Q&A Hero

Q: A perfectly competitive industry achieves allocative efficiency in the long run. What does allocative efficiency mean? A) Each firm produces up to the point where the price of the good equals the marginal cost of producing the last unit. B) Each firm produces up to the point where all scale economies are exhausted. C) Production occurs at the lowest average total cost. D) Firms use an input combination that minimizes cost and maximizes output.

Q: If a perfectly competitive firm raises the price it charges to consumers, which of the following is the most likely outcome? A) The firm's revenue will not change because some consumers will refuse to pay the higher price. B) The firm will not sell any output. C) The firm's total revenue will increase only if the demand for its product is inelastic. D) The firm's total revenue will increase only if the demand for its product is elastic.

Q: Which of the following does not hold true for a perfectly competitive firm in long-run equilibrium? A) Its economic profit will be zero. B) It will minimize average total cost. C) It will charge a price equal to marginal cost. D) Marginal cost will be minimized.

Q: Which of the following is a characteristic of a firm in a perfectly competitive market? A) The firm cannot make a profit in the short run because it is too small a part of the total market. B) The firm can make a profit in the long run but not in the short run. C) The firm can sell as much as it wants without having to lower its price. D) The firm must lower its price in order to increase quantity demanded.

Q: 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) 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." B) In perfect competition, price equals marginal cost of production. In this sense, consumers receive the new technology "free of charge." C) In the long run, price equals the lowest possible average cost of production. In this sense, consumers receive the new technology "free of charge." D) 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."

Q: Some markets have many buyers and sellers but fall into the category of monopolistic competition rather than perfect competition. The most common reason for this is A) there are high barriers to entering these markets. B) firms in these markets sell identical products. C) firms in these markets make high profits. D) firms in these markets do not sell identical products.

Q: 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) 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. B) 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. 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 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.

Q: A perfectly competitive firm faces a demand curve that is A) horizontal. B) vertical. C) perpendicular to the quantity axis. D) perfectly inelastic.

Q: Assume that the LCD and plasma television sets industry is perfectly competitive. Suppose a producer develops a successful innovation that enables it to lower its cost of production. What happens in the short run and in the long run? A) Initially, the firm will be able to increase its profit significantly, but in the long run its profits will still be greater than zero but lower than its short run profits because other firms would also innovate. B) The firm will probably incur losses temporarily because of the high cost of the innovation, but in the long run it will start earning positive profits. C) This firm will be able to earn above normal profits indefinitely if it obtains a patent for its innovation. D) The firm will be able to increase its profits temporarily, but in the long run its profits will be eliminated as other firms copy the innovation.

Q: The delivery of first-class mail by the U.S. Postal Service is an example of A) a monopoly. B) perfect competition because consumers have access to other methods of written communication; for example, email and text messaging. C) monopolistic competition, because mail delivery is a differentiated product provided by many firms. D) an oligopoly because a few other firms provide delivery of letters and packages.

Q: Figure 12-20 Refer to Figure 12-20. If the market price is P1, what is the allocatively efficient output level? A) Q0 B) Q1 C) Q2 D) There is no allocatively efficient output level because the firm is making a loss.

Q: Firms in perfectly competitive industries are unable to control the prices of the products they sell and earn a profit in the long run. Which of the following is one reason for this? A) Owners of perfectly competitive firms realize that their short-run profits are temporary. Therefore, they either sell their businesses or develop other products that will earn short-run profits. B) Firms in perfectly competitive industries can use advertising in the short run to persuade consumers that their products are better than those of other firms. But eventually consumers realize that all of the firms sell virtually identical products. C) Firms from other countries are able to produce similar products at lower costs. D) Firms in these industries sell identical products.

Q: A perfectly competitive industry achieves allocative efficiency because A) goods and services are produced at the lowest possible cost. B) 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. C) it produces where market price equals marginal production cost. D) firms carry production surpluses.

Q: Which of the following characteristics of a farmers' market make it a good example of a perfectly competitive market? A) Selling product at a farmers' market was very profitable for farmers in the early 2000s. As result, many farmers sold their farms to larger firms. B) Farmers who sell product at a farmers' market are similar to other entrepreneurs who introduce products that earn short-run profits but invite competition that drives down prices and profits in the long run. C) Farmers who sell product at a farmers' market are similar to other business owners who take advantage of the willingness of some consumers to pay high prices for new and different products. D) Farmers selling product at a farmers' market provide a product that is a necessity, rather than a luxury.

Q: 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 such that goods can be produced at their lowest possible average cost. 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 fairly to all consumers in a society.

Q: Which of the following arguments could be made as evidence that the market for produce sold at a farmers' market is perfectly competitive? A) The U.S. Department of Agriculture has established standards for the labeling of organic produce sold at farmers' markets. B) Sales of organically grown food have increased at a rate of 20 percent per year. C) As more farmers began selling their products at farmers' markets, the increase in supply has driven down prices to the point where they just cover the cost of production. D) The profits earned by farmers who sell their products at farmers' markets have continued to grow, despite the increasing number of farmers entering this market.

Q: 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) productive efficiency B) allocative efficiency C) marginal efficiency D) profit maximization

Q: In perfect competition A) the market demand curve and the individual's demand are identical. B) the market demand curve is perfectly inelastic while demand for an individual seller's product is perfectly elastic. C) the market demand curve is perfectly elastic while demand for an individual seller's product is perfectly inelastic. D) the market demand curve is downward sloping while demand for an individual seller's product is perfectly elastic.

Q: If the long-run average cost curve is U-shaped, the optimal scale of production from society's viewpoint is A) the minimum efficient scale. B) where maximum economic profit is earned by producers. C) where firm profit is large enough to finance research and development. D) one which guarantees economic profit.

Q: The demand curve for an individual seller's product in perfect competition is A) the same as market demand. B) downward sloping. C) vertical. D) horizontal.

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

Q: Jason, a high-school student, mows lawns for families in his neighborhood. The going rate is $12 for each lawn-mowing service. Jason would like to charge $20 because he believes he has more experience mowing lawns than the many other teenagers who also offer the same service. If the market for lawn mowing services is perfectly competitive, what would happen if Jason raised his price? A) He would lose some but not all his customers. B) Initially, his customers might complain but over time they will come to accept the new rate. C) If Jason raises his price he would lose all his customers. D) If Jason raises his price, then all others supplying the same service will also raise their prices.

Q: What is productive efficiency? A) a situation in which resources are allocated to their highest profit use B) a situation in which resources are allocated such that goods can be produced at their lowest possible average cost C) 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 D) a situation in which firms produce as much as possible

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

Q: Which of the following describes a situation in which a good or service is produced at the lowest possible cost? A) productive efficiency B) allocative efficiency C) marginal efficiency D) profit maximization

Q: The demand curve for each seller's product in perfect competition is horizontal at the market price because A) each seller is too small to affect market price. B) the price is set by the government. C) all the sellers get together and set the price. D) all the demanders get together and set the price.

Q: Figure 12-19 Refer to Figure 12-19. The figure above shows the cost curves of a perfectly competitive firm in the coffee market. Use the graph in Figure 12-19 to answer the following questions. Assume the market price is $3 per pound. a. What is the lowest price at which the coffee grower will supply output in the short run? b. In the diagram draw the firm's demand curve (label this "MR" for marginal revenue). c. What is the firm's profit-maximizing output? d. Is the firm earning a profit or a loss? Identify the area in the graph that represents the firm's profit or loss. e. Explain how entry or exit will occur in the market to ensure that firms will break even in the long run.

Q: Suppose the equilibrium price in a perfectly competitive industry is $15 and a firm in the industry charges $21. Which of the following will happen? A) The firm's profits will increase. B) The firm's revenue will increase. C) The firm will not sell any output. D) The firm will sell more output than its competitors.

Q: Figure 12-18 Use the figure above to answer the following questions. a. How can you determine that the figure represents a graph of a perfectly competitive firm? Be specific; indicate which curve gives you the information and how you use this information to arrive at your conclusion. b. What is the market price? c. What is the profit-maximizing output? d. What is total revenue at the profit-maximizing output? e. What is the total cost at the profit-maximizing output? f. What is the profit or loss at the profit-maximizing output? g. What is the firm's total fixed cost? h. What is the total variable cost? i. Identify the firm's short-run supply curve. j. Is the industry in a long-run equilibrium? k. If it is not in long-run equilibrium, what will happen in this industry to restore long-run equilibrium? l. In long-run equilibrium, what is the firm's profit maximizing quantity?

Q: Both buyers and sellers are price takers in a perfectly competitive market because A) the price is determined by government intervention and dictated to buyers and sellers. 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) each buyer and seller is too small relative to others to independently affect the market price.

Q: Why would a company continue to operate for many years while never once turning a profit rather than shut down immediately? Using revenue and cost analysis, explain when the company would shut down.

Q: Both individual buyers and sellers in perfect competition A) can influence the market price by their own individual actions. B) can influence the market price by joining with a few of their competitors. C) have to take the market price as a given. D) have the market price dictated to them by government.

Q: In the long run, perfectly competitive firms earn zero economic profit. Why do firms enter an industry when they know that in the long-run they will not earn any profit?

Q: The price of a seller's product in perfect competition is determined by A) the individual seller. B) a few of the sellers. C) market demand and market supply. D) the individual demander.

Q: What is a long-run supply curve? What does a long-run supply curve look like on a perfectly competitive market graph?

Q: Which of the following is the best example of a perfectly competitive industry? A) wheat production B) steel production C) electricity production D) airplane production

Q: What is meant by the term "long-run competitive equilibrium?

Q: A very large number of small sellers who sell identical products imply A) a multitude of vastly different selling prices. B) a downward sloping demand for each seller's product. C) the inability of one seller to influence price. D) chaos in the market.

Q: Assume that the personal computer industry is perfectly competitive. The fact that the price of personal computers over the last decade has fallen despite increases in demand signifies that the industry is a decreasing-cost industry.

Q: Perfect competition is characterized by all of the following except A) heavy advertising by individual sellers. B) homogeneous products. C) sellers are price takers. D) a horizontal demand curve for individual sellers.

Q: When firms exit a perfectly competitive industry, the market supply curve shifts to the left.

Q: Which of the following is a characteristic of a monopoly? A) It is easy for new firms to enter the market. B) There is only one seller in the market. C) The product is not unique. D) The firm has no control over price.

Q: In a decreasing-cost industry, the entry of new firms lowers average cost at each level of output.

Q: Which of the following is a characteristic of an oligopolistic market structure? A) There are few dominant sellers. B) Each firm sells a unique product. C) It is easy for new firms to enter the industry. D) Each firm need not react to the actions of rivals.

Q: Competition has driven the economic profits in the video rental business to zero. Surya Bacha, who owns a video rental business, would be better off leaving the industry for another alternative.

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

Q: After an increase in demand in a constant-cost industry, firms will find themselves with higher average cost curves.

Q: Which of the following is not a characteristic of a perfectly competitive market structure? A) There are a very large number of firms that are small compared to the market. B) All firms sell identical products. C) There are no restrictions to entry by new firms. D) There are restrictions on exit of firms.

Q: In an increasing-cost industry the long-run supply curve is upward sloping.

Q: 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 right, the demand curve will shift to the left, and the equilibrium price will decrease. D) the supply curve will shift to the left, the demand curve will shift to the left, and the equilibrium price will increase.

Q: Suppose there are economies of scale in the production of a specialized memory chip that is used in manufacturing microwaves. This suggests that the microwave industry is a decreasing-cost industry.

Q: Assume the market for organic produce sold at farmers' markets is perfectly competitive. All else equal, as more farmers choose to produce and sell organic produce at farmers' markets, what is likely to happen to the equilibrium price of the produce and profits of the organic farmers in the long run? A) The equilibrium price is likely to increase and profits are likely to remain unchanged. B) The equilibrium price is likely to remain unchanged and profits are likely to increase. C) The equilibrium price is likely to decrease and profits are likely to decrease. D) The equilibrium price is likely to increase and profits are likely to increase.

Q: A perfectly competitive firm in a constant-cost industry produces 1,000 units of a good at a total cost of $50,000. If the prevailing market price is $48, the number of firms and the industry's output will decrease in the long run.

Q: If in the long run a firm makes zero profit, it should exit the industry.

Q: A firm would decide to shut down if its production resulted in A) MR < ATC. B) ATC > AVC. C) AFC > AVC. D) MR < AVC.

Q: A firm could continue to operate for years without ever earning a profit as long as it is producing an output where A) MR < ATC. B) ATC > AVC. C) MR > AVC. D) AFC < AVC.

Q: Assume that firms in a perfectly competitive market are earning economic profits. Which of the following statements describes the change in market price and output as a result of the entry of new firms into this market? A) The market demand curve shifts to the right, causing price to rise and market output to increase. B) The market demand curve shifts to the left, causing price to fall and market output to decrease. C) The short-run market supply curve shifts to the right, causing price to fall and total market output to increase. D) The short-run market supply curve shifts to the left, causing price to rise and total market output to decrease.

Q: Figure 12-17 The graphs in Figure 12-17 represent the perfectly competitive market demand and supply curves for the apple industry and demand and cost curves for a typical firm in the industry. Refer to Figure 12-17. The graphs depicts a short run equilibrium. How will this differ from the long-run equilibrium? (Assume this is a constant-cost industry.) A) Fewer firms will be in the market in the long run than in the short run. B) The price will be higher in the long run than in the short run. C) The market supply curve will be further to the left in the long run than in the short run. D) The firm's profit will be lower in the long run than in the short run.

Q: Figure 12-17 The graphs in Figure 12-17 represent the perfectly competitive market demand and supply curves for the apple industry and demand and cost curves for a typical firm in the industry. Refer to Figure 12-17. Which of the following statements is true? A) The firm will produce 30 thousand pounds of apples in the short run and earn an economic profit. New firms will enter the market and shift the market supply curve to the left. B) The firm will produce 30 thousand pounds of apples in the short run and earn an economic profit, but it would earn a greater profit if it produced at the lowest point on the ATC curve. C) The firm will produce 30 thousand pounds of apples in the short run and earn an economic profit. New firms will enter the industry; as a result, the firm will be forced to exit the industry in the long run. D) The firm will produce 30 thousands pounds of apples in the short run and earn an economic profit. In the long run the firm will break even.

Q: Figure 12-17 The graphs in Figure 12-17 represent the perfectly competitive market demand and supply curves for the apple industry and demand and cost curves for a typical firm in the industry. Refer to Figure 12-17. Which of the following statements is true? A) The current market price is $3 but the firm will be able to increase the price in the future. B) The current market price is $3 but the price will fall in the long-run as a result of a decrease in demand. C) The current market price is $3 but the price will fall in the long-run as new firms enter the market. D) The current market price is $3 but the price will increase in the future as the market demand increases.

Q: Assume that a perfectly competitive market is in long-run equilibrium. Suppose as a result of a health hazard associated with the industry's product, demand decreases drastically. What is the immediate result of this event? A) The market price falls and the typical firm suffers an economic loss. B) The market supply increases to offset the fall in demand. C) The typical firm's average total cost curve shifts downward. D) The typical firm's marginal cost curve shifts to the left.

Q: If a firm in a perfectly competitive industry experiences persistent losses, in the long run it should A) shut down temporarily and wait for market conditions to change. B) exit the industry. C) raise its price to cover average total cost. D) continue to operate if it can raise the demand for its product through advertising and quality improvements.

Q: What characteristic of a competitive market has made the "long run pretty short" in the market for iPhone applications? A) few firms in the market B) identical products C) ease of entry D) blocked entry

Q: Ethan Nicholas, who developed the iShoot application for the iPhone 3G, found that to maintain sales in a profitable competitive market, the price of a product A) will usually rise. B) will usually fall. C) will usually remain stable. D) will eventually fall to zero.

Q: If, as a perfectly competitive industry expands, it can supply larger quantities at the same long-run market price, it is A) a constant-cost industry. B) an increasing-cost industry. C) a decreasing-cost industry. D) a fixed-cost industry.

Q: If, as a perfectly competitive industry expands, it can supply larger quantities only at a higher long-run equilibrium price, it is A) a constant-cost industry. B) an increasing-cost industry. C) a decreasing-cost industry. D) a fixed-cost industry.

Q: A firm's expansion path A) is the same thing as its long-run average cost curve. B) is a curve that shows a firm's cost-minimizing combination of inputs for every level of output, holding input prices constant. C) shows the targeted growth rate in sales over the long run. D) is a curve that shows expected profits at various price levels.

Q: The relationship between the inputs employed by a firm and the maximum output that it can produce with those inputs is the firm's A) production function. B) supply curve, or supply schedule. C) marginal product of labor. D) average product of labor.

Q: Figure 11-17 Refer to Figure 11-17. Assume that production isoquants are convex. Total cost and output produced must increase for each of the following movements except one. Which movement is the exception? A) point a to point b B) point a to point c C) point b to point c D) point b to point d

Q: Jennifer Borts moves her office from the premises she rents at a local mall to her home. As a result of this move A) Jennifer's explicit costs fall and her implicit costs rise. B) Jennifer's total costs fall. C) Jennifer's implicit costs fall. D) Jennifer's opportunity costs fall.

Q: Suppose a firm uses labor and capital to produce output. The last unit of labor hired has a marginal product of 12 units of output, and the last unit of capital employed has a marginal product of 20 units. Use the optimal combination of inputs rule to calculate the price of capital if the price of labor is $6 per unit. The price of capital is A) $2. B) $10. C) $20. D) impossible to determine with the information given.

Q: Which of the following statements is true? A) An explicit cost is an actual cost; an implicit cost is a theoretical cost. B) Economic costs include both explicit costs and implicit costs. C) An explicit cost is more important, dollar for dollar, than an implicit cost. D) Explicit costs are accounting costs, not economic costs; implicit costs are economic costs, not accounting costs.

Q: Suppose two countries use different combinations of inputs, such as labor and capital, to produce the same product. This implies all of the following except that A) the two countries use different technologies to produce the product. B) the inputs are not equally productive in the two countries. C) the prices of the inputs are not the same in the countries. D) one country is more efficient in the production of the good than the other.

Q: An explicit cost is defined as A) a cost that does not change as output changes. B) a nonmonetary opportunity cost. C) a cost that involves spending money. D) a nonmonetary accounting cost.

Q: Consider a firm that uses two inputs, labor and capital, to produce its output. Assume labor is measured on the horizontal axis and capital on the vertical axis. Which of the following best explains why the marginal rate of technical substitution decreases in absolute value as we move down an isoquant? A) The law of diminishing returns: for a given decline in capital, decreasing amounts of labor are required to produce the same level of output. B) The law of increasing marginal opportunity cost: if a firm uses less and less capital it must use more and more labor, which drives up the cost of labor. C) The law of diminishing returns: for a given decline in capital, increasing amounts of labor are required to produce the same level of output. D) The law of imperfect substitutability: labor and capital are not perfect substitutes; therefore, a firm must replace decreases in capital with increases in labor.

Q: Which of the following statements is false? A) An implicit cost is a nonmonetary opportunity cost. B) Economic costs include both accounting costs and implicit costs. C) An explicit cost is a cost that involves spending money. D) Economists consider all costs to be implicit costs.

Q: A change in the slope of an isocost line is due to a change in A) the output price. B) the price of one or both inputs. C) total cost. D) quantity of output.

Q: Which of the following is typically considered a fixed cost by academic book publishers but a variable cost by companies that print books? A) postage and supplies B) travel C) rent D) wages and salaries

Q: Figure 11-16 Refer to Figure 11-16. The figure above illustrates a series of isoquants. Which of the following statements is true? A) Points x, z, and y all represent the same output. B) Points z and y represent the same output; this output is produced with more capital at z than at y. C) Point x and y represent the same output but the cost of production at y is greater than the cost of production at x. D) Point z represents a greater output than point x or point y.

Q: Which of the following are implicit costs for a typical firm? A) the cost of labor B) the opportunity cost of capital owned and used by the firm C) the cost of energy used in production D) a business licensing fee