Chapter 5: Price Controls: Multiple Choice Questions

1. A legal maximum price at which a good can be sold is a price a. floor. b. stabilization. c. support. d. ceiling.

2. A binding price ceiling causes a. a shortage, which cannot be eliminated through market adjustment. b. a surplus, which cannot be eliminated through market adjustment. c. a shortage, which is temporary, since market adjustment will cause price to rise. d. a surplus, which is temporary, since market adjustment will cause price to rise.

3. If a price ceiling is not binding, a. the equilibrium price is above the ceiling. b. the equilibrium price is below the ceiling. c. it has no legal enforcement mechanism. d. people must voluntarily agree to abide by it.

4. In the figure shown, a binding price ceiling is shown in a. panel (a). b. panel (b). c. both panel (a) and panel (b). d. neither panel (a) nor panel (b).

5. According to the graph shown, a binding price ceiling would exist at a price of a. $14.00. b. $12.00. c. $10.00. d. $8.00.

6. According to the graph shown, if the government imposes a price floor of $14.00 in this market, the result would be a

a. surplus of 20. b. surplus of 40. c. shortage of 20. d. shortage of 40.

7. According to the graph shown, if the government imposes a price ceiling of $8.00 in this market, the result would be a

a. surplus of 20. b. surplus of 40. c. shortage of 20. d. shortage of 40.

8. In the figure shown, which of the panels represents a binding price floor? a. panel (a) b. panel (b) c. panel (a) and panel (b) d. neither panel (a) nor panel (b)

9. In panel (b), at the actual price there will be a. a shortage of wheat. b. equilibrium in the market. c. a surplus of wheat. d. an excess demand for wheat.

10. Rent control is a. a common example of a social problem solved by government regulation. b. a common example of a price ceiling. c. the most effective way to provide affordable housing. d. the most efficient way to allocate housing.

11. Over time, housing shortages caused by rent control a. increase, because the demand and supply curves for housing are more elastic in the long run. b. increase, because the demand and supply curves for housing are more inelastic in the long run. c. decrease, because the demand and supply curves for housing are more inelastic in the long run. d. change very little since price is not allowed to adjust.

12. Under rent control, tenants can expect a. lower rent and higher quality housing. b. lower rent and lower quality housing. c. higher rent and higher quality housing. d. higher rent and lower quality housing.

13. The minimum wage is an example of a. a price ceiling. b. a price floor. c. a free-market process. d. an efficient labor allocation mechanism.

14. Which of the following is the most likely explanation for the imposition of a price floor in the market for corn?

a. Policy makers have studied the effects of the price floor carefully and recognize that the price floor is advantageous for society as a whole.

b. Buyers and sellers of corn have agreed that the price floor is good for both of them and have therefore pressured policy makers into enacting the price floor.

c. Buyers of corn, recognizing that the price floor is good for them, have pressured policy makers into enacting the price floor.

d. Sellers of corn, recognizing that the price floor is good for them, have pressured policy makers into enacting the price floor.

Chapter 6: Elasticity Multiple Choice Questions

1. The price elasticity of demand measures how responsive

a. buyers are to a change in income. b. sellers are to a change in price. c. buyers are to a change in price. d. sellers are to a change in buyers’ incomes.

2. Demand for a good would tend to be more inelastic the a. fewer the available substitutes. b. longer the time period considered. c. more the good is considered a luxury good. d. more narrowly defined the market is. 3. Demand is said to be elastic if a. the price of the good responds substantially to changes in demand. b. demand shifts substantially when the price of the good changes. c. the percentage change in quantity demanded is smaller than the percentage change in the price of

the good d. the percentage change in quantity demanded is larger than the percentage change in the price of

the good 4. If a good is a necessity, demand for the good would tend to be a. elastic. b. horizontal. c. unit elastic. d. inelastic. 5. If a good is a luxury, demand for the good would tend to be a. inelastic. b. elastic. c. unit elastic. d. horizontal. 6. If a person only occasionally enjoys a cup of coffee, his demand for coffee would be a. horizontal. b. inelastic. c. unit elastic. d. elastic. 7. A person who has high cholesterol and must exercise an hour every day has what type of demand for exercise equipment ? a. elastic b. unit elastic c. inelastic d. weak 8. Demand for a good would tend to be more inelastic the a. fewer the available substitutes. b. longer the time period considered. c. more the good is considered a luxury good. d. more narrowly defined the market is. 9. Chocolate Chip Cookie Dough ice cream would tend to have very elastic demand because a. it must be eaten quickly. b. the market is broadly defined. c. there are few substitutes. d. other flavors of ice cream are almost perfect substitutes.

10. Holding all other forces constant, when the price of gasoline rises, the number of gallons of gasoline demanded would fall substantially over a ten-year period because a. buyers tend to be much less sensitive to a change in price when given more time to react. b. buyers will have substantially more income over a ten-year period. c. buyers tend to be much more sensitive to a change in price when given more time to react. d. None of these answers are correct. 11. Economists compute the price elasticity of demand as the a. percentage change in the price divided by the percentage change in quantity demanded. b. change in quantity demanded divided by the change in the price. c. percentage change in the quantity demanded divided by the percentage change in price. d. percentage change in the quantity demanded divided by the percentage change in income. 12. The price elasticity of demand for a good measures how willing a. consumers are to move away from the good as price rises. b. firms are to produce more of a good as price rises. c. consumers are to buy more of a good as price rises. d. firms are to produce more of a good as price falls. 13. The greater the price elasticity of demand the a. more likely the product is a necessity. b. smaller the responsiveness of quantity demanded to price. c. greater the percentage change in price over the percentage change in quantity demanded. d. greater the responsiveness of quantity demanded to price. 14. When the price of bubble gum is $0.50, the quantity demanded is 400 packs per day. When the price falls to $0.40, the quantity demanded increases to 600. Given this information, you know that the demand for bubble gum is a. inelastic. b. elastic. c. unit elastic. d. perfectly inelastic. 15. Consider the information given in question 14. Which of the following is the price elasticity of bubble gum? a. -1.0 b. -1.5 c. -0.4 d. -2.5 16. Suppose there is a 6 percent increase in the price of good X and a resulting 6 percent decrease in the quantity of X demanded. Price elasticity of demand for X is a. -1. b. -6. c. 0. d. infinite. 17. Suppose the price of Twinkies is reduced from $2.00 to $1.75 and, as a result, the quantity of Twinkies demanded increases from 2,000 to 2,200. The price elasticity of demand for Twinkies is a. -1.25 b. -0.8 c. -1.00 d. -0.4 18. If the price elasticity of demand for a good is 4.0, then a 10 percent increase in price would result in a a. 4.0 percent decrease in the quantity demanded. b. 10 percent decrease in the quantity demanded. c. 40 percent decrease in the quantity demanded. d. 400 percent decrease in the quantity demanded. 19. Demand is elastic if (the absolute value of) elasticity is a. less than 1. b. equal to 1. c. equal to 0. d. greater than 1.

20. Demand is inelastic if (the absolute value of) elasticity is a. less than 1. b. equal to 1. c. greater than 1. d. equal to 0. 21. Demand is unit elastic if (the absolute value of) elasticity is a. less than 1. b. greater than 1. c. equal to 1. d. equal to 0. 22. A perfectly elastic demand implies that a. buyers will not respond to any change in price. b. any rise in price above that represented by the demand curve will result in no output demanded. c. price and quantity demanded respond proportionally. d. price will rise by an infinite amount when there is a change in quantity demanded. 23. A perfectly elastic demand curve will be a. vertical. b. horizontal. c. downward sloping to the right. d. upward sloping to the right. 24. In the case of perfectly inelastic demand, a. quantity demanded stays the same regardless of price changes. b. huge changes in quantity demanded result from very small changes in the price. c. the change in quantity demanded exactly equals the change in price. d. the change in quantity demanded will be twice the change in price. 25. When demand is inelastic, a decrease in price will cause a. an increase in total revenue. b. a decrease in total revenue. c. no change in total revenue. d. There is insufficient information to answer this question. 26. According to the graph, total revenue at a price of $30 would be a. $9,000. b. $7,000. c. $5,000. d. $3,000. 27. According to the graph, when price falls from point $40 to $30 we know that demand must be a. elastic, since total revenue increases from $8000 to $9000. b. inelastic, since total revenue increases from $8000 to $9000. c. inelastic, since total revenue decreases from $9000 to $8000. d. unit elastic, since total revenue decreases from $9000 to $8000. 28. According to the graph, lowering price from $30 to $20 would a. increase total revenue by $2,000. b. decrease total revenue by $2,000. c. increase total revenue by $1,000. d. decrease total revenue by $1,000.

29. According to the graph, the total revenue at P1 is represented by area(s) a. B + D. b. A + B. c. C + D. d. D. 30. If the demand for donuts is elastic, a decrease in the price of donuts will a. increase total revenue of donut sellers. b. decrease total revenue of donut sellers. c. not change total revenue of donut sellers. d. There is not enough information to answer this question. 31. The local pizza restaurant makes such great bread sticks that price elastic of demand for bread sticks

is inelastic. If the owner is only interested in increasing revenue, he should a. lower the price of the bread sticks. b. leave the price of the bread sticks alone. c. raise the price of the bread sticks. d. reduce costs.

Chapter 6: Elasticity Short Answer Questions

1. Consider the following pairs of goods. Which would you expect to have the more elastic demand? Why?

a. water or diamonds b. insulin or nasal decongestant spray c. food in general or breakfast cereal d. gasoline over the course of a week or gasoline over the course of a year e. personal computers or Microsoft personal computers

2. You own a small town movie theatre. You currently charge $5 per ticket for everyone who comes to your movies. Your friend who took an economics course in college tells you that there may be a way to increase your total revenue. Given the demand curves shown, answer the following questions.

a. What is your current total revenue for both groups? b. The elasticity of demand is more elastic in which market? c. Which market has the more inelastic demand? d. What is the elasticity of demand at $5 in the adult market? Is this elastic or inelastic? e. What is the elasticity of demand at $5 in the children’s market? Is this elastic or inelastic? f. Given the graphs and what your friend knows about economics, he recommends you increase the

price of adult tickets to $8 each and lower the price of a child’s ticket to $3. How much could you increase total revenue if you take his advice?

Chapter 7: Consumer and Producer Surplus Multiple Choice Questions

1. Willingness to pay measures the a. amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it. b. amount a seller actually receives for a good minus the minimum amount the seller is willing to

accept. c. maximum amount a buyer is willing to pay minus the minimum amount a seller is willing to

accept. d. maximum amount that a buyer will pay for a good.

2. Consumer surplus is a. a buyer’s willingness to pay minus the price. b. a buyer’s willingness to pay plus the price. c. the price of the product minus the buyer’s willingness to pay. d. when the buyer’s willingness to pay and the price of the product are equal.

3. If a consumer is willing and able to pay $15.00 for a particular good but the price of the good is $17.00, then the

a. consumer would have consumer surplus of $2.00. b. consumer would increase his/her willingness and ability to pay by earning more. c. consumer would not purchase the good and would not have any consumer surplus. d. market must not be a perfectly competitive market.

4. If a consumer is willing and able to pay $20.00 for a particular good but only has to pay $14.00, the consumer surplus is

a. $6.00. b. $14.00. c. $20.00. d. $34.00. BUYER

WILLINGNESS TO PAY

MIKE

$50.00

SANDY

$30.00

JONATHAN

$20.00

HALEY

$10.00

5. If the table represents the willingness to pay of 4 buyers and the price of the product is $15, then who would be willing to purchase the product?

a. Mike b. Mike and Sandy c. Mike, Sandy, and Jonathan d. Mike, Sandy, Jonathan, and Haley

6. If you pay a price exactly equal to your willingness to pay, then a. your consumer surplus is negative. b. your willingness to pay is less than your consumer surplus. c. your consumer surplus is zero. d. you place little value on the good.

7. On a graph, consumer surplus would be the area a. between the demand and supply curves. b. below the demand curve and above price. c. below the price and above the supply curve. d. below the demand curve to the right of equilibrium price.

8. Other things equal, if the price of a good falls, the consumer surplus a. decreases. b. is unchanged. c. increases. d. may increase, decrease, or remain unchanged.

9. Given the graph, which area represents consumer surplus at a price of P2?

a. A + B b. A c. A + B + C d. A + B + D e. A + B + C + D + E

10. Producer surplus is the a. area under the supply curve to the left of the amount sold. b. amount a seller is paid less the cost of production. c. amount represented by the area under the supply curve. d. cost to sellers of participating in a market. SELLER

COST

DALE

$1,500

JILL

$1,200

DENISE

$1,000

CATHERINE

$750

JACKSON

$500

The table represents the costs of five possible sellers.

11. According to the table shown, if the market price is $1,000, the producer surplus in the market would be

a. $700. b. $750. c. $2,250. d. $3,700.

12. Producer surplus measures the a. well-being of society as a whole. b. well-being of sellers. c. well-being of buyers and sellers. d. loss to sellers.

13. Denea produces cookies. Her production cost is $3 per dozen. She sells the cookies for $8 per dozen. Her producer surplus is

a. $3 per dozen. b. $5 per dozen. c. $8 per dozen. d. $11 per dozen.

14. Total surplus in a market equals a. Consumer surplus + Producer surplus. b. Value to buyers – Amount paid by buyers. c. Amount received by sellers – Costs of sellers. d. Producer surplus – Consumer surplus.

15. According to the graph shown, at the equilibrium price, consumer surplus would be a. $480. b. $640. c. $1,120. d. $1,280.

16. According to the graph shown, if the price decreases from $22 to $16, consumer surplus would increase by

a. $120. b. $360. c. $480. d. $600.

17. According to the graph shown, at the equilibrium price, producer surplus would be a. $480. b. $640. c. $1,120. d. $1,280.

18. According to the graph shown, at the equilibrium price, total surplus would be a. $480. b. $640. c. $1,120. d. $1,280.

19. According to the graph, Jamaica would a. import 150 calculators. b. import 250 calculators. c. export 100 calculators. d. export 250 calculators.

20. According to the graph, consumer surplus in Jamaica before trade is a. $375. b. $1,500. c. $2,250. d. $8,700.

21. According to the graph, the change in total surplus in Jamaica because of trade is a. $625. b. $865. c. $1,375. d. $1,500.

Chapter 7: Consumer and Producer Surplus Short Answer Questions

1. Answer each of the following questions on demand and consumer surplus. a. What is consumer surplus, and how is it measured? b. What is the relationship between the demand curve and the willingness to pay? c. Other things equal, what happens to consumer surplus if the price of a good falls? Why? Illustrate

using a demand curve. d. In what way does the demand curve represent the benefit consumers receive from participating in

a market? In addition to the demand curve, what else must be considered to determine consumer surplus?

2. Tammy loves donuts. The table shown reflects the value Tammy places on each donut she eats:

VALUE OF FIRST DONUT

60¢

VALUE OF SECOND DONUT

$0.50

VALUE OF THIRD DONUT

$0.40

VALUE OF FOURTH DONUT

$0.30

VALUE OF FIFTH DONUT

$0.20¢

VALUE OF SIXTH DONUT

$0.10

a. Use this information to construct Tammy’s staircase demand curve for donuts. b. If the price of donuts is $0.20, how many donuts will Tammy buy? c. Show Tammy’s consumer surplus on your graph. How much consumer surplus would she have

at a price of $0.20? d. If the price of donuts rose to $0.40, how many donuts would she purchase now? What would

happen to Tammy’s consumer surplus? Show this change on your graph.

3. Answer each of the following questions on supply and producer surplus. a. What is producer surplus, and how is it measured? b. What is the relationship between the cost to sellers and the supply curve? c. Other things equal, what happens to producer surplus when the price of a good rises? Illustrate

your answer on a supply curve.

4. Given the following equations two equations: 1) Total Surplus = Consumer Surplus + Producer Surplus 2) Total Surplus = Value to Buyers – Cost to Sellers Show how equation (1) can be used to derive equation (2).

Chapter 8: The Cost of Production Multiple Choice Questions

1. Economists normally assume that the goal of a firm is to (i) sell as much of their product as possible. (ii) set the price of their product as high as possible. (iii) maximize profit. a. (i) and (ii) b. (ii) and (iii) c. (iii) only d. All of the above are correct.

2. The amount of money that a firm receives from the sale of its output is called a. total gross profit. b. total net profit. c. total revenue. d. net revenue.

3. The amount of money that a firm pays to buy inputs is called a. total cost. b. variable cost. c. marginal cost. d. fixed cost.

4. Profit is defined as a. net revenue minus depreciation. b. total revenue minus total cost. c. average revenue minus average total cost. d. marginal revenue minus marginal cost.

5. Total revenue equals a. total output multiplied by price per unit of output. b. total output divided by profit. c. (total output multiplied by sales price) – inventory surplus. d. (total output multiplied by sales price) – inventory shortage.

6. Explicit costs a. require an outlay of money by the firm. b. include all of the firm’s opportunity costs. c. include income that is forgone by the firm’s owners. d. All of the above are correct.

7. An example of an explicit cost of production would be a. the cost of forgone labor earnings for an entrepreneur. b. the lost opportunity to invest in other capital markets when the money is invested in one’s

business. c. the cost of flour for a baker. d. None of the above are correct.

8. Which of the following is an implicit cost? (i) the owner of a firm forgoing an opportunity to earn a large salary working for a Wall Street

brokerage firm (ii) interest paid on the firm’s debt (iii) rent paid by the firm to lease office space a. (ii) and (iii) b. (i) and (iii) c. (i) only d. All of the above are correct.

9. Economic profit is equal to a. total revenue minus the explicit cost of producing goods and services. b. total revenue minus the opportunity cost of producing goods and services. c. total revenue minus the accounting cost of producing goods and services. d. average revenue minus the average cost of producing the last unit of a good or service.

10. Accounting profit is equal to a. marginal revenue minus marginal cost. b. total revenue minus the explicit cost of producing goods and services. c. total revenue minus the opportunity cost of producing goods and services. d. average revenue minus the average cost of producing the last unit of a good or service.

11. Economic profit is equal to (i) total revenue – (explicit costs + implicit costs). (ii) total revenue – opportunity costs. (iii) accounting profit + implicit costs. a. (i) only b. (i) and (ii) c. (ii) and (iii). d. All of the above are correct.

12. Accounting profit is equal to (i) total revenue – implicit costs. (ii) total revenue – opportunity costs. (iii) economic profit + implicit costs. a. (i) only b. (iii) only c. (i) and (ii) d. None of the above are correct.

13. The marginal product of labor is equal to the a. incremental cost associated with a one unit increase in labor. b. incremental profit associated with a one unit increase in labor. c. increase in labor necessary to generate a one unit increase in output. d. increase in output obtained from a one unit increase in labor.

14. One would expect to observe diminishing marginal product of labor when a. crowded office space reduces the productivity of new workers. b. workers are discouraged about the lack of help from other workers. c. only new workers are trained in using the most productive capital. d. union workers are told to reduce their work effort in preparation for a new round of collective

bargaining talks.

16. When adding another unit of labor leads to an increase in output that is smaller than increases in output that resulted from adding previous units of labor, we have the property of

a. diminishing labor. b. diminishing output. c. diminishing marginal product. d. negative marginal product.

17. One assumption that distinguishes short-run cost analysis from long-run cost analysis for a profit-maximizing firm is that in the short run,

a. output is not variable. b. the number of workers used to produce the firm's product is fixed. c. the size of the factory is fixed. d. there are no fixed costs.

18. The cost of producing the typical unit of output is the firm’s a. average total cost. b. opportunity cost. c. variable cost. d. marginal cost.

19. Average total cost is equal to a. output/total cost. b. total cost – total quantity of output. c. average variable cost + total fixed cost. d. total cost/output.

20. The amount by which total cost rises when the firm produces one additional unit of output is called a. average cost. b. marginal cost. c. fixed cost. d. variable cost.

21. Variable cost divided by quantity produced is a. average total cost. b. marginal cost. c. profit. d. None of the above are correct.

22. Marginal cost equals (i) change in total cost divided by change in quantity produced. (ii) change in variable cost divided by change in quantity produced. (iii) the average fixed cost of the current unit. a. (i) and (ii) b. (ii) and (iii) c. (ii) only d. All of the above are correct.

23. The average fixed cost curve a. always declines with increased levels of output. b. always rises with increased levels of output. c. declines as long as it is above marginal cost. d. declines as long as it is below marginal cost.

24. When marginal cost is less than average total cost, a. marginal cost must be falling. b. average variable cost must be falling. c. average total cost is falling. d. average total cost is rising.

25. Johnny is a sophomore in college and has a 1.5 cumulative grade point average (GPA). Johnny’s cumulative GPA will be better next semester if he

(i) performs better than he did last semester. (ii) performs better than his cumulative GPA. (iii) gives an average performance. a. (ii) only b. (iii) only c. (i) and (iii) d. All of the above are correct.

26. The marginal cost curve crosses the average total cost curve at a. the efficient scale. b. the minimum point on the average total cost curve. c. a point where the marginal cost curve is rising. d. All of the above are correct.

27. If marginal cost is below average total cost, then average total cost a. is constant. b. is falling. c. is rising. d. may rise or fall depending on the size of fixed costs.

28. Total cost can be divided into two types. Those two types are a. fixed costs and variable costs. b. fixed costs and marginal costs. c. variable costs and marginal costs. d. average costs and marginal costs.

29. For a large firm that produces and sells automobiles, which of the following costs would be a variable cost?

a. the $20 million payment that the firm pays each year for accounting services b. the cost of the steel that is used in producing automobiles c. the rent that the firm pays for office space in a suburb of St. Louis d. All of the above are correct.

Refer to the following information to answer Questions 30 through 34. A certain firm produces and sells staplers. Last year, it produced 5,000 staplers and sold each stapler for $8. In producing the 5,000 staplers, it incurred variable costs of $30,000 and a total cost of $45,000.

30. The firm’s fixed costs amounted to a. $15,000. b. $30,000. c. $40,000. d. $50,000.

31. In producing the 5,000 staplers, the firm’s average fixed cost was a. $3. b. $4. c. $5. d. $7.

32. In producing the 5,000 staplers, the firm’s average variable cost was a. $2. b. $4. c. $6. d. $8.

33. In producing the 5,000 staplers, the firm’s average total cost was a. $6. b. $7. c. $8. d. $9.

34. The firm’s economic profit for the year was a. $–35,000. b. $–5,000 c. $10,000. d. $40,000.

35. Economies of scale occur when a. long-run average total costs rise as output increases. b. long-run average total costs fall as output increases. c. average fixed costs are falling. d. average fixed costs are constant.

36. Diseconomies of scale occur when a. average fixed costs are falling. b. average fixed costs are constant. c. long-run average total costs rise as output increases. d. long-run average total costs fall as output increases.

37. How long does it take a firm to go from the short run to the long run? a. six months b. one year c. two years d. It depends on the nature of the firm.

38. In the long run, a firm that produces and sells computers gets to choose a. how many workers to hire. b. the size of its factories. c. which short-run average-total-cost curve to use. d. All of the above are correct.

Chapter 9: Perfect Competition Multiple Choice Questions

1. A market is competitive if (i) firms have the flexibility to price their own product. (ii) each buyer is small compared to the market. (iii) each seller is small compared to the market. a. (i) and (ii) only b. (i) and (iii) only c. (ii) and (iii) only d. All of the above are correct.

2. When a firm has no ability to influence market prices it is said to be in what kind of a market? a. a competitive market b. a strategic market c. a thin market d. a power market

3. For a firm in a perfectly competitive market, the price of the good is always a. equal to marginal revenue. b. equal to total revenue. c. greater than average revenue. d. All of the above are correct.

4. Because the goods offered for sale in a competitive market are largely the same, a. there will be few sellers in the market. b. there will be few buyers in the market. c. buyers will have market power. d. sellers will have little reason to charge less than the going market price.

5. Which of the following is NOT a characteristic of a perfectly competitive market? a. Firms are price takers. b. Firms have difficulty entering the market. c. There are many sellers in the market. d. Goods offered for sale are largely the same.

6. In a competitive market, no single producer can influence the market price because a. many other sellers are offering a product that is essentially identical. b. consumers have more influence over the market price than producers do. c. government intervention prevents firms from influencing price. d. producers agree not to change the price.

7. When a firm in a competitive market receives $500 in total revenue, it has a marginal revenue of $10. What is the price, and how many units were sold?

a. $5 and 100 b. $10 and 50 c. $10 and 100 d. The answer cannot be determined from the information given. Use the information for a competitive firm in the table below to answer questions 8 through 13. Quantity Total Revenue Total Cost 0 $ 0 $ 10 1 9 14 2 18 19 3 27 25 4 36 32 5 45 40 6 54 49 7 63 59 8 72 70 9 81 82

8. At a production level of 4 units which of the following is true? a. Marginal cost is $6. b. Total revenue is greater than variable cost. c. Marginal revenue is less than marginal cost. d. All of the above are correct.

9. At which quantity of output is margin/al revenue equal to marginal cost? a. 3 b. 6 c. 8 d. All of the above are correct.

10. If this firm chooses to maximize profit it will choose a level of output where marginal cost is equal to a. 6. b. 7. c. 8. d. 9.

11. The maximum profit available to this firm is a. $5. b. $4. c. $3. d. $2.

12. If the firm finds that its marginal cost is $11, it should a. increase production to maximize profit. b. increase the price of the product to maximize profit. c. advertise to attract additional buyers to maximize profit. d. None of the above are correct.

13. If the firm finds that its marginal cost is $5, it should a. reduce fixed costs by lowering production. b. increase production to maximize profit. c. decrease production to maximize profit. d. maintain its current level of production to maximize profit. The graph below depicts the cost structure for a firm in a competitive market. Use the graph to answer questions 14 through 17. Refer to the above diagram for questions 14-17.

14. When price is equal to P3, the profit-maximizing firm will produce what level of output? a. Q1 b. Q2 c. Q3 d. Q4 15. When market price is at P2, a firm producing output level Q1 would experience a. profits equal to (P2 – P1) × Q1. b. losses equal to (P2 – P1) × Q1. c. losses because P2 < ATC at output level Q1. d. zero profits.

P1

P3 P2

P4

16. When market price is at P4, a profit-maximizing firm will produce what level of output? a. Q1 b. Q2 c. Q3 d. Q4

17. When the price is P2 and the firm maximizes its profit or minimizes its loss, the firm a. experiences a positive profit. b. experiences a zero profit. c. experiences a loss, but continues to operate. d. shuts down.

18. When a perfectly competitive firm makes a decision to shut down, it is most likely that a. marginal cost is above average variable cost. b. marginal cost is above average total cost. c. price is below the minimum of average variable cost. d. fixed costs exceed variable costs.

19. Firms that shut down in the short run still have to pay their a. variable costs. b. fixed costs. c. total cost. d. All of the above are correct.

20. When price is below average variable cost, a firm in a competitive market will a. shut down and incur fixed costs. b. shut down and incur both variable and fixed costs. c. continue to operate as long as average revenue exceeds marginal cost. d. continue to operate as long as average revenue exceeds average fixed cost.

21. In 1999, sheepherders in the western United States slaughtered 10,000 sheep and buried them in large open pits rather than truck them to the market to be sold. This behavior is most likely explained by

a. sheepherders making a shut-down decision to save the variable cost of transporting sheep to a slaughter house.

b. sheepherders making an exit decision to recover the fixed cost of raising the sheep. c. the rising marginal cost of producing sheep. d. irrational behavior of sheepherders.

22. When economists refer to a production cost that has already been committed and cannot be recovered, they use the term

a. implicit cost. b. explicit cost. c. variable cost. d. sunk cost.

23. A profit-maximizing firm in a competitive market produces small rubber balls. When the market price for small rubber balls falls below the minimum of its average total cost, but still lies above the minimum of average variable cost, the firm

a. will experience losses but it will continue to produce rubber balls. b. will shut down. c. will be earning both economic and accounting profits. d. should raise the price of its product.

24. Which of the following statements best reflects the production decision of a profit-maximizing firm in a competitive market when price falls below the minimum of average variable cost?

a. The firm will continue to produce to attempt to pay fixed costs. b. The firm will immediately stop production to minimize its losses. c. The firm will stop production as soon as it is able to pay its sunk costs. d. The firm will continue to produce in the short run but will likely exit the market in the long run.

25. A profit-maximizing firm will shut down in the short run when a. price < average variable cost. b. price < average total cost. c. average revenue > marginal cost. d. average revenue > average fixed cost.

26. In the long run all of a firm’s costs are variable. In this case the exit criterion for a profit-maximizing firm is

a. price < average total cost. b. price > average total cost. c. average revenue > average fixed cost. d. average revenue > marginal cost.

27. When profit-maximizing firms in competitive markets are earning profits, a. market demand must exceed market supply at the market equilibrium price. b. market supply must exceed market demand at the market equilibrium price. c. new firms will enter the market. d. the most inefficient firms will be encouraged to leave the market. The figure below depicts the cost structure of a firm in a competitive market. Use the figure to answer questions 28 through 30.

28. When market price is P5, a profit-maximizing firm’s profits can be represented by the area a. P5 × Q3. b. (P5 – P3) × Q2. c. (P5 – P4) × Q3. d. When market price is P5 there are no profits.

29. Firms would be encouraged to enter this market for all prices that exceed a. P1. b. P2. c. P3. d. None of the above are correct.

30. When market price is P2, a profit-maximizing firm’s losses can be represented by the area a. (P3 – P2) × Q2. b. (P2 – P1) × Q2. c. At a market price of P2, the firm does not have losses. d. At a market price of P2 the firm has losses, but the reference points in the figure don’t identify the

losses. 31. In the long run, a profit-maximizing firm will choose to exit a market when

a. average fixed cost is falling. b. variable costs exceed sunk costs. c. marginal cost exceeds marginal revenue at the current level of production. d. total revenue is less than total cost.

32. If a competitive firm is currently producing a level of output at which marginal revenue exceeds marginal cost, then

a. a one-unit increase in output will increase the firm’s profit. b. a one-unit decrease in output will increase the firm’s profit. c. total revenue exceeds total cost. d. total cost exceeds total revenue.

33. If a competitive firm is currently producing a level of output at which marginal cost exceeds marginal revenue, then

a. average revenue exceeds marginal cost. b. the firm is earning a positive profit. c. a one-unit decrease in output would increase the firm’s profit. d. All of the above are correct.

34. At the profit-maximizing level of output, a. marginal revenue = average total cost. b. marginal revenue = average variable cost. c. marginal revenue = marginal cost. d. average revenue = average total cost.

35. A certain competitive firm sells its output for $20 per unit. The 50th unit of output that the firm produces has a marginal cost of $22. It follows that the production of the 50th unit of output

a. increases the firm’s total revenue by $20. b. increases the firm’s total cost by $22. c. decreases the firm’s profit by $2. d. All of the above are correct.

36. Which of the following expressions is correct? a. Profit = (Price of output – Average total cost) × Quantity of output. b. Profit = (Price of output × Quantity of output) – Average total cost. c. Profit = Total revenue – (Average total cost/Quantity of output). d. Profit = Total revenue – (Average variable cost × Quantity of output).

37. Assume a firm is producing 800 units of output, and it sells each unit for $6. Its average total cost is $4. Its profit is

a. $–1,600. b. $1,600. c. $3,200. d. $8,000.

38. When new firms have an incentive to enter a competitive market, their entry will a. increase the price of the product. b. drive down profits of existing firms in the market. c. shift the market supply curve to the left. d. All of the above are correct.

39. When firms have an incentive to exit a competitive market, their exit will a. lower market price. b. necessarily raise the costs of firms that remain in the market. c. raise profits for firms that remain in the market. d. All of the above are correct.

40. In a competitive market that is characterized by free entry and exit, a. all firms will operate at minimum efficient scale in the short run. b. all firms will operate at minimum efficient scale in the long run. c. the price of the product will differ across firms. d. the number of sellers in the market will steadily decrease over time.

41. When firms are neither entering nor exiting a perfectly competitive market, a. total cost must equal total revenue. b. economic profits must be zero. c. average revenue must equal average total cost. d. All of the above are correct.

Chapter 9: Perfect Competition Short Answer Questions

1. List and describe the characteristics of a perfectly competitive market.

2. Why would a firm in a perfectly competitive market always choose to set its price equal to the current market price? If a firm set its price below the current market price, what effect would this have on the market?

3. Use a graph to demonstrate the circumstances that would prevail in a competitive market where firms are earning economic profits. Can this scenario be maintained in the long run? Carefully explain your answer.

4. Explain how a firm in a competitive market identifies the profit-maximizing level of production. When should the firm raise production, and when should the firm lower production?

5. News reports from the western United States occasionally report incidents of cattle ranchers slaughtering a large number of newborn calves and burying them in mass graves rather than transport them to markets. Assuming that this is rational behavior by profit-maximizing "firms," explain what economic factors may influence such behavior.

6. Use a graph to demonstrate the circumstances that would prevail in a perfectly competitive market where firms are experiencing economic losses. Identify costs, revenue, and the economic losses on your graph. Using your graph, determine whether this firm will shut down in the short run, or choose to remain in the market. Explain your answer.

7. At its current level of production a profit-maximizing firm in a competitive market receives $12.50 for each unit it produces, and faces an average total cost of $10. At the market price of $12.50 per unit, the firm’s marginal cost curve crosses the marginal revenue curve at an output level of 1000 units. What is the firm’s current profit? What is likely to occur in this market and why?