Economics 2nd Edition Hubbard Test Bank

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Economics, 2e Updated (Hubbard/O'Brien) - Testbank 2
Chapter 11 Firms in Perfectly Competitive Markets
11.1 Perfectly Competitive Market
1) Which of the following arguments was used in the textbook as evidence that the market for organically
grown apples is perfectly competitive?
A) The U.S. Department of Agriculture has established standards for the labeling of organic apples.
B) In 1997, organically grown applies sold for a price 50 percent higher than the price of regular apples.
C) Between 1997 and 2001, many apple farmers switched to growing organically grown apples. The
increased supply forced down prices and made growing organically grown apples no more profitable
than growing other apples.
D) As organically grown apples became more popular with consumers in the 1990s, apple farmers in the
Yakima Valley of Washington State began to grow more organically grown apples because the absence of
insects there made it an ideal location.
Answer: C
Diff: 2 Page Ref: 376-7/376-7
Topic: Characteristics of perfectly competitive firms
Skill: Conceptual
Objective: LO1: Define a perfectly competitive market, and explain why a perfect competitor faces a horizontal
demand curve
AACSB: Reflective Thinking
Special Feature: Chapter Opener: Perfect Competition in the Market for Organic Apples
2) Which of the following characteristics of the market for organically grown apples make it a good
example of a perfectly competitive market?
A) Growing organic apples was very profitable for farmers in the 1990s. As result, many farmers sold
their farms to larger firms.
B) Organic apple farmers are similar to other entrepreneurs who introduce new products that earn short-
run profits but invite competition that drives down prices and profits in the long run.
C) Apple farmers 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) Apple growers provide a product that is a necessity, rather than a luxury.
Answer: B
Diff: 2 Page Ref: 376-7/376-7
Skill: Conceptual
demand curve
Special Feature: Chapter Opener: Perfect Competition in the Market for Organic Apples
1
Copyright © 2009 Pearson Education, Inc.
3) 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.
Answer: D
Diff: 1 Page Ref: 379/379
Skill: Conceptual
demand curve
Special Feature: None
4) 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.
Answer: A
Topic: Market structures
Skill: Fact
demand curve
5) A perfectly competitive firm faces a demand curve that is

A) horizontal.
B) vertical.
C) perpendicular to the quantity axis.
D) perfectly inelastic.
Answer: A
Diff: 1 Page Ref: 379-80/379-80
Topic: Horizontal demand curve
Skill: Conceptual
demand curve
2
6) 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.
Answer: D
Diff: 1 Page Ref: 378-9/378-9
Skill: Conceptual
demand curve
7) 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.
Answer: C
Skill: Conceptual
demand curve
8) 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.
Answer: B
Diff: 2 Page Ref: 379-80/379-80
Skill: Conceptual
demand curve
3
9) A perfectly competitive firm has to charge the same price as every other firm in the market. Therefore,
the firm
A) faces a perfectly inelastic demand curve.
B) is not able to make a profit in the short run.
C) is a price taker.
D) faces a perfectly elastic supply curve.
Answer: C
Diff: 1 Page Ref: 379-80/379-80
Topic: Price taker
Skill: Definition
demand curve
10) Which of the following is not an assumption of perfectly competitive markets?

A) There are many sellers and many buyers, all of which are small relative to the market.
B) Each firm produces a similar but not identical product.
C) There are no barriers to new firms entering the market.
D) The products sold by all firms in the market are identical.
Answer: B
Skill: Definition
demand curve
11) In a perfectly competitive market the term "price taker" applies to

A) sellers and buyers.
B) firms but not buyers.
C) buyers but not sellers.
D) only the smallest sellers and buyers.
Answer: A
Diff: 1 Page Ref: 379-80/379-80
Topic: Price taker
Skill: Conceptual
demand curve
4
12) Which of the following describes the difference between the market demand curve for a perfectly
competitive industry and the demand curve for a firm in this industry?
A) The market demand curve is a horizontal line; the firm's demand curve is downward-sloping.
B) The market demand curve is downward-sloping; the firm's demand curve is a vertical line.
C) The market demand curve can not have a constant slope; the firm's demand curve has a slope equal to
zero.
D) The market demand curve is downward-sloping; the firm's demand curve is a horizontal line.
Answer: D
Diff: 2 Page Ref: 380-1/380-1
Topic: Demand curves in perfectly competitive industries
Skill: Conceptual
demand curve
13) The price a perfectly competitive firm receives for its output
A) is determined by the interaction of the firm and all of the consumers who buy from the firm.
B) is determined by the interaction of all sellers and all buyers in the firm's market.
C) will not change in response to changes in market demand and supply because the firm is a price taker.
D) will be lowered by the firm in order to sell more output.
Answer: B
Skill: Conceptual
demand curve
14) Which of the following is the best example of a perfectly competitive firm?
A) a corn farmer in Illinois
B) a Taco Bell restaurant
C) the Ford Motor Company
D) the United Parcel Service (UPS)
Answer: A
Diff: 1 Page Ref: 378-1/378-1
Skill: Conceptual
demand curve
5
15) Suppose the equilibrium price in a perfectly competitive industry is $10 and a firm in the industry
charges $12. Which of the following will happen?
A) The firm will sell more output than its competitors.
B) The firm's revenue will increase.
C) The firm will not sell any output.
D) The firm's profits will increase.
Answer: C
Diff: 1 Page Ref: 379-80/379-80
Skill: Conceptual
demand curve
16) Firms that are price takers

A) must lower their prices to increase sales.
B) are able to sell a fixed quantity of output at the market price.
C) can raise their prices as a result of a successful advertising campaign.
D) are able to sell all their output at the market price.
Answer: D
Diff: 1 Page Ref: 379-80/379-80
Topic: Price taker
Skill: Definition
demand curve
17) Firms in perfect competition are price takers because

A) one firm determines the price that all other firms in the industry will charge.
B) consumers have enough market power to set prices.
C) firms accept the price determined by the government.
D) each firm is too small relative to the market to be able to influence price.
Answer: D
Diff: 1 Page Ref: 379-80/379-80
Skill: Conceptual
demand curve
6
18) A wheat farmer and a firm in a perfectly competitive market are similar in that
A) both face vertical demand curves.
B) both have to lower their prices if a rival firm lowers its price.
C) both face horizontal demand curves.
D) both will earn an economic profit if their total revenue equals their total cost.
Answer: C
Skill: Conceptual
demand curve
Special Feature: Don't Let This Happen to YOU!: Don't Confuse the Demand Curve for Farmer Parker's Wheat with
the Market Demand Curve for Wheat
19) Which of the following offers the best reason why restaurants are not considered to be perfectly
competitive firms?
A) Restaurants do not sell identical products.
B) Restaurants compete in small market areas - neighborhoods and cities - rather than in regional or
national markets. Therefore, restaurants are not small relative to their market size.
C) Restaurants usually have entry barriers in the form of zoning restrictions and health regulations.
D) Restaurants have significant liability costs that perfectly competitive firms do not have; for example,
customers may sue if they suffer from food poisoning.
Answer: A
Diff: 2 Page Ref: 378-80/378-80
Skill: Conceptual
demand curve
20) The market demand curve in a perfectly competitive market is downward-sloping.

Answer: TRUE
Diff: 1 Page Ref: 380-1/380-1
Skill: Conceptual
demand curve
7
21) What assumptions are necessary for a market to be perfectly competitive? Explain why each of these
assumptions is important.
Answer: The assumptions necessary for a market to be perfectly competitive are:
1. There are many buyers and sellers, all of whom are small relative to the market. This assumption
ensures that each seller (or firm) and buyer is a price taker. A price taker cannot affect the market price.
2. All firms sell identical products. This condition excludes the possibility of any product differences
which might justify different prices. Because the consumer cannot differentiate between products of
different producers, any firm that charges a higher price will lose all its customers.
3. No barriers to new firms entering the market or exiting the market. This assumption guarantees that
economic profits earned in the short run will be eliminated in the long run. In the long run, perfectly
competitive firms will break even.
Diff: 2 Page Ref: 379-81/379-81
Skill: Conceptual
demand curve
22) Of the following industries, which are perfectly competitive? For those that are not perfectly
competitive, explain why.
a. Restaurants
b. Corn
c. College education
d. Local radio and television
Answer:
a. Restaurants are not perfectly competitive. Although cities typically have many restaurants for
consumers to choose from, they do not sell identical products. They also differ in the services they offer
their customers. Some restaurants have take-out windows, some have servers while others (McDonald's,
Burger King) require customers to pick up their own orders.
b. The market for corn (and other agricultural commodities) is a perfectly competitive market. Each
buyer and seller is small relative to the total market. Although there are varieties of corn (for example
"number 2" corn) within these varieties one farmer's corn is indistinguishable from any other farmer's
corn.
c. The market for a college education is not perfectly competitive. This is an example of a market that
offers consumers (students) a differentiated product. Colleges and universities differ in size, amenities,
quality of instruction, location, and many other factors.
d. Local radio and television markets are not perfectly competitive. Radio and television stations do not
offer identical products. Some radio stations broadcast only classical music, while others play classic rock,
alternative rock, country music, etc. Television stations also offer different programming including
movies, sports, news, etc.
Diff: 2 Page Ref: 378-9/378-9
Skill: Conceptual
demand curve
8
11.2 How a Firm Maximizes Profits in a Perfectly Competitive Market.
1) To maximize profit, a perfectly competitive firm

A) should sell the quantity of output determined by the interaction between industry demand and
supply.
B) should sell the quantity of output that results in a value for total revenue that is equal to total cost.
C) should produce the quantity of output that results in the greatest difference between total revenue and
total cost.
D) should produce the quantity of output that results in the greatest difference between marginal revenue
and marginal cost.
Answer: C
Diff: 1 Page Ref: 381-4/381-4
Topic: Profit-maximizing level of output
Skill: Conceptual
Objective: LO2: Explain how a firm maximizes profits in a perfectly competitive market
2) For a perfectly competitive firm, average revenue is equal to

A) marginal cost.
B) the market price.
C) total revenue.
D) average fixed cost.
Answer: B
Topic: Average revenue and marginal revenue
Skill: Conceptual
3) For a firm in a perfectly competitive market, price is

A) equal to both average revenue and marginal revenue.
B) equal to average revenue but greater than marginal revenue.
C) greater than marginal revenue but less than average revenue.
D) less than both average revenue and marginal revenue.
Answer: A
Skill: Conceptual
9
4) Marginal revenue is
A) total revenue divided by the total quantity of output.
B) the change in profit divided by the change in the quantity of output.
C) the change in total revenue divided by the change in total cost.
D) the change in total revenue divided by the change in the quantity of output.
Answer: D
Skill: Conceptual
5) In a graph that illustrates a perfectly competitive firm, marginal revenue is

A) a diagonal line that lies below the firm's demand curve.
B) a line that intersects the firm's demand curve from below at its lowest point.
C) a line that intersects the firm's average total cost curve from below at its lowest point.
D) the same as the firm's demand curve.
Answer: D
Diff: 1 Page Ref: 382-4/382-4
Skill: Analytical
AACSB: Analytic Skills
6) The marginal revenue curve for a perfectly competitive firm

A) is downward-sloping.
B) is the same as its demand curve.
C) is perfectly inelastic.
D) is the same as its marginal cost curve.
Answer: B
Skill: Conceptual
10
7) Mark Frost grows apples in a perfectly competitive market. If we drew a line in a graph that illustrates
Mark's total revenue from selling apples, it would be
A) a straight, upward-sloping line.
B) a horizontal line.
C) a straight, downward-sloping line.
D) a curve that is negatively sloped at low levels of output and positively sloped at higher levels of
output.
Answer: A
Diff: 1 Page Ref: 382-4/382-4
Skill: Conceptual
8) Producing where marginal revenue equals marginal cost is equivalent to producing where
A) average total cost equals average revenue.
B) average fixed cost is minimized.
C) total revenue is equal to total cost.
D) total profit is maximized.
Answer: D
Skill: Conceptual
9) A perfectly competitive firm's marginal revenue

A) is greater than price.
B) is less than price because a firm must lower its price to sell more.
C) is equal to price.
D) may be either greater or less than price, depending on the quantity sold.
Answer: C
Skill: Conceptual
11
Table 11-1
Number of lbs. Market Price Total Revenue Average Marginal

of apples (per lb.) (TR) Revenue (AR) Revenue (MR)
0 $3 $0 ----- -----
100
150
200
250
300
350
400
10) Refer to Table 11-1. Table 11-1 lists the various pounds (lbs.) of apples that Margie Stattler can sell.
Assume that Margie operates in a perfectly competitive market. Use Table 11-1 to answer the following
question. What is Margie's total revenue if she sells 250 pounds of apples?
A) $250
B) $500
C) $750
D) There is not enough information in the table to determine Margie's total revenue.
Answer: C
Diff: 1 Page Ref: 382-4/382-4
Topic: Total revenue
Skill: Analytical
11) Refer to Table 11-1. Table 11-1 lists the various pounds (lbs.) of apples that Margie Stattler can sell.
Assume that Margie operates in a perfectly competitive market. Use Table 11-1 to answer the following
question. How many pounds of apples should Margie sell to maximize her profit?
A) 300 pounds
B) 400 pounds
C) This cannot be determined without knowing Margie's total or marginal production costs.
D) This can be determined only when all of the values for market price, total revenue, average revenue
and marginal revenue are given.
Answer: C
Diff: 2 Page Ref: 382-4/382-4
Skill: Analytical
12
12) What is the relationship among the following variables: the market price, average revenue and
marginal revenue?
A) Average revenue is equal to the market price; average revenue is greater than marginal revenue.
B) The market price is equal to both average revenue and marginal revenue.
C) Average revenue is equal to marginal revenue; average revenue is greater than the market price.
D) As a firm lowers the market price to sell more output, marginal revenue and average revenue will be
less than the market price.
Answer: B
Skill: Analytical
13) At the profit-maximizing level of output for a perfectly competitive firm,

A) price equals marginal cost.
B) average revenue equals average variable cost and price equals marginal cost.
C) marginal revenue equals marginal cost and average total cost equals average fixed cost.
D) price equals average revenue and marginal cost equals average variable cost.
Answer: A
Diff: 2 Page Ref: 382-4/382-4
Skill: Conceptual
14) At the profit-maximizing level of output for a perfectly competitive firm, price equals marginal cost.
Which of the following is also true?
A) The difference between total revenue and total cost is the greatest.
B) Total revenue equals total cost.
C) Average revenue equals average total cost.
D) Marginal profit equals marginal cost.
Answer: A
Diff: 2 Page Ref: 382-4/382-4
Skill: Conceptual
13
15) If, for the last unit of a good produced and sold by a firm marginal revenue exceeds marginal cost,
then in producing that unit the firm
A) added more to total cost than it added to total revenue.
B) added an equal amount to both total revenue and total cost.
C) added more to total revenue than it added to total cost.
D) maximized its profits or minimized its losses.
Answer: C
Diff: 1 Page Ref: 382-4/382-4
Skill: Conceptual
16) If a perfectly competitive firm's marginal revenue exceeds the marginal cost of the last unit of output
sold, what should the firm do to maximize its profit?
A) determine what the total revenue and total cost of production are
B) increase output
C) decrease output
D) lower its price to sell more
Answer: B
Diff: 2 Page Ref: 382-4/382-4
Skill: Conceptual
11.3 Illustrating Profit or Loss on the Cost Curve Graph
1) Letters are used to represent the terms used to answer this question: price (P), quantity of output (Q),
total cost (TC) and average total cost (ATC). Which of the following equations is equal to a firm's profit?
A) P - ATC
B) (P × Q) - TC
C) (P × Q) - (P × ATC)
D) P - TC
Answer: B
Skill: Conceptual
Objective: LO3: Use graphs to show a firm's profit or loss
14
2) Letters are used to represent the terms used to answer this question: price (P), quantity of output (Q),
total cost (TC) and average total cost (ATC). Which of the following equations is equal to a firm's average
profit?
A) P - ATC
B) (P - ATC) × Q
C) (P × Q) - TC
D) P - TC
Answer: A
Skill: Conceptual
3) If price = marginal cost at the output produced by a perfectly competitive firm and the firm is earning
an economic profit, then
A) marginal revenue is less than price.
B) average total cost is at a minimum.
C) total revenue equals total cost.
D) price exceeds average total cost.
Answer: D
Skill: Conceptual
4) What is always true at the quantity where a firm's average total cost equals average revenue?
A) The firm's revenue is maximized.
B) The firm's profit is maximized.
C) The firm breaks even.
D) Marginal cost equals marginal revenue.
Answer: C
Diff: 1 Page Ref: 388-9/388-9
Topic: Profit
Skill: Definition
15
5) Profit is the difference between
A) marginal revenue and marginal cost.
B) total revenue and variable cost.
C) total revenue and total explicit cost.
D) total revenue and total cost.
Answer: D
Topic: Profit
Skill: Definition
Table 11-2
Q TC ATC MC
0 $10.00 ----- -----
1 15.00 $15.00 $5.00
2 17.50 8.75 2.50
3 22.50 7.50 5.00
4 30.00 7.50 7.50
5 40.00 8.00 10.00
6 52.50 8.75 12.50
7 67.50 9.64 15.00
8 85.00 10.63 17.50
9 105.00 11.67 20.00
6) Refer to Table 11-2. Arnie sells basketballs in a perfectly competitive market. Table 11-2 summarizes
Arnie's output per day (Q), total cost (TC), average total cost (ATC) and marginal cost (MC). Use the data
in the table to answer the following question. What price (P) will Arnie charge and how much profit will
he earn if the market price of basketballs is $12.50?
A) Price and profit cannot be determined from the information given.
B) P = $12.50; profit = $52.50
C) P = $12.50; profit = $22.50
D) P = $20; profit = $75.00.
Answer: C
Diff: 2 Page Ref: 386-7/386-7
Skill: Analytical
Special Feature: Solved Problem: Determining Profit-Maximizing Price and Quantity
16
7) Refer to Table 11-2. Arnie sells basketballs in a perfectly competitive market. Table 11-2 summarizes
Arnie's output per day (Q), total cost (TC), average total cost (ATC) and marginal cost (MC). Use the data
in the table to answer the following question. What will Arnie's output be and how much profit will he
earn if the market price of basketballs is $5.00?
A) Q = 1; profit = -$10.
B) Q = 3; profit = -$7.50
C) Q = 0; profit = -$10.00
D) Price and profit cannot be determined from the information given.
Answer: B
Diff: 3 Page Ref: 386-7/386-7
Skill: Analytical
Special Feature: Solved Problem: Determining Profit-Maximizing Price and Quantity
8) A firm will break even when

A) P = ATC.
B) P > ATC.
C) P < AVC.
D) P = AVC.
Answer: A
Topic: Break even
Skill: Analytical
9) A firm will make a profit when

A) P > AVC.
B) P > ATC.
C) P = ATC.
D) P = MC.
Answer: B
Topic: Profit
Skill: Analytical
17
10) In the early 2000s, some entrepreneurs took advantage of a reduction in the price of computed
tomography (CT) scanning equipment by offering apparently healthy people preventive body scans to
provide early detection of diseases. This effort failed to earn the entrepreneurs a profit. Which of the
following is one reason for this failure?
A) Few people wanted to devote the time needed for an unnecessary medical procedure.
B) The Food and Drug Administration (FDA) published a warning to consumers that the procedure could
cause negative side effects.
C) Since the CT scan was a voluntary procedure it was not covered under most medical insurance plans.
D) The American Medical Association (AMA) refused to endorse the procedure.
Answer: C
Diff: 1 Page Ref: 389-90/389-90
Topic: Profit and loss
Skill: Fact
Special Feature: Making the Connection: Losing Money in the Medical Screening Industry
11) In the early 2000s, some entrepreneurs took advantage of a reduction in the price of computed
tomography (CT) scanning equipment by offering apparently healthy people preventive body scans to
provide early detection of diseases. Which of the following is one reason for the failure of this effort to be
profitable?
A) Negative publicity from "false positives" that occurred from the CT tests reduced the demand for this
service.
B) The federal government halted the CT body scans until further tests proved the procedure was safe
and effective.
C) The U.S. Congress passed a law that restricted the ability of the entrepreneurs to offer the body scans.
As a result, the industry was not able to reach minimum efficient scale.
D) A lack of publicity resulted in few consumers being aware that the procedure was available.
Answer: A
Diff: 1 Page Ref: 389-90/389-90
Topic: Profit and loss
Skill: Fact
Special Feature: Making the Connection: Losing Money in the Medical Screening Industry
18
Figure 11-1
12) Refer to Figure 11-1. Figure 11-1 shows the demand, marginal cost (MC) and average total cost (ATC)
curves for Jason's House of Apples. To maximize his profit, Jason should produce the rate of output
indicated by point
A) a
B) b
C) e
D) d
Answer: D
Topic: Illustrating profit and loss
Skill: Analytical
Special Feature: Don't Let This Happen to YOU!: Remember That Firms Maximize Total Profit Not Profit Per Unit
curves for Jason's House of Apples. Jason is currently producing 20 thousand pounds of apples. To
maximize his profit Jason should
A) keep production at 20 thousand pounds.
B) increase production to the output rate indicated by point d.
C) increase production to the output rate indicated by point e.
D) decrease production to the output rate indicated by point a.
Answer: B
Diff: 2 Page Ref: 385-8/385-8
Skill: Analytical
19
curves for Jason's House of Apples. Which of the following statements is true?
A) Jason should produce where MC equals $3 (point d) where he will minimize his losses.
B) Jason should produce where the distance between MC and his demand curve is greatest (point b).
C) Jason cannot earn a profit from selling any number of apples.
D) Jason should produce where MC equals $3 (point d) where he will maximize his profit.
Answer: D
Diff: 2 Page Ref: 385-9/385-9
Skill: Analytical
Special Feature: Don't Let This Happen to YOU!: Remember That Firms Maximize Total Profit Not Profit Per Unit
curves for Jason's House of Apples. If Jason maximizes his profit he will produce the output rate
indicated by point ________ and his average profit will equal ________.
A) d; $3 minus ATC at point d
B) b; $3 minus ATC at point b
C) e; $3 minus ATC at point e
D) a; $3
Answer: A
Diff: 2 Page Ref: 385-9/385-9
Skill: Analytical
16) A perfectly competitive firm will maximize its profit at the rate of output where the vertical distance
between its total revenue and total cost is the largest. This is the same rate of output where
A) average total cost equals marginal revenue.
B) marginal revenue equals marginal profit.
C) marginal revenue equals marginal cost.
D) marginal revenue equals average revenue.
Answer: C
Skill: Conceptual
20
Figure 11-2
17) Refer to Figure 11-2, which illustrates the cost curves of a perfectly competitive firm. If the market
price is P1
A) The firm will experience a loss and raise its price to P2. The firm will then break even.
B) The firm will break even by producing a quantity of Q2.
C) The firm will experience a loss since price is less than ATC.
D) The firm may make a profit if it can increase the demand for its product.
Answer: C
Diff: 2 Page Ref: 385-9/385-9
Skill: Analytical
price is P3 the firm
A) will break even.
B) will make a profit.
C) will earn enough revenue to cover its variable costs but not its fixed costs.
D) will produce a quantity of Q1.
Answer: B
Diff: 2 Page Ref: 385-9/385-9
Skill: Analytical
21
price is P2 the firm
A) will break even and produce a quantity of Q2.
B) will make a profit and produce a quantity of Q2.
C) will make a profit and produce a quantity of Q1.
D) will make a profit and produce a quantity of Q3.
Answer: A
Diff: 2 Page Ref: 385-9/385-9
Skill: Analytical
Figure 11-3
20) Refer to Figure 11-3. Suppose the firm produces 4,000 units. What does the shaded area labeled A
represent?
A) total variable cost
B) profit
C) total fixed cost
D) total revenue
Answer: C
Diff: 2 Page Ref: 385-9/385-9
Skill: Analytical
22
21) Refer to Figure 11-3. Suppose the market price is $120. Which of the following is true?
A) The firm earns a profit equal to the area A.
B) The firm earns a profit equal to the area A + B.
C) The firm suffers a loss equal to the area A.
D) The firm will break even.
Answer: C
Diff: 2 Page Ref: 385-9/385-9
Skill: Analytical
22) Refer to Figure 11-3. Suppose the firm produces 4,000 units. What does the shaded area labeled B
represent?
A) the firm's economic loss
B) total variable cost
C) average variable cost
D) total fixed cost
Answer: B
Diff: 2 Page Ref: 385-9/385-9
Skill: Analytical
23
Table 11-3
Average
Average Fixed Marginal Cost
Quantity Variable Cost
Cost (AFC) (MC)
(AVC)
20 $40 $18 $18
40 20 14 10
60 13.1 16 20
80 10 22 40
100 8 30 62
120 6.61 40 90
Table 11-3 shows the short-run cost data of a perfectly competitive firm. Assume that output can only be
increased in batches of 20 units.
23) Refer to Table 11-3. If the market price is $45 the firm will produce
A) 60 units.
B) 80 units.
C) 100 units
D) 120 units
Answer: B
Diff: 2 Page Ref: 385-9/385-9
Skill: Analytical
24) Refer to Table 11-3. If the market price is $45, the firm
A) earn a profit of $3,600.
B) will suffer a loss of $200.
C) will break even.
D) will earn profit of $1,040.
Answer: D
Diff: 2 Page Ref: 385-9/385-9
Skill: Analytical
25) If price is equal to average variable cost, a perfectly competitive firm breaks even.
Answer: FALSE
Topic: Profit
Skill: Conceptual
24
26) For a given quantity, the total profit of a perfectly competitive firm is equal to the vertical distance
between the firm's total revenue curve and its total cost curve.
Answer: TRUE
Topic: Illustrating Profit
Skill: Conceptual
27) If firms do not earn economic profits in a competitive equilibrium, why would the firms choose to
stay in business?
Answer: When firms earn no economic profit but earn a normal profit, they earn precisely as much as
they could have earned by investing their time and money elsewhere. In other words, each producer is
able to earn sufficient accounting profits to cover the opportunity cost of invested factors (time and
money) and to continue operating. The source of the confusion stems from the difference between
accounting and economic profits.
Diff: 3 Page Ref: 385-90/385-90
Topic: Profit
Skill: Conceptual
11.4 Deciding Whether to Produce or to Shut Down in the Short Run
1) In the short run, a firm that is operating at a loss has two options. These options are
A) to reduce output or reduce its variable costs.
B) to go out of business or declare bankruptcy.
C) to shut down temporarily or continue to produce.
D) to adopt new technology or change the size of its physical plant.
Answer: C
Topic: Shutting down in the short run
Skill: Conceptual
Objective: LO4: Explain why firms may shut down temporarily
2) If a firm shuts down it

A) will suffer a loss equal to its fixed costs.
B) will produce nothing but must pay its variable costs.
C) will produce nothing but must pay its fixed and variable costs.
D) will earn enough revenue to cover its variable costs but not all of its fixed costs.
Answer: A
Skill: Conceptual
25
3) If a firm shuts down in the short run it will
A) break even.
B) declare bankruptcy.
C) suffer a loss equal to its variable costs.
D) suffer a loss equal to its fixed costs.
Answer: D
Skill: Conceptual
4) Ben's Peanut Shoppe suffers a short-run loss. Ben will not choose to shut down if
A) his Shoppe's total revenue exceeds his fixed cost.
B) his Shoppe's total revenue exceeds his variable cost.
C) his Shoppe's total revenue exceeds his implicit costs.
D) his Shoppe's total revenue exceeds his capital costs.
Answer: B
Skill: Conceptual
5) Ted's Pancake Kitchen suffers a short-run loss. When should Ted decide to shut down rather than
continue to produce?
A) if his Kitchen's revenue is less than its variable costs
B) if his Kitchen's revenue is less than its fixed costs
C) if his Kitchen's revenue is less than its explicit costs
D) if his Kitchen's revenue is less than its total costs
Answer: A
Skill: Conceptual
26
6) Marty's Bird House suffers a short-run loss. Marty can reduce his loss below the amount of his total
fixed costs by continuing to produce if his revenue
A) exceeds his implicit costs.
B) exceeds his nonmonetary opportunity costs.
C) exceeds his variable costs.
D) exceeds his marginal costs.
Answer: C
Skill: Conceptual
7) In analyzing the decision to shut down in the short run we assume that the firm's fixed costs are
A) implicit costs.
B) capital costs.
C) nonmonetary opportunity costs.
D) sunk costs.
Answer: D
Skill: Conceptual
8) Robert Kjelgaard bought a laundry business that required him to lease a building for six years. The
monthly lease payment was $3,300. The losses that Kjelgaard's business suffered led him to consider
closing his business but this would not prevent him from paying the monthly payment for the remainder
of his six-year lease. Which of the following statements regarding Klelgaard's business is true?
A) His variable costs are sunk costs.
B) His fixed costs are sunk costs.
C) His fixed costs are implicit costs.
D) His business experienced diseconomies of scale.
Answer: B
Diff: 2 Page Ref: 390-1/390-1
Skill: Conceptual
Special Feature: Making the Connection: When to Close a Laundry
27
9) Which of the following is not an option for a perfectly competitive firm that suffers short-run losses?
A) shutting down
B) reducing production
C) reducing the use of variable factors
D) raising price
Answer: D
Skill: Conceptual
10) The supply curve of a perfectly competitive firm in the short run is
A) the firm's average variable cost curve.
B) the portion of the firm's marginal cost curve below the minimum point of the average variable cost
curve.
C) the portion of the firm's marginal cost curve above the minimum point of the average variable cost
curve.
D) the portion of the firm's marginal cost curve above the minimum point of the average total cost curve.
Answer: C
Topic: The firm's supply curve
Skill: Conceptual
11) A perfectly competitive firm's short-run supply curve is

A) upward sloping and is the portion of the marginal cost curve that lies above the average total cost
curve.
B) upward sloping and is the portion of the marginal cost curve that lies above the average variable cost
curve.
C) perfectly elastic at the market price.
D) horizontal at the minimum average total cost.
Answer: B
Skill: Conceptual
28
12) The minimum point on the average variable cost curve is called
A) the shutdown point.
B) the break-even point.
C) the loss minimizing point.
D) the point of diminishing returns.
Answer: A
Skill: Definition
13) If a perfectly competitive firm's total revenue is less than its total variable cost, the firm
A) should raise its price above its average variable cost.
B) should continue to produce and increase its demand.
C) should stop production by shutting down temporarily.
D) should adopt new technology in order to lower its costs of production.
Answer: C
Diff: 2 Page Ref: 390-1/390-1
Skill: Conceptual
14) In the mid-1990s, cattle ranchers in the United States kept raising cattle even though prices were at a
ten-year low and below average total cost. What is the likely explanation for this?
A) Continuing to operate resulted in smaller losses than would have been incurred by shutting down.
B) The ranchers were hoping to receive government subsidies.
C) The exit costs were too high.
D) Cattle is an important source of protein and its production is essential for the United States.
Answer: A
Diff: 2 Page Ref: 390-1/390-1
Skill: Conceptual
29
Figure 11-4
15) Refer to Figure 11-4. The firm's short-run supply curve is its
A) marginal cost curve.
B) marginal cost curve from b and above.
C) marginal cost curve from c and above.
D) marginal cost curve from d and above.
Answer: B
Diff: 2 Page Ref: 391-2/391-2
Skill: Analytical
16) Refer to Figure 11-4. Total revenue at the profit-maximizing level of output is
A) $1,200.
B) $2,500.
C) $4,800.
D) $6,000.
Answer: D
Diff: 1 Page Ref: 390-2/390-2
Topic: Short-run equilibrium
Skill: Analytical
30
17) Refer to Figure 11-4. The total cost at the profit-maximizing output level equals
A) $4,800.
B) $3,300.
C) $2,500.
D) $1,800.
Answer: B
Diff: 1 Page Ref: 390-2/390-2
Skill: Analytical
18) Refer to Figure 11-4. At the profit-maximizing output level, the firm earns
A) zero economic profit.
B) a profit of $600.
C) a profit of $1,200.
D) a profit of $2,700.
Answer: D
Diff: 3 Page Ref: 390-2/390-2
Skill: Analytical
19) In the short run, a profit-maximizing firm will shut down if its total revenue is greater than its
variable costs.
Answer: FALSE
Skill: Conceptual
20) The short-run supply curve for a perfectly competitive firm is that part of the firm's marginal
cost curve that lies above the minimum point of its average variable cost curve.
Answer: TRUE
Skill: Conceptual
31
21) What is the difference between "shutting down temporarily" and "exiting the industry"?
Answer: The difference between the two has to do with fixed costs. In the short run a firm cannot avoid
its fixed costs. When price falls so low that the firm can no longer cover its variable costs of production
with the revenue it earns from selling its product it should shut down temporarily and wait for economic
conditions to improve. In the long run, all costs are variable. If total revenue cannot cover all costs the
firm will exit the industry.
Diff: 3 Page Ref: 390-1/390-1
Skill: Conceptual
22) Werner & Sons is a manufacturer of three-ring binders operating in a perfectly competitive industry.
Table 11-4 shows the firm's cost schedule.
Table 11-4
Average Average
Quantity Variable Total Cost Marginal
Variable Total Cost
(cases) Cost ($) ($) Cost ($)
Cost ($) ($)
0 0 76
1 30 106
2 50
3 134
4 140
5 160
6 114
7 150
8 190
9 316
Use the table to answer the following questions.

a. Complete Table 11-4 by filling in the blank cells.
b. Werner is selling in a perfectly competitive market at a price of $40. What is the profit maximizing or
loss-minimizing output?
c. Calculate the firm's profit or loss.
d. Should the firm continue to produce in the short run? Explain.
e. If the firm's fixed costs were $30 higher what would be the profit-maximizing output level in the short
run? Indicate whether the output level will increase, decrease or remain unchanged compared to your
answer in b.
f. Suppose fixed cost remains at $76. If the price of three-ring binders falls to $20 what is the profit-
maximizing or loss-minimizing output?
g. Calculate the profit or loss. Should the firm continue to produce in the short run? Explain your
answer.
h. Suppose the fixed cost remains at $76. What price corresponds to the shut-down point?
i. Suppose the fixed cost remains at $76. What price corresponds to the break-even point?
32
Answer:
a.
Average Average
Quantity Variable Total Cost Marginal
Variable Total Cost
(cases) Cost ($) ($) Cost ($)
Cost ($) ($)
0 0 76 -- -- 76
1 30 106 30 30 106
2 50 126 20 25 63
3 58 134 8 19.33 44.67
4 64 140 6 16 35
5 84 160 20 16.8 32
6 114 190 30 19 31.67
7 150 226 36 21.43 32.29
8 190 266 40 23.75 33.25
9 240 316 50 26.67 35.11
b. Quantity = 8 units.
c. Profit = $54.
d. Yes, it is earning an economic profit.
e. The profit-maximizing output will not change since marginal cost is not affected by changes in fixed
cost.
f. Quantity = 5 units.
g. Loss = $60. Yes, it is loss-minimizing.
h. The shut-down point corresponds to a price of $16 and an output of 4 units.
i. The break-even point occurs at a price $31.67 and an output of 6 units.
Diff: 3 Page Ref: 390-2/390-2
Skill: Analytical
11.5 "If Everyone Can Do It, You Can't Make Money at It"- The Entry and Exit of Firms
in the Long Run
1) In the long run, a firm in a perfectly competitive industry will supply output only if its total revenue
covers its
A) explicit plus its implicit costs.
B) fixed costs.
C) implicit costs.
D) explicit costs.
Answer: A
Topic: Long-run equilibrium
Skill: Conceptual
Objective: LO5: Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the
long run
33
2) Which of the following statements is true?
A) A long-run competitive equilibrium can only be achieved in constant-cost industries.
B) When an industry achieves a long-run competitive equilibrium, industry output will not change in the
future.
C) A long-run competitive equilibrium outcome is not economically efficient.
D) When an industry reaches a long-run competitive equilibrium, the typical firm in the industry breaks
even.
Answer: D
Skill: Conceptual
long run
3) A constant-cost industry is an industry in which

A) average costs fall as the industry expands output.
B) average costs rise as the industry expands output.
C) average costs remain constant as the industry expands output.
D) input prices rise at a constant rate as firms in the industry use more inputs.
Answer: C
Topic: Constant-cost industry
Skill: Definition
long run
4) The long-run supply curve for a perfectly competitive, constant-cost industry

A) is upward-sloping.
B) is horizontal.
C) is downward-sloping.
D) is found by adding up the marginal cost curves for all firms in the industry.
Answer: B
Skill: Conceptual
long run
34
5) 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.
Answer: B
Diff: 2 Page Ref: 393-5/393-5
Topic: Entry and exit
Skill: Conceptual
long run
6) 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.
Answer: A
Diff: 2 Page Ref: 393-6/393-6
Skill: Conceptual
long run
35
Figure 11-5
7) Refer to Figure 11-5. The graphs in this figure 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.
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.
Answer: C
Diff: 2 Page Ref: 393-6/393-6
Skill: Analytical
long run
36
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.
Answer: D
Diff: 2 Page Ref: 393-6/393-6
Skill: Analytical
long run
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.
Answer: D
Diff: 2 Page Ref: 393-6/393-6
Skill: Analytical
long run
37
10) 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.
Answer: C
Diff: 2 Page Ref: 394-5/394-5
Skill: Analytical
long run
11) After an increase in demand in a constant-cost industry, firms will find themselves with higher
average cost curves.
Answer: FALSE
Skill: Definition
long run
12) 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.
Answer: FALSE
Diff: 1 Page Ref: 393-5/393-5
Topic: Profit
Skill: Conceptual
long run
13) In a decreasing-cost industry, the entry of new firms lowers average cost at each level of output.
Answer: TRUE
Diff: 1 Page Ref: 397-8/397-8
Topic: Decreasing-cost industry
Skill: Conceptual
long run
38
14) When firms exit a perfectly competitive industry, the market supply curve shifts to the left.
Answer: TRUE
Diff: 1 Page Ref: 394-5/394-5
Topic: Market supply curve
Skill: Conceptual
long run
Figure 11-6
15) Refer to Figure 11-6. The figure above shows the cost curves of a perfectly competitive firm in the
coffee market. Use the graph in Figure 11-6 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.
39
Answer:
a. $1.50 per pound. This represents the lowest point on the AVC curve, or the shut-down point.
b. See the figure below.
c. 225. This is the output where price (MR) equals MC.
d. The firm is earning a profit. See the figure below.
e. Above normal profits attract new entrants into the industry, which will shift the industry supply
curve to the right and decrease the market price. This entry stops when all economic profits are
eliminated and price equals average total cost.
Diff: 3 Page Ref: 393-6/393-6
Skill: Analytical
long run
40
Figure 11-7
16) Refer to Figure 11-7. Use the figure above to answer the following questions.
a. How can you determine that Figure 11-7 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?
m. Compare Figure 11-6 to the firm's long-run equilibrium. Will the firm's output be greater in the long
run or in the short-run?
Answer:
a. The perfectly competitive firm is a price taker and therefore faces a perfectly elastic demand curve
which is also the MR curve.
b. Market price = $40
c. Profit maximizing output = 200
d. Total revenue = $40 × 200 = $8,000
e. Total cost = ATC × total output = $24 × 200 = $4,800
f. Profit = Total revenue - total cost = $8,000 - 4,800 = $3,200
g. Total fixed cost = AFC × total output = (ATC - AVC) × 150 = $6 × 150 = $900. (Note: fixed cost has the
same value at all output rates)
h. The total variable cost at the profit maximizing output level = ($4,800 - 900) =$3,900
i. The firm's short run supply curve is its MC curve above minimum AVC (from point b and above).
j. No, the industry is not in a long-run equilibrium because the firm earns an economic profit.
k. Some firms will enter the industry, causing the industry supply curve to shift rightward. This causes
market price to fall. Entry stops when economic profits are eliminated and all firms break even.
l. In the long run equilibrium the firm's profit maximizing quantity = 150, where price will equal
41
marginal cost.
m. In the long run equilibrium, industry output increases because more firms will have entered the
industry.
Diff: 3 Page Ref: 390-6/390-6
Skill: Analytical
17) 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?
Answer: Even though in the long run firms earn zero profit, in the interim period they can earn economic
profits. Breaking even in the long run means that a firm earns a return comparable to what it could earn
in an alternative use of their resources. .
Diff: 2 Page Ref: 393-6/393-6
Topic: Break even
Skill: Conceptual
long run
11.6 Perfect Competition and Efficiency
1) After 1985, many apple growers near New York City sold their land to housing developers because
A) a mysterious blight infected the apple crop in New York. This made apple growing unprofitable.
B) land and other resources used to grow apples became more valuable in other uses.
C) many workers were not satisfied with wages and working conditions; as they sought other
employment wages rose and growing apples became unprofitable.
D) consumers began to buy more and more organically grown apples which were produced in other
states. Economic losses forced New York growers to leave the market.
Answer: B
Diff: 2 Page Ref: 398-9/398-9
Topic: Perfect competition and efficiency
Skill: Fact
Objective: LO6: Explain how perfect competition leads to economic efficiency
Special Feature: Making the Connection: The Decline of Apple Production in New York State
42
2) Apple production in New York State has declined since the 1980s. Which of the following is one reason
for this?
A) Regulations placed on apple growers by the state government increased the costs of production. As a
result, some growers went out of business.
B) New York growers did not move quickly to produce the organic apples that many consumers wanted.
As a result, some of the demand for apples shifted to other states.
C) Stagnant apple prices induced many farmers to sell their land to housing developers.
D) The increased demand for wine caused many apple farmers to switch to growing grapes on their land.
Answer: C
Diff: 2 Page Ref: 398-9/398-9
Skill: Fact
Special Feature: Making the Connection: The Decline of Apple Production in New York State
3) 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.
Answer: D
Diff: 2 Page Ref: 398-400/398-400
Skill: Conceptual
4) 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.
Answer: A
Topic: Allocative efficiency
Skill: Definition
long run
43
5) New York Times writer Michael Lewis wrote that "The sad truth, for investors, seems to be that most of
the benefits....are passed through to consumers free of charge." To which of the following did Lewis
refer?
A) apple farming in New York state
B) the Enron accounting scandal
C) the medical screening industry
D) new technologies developed in the 1990s
Answer: D
Diff: 1 Page Ref: 399-400/399-400
Skill: Fact
Special Feature: Solved Problem: How Productive Efficiency Benefits Consumers
6) When plasma television sets were first introduced prices were high and few firms were in the market.
Later, economic profits attracted new firms and the price of plasma televisions fell. This example
illustrates
A) a decreasing-cost industry.
B) that consumers receive this new technology "free of charge" in the sense that they only have to pay a
price for plasma televisions equal to the lowest production cost.
C) an industry with a low minimum efficient scale.
D) how fickle consumer demands are.
Answer: B
Diff: 1 Page Ref: 399-400/399-400
Skill: Fact
Special Feature: Solved Problem: How Productive Efficiency Benefits Consumers
7) Perfectly competitive firms produce up to the point where the price of the good equals the marginal
cost of producing the last unit. This condition is referred to as
A) productive efficiency.
B) constant returns to scale.
C) allocative efficiency.
D) perfectly competitive efficiency.
Answer: C
Skill: Conceptual
44
8) Which of the following describes a difference between allocative efficiency and productive efficiency in
a perfectly competitive market?
A) Allocative efficiency is achieved only in the long run. Productive efficiency is achieved only in the
short run.
B) Allocative efficiency is achieved only in the long run. Productive efficiency is achieved in the short run
and the long run.
C) Allocative efficiency is achieved only in the short run. Productive efficiency is achieved only in the
long run.
D) Allocative efficiency is achieved in the short run and the long run. Productive efficiency is achieved
only in the long run.
Answer: D
Diff: 3 Page Ref: 398-401/398-401
Skill: Conceptual
9) If a perfectly competitive firm achieves productive efficiency then

A) it will raise its price in order to earn an economic profit.
B) the price of the good it sells is equal to the benefit consumers receive from consuming the last unit of
the good sold.
C) it is producing at minimum efficient scale.
D) it is producing the good it sells at the lowest possible cost.
Answer: D
Topic: Productive efficiency
Skill: Conceptual
10) If productive efficiency characterizes a market,

A) the marginal cost of production is minimized.
B) firms produce the goods that consumers desire most.
C) the output is being produced at the lowest possible cost.
D) firms use the best technology available to produce the good.
Answer: C
Skill: Definition
45
11) Which of the following has the most influence on the number of organic apples produced and sold in
the United States?
A) consumers of apples
B) producers of apples
C) the Department of Agriculture
D) organic food stores
Answer: A
Diff: 1 Page Ref: 398-401/398-401
Skill: Conceptual
12) A teenage babysitter is similar to a firm in a perfectly competitive industry in that, for both,
A) fixed costs are lower than variable costs.
B) there are many other suppliers of similar goods or services.
C) the implicit costs of production exceed the explicit costs of production.
D) average costs of production do not change when their industry expands.
Answer: B
Skill: Conceptual
Special Feature: Economics in YOUR Life!: Are You an Entrepreneur?
13) An increase in the demand for organic foods has led Wal-Mart to expand the organic produce, dairy
goods and dry goods it offers for sale in its stores. Some organic farmers fear the consequences of Wal-
Mart's actions because
A) most organic food customers do not shop at Wal-Mart. Some farmers are concerned that many of their
customers will now buy fewer organic products at other supermarkets and stores.
B) organic farmers prefer to sell their products through supermarkets and stores that allow their workers
to form unions. Wal-Mart's workers do not belong to unions.
C) they fear that Wal-Mart's actions will result in lower prices for their products.
D) they believe the demand for their products is inelastic.
Answer: C
Diff: 1 Page Ref: 402-3/402-3
Skill: Conceptual
Special Feature: An Inside Look: Why Are Organic Farmers Worried about Wal-Mart?
46
14) Allocative efficiency is achieved in an industry when firms supply those goods and services that
provide consumers with a marginal benefit equal to the marginal cost of producing those goods and
services.
Answer: TRUE
Skill: Definition
15) What is meant by allocative efficiency? How does a perfectly competitive firm achieve allocative
efficiency?
Answer: Allocative efficiency refers to a state of the economy in which production reflects consumer
preferences; in particular, 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. The price of a good represents
the marginal benefit consumers receive from consuming the last unit of the good sold. Since perfectly
competitive firms produce up to the point where the price of the good equals the marginal cost of the last
unit produced, allocative efficiency is achieved.
Diff: 2 Page Ref: 398-401/398-401
Skill: Conceptual
16) In long-run competitive equilibrium, the perfectly competitive firm produces where price equals
minimum average total cost.
a. What is this efficiency criterion called?

b. How does it benefit consumers?
Answer:
a. Productive efficiency
b. Productive efficiency means that a product is produced at the lowest possible cost. In other words,
the product is produced with a minimum amount of scarce resources. Consumers benefit because society
can produce more products with its scarce resources.
Diff: 2 Page Ref: 398-401/398-401
Skill: Conceptual
47

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Economics 2nd Edition Hubbard Test

11.1 Perfectly Competitive Market

4) The delivery of first-class mail by the U.S. Postal Service is an example of

5) A perfectly competitive firm faces a demand curve that is

7) Which of the following is a characteristic of a firm in a perfectly competitive market?

10) Which of the following is not an assumption of perfectly competitive markets?

11) In a perfectly competitive market the term "price taker" applies to

16) Firms that are price takers

17) Firms in perfect competition are price takers because

20) The market demand curve in a perfectly competitive market is downward-sloping.

1) To maximize profit, a perfectly competitive firm

2) For a perfectly competitive firm, average revenue is equal to

3) For a firm in a perfectly competitive market, price is

5) In a graph that illustrates a perfectly competitive firm, marginal revenue is

6) The marginal revenue curve for a perfectly competitive firm

9) A perfectly competitive firm's marginal revenue

Number of lbs. Market Price Total Revenue Average Marginal

13) At the profit-maximizing level of output for a perfectly competitive firm,

11.3 Illustrating Profit or Loss on the Cost Curve Graph

8) A firm will break even when

9) A firm will make a profit when

11.4 Deciding Whether to Produce or to Shut Down in the Short Run

2) If a firm shuts down it

11) A perfectly competitive firm's short-run supply curve is

Use the table to answer the following questions.

3) A constant-cost industry is an industry in which

4) The long-run supply curve for a perfectly competitive, constant-cost industry

11.6 Perfect Competition and Efficiency

9) If a perfectly competitive firm achieves productive efficiency then

10) If productive efficiency characterizes a market,

a. What is this efficiency criterion called?

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