Principles of Microeconomics Brief Edition 3rd Edition Frank Test Bank 1

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File: Chapter 005 Perfectly Competitive Supply
Multiple Choice
1. A rational seller will sell another unit of output:

A. whenever the seller is earning a profit.
B. if the cost of making another unit is less than the revenue gained from selling another unit.
C. as long as the quantity demanded is greater than zero.
D. if the seller can charge more than the equilibrium price.
Ans: B
Difficulty: 02 Medium
Learning Objective: 05-01
Topic: Thinking About Supply: The Importance of Opportunity Cost
Blooms: Understand
AACSB: Reflective Thinking
Feedback: If the cost of making another unit is less than the revenue gained from selling another
unit, then selling an additional unit will increase the seller’s profit.
1
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2. Your neighbors have offered to pay you to look after their dog while they are on vacation. It
will take you one hour per day to feed, walk, and care for the dog, which you can do either
before or after you go to work. Your regular job pays $10 per hour, and you can work up to eight
hours per day. The smallest amount of money you would accept to look after your neighbor’s
dog is equal to:
A. $10 per day, because that is your opportunity cost of one hour of work.
B. $15 per day, because overtime wages are generally 1.5 times your regular wage when you
work more than eight hours a day.
C. zero, because your regular job is not available for more than eight hours per day.
D. the value of one hour of leisure, which is greater than zero.
Ans: D
Difficulty: 03 Hard
Blooms: Apply
AACSB: Analytic
Feedback: Your opportunity cost is the value of what you have given up in order to take care of
the dog.
3. Which of the following best explains why you are more likely to see a poor person than a
wealthy person picking up aluminum cans to sell?
A. Wealthy people do not care about the environment.
B. The opportunity cost of picking up cans is higher for wealthy people than for poor people.
C. Wealthy people are more concerned about their public image than are poor people.
D. Wealthy people are more aware of diseases transmitted through litter than are poor people.
Ans: B
Difficulty: 03 Hard
Blooms: Apply
AACSB: Analytic
Feedback: Wealthy people are likely to place a higher dollar value on their time than are poor
people, so the opportunity cost of picking up aluminum cans will be higher for the wealthy than
for the poor.
4. John is trying to decide how to divide his time between his job as a stocker in the local grocery
store, which pays $7 per hour for as many hours as he chooses to work, and cleaning windows
for the businesses downtown. He makes $2 for every window he cleans. John is indifferent
between the two tasks, and the number of windows he can clean depends on how many hours he
spends cleaning in a day, as shown in the table below:
Hours Per Total Number

Day Cleaning of Windows
Windows Cleaned
0 0
1 7
2
2 11
3 14
4 16
5 17
What is John's opportunity cost of cleaning windows for an hour?

A. $14
B. $8
C. $7
D. $2
Ans: C
Blooms: Understand
Feedback: Each hour John spends cleaning windows is one fewer hour he can work at the store.
His wage at the store is $7 per hour, so that is what he sacrifices per hour spent cleaning
windows.

Windows Cleaned
0 0
1 7
2 11
3 14
4 16
5 17
John’s benefit from his first hour cleaning windows is:

A. $14
B. $18
C. $7
D. $2.
Ans: A
3
Blooms: Understand
Feedback: In the first hour John spends cleaning windows he cleans 7 windows and earns $2 per
window for a total benefit of $14.

Windows Cleaned
0 0
1 7
2 11
3 14
4 16
5 17
The first hour John spends cleaning windows costs him ______ that he could have earned in the
grocery store.
A. $2
B. $7
C. $14
D. $18
Ans: B
Blooms: Understand
Feedback: John is paid $7 per hour at the grocery store.

Windows Cleaned
0 0
4
1 7
2 11
3 14
4 16
5 17
A second hour cleaning windows will yield additional earnings of ______.

A. $2
B. $14
C. $8
D. $7
Ans: C
Difficulty: 03 Hard
Blooms: Analyze
AACSB: Analytic
Feedback: In the second hour John spends cleaning windows, he cleans 4 additional windows
and earns $2 per window for a total benefit of $8.

Windows Cleaned
0 0
1 7
2 11
3 14
4 16
5 17
Should John spend a third hour cleaning windows?

A. Yes, because he would earn $28.
B. Yes, because the additional amount he would earn is $14, which is greater than his
opportunity cost of $7.
C. No, because the additional amount he would earn is $6, which is less than his opportunity cost
of $7.
D. Yes, because the additional amount he would earn is $6, which is better than earning nothing.
Ans: C
5
Difficulty: 03 Hard
Blooms: Analyze
AACSB: Analytic
Feedback: In the third hour John spends cleaning windows he cleans 3 additional windows and
earns $2 per window for a total benefit of $6. He could have spent that hour earning $7 at the
store, so his opportunity cost is $7. Since $6 is less than $7, he should not clean windows for a
third hour.

Windows Cleaned
0 0
1 7
2 11
3 14
4 16
5 17
How many hours a day should John spend cleaning windows?
A. 1
B. 2
C. 3
D. 4
Ans: B
Difficulty: 03 Hard
Blooms: Analyze
AACSB: Analytic
Feedback: John’s opportunity cost of spending an hour cleaning windows is $7. His benefit from
the first hour cleaning windows is $27=$14. His benefit from his second hour cleaning
windows is $24=$8, and his benefit from his third, fourth and fifth hour cleaning windows is
$6, $4 and $2, respectively. Thus, his benefit of spending an hour cleaning windows is only
greater than his opportunity cost for the first 2 hours he spends cleaning windows.
10. John is trying to decide how to divide his time between his job as a stocker in the local
grocery store, which pays $7 per hour for as many hours as he chooses to work, and cleaning
6
windows for the businesses downtown. He makes $2 for every window he cleans. John is
indifferent between the two tasks, and the number of windows he can clean depends on how
many hours he spends cleaning in a day, as shown in the table below:

Windows Cleaned
0 0
1 7
2 11
3 14
4 16
5 17
What is the lowest price per window that would induce John to spend at least one hour per day
cleaning windows?
A. $7
B. $1
C. $3
D. $2
Ans: B
Difficulty: 03 Hard
Blooms: Analyze
AACSB: Analytic
Feedback: In the first hour John spends cleaning windows he cleans 7 additional windows.
Alternatively, he could spend that hour earning $7 at the store. Thus, in order to give up the hour
at the store, John must earn at least $1 per window.

Windows Cleaned
0 0
1 7
2 11
3 14
4 16
5 17
7
What is the lowest price per window that John would be willing to accept to spend 4 hours per
day cleaning windows?
A. $7
B. $2
C. $3.50
D. $11
Ans: C
Difficulty: 03 Hard
Blooms: Analyze
AACSB: Analytic
Feedback: He must make at least $7 per hour cleaning windows since he can earn that amount at
the grocery store. If he spends a 4th hour cleaning windows, he can clean 2 additional windows.
Thus, in order to earn at least $7, he has to be paid a minimum of $3.50 per window.

Windows Cleaned
0 0
1 7
2 11
3 14
4 16
5 17
If we plot John's opportunity cost per window on the vertical axis and the number of windows
cleaned each day on the horizontal axis, we will have John's ______ curve for window-cleaning
services.
A. production possibilities
B. supply
C. benefit
D. demand
Ans: B
Difficulty: 03 Hard
8
Blooms: Analzye
AACSB: Analytic
Feedback: John’s opportunity cost of cleaning another window is his reservation price, the
minimum amount you would have to pay him to get him to clean another window.
13. For a given seller, the figure below shows the relationship between the number of units
produced and the opportunity cost of producing an additional unit of output. What is this seller's
reservation price for the 250th unit?
A. $2
B. $4
C. $8
D. $14
Ans: B
Blooms: Understand
Feedback: A seller's reservation price is the smallest dollar amount for which the seller would be
willing to sell an additional unit, which is generally equal to the seller’s opportunity cost of
producing that unit.
produced and the opportunity cost of producing an additional unit of output. If the market price
of this good is $6, how many units would this seller produce?
9
A. 50
B. 150
C. 250
D. 300
Ans: D
Blooms: Understand
Feedback: The seller will continue to produce as the opportunity cost of producing an additional
unit is less than or equal to price.
produced and the opportunity cost of producing an additional unit of output. As the market price
of this good increases, the quantity produced by this seller will ______.
A. increase
B. decrease
10
C. stay the same
D. stay the same until the price rises above $6 per unit, and then it will increase
Ans: A
Blooms: Understand
Feedback: The seller will continue to produce as the opportunity cost of producing an additional
unit is less than or equal to price. Thus, as price increases, so will the quantity produced.
16. For a single seller, the figure below shows the relationship between the number of units
produced and the opportunity cost of producing an additional unit of output. If the market
consists of 50 identical sellers, how much would be supplied in the market at a price of $14 per
unit?
A. 350
B. 1,750
C. 17,500
D. 175,000
Answer: C
Difficulty: 03 Hard
Topic: Individual and Market Supply Curves
Blooms: Apply
AACSB: Analytic
Feedback: At a price of $14, each firm would produce 350 units. Thus, a total of 17,500 (= 350 
50) units would be produced.
17. A seller’s supply curve shows the seller’s:

A. willingness to pay for an additional unit of output at each quantity.
B. opportunity cost of producing an additional unit of output at each quantity.
11
C. hourly wage for producing an additional unit of output at each quantity.
D. profit from producing an additional unit of output at each quantity.
Ans: B
Difficulty: 01 Easy
Blooms: Remember
Feedback: A seller will supply an additional unit of output if the market price is greater than or
equal to the seller’s opportunity cost of producing an additional unit.
18. Individual supply curves generally slope ______ because ______.

A. downward; sellers become more efficient with practice.
B. upward; profits increase with quantity.
C. downward; inputs are cheaper when purchased in high volume.
D. upward; of increasing opportunity costs.
Ans: D
Blooms: Understand
Feedback: Consistent with the Principle of Increasing Opportunity Cost, in expanding production
of any good, firms will first employ those resources with the lowest opportunity cost, and only
afterwards turn to resources with higher opportunity costs.
19. As the market price of a service increases, more potential sellers will decide to perform that
service because:
A. higher prices result in higher revenue.
B. more potential sellers will find that the market price exceeds their reservation price.
C. it’s more prestigious to produce high-priced services.
D. higher prices lead to lower opportunity costs.
Ans: B
Blooms: Understand
Feedback: A seller will supply an additional unit of output if the market price is greater than or
equal to the seller’s opportunity cost of producing an additional unit. Thus, as the market price
rises, sellers with higher opportunity costs will enter the market.
20. The primary objective of most private firms is to:
12
A. maximize revenue.
B. maximize profit.
C. minimize cost.
D. maximize output.
Ans: B
Difficulty: 01 Easy
Topic: Profit-Maximizing Firms in Perfectly Competitive Markets
Blooms: Remember
Feedback: Most firms exist to earn profit for their owners.
21. The most important challenge facing a firm in a perfectly competitive market is deciding:
A. whether to maximize its profits.
B. how much to produce.
C. what price to charge.
D. whether to advertise.
Ans: B
Difficulty: 01 Easy
Blooms: Remember
Feedback: Since firms in perfectly competitive markets have no control over the market price,
their most important challenge is deciding how much to produce.
22. Total revenue minus both explicit and implicit costs defines a firm’s:
A. gross earnings.
B. profit.
C. marginal earnings.
D. net worth.
Ans: B
Difficulty: 01 Easy
Blooms: Remember
Feedback: Profit is defined as total revenue from the sale of a firm's product minus all costs (both
implicit and explicit) incurred producing it.
24. Which of the following statements is true for both Microsoft and a locally owned restaurant?
A. Both are perfect competitors.
B. Both confront perfectly elastic demand for their products.
13
C. Neither firm is able to influence the price of their products.
D. Both seek to maximize profits.
Ans: D
Difficulty: 03 Hard
Blooms: Analyze
AACSB: Analytic
Feedback: All firms seek to maximize profits. Only perfectly competitive firms face perfectly
elastic demand and are unable to influence price. Microsoft is an example of an imperfectly
competitive firm.
25. Which of the following is a defining characteristic of all perfectly competitive markets?
A. Each firm in the market faces a perfectly inelastic demand curve.
B. The market demand curve is perfectly elastic.
C. All firms sell the same standardized product.
D. Consumers display strong brand loyalty.
Ans: C
Blooms: Remember
Feedback: In perfectly competitive markets, all firms sell the same standardized product.
Although each firm in perfectly competitive market faces a perfectly elastic demand curve, the
market demand curve does not have to be perfectly elastic.
26. Which of the following is NOT true of a perfectly competitive firm?

A. It faces a perfectly elastic demand curve.
B. It is unable to influence the price of the good it sells.
C. It seeks to maximize revenue.
D. It sells only a small fraction of the total quantity exchanged in the market.
Ans: C
Difficulty: 01 Easy
Blooms: Remember
Feedback: Firms (in any market) maximize profit, not revenue.
27. Which of the following is NOT a characteristic of a perfectly competitive market?

A. Each firm in the market sells a somewhat different variant of the good.
B. There are many sellers, each of which sells only a small fraction of the total quantity
exchanged.
C. Buyers and sellers are well-informed.
14
D. Sellers can easily buy and sell the productive resources needed to enter the market.
Ans: A
Difficulty: 01 Easy
Blooms: Remember
Feedback: All firms in a perfectly competitive market sell the same standardized product.
28. In which of the following markets do firms sell the same standardized product?
A. Four-door cars
B. 2% milk
C. Desktop computers
D. Sandwiches
Ans: B
Blooms: Understand
Feedback: 2% milk is essentially the same regardless of the brand.
29. Last year, Casey grew fresh vegetables, which she sold at her local farmers market, but this
year, Casey did not plant any vegetables and went to work at a bank instead. If Casey’s decision
to change careers did not affect the price of vegetables at the farmers market, then this suggests
that:
A. the demand for vegetables did not change.
B. the market for vegetables is perfectly competitive.
C. the demand for vegetables increased this year.
D. the market demand for vegetables is perfectly inelastic.
Ans: B
Difficulty: 03 Hard
Blooms: Analyze
AACSB: Analytic
Feedback: A single firm cannot influence price in a perfectly competitive market.
30. Last year, Casey grew fresh vegetables, which she sold at her local farmers market, but this
year, Casey did not plant any vegetables and went to work at a bank instead. Which of the
following best explains Casey’s career change?
A. Casey’s opportunity costs of gardening exceeded Casey’s benefits from working at the bank.
B. Casey’s opportunity costs of working at the bank exceeded Casey’s benefits from gardening.
C. Casey’s opportunity costs of working at the bank exceeded Casey’s opportunity costs of
gardening.
15
D. Casey’s opportunity costs of gardening exceeded Casey’s opportunity costs of working at the
bank.
Ans: D
Difficulty: 03 Hard
Blooms: Analyze
AACSB: Analytic
Feedback: The opportunity cost of gardening is the benefit of working at the bank. Casey will
work at the bank if the benefit of working at the bank is greater than her opportunity cost of
working at the bank.
31. A price-taker faces a demand curve that is:

A. vertical at the market price.
B. upward sloping.
C. downward sloping.
D. horizontal at the market price.
Ans: D
Difficulty: 01 Easy
Blooms: Remember
Feedback: A perfectly competitive firm faces a horizontal demand curve at the market price
because it need not lower its price to sell more output and it would sell no output if it raised its
price above the market price.
32. One implication of the shape of the demand curve facing a perfectly competitive firm is that:
A. if the firm increases its price above the market price, it will earn higher revenue.
B. if the firm decreases its price below the market price, it will earn higher revenue.
C. if the firm increases its price above the market price, it will earn zero revenue.
D. the market would be unable to reach a new equilibrium if demand changed.
Ans: C
Blooms: Understand
Feedback: A perfectly competitive firm cannot raise its price without losing all of its customers
to the many rival firms that produce the same product.
33. An imperfectly competitive firm is one that:

A. has at least some influence over the market price.
B. charges any price it wants.
C. seeks to maximize revenue.
D. faces a perfectly inelastic demand curve.
16
Ans: A
Difficulty: 01 Easy
Blooms: Understand
Feedback: An imperfectly competitive firm can increase its price and still retain some customers.
34. A profit-maximizing perfectly competitive firm must decide:

A. only what price to charge, taking output as fixed.
B. both what price to charge and how much to produce.
C. only how much to produce, taking price as fixed.
D. only which industry to join, taking price and output as fixed.
Ans: C
Difficulty: 01 Easy
Blooms: Remember
Feedback: A perfectly competitive firm is a price taker, so it only chooses how much to produce.
35. Jenny sells lemonade in front of her house in the summer. Several other kids in Jenny’s
neighborhood also run lemonade stands in the summer. The lemonade market in Jenny’s
neighborhood is more likely to be perfectly competitive if:
A. all of the kids advertise heavily.
B. each stand tries to get more customers by offering different varieties of lemonade and snacks.
C. each lemonade stand sells the same kind of lemonade.
D. some of the neighborhood parents build elaborate booths for their kids’ stands while some
kids sell from makeshift tables.
Ans: C
Difficulty: 03 Hard
Blooms: Analyze
AACSB: Analytic
Feedback: One characteristic of a perfectly competitive market is that the firms sell the same
standardized product.
neighborhood also run lemonade stands in the summer. If the lemonade market is perfectly
competitive and Jenny is charging the equilibrium price, then Jenny can increase her revenue if
she:
A. decreases the price of her lemonade and doesn’t change her output.
B. increases the price of her lemonade and decreases her output.
C. increases the price of her lemonade and doesn’t change her output.
D. keeps the price of her lemonade the same and increases the output.
17
Ans: D
Blooms: Understand
Feedback: If the market for lemonade is perfectly competitive, then no one will buy Jenny’s
lemonade if she increases the price. Thus, if she wants to increase her revenue, she has to keep
the price of her lemonade the same and increase output.
neighborhood also run lemonade stands in the summer. Suppose that the first week of summer,
Jenny charged 25 cents for an 8-ounce cup of lemonade, her next-door neighbor Sam charged 50
cents for an 8-ounce cup of lemonade, and Alex across the street charged 15 cents for an 8-ounce
cup of lemonade. Assuming the market for lemonade is perfectly competitive, what is most
likely to happen?
A. Everyone will start to charge 50 cents to maximize revenue.
B. A price war will break out, and all of the kids will lower their prices.
C. Each kid will keep his or her price at the original amount.
D. Eventually prices will equalize across all three lemonade stands.
Ans: D
Difficulty: 03 Hard
Blooms: Analyze
AACSB: Analytic
Feedback: If the market is perfectly competitive, they will all eventually charge the equilibrium
price.
38. Which of the following would be considered a factor of production in the provision of bus
service?
A. The revenue from the sale of bus tickets.
B. The amount it costs to provide bus service between two locations.
C. Bus drivers.
D. The hourly wage paid to bus drivers.
Ans: C
Blooms: Understand
Feedback: A factor production is an input used in the production of a good or services. Busses,
drivers and gasoline are all used to produce bus service.
39. The short run is best defined as:

A. one year or less.
18
B. a period of time sufficiently short that all factors of production are variable.
C. the period of time between quarterly accounting reports.
D. a period of time sufficiently short that at least one factor of production is fixed.
Ans: D
Difficulty: 01 Easy
Blooms: Remember
Feedback: The short run is a period of time sufficiently short that at least some of a firm’s factors
of production are fixed.
40. A fixed factor of production:

A. is fixed in the long run but variable in the short run.
B. is fixed only in the short run.
C. is fixed in both the short run and the long run.
D. is common in large firms but rare in small firms.
Ans: B
Blooms: Understand
Feedback: No factors are fixed in the long run, but in the short run, fixed factors of production
cannot be changed.
41. A variable factor of production:

A. is fixed in the long run but variable in the short run.
B. plays no role in the law of diminishing marginal returns.
C. is variable in both the short run and the long run.
D. is variable only in the short run.
Ans: C
Blooms: Understand
Feedback: Variable factors are those that can be changed at any time.
42. The long run is best defined as:

A. one year or more.
B. a period of time sufficiently long that all factors of production are variable.
C. the period of time between annual accounting reports.
D. a period of time sufficiently long that at least one factor of production is fixed.
Ans: B
Difficulty: 01 Easy
19
Blooms: Remember
Feedback: The long run is a period of time of sufficient length that all the firm's factors of
production are variable.
43. According to the law of diminishing returns, when some factors of production are fixed, in
order to increase production by a given amount, a firm will eventually need to add successively:
A. smaller and smaller quantities of the variable factors of production.
B. constant quantities of the variable factors of production.
C. larger and larger quantities of the variable factors of production.
D. larger and larger quantities of the fixed factor of production.
Ans: C
Blooms: Understand
Feedback: The law of diminishing returns notes that it takes larger and larger increases in the
variable inputs to increase output by the same amount.
44. Which of the following is the most likely to be a fixed factor of production at a farm?
A. The land on which the farm is located.
B. The number of workers hired to harvest the crops.
C. The amount of fertilizer used each week.
D. The amount of water used each day.
Ans: A
Blooms: Understand
Feedback: The land on which the farm is located would take more time to alter than the other
inputs listed, so it is the most likely to be a fixed factor of production.
45. Which of the following is the most likely to be a fixed factor of production at a pizza
restaurant?
A. The number of waiters.
B. The size of the seating area.
C. The amount of pizza dough.
D. The amount of electricity.
Ans: B
20
Blooms: Understand
Feedback: The size of the seating area would take more time to alter than the other inputs listed,
so it is the most likely to be a fixed factor of production.
46. Which of the following is the most likely to be a variable factor of production at a university?
A. The number of librarians.
B. The size of the football stadium.
C. The size of the student union.
D. The location of the university.
Ans: A
Blooms: Understand
Feedback: The number of librarians is easier to alter than any of the other factors listed, so it is
the most likely to be a variable factor of production.
47. One reason that variable factors of production tend to show diminishing returns in the short
run is that:
A. capital equipment is often idle in the short run.
B. there is only so much that can be produced using additional variable inputs when some factors
of production are fixed.
C. large firms cannot effectively manage their resources.
D. the cost of employing additional resources increases as firms employ more of those resources.
Ans: B
Blooms: Understand
Feedback: Diminishing returns results from trying increase output when some factors of
production are fixed.
48. To produce 150 units of output, a firm must use 3 employee-hours. To produce 300 units of
output, the firm must use 8 employee-hours. Apparently, the firm is:
A. producing in the long run.
B. experiencing diminishing returns.
C. not using any fixed factors of production.
D. experiencing negative returns.
Ans: B
Difficulty: 03 Hard
21
Blooms: Apply
AACSB: Analytic
Feedback: If production exhibits diminishing returns, then it takes ever-larger increases in the
variable input to increase output by a given amount.
49. Suppose 30 employee-hours can produce 50 units of output. Assuming the law of
diminishing marginal returns is present, to produce 100 units of output would require:
A. an additional 30 employee-hours.
B. more than 30 additional employee-hours.
C. a total of 60 or fewer employee-hours.
D. fewer than 30 additional employee-hours.
Answer: B
Difficulty: 03 Hard
Blooms: Apply
AACSB: Analytic
Feedback: If production exhibits diminishing returns, then it takes ever-larger increases in the
variable input to increase output by a given amount.
50. Refer to the table below. As the firm increases the number of employee-hours each day from
1 to 2, output increases by:
Output Number of
Per Day Employee
Hours Per Day
0 0
33 1
66 2
99 4
132 7
165 11
A. 33 units.
B. 66 units.
C. 99 units.
D. 132 units.
Ans: A
Blooms: Understand
Feedback: With 1 worker output is 33 units and with 2 workers output is 66 units, an increase of
33.
22
51. Refer to the table below. To increase output from 33 to 66 units requires ______ extra
employee-hour(s); to increase output from 66 to 99 units requires ______ extra employee-
hour(s).
Output Number of
Per Day Employee
Hours Per Day
0 0
33 1
66 2
99 4
132 7
165 11
A. 1; 1
B. 1; 2
C. 2; 1
D. 2; 4
Ans: B
Blooms: Understand
Feedback: Going from 1 to 2 employee-hours increases output from 33 to 66 units of output per
day. Going from 2 to 4 employee-hours increases output from 66 to 99 units per day.
52. Refer to the table below. To increase output from 99 to 132 units requires ______ extra
employee-hours; to increase output from 132 to 165 units requires ______ extra employee-hours.
Output Number of
Per Day Employee
Hours Per Day
0 0
33 1
66 2
99 4
132 7
165 11
A. 11; 18
B. 7; 11
23
C. 4; 3
D. 3; 4
Ans: D
Blooms: Understand
AACSB: Analytic
Feedback: Going from 4 to 7 employee-hours increases output from 99 to 132 units of output per
day. Going from 7 to 11 employee-hours increases output from 132 to 165 units per day.
53. Refer to the table below. The law of diminishing marginal returns becomes evident after
______ units of output are produced.
Output Number of
Per Day Employee
Hours Per Day
0 0
33 1
66 2
99 4
132 7
165 11
A. 33
B. 66
C. 99
D. 132
Ans: B
Difficulty: 03 Hard
Blooms: Apply
AACSB: Analytic
Feedback: After 66 units, larger and larger increases in the number of employee hours are needed
to increase output by 33 units per day.
54. The table below describes the relationship between the number of workers hired by a call
center each hour and the number of calls the call center can make each hour. The call center has
only 1 telephone. The telephone costs the firm $5/hour (regardless of how many calls are made),
and each worker is paid $10 per hour.
Number of Number of
Calls Per
Telephones Workers
Hour
Per Hour Per Hour
1 1 2
24
2 1 4
6 1 6
16 1 8
22 1 10
24 1 12
What is the total cost of making 6 calls an hour?
A. $30
B. $40
C. $60
D. $65
Ans: D
Difficulty: 03 Hard
Blooms: Apply
AACSB: Analytic
Feedback: To make 6 calls an hour requires 1 telephone and 6 workers. The cost of the
telephone is $5, and the cost of hiring 6 workers is $60, so the total cost is $65.
56. The table below describes the relationship between the number of workers hired by a call
center each hour and the number of calls the call center can make each hour. The call center has
only 1 telephone. The telephone costs the firm $5/hour (regardless of how many calls are made),
and each worker is paid $10 per hour.
Number of Number of
Calls Per
Telephones Workers
Hour
Per Hour Per Hour
1 1 2
2 1 4
6 1 6
16 1 8
22 1 10
24 1 12
If the price of a telephone increases to from $5 to $10 an hour and nothing else changes, then:
A. total cost would not change.
B. marginal cost would increase by $5 at every level of output.
C. marginal cost would not change.
D. fixed cost could not change.
Ans: C
Difficulty: 03 Hard
Blooms: Analyze
AACSB: Analytic
25
Feedback: Because only the cost of the fixed input changed, there is no change in marginal cost.
60. If a production process exhibits diminishing returns, then as output rises:

A. average total cost will eventually decrease.
B. marginal cost will eventually increase.
C. total fixed cost will eventually increase.
D. total revenue will eventually decrease.
Ans: B
Blooms: Understand
Feedback: Diminishing returns implies that the cost of producing an additional unit of output will
eventually increase.
61. Assume that each day a firm uses 13 employee-hours and an office to produce 100 units of
output. The price of each unit output is $5, the hourly wage rate is $10, and rent on the office is
$200 per day. Each day the firm earns a ______ of ______.
A. profit; $370
B. loss; $200
C. profit; $170
D. loss; $170
Ans: C
Difficulty: 03 Hard
Blooms: Apply
AACSB: Analytic
Feedback: Revenue is $5 times 100, or $500. Total labor costs are $130 (= 13 × $10) and rent is
$200, so total costs are $330. Thus, profit is $500 - $330 = $170.
62. In general, when the price of a variable factor of production increases:

A. total cost falls.
B. the profit maximizing level of output rises.
C. the profit-maximizing price falls.
D. the profit-maximizing level of output falls.
Ans: D
Blooms: Understand
Feedback: When the price of a variable factor of production increases, the cost of producing each
additional unit of output increases, so the profit-maximizing level of output falls.
26
63. In general, when the price of a fixed factor of production increases:
A. the profit-maximizing price falls.
B. the profit-maximizing level of output does not change.
C. marginal cost increases.
D. the profit-maximizing level of output increases.
Ans: B
Blooms: Understand
Feedback: An increase in the price of a fixed factor of production does not change the marginal
cost of producing another unit, so the profit-maximizing level of output does not change.
64. Suppose a profit-maximizing firm in a perfectly competitive market is earning an economic

profit of $1,345. If the firm’s fixed cost increases from $200 to $300, the firm will:
A. reduce its output.
B. raise its price.
C. earn a greater profit.
D. earn a smaller profit.
Ans: D
Difficulty: 03 Hard
Blooms: Analyze
AACSB: Analytic
Feedback: An increase in fixed costs increases total cost but does not affect marginal cost. Thus,
the firm will earn a smaller profit, but their output will not change.
65. Suppose a profit-maximizing firm in a perfectly competitive market is collecting $1,999 in

total revenues. If the total cost of its fixed factors of production falls from $500 to $400, the firm
will:
A. expand its output.
B. lower its price.
C. earn greater profits or smaller losses.
D. earn smaller profits or larger losses.
Ans: C
Difficulty: 03 Hard
Blooms: Analyze
AACSB: Analytic
Feedback: An decrease in fixed costs decreases total cost but does not affect marginal cost.
Thus, the firm will earn a greater profit (or smaller loss), but their output will not change.
27
66. Suppose a firm uses workers and office space to produce output. The firm is locked into a
year-long lease on its office space, but it can easily vary the number of employee-hours it uses
each day. The table below describes the relationship between the number of employee-hours the
firm uses each day and the firm’s daily output. Each unit of output sells for $2, the hourly wage
rate is $14, and the rent on the office space is $50 per day.
Employee-Hours Output
Per Day Per Day
0 0
1 40
4 80
9 120
15 160
23 200
This firm’s fixed cost each day is:

A. $66
B. $64
C. $50
D. $14
Ans: C
Difficulty: 03 Hard
Blooms: Apply
AACSB: Analytic
Feedback: The fixed factor of production is the office space, which rents for $50 per day.
Per Day Per Day
0 0
1 40
4 80
9 120
15 160
23 200
When the firm uses 9 employee-hours, its total labor cost each day is:
A. $30
28
B. $56
C. $84
D. $126
Ans: D
Difficulty: 03 Hard
Blooms: Apply
AACSB: Analytic
Feedback: 9 employee-hours × $14 = $126.
Per Day Per Day
0 0
1 40
4 80
9 120
15 160
23 200
When the firm uses 9 employee-hours, its total cost each day is:
A. $126
B. $64
C. $56
D. $176
Ans: D
Difficulty: 03 Hard
Blooms: Apply
AACSB: Analytic
Feedback: 9 × $14 = $126 in labor costs plus $50 in rent for a total cost of $176.
29
Per Day Per Day
0 0
1 40
4 80
9 120
15 160
23 200
When the firm uses 9 employee-hours, its total revenue each day is:
A. $240.
B. $160.
C. $120.
D. $18.
Ans: A
Difficulty: 03 Hard
Blooms: Apply
AACSB: Analytic
Feedback: 9 employee-hours produce 120 units, which sell for $2 each, yielding $240 in
revenue.
Per Day Per Day
0 0
1 40
4 80
9 120
15 160
23 200
When the firm uses 9 employee-hours, it earns a daily ______ of ______.

A. loss; $64
B. profit; $64
C. loss; $114
D. profit; $114
Ans: B
Difficulty: 03 Hard
30
Blooms: Apply
AACSB: Analytic
Feedback: If the firm uses 9 employee hours, its total cost is $176 (= 9  $14 + $50), and its total
revenue is $240 (= 120  $2). Thus, its profit is $64 (= $240 - $176).
72. Refer to the information below. It is clear that diminishing returns sets in after ______
workers per day.
Number of Output Per

Workers Per Day Day
0 0
1 3
2 8
3 15
4 24
5 32
6 39
A. 3
B. 4
C. 5
D. 6
Ans: B
Difficulty: 03 Hard
Blooms: Analyze
AACSB: Analytic
Feedback: The additional output generated by the 1st worker is 3, by the 2nd worker is 5, by the
3rd worker is 7, by the 4th worker is 9, but the 5th worker is 8, and by the 6th worker is 7. The
additional output generated by each additional worker begins to diminish after the 4th worker.
73. The table below shows a pizzeria’s fixed cost and variable cost at different levels of output.
Pizza’s sell for $20 each.
Number of Fixed Cost Variable Cost

Pizzas Per Day ($/Day) ($/Day)
0 500 0
25 500 150
50 500 250
75 500 450
100 500 850
125 500 1,650
31
When the pizzeria makes 100 pizzas a day, its fixed cost is ______ and its total cost is ______.
A. $350; $850
B. $500; $850
C. $500; $1,350
D. $850; $1,650
Ans: C
Blooms: Understand
Feedback: At 100 pizzas a day, fixed cost is $500 and variable cost is $850, so total cost is
$1,350.

0 500 0
25 500 150
50 500 250
75 500 450
100 500 850
125 500 1,650
When the pizzeria makes 125 pizzas per day, its total revenue is:
A. $2,500
B. $1,250
C. $125
D. $20
Ans: A
Difficulty: 03 Hard
Blooms: Apply
AACSB: Analytic
Feedback: Total revenue equals price  quantity, which in this case is $2,500 = $20  125.

0 500 0
25 500 150
32
50 500 250
75 500 450
100 500 850
125 500 1,650
When the pizzeria makes 100 pizzas per day, it earns an economic ______ of ______.
A. loss, $650
B. profit, $650
C. loss, $500
D. profit, $1,150
Ans: B
Difficulty: 03 Hard
Blooms: Analyze
AACSB: Analytic
Feedback: Economic profit equals total revenue minus total cost. At 100 pizzas a day, total
revenue is $2,000 (= $20  100) and total cost is $1,350 (= $500 + $850).
85. The Cost-Benefit Principle tells us that a firm should continue to expand production as long
as:
A. the firm’s profit is positive.
B. price of the good is greater than its marginal cost.
C. it can sell another unit of the good.
D. the supply curve is upward sloping.
Ans: B
Difficulty: 01 Easy
Blooms: Remember
Feedback: According to the Cost-Benefit Principle, a firm should produce another unit of output
as long as the extra benefit of producing that unit is greater than the extra cost. This is just
another way of saying that the firm should increase output whenever price is greater than
marginal cost (and it should stop when price is equal to marginal cost).
86. Suppose a firm produces the level of output at which the marginal cost of the last unit
produced equals the price of the good. Which of the following statements is always true?
A. The firm should shutdown if its total revenue is less than its variable cost.
B. The firm will earn a positive economic profit.
C. The firm is maximizing its profit.
D. The firm should produce more if its economic profit is positive.
Ans: A
Difficulty: 03 Hard
33
Blooms: Understand
Feedback: In general, a firm maximizes its profit by choosing the level of output at which price
equals marginal cost. However, if a firm’s total revenue isn’t large enough to cover its variable
cost, then the firm should shut down. Note that even when a firm produces where price equals
marginal cost, there is no guarantee that the firm will earn a positive economic profit.
87. A firm should shut down if its total revenue is less than its _____ even when the firm
produces the level of output at which price equals marginal cost.
A. marginal cost.
B. fixed cost.
C. variable cost.
D. total cost.
Ans: C
Blooms: Understand
Feedback: The firm must pay fixed costs whether it operates or not. As long as the firm is
covering its variable cost, it should produce a positive level of output. Otherwise, it should shut
down.
87. If a firm’s total revenue is less than its variable cost when the firm produces the level of
output at which price equals marginal cost, then the firm should:
A. not change its level of output even if it’s earning an economic loss in the short run.
B. shut down.
C. produce more so that its total revenue increases.
D. purchase more fixed factors of production.
Ans: B
Blooms: Understand
covering its variable cost, it should produce a positive level of output. Otherwise, it should shut
down.
88. Suppose that when a perfectly competitive firm produces 500 units of output a day, it earns
an economic loss. If the price of each unit of output is $1.50, then, in the short run, it’s clear that
this firm:
A. should shut down.
34
B. should not shut down if its total variable cost is less than $750.
C. is not maximizing its profit.
D. should produce more than 500 units a day.
Ans: B
Difficulty: 03 Hard
Blooms: Evaluate
AACSB: Analytic
Feedback: A firm will only shut down if its total revenue is less than its total variable cost. If
this firm produces 500 units of output and the price of each unit is $1.50, then we know this
firm’s total revenue is $750. Thus, this firm should not shut down if its total variable cost is less
than $750.
89. Suppose that at a firm’s profit-maximizing level of output, its total revenue is $1,250, the
total cost of its variable factors of production is $1,000, and its total fixed cost is $500. This firm
will ______ in the short run, and will ______ in the long run.
A. shut down; reopen for business
B. earn a profit; earn a loss
C. earn a loss; earn a profit
D. not shut down; exit the industry
Ans: D
Difficulty: 03 Hard
Blooms: Analyze
AACSB: Analytic
Feedback: In the short run, the firm must pay fixed costs whether it operates or not. Thus, as long
as the firm’s total revenue is high enough to cover its variable cost, it will continue to operate in
the short run. If profits are negative, however, the firm will exit the industry in the long run
because all costs are variable in the long run.
90. If a firm shuts down in the short run, then its:

A. total revenue and total cost will fall to zero.
B. profit will equal zero.
C. economic loss will equal its fixed costs.
D. economic loss will equal its variable costs.
Ans: C
Blooms: Understand
Feedback: When a firm shuts down, its total variable costs and its total revenue shrink to zero,
but the firm still must pay fixed costs whether it operates or not. So, if a firm shuts down, its
economic loss is equal to its fixed cost.
35
91. Suppose that when a perfectly competitive firm produces 1,000 units of output, its total
variable cost is $1,900. If the marginal cost of producing the 1,000th unit is $1.70, and if the
market price of each unit of output is $1.70, then the firm should:
A. shut down.
B. raise its price.
C. increase output.
D. continue to produce 1000 units.
Ans: A
Difficulty: 03 Hard
Blooms: Evaluate
AACSB: Analytic
Feedback: This firm should shut down. Even though P=MC at 1000 units of output, the firm’s
total revenue, $1,700, is less than the firm’s total variable cost, $1,900.
92. Fred runs a fishing lodge, and has a very profitable business during the summer. In the fall,
the number of guests at the lodge starts to decline. Fred should keep the lodge open:
A. all year because his summer profits offset any losses he might have in the winter.
B. only during those months in which his total revenue exceeds his total cost.
C. only during those months in which his total revenue exceeds his fixed cost.
D. only during those months in which his total revenue exceeds his variable cost.
Ans: D
Difficulty: 03 Hard
Blooms: Evaluate
AACSB: Analytic
covering its variable costs, it will rationally operate even if its economic profit is negative.
95. Suppose Chris is a potter who makes mugs. His total costs depend on the number of mugs he
makes each day, as shown in the table below.
Number of Total Cost

Mugs Per Day Per Day
0 $10
1 $14
2 $19
3 $25
4 $32
5 $40
6 $49
36
Chris’s fixed cost is ______ per day.
A. $0
B. $10
C. $39
D. $49
Ans: B
Blooms: Understand
Feedback: His fixed cost is his total cost when output is zero, $10 per day.

0 $10
1 $14
2 $19
3 $25
4 $32
5 $40
6 $49
The marginal cost if the 4th mug per day is ______.

A. $5
B. $7
C. $8
D. $32
Ans: B
Difficulty: 03 Hard
Blooms: Apply
AACSB: Analytic
Feedback: When Chris goes from making 3 to 4 mugs per day, his total cost increases from $25
to $32, so the marginal cost of the 4th mug is $7 (= $32 - $25).

37
0 $10
1 $14
2 $19
3 $25
4 $32
5 $40
6 $49
If the market for mugs is perfectly competitive, and mugs sell for $7.50 each, then Chris should
make ______ mugs per day.
A. 0
B. 4
C. 5
D. 6
Ans: B
Difficulty: 03 Hard
Blooms: Analyze
AACSB: Analytic
Feedback: Chris should continue to expand output as long as price is at least as great as marginal
cost. The marginal cost of each of the first 4 mugs is less than $7.50, but the marginal cost of the
5th mug is $8. Since $8 is greater than $7.50, Chris will only produce 4 mugs per day. [Note that
at 4 mugs per day, Chris’s total revenue ($30 = $7.50  4) is sufficient to cover his variable cost
($22 = $32 - $10), so she will not shut down.]

0 $10
1 $14
2 $19
3 $25
4 $32
5 $40
6 $49
If the market for mugs is perfectly competitive, and mugs sell for $7.50 each, then at his profit-
maximizing level of output, Chris will earn a ______ of ______ per day.
A. loss; $2
B. loss; $10
C. profit; $2
D. profit; $30
Ans: A
38
Difficulty: 03 Hard
Blooms: Analyze
AACSB: Analytic
Feedback: Profit equals total revenue minus his total cost. When Chris makes 4 mugs a day (his
profit-maximizing level of output), his total revenue equals $30 (= $7.50  4), and his total cost
is $32. Thus, Chris will earn a loss of $2 per day.
100. Suppose Chris is a potter who makes mugs. His total costs depend on the number of mugs
he makes each day, as shown in the table below.

0 $10
1 $14
2 $19
3 $25
4 $32
5 $40
6 $49
If Chris’s fixed costs decrease, then in the short run his profit-maximizing level of output will:
A. not change.
B. increase.
C. decrease.
D. only increase if he can earn a positive profit.
Ans: A
Blooms: Analyze
AACSB: Analytic
Feedback: Since a change in fixed cost will have no effect on the cost of producing an additional
unit of output, Chris’s profit-maximizing level of output will not change.
101. Suppose Sarah owns a small company that makes wedding cakes. The table below shows
how Sarah’s total cost varies depending on the number of wedding cakes she makes each day.

Cakes Per Day Per Day
0 $100
1 $180
2 $220
3 $300
39
4 $400
5 $520
6 $660
Sarah’s fixed cost is ______ per day.

A. $10
B. $20
C. $100
D. $200
Ans: C
Blooms: Understand
Feedback: Her fixed cost is her total cost when output is zero, $100 per day.

0 $100
1 $180
2 $220
3 $300
4 $400
5 $520
6 $660
The marginal cost if the 4th wedding cake per day is ______.
A. $100
B. $120
C. $300
D. $400
Ans: A
Difficulty: 03 Hard
Blooms: Apply
AACSB: Analytic
Feedback: When Sarah goes from making 3 to 4 wedding cakes per day, her total cost increases
from $300 to $400, so the marginal cost of the 4th wedding cake is $100 (= $400 - $300).
40

0 $100
1 $180
2 $220
3 $300
4 $400
5 $520
6 $660
If the market for wedding cakes is perfectly competitive, and wedding cakes sell for $95 each,
then Sarah should produce ______ cakes per day.
A. 0
B. 3
C. 5
D. 6
Ans: B
Difficulty: 03 Hard
Blooms: Analyze
AACSB: Analytic
Feedback: Sarah should continue to expand output as long as price is at least as great as marginal
cost. The marginal cost of each of the first 3 wedding cakes is less than $95, but the marginal
cost of the 4th wedding cake is $100. Since $100 is greater than $95, Sarah will only produce 3
wedding cakes per day. [Note that at 3 wedding cakes per day, Sarah’s total revenue ($285) is
sufficient to cover her variable cost ($200 = $300 - $100), so she will not shut down.]

0 $100
1 $180
2 $220
3 $300
4 $400
5 $520
6 $660
then at her profit-maximizing level of output, Sarah will earn a ______ of ______ per day.
41
A. loss; $100
B. loss; $15
C. profit; $15
D. profit; $285
Ans: B
Difficulty: 03 Hard
Blooms: Analyze
AACSB: Analytic
Feedback: Profits equals total revenue minus total cost. When Sarah makes 3 wedding cakes a
day (her profit-maximizing level of output), her total revenue equals $285 (= 3  $95), and her
total cost is $300. Thus, Sarah will earn a loss of $15 per day.

0 $100
1 $180
2 $220
3 $300
4 $400
5 $520
6 $660
then Sarah should produce ______ cakes per day.
A. 0
B. 3
C. 5
D. 6
Ans: C
Difficulty: 03 Hard
Blooms: Analyze
AACSB: Analytic
Feedback: Sarah should continue to expand output as long as price is at least as great as marginal
cost. The marginal cost of each of the first 5 wedding cakes is less than $125, but the marginal
cost of the 6th wedding cake is $140. Since $140 is greater than $125, Sarah will only produce 5
wedding cakes per day. [Note that at 5 wedding cakes per day, Sarah’s total revenue ($625) is
sufficient to cover her variable cost ($420), so she will not shut down.]
42

0 $100
1 $180
2 $220
3 $300
4 $400
5 $520
6 $660
then at her profit-maximizing level of output, Sarah’s profit will be ______ per day.
A. $90
B. $100
C. $105
D. $625
Ans: C
Difficulty: 03 Hard
Blooms: Analyze
AACSB: Analytic
Feedback: Profit equals total revenue minus total cost. When Sarah makes 5 wedding cakes a
day (her profit-maximizing level of output), her total revenue equals $625, and her total cost is
$520. Thus, her profits will be $105 per day.

0 $100
1 $180
2 $220
3 $300
4 $400
5 $520
6 $660
If Sarah’s fixed costs double, then in the short run, her profit-maximizing level of output:
A. will shrink to zero if she starts earning a loss.
B. will increase.
43
C. will decrease.
D. will not change.
Ans: D
Difficulty: 03 Hard
Blooms: Analyze
AACSB: Analytic
Feedback: Since a change in fixed cost will have no effect on the cost of producing an additional
unit of output, Sarah’s profit-maximizing level of output will not change.
110. When Acme Dynamite produces 250 units of output, its variable cost is $2,000, and its
fixed cost is $500. It sells each unit of output for $25. When Acme Dynamite produces 250 units
of output, its profit is:
A. $6,250
B. $5,750
C. $4,250
D. $3,750
Ans: D
Difficulty: 03 Hard
Blooms: Apply
AACSB: Analytic
Feedback: Profit equals total revenue minus total cost. Here, TR = P × Q = 250 × $25 = $6,250,
and TC = TVC + TFC = $2000 + $500 = $2,500, so profit is $6,250 - $2,500 = $3,750.
112. In general, perfectly competitive firms maximize their profit by producing the level of
output at which:
A. marginal cost is minimized.
B. total cost is minimized.
C. total cost equals total revenue.
D. marginal cost equals price.
Ans: D
Difficulty: 01 Easy
Blooms: Remember
Feedback: The rule for profit maximization follows from the Cost-Benefit Principle: a firm
should continue to produce output as long as price is at least as great as marginal cost.
113. If a perfectly competitive firm produces an output level at which price is greater than
marginal cost, then the firm should:
A. employ more fixed factors of production.
44
B. reduce output to earn greater profits or smaller losses.
C. expand output to earn greater profits or smaller losses.
D. leave its output decision unchanged because it is earning a profit.
Ans: C
Blooms: Understand
Feedback: If the price is greater than marginal cost, the firm should increase output because the
revenue generated from selling an additional unit is greater than the cost of producing an
additional unit.
114. If a perfectly competitive firm produces an output level at which price is less than marginal
costs, then the firm should:
A. raise its price.
B. reduce output to earn greater profits or smaller losses.
C. expand output to earn greater profits or smaller losses.
D. leave its output level unchanged provided it is covering its variable cost.
Ans: B
Blooms: Understand
Feedback: If price is less than marginal cost, then the firm should decrease output because the
revenue generated from the last unit produced was less than the cost of producing the last unit.
146. If a perfectly competitive firm can sell each unit of output for $9, and the marginal cost of
the last unit produced is $8.50, then the:
A. extra benefit of the last unit produced is less than the extra cost.
B. firm should lower its output level in order to increase profits.
C. firm is earning an average profit of $0.50.
D. extra benefit of the last unit produced is greater than the extra cost.
Ans: D
Blooms: Understand
Feedback: For a perfectly competitive firm, the extra benefit of the last unit produced is the
revenue the firm generates from selling it. So, here, the added benefit of $9.00 is greater than the
added cost of $8.50.
45
115. An increase in the price a firm receives for its output will lead the firm to:
A. expand output.
B. leave output unchanged and earn greater profits.
C. leave output unchanged and earn smaller losses.
D. reduce output.
Ans: A
Blooms: Understand
Feedback: As price increases, a profit-maximizing firm will expand output up to the point where
marginal cost is again equal to price.
116. A decrease in the price a firm receives for its output will lead the firm to:
A. expand output.
B. cut its payments to its factors of production.
C. leave output unchanged.
D. reduce output.
Ans: D
Blooms: Understand
Feedback: As price increases, a profit-maximizing firm will reduce output down to the point
where marginal cost is again equal to price.
117. Suppose a perfectly competitive firm is producing 37 units output, and the marginal cost of
the 37th unit is $3. If the firm can sell each unit of output for $5 and the firm’s revenue is
sufficient to cover its variable cost, the firm should:
A. lower its price.
B. decrease production.
C. increase production.
D. raise its price.
Ans: C
Difficulty: 03 Hard
Blooms: Apply
AACSB: Analytic
Feedback: If price is greater than marginal cost, then the revenue gained from selling an
additional unit is greater than the cost of producing an additional unit. Thus, the firm should
expand output (provided the firm’s revenue is sufficient to cover its variable cost).
46
118. Suppose a perfectly competitive firm is producing 77 units of output, and the marginal cost
of the 77th unit is 11. If the firm can sell each unit of output for $8 and the firm’s revenue is
sufficient to cover its variable cost, the firm should:
A. lower its price.
B. decrease production.
C. increase production.
D. raise its price.
Ans: B
Difficulty: 03 Hard
Blooms: Apply
AACSB: Analytic
Feedback: If price is less than marginal cost, then the revenue gained from selling the last unit
was less than the cost of producing the last unit. Thus, the firm should reduce output.
119. Suppose a perfectly competitive firm is producing 1,000 units of output and the marginal
cost of the 1,000th unit is $7. If the firm can sell each unit of output for $7 and the firm’s
revenue is sufficient to cover its variable cost, the firm should:
A. leave production unchanged.
B. increase price to increase profits.
C. increase production to increase profits.
D. decrease production to lower losses.
Ans: A
Difficulty: 03 Hard
Blooms: Apply
AACSB: Analytic
Feedback: Firms should expand output until price is equal to marginal cost. In this case, price
equals marginal cost, so the firm is maximizing its profits (provided its revenue is sufficient to
cover its variable cost).
125. A profit-maximizing firm will only produce a positive amount of output if:
A. its total revenue is greater than its total cost.
B. its total revenue is greater than its fixed cost.
C. its total revenue equals its total cost.
D. its total revenue is greater than or equal to its variable cost.
Ans: D
Blooms: Understand
Feedback: A firm must be able to earn enough revenue to cover its variable cost.
47
136. When the price of a perfectly competitive firm’s output rises:
A. the firm will produce more.
B. the firm’s marginal cost curve will shift to the right.
C. the firm will produce less.
D. the firm’s marginal cost curve will shift to the left.
Ans: A
Blooms: Understand
Feedback: Since the marginal cost curve is upward sloping (due to diminishing returns), the firm
will produce more and the price of its output rises.
138. A technological innovation that reduces a firm’s marginal cost will lead to:
A. an increase in the quantity supplied by the firm, but no change in the firm’s supply.
B. an increase in the firm’s supply.
C. a decrease in the quantity supplied by the firm, but no change in the firm’s supply.
D. a decrease in the firm’s supply.
Ans: B
Topic: Determinants of Supply Revisited
Blooms: Understand
Feedback: A reduction in marginal cost is equivalent to a rightward shift in the supply curve (that
is, an increase in supply).
139. If crude oil is a variable factor of production for a firm, then an increase in the price of
crude oil will lead to:
A. a decrease in the quantity supplied by the firm, but no change in the firm’s supply.
B. a decrease in the firm’s supply.
C. an increase in the quantity supplied by the firm, but no change in the firm’s supply.
D. an increase in the firm’s supply.
Ans: B
Blooms: Understand
Feedback: An increase in the price of a variable factor of production increases a firm's marginal
cost, leading to a decrease in supply.
48
140. When more firms enter an industry:
A. the amount produced by each of the new firms will be greater than the amount produced by
each of the original firms.
B. the industry supply curve will shift left.
C. the amount produced by each of the new firms will be less than the amount produced by each
of the original firms.
D. the industry supply curve will shift right.
Ans: D
Difficulty: 01 Easy
Blooms: Remember
Feedback: More suppliers increase the market supply.
141. Assume that the production technology required to produce goods X and Y is very similar.
If a firm that is producing good X notices that the market price of good Y is rising, it will:
A. intensify its production of good X.
B. shift into producing good Y.
C. anticipate a price increase for good X.
D. charge a higher price for good X.
Ans: B
Blooms: Understand
Feedback: When the price of a similar good increases, firms have an incentive to produce more
of the now higher-priced good.
142. Which of the following will cause an increase market supply?

A. A decrease in the number of firms in the market.
B. An increase in demand for the good.
C. A technological innovation that lowers the marginal cost of producing the good.
D. An increase in the price of the good.
Ans: C
Blooms: Understand
Feedback: A reduction in marginal cost will lead to an increase in supply
143. Which of the following will cause a decrease the supply of jeans?
A. An increase in the wages paid to workers who make jeans.
B. A decrease in the demand for jeans.
49
C. A decrease in the price of jeans.
D. A decrease in the expected future price of jeans.
Ans: A
Blooms: Understand
Feedback: An increase in the price of a variable factor of production will increase a firm's
marginal cost, thereby reducing its supply.
144. An increase in consumers’ demand for espresso will lead to an increase in ______, while an
increase in the number of firms producing espresso will lead to a(n) ______.
A. quantity supplied; decrease in supply
B. supply; increase in quantity supplied
C. quantity supplied; increase in supply
D. supply; decrease in supply
Ans: C
Blooms: Understand
Feedback: An increase in demand would lead to an increase in quantity supplied because the
product price would increase. An increase in the number of firms producing espresso would lead
to an increase in supply.
145. As price increases, firms in a perfectly competitive market find that it is:
A. beneficial to produce more units of output.
B. more difficult to sell their product.
C. beneficial to produce fewer units of output.
D. easier to sell their product.
Ans: A
Difficulty: 01 Easy
Blooms: Remember
Feedback: As price increases, firms in a perfectly competitive market find that it is beneficial to
produce more units of output because price now equals marginal cost at a higher level of output.
129. The percentage change in quantity supplied that results from a 1 percent change in price is
known as the:
A. cross-price elasticity of supply.
50
B. slope of the supply curve.
C. price elasticity of supply
D. cross-price elasticity of demand
Ans: C
Difficulty: 01 Easy
Topic: The Price Elasticity of Supply
Blooms: Remember
Feedback: Price elasticity of supply is the percentage change in quantity supplied that occurs in
response to a 1 percent change in price.
130. The price elasticity of supply at a point is:

A. the percentage change in quantity supplied divided by the percentage change in price.
B. the percentage change in price divided by the percentage change in quantity supplied.
C. the change in quantity supplied divided by the change in price.
D. the change in price divided by the change in quantity supplied.
Ans: A
Difficulty: 01 Easy
Blooms: Remember
Feedback: The price elasticity of supply at a point is the percentage change in quantity supplied
divided by the percentage change in price.
131. If a one percent increase in the price of oranges leads to a five percent increase in the
quantity supplied, the price elasticity of supply for oranges is ______.
A. 1/5
B. 1/2
C. 5
D. 2
Ans: C
Blooms: Understand
divided by the percentage change in price.
132. Suppose an increase in the price of golf clubs from $75 to $125 leads to an increase in
quantity supplied from 200 units to 300 units. The price elasticity of supply for golf clubs at the
original price of $75 is ______, so supply is ______.
A. 2; elastic
B. 2; inelastic
51
C. 4/3; elastic
D. 3/4; inelastic
Ans: D
Difficulty: 03 Hard
Blooms: Apply
AACSB: Analytic
(ΔQ/Q) divided by the percentage change in price (ΔP/P). This can be expressed as
(ΔQ/Q)/(ΔP/P) or (ΔQ/ΔP)×(P/Q). Using the last formula, we have (100/50)×(75/200), which
yields 3/4 (or, 0.75), indicating that supply is inelastic with respect to price.
133. Suppose an increase in the price of hamburger from $3 to $4 leads to an increase in quantity
supplied from 100 units to 150 units. At the original price, the price elasticity of supply for
hamburgers is ______ so supply is ______.
A. 2/3; elastic
B. 2/3; inelastic
C. 3/2; elastic
D. 3/2; inelastic
Ans: C
Difficulty: 03 Hard
Blooms: Apply
AACSB: Analytic
Feedback: Price elasticity of supply at a point is the percentage change in quantity supplied
(ΔQ/Q) divided by the percentage change in price (ΔP/P). This can be expressed as
(ΔQ/Q)/(ΔP/P) or as (ΔQ/ΔP)×(P/Q). Using the last formula, we have (50/1)×(3/100), which
yields 3/2 (or, 1.5), indicating that supply is elastic with respect to price.
134. Refer to the figure below. What is the slope of the supply curve?
52
A. 4
B. 2
C. 1/2
D. 1
Ans: C
Difficulty: 03 Hard
Blooms: Apply
AACSB: Analytic
Feedback: Slope is computed as rise/run.
135. Refer to the figure below. What is the price elasticity of supply at point A?
A. 4
B. 2
C. 1
D. 1/2
Ans: C
Difficulty: 03 Hard
53
Blooms: Apply
AACSB: Analytic
Refer to: Ch4Ref5
Feedback: The price elasticity of supply is (P/Q)  (1/slope). Here, (2/4)  (1/0.5) = 1.
136. Refer to the figure below. What is the price elasticity of supply at point B and point C?
A. 1/2; 3/4
B. 3/4; 1/2
C. 3; 2
D. 1; 1
Ans: D
Difficulty: 03 Hard
Blooms: Apply
AACSB: Analytic
Feedback: The price elasticity of supply is (P/Q)  (1/slope). For a linear supply curve, (1/slope)
is the same at every point, and the ratio P/Q remains the same as Q increases (2/4 = 4/8 = 6/12).
Thus, the elasticity of supply is the same at every point along this supply curve.
137. Refer to the figure below. If P = $6, then the price elasticity of supply is:
54
A. less than zero
B. positive, but less than one
C. one
D. greater than one
Ans: D
Difficulty: 03 Hard
Blooms: Apply
AACSB: Analytic
Feedback: The price elasticity of supply computed as (P/Q)  (1/slope). The slope of this supply
curve is 1/50, so the reciprocal of the slope is 50. Thus, if P=6, the price elasticity of supply
equals (6/100)  (50) = 3, which is clearly greater than 1.
138. Refer to the figure below. If the price rises from $10 to $14, what will happen to the price
elasticity of supply?
55
A. It increases.
B. It decreases.
C. It stays the same.
D. This cannot be determined from the information provided.
Ans: B
Difficulty: 03 Hard
Blooms: Apply
AACSB: Analytic
Feedback: The price elasticity of supply computed as (P/Q)  (1/slope). Note that as price rises
from $10 to $14, P/Q falls, and since slope is constant along a linear supply curve, this implies
that the price elasticity of supply falls as price rises from $10 to $14.
139. It takes many years to train to become an orthopedic surgeon. This suggests that, in the
short run, a sudden increase in the demand for orthopedic surgeons will:
A. not affect the salaries of orthopedic surgeons.
B. have no impact on the number of people who decide to become orthopedic surgeons.
C. lead to a large increase in the number of orthopedic surgeons.
D. have little effect on the number of trained orthopedic surgeons.
Ans: D
Difficulty: 03 Hard
Blooms: Analyze
AACSB: Analytic
Feedback: Given that it takes many years to train to become an orthopedic surgeon, the supply of
orthopedic surgeons will be relatively inelastic in the short run. Thus, in the short run, an
increase in the demand for orthopedic surgeons will have only a small impact on the number of
trained orthopedic surgeons.
56
140. The inputs used to produce cupcakes (e.g., flour, sugar, butter, and labor) are also used to
produce cookies, cakes, muffins, pies and many other goods. This suggests that:
A. the supply curve for cupcakes is downward sloping.
B. the elasticity of supply of cupcakes is relatively high.
C. the elasticity of supply of cupcakes is relatively low.
D. cupcakes are a normal good.
Ans: B
Blooms: Understand
Feedback: If the production of a good requires inputs that are also useful in the production of
other goods, then the elasticity of supply for that good will be relatively high.
141. The price elasticity of supply for the Hope Diamond is zero because there is only one.
Therefore, the supply curve for the Hope Diamond is
A. elastic.
B. perfectly inelastic.
C. unit elastic.
D. perfectly elastic.
Ans: B
Blooms: Understand
Feedback: If the price elasticity of supply is zero, supply is perfectly inelastic.
142. Suppose that each serving of Mac & Cheese costs $0.50 to make no matter how many
servings are produced. This means that the price elasticity of supply for Mac & Cheese is ______
and the supply curve is ______.
A. one; perfectly inelastic
B. zero; perfectly elastic
C. infinite; perfectly inelastic
D. infinite; perfectly elastic
Ans: D
Difficulty: 03 Hard
Blooms: Analyze
AACSB: Analytic
Feedback: In this case, the supply curve is horizontal at P = $0.50, so supply is perfectly elastic
with respect to price and the elasticity of supply is infinite.
143. Antony's Pizza uses the same dough, sauce, and cheese for pizza and calzones. When the
price of pizza is low Antony produces more calzones. For Antony, the supply of pizza is ______
57
compared to the supply at a pizza restaurant that does not serve calzones.
A. less price elastic
B. more price elastic
C. higher
D. lower
Ans: B
Difficulty: 03 Hard
Blooms: Analyze
AACSB: Analytic
Feedback: Supply is more elastic for Antony than at a restaurant that does not serve calzones
because Antony can more easily respond to an increase in the price of pizza by shifting away
from producing calzones to producing pizza.
144. Oil and oil products remain the main fuel for cars, planes, ships, and power plants. The
amount of oil still in the earth is finite. Given this information, the supply of gasoline is ______.
A. relatively elastic
B. relatively inelastic
C. unit elastic
D. greater than the quantity demanded
Ans: B
Blooms: Understand
Feedback: Supply is relatively inelastic because supply is finite.
145. The championship game will be held next weekend in your college's 40,000-seat stadium.
The supply of tickets to the game:
A. will increase because the price charged will be higher.
B. is elastic.
C. is perfectly inelastic.
D. depends on which teams make it to the championship game.
Ans: C
Blooms: Understand
Feedback: The supply of tickets is perfectly price inelastic because the supply curve is vertical at
the 40,000 seat capacity. That is, a change in price cannot change quantity supplied, at least in
the short run.
58
146. For Outback Steakhouse, seating capacity is limited in the short run. In the long run, they
can add as many seats as they want. Therefore, the price elasticity of supply for meals at Outback
would be ______ in the short run than in the long run.
A. higher
B. lower
C. the same
D. more variable
Ans: B
Difficulty: 03 Hard
Blooms: Analyze
AACSB: Analytic
Feedback: The price elasticity of supply is lower in the short run because the quantity supplied
cannot be quickly changed in response to a price change.
147. You read online that, at current rates of production, the yearly world supply of food is
sufficient to feed the projected 2050 population of earth, but that after 2050 there will be massive
starvation. This prediction appears to assume that:
A. the long-run supply of food is perfectly elastic.
B. the long-run supply of food is perfectly inelastic.
C. the short-run supply of food is perfectly elastic.
D. the short-run elasticity of supply of food is greater than long-run elasticity of supply.
Ans: B
Difficulty: 03 Hard
Blooms: Apply
AACSB: Analytic
Feedback: This prediction appears to assume that the long-run supply of food is perfectly
inelastic. Otherwise, as increases in the earth’s population increase the demand for food, this
should increase the price of food, leading to an increase in the quantity supplied (unless the
supply of food is perfectly inelastic).
148. In 1985 a desert community stopped pumping water from a 1000 foot well because it had
run dry. In 2005 the price of water doubled. The community then drilled the well deeper and
started pumping again. In this community,
A. the supply of water is perfectly inelastic because it is a finite resource.
B. water production is characterized by increasing opportunity costs.
C. markets cannot reach equilibrium because there is a persistent shortage of water.
D. higher water prices can reduce quantity demanded but cannot increase quantity supplied.
Ans: B
Difficulty: 03 Hard
59
Blooms: Apply
AACSB: Analytic
Feedback: A deeper well is more costly to dig and utilize. Thus, in 1985, the benefit of
additional lower-priced water was not worth the added cost of a deeper well, but at the higher
2005, apparently the benefit of the additional now higher-price water was greater than the
additional cost of a deeper well.
60

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Principles of Microeconomics Brief Edition 3rd Edition Frank Test Bank 1

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Principles of Microeconomics Brief

Edition 3rd Edition Frank Test Bank

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Solution Manual: https://testbankpack.com/p/solution-

File: Chapter 005 Perfectly Competitive Supply

1. A rational seller will sell another unit of output:

Hours Per Total Number

What is John's opportunity cost of cleaning windows for an hour?

Hours Per Total Number

John’s benefit from his first hour cleaning windows is:

Hours Per Total Number

Hours Per Total Number

A second hour cleaning windows will yield additional earnings of ______.

Hours Per Total Number

Should John spend a third hour cleaning windows?

Hours Per Total Number

How many hours a day should John spend cleaning windows?

Hours Per Total Number

Hours Per Total Number

Hours Per Total Number

17. A seller’s supply curve shows the seller’s:

18. Individual supply curves generally slope ______ because ______.

20. The primary objective of most private firms is to:

26. Which of the following is NOT true of a perfectly competitive firm?

27. Which of the following is NOT a characteristic of a perfectly competitive market?

31. A price-taker faces a demand curve that is:

33. An imperfectly competitive firm is one that:

34. A profit-maximizing perfectly competitive firm must decide:

39. The short run is best defined as:

40. A fixed factor of production:

41. A variable factor of production:

42. The long run is best defined as:

60. If a production process exhibits diminishing returns, then as output rises:

62. In general, when the price of a variable factor of production increases:

64. Suppose a profit-maximizing firm in a perfectly competitive market is earning an economic

65. Suppose a profit-maximizing firm in a perfectly competitive market is collecting $1,999 in

This firm’s fixed cost each day is:

When the firm uses 9 employee-hours, it earns a daily ______ of ______.

Number of Output Per

Number of Fixed Cost Variable Cost

Number of Fixed Cost Variable Cost

Number of Fixed Cost Variable Cost

90. If a firm shuts down in the short run, then its:

Number of Total Cost

Number of Total Cost

The marginal cost if the 4th mug per day is ______.

Number of Total Cost

Number of Total Cost

Number of Total Cost

Number of Total Cost

Sarah’s fixed cost is ______ per day.

Number of Total Cost

Number of Total Cost

Number of Total Cost

Number of Total Cost

Number of Total Cost

Number of Total Cost

142. Which of the following will cause an increase market supply?

130. The price elasticity of supply at a point is:

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18. Individual supply curves generally slope because .

When the firm uses 9 employee-hours, it earns a daily of .