Principles of Economics 8th Edition Marshall Test Bank

Principles of Economics 8th Edition
Marshall Test Bank

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Chapter 9
The Rise and Fall of Industries
Multiple Choice Questions
1. Three reasons for the rise and fall of industries are

a. government subsidy, cost-reducing technology, and changing tastes.
b. new ideas, cost-reducing technology, and changing tastes.
c. government subsidy, population growth, and cost-reducing technology.
d. population growth, cost-reducing technology, and changing tastes.
e. new ideas, necessity, and changing tastes.
b; Moderate
OBJ: factual
SEC: 1. Markets and Industries
TOP: Rise and Fall of Industries
MSC: Bloom's: Knowledge | AACSB: Analytic
2. A group of firms, each of which produces similar products, is called a(n)

a. market.
b. trust.
c. conglomerate.
d. industry.
e. production group.
d; Basic
OBJ: factual
TOP: Industry
MSC: Bloom's: Knowledge
3. An industry is
a. a group of firms that produce similar products.
b. a collection of production facilities.
c. a group of consumers who wish to purchase similar products.
d. supply and demand for a product.
e. a union of workers from different firms.
a; Basic
OBJ: factual
TOP: Industry
True/False Questions
4. One reason old industries die off is that entrepreneurs create new industries that replace the old ones.
True; Basic
OBJ: factual
5. Consumers are part of an industry.

False; Basic
OBJ: factual
TOP: Industry
6. The definition of a market is broader than that of an industry.

True; Basic
OBJ: factual
TOP: Industry
7. An industry tends to expand as market demand increases.

True; Basic
OBJ: factual
Short Answer Questions
8. List three reasons for the rise and fall of industries.
ANSWER:
New ideas, cost-reducing technology, and changes of taste
Moderate
OBJ: factual
9. Define the term industry.
ANSWER:
An industry is a group of firms that produce similar products.
Moderate
OBJ: factual
TOP: Industry
10. The long-run competitive equilibrium model describes what happens to an industry after
a. all existing firms disappear.
b. only one firm survives.
c. the government intervenes.
d. the entry and exit of firms over time.
e. the market no longer exists.
d; Basic
OBJ: factual
SEC: 2. The Long-Run Competitive Equilibrium Model of an Industry
TOP: Long-Run Equilibrium Model
11. Which of the following statements is false?

a. The long-run equilibrium model takes into account the entry and exit of firms.
b. The long-run equilibrium model is an attempt to explain the behavior of industries.
c. Firms enter an industry when economic profits are positive.
d. The long-run equilibrium model can be applied only to U.S. industries.
e. Firms exit an industry in the long run when economic profits are negative.
d; Moderate
OBJ: factual
TOP: Entry and Exit
12. Which of the following is a condition of long-run competitive equilibrium?

a. There are incentives for firms to enter the industry.
b. There are incentives for firms to exit the industry.
c. There is no incentive for firms to enter or exit the industry.
d. There are incentives for firms to produce more output.
e. There are incentives for firms to change plant size.
c; Basic
OBJ: factual
13. In the long run, firms enter an industry when

a. firms in the industry realize positive economic profits.
b. firms in the industry realize economic losses.
c. other firms exit the industry.
d. economic profits in the industry are zero.
e. firms in the industry become price-makers.
a; Basic
OBJ: factual
TOP: Entry and Exit
14. In the long run, if price is greater than average total cost in an industry, then
a. some firms leave the industry.
b. some firms are attracted to the industry.
c. all firms leave the industry.
d. there is no incentive for any firm to enter or leave the industry.
e. the industry disappears.
b; Moderate
OBJ: factual
TOP: Entry and Exit
MSC: Bloom's: Analysis | AACSB: Analytic
15. Firms may enter or exit a competitive industry

a. in the short run.
b. in the long run.
c. in either the short run or the long run.
d. only when they are no longer price-takers.
e. immediately after they begin operation.
b; Moderate
OBJ: factual
TOP: Entry and Exit
16. The number of firms increases in the long run when the industry realizes profits.
True; Basic
OBJ: factual
TOP: Entry
17. The entry and exit of firms occurs in the long run.
True; Basic
OBJ: factual
18. In economics, firms can enter an industry in the short run.

False; Basic
OBJ: factual
19. The long-run competitive equilibrium model can be used to predict the number of firms in an industry
given a certain level of market demand.
True; Moderate
OBJ: factual
20. In a competitive industry, firm demand is

a. downward-sloping.
b. vertical.
c. nonexistent.
d. horizontal.
e. unchanging.
d; Moderate
OBJ: factual
TOP: Firm Demand
21. The market demand curve in a competitive market is

a. vertical.
b. downward-sloping.
c. horizontal.
d. unit elastic.
e. perfectly elastic.
b; Moderate
OBJ: factual
TOP: Market Demand
22. When firms enter an industry, market supply

a. and firm demand both decrease.
b. increases and firm demand does not change.
c. and firm supply both decrease.
d. and firm demand both increase.
e. increases and firm demand shifts down.
e; Moderate
OBJ: conceptual
TOP: Firm Entry
23. When firms exit an industry,
a. firm profits typically fall.
b. market supply decreases, pushing market price higher.
c. market supply decreases, decreasing the firm's output price.
d. demand decreases and economic profits continue to decline.
e. market supply decreases, increasing price and bringing firms back into the industry.
b; Moderate
OBJ: conceptual
TOP: Firm Exit
24. If zero economic profit is being earned in a competitive industry,

a. firms leave the industry.
b. firms permanently shut down.
c. firms enter the industry.
d. no firms enter or leave the industry.
e. firms temporarily shut down.
d; Moderate
OBJ: conceptual
TOP: Firm Entry and Exit
25. Free entry and exit means that

a. banks charge no interest on a loan to start a firm.
b. there are no artificial barriers to entering and exiting an industry.
c. no investment is necessary in order to enter an industry.
d. it costs nothing to start a firm.
e. a firm is free to enter and exit a nation without having to pay high tax levies.
b; Moderate
OBJ: conceptual
TOP: Free Entry and Exit
26. A firm in a long-run equilibrium state

a. produces at the minimum of average variable cost.
b. produces at the minimum of marginal cost.
c. suffers accounting profit losses.
d. enjoys economies of scale.
e. makes no economic profit.
e; Moderate
OBJ: factual
TOP: Long-Run Equilibrium
27. If the typical firm in an industry is experiencing economies of scale,

a. short-run equilibrium cannot exist.
b. some firms exit the industry.
c. industry expansion occurs.
d. long-run equilibrium is achieved.
e. firms need to divest and become smaller.
c; Challenging
OBJ: conceptual
28. Which of the following does not need to be true for long-run equilibrium to be attained?
a. Constant returns to scale are reached.
b. The latest in technology is utilized.
c. Profit is being maximized.
d. There is no incentive to enter or exit the industry.
e. Economic profits equal zero.
b; Moderate
OBJ: conceptual
29. Which of the following is true in a long-run competitive equilibrium?

a. Price is greater than average total cost.
b. Profits are greater than zero.
c. Marginal cost is greater than average total cost.
d. Market supply is greater than market demand.
e. There is no incentive to enter or exit the industry.
e; Moderate
OBJ: conceptual
30. If the government subsidizes the production of wind energy, then the industry produces
a. more energy in the short run and firm entry occurs in the long run.
b. more energy in the short run and firm exit occurs in the long run.
c. less energy in the short run and firm entry occurs in the long run.
d. less energy in the short run and firm exit occurs in the long run.
e. the same amount of energy in both the short run and long run.
a; Moderate
OBJ: conceptual
31. If higher taxes raise the unit cost of a competitive industry, then producers
a. decrease production in the short run and the number of producers decreases in the long
run.
b. decrease production in the short run and the number of producers increases in the long run.
c. increase production in the short run and the number of producers decreases in the long run.
d. increase production in the short run and the number of producers increases in the long run.
e. keep production constant in the short run and the number of producers remains the same in
the long run.
a; Moderate
OBJ: conceptual
32. If higher taxes raise the unit cost of a competitive industry, then in the long run, industry supply
a. and market price decrease.
b. decreases and market price increases.
c. increases and market price decreases.
d. and market price increase.
e. and market price remain constant.
b; Moderate
OBJ: conceptual
33. If an innovation lowers the marginal cost of production for firms in a competitive industry, then in the
long run, the number of firms
a. increases and firms in the industry make normal profits.
b. does not change and firms in the industry make profits.
c. decreases and firms in the industry incur losses.
d. decreases and firms in the industry make profits.
e. decreases and firms in the industry make normal profits.
a; Moderate
OBJ: conceptual
34. Firm demand in a competitive industry, like market demand, is downward-sloping.

False; Basic
OBJ: factual
TOP: Firm Demand
35. Free entry and exit refers to industries with very low start-up costs.
False; Basic
OBJ: factual
TOP: Free Entry and Exit
36. When economic profits equal zero for firms in an industry, there is no entry or exit.
True; Basic
OBJ: factual
TOP: Entry and Exit
37. By definition, when market supply (the sum of firms' marginal cost curves) equals market demand,
long-run equilibrium is achieved.
False; Challenging
OBJ: conceptual
38. In long-run competitive equilibrium, market price equals a firm's average total cost.
True; Moderate
OBJ: conceptual
39. If, at the equilibrium level of output, a typical competitive firm's price is greater than its ATC, the firm
a. should raise the price.
b. should lower the price.
c. should decrease output.
d. finds that new firms are attracted to this industry.
e. should increase output.
d; Moderate
OBJ: conceptual
TOP: Short Run
40. In a competitive market, the presence of short-run economic profits would, in the long run, cause
economic profits to
a. disappear because market costs increase.
b. disappear because firms are able to take advantage of economies of scale.
c. continue.
d. decline but be larger than zero.
e. disappear because the market supply curve has shifted to the right.
e; Moderate
OBJ: conceptual
TOP: Long Run
41. If market demand increases, a competitive firm sees

a. its cost curves shift up.
b. its profit-maximizing output level increase.
c. its marginal cost fall.
d. its profits decrease.
e. the demand curve facing the firm shift down.
b; Basic
OBJ: conceptual
TOP: Market Demand and the Competitive Firm
42. When market demand increases in a competitive industry,

a. the number of firms increases, causing short-run market supply to increase.
b. firms become less efficient.
c. firms' marginal cost curves shift to the right.
d. economic profits stay at zero because of competition.
e. market price increases, making it possible for ATC curves to shift up.
a; Moderate
OBJ: conceptual
TOP: Market Demand Change and Effect on Industry Supply
43. Suppose that a competitive market is initially in long-run equilibrium. Which of the following are the
most likely results of an increase in market demand?
a. Existing firms will produce less and some firms will exit the market so that the market
supply curve will shift to the left.
b. Some existing firms will produce more while some other firms will exit the market so that
the market supply curve will remain the same.
c. Existing firms will produce more and new firms will enter the market so that the market
supply curve will shift to the right.
d. Existing firms will produce less while new firms will enter the market so that the effect on
the market supply curve is uncertain.
e. Nothing will change in the market.
c; Moderate
OBJ: conceptual
44. An increase in market demand can be shown by shifting a firm's demand curve to the right.
False; Moderate
OBJ: conceptual
TOP: Market Demand and the Competitive Firm
45. In the long run, market supply increases as market demand increases.
True; Moderate
OBJ: conceptual
TOP: Long Run
46. Suppose a mechanic uses $150,000 of his own money to start a business. The rate of interest he could
earn in a savings account is 5 percent, and the rate of interest he could earn by investing in bonds is 8
percent. What is the opportunity cost of capital when the mechanic uses his money to start his own
business?
a. $8,000/year
b. $7,500/year
c. $150,000
d. $12,000/year
e. $19,500/year
d; Challenging
OBJ: conceptual
TOP: Implicit Cost
MSC: Bloom's: Application | AACSB: Analytic
47. Suppose a dentist has total revenue of $320,000, and his total costs are $250,000 for the year. Also
suppose the dentist left a job paying $112,000 a year to start his own practice. What is the dentist's
accounting profit?
a. −$28,000
b. −$42,000
c. $182,000
d. $70,000
e. $112,000
d; Moderate
OBJ: conceptual
TOP: Accounting Profit
48. Suppose a dentist has total revenue of $320,000, and his total costs are $250,000 for the year. Also
suppose the dentist left a job paying $112,000 a year to start his own practice. What is the dentist's
economic profit?
a. $182,000
b. −$42,000
c. −$28,000
d. $112,000
e. $70,000
b; Moderate
OBJ: conceptual
TOP: Economic Profit
49. When economic profit is equal to zero, we say that

a. implicit costs equal zero.
b. a normal profit is being earned.
c. total cost is greater than total revenue.
d. accounting profit is negative.
e. the business is not profitable.
b; Moderate
OBJ: factual
TOP: Normal Profit
50. A normal profit may be defined as

a. the minimum amount of profit required to keep a business operating in the long run.
b. an accounting profit equal to the sum of all opportunity costs.
c. the maximum amount of profit that a business has ever made.
d. economic profit that is equal to accounting profit.
e. accounting profit equal to zero.
a; Moderate
OBJ: conceptual
TOP: Normal Profit
51. The difference between accounting profit and economic profit is

a. total costs.
b. implicit costs.
c. total opportunity costs.
d. normal profits.
e. marginal cost.
b; Basic
OBJ: factual
TOP: Accounting and Economic Profit
Exhibit 9-1
52. Refer to Exhibit 9-1. If all firms are identical, the equilibrium number of firms in the industry is
a. 125,000.
b. 3,333.
c. 2,500.
d. 3,000.
e. 250,000.
b; Moderate
OBJ: conceptual
TOP: Number of Firms
MSC: Bloom's: Application
53. Refer to Exhibit 9-1. If the market demand curve is D1, what happens in the long run?
a. Firm entry occurs.
b. Firm exit occurs.
c. Some firms increase capital input.
d. Some firms increase labor input.
e. Most firms do nothing.
b; Basic
OBJ: conceptual
TOP: Firm Exit
54. Refer to Exhibit 9-1. If the market demand curve is D3, what happens over time?
a. Some existing firms increase capital input.
b. Firm exit occurs.
c. Some existing firms decrease labor input.
d. Market price decreases.
e. Most firms do nothing.
a; Moderate
OBJ: conceptual
55. Refer to Exhibit 9-1. When does firm entry occur?

a. When demand is at D3
b. When demand is at D1
c. When demand is at D2
d. When price is P1 or greater
e. When price is P2 or less
a; Moderate
OBJ: conceptual
TOP: Firm Entry
56. Refer to Exhibit 9-1. Which of the following describes a long-run competitive equilibrium?
a. When market demand is at D2, each firm produces more than 75 units.
b. When market demand is at D2, each firm produces 75 units.
c. When market demand is at D2, each firm produces fewer than 75 units.
d. When market demand is at D2, each firm produces 250,000 units.
e. When price is P2, each firm produces 250,000 units.
b; Moderate
OBJ: conceptual
57. Refer to Exhibit 9-1. Which demand curve results in normal profits?
a. D1
b. D2
c. D3
d. Both D1 and D2
e. Both D2 and D3
b; Moderate
OBJ: conceptual
TOP: Normal Profit
58. Refer to Exhibit 9-1. Which demand curve results in economic losses?
a. D1
b. D2
c. D3
d. Both D1 and D2
e. Both D2 and D3
a; Moderate
OBJ: conceptual
TOP: Economic Profit
Exhibit 9-2
59. Refer to Exhibit 9-2. If the market demand curve is D1, then the firm earns normal profit.
True; Moderate
OBJ: conceptual
TOP: Normal Profit
60. Refer to Exhibit 9-2. If the demand curve shifts from D1 to D2, then
a. some firms enter the industry.
b. some firms exit the industry.
c. the number of firms does not change.
d. firms earn a normal profit.
e. most firms earn a loss.
a; Moderate
OBJ: conceptual
TOP: Entry
61. As firms enter a competitive industry,

a. both market demand and industry output increase.
b. industry economic profits increase.
c. output price falls and individual firms increase output.
d. output price falls and cost curves shift down.
e. output price falls and industry output increases.
e; Challenging
OBJ: conceptual
TOP: Entry and Firm Output
62. A competitive firm's long-run equilibrium exists where price

a. equals MC at minimum ATC.
b. equals TR.
c. exceeds AFC.
d. equals both AVC and MC.
e. exceeds ATC.
a; Basic
OBJ: factual
63. In a competitive industry, which of the following cannot be true for a firm in the long run?
a. Price equals marginal cost.
b. Profits are maximized.
c. The firm takes market price as given.
d. Economic profits equal zero.
e. Price equals average variable cost.
e; Moderate
OBJ: conceptual
TOP: Profits in the Long Run
64. In a competitive industry where the typical firm is making economic profit,
a. entry occurs as long as economic profit can be made.
b. entry occurs until supply equals demand.
c. entry occurs until price equals minimum average variable cost.
d. entry occurs until price equals marginal cost.
e. exit occurs as firms are sold to the highest bidders.
a; Challenging
OBJ: conceptual
TOP: Entry in a Competitive Industry
65. Suppose a competitive industry is in long-run equilibrium. When demand increases, market price
a. decreases in the short and long run.
b. rises in the short run and falls in the long run.
c. decreases in the short run and rises in the long run.
d. rises in the short and long run.
e. rises in the short run and rises more in the long run.
b; Moderate
OBJ: conceptual
TOP: Entry in a Competitive Industry
66. Which of the following statements is false?

a. Given the nature of cost curves, positive economic profits can only induce entry of new
firms.
b. Entry and expansion can occur at the same time in the same industry.
c. When positive economic profits prevail in an industry, firms often expand.
d. When economic profits are negative, firms might leave an industry.
e. An industry ceases to either expand or contract when economic profits are zero.
a; Moderate
OBJ: factual
TOP: Entry and Expansion
67. When economic losses occur in an industry,

a. the industry ceases to exist.
b. the only way the industry can change is by firms leaving it.
c. the only way the industry can change is by firms divesting themselves of capital.
d. firms in the industry may divest; others may exit the industry.
e. the industry expands with more firms.
d; Moderate
OBJ: conceptual
TOP: Exit
68. Which of the following is a condition for industry expansion through expansion of existing firms
instead of entry of new firms?
a. Firms take advantage of diseconomies of scale.
b. A firm size is greater than the minimum efficient sale.
c. A firm's average total cost decreases as a result of technological change.
d. A firm produces beyond the minimum long-run average total cost.
e. Firms make normal profits.
c; Moderate
OBJ: factual
69. A firm earns normal profit if its total revenue is greater than its total cost.
False; Moderate
OBJ: conceptual
TOP: Normal Profit
70. Industry expansion cannot occur without firms entering an industry.

False; Moderate
OBJ: conceptual
71. An increase in market price is likely to result in more firm entry in the long run.
True; Basic
OBJ: conceptual
TOP: Entry
72. In the long run, an industry can expand when existing firms expand by investing in new capital.
True; Moderate
OBJ: conceptual
73. All else being constant, when firms leave a competitive market, then
a. market supply decreases and market price rises.
b. both market demand and market supply decrease.
c. market supply decreases and market price falls.
d. market demand decreases and market price falls.
e. market demand increases and market price rises.
a; Moderate
OBJ: conceptual
TOP: Industry Decline
74. When an industry is in decline,

a. it is indicative of a weak economy.
b. it might be due to an increase in demand for the product.
c. it is common for firms to earn economic losses.
d. firm entry occurs.
e. all firms eventually leave the industry.
c; Moderate
OBJ: conceptual
75. Which of the following is false?

a. As firms exit an industry, market supply decreases.
b. As firms exit an industry, market price increases as demand increases.
c. As firms exit an industry, economic losses for the remaining firms decrease.
d. As firms exit an industry, at least some firm output increases.
e. As firms exit an industry, industry output is reduced.
b; Moderate
OBJ: conceptual
TOP: Firm Exit
76. Firms leave a competitive industry in the long run when

a. price is less than the minimum of marginal cost.
b. price is less than the minimum of average variable cost.
c. the return on investment is less than 10 percent.
d. price is less than the minimum of average total cost.
e. price is equal to the minimum of average total cost.
d; Moderate
OBJ: conceptual
TOP: Firm Exit
77. If market demand decreases in a market previously in long-run equilibrium,

a. the number of firms increases as each firm downsizes.
b. it is an indication that the industry has not kept up with new technology.
c. market price first rises and then falls in the movement to a new long-run equilibrium.
d. the immediate or short-run effect is a decrease in market price.
e. the industry ceases to exist.
d; Moderate
OBJ: conceptual
TOP: Firm Exit
78. Suppose that a competitive market is initially in long-run equilibrium. Which of the following are the
most likely results of a decrease in market demand?
a. Some existing firms will produce more while some other firms will exit the market so that
the market supply curve will remain the same.
b. Existing firms will produce less and some firms will exit the market so that the market
supply curve will shift to the left.
c. Existing firms will produce more and new firms will enter the market so that the market
supply curve will shift to the right.
d. Existing firms will produce less while new firms will enter the market so that the effect on
the market supply curve is uncertain.
e. Nothing will change in the market.
b; Moderate
OBJ: conceptual
TOP: Decrease in Market Demand and Effect on Industry Supply
79. In the long run, if a firm cannot cover its costs, then the profit-maximizing firm
a. increases output and lowers price.
b. continues to produce as long as total revenue exceeds fixed costs.
c. seeks more rewarding opportunities in some other industry.
d. continues to produce so that it maximizes its opportunity costs.
e. continues to produce as long as total revenue exceeds variable costs.
c; Moderate
OBJ: conceptual
TOP: Firm Exit
80. When firms leave an industry,

a. it is due to long-term losses.
b. other firms immediately enter to take their place.
c. it is because they anticipate an increase in demand.
d. other firms enter.
e. it is always due to a decrease in demand.
a; Moderate
OBJ: conceptual
81. If losses are incurred in a competitive industry, then over the long run, we can expect a greater
quantity supplied because market price will rise.
False; Challenging
OBJ: conceptual
TOP: Losses in an Industry
82. When an industry is in decline, firms do not necessarily exit; they may just shrink.
True; Moderate
OBJ: conceptual
83. An industry previously in long-run equilibrium might experience economic profits for any of the
following reasons except when
a. new, cost-saving production technology is developed.
b. new markets open up as trade barriers are reduced.
c. prices of inputs in the production process increase.
d. substitutes for the industry's output cease to be produced.
e. market demand increases.
c; Moderate
OBJ: conceptual
TOP: Changes in Costs
84. A change in production costs may occur for any of the following reasons except when
a. new production technology is introduced.
b. a new, cheaper, rival product is introduced.
c. the price of an input falls.
d. demand of other industries for a key input increases.
e. the use of cost savings management is introduced.
b; Moderate
OBJ: conceptual
TOP: Changes in Costs
85. A technological breakthrough that reduces the cost of materials in a perfectly competitive industry
would, in the long run,
a. lead to higher profits.
b. raise prices.
c. lower the output produced by each firm.
d. increase the number of producers.
e. decrease the number of producers.
d; Moderate
OBJ: conceptual
TOP: Change in Technology
86. In the long-run equilibrium, which of the following is at its minimum point?
a. Price
b. Average variable cost
c. Average fixed cost
d. Average total cost
e. Marginal cost
d; Basic
OBJ: factual
TOP: Average Total Cost
87. Which of the following conditions results in firms producing at the minimum average total cost in the
long run?
a. Free entry and exit of firms
b. Government price control
c. Economies of scale
d. Diseconomies of scale
e. Industry expansion
a; Moderate
OBJ: factual
TOP: Firm Entry and Exit
88. In a long-run equilibrium, a firm produces where

a. constant returns to scale are reached.
b. short-run average total cost is at a minimum.
c. long-run average total cost is at a minimum.
d. price equals marginal cost.
e. all of these are true.
e; Basic
OBJ: conceptual
TOP: Minimum Average Costs
89. When firms in an industry are all producing at the minimum of average total costs,
a. consumers pay the highest possible price.
b. firms begin to leave the industry.
c. per unit costs are at their lowest.
d. there is no consumer surplus.
e. price is greater than marginal cost.
c; Basic
OBJ: conceptual
90. In the long run, firms reduce capital input under which of the following conditions?
a. Economies of scale
b. Diseconomies of scale
c. Constant returns to scale
d. When average total cost increases with output
e. When price equals marginal cost
b; Moderate
OBJ: conceptual
TOP: Movement of Capital
91. With free entry and exit in a competitive market, capital

a. moves to declining industries.
b. moves to growing industries.
c. does not move.
d. becomes more expensive.
e. does not reflect market demand.
b; Moderate
OBJ: factual
TOP: Capital Allocation
92. Which of the following statements is false about capital in an industry?

a. An industry experiencing economic profits gains capital.
b. Increased government taxation of an industry prevents some capital movement.
c. The movement of capital occurs in the short run and the long run.
d. Market forces cause capital to move where it is most highly valued.
e. The movement of capital is determined by how profitable industries are.
c; Challenging
OBJ: conceptual
TOP: Movement of Capital
93. In a competitive market, capital allocation is efficient when it causes price to

a. equal marginal cost.
b. equal average variable cost.
c. be greater than marginal cost.
d. be greater than average variable cost.
e. be greater than average total cost.
a; Moderate
OBJ: conceptual
TOP: Efficient Allocation of Capital
94. A reduction in capital cost shifts the long-run average total cost curve down.
True; Basic
OBJ: conceptual
TOP: Change in Costs
95. Cost saving technologies result in an increase in economic profits in both the short run and the long
run.
False; Moderate
OBJ: conceptual
96. In the long-run competitive equilibrium, consumers pay for the lowest cost that a firm incurs.
True; Moderate
OBJ: conceptual
97. If price is greater than minimum average total cost in a competitive industry, entry occurs.
True; Moderate
OBJ: factual
98. The long-run equilibrium for a competitive firm occurs when its average total cost continues to
decline.
False; Basic
OBJ: factual
99. In the long-run competitive equilibrium model, capital is allocated in the most efficient manner.
True; Basic
OBJ: conceptual
100. In a system of competitive markets, capital, like all inputs, is allocated to its most highly valued uses,
making its allocation efficient.
True; Moderate
OBJ: conceptual
101. The long-run competitive equilibrium results in efficient allocation of capital.

True; Moderate
OBJ: conceptual
102. Explain what is wrong with the following statement: "It's not fair that firms profit so highly in an
industry that benefits from new, cost saving technology; they should have to immediately pass cost
savings directly on to the consumer."
ANSWER:
This statement assumes that consumers do not eventually benefit from the reduced costs. As a result of
the economic profits earned by firms already in the industry, entry occurs, increasing supply and
decreasing market price. This increases benefits to consumers over time. If profits were somehow
forced to be reduced by immediately passing cost savings directly to consumers, such entry and
expansion of the industry would not occur and consumers would benefit less in the long run than
otherwise.
Challenging
OBJ: conceptual
TOP: Firm Entry Effects
103. Explain why a sudden decrease in demand in a competitive industry causes price to fluctuate more in
the short run than in the long run, compared to the original equilibrium price.
ANSWER:
In the short run, the number of firms cannot change, so the reduction in output in an industry when
demand decreases can occur only by firms reducing output along their respective marginal cost curves.
In the long run, however, firms can divest and other firms can exit. Both of these actions cause
short-run market supply to shift left, bringing price back down, nearer to the original price. In the short
run, price adjustment is greater. In the long run, quantity adjustment is greater.
Challenging
OBJ: conceptual
TOP: Change in Demand
104. Draw a diagram of a competitive industry in a long-run equilibrium. Be sure to illustrate both the
market and a representative firm. When would entry occur? When would exit occur?
ANSWER:
If market demand increased for some reason or if market supply increased due to lower costs, entry
would occur. Exit would occur in the opposite circumstances.
Challenging
OBJ: conceptual
105. Can individual firm expansion affect market supply? Explain.
ANSWER:
Yes. When an individual firm expands, its quantity of capital input increases. This shifts it to the right
along its long-run average total cost curve. The long-run average total cost curve is made up of many
short-run average total cost curves, so the firm actually shifts from one set of short-run cost curves to
another. This means that the firm's supply curve, its marginal cost curve, shifts right. Because market
supply is the sum of firm supplies, market supply also shifts right.
Moderate
OBJ: conceptual
TOP: Firm Expansion
106. How might a change in technology in one industry negatively affect another? Give an example.
ANSWER:
Two narrowly defined industries can be part of the same broad industry, which means that a
technological advance in one that lowers costs and market price can cause demand in the other
industry to decline, thus causing that industry's profits to fall and firms to exit. One example is the
adding machine industry. A technological advance in electronics rendered mechanical adding
machines obsolete, so their demand fell and the mechanical adding machine industry no longer exists.
Another example is the CD industry and vinyl records.
Challenging
OBJ: conceptual
TOP: Change in Technology
107. Suppose a market equilibrium occurs at a quantity of 6,500 units. Also suppose that the typical firm's
constant returns to scale extend from a production level of 20 units to a production level of 50 units.
Calculate the maximum and minimum number of firms that could prevail in this industry.
ANSWER:
130 to 325
Maximum: (industry output)/(smallest firm output) = 6,500/20
Minimum: (industry output)/(largest firm output) = 6,500/50
Challenging
OBJ: conceptual
TOP: Equilibrium Number of Firms
108. Explain why a long-run equilibrium can occur only when firms in the industry are at the minimum of
their average total cost curves.
ANSWER:
All firms that survive in a competitive industry such that there is no entry or exit must sell at the same
price. If a firm were not at its minimum of average total cost, it could change its output and sell for less
than its competitors, thereby increasing profits. Or a firm not at its minimum average total cost would
face firms whose prices were lower than it could afford, and it would be forced to move to its
minimum or leave the industry. Because there is no exit or entry in the long-run equilibrium, there is
no incentive for such to occur, so all firms must be at their minimum average total costs.
Challenging
OBJ: conceptual
109. Justify the claim of economists that capital is efficiently allocated in competitive markets.
ANSWER:
In a competitive system, capital is allocated on the basis of who is willing to pay for it. Those who are
willing to pay for capital have successful production operations, whose products are most wanted by
consumers. They also will have the lowest costs, thereby creating the residual necessary for capital
investment. Economists say that capital is allocated most efficiently because the survivors in an
industry produce what people want at least cost, so capital contributes to the greatest possible benefit
from scarce resources.
Moderate
OBJ: conceptual
MSC: Bloom's: Evaluation | AACSB: Analytic
110. When the market price in long-run equilibrium remains unchanged after an industry expands, then the
long-run industry supply curve
a. is vertical.
b. is downward sloping.
c. is upward sloping.
d. is horizontal.
e. does not exist.
d; Basic
OBJ: conceptual
TOP: Long-Run Supply Curve
111. If an industry has a horizontal long-run industry supply curve, then which of the following must be
true?
a. An increase in market demand results in firm entry, and so market price declines in the
long run.
b. An increase in market demand results in industry expansion, and so market price increases
in the long run.
c. A decrease in market demand results in firm exit, and so market price in the long run
remains the same as before the market demand change.
d. A decrease in market demand results in firm exit, and so market price in the long run
declines in the long run.
e. Any change in market demand has no effects on firms.
c; Moderate
OBJ: conceptual
112. If a change in market demand results in no change in price in the long run, then it is true that the
long-run industry supply curve does not exist.
False; Moderate
OBJ: conceptual
113. External diseconomies of scale occur when

a. industry expansion leads to a decrease in marginal product.
b. long-run marginal cost increases with output.
c. problems with managing a large firm cause long-run average total costs to rise with
output.
d. industry expansion causes demand to increase.
e. industry expansion causes input prices to rise.
e; Basic
OBJ: factual
SEC: 3. External Economies and Diseconomies of Scale
TOP: External Diseconomies
114. External diseconomies cause the long-run industry supply curve to

a. first rise and then fall.
b. slope upward.
c. be flat.
d. not exist.
e. slope downward.
b; Basic
OBJ: factual
115. When external diseconomies of scale occur, as compared to the original equilibrium, an increase in
market demand causes
a. price to increase more in the long run than in the short run.
b. industry output to increase more in the short run than in the long run.
c. industry output to rise and then fall.
d. price to fall in the long run.
e. price to increase less in the long run than in the short run.
e; Challenging
OBJ: conceptual
116. Suppose an industry that experiences external diseconomies is in a long-run equilibrium. A decrease in
demand causes a(n)
a. decrease in price in the short run, with price returning to its former level in the long run.
b. decrease in price in the short run, with price returning to less than its former level in the
long run.
c. decrease in price in the short run, with price rising above its former level in the long run.
d. decrease in output in the short run, with output returning to its former level in the long run.
e. increase in output in the short run and even more increase in the long run.
b; Challenging
OBJ: conceptual
117. When industry expansion causes input prices to rise, we call this
a. external diseconomies of scale.
b. the law of increasing costs.
c. internal diseconomies of scale.
d. increasing returns.
e. diminishing returns.
a; Basic
OBJ: factual
118. An industry with an upward-sloping long-run supply curve experiences

a. external diseconomies of scale.
b. the law of increasing costs.
c. diminishing returns.
d. a loss of efficiency.
e. external economies of scale.
a; Basic
OBJ: factual
119. External diseconomies of scale cause an industry's long-run supply curve to slope upward.
True; Basic
OBJ: factual
120. External diseconomies of scale occur when firm entry results in lower unit costs for firms in the
industry.
False; Basic
OBJ: factual
121. External diseconomies of scale are caused by internal management problems when firms get very
large.
False; Basic
OBJ: factual
122. External economies of scale occur when

a. a firm's supply curve is downward-sloping.
b. an increase in firm output results in lower long-run average total costs.
c. an increase in the number of firms in an industry causes production costs to decline.
d. marginal product increases when input increases.
e. all firms in an industry experience decreasing marginal costs.
c; Moderate
OBJ: factual
TOP: External Economies
123. The fact that the expansion of the Zinfandel grape industry has resulted in the development of
agricultural schools in winemaking is an example of
a. internal economies of scale.
b. external economies of scale.
c. internal diseconomies of scale.
d. external diseconomies of scale.
e. a waste of resources.
b; Basic
OBJ: factual
124. If the computer industry exhibits external economies of scale, then its expansion is likely to result in
a. more firms outside the computer industry.
b. fewer firms outside the computer industry.
c. more firms within the computer industry.
d. fewer but bigger firms within the computer industry.
e. no impact on industries other than computer manufacturing.
a; Moderate
OBJ: factual
125. When an industry expansion brings about additional specialization of resources, thus reducing
production costs in that industry, we call this
a. returns from specialization.
b. external economies of scale.
c. the law of demand.
d. decreasing marginal costs.
e. the law of increasing returns.
b; Basic
OBJ: factual
126. If an industry that experiences external economies is in a long-run equilibrium, then an increase in
market demand causes
a. a decrease in price in the short run, with the price returning to its former level in the long
run.
b. an increase in price in the short run, with the price returning to its former level in the long
run.
c. an increase in price in the short run, but the price falls below its former level in the long
run.
d. an increase in price in the short run, with the price rising above its former level in the long
run.
e. nothing to change in the market.
c; Challenging
OBJ: conceptual
127. When long-run industry supply has a negative slope,

a. firms experience the law of decreasing costs.
b. short-run industry supply is also negatively sloped.
c. marginal product is negative.
d. we have a phenomenon that cannot occur.
e. industry expansion makes cost savings possible.
e; Moderate
OBJ: conceptual
128. External economies of scale cause an industry's long-run supply curve to slope upward.
False; Basic
OBJ: factual
129. External economies of scale occur when an industry expansion results in lower unit costs for firms.
True; Basic
OBJ: factual
130. External economies of scale occur when costs go down as an industry expands.
True; Basic
OBJ: factual
131. Explain why diseconomies of scale occur. Do you think diseconomies or economies of scale are more
prevalent? Why?
ANSWER:
Diseconomies of scale occur because when an industry expands, demand for the inputs it uses also
expands. In most markets, when demand increases, price increases as the market moves along the
supply curve. So when an industry expands, its input prices usually rise and the cost curves of firms in
the industry shift up, bringing about long-run equilibrium at a higher price level. External
diseconomies of scale are probably most common because of the consistency shown in most
markets--all have upward-sloping supply curves. External economies of scale are rare because they
usually require some sort of technological change, which does not always occur.
Challenging
OBJ: conceptual
TOP: Diseconomies of Scale
132. Given the following data for a typical firm in a competitive industry, sketch the two short-run average
total cost curves and the two marginal cost curves, and answer the following:
(A) What is the long-run price and quantity produced for the typical firm in this industry?
How many units of capital will the firm be using?
(B) Suppose the current market price of the output is $6. What level of capital and output is
profit-maximizing? Explain.
(C) Suppose the price of the output increases to $10. What level of capital and output is
profit-maximizing now?
(D) Will it make sense for the firm to expand even when the long-run equilibrium may be at
a lower level of capital? On what does it depend?
ANSWER:
(A) The firm produces 5 units of output at a little above $4 per unit. The firm uses 1 unit of
capital.
(B) If the market price is $6 per unit and the firm uses 1 unit of capital, then it produces 6
units of output. It will earn $1.30 of profit per unit. Total profit is $7.80. If the firm
employs 2 units of capital, then it will produce 8 units of output and earn $1.10 of profit
per unit. Total profit equals $8.80. Therefore, at a price of $6, the firm maximizes profits
by employing 2 units of capital.
(C) At $10, the firm maximizes profits by using 2 units of capital to produce 10 units of
output.
(D) Whether it makes sense for the firm to expand depends on how long it takes other firms
to enter the industry.
Moderate
OBJ: conceptual
TOP: Long Run
133. A moving company has $20 in fixed costs per day and pays an hourly wage of $10 per worker. The
moving company is paid $80 for each room of furniture it moves. The daily production function of the
firm is as follows:
(A) Calculate marginal cost and average total cost for this typical firm.
(B) How many rooms of furniture will this firm move in the short run? What are the profits
or losses of the firm?
(C) What will be the long-run adjustment in this industry? What will be the long-run price
and output for a typical firm in this industry?
ANSWER:
(A)
(B) This firm will move 4 rooms of furniture. Its profits are $60.
(C) In the long run, other firms will enter this industry. Profits will be competed away. The
long-run price and output for the typical firm in this industry will be $60, and the typical
firm will move 3 rooms of furniture.
Moderate
OBJ: conceptual
TOP: Long-Run Adjustment
134. Consider a competitive industry with a large number of toy-producing firms. Describe how that
industry adjusts to a decline in the demand for toys. Explain your answer graphically, showing both
the typical toy firm's marginal cost and average total cost curves, as well as the market supply and
demand curves. Distinguish between the short run and the long run.
ANSWER:
As demand decreases, in the short run, the price falls to P2 from P1. Individual toy firms reduce
production because of the lower market price. This results in reduced profits, leading to firms exiting
the market. In the long run, because of the reduction in the number of firms, the market supply curve
shifts leftward from S1 to S2. Therefore, the long-run supply curve (LRS) is horizontal.
Moderate
OBJ: conceptual
TOP: Competitive Equilibrium
135. Consider developments in the computing industry. Old leading firms rely on using large computers,
called mainframes, to serve their commercial customers. Because of the increased capability of
personal computers, new firms in the industry can use personal computers or small workstations to
provide the same services as the leading firms but at lower average costs. Describe the impact of these
new arrivals on the computing industry in the short run and in the long run.
ANSWER:
The new computing technology causes the new firms to make economic profits and expand
production. In the long run, the industry will expand capacity, and more computing companies will
enter the industry. The expansion will continue until all economic profits are eliminated.
Moderate
OBJ: conceptual
136. Consider developments in movie theaters, which have suffered declining sales because more
customers watch movies on videos and DVDs instead of going to the theater to see movies. Explain
how this change in people's preferences affects movie theaters in the short run and in the long run.
ANSWER:
The decline in the demand for movies in theaters will cause some movie theaters to suffer losses and
eventually leave the industry. In the long run, the movie ticket price will increase as the total market
supply decreases, and the remaining movie theaters will make normal profits.
Moderate
OBJ: conceptual
137. Suppose the government gives a subsidy to each gallon of milk sold in a competitive milk industry.
Describe what happens to the price of milk in the short run and the long run when farmers are free to
enter and exit. What happens to milk output and the number of farmers in the short run and the long
run?
ANSWER:
A subsidy to milk lowers the average cost and marginal cost, so it encourages farmers in the industry
to produce more in the short run. In the long run, the number of farmers increases. Production is higher
in both the short run and the long run.
Moderate
OBJ: conceptual
TOP: Effect of a Subsidy
138. Explain what happens to firm output and profits in the long run when higher energy costs raise the
marginal cost of production for firms in a competitive industry.
ANSWER:
As a result of the higher marginal production costs, firms produce less in the short run. Firms also have
lower profits or incur losses. In the long run, the number of firms decreases due to exits or divestment.
Production is lower in both the short run and the long run. In the long run, firms make zero or normal
profits.
Moderate
OBJ: conceptual
TOP: Long-Run Adjustment
139. List some external economies of scale and some external diseconomies of scale that might be realized
by an airline in an airport. How do these economies or diseconomies of scale affect the shape of the
long-run industry supply curve?
ANSWER:
Examples of external economies of scale for an airline in an airport include better connections to other
cities for other airlines and access to plane maintenance and repair services. An example of external
diseconomies of scale is increased delays due to traffic congestion on the runway. External economies
lower the average total costs of airlines as they expand, so that the long-run industry supply curve
slopes downward. External diseconomies raise the average total costs of airlines as they expand, so
that the long-run industry supply curve slopes upward.
Moderate
OBJ: conceptual

Principles of Economics 8th Edition Marshall Test Bank

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Principles of Economics 8th Edition Marshall Test Bank

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Principles of Economics 8th Edition

Marshall Test Bank

The Rise and Fall of Industries

Multiple Choice Questions

1. Three reasons for the rise and fall of industries are

2. A group of firms, each of which produces similar products, is called a(n)

5. Consumers are part of an industry.

6. The definition of a market is broader than that of an industry.

7. An industry tends to expand as market demand increases.

Short Answer Questions

8. List three reasons for the rise and fall of industries.

9. Define the term industry.

11. Which of the following statements is false?

12. Which of the following is a condition of long-run competitive equilibrium?

13. In the long run, firms enter an industry when

15. Firms may enter or exit a competitive industry

18. In economics, firms can enter an industry in the short run.

Multiple Choice Questions

20. In a competitive industry, firm demand is

21. The market demand curve in a competitive market is

22. When firms enter an industry, market supply

24. If zero economic profit is being earned in a competitive industry,

25. Free entry and exit means that

26. A firm in a long-run equilibrium state

27. If the typical firm in an industry is experiencing economies of scale,

29. Which of the following is true in a long-run competitive equilibrium?

34. Firm demand in a competitive industry, like market demand, is downward-sloping.

Multiple Choice Questions

41. If market demand increases, a competitive firm sees

42. When market demand increases in a competitive industry,

Multiple Choice Questions

49. When economic profit is equal to zero, we say that

50. A normal profit may be defined as

51. The difference between accounting profit and economic profit is

55. Refer to Exhibit 9-1. When does firm entry occur?

Multiple Choice Questions

61. As firms enter a competitive industry,

62. A competitive firm's long-run equilibrium exists where price

66. Which of the following statements is false?

67. When economic losses occur in an industry,

70. Industry expansion cannot occur without firms entering an industry.

Multiple Choice Questions

74. When an industry is in decline,

75. Which of the following is false?

76. Firms leave a competitive industry in the long run when

77. If market demand decreases in a market previously in long-run equilibrium,

80. When firms leave an industry,

Multiple Choice Questions

88. In a long-run equilibrium, a firm produces where

91. With free entry and exit in a competitive market, capital

92. Which of the following statements is false about capital in an industry?

93. In a competitive market, capital allocation is efficient when it causes price to

101. The long-run competitive equilibrium results in efficient allocation of capital.

Short Answer Questions

105. Can individual firm expansion affect market supply? Explain.

Multiple Choice Questions

113. External diseconomies of scale occur when

114. External diseconomies cause the long-run industry supply curve to

118. An industry with an upward-sloping long-run supply curve experiences

Multiple Choice Questions

122. External economies of scale occur when

127. When long-run industry supply has a negative slope,

Short Answer Questions