B) vertically summing each individual producer's average total cost curve.
C) horizontally summing the relevant part of each individual producer's marginal cost curve.
D) vertically summing the relevant part of each individual producer's marginal cost curve.

40)

41) The price of a seller's product in perfect competition is determined by

A) market demand and market supply.
B) the individual demander.
C) the individual seller.
D) a few of the sellers.

41)

12

Figure 9-6

Figure 9-6 shows cost and demand curves facing a profit-maximizing, perfectly competitive firm.

42) Refer to Figure 9-6. At price P4 , the firm would

42)

A) lose an amount equal to its fixed cost.

C) make a profit.

B) lose an amount less than fixed cost.

D) make a normal profit.

43) Refer to Figure 9-6. At price P1 , the firm would

43)

A) lose an amount more than fixed cost.

C) lose an amount equal to its fixed cost.

B) break even.
D) lose an amount less than fixed cost.

Figure 9-4

Figure 9-4 shows the cost and demand curves for a profit-maximizing firm in a perfectly competitive market.

44) Refer to Figure 9-4. What is the amount of its total fixed cost?
A) $1,080
B) $1,440
C) $2,520
D) It cannot be determined.

13

44)

Table 9-1
Quantity

Total Cost
(dollars)

Variable Cost
(dollars)

$1,000

$0

100

1,360

360

200

1,560

560

300

1,960

960

400

2,760

1,760

500

4,000

3,000

600

5,800

4,800

Table 9-1 shows the short-run cost data of a perfectly competitive firm that produces plastic camera cases. Assume that
output can only be increased in batches of 100 units.

45) Refer to Table 9-1. Suppose the fixed cost of production rises by $500 and the price per unit is still
$8. What happens to the firm's profit-maximizing output level?
A) It will remain the same.
B) The firm will shut down.
C) It must rise to offset the increased cost.
D) It must fall.

45)

46) If, in a perfectly competitive industry, the market price facing a firm is above its average total cost
at the output where marginal revenue equals marginal cost, then
A) firms are breaking even.
B) existing firms will exit the industry.
C) market supply will remain constant.
D) new firms are attracted to the industry.

46)

47) Assume that price is greater than average variable cost. If a perfectly competitive seller is
producing at an output where price is $11 and the marginal cost is $14.54, then to maximize profits
the firm should
A) produce a larger level of output.
B) There is not enough information given to answer the question.
C) produce a smaller level of output.
D) continue producing at the current output.

47)

48) What is allocative efficiency?

A) It refers to a situation in which resources are allocated to their highest profit use.
B) It refers to a situation in which resources are allocated fairly to all consumers in a society.
C) It refers to a situation in which resources are allocated such that the last unit of output
produced provides a marginal benefit to consumers equal to the marginal cost of producing
it.
D) It refers to a situation in which resources are allocated such that goods can be produced at
their lowest possible average cost.

48)

49) Both buyers and sellers are price takers in a perfectly competitive market because
A) each buyer and seller is too small relative to others to independently affect the market price.
B) each buyer and seller knows it is illegal to conspire to affect price.
C) both buyers and sellers in a perfectly competitive market are concerned for the welfare of
others.
D) the price is determined by government intervention and dictated to buyers and sellers.

49)

14

50) Max Shreck, an accountant, quit his $80,000-a-year job and bought an existing tattoo parlor from
its previous owner, Sylvia Sidney. The lease has five years remaining and requires a monthly
payment of $4,000. The lease
A) is part of the marginal cost of operating the tattoo parlor.
B) is a fixed cost of operating the tattoo parlor.
C) is an implicit cost of operating the tattoo parlor.
D) is a variable cost of operating the tattoo parlor.
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
51) Assuming a market price of $4, fill in the columns in the following table. What is the
profit-maximizing level of production? What are the two ways to determine the
profit-maximizing level of production?
Total
Revenue
Quantity (TR)
0
1
2
3
4
5
6
7

Total
Cost (TC) Profit
3
5
6
9
14
20
28
40

Marginal
Revenue
(MR)

Marginal
Cost (MC)

52) Suppose Veronica sells teapots in the perfectly competitive teapot market. Her output per
day and her costs are as follows:
Output per
Day
Total Cost
0
$20
1
32
2
37
3
48
4
61
5
75
6
92
7
113
8
136
Suppose the current equilibrium price in the teapot market is $15. To maximize profit, how
many teapots will Veronica produce, what price will she charge, and how much profit (or
loss) will she make? Draw a graph to illustrate your answer. Your graph should include
Veronica's demand, ATC, AVC, MC, and MR curves, the price she is charging, the quantity
she is producing, and the area representing her profit (or loss).

15

51)

52)

50)

53) Consider the market for wheat which is a perfectly competitive market. Is the market
demand curve the same as the demand curve facing an individual producer? If not,
explain how and why they are different? Illustrate your answer graphically.

53)

54) Suppose Veronica sells teapots in the perfectly competitive teapot market. Her output per
day and her costs are as follows:
Output per
Day
Total Cost
0
$20
1
32
2
37
3
48
4
61
5
75
6
92
7
113
8
136

54)

Suppose the current equilibrium price in the teapot market is $20. To maximize profit, how
many teapots will Veronica produce, what price will she charge, and how much profit (or
loss) will she make? Draw a graph to illustrate your answer. Your graph should include
Veronica's demand, ATC, AVC, MC, and MR curves, the price she is charging, the quantity
she is producing, and the area representing her profit (or loss).

55) How are market price, average revenue, and marginal revenue related for a perfectly
competitive firm and why?

16

55)

Answer Key
Testname: WEEK6PRACTICE101
1) D
2) A
3) A
4) D
5) B
6) C
7) B
8) B
9) A
10) A
11) C
12) B
13) A
14) C
15) A
16) A
17) C
18) D
19) B
20) B
21) C
22) A
23) B
24) C
25) D
26) D
27) C
28) B
29) A
30) B
31) C
32) D
33) A
34) C
35) A
36) A
37) A
38) A
39) D
40) C
41) A
42) C
43) A
44) C
45) A
46) D
47) C
48) C
49) A
50) B
17

Answer Key
Testname: WEEK6PRACTICE101
51)

Total
Revenue
Quantity (TR)

Total Cost
(TC)

Profit

Marginal
Marginal
Revenue (MR) Cost (MC)
-----

-3

-1

12

16

14

20

20

24

28

-4

28

40

-12

12

The profit-maximizing level of production is 3 units, which can be determined by the greatest difference between total
revenue and total cost, which is equal to profit, and can also be determined where marginal revenue is equal to
marginal cost (or marginal revenue is the closest to marginal cost, without being below marginal cost).
52) Veronica will produce 5 teapots per day. She will charge the market price of $15. She will break even and make a profit
of $0.

18

Answer Key
Testname: WEEK6PRACTICE101
53) The market demand is downward sloping while the demand for an individual firm's output is horizontal at the
equilibrium market price. This is because an individual producer is too small to influence the market price and must
take the market price as given. At the market price, the individual seller can sell all the output she desires. The figure
below shows the market demand curve and the demand curve for a single firm.

54) Veronica will produce 6 teapots per day. She will charge the market price of $20. She will make a profit of $28.

55) They are all equal to each other. The market price for any firm equals average revenue. This can be verified by noting
that average revenue = total revenue quantity = (price quantity) quantity. Further, a perfectly competitive firm
faces a horizontal demand curve at the market price which means that it does not need to reduce the price to sell more.
Therefore, its marginal revenue equals price.

19