Q&A Hero

Q: Monopolistically competitive firms have downward-sloping demand curves. In the long run, monopolistically competitive firms earn zero economic profits. These two characteristics imply that in the long run A) monopolistically competitive markets achieve productive efficiency. B) monopolistically competitive markets achieve allocative efficiency. C) monopolistically competitive firms earn economic profits. D) monopolistically competitive firms have excess capacity.

Q: Excess capacity is a characteristic of monopolistically competitive firms. What does excess capacity mean? A) It means that firms do not produce the output level that corresponds to the minimum point on their average total cost curves. B) It means that firms hire more than the minimum number of workers needed to produce the profit-maximizing level of output. C) It means that firms produce with inefficient combinations of resources. D) It means that firms build plants that are not large enough to achieve minimum efficient scale.

Q: In contrast with perfect competition, excess capacity characterizes monopolistic competition. Excess capacity is due to which of the following? A) Monopolistically competitive firms produce at the minimum point on their average total cost curves. B) Monopolistically competitive firms face downward-sloping demand curves. In the long run, firms produce where their demand curves are tangent to their long-run average total cost curves. C) Monopolistically competitive firms produce where marginal revenue is equal to marginal cost. D) Monopolistically competitive markets have low barriers to entry.

Q: Which of the following is not a characteristic of a monopolistically competitive firm in long-run equilibrium? A) Marginal revenue is equal to marginal cost. B) Price is equal to average revenue. C) The firm has excess capacity. D) Price is equal to marginal cost.

Q: Which of the following statements is true about monopolistically competitive firms? A) Unlike perfectly competitive firms, monopolistically competitive firms are able to raise their prices without losing all of their customers. B) Like perfectly competitive firms, monopolistically competitive firms are not able to raise prices without losing all of their customers because they face competition from firms selling similar products. C) Like perfectly competitive firms, monopolistically competitive firms maximize their profits by settling price equal to marginal cost. D) Unlike perfectly competitive firms, monopolistically competitive face perfectly inelastic demand curves.

Q: Compared to a perfectly competitive firm, the demand curve facing a monopolistically competitive firm is A) more elastic because there are many close substitutes for the product of a monopolistically competitive firm. B) less elastic because monopolistically competitive firms produce similar, but not identical, products. C) just as elastic because there are many sellers in both markets. D) more elastic because in the long run, the demand curve is tangent to the firm's average total cost curve.

Q: In the long run firms in both monopolistically competitive markets and perfectly competitive markets earn zero economic profits, but unlike perfectly competitive firms in the long run, monopolistically competitive firms A) charge a price that is greater than average revenue. B) charge a price that is equal to marginal cost. C) do not produce at minimum average total cost. D) charge a price that is equal to average total cost.

Q: In both monopolistically competitive and perfectly competitive industries A) firms produce products for which there are no close substitutes. B) there are high barriers to entry. C) there are many buyers and sellers. D) firms are price takers.

Q: A perfectly competitive firm in a constant-cost industry produces 1,000 units of a good at a total cost of $50,000. The prevailing market price is $48. Assuming that this firm continues to produce in the long run, what happens to output level in the long run? A) The firm's output falls. B) The firm's output increases. C) The firm produces the same output level. D) There is insufficient information to answer the question.

Q: A perfectly competitive firm in a constant-cost industry produces 3,000 units of a good at a total cost of $36,000. The prevailing market price is $15. What will happen to the number of firms in the industry and to the industry's output in the long run? A) The number of firms and the industry's output increase. B) The number of firms and the industry's output decrease. C) The number of firms remains constant and the industry's output increases. D) The number of firms remains constant and the industry's output decreases.

Q: The long-run supply curve for a perfectly competitive, constant-cost industry A) is upward-sloping. B) is horizontal. C) is downward-sloping. D) is found by adding up the marginal cost curves for all firms in the industry.

Q: A constant-cost industry is an industry in which A) average costs fall as the industry expands output. B) average costs rise as the industry expands output. C) average costs remain constant as the industry expands output. D) input prices rise at a constant rate as firms in the industry use more inputs.

Q: A constant cost, perfectly competitive market is in long-run equilibrium. At present, there are 1,000 firms each producing 400 units of output. The price of the good is $60. Now suppose there is a sudden increase in demand for the industry's product which causes the price of the good to rise to $64. In the new long-run equilibrium, how will the average total cost of producing the good compare to what it was before the price of the good rose? A) The average total cost will be higher than it was before the price increase since the increase in demand will drive up input prices. B) The average total cost will be lower than it was before the price increase because of economies of scale. C) The average total cost will be higher than it was before the price increase because of diseconomies of scale arising from the increased demand. D) The average total cost will be the same as it was before the price increase.

Q: In a perfectly competitive industry, in the long-run equilibrium A) the typical firm is producing at the output where its long-run average total cost is not minimized. B) the typical firm is earning an accounting profit greater than its implicit costs. C) the typical firm earns zero profit. D) the typical firm is maximizing its revenue.

Q: Figure 12-16 Refer to Figure 12-16. Which panel best represents the perfectly competitive organic produce market in which firms are breaking even, economically, organic produce is considered a normal good, and the average income level of consumers is rising? A) Panel A B) Panel B C) Panel C D) Panel D

Q: Figure 12-16 Refer to Figure 12-16. Which panel best represents the perfectly competitive organic produce market in which some firms are earning short-run economic profits, and the Surgeon General announces that switching from non-organic produce to organic produce will add 5 years to the average life span of consumers? A) Panel A B) Panel B C) Panel C D) Panel D

Q: Figure 12-16 Refer to Figure 12-16. Which panel best represents the perfectly competitive organic produce market's transition to the long run when some firms in the market are earning economic profits? A) Panel A B) Panel B C) Panel C D) Panel D

Q: Figure 12-16 Refer to Figure 12-16. Which panel best represents the perfectly competitive organic produce market in which some firms are experiencing short-run losses, and consumers are displaying an increased preference for organic produce? A) Panel A B) Panel B C) Panel C D) Panel D

Q: Which of the following statements is true? A) A long-run competitive equilibrium can only be achieved in constant-cost industries. B) When an industry achieves a long-run competitive equilibrium, industry output will not change in the future. C) A long-run competitive equilibrium outcome is not economically efficient. D) When an industry reaches a long-run competitive equilibrium, the typical firm in the industry breaks even.

Q: In the long run, a firm in a perfectly competitive industry will supply output only if its total revenue covers its A) explicit plus its implicit costs. B) fixed costs. C) implicit costs. D) explicit costs.

Q: 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) a constant-cost industry B) an increasing-cost industry C) a decreasing-cost industry D) a fixed-cost industry

Q: 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) the ease at which a new firm can enter a competitive market is high. C) entry into the market is blocked. D) entry into the market is restricted in the short run, but becomes easier in the long run.

Q: In August 2008, Ethan Nicholas developed the iShoot application for the apple iPhone 3G, and within five months had earned $800,000 from this program. By May 2009, Nicholas had dropped the price from $4.99 to $1.99 in an attempt to maintain sales. This example indicates that in a competitive market A) earning an economic profit in the long run is extremely easy. B) earning an economic profit in the long run is extremely difficult. C) it is impossible to earn an economic profit in either the short run or the long run. D) economic profits are only earned in the long run.

Q: A perfectly competitive wheat farmer in a constant-cost industry produces 1,000 bushels of wheat at a total cost of $50,000. The prevailing market price is $48. What will happen to the market price of wheat in the long run? A) The price remains constant at $48. B) The price falls below $48. C) The price rises above $48. D) There is insufficient information to answer the question.

Q: A perfectly competitive wheat farmer in a constant-cost industry produces 3,000 bushels of wheat at a total cost of $36,000. The prevailing market price is $15. What will happen to the market price of wheat in the long run? A) The price remains constant at $15. B) The price falls to $12. C) The price rises above $15. D) There is insufficient information to answer the question.

Q: In the long run, a perfectly competitive market will A) produce only the quantity of output that yields a long-run profit for the typical firm. B) supply whatever amount consumers will buy at a price which earns the market an economic profit. 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.

Q: An industry's long-run supply curve shows A) the relationship in the long run between market price and quantity supplied. B) how the government determines the price of the product. C) how average productivity is changing. D) greater than normal profit.

Q: Assume that the medical screening industry is perfectly competitive. Consider a typical firm that is making short-run losses. Suppose the medical screening industry runs an effective advertising campaign which convinces a large number of people that yearly CT scans are critical for good health. How will this affect a typical firm that remains in the industry? A) The firm's supply curve shifts right and its marginal revenue curve shifts upwards as the market price rises and ultimately the firm starts making profits. B) The firm's marginal revenue curve and average cost curve shift upwards in response to the increase in market price and advertising expenditure. The firm increases output until it starts breaking even. C) The marginal revenue curve shifts upwards, the firm's output increases along its marginal cost curve, it expands production and eventually starts making profits. D) The marginal revenue curve shifts upwards, the firm's output increases along its marginal cost curve, it expands production until it breaks even.

Q: Figure 12-15 Refer to Figure 12-15. Suppose a typical firm in a perfectly competitive market is earning economic profits in the short run. Which of the diagrams in the figure depicts what happens to in the industry as it transitions to along run equilibrium? A) Panel A B) Panel B C) Panel C D) Panel D

Q: Figure 12-15 Refer to Figure 12-15. Assume that the medical screening industry is perfectly competitive and that some firms are making short-run losses. Suppose the medical screening industry runs an effective advertising campaign which convinces a large number of people that yearly CT scans are critical for good health. Which of the diagrams in the figure best describes what happens in the industry? A) Panel A B) Panel B C) Panel C D) Panel D

Q: If in a perfectly competitive industry, the market price facing a firm is below its average total cost but above average variable cost at the output where marginal cost equals marginal revenue A) the industry supply will not change. B) new firms are attracted to the industry. C) some existing firms will exit the industry. D) firms are breaking even.

Q: Figure 12-14 Refer to Figure 12-14. Consider a typical firm in a perfectly competitive industry which is incurring short-run losses. Which of the diagrams in the figure shows the effect on the industry as it transitions to a long-run equilibrium? A) Panel A B) Panel B C) Panel C D) Panel D

Q: In long-run perfectly competitive equilibrium, which of the following is false? A) There is efficient, low-cost production at the minimum efficient scale. B) Economic surplus is maximized. C) Firms earn economic profit. D) Economies of scale are exhausted.

Q: A perfectly competitive market is in long-run equilibrium. At present there are 100 identical firms each producing 5,000 units of output. The prevailing market price is $20. Assume that each firm faces increasing marginal cost. Now suppose there is a sudden increase in demand for the industry's product which causes the price of the good to rise to $24. Which of the following describes the effect of this increase in demand on a typical firm in the industry? A) In the short run, the typical firm increases its output and makes an above normal profit. B) In the short run, the typical firm's output remains the same but because of the higher price, its profit increases. C) In the short run, the typical firm increases its output but its total cost also rises, resulting in no change in profit. D) In the short run, the typical firm increases its output but its total cost also rises. Hence, the effect on the firm's profit cannot be determined without more information.

Q: If a typical firm in a perfectly competitive industry is incurring losses, then A) all firms will continue to lose money. B) some firms will exit in the long run, causing market supply to decrease and market price to rise increasing profits for the remaining firms. C) some firms will exit in the long run, causing market supply to decrease and market price to fall increasing losses for the remaining firms. D) some firms will enter in the long run, causing market supply to increase and market price to rise increasing profit for all firms.

Q: Figure 12-13 Refer to Figure 12-13. Suppose the prevailing price is P1 and the firm is currently producing its loss-minimizing quantity. If the firm represented in the diagram continues to stay in business, in the long-run equilibrium A) it will reduce its output to Q0 and face a price of P0. B) it will continue to produce Q1 but faces the higher price of P2. C) it will expand its output to Q2 and face a price of P2. D) it will expand its output to Q3 and face a price of P1.

Q: Figure 12-13 Refer to Figure 12-13. Suppose the prevailing price is P1 and the firm is currently producing its loss-minimizing quantity. In the long-run equilibrium A) there will be fewer firms in the industry and total industry output decreases. B) there will be more firms in the industry and total industry output increases. C) there will be fewer firms in the industry but total industry output increases. D) there will be more firms in the industry and total industry output remains constant.

Q: 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) new firms are attracted to the industry. C) existing firms will exit the industry. D) market supply will remain constant.

Q: Figure 12-12 Refer to Figure 12-12. Consider a typical firm in a perfectly competitive industry that makes short-run profits. Which of the diagrams in the figure shows the effect on the industry as it transitions to a long-run equilibrium? A) Panel A B) PanelB C) PanelC D) PanelD

Q: If a typical firm in a perfectly competitive industry is earning profits, then A) all firms will continue to earn profits. B) new firms will enter in the long run causing market supply to decrease, market price to rise and profits to increase. C) new firms will enter in the long run causing market supply to increase, market price to fall and profits to decrease. D) the number of firms in the industry will remain constant in the long run.

Q: Figure 12-11 Refer to Figure 12-11. If this is a constant-cost industry, what is the market price in the long-run equilibrium? A) $5 B) $14 C) $15 D) $20

Q: Figure 12-11 Refer to Figure 12-11. 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 and total industry output decreases. B) there will be more firms in the industry and total industry output increases. C) there will be fewer firms in the industry but total industry output increases. D) there will be more firms in the industry and total industry output remains constant.

Q: Figure 12-11 Refer to Figure 12-11. Suppose the prevailing price is $20 and the firm is currently producing 1,350 units. In the long-run equilibrium, the firm represented in the diagram A) will continue to produce the same quantity. B) will reduce its output to 1,100 units. C) will reduce its output to 750 units. D) will cease to exist.

Q: Which of the following statements is correct? A) Economic profit takes into account all costs involved in producing a product. B) Accounting profit is not relevant in preparing the firm's financial statement. C) Economic profit always exceeds accounting profit. D) Accounting profit is the same as economic profit.

Q: Use a graph to show the demand, AVC, ATC, MC, and MR curves of a firm that should temporarily shut down in the short run. Identify the shutdown point on the graph.

Q: Werner & Sons is a manufacturer of three-ring binders operating in a perfectly competitive industry. Table 12-5 shows the firm's cost schedule.Table 12-5Quantity (cases)Variable CostTotal CostMarginal CostAverage Variable CostAverage Total Cost0$0$761301062503134414051606114715081909316Use the table to answer the following questions.a. Complete Table 12-5 by filling in the blank cells.b. Werner is selling in a perfectly competitive market at a price of $40. What is the profit maximizing or loss-minimizing output?c. Calculate the firm's profit or loss.d. Should the firm continue to produce in the short run? Explain.e. If the firm's fixed costs were $30 higher what would be the profit-maximizing output level in the short run? Indicate whether the output level will increase, decrease or remain unchanged compared to your answer in b.f. Suppose fixed cost remains at $76. If the price of three-ring binders falls to $20 what is the profit-maximizing or loss-minimizing output?g. Calculate the profit or loss. Should the firm continue to produce in the short run? Explain your answer.h. Suppose the fixed cost remains at $76. What price corresponds to the shut-down point?i. Suppose the fixed cost remains at $76. What price corresponds to the break-even point?

Q: What is the difference between "shutting down temporarily" and "exiting the industry"?

Q: Under what conditions should a competitive firm shut down in the short run?

Q: The short-run supply curve for a perfectly competitive firm is that part of the firm's marginal cost curve that lies above the minimum point of its average variable cost curve.

Q: If a firm's total variable cost exceeds its total revenue, the firm should stop production by shutting down temporarily.

Q: In the short run, a firm might choose to produce rather than shut down even if its market price is less than its average total cost of production.

Q: In the short run, a profit-maximizing firm will shut down if its total revenue is greater than its variable costs.

Q: If a firm's fixed cost exceeds its total revenue, the firm should stop production by shutting down temporarily.

Q: The minimum point on the average variable cost curve is called the loss-minimizing point.

Q: In the short run, if a firm shuts down its maximum loss equals the amount of its fixed cost.

Q: In the short run, if a firm shuts down it avoids its variable cost but not its fixed cost.

Q: In the short run, a firm that incurs losses might choose to produce rather than shut down if the amount of its revenue is less than its fixed cost.

Q: Figure 12-10 Refer to Figure 12-10. At the profit-maximizing output level, the firm earns A) zero economic profit. B) a profit of $600. C) a profit of $1,200. D) a profit of $2,700.

Q: Figure 12-10 Refer to Figure 12-10. The total cost at the profit-maximizing output level equals A) $4,800. B) $3,300. C) $2,500. D) $1,800.

Q: Figure 12-10 Refer to Figure 12-10. Total revenue at the profit-maximizing level of output is A) $1,200. B) $2,500. C) $4,800. D) $6,000.

Q: Figure 12-10 Refer to Figure 12-10. The firm's short-run supply curve is its A) marginal cost curve. B) marginal cost curve from b and above. C) marginal cost curve from c and above. D) marginal cost curve from d and above.

Q: In the mid-1990s, cattle ranchers in the United States kept raising cattle even though prices were at a ten-year low and below average total cost. What is the likely explanation for this? A) Continuing to operate resulted in smaller losses than would have been incurred by shutting down. B) The ranchers were hoping to receive government subsidies. C) The exit costs were too high. D) Cattle is an important source of protein and its production is essential for the United States.

Q: If a perfectly competitive firm's total revenue is less than its total variable cost, the firm A) should raise its price above its average variable cost. B) should continue to produce and increase its demand. C) should stop production by shutting down temporarily. D) should adopt new technology in order to lower its costs of production.

Q: The minimum point on the average variable cost curve is called A) the shutdown point. B) the break-even point. C) the loss minimizing point. D) the point of diminishing returns.

Q: A perfectly competitive firm's short-run supply curve is A) upward sloping and is the portion of the marginal cost curve that lies above the average total cost curve. B) upward sloping and is the portion of the marginal cost curve that lies above the average variable cost curve. C) perfectly elastic at the market price. D) horizontal at the minimum average total cost.

Q: The supply curve of a perfectly competitive firm in the short run is A) the firm's average variable cost curve. B) the portion of the firm's marginal cost curve below the minimum point of the average variable cost curve. C) the portion of the firm's marginal cost curve above the minimum point of the average variable cost curve. D) the portion of the firm's marginal cost curve above the minimum point of the average total cost curve.

Q: Which of the following is not an option for a perfectly competitive firm that suffers short-run losses? A) shutting down B) reducing production C) reducing the use of variable factors D) raising price

Q: Molly Sharp is producing a documentary about the plight of the six-toed ferrets of Sri Lanka. Molly has spent $125,000 of her own money on this project and the documentary is now complete. Molly just found out that no studio is willing to release her documentary and she must now shop it to cable television networks, where she knows she will not be able to recoup her investment. Which of the following statements regarding Molly Sharp's documentary is true? A) She should not try to have her documentary aired on television because she cannot recoup her $125,000 investment. B) Since the $125,000 is a sunk cost, she should still try to have her documentary aired on television even though she will not see a profit. C) The $125,000 is a variable cost, so will not be incurred if she chooses not to have her documentary aired. D) The $125,000 investment is an economic cost, and she will still make an accounting profit even if the television network willing to air her documentary pays her less than $125,000.

Q: In analyzing the decision to shut down in the short run we assume that the firm's fixed costs are A) implicit costs. B) capital costs. C) nonmonetary opportunity costs. D) sunk costs.

Q: Marty's Bird House suffers a short-run loss. Marty can reduce his loss below the amount of his total fixed costs by continuing to produce if his revenue A) exceeds his implicit costs. B) exceeds his nonmonetary opportunity costs. C) exceeds his variable costs. D) exceeds his marginal costs.

Q: Ted's Pancake Kitchen suffers a short-run loss. When should Ted decide to shut down rather than continue to produce? A) if his Kitchen's revenue is less than its variable costs B) if his Kitchen's revenue is less than its fixed costs C) if his Kitchen's revenue is less than its explicit costs D) if his Kitchen's revenue is less than its total costs

Q: Ben's Peanut Shoppe suffers a short-run loss. Ben will not choose to shut down if A) his Shoppe's total revenue exceeds his fixed cost. B) his Shoppe's total revenue exceeds his variable cost. C) his Shoppe's total revenue exceeds his implicit costs. D) his Shoppe's total revenue exceeds his capital costs.

Q: If a firm shuts down in the short run it will A) break even. B) declare bankruptcy. C) suffer a loss equal to its variable costs. D) suffer a loss equal to its fixed costs.

Q: How are sunk costs and fixed costs related? A) They are not related in any way. B) Sunk costs cannot be recovered and fixed costs can be avoided by shutting down. C) In the short run they are equal to each other. D) In the long run they are equal to each other.

Q: If a firm shuts down it A) will suffer a loss equal to its fixed costs. B) will produce nothing but must pay its variable costs. C) will produce nothing but must pay its fixed and variable costs. D) will earn enough revenue to cover its variable costs but not all of its fixed costs.

Q: In the short run, a firm that is operating at a loss has two options. These options are A) to reduce output or reduce its variable costs. B) to go out of business or declare bankruptcy. C) to shut down temporarily or continue to produce. D) to adopt new technology or change the size of its physical plant.

Q: A perfectly competitive firm produces 3,000 units of a good at a total cost of $36,000. The fixed cost of production is $20,000. The price of each good is $10. Should the firm continue to produce in the short run? A) No, it should shut down because it is making a loss. B) Yes, it should continue to produce because its price exceeds its average fixed cost. C) Yes, it should continue to produce because it is minimizing its loss. D) There is insufficient information to answer the question.

Q: If a firm shuts down in the short run A) its loss equals zero. B) its loss equals its fixed cost. C) is makes zero economic profit. D) its total revenue is not large enough to cover its fixed cost.

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

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