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MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

1) The length of time constituting the long run:

A) varies substantially by industry. B) is about 5 years.
C) is about 2 years. D) is the same for pretty well all industries.
Answer: A

2) If in the short run, profit is greater than average total cost, and new firms are attracted to an industry,
then price will be:
A) left the same.
B) be brought back up to equality with minimum total cost in the long run.
C) be brought back down to equality with minimum average total cost in the long run.
D) be brought back down to equality with maximum total cost in the long run.
Answer: C

3) After all long run adjustments in a perfectly competitive industry, product price will be exactly
equal to, and production will occur at, each firm's
A) maximum average total cost. B) minimum marginal cost.
C) minimum average total cost. D) marginal revenue.
Answer: C

4) A perfectly competitive firm is precluded from making economic profit in the long run because:
A) it is a "price taker." B) its demand curve is perfectly elastic.
C) of free entry of firms to the industry. D) it produces a differentiated product.
Answer: C

5) A constant-cost industry is one in which:

A) resource prices remain unchanged as output is increased.
B) resource prices fall as output is increased.
C) small and large levels of output entail the same total costs.
D) resource prices rise as output is increased.
Answer: A

6) In a perfectly competitive industry:

A) there may be economic profits in the long run, but not in the short run.
B) there may be economic profits in the short run, but not in the long run.
C) economic profits may persist in the long run if consumer demand is strong and stable.
D) there will be no economic profits in either the short run or the long run.
Answer: B

1
7) Assume a perfectly competitive firm is maximizing profit at some output at which long-run average
total cost is at a minimum. Then:
A) there is no tendency for the firm's industry to expand or contract.
B) allocative but not productive efficiency is being achieved.
C) the firm is earning an economic profit.
D) other firms will enter this industry.
Answer: A

8) We would expect an industry to expand if firms in that industry are:

A) earning normal profits.
B) realizing an equality of total revenue and total costs.
C) earning accounting profits.
D) earning economic profits.
Answer: D

9) Which of the following is true concerning perfectly competitive industries?

A) There are economic profits in the long run, but not in the short run.
B) In the short run, firms may incur economic losses or earn economic profit, but in the long run
they earn a normal profit.
C) There will be economic losses in the long run because of cut-throat competition.
D) Economic profits will persist in the long run if consumer demand is strong and stable.
Answer: B

10) When a perfectly competitive firm is in long-run equilibrium, price is equal to:
A) minimum of the average cost, and also to marginal cost.
B) marginal cost, but may be greater or less than average cost.
C) minimum average cost, but may be greater or less than marginal cost.
D) marginal revenue, but may be greater or less than both average and marginal cost.
Answer: A

11) When a perfectly competitive industry is in long-run equilibrium, which statement is true?
A) Marginal cost is at its maximum level.
B) Price and average total cost are equal.
C) Average total cost is less than marginal cost.
D) Marginal revenue is greater than price.
Answer: B

12) Long-run competitive equilibrium:

A) is realized only in constant-cost industries. B) is not economically efficient.
C) results in zero economic profits. D) will never change once it is realized.
Answer: C

2
13) When a perfectly competitive firm is in long-run equilibrium:
A) price equals marginal cost. B) marginal revenue equals marginal cost.
C) minimum average total cost equals price. D) all of these are true.
Answer: D

14) A perfectly competitive firm industry:

A) must earn a normal profit in the short run.
B) cannot earn economic profit in the long run.
C) cannot earn economic profit in the short run.
D) may realize either economic profit or losses in the long run.
Answer: B

15) The graph depicts the average total cost curve for a perfectly competitive firm. At the long-run equilibrium
level of output, this firm's total revenue:

A) is $400.
B) is $10.
C) is $40.
D) cannot be determined from the information provided.
Answer: A

3
16) The graph depicts the average total cost curve for a perfectly competitive firm. At the long-run equilibrium
level of output, this firm's total cost:

A) is $400.
B) is $40.
C) is $10.
D) cannot be determined from the information provided.
Answer: A

4
17) The graph depicts the average total cost curve for a perfectly competitive firm. At the long-run equilibrium
level of output, this firm's economic profit:

A) is $200.
B) is $400.
C) is zero.
D) cannot be determined from the information provided.
Answer: C

18) In long-run equilibrium a perfectly competitive firm will operate where price is:
A) greater than MC and minimum ATC, but equal to MR.
B) equal to MR, MC, and minimum ATC.
C) greater than MR and MC, but equal to minimum ATC.
D) greater than MR but equal to MC and minimum ATC.
Answer: B

19) Which is true of a perfectly competitive firm in the long-run equilibrium?

A) Average variable cost equals marginal cost.
B) Price equals marginal cost.
C) Average fixed cost equals price.
D) Marginal cost equals marginal product.
Answer: B

5
20) Assume that the market for soybeans is perfectly competitive. Currently, firms growing soybeans are
experiencing economic profits. In the long run, we can expect this market's:
A) supply curve to shift to the left. B) supply curve to shift to the right.
C) demand curve to shift to the left. D) demand curve to shift to the right.
Answer: B

21) The diagram below portrays:

A) the equilibrium position of a competitive firm in the long run.

B) a competitive firm which should shut down in the short run.
C) a competitive firm which is realizing an economic profit.
D) the loss-minimizing position of a competitive firm in the short run.
Answer: A

22) Supposea firm in a perfectly competitive market discovers that the price of its product is above its
minimum AVC point but below ATC. Given this, the firm:
A) should continue producing in the short run, but leave the industry in the long run.
B) maximizes profits by producing where MR = ATC.
C) minimizes losses by producing at the minimum point of its AVC curve.
D) should close down immediately.
Answer: A

23) Which of the following will not hold true for a competitive firm in long-run equilibrium?
A) P equals MC B) P equals minimum ATC
C) MC equals minimum ATC D) P equals AFC
Answer: D

6
24) These diagrams, pertain to a perfectly competitive firm producing output q and the industry in which it
operates. In the long run we should expect:

A) firms to enter the industry, market supply to rise, and product price to fall.
B) firms to leave the industry, market supply to fall, and product price to rise.
C) firms to leave the industry, market supply to rise, and product price to fall.
D) no change in the number of firms in this industry.
Answer: B

25) Which of the following will not hold true for a competitive firm in long-run equilibrium?
A) MC equals minimum ATC B) P equals AFC
C) P equals MC D) P equals minimum ATC
Answer: B

26) Suppose a firm in a perfectly competitive market discovers that the price of its product is above its
minimum AVC point but below ATC. Given this, the firm:
A) should continue producing in the short run, but leave the industry in the long run.
B) minimizes losses by producing at the minimum point of its AVC curve.
C) should close down immediately.
D) maximizes profits by producing where MR = ATC.
Answer: A

27) Ifa perfectly competitive firm is producing at the MR = MC output level and earning an economic
profit, then:
A) some existing firms in this market will leave.
B) the selling price for this firm is above the market equilibrium price.
C) there must be price fixing by the industry's firms.
D) new firms will enter this market.
Answer: D

7
28) Which of the following statements is correct?
A) Economic profits and losses have no significant impact on the growth or decline of an industry.
B) Normal profits will cause an industry to expand.
C) Economic profits induce firms to leave an industry; profits encourage firms to leave.
D) Economic profits induce firms to enter an industry; losses encourage firms to leave.
Answer: D

29) Ifa perfectly competitive firm is in short-run equilibrium and its marginal cost exceeds its average
total cost, then we can conclude that:
A) this is an increasing-cost industry.
B) this is a decreasing-cost industry.
C) firms will enter the industry in the long run.
D) firms will exit the industry in the long run.
Answer: C

30) A perfectly competitive firm, as shown below, will face what kind of change in profits over the long run,
assuming industry demand is constant?

A) Profits will be unchanged.

B) Profits will decrease.
C) Profits will increase.
D) Cannot be decided from the information given.
Answer: B

31) Iffirms enter a perfectly competitive industry, then in the long run this change will shift the
industry:
A) demand curve to the right, and the market price will increase.
B) supply curve to the left, and the market price will increase.
C) demand curve to the left, and the market price will decrease.
D) supply curve to the right, and the market price will decrease.
Answer: D

8
32) According to the graphs below, what will happen in the long run to industry supply and the equilibrium price of
the product?

A) S will decrease, P will increase. B) S will increase, P will increase.

C) S will decrease, P will decrease. D) S will increase, P will decrease.
Answer: A

33) Iffirms are losing money in a perfectly competitive industry, then in the long run this situation will
shift the industry:
A) supply curve to the right, and the market price will decrease.
B) supply curve to the left, and the market price will increase.
C) demand curve to the left, and the market price will decrease.
D) demand curve to the right, and the market price will increase.
Answer: B

34) Perfectly competitive industry X has constant costs and its product is an inferior good. The industry
is currently in long-run equilibrium. The economy now goes into a recession and average incomes
decline. The result will be:
A) a decrease in output and in the price of the product.
B) a decrease in the output, but not in the price, of the product.
C) an increase in output and in the price of the product.
D) an increase in output, but not in the price, of the product.
Answer: D

35) A constant-cost industry is one in which:

A) the demand curve and therefore the unit price and quantity sold seldom change.
B) a higher price per unit will not result in an increased output.
C) the total cost of producing 200 or 300 units is no greater than the cost of producing 100 units.
D) if 100 units can be produced for $100, then 150 can be produced for $150, 200 for $200, and so
forth.
Answer: D

9
36) Ifa perfectly competitive constant-cost industry is realizing economic profits, we can expect
industry supply to:
A) increase, output to increase, price to increase, and profits to decrease.
B) decrease, output to decrease, price to increase, and profits to increase.
C) increase, output to decrease, price to decrease, and profits to decrease.
D) increase, output to increase, price to decrease, and profits to decrease.
Answer: D

37) The long-run supply curve would be perfectly elastic in:

A) a constant-cost industry. B) a variable-cost industry.
C) a decreasing-cost industry. D) an increasing-cost industry.
Answer: A

38) Refer to the diagram below. Line (2) reflects the long-run supply curve for:

A) a decreasing-cost industry. B) technologically progressive industry.

C) an increasing-cost industry. D) a constant-cost industry.
Answer: D

39) The long-run supply curve would be perfectly elastic in:

A) a decreasing-cost industry. B) a variable-cost industry.
C) an increasing-cost industry. D) a constant-cost industry.
Answer: D

10
40) Suppose a perfectly competitive increasing-cost industry is in long-run equilibrium. Now assume
that a decrease in consumer demand occurs. After all resulting adjustments have been completed,
the new equilibrium price:
A) will be less than the initial price, but the new industry output will be greater than the original
output.
B) will be greater than the initial price, but the new industry output will be less than the original
output.
C) and industry output will be greater than the initial price and output.
D) and industry output will be less than the initial price and output.
Answer: D

41) Which of the following statements is correct?

A) The long-run supply curve for a perfectly competitive increasing-cost industry will be perfectly
elastic.
B) The long-run supply curve for a perfectly competitive industry will be less elastic than the
industry's short-run supply curve.
C) The long-run supply curve for a perfectly competitive decreasing-cost industry will be upward
sloping.
D) The long-run supply curve for a perfectly competitive increasing-cost industry will be upward
sloping.
Answer: D

42) Assume a perfectly competitive increasing-cost industry is initially in long-run equilibrium and that
an increase in consumer demand occurs. After all economic adjustments have been completed
product price will be:
A) higher and total output will be larger than originally.
B) lower, but total output will be larger than originally.
C) lower and total output will be smaller than originally.
D) higher, but total output will be smaller than originally.
Answer: A

43) Assume a perfectly competitive, increasing-cost industry is in long-run equilibrium. If a decline in

demand occurs, firms will:
A) leave the industry and price and output will both increase.
B) enter the industry and price and quantity will both increase.
C) leave the industry, price will decrease, and quantity produced will increase.
D) leave the industry and price and output will both decline.
Answer: D

44) Anincreasing-cost industry is associated with:

A) an upward sloping long-run supply curve. B) a perfectly elastic long-run supply curve.
C) a perfectly inelastic long-run supply curve. D) an upward sloping long-run demand curve.
Answer: A

11
45) An increasing-cost industry is the result of:
A) the law of diminishing returns.
B) higher resource prices which occur as the industry expands.
C) X-inefficiency.
D) a change in the industry's minimum efficient scale.
Answer: B

46) Suppose losses cause industry X to contract and, as a result, the prices of relevant inputs decline.
Industry X is:
A) a decreasing-cost industry. B) a constant-cost industry.
C) encountering X-inefficiency. D) an increasing-cost industry.
Answer: D

47) One explanation for the existence of an increasing-cost industry is:

A) as the industry expands, input prices are bid up for some factor of production.
B) firms produce beyond the point of minimum long-run average total costs.
C) perfectly elastic long-run supply schedules are observed in the industry.
D) increasing marginal returns to labour occur.
Answer: A

48) Ifthe long-run supply curve of a perfectly competitive industry slopes upward, this implies that the
prices of relevant resources:
A) rise as the industry contracts. B) rise as the industry expands.
C) will fall as the industry expands. D) are constant as the industry expands.
Answer: B

49) Which of the following statements is true of an increasing-cost industry?

A) The long-run supply curve is always downward sloping.
B) The entry of new firms causes resource prices to decline.
C) A decline in consumer demand increases the equilibrium price and output.
D) The firms' average total cost curves shift upwards as the industry expands.
Answer: D

50) Assume a perfectly competitive firm in long-run equilibrium is producing 10,000 units of output
that is sold at a price of $40 per unit. Which of the following outcomes indicates that the industry is
an increasing-cost industry?
A) A decline in demand decreases the price to $35 and increases the output to 15,000 units.
B) A decline in demand increases the price to $45 and reduces the output to 9,000 units.
C) An increase in demand increases the price to $50 and increases the output to 15,000 units.
D) An increase in demand increases the price to $45 and reduces the output to 9,000 units.
Answer: C

12
51) Assume a perfectly competitive increasing-cost industry is initially in long-run equilibrium and that
an increase in consumer demand occurs. After all economic adjustments have been completed,
product price will be:
A) higher, but total output will be smaller than originally.
B) lower, and total output will be smaller than originally.
C) lower, but total output will be larger than originally.
D) higher, and total output will be larger than originally.
Answer: D

52) Refer to the diagram below. Line (1) reflects the long-run supply curve for:

A) technologically progressive industry. B) a decreasing-cost industry.

C) an increasing-cost industry. D) a constant-cost industry.
Answer: C

13
53) The diagram below depicts long-run supply for:

A) a constant-cost industry. B) an increasing-cost industry.

C) a decreasing-cost industry. D) none of these.
Answer: B

54) The
industry represented by the graph where S1 and S2 are short-run supply curves, D1 and D2 are short-run
demand curves, and LRS is the long-run supply curve can be said to be:

A) an average-cost industry. B) a decreasing-cost industry.

C) a constant-cost industry. D) an increasing-cost industry.
Answer: D

14
55) The long-run supply curve under perfect competition will be:
A) horizontal in a constant-cost industry and downward sloping in an increasing-cost industry.
B) upward sloping in an increasing-cost industry and vertical in a constant-cost industry.
C) downward sloping in a decreasing-cost industry and upward sloping in an increasing-cost
industry.
D) vertical in a constant-cost industry and upward sloping in a decreasing-cost industry.
Answer: C

56) When compact disc (CD) players first came on the market, they sold for over $1,000. Now a good
CD player can be purchased for $100. These facts imply that:
A) the CD player industry is a decreasing-cost industry.
B) fewer firms produce CD players than was the case five or ten years ago.
C) the demand curve for CD players has shifted leftward.
D) the CD industry was once competitive, but is now monopolistic.
Answer: A

57) Suppose that an industry's long-run supply curve is downward sloping. This suggests that:
A) relevant inputs have become more expensive as the industry has expanded.
B) technology has become less efficient as a result of the industry's expansion.
C) it is an increasing-cost industry.
D) it is a decreasing-cost industry.
Answer: D

58) A decreasing-cost industry is one in which:

A) the long-run supply curve is perfectly elastic.
B) input prices fall or technology improves as the industry expands.
C) contraction of the industry will decrease unit costs.
D) the long-run supply curve is upward sloping.
Answer: B

59) A decreasing-cost industry is one in which:

A) input prices fall or technology improves as the industry expands.
B) the long-run supply curve is perfectly inelastic.
C) contraction of the industry will increase unit costs.
D) the long-run supply curve is vertical.
Answer: A

60) The long-run supply curve would be downward sloping in:

A) a decreasing-cost industry. B) a variable-cost industry.
C) a constant-cost industry. D) an increasing-cost industry.
Answer: A

15
61) Suppose an increase in product demand occurs in a decreasing-cost industry. As a result:
A) firms will eventually leave the industry.
B) equilibrium quantity will decline.
C) the new long-run equilibrium price will be lower than the original long-run equilibrium price.
D) the new long-run equilibrium price will be higher than the original price.
Answer: C

62) The following diagram represents a(n):

A) increasing-cost industry: Firms may be paying higher prices for their inputs when the industry
expands.
B) constant-cost industry: Prices of the inputs stay the same, and other production costs are
constant as the industry expands.
C) competitive, break-even industry: The long-run supply curve is upward sloping as it must be
according to the law of supply.
D) decreasing-cost industry: Firms may be paying lower prices for their inputs when the industry
expands.
Answer: D

16
63) The long-run supply curve for the industry described in the graph would be:

A) vertical. B) upward sloping.

C) horizontal. D) downward sloping.
Answer: D

64) Productive efficiency refers to:

A) production, where P = MC.
B) setting TR = TC.
C) maximizing profits by producing where MR = MC.
D) cost minimization, where P = minimum ATC.
Answer: D

65) Theterm "productive efficiency" refers to:

A) the production of the product-mix most desired by consumers.
B) the production of a good at the lowest average total cost.
C) fulfilling the condition P = MC.
D) any short-run equilibrium position of a competitive firm.
Answer: B

66) Which statement is correct?

A) In order to maximize profits a firm should produce at that output at which total revenue is
greatest.
B) A competitive firm will produce in the short run so long as total receipts are sufficient to cover
total fixed costs.
C) A competitive firm will close down in the short run whenever price is less than the minimum
attainable average total cost.
D) In long-run equilibrium a competitive firm will produce at the point of minimum average costs.
Answer: D

17
67) Which of the following is true of would indicate that a firm is operating under conditions of perfect
competition and is being productively efficient?
A) Marginal cost equals average variable cost.
B) It produces at the minimum average total cost.
C) Its marginal revenue is less than average revenue.
D) It is making economic profits in the long run.
Answer: B

68) Aneconomy is producing at the least-cost rate of production when:

A) price and the minimum average cost are equal.
B) marginal cost is greater than average total cost.
C) price and marginal revenue are equal.
D) marginal revenue is greater than price.
Answer: A

69) Which statement is true of a productively efficient firm in a perfectly competitive industry? In
long-run equilibrium under conditions of perfect competition and productive efficiency, all firms
produce at minimum:
A) marginal cost. B) average total cost.
C) total cost. D) average variable cost.
Answer: B

70) Theterm "allocative efficiency" refers to:

A) the production of the product-mix most desired by consumers.
B) the level of output which coincides with the intersection of the MC and AVC curves.
C) the production of a good at the lowest average total cost.
D) minimization of the AFC in the production of any good.
Answer: A

71) Resources are efficiently allocated when production occurs where:

A) price is equal to average variable cost. B) price is equal to average revenue.
C) price is equal to marginal cost. D) marginal cost equals average variable cost.
Answer: C

72) Allocative efficiency occurswhen the:

A) marginal cost equals the marginal benefit to society.
B) minimum of average total cost equals average revenue.
C) marginal revenue equals marginal benefit to society.
D) minimum of average total cost equals marginal revenue.
Answer: A

73) Allocative efficiency is

achieved when the production of a good occurs where:
A) P = MC. B) P = minimum ATC.
C) total revenue is equal to TFC. D) P = minimum AVC.
Answer: A

18
74) Perfect
competition produces a socially optimal allocation of resources in the long run because:
A) marginal revenue equals price. B) marginal cost equals marginal revenue.
C) marginal cost equals average total cost. D) marginal cost equals price.
Answer: D

75) When a perfectly competitive firm is in long-run equilibrium and is allocatively efficient:
A) totalcost is at a minimum. B) marginal cost equals marginal revenue.
C) average variable cost equals marginal cost. D) total revenue is at a maximum.
Answer: B

76) Which of the following statements is correct?

A) In a competitive market, production occurs at that output at which price exceeds marginal cost.
B) In a competitive market, production occurs at that output at which price exceeds marginal
revenue.
C) Perfect competition yields allocative efficiency.
D) Only producer surplus is maximized when a firm achieves allocative efficiency.
Answer: C

77) Assume that a firm's allocatively efficient output is 1 million units. Which of the following is true of
the firm?
A) Marginal cost exceeds marginal benefit for any output lesser than 1 million.
B) Marginal benefit exceeds marginal cost for any output greater than 1 million.
C) Marginal cost equals marginal benefit for any output greater than 1 million.
D) Marginal benefit exceeds marginal cost for any output lesser than 1 million.
Answer: D

78) Assume that a firm's allocatively efficient output and price are 1 million and $10 respectively.
Which of the following is true of the firm?
A) Price exceeds marginal cost for any output lesser than 1 million.
B) Marginal benefit exceeds marginal cost for any output greater than 1 million.
C) Marginal cost exceeds marginal benefit for any output lesser than 1 million.
D) Price exceeds marginal cost for any output greater than 1 million.
Answer: A

79) When aperfectly competitive firm is in long-run equilibrium and is allocatively efficient:
A) total
cost is at a minimum. B) average variable cost equals marginal cost.
C) marginal cost equals marginal revenue. D) total revenue is at a maximum.
Answer: C

19
80) By producing output level Q:

A) neither productive nor allocative efficiency are achieved.

B) productive efficiency is achieved, but allocative efficiency is not.
C) both productive and allocative efficiency are achieved.
D) allocative efficiency is achieved, but productive efficiency is not.
Answer: C

20
81) At output level Q1:

A) both productive and allocative efficiency are achieved.

B) productive efficiency is achieved, but allocative efficiency is not.
C) neither productive nor allocative efficiency are achieved.
D) allocative efficiency is achieved, but productive efficiency is not.
Answer: C

82) Under perfect competition in the long run:

A) both "allocative efficiency" and "productive efficiency" are achieved.
B) allocative efficiency is achieved, but "productive efficiency" is not.
C) productive efficiency is achieved, but "allocative efficiency" is not.
D) neither "allocative efficiency" nor "productive efficiency" are achieved.
Answer: A

83) If for a firm P = minimum ATC = MC, then:

A) both "allocative efficiency" and "productive efficiency" are being achieved.
B) neither "allocative efficiency" nor "productive efficiency" is being achieved.
C) allocative efficiency is being achieved, but "productive efficiency" is not.
D) productive efficiency is being achieved, but "allocative efficiency" is not.
Answer: A

21
84) Afirm is producing an output such that the benefit from one more unit is more than the cost of
producing that additional unit. This means the firm is:
A) producing less output than allocative efficiency requires.
B) producing an inefficient output, but we cannot say whether output should be increased or
decreased.
C) realizing productive efficiency.
D) producing more output than allocative efficiency requires.
Answer: A

85) At output level Q 1 :

A) resources are overallocated to this product and productive efficiency is not realized.
B)productive efficiency is achieved, but resources are underallocated to this product.
C) productive efficiency is achieved, but resources are overallocated to this product.
D) resources are underallocated to this product and productive efficiency is not realized.
Answer: D

22
86) At output level Q 2 :

A) resources are overallocated to this product and productive efficiency is not realized.
B) productive efficiency is achieved, but resources are overallocated to this product.
C) resources are underallocated to this product and productive efficiency is not realized.
D) productive efficiency is achieved, but resources are underallocated to this product.
Answer: A

87) If the price of product Y is $25 and its marginal cost is $18:
A) resources are being underallocated to Y.
B) resources are being overallocated to Y.
C) society will realize a net gain if less of Y is produced.
D) Y is being produced with the least-cost combination of resources.
Answer: A

88) Assume that society places a higher value on the last unit of X produced than the value of the
resources used to produce that unit. With no externalities, this information means that:
A) resources are being overallocated to X. B) total cost is greater than total revenue.
C) price is greater than marginal cost. D) marginal cost is greater than price.
Answer: C

89) If production is occurring where marginal cost exceeds price, the perfectly competitive firm will:
A) fail to maximize profit and resources will be underallocated to the product.
B) maximize profit, but resources will be underallocated to the product.
C) fail to maximize profit and resources will be overallocated to the product.
D) maximize profit, but resources will be overallocated to the product.
Answer: C

23
90) If a perfectly competitive firm is producing where price exceeds marginal cost, then:
A) the firm will fail to maximize profit, but resources will be efficiently allocated.
B) the firm will fail to maximize profit and resources will be overallocated to the product.
C) resources will be underallocated to the product, but the firm will maximize profit.
D) the firm will fail to maximize profit and resources will be underallocated to the product.
Answer: D

91) If a market is characterized by substantial external costs:

A) entry to the industry will be blocked.
B) government will have to assume responsibility for the product's production.
C) resources will be overallocated to the product.
D) resources will be underallocated to the product.
Answer: C

92) If a market is characterized by substantial external benefits:

A) the exclusion principle will not apply.
B) it must be a natural monopoly.
C) resources will be overallocated to the product.
D) resources will be underallocated to the product.
Answer: D

93) Refer tothe graph below. If these supply and demand curves accurately reflect all costs and benefits in the
production and consumption of a product, we know that in a competitive market marginal:

A) cost exceeds marginal benefit at an output level of Q2.

B) benefit exceeds marginal cost at an output level of Q2.
C) cost equals marginal benefit at all points on the supply curve.
D) cost equals marginal benefit at P1Q1.
Answer: B

24
94) The
diagram represents an industry. Assuming that the market structure for this industry is perfect
competition, the producer surplus is shown by the area:

A) abe B) ace C) 0ge D) ghae

Answer: C

25
95) Assuming a perfectly competitive market structure, what area represents the consumer surplus?

A) pha B) pge C) ghae D) 0ge

Answer: B

96) In long-run equilibrium, perfectly competitive markets:

A) inevitably degenerate into monopoly in increasing cost industries.
B) yield economic profits to most sellers.
C) minimize total cost.
D) maximize consumer surplus.
Answer: D

97) In a perfectly competitive industry at equilibrium price and quantity

A) the sum of consumer and producer surplus is maximized.
B) the producer surplus exceeds the consumer surplus.
C) the consumer surplus exceeds producer surplus.
D) the willingness of consumers to pay exceeds the opportunity cost of producing the product.
Answer: A

26
 98) Assume that a decline in consumer demand occurs in a perfectly competitive industry which is
initially in long-run equilibrium. We can:
A) predict that the new price will be less than the original price.
B) predict that the new price will be the same as the original price.
C) not compare the original and the new price without knowing about cost conditions in the
industry.
D) predict that the new price will be greater than the original price.
Answer: C

99) These diagrams pertain to a perfectly competitive firm producing output q and the industry in which it
operates. The predicted long-run adjustments in this industry might be offset by:

A) an increase in resource prices.

B) a technological improvement in production methods.
C) a decline in product demand.
D) none of these.
Answer: B

100) If there is a decrease in demand for a product in a perfectly competitive industry, it results in an
industry:
A) expansion that will end when the price of the product is equal to its marginal cost.
B) expansion that will end when the price of the product is greater than its marginal cost.
C) contraction that will end when the price of the product is greater than its marginal cost.
D) contraction that will end when the price of the product is equal to its marginal cost.
Answer: D

101) The highly efficient allocation of resources in perfect competition:

A) maximizes the consumer satisfaction but does not maximize producers' profits.
B) maximizes the profit for producers but reduces the consumer satisfaction.
C) maximizes the profit for producers at the same time that maximizes consumer satisfaction.
D) maximizes the profit for producers but does not maximize consumer satisfaction.
Answer: C

27
 102) The most efficient combination of resources in producing any output is that combination which:
A) can be obtained for the smallest money outlay.
B) comes closest to using the same quantities of land, labour, capital, and entrepreneurial ability.
C) uses the smallest total quantity of all resources.
D) conserves most on the use of labour.
Answer: A

103) The development of the Internet and e-mail to replace regular mail services in many cases would be
an example of:
A) creative destruction. B) roundabout production.
C) specialization. D) derived demand.
Answer: A

104) The development of MP3 players that significantly reduced the market for CDs would be an
example of:
A) derived demand. B) specialization.
C) creative destruction. D) roundabout production.
Answer: C

105) The two strategies that entrepreneurs in a perfectly competitive industry use in order to try to earn
more than a normal profit are:
A) to try to maintain the current production costs, while increasing sales of existing product.
B) the lowering of production costs and increasing sales of existing products.
C) the development of a totally new product and increasing sales of an existing product.
D) the lowering of production costs and the development of a totally new product.
Answer: D

106) The creation of new products or the development of lower cost production methods for existing
firms cause:
A) creative destruction. B) perfect competition.
C) negative destruction. D) specialization.
Answer: A

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

107) The length of time constituting the long run varies substantially by industry.
Answer: True False

108) After all long-run adjustments in a perfectly competitive industry, product price will be exactly
equal to, and production will occur at, each firm's minimum average total cost.
Answer: True False

109) After all long-run adjustments have been completed, a firm in a competitive industry will produce
that level of output where average total cost is at a minimum.
Answer: True False

28
110) In long-run equilibrium, a competitive firm produces where P = MR = MC = minimum ATC and
earns normal economic profits.
Answer: True False

111) The long-run supply curve for an increasing-cost industry is downward sloping.
Answer: True False

112) The long-run supply curve for a competitive, decreasing-cost industry is downward sloping.
Answer: True False

113) Productive efficiency refers to long-run market conditions where marginal cost is equal to marginal
revenue.
Answer: True False

114) Marginal cost is a measure of the alternative goods which society forgoes in using resources to
produce an additional unit of some specific product.
Answer: True False

115) Because the equilibrium position of a perfectly competitive seller entails an equality of price and
marginal costs, competition produces to an efficient allocation of economic resources.
Answer: True False

116) In the long run, perfect competition forces firms to produce at the minimum of average total cost
and charge a price consistent with that cost.
Answer: True False

117) An underallocation of resources will occur in a perfectly competitive industry at any level of output
where price is greater than marginal cost.
Answer: True False

118) The creation of new products and production methods that puts firms that are reliant on older ways
of doing business and producing items is known as innovative destruction.
Answer: True False

119) The two strategies that entrepreneurs in a perfectly competitive industry use in order to try to earn
more than a normal profit are the lowering of production costs and the development of a totally new
product.
Answer: True False

29
Answer Key
Testname: UNTITLED11

1) A
2) C
3) C
4) C
5) A
6) B
7) A
8) D
9) B
10) A
11) B
12) C
13) D
14) B
15) A
16) A
17) C
18) B
19) B
20) B
21) A
22) A
23) D
24) B
25) B
26) A
27) D
28) D
29) C
30) B
31) D
32) A
33) B
34) D
35) D
36) D
37) A
38) D
39) D
40) D
41) D
42) A
43) D
44) A
45) B
46) D
47) A
48) B
49) D
50) C
30
Answer Key
Testname: UNTITLED11

51) D
52) C
53) B
54) D
55) C
56) A
57) D
58) B
59) A
60) A
61) C
62) D
63) D
64) D
65) B
66) D
67) B
68) A
69) B
70) A
71) C
72) A
73) A
74) D
75) B
76) C
77) D
78) A
79) C
80) C
81) C
82) A
83) A
84) A
85) D
86) A
87) A
88) C
89) C
90) D
91) C
92) D
93) B
94) C
95) B
96) D
97) A
98) C
99) B
100) D
31
Answer Key
Testname: UNTITLED11

101) C
102) A
103) A
104) C
105) D
106) A
107) TRUE
108) TRUE
109) TRUE
110) TRUE
111) FALSE
112) TRUE
113) FALSE
114) TRUE
115) TRUE
116) TRUE
117) TRUE
118) FALSE
119) TRUE

32
Another random document with
no related content on Scribd:
 It cures from head to foot.
Puritana
Trade Mark Registered.

Nature's
Cure
For diseases of the
Stomach
Liver
Blood
Kidneys

And for
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Starved Nerves
Fagged Brain

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It cures from head to foot.

Puritana
is the
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Crosby,
M.D.,
LL.D., for
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years at
the head
of
Dartmout
h
Medical
College.

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The Story of
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Prof. Dixi Crosby, M. D., LL. D., who for thirty-two
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other family in America. His father was Dr. Asa
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inventor and discoverer of various important
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twenty-four his extraordinary skill and success in
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won for him the highest honors. His greatest
achievement was the discovery of an original
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permanent form what has become known as his
"prize formula," and which, under the name of
Puritana, is legally protected. The foundation of this
remarkable medical discovery consists of simple
New England roots and herbs, and the original
family recipe for it has descended to the long line of
Crosby physicians from their Puritan ancestors. Its
peculiar vegetable composition rendered it
necessary to brew it whenever needed in the early
days of its history, and after the scattering of the
Puritan families to remote localities, where the
necessary ingredients were not to be found, many
attempts were made to put it up in permanent form,
all of which failed until Dr. Dixi Crosby discovered
means and methods, the result of which is: Nature's
Cure compounded in the laboratory of Common
Sense.
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NOTWITHSTANDING the great number of
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American Hair Cloth Company.
Pawtucket, R.I.

Charles E. Pervear, Agent.

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 Queen Victoria
Was ordered to cease drinking claret,
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 COASTING
IN THE DARK
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IF YOU HAVE A
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