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Microeconomics (Acemoglu/Laibson/List)
Chapter 6 Sellers and Incentives
6.1 Sellers in a Perfectly Competitive Market
1) Which of the following statements is true of a perfectly competitive market?

A) Sellers in the market produce differentiated goods.
B) There is free entry and exit in the market.
C) There are only few buyers and sellers in the market.
D) Sellers and buyers are both price-makers.
Answer: B
Difficulty: Easy
Topic: Sellers in a Perfectly Competitive Market
2) In a perfectly competitive market:

A) the sellers produce identical goods.
B) there are restrictions on the entry of new firms.
C) each seller charges a different price for its product.
D) bargaining over prices is a common phenomenon.
Answer: A
Difficulty: Easy
3) In a competitive market, there are a ________ number of buyers and a ________ number of sellers.
A) large; small
B) small; large
C) small; small
D) large; large
Answer: D
Difficulty: Easy
4) In a perfectly competitive market, since an individual seller tends to sell only a fraction of the total
amount of the good produced:
A) he can independently determine the market price.
B) he can charge prices above the equilibrium price.
C) his individual choices do not affect market outcomes.
D) he always earns positive profit.
Answer: C
Difficulty: Easy
1
Copyright © 2015 Pearson Education, Inc.
5) Sellers in a perfectly competitive market:
A) are price-takers.
B) sell differentiated goods and services.
C) are not allowed to exit the market.
D) are small in number.
Answer: A
Difficulty: Easy
6) A firm is said to be a price-taker if:

A) it can affect the market price of goods by changing its supply.
B) it sells as much of any good as it wants at the prevailing market price.
C) consults the government before fixing the price of its goods and services.
D) it's not free to enter a new market or exit from an existing market.
Answer: B
Difficulty: Easy
7) Price in a perfectly competitive market:

A) is affected by government policies.
B) is determined through auctions.
C) is affected by the combined decision of all sellers.
D) is determined by buyers alone.
Answer: C
Difficulty: Easy
8) Which of the following examples best describes the concept of free entry?
A) Jack has an old cell phone which he wants to sell. He opens an account on eBay and auctions it off.
B) Purecircuit Corp. wants to expand its production so it doubles its annual recruitment.
C) System Corp. decides to charge a price lower than the market price to increase its market share.
D) The government enters the market to correct any shortage or surplus in the market for gasoline.
Answer: A
Difficulty: Medium
AACSB: Application of Knowledge
9) What are the conditions which characterize the sellers' side in a perfectly competitive market?
Answer: Three conditions characterize the sellers' side in a perfectly competitive market. These are:
a) A large number of sellers participate in the market and no single seller has a large market share.
b) All sellers in the market produce identical goods.
c) There is free entry and exit of sellers in the market.
Difficulty: Easy
2
6.2 The Seller's Problem
1) The goal of a seller is primarily to:

A) maximize sales.
B) maximize profits.
C) minimize costs.
D) minimize consumer surplus.
Answer: B
Difficulty: Easy
Topic: The Seller's Problem
2) Net benefits of sellers represent their:

A) revenue.
B) profits.
C) sales.
D) inventory.
Answer: B
Difficulty: Easy
3) Which of the following is NOT an element of a seller's decision-making process in a perfectly

competitive market?
A) The relationship between inputs and output
B) The cost of inputs
C) The price of the output
D) The number of buyers
Answer: D
Difficulty: Easy
4) A business entity that produces goods or services is referred to as a(n):

A) market.
B) firm.
C) government.
D) industry.
Answer: B
Difficulty: Easy
Topic: Making the Goods: How Inputs are Turned into Outputs
5) The process by which inputs are transformed to outputs is referred to as:

A) production.
B) distribution.
C) depreciation.
D) absorption.
Answer: A
Difficulty: Easy
3
6) A production function establishes the relationship between:
A) the market price of a good and the sales revenue generated.
B) the quantity of output produced and the firm's profit.
C) the quantity of inputs used and the quantity of output produced.
D) the market price of a good and the quantity of output supplied.
Answer: C
Difficulty: Easy
7) Which of the following statements is true of the short run?

A) Only some of a firm's input can be varied in the short run.
B) All firms earn zero economic profits in the short run.
C) All factors of production can be changed in the short run.
D) All the factors of production are fixed in the short run.
Answer: A
Difficulty: Easy
8) In the long run:

A) all factors of production are fixed.
B) only some inputs of a firm can be changed.
C) all firms earn positive economic profits.
D) all factors of production can be changed.
Answer: D
Difficulty: Easy
9) Which of the following inputs can be changed in the short run?

A) Machinery
B) Land owned
C) Office Space
D) Labor employed
Answer: D
Difficulty: Medium
10) Which of the following statements is true of the long run?

A) There are no fixed inputs in the long run.
B) Capital cannot be changed in the long run.
C) Labor cannot be changed in the long run.
D) A firm cannot alter its level of output in the long run.
Answer: A
Difficulty: Medium
4
11) A firm uses workers, land, and machinery for its production process. Which of the following
statements is then true?
A) The only way the firm can change its output level in the long run is by changing the number of
workers.
B) The only way the firm can change its output level in the long run is by changing the amount of land it
owns.
C) The only way the firm can change its output level in the long run is by changing the amount of
machinery.
D) The firm can change its output level in the long run by changing any or all of its three inputs.
Answer: D
Difficulty: Medium
12) The change in the total output of a firm associated with using one more unit of an input is referred to
as the:
A) marginal product of the input.
B) total product.
C) average product of the input.
D) variable product of the input.
Answer: A
Difficulty: Easy
13) A firm produced 376 units with 10 workers. When the 11 th worker was hired, the output increased to
398 units. The marginal product of the 11th worker is:
A) 22 units.
B) 37.6 units.
C) 36.18 units.
D) 398 units.
Answer: A
Difficulty: Medium
14) A firm produces 200 units of a good when it employs 7 workers. The marginal product of the 8 th
worker is 46 units. If the 8th worker is hired, the firm's total product will increase to:
A) 208 units.
B) 228 units.
C) 246 units.
D) 322 units.
Answer: C
Difficulty: Medium
5
The following table shows the total output produced by different numbers of workers in a shoe factory.
Output per day (pairs) Number of Workers

0 0
50 1
112 2
180 3
225 4
260 5
280 6
15) Refer to the table above. What is the marginal product of the 3 rd worker?
A) 60 pairs of shoes
B) 68 pairs of shoes
C) 112 pairs of shoes
D) 180 pairs of shoes
Answer: B
Difficulty: Medium
16) Refer to the table above. What is the marginal product of the 6 th worker?
A) 20 pairs of shoes
B) 46.7 pairs of shoes
C) 60 pairs of shoes
D) 280 pairs of shoes
Answer: A
Difficulty: Medium
17) Refer to the table above. If the factory plans to hire a 7 th worker whose marginal product is 15 pairs,
the total output after he is hired will be:
A) 15 pairs.
B) 105 pairs.
C) 280 pairs.
D) 295 pairs.
Answer: D
Difficulty: Medium
6
18) Refer to the table above. Which of the following statements is true about the marginal product of
labor?
A) The marginal product initially decreases with the first few workers and then increases.
B) The marginal product initially increases with the first few workers and then decreases.
C) The marginal product decreases as more workers are hired.
D) The marginal product increases as more workers are hired.
Answer: B
Difficulty: Medium
19) Increases in marginal product of labor can be attributed to:

A) specialization of workers.
B) depreciation of capital.
C) diminishing returns to workers.
D) congestion and thus better use of work space.
Answer: A
Difficulty: Medium
20) Specialization is the result of:

A) hiring experienced workers.
B) paying higher wages to experienced workers.
C) workers developing a certain skill set.
D) increased demand for a firm's commodity.
Answer: C
Difficulty: Easy
21) Which of the following is an example of specialization?

A) The output of workers in a chocolate factory doubled when a new manager was appointed.
B) The cost of production of a light making factory decreased as its capacity increased.
C) Instead of a worker making an entire shoe, the total productivity increased when different workers
were allotted different jobs in the production process.
D) Import of better technology and machinery from developed countries greatly increased the number of
laser printers that a company was manufacturing.
Answer: C
Difficulty: Easy
7
22) The law of diminishing marginal returns states that:
A) successive increases in inputs eventually leads to less additional output.
B) successive increases in product prices leads to a fall in revenue.
C) the demand for a good decreases as the price of the good increases.
D) the net benefits of a perfectly competitive firm decreases as more firms enter the market.
Answer: A
Difficulty: Easy
23) Which of the following statements is true of the marginal product of an input?
A) The marginal product of an input is given by the ratio of the firm's total output to the units of the
input hired.
B) The marginal product of an input increases as more and more inputs are hired.
C) The marginal product of an input can take negative values.
D) The marginal product of the first unit of a variable input is zero.
Answer: C
Difficulty: Hard
24) Which of the following refers to diminishing marginal returns?

A) The revenue of a cell phone manufacturer decreased when it increased its product price.
B) The additional output produced in a firm decreased as more workers were hired.
C) The profits of an entrepreneur increased substantially after he fired a few of his employees.
D) The total output of a firm decreased as more workers were hired.
Answer: B
Difficulty: Medium
8
The following table shows the total output of bread produced by different numbers of workers in a
bakery.
Number of Loaves Number of workers

0 0
12 1
26 2
40 3
50 4
58 5
60 6
59 7
25) Refer to the table above. Diminishing marginal returns sets in when:
A) the second worker is hired.
B) the fourth worker is hired.
C) the fifth worker is hired.
D) the seventh worker is hired.
Answer: B
Difficulty: Medium
26) Refer to the table above. The marginal product of workers falls below zero when the ________ worker
is hired.
A) first
B) fourth
C) sixth
D) seventh
Answer: D
Difficulty: Medium
27) What a firm must pay for its inputs is referred to as its:
A) production value.
B) cost of production.
C) opportunity cost.
D) loss in production.
Answer: B
Difficulty: Easy
Topic: The Cost of Doing Business: Introducing Cost Curves
9
28) Which of the following statements identifies the difference between variable costs and fixed costs?
A) Variable costs are the costs incurred on variable factors of production, whereas fixed costs are the costs
incurred on all factors of production.
B) Variable costs of a firm are zero after it shut downs, whereas it continues to incur the fixed costs of
production in the short run.
C) Variable costs exist even when the production is zero, whereas fixed costs exist only when there is
some positive production.
D) Variable costs are incurred only in the long run, whereas a firm incurs some fixed cost in both short
run and long run.
Answer: B
Difficulty: Easy
29) Total cost of production refers to the:

A) sum of variable costs and fixed costs.
B) product of variable costs and fixed costs.
C) difference between variable costs and fixed costs.
D) ratio of variable costs to fixed costs.
Answer: A
Difficulty: Easy
30) In the short run, when a firm is about to begin production it pays only:
A) variable costs.
B) opportunity costs.
C) sunk costs.
D) fixed costs.
Answer: D
Difficulty: Medium
10
The following table shows the total output, number of workers employed, variable costs, and fixed costs
of a firm.
Number of workers Total Output (units) Variable Costs ($) Fixed Costs ($)
0 0 0 150
1 25 10 150
2 55 20 150
3 86 30 150
4 110 40 150
5 130 50 150
6 145 60 150
7 155 70 150
8 160 80 150
31) Refer to the table above. Suppose that the only variable input that the firm uses is labor. What is the
wage paid to a worker in the firm?
A) $1
B) $5
C) $10
D) $15
Answer: C
Difficulty: Medium
32) Refer to the table above. When the ________ is employed, diminishing marginal returns sets in.
A) 2nd worker
B) 4th worker
C) 6th worker
D) 8th worker
Answer: B
Difficulty: Medium
33) Refer to the table above. What is the total cost of producing 145 units of the good?
A) $90
B) $180
C) $190
D) $210
Answer: D
Difficulty: Easy
11
34) Refer to the table above. What is the average variable cost of producing 86 units of the good?
A) $30
B) $0.35
C) $2.1
D) $10
Answer: B
Difficulty: Medium
35) Refer to the table above. What is the average fixed cost of producing 110 units of the good?
A) $1.36
B) $1.72
C) $37.50
D) $150
Answer: A
Difficulty: Medium
36) Refer to the table above. What is the average total cost of producing 160 units of the good?
A) $0.50
B) $0.93
C) $1.44
D) $2
Answer: C
Difficulty: Medium
37) Refer to the table above. What is the firm's marginal cost when it produces 55 units of the good?
A) $0.33
B) $0.50
C) $0.66
D) $0.75
Answer: A
Difficulty: Hard
12
38) Refer to the table above. What is the firm's marginal cost when it produces 155 units of the good?
A) $0.66
B) $1
C) $1.33
D) $1.50
Answer: B
Difficulty: Hard
39) The total cost of a firm is $50, average variable cost is $2, and average fixed cost is $3. How may units
of the output does the firm produce?
A) 5 units
B) 10 units
C) 15 units
D) 18 units
Answer: B
Difficulty: Hard
40) Marginal cost is the change in:

A) total cost associated with producing one more unit of output.
B) average total cost associated with producing one more unit of output
C) average variable cost associated with producing one more unit of output.
D) opportunity cost associated with producing one more unit of output.
Answer: A
Difficulty: Easy
41) A firm producing 10 units of output incurs a total cost of $800. When it produces 11 units, the total
cost increases to $890. What is the marginal cost of producing the 11 th unit?
A) $10
B) $80
C) $90
D) $100
Answer: C
Difficulty: Medium
13
42) When the marginal product ________, the marginal cost ________.
A) increases; remains same
B) remains same; increases
C) increases; increases
D) increases; decreases
Answer: D
Difficulty: Easy
43) When the marginal cost curve lies below the average cost curve, ________.
A) the marginal cost curve is vertical
B) the marginal cost curve is horizontal
C) the average cost curve slopes downward
D) the average cost curve slopes upward
Answer: C
Difficulty: Medium
44) When the marginal cost curve lies above the average cost curve, ________.
A) the marginal cost curve slopes upward, while the average cost curve slopes downward
B) the marginal cost curve slopes downward, while the average cost curve slopes upward
C) both the marginal cost curve and the average cost curve slope upward
D) both the marginal cost curve and the average cost curve slope downward
Answer: C
Difficulty: Medium
45) The marginal cost curve intersects:

A) the total cost curve at its minimum.
B) the average fixed cost curve at its maximum.
C) the average fixed cost curve at its minimum.
D) both average variable cost curve and average total cost curve at their minimum.
Answer: D
Difficulty: Medium
46) Total revenue earned from the sale of a good is:

A) the price at which the good is sold.
B) the difference between price and cost of production of the good.
C) the product of price and quantity of the good sold in the market.
D) the product of cost of production and quantity of the good sold in the market.
Answer: C
Difficulty: Easy
Topic: The Rewards of Doing Business: Introducing Revenue Curves
14
47) A firm sells 20 units of a good at a price of $5 per unit. If the average cost of production of the good
equals $3 per unit, the firm's revenue is:
A) $40.
B) $60.
C) $100.
D) $120.
Answer: C
Difficulty: Medium
48) A firm earns $600 of total revenue from selling its product at $200 per unit. If the per unit cost of
producing the good is $150, the firm sells ________ units(s) of the good.
A) 1
B) 2
C) 3
D) 4
Answer: C
Difficulty: Medium
49) The equilibrium price in a market occurs where the:

A) market demand and the firms' average cost curves intersect.
B) market supply and the firms' average cost curves intersect.
C) market demand and the market supply curves intersect.
D) market supply and the firms' revenue curves intersect.
Answer: C
Difficulty: Easy
50) Marginal revenue:

A) is the change in total revenue associated with producing one more unit of output.
B) is the product of the price of a good and its quantity sold minus the cost of production.
C) is always greater than the total revenue.
D) is always equal to the price of the good.
Answer: A
Difficulty: Easy
15
51) The equilibrium price of a good sold in a competitive market is $10. If an individual firm decides to
sell its product at a price higher than $10, ________.
A) the firm's profits will increase
B) the firm's revenue will increase
C) the firm will lose all its consumers
D) the firm's cost of production will decrease
Answer: C
Difficulty: Easy
52) Profits equal:

A) total revenue minus variable costs.
B) revenue minus fixed costs.
C) total revenue minus total costs.
D) total revenue.
Answer: C
Difficulty: Easy
Topic: Putting It All Together: Using the Three Components to Do the Best You Can
53) A firm sells 30 units of its product at a price of $5 per unit. It incurs a fixed cost of $100 and a variable
cost of $20. The firm's profit is:
A) $30.
B) $50.
C) $100.
D) $150.
Answer: A
Difficulty: Medium
54) A firm will maximize profit at the level of output where:

A) its marginal revenue equals total cost.
B) its marginal revenue equals marginal cost.
C) its total cost equals total revenue.
D) its average revenue equals average cost.
Answer: B
Difficulty: Easy

A) price is always greater than marginal revenue.
B) price is always equal to marginal revenue.
C) price is always greater than marginal cost.
D) price is always equal to marginal cost.
Answer: B
Difficulty: Easy
16
56) Which of the following relationships correctly identifies the profit maximization condition of a firm in
a perfectly competitive market?
A) Marginal Cost < Price = Marginal Revenue
B) Marginal Cost > Price = Marginal Revenue
C) Marginal Cost = Price = Marginal Revenue
D) Marginal Cost = Price < Marginal Revenue
Answer: C
Difficulty: Medium
57) If the marginal cost of a perfectly competitive firm producing a good is $50 and the market price of
the good is $100, the firm should:
A) decrease its output.
B) increase its output.
C) try to increase the market price.
D) try to decrease the market price.
Answer: B
Difficulty: Easy
58) A firm has an average total cost of $50. If it sells 20 units of its product at $80 each, what is its profit?
A) $30
B) $600
C) $1,000
D) $1,600
Answer: B
Difficulty: Medium
59) Which of the following is true?

A) Accounting profits = Revenues - implicit costs - explicit costs
B) Economic profits = Revenues - explicit costs
C) Accounting profits = Revenues - implicit costs
D) Economic profits = Accounting profits - implicit costs
Answer: D
Difficulty: Medium
17
60) Define the terms "production" and "production function." Differentiate between the short run and the
long run based on the usage of inputs by a firm.
Answer: Production refers to the process of transforming inputs to outputs. The relationship between the
quantity of inputs used and the quantity of output produced is referred to as the production function.
In terms of usage of inputs, the basic difference between the short run and the long run is that in the short
run only some of the firm's inputs can be varied while other inputs are fixed. Contrary to this, in the long
run, a firm can vary all of its inputs and there are no fixed inputs.
Difficulty: Easy
61) Is it possible for an input to have a negative marginal product?

Answer: Yes, sometimes if a variable input is continued to be hired even after the stage of diminishing
returns, it can actually lead to a fall in total output. Hence, it is possible for an input to have a negative
marginal product.
Difficulty: Easy
62) A bakery which produces 100 loaves of bread has a variable cost of $50 and a fixed cost of $200.
Calculate the total cost, average total cost, average variable cost, and average fixed cost of the bakery.
Answer: The total cost that the bakery incurs = $50 + $200 = $250.
The average total cost of the bakery = $250/100 = $2.50.
The average variable cost of the bakery = $50/100 = $0.50.
The average fixed cost of the bakery = $200/100 = $2.
Difficulty: Medium
63) The output of a bakery is 250 loaves of bread, when 10 workers are hired. If one more worker is hired,
the total output increases to 275 loaves. Given that labor is the only variable input that the bakery uses,
and the market wage rate is $10, calculate the marginal cost when employment is increased from 10 to 11
workers.
Answer:
The marginal cost when 275 loaves are produced = Change in total cost / Change in total output = $10/25
= $0.40.
Difficulty: Medium
18
64) Differentiate between the terms "revenue" and "profit." Assume that a firm sells 20 units of a good at a
price of $5 per unit. If the average total cost of the firm is $3 per unit, calculate the firm's profit.
Answer: The revenue of a firm is equal to the price of the goods multiplied by the quantity of goods sold.
On the other hand, the profit of a firm is equal to the difference of the revenue that a firm earns and the
costs it incurs.
If a firm sells 20 units of a good at $5 each, its revenue is equal to 20 × $5 or $100.
If the average total cost of the firm is $3, the total cost it incurs is 20 × $3 or $60.
Hence, profits of the firm are $100 - $60 or $40.
Difficulty: Medium
65) Consider the following two scenarios:

i) The marginal product of a worker in a firm is 10 units. When an additional worker is employed, his
marginal product is less than 10 units.
ii) The average total cost of a firm producing 10 units of output is $200. When it produces an additional
unit, the average total cost increases to $300.
What is the difference between both scenarios? What could be the reason behind both phenomena
occurring? Does specialization explain any of the above situations?
Answer: The first scenario represents diminishing marginal returns, while the second scenario represents
diseconomies of scale.
The law of diminishing marginal returns states that in all production processes, if more and more of one
input is added keeping all other inputs fixed, the marginal product of that input will start to decrease
eventually. Diminishing returns occur when only one input is increased, keeping all the other inputs
fixed. Hence, it is a short-run phenomenon. The reason for diminishing returns to exist is that over-
employment of one input with other inputs fixed will eventually lead to fewer of the fixed input available
per unit of the variable input. This will at some point lead to a fall in the productivity of the variable
input.
Diseconomies of scale occur in the long run. It is said to occur when an increase in the production of a
firm leads to an increase in the average total cost of the firm. The average total cost of a firm may increase
with an increase in output when a firm grows too big in size. For example, a big firm may have
managerial issues or may have to hire low productivity workers as the high productivity workers are
already employed. This stage is characterized by the upward sloping portion of the long-run average cost
curve.
Specialization does not explain any of the above two situations. Specialization occurs when workers
develop a particular skill set because of performing a particular work duty over a period of time. Instead
of leading to diminishing return or diseconomies of scale, specialization instead is likely to result in an
increase in returns with increasing input or output.
Difficulty: Medium
19
66) Consider a textile factory operating in the short run. Classify the following costs that the mill incurs as
variable costs, sunk costs, and fixed costs.
a) Cost of issuing identity cards to all workers
b) Wages paid to workers of the factory.
c) Yearly rent paid for production space
d) Tax paid on the sale of its products
Answer:
a) Cost of issuing identity cards to all employees is a sunk cost as it is not to be considered while
making future production decisions of the firm.
b) Wages paid to workers at the mill are variable costs as they change with changes in the output of the
production unit.
c) Yearly rent paid for the production space is a fixed cost as the mill has to pay this rent irrespective of
the output produced.
d) Tax paid on the sale of its products is a variable cost as the tax will vary depending on the output
sold by the firm.
Difficulty: Medium
20
67) The following table shows the output and employment figures for a bakery. Calculate the missing
values in the table.
Answer: The values are shown in the table below.
Number Output Marginal Variable Fixed Total Average Average Average Marginal
of Per Product Cost ($) Cost ($) Cost ($) Total Fixed Variable Cost ($)
Workers Day Cost ($) Costs ($) Cost ($)
(units)
0 0 0 300 300
1 150 150 20 300 320 2.133 2 0.133 0.133
2 315 165 40 300 340 1.079 0.952 0.127 0.121
3 475 160 60 300 360 0.758 0.631 0.126 0.125
4 615 140 80 300 380 0.617 0.488 0.130 0.143
5 730 115 100 300 400 0.548 0.411 0.136 0.174
6 830 100 120 300 420 0.506 0.361 0.145 0.2
7 900 70 140 300 440 0.489 0.333 0.156 0.286
8 960 60 160 300 460 0.479 0.312 0.166 0.333
Difficulty: Hard
21
68) Given the following cost and revenue figures, estimate the profit maximizing output assuming that
the firm is participating in a perfectly competitive market. What is the fixed cost that the firm faces? What
is the profit at this output?
Answer: Fixed cost is the cost that a firm has to incur irrespective of the output it is producing. The total
cost of the firm when quantity sold is 0 is $15; hence, the fixed cost is $15.
Under perfect competition, a firm maximizes profits at the level of production where its marginal
revenue is equal to its marginal cost. This is displayed in the following table.
Quantity Sold Total Cost Total Revenue Marginal Marginal

Price ($) (units) ($) ($) Cost ($) Revenue ($)
10 0 15 0 - -
10 1 18 10 3 10
10 2 22 20 4 10
10 3 27 30 5 10
10 4 33 40 6 10
10 5 41 50 8 10
10 6 51 60 10 10
10 7 62 70 11 10
The marginal revenue is equal to the marginal cost when 6 units are sold at a price of $10 each.
Hence, 6 units is the profit maximizing quantity of output. The profit at this output is
total revenue – total cost = $60 - $51 = $9.
Difficulty: Hard
22
69) Assume that the market demand for pens is given by QD = 650 - 25P and the market supply of pens is
given by QS = 200 + 20P. If a firm sells 20 pens and faces an average total cost of $6, calculate the firm's
profit.
Answer: To determine the firm's profit, it is essential to determine the equilibrium price that the firm
faces. At equilibrium QD = QS or, 650 - 25P = 200 + 20P or, 450 = 45P or, P = $10.
Profits = Total Revenues - Total Cost
= Price × Quantity - Average Total Cost × Quantity
= 10 × 20 - 6 × 20
= 200 - 120
= $80
Difficulty: Medium
6.3 From the Seller's Problem to the Supply Curve
1) A supply curve shows the relationship between:

A) output and total cost of production.
B) output and prices.
C) output and consumer income.
D) output and revenue.
Answer: B
Difficulty: Easy
Topic: From the Seller's Problem to the Supply Curve
2) Which of the following is true about price elasticity of supply?

A) Price elasticity of supply = percentage change in quantity supplied / absolute change in price
B) Price elasticity of supply = percentage change in quantity supplied / percentage change in price
C) Price elasticity of supply = percentage change in quantity supplied × absolute change in price
D) Price elasticity of supply = percentage change in quantity supplied × percentage change in price
Answer: B
Difficulty: Easy
Topic: Price Elasticity of Supply
3) When the price of a good increases by 300%, the quantity supplied of the good increases from 200 units
to 900 units. The price elasticity of supply of the good is:
A) 1.17.
B) 1.5.
C) 3.
D) 4.5.
Answer: A
Difficulty: Medium
23
4) If the price elasticity of supply of a good is 2, a 200% increase in the price of the good, will change the
quantity supplied by:
A) 50%.
B) 100%.
C) 200%.
D) 400%.
Answer: D
Difficulty: Medium
5) A good is said to have an elastic supply if its price elasticity of supply is:
A) equal to zero.
B) between zero and one.
C) equal to one.
D) greater than one.
Answer: D
Difficulty: Easy
6) If the percentage change in the quantity supplied of a good is less than the percentage change in price
of the good, the good is said to have a(n):
A) inelastic supply.
B) unit elastic supply.
C) elastic supply.
D) perfectly elastic supply.
Answer: A
Difficulty: Easy
7) If with a small decrease in the price of a good, the quantity supplied falls to zero, the supply of the
good is said to be:
A) unit elastic.
B) inelastic.
C) perfectly inelastic.
D) perfectly elastic.
Answer: D
Difficulty: Easy
Topic: Elasticity of Supply
24
8) Which of the following best describes a good with perfectly elastic supply?
A) Any increase in the price of the good leads to an increase in the seller's revenue.
B) Any increase in the price of the good decreases the quantity supplied of the good by more than the
price change.
C) Any increase in the price of the good will induce the firm to supply an infinite quantity of the good.
D) Any increase in the price of the good increases the quantity supplied of the good exactly by the
amount of the price change.
Answer: C
Difficulty: Easy
9) A good with a perfectly inelastic supply has a price elasticity of supply:

A) equal to zero.
B) between zero and one.
C) equal to one.
D) greater than one.
Answer: A
Difficulty: Easy
10) As the amount of inventories maintained by a firm increases:

A) its elasticity of supply increases.
B) its elasticity of supply decreases.
C) the elasticity of demand for its product increases.
D) the elasticity of demand for its product decreases.
Answer: A
Difficulty: Easy
11) Firm A and Firm B produce the same goods but with different inputs. If the inputs used by firm A are
more easily available than the inputs used by firm B, then which of the following statements is true?
A) The elasticity of supply of firm A and firm B will be equal.
B) The elasticity of supply of firm A will be higher than the elasticity of supply of firm B.
C) The elasticity of supply of firm A will be lower than the elasticity of supply of firm B.
D) The elasticity of supply of firm A and firm B cannot be compared without information on price
change.
Answer: B
Difficulty: Medium
25
12) A short-run decision by a firm to not produce anything during a specific period is referred to as a(n):
A) lockout.
B) shut down.
C) buyout.
D) exit.
Answer: B
Difficulty: Easy
Topic: Shut Down
13) A firm should shut down in the short run if the price is:
A) less than average fixed cost.
B) less than average total cost.
C) less than average variable cost.
D) less than marginal cost.
Answer: C
Difficulty: Easy
Topic: Shut Down
14) A firm with a fixed cost of $300 every month, and variable cost of $200 every month decides to shut
down. In such a situation it would lose:
A) $200 every month.
B) $300 every month.
C) $500 every month.
D) $0 every month.
Answer: B
Difficulty: Medium
Topic: Shut Down
15) Exit of a firm refers to:

A) a short-run decision by a firm to not produce anything.
B) a long-run decision by a firm to leave the market.
C) a refusal to work organized by a group of employees at the firm.
D) an exclusion of employees of a firm from their place of work until certain terms are agreed upon by
them.
Answer: B
Difficulty: Easy
Topic: Shut Down
16) ________ are costs that, once committed, can never be recovered and should not affect current and
future production costs.
A) Opportunity costs
B) Marginal costs
C) Sunk costs
D) Variable costs
Answer: C
Difficulty: Easy
Topic: Shut Down
26
17) Which of the following is an example of a sunk cost?
A) The cost incurred in painting a new office space
B) The wage paid to workers in a mill
C) The cost of raw materials used in a factory
D) The cost of electricity used in the office
Answer: A
Difficulty: Medium
Topic: Shut Down
18) Which of the following is an example of a variable cost?

A) The cost incurred on the installation of new software in all office computers
B) The cost of electricity used in the office
C) The cost incurred on the purchase of land for a new office space
D) The annual rent paid for an office space
Answer: B
Difficulty: Medium
Topic: Shut Down
19) The short-run supply curve of a competitive firm is the portion of:
A) its average cost curve which lies above its marginal cost curve.
B) its average cost curve which lies below its marginal cost curve.
C) its marginal cost curve which lies above its average variable cost curve.
D) its marginal cost curve which lies below its average cost curve.
Answer: C
Difficulty: Easy
Topic: From the Seller's Problem to the Supply Curve
20) Differentiate between perfectly elastic supply and perfectly inelastic supply. When the price of a good
is $100, 50 units are supplied. When the price increases to $300, 250 units are supplied. Calculate the price
elasticity of supply of the good.
Answer: A good is said to have a perfectly elastic supply when a very small change in the good's price
leads to an infinite change in the good's quantity supplied. The price elasticity of supply of such goods
equals infinity. On the other hand, a good is said to have a perfectly inelastic supply when the quantity
supplied of a good does not change with changes in its price, in which case the price elasticity of supply
equals zero.
Percentage change in price of the good when price increases from $100 to $300 = 200%
Percentage change in quantity supplied of the good from 50 units to 250 units = 400%
Hence price elasticity of supply of the good = 400/200 = 2.
Difficulty: Medium
27
21) Are the terms "shut down" and "exit" synonymous? What is the optimal shut down rule for a firm?
Answer: No, the terms "shut down" and "exit" are not synonymous. Shut down refers to a short-run
decision to not produce anything during a specific period of time. When a firm shuts down, it still incurs
its fixed costs. On the other hand, exit refers to a long-run decision by a firm to leave the market. The
optimal shut down rule for a firm suggests that a firm should shut down if the price of the good it
produces falls below its average variable cost. In situations, where the price is less than the average
variable cost, for every unit of a good that the firm sells, it is paying its variable inputs more than what it
is receiving from the sale of the good. As a result, the firm would lose more than the fixed cost that it
would lose by shutting down—it would also lose a portion of the variable cost.
Difficulty: Easy
Topic: Shut Down
22) Calculate the price elasticity of supply for the following goods. Also comment on the elasticity in each
case.
a) When the price of a good is $100, 200 units are supplied. But when the price increases to $300, 220
units are supplied.
b) When the price of a good is $50, 50 units are supplied. But when the price decreases to $30, 10 units
are supplied.
Answer:
a) Percentage change in price = 200%
Percentage change in quantity supplied = 10%
Price elasticity of supply = 10/200 = 0.05.
The good has a relatively inelastic supply.
b) Percentage change in price = -40%.
Percentage change in quantity supplied = -80%
Price elasticity of supply = -80/-40 = 2.
The good has a relatively elastic supply.
Difficulty: Medium
6.4 Producer Surplus
1) Graphically, producer surplus is the:

A) difference between the demand curve and the price a consumer pays.
B) difference between the supply curve and the price a consumer pays.
C) difference between total cost and total revenue.
D) product of price of a good and quantity sold.
Answer: B
Difficulty: Easy
Topic: Producer Surplus
28
The following figure shows the supply curve of a shoe manufacturing firm.
2) Refer to the figure above. What is the producer surplus when the price is $50?
A) $100
B) $200
C) $400
D) $1,000
Answer: B
Difficulty: Medium
3) Refer to the figure above. What is the producer surplus when the price is $70?
A) $800
B) $1,600
C) $2,000
D) $2,800
Answer: A
Difficulty: Medium
4) The total producer surplus in the entire market is given by the:

A) product of the individual seller's surplus.
B) sum of all the individual sellers' producer surplus.
C) area between the market supply curve and the market demand curve.
D) area between the market demand curve and the price line.
Answer: B
Difficulty: Easy
29
5) Define producer surplus. Calculate the producer surplus from the following figure.
Answer: Producer surplus is the area between the supply curve and the equilibrium price of the good. It
represents a useful tool for measuring the net benefits that sellers receive from participating in the
market. In the figure, producer surplus = 1/2 × (70 - 30) × 50 = 1/2 × 40 × 50 = $1,000.
Difficulty: Medium
30
6) The following figure shows the individual supply curve, S 1 , of a firm manufacturing cell phones.
Calculate the firm's producer surplus when the price of one cell phone is $60. If the price of cell phones
increases to $100 per unit, what happens to the producer surplus? Later, due to a fall in the price of
inputs, the supply curve of the firm shifts to S2, calculate the new producer surplus at a price of $60 per
unit.
Answer: Producer surplus for a firm is the difference between its supply curve and the price that the firm
receives for its product.
When the price of a cell phone is $60 and the supply curve of the factory is S 1, the producer surplus = 1/2
× $(60 - 20) × 50 = $1,000.
When the price of a cell phone increases to $100, the producer surplus is expected to increase. The new
producer surplus = 1/2 × $(100 - 20) × 110 = $4,400.
When the supply curve shifts to S2 and the price of a calculator is $60,
Difficulty: Medium
31
7) Explain the impact of an increase in demand for Good X on producer surplus with the help of a
suitable diagram.
Answer: Change in producer surplus can be explained by the difference of the areas of the producer
surplus before the shift in the demand curve and the producer surplus after the shift.
The initial demand curve is D1 and it intersects the supply curve, S, at point B. The equilibrium price is
P1 and the equilibrium quantity is Q1.
Producer surplus for the firm is the area between its supply curve and the market price line. Therefore,
the initial producer surplus is equal to the area of the triangle ABP 1.
After the demand curve shifts to D2, the equilibrium price and quantity change. D 2 intersects S at C, and
the new equilibrium price is P2 and the new equilibrium quantity is Q2. The producer surplus is now
equal to the area of the triangle ACP2.
The area of triangle ACP2 is greater than the area of triangle ABP1. Using this information, it can be
concluded that, everything else remaining unchanged, when there is an outward shift in the demand for
Good X, the producer surplus increases.
Difficulty: Medium
32
6.5 From the Short Run to the Long Run
1) Which of the following statements is true?

A) In the long run, a firm cannot vary any of its inputs.
B) In the long run, a firm can vary all its inputs.
C) In the short run, a firm cannot vary any of its inputs.
D) In the short run, a firm can vary all its inputs.
Answer: B
Difficulty: Easy
Topic: From the Short Run to the Long Run

A) In the short run, a firm can vary all its inputs
B) In the long run, a firm cannot vary any of its inputs.
C) Short-run cost curves lie above long-run cost curves.
D) Short-run cost curves lie below long-run cost curves.
Answer: C
Difficulty: Easy
3) Short-run average total cost curves lie above the long-run average cost curves because:
A) prices of inputs are less when hired for a longer time period.
B) in the long run, firms have more flexibility to change input combinations.
C) specialization of inputs increases productivity only in the long run.
D) the firms earn positive profits in the long run.
Answer: B
Difficulty: Medium
4) ________ occur when the average total cost falls as the quantity produced increases.
A) Increasing marginal returns
B) Decreasing marginal returns
C) Economies of scale
D) Diseconomies of scale
Answer: C
Difficulty: Easy
33
5) Which of the following situations depicts diseconomies of scale?
A) The average total cost of a firm increases from $50 to $55 when it increases its production from 10 units
to 20 units.
B) The average total cost of a firm decreases from $50 to $40 when it increases its production from 10
units to 20 units.
C) The average total cost of a firm remains at $50 when it increases its production from 10 units to 20
units.
D) The average total cost of a firm remains at $50 when it decreases its production from 20 units to 10
units.
Answer: A
Difficulty: Easy
6) In the long run, a firm should exit when:

A) price is less than average total cost.
B) price is equal to average total cost.
C) price is equal to marginal cost.
D) price is more than marginal cost.
Answer: A
Difficulty: Easy
7) The long-run supply curve of a firm is:

A) its marginal cost curve.
B) its average total cost curve.
C) the portion of its marginal cost curve that lies above its average total cost curve.
D) the portion of its marginal cost curve that lies below its average total cost curve.
Answer: C
Difficulty: Easy
Topic: Long-Run Supply Curve
8) Define the terms "economies of scale," "constant returns to scale," and "diseconomies of scale."
Among these three situations, operating in which stage is likely to be most profitable for a firm?
Answer: Economies of scale occur when the average total cost falls when as the quantity produced
increases.
Constant returns to scale exist when the average total cost does not change as the quantity produced
changes.
Diseconomies of scale occur when average total cost rises as the quantity produced increases.
Operating at a stage where economies of scale occur is likely to be most profitable from a firm's point of
view. This is because it allows a firm to expand its productions with a decrease in the cost incurred per
unit of additional output produced.
Difficulty: Easy
34
9) If the market for bottled water is perfectly competitive, how will the following aspects differ in the
short run and in the long run?
a. Use of inputs
b. Market supply curve of bottled water when firms have identical cost structures
c. Profitability of firms with identical cost structures
d. Condition to stop production
e. Average cost curves of a firm
f. Number of firms
Answer:
a. Firms producing bottled water can change only its variable inputs like the labor employed in
production in the short run, while a few other inputs remain fixed. On the other hand, in the long run,
there are no fixed inputs and the firm can vary the quantity of all inputs used.
b. The market supply curve of bottled water when firms have identical cost structures is upward
sloping in the short run. Whereas, in the long run the market supply curve of firms with identical cost
structures is horizontal.
c. Firms with identical cost structures can earn positive economic profits in the short run. On the other
hand, in the long run, all firms with identical cost participating in the market for bottled water will earn
zero economic profits.
d. In the short run, firms should continue production as long as the price of bottled water is greater than
or equal to the average variable cost the firm faces. If the price falls below the average variable cost, the
firm should stop production in the short run. In the long run, a firm should stop producing bottled water
or exit from the market if the price of bottled water is less than the average total cost of the firm, or if the
total cost exceeds total revenue.
e. The short-run average cost curves of firms will lie above the long-run average cost curves of the
firms. This happens because, in the short run, a few inputs are fixed and do not allow for an optimal
combination of fixed and variable inputs at times. On the other hand, in the long run, all inputs are
variable thus allowing for better input combinations and thus lower costs.
f. The number of firms operating in the market is fixed in the short run. In the long run, there is
possible entry and exit of firms, and as such the number of firms operating in the market can change.
Difficulty: Hard
6.6 From The Firm to the Market: Long-Run Competitive Equilibrium
1) Which of the following statements about the short run and long run is true?
A) The number of firms in the industry is fixed in the short run, but in the long run the number can
change.
B) Free entry and exit of firms is possible in the short run, but entry and exit of firms is restricted in the
long run.
C) The short-run average cost curves lies below the long-run average cost curves.
D) A firm can vary all of its factors of production in both the short run and the long run.
Answer: A
Difficulty: Easy
Topic: Firm Entry
35
2) The entry and exit of firms in a perfectly competitive market is mostly dependent on:
A) the number of firms in the market.
B) government regulations.
C) profitability.
D) the number of consumers in the market.
Answer: C
Difficulty: Easy
Topic: From the Firm to the Market: Long-Run Equilibrium
3) Free entry is said to exist in an industry when:

A) all firms entering an industry enjoy economies of scale.
B) entry is unfettered by any special legal or technical barriers.
C) equal amounts of inputs are available to all firms entering an industry.
D) the government subsidizes costs for all new firms entering an industry.
Answer: B
Difficulty: Easy
Topic: Firm Entry
4) Entry of new firms into an existing market causes:

A) an upward movement along the market supply curve.
B) a downward movement along the market supply curve.
C) a rightward shift of the market supply curve.
D) a leftward shift of the market supply curve.
Answer: C
Difficulty: Medium
Topic: Firm Entry
5) If new firms are expected to enter an existing market, ________.

A) the market price is likely to fall
B) the market demand is likely to increase
C) the market supply is likely to fall
D) the profits of all firms are likely to increase
Answer: A
Difficulty: Medium
Topic: Firm Entry
6) When price is less than the firms' minimum average total cost, ________.
A) new firms will enter the market
B) existing firms will leave the market
C) prices are likely to fall further
D) firms' profits are likely to be maximum
Answer: B
Difficulty: Easy
Topic: Firm Exit
36
7) In a perfectly competitive market, the price in the long run:
A) will always be more than the minimum average total cost of the industry.
B) will always be less than the minimum average total cost of the industry.
C) will always equal the minimum average total cost of the industry.
D) will always equal the average fixed cost of the industry.
Answer: C
Difficulty: Easy
Topic: Zero Profits in the Long Run
8) The long-run supply curve for a firm in a perfectly competitive industry is:
A) negatively sloped.
B) positively sloped.
C) vertical.
D) horizontal.
Answer: D
Difficulty: Easy

A) the long-run market price is equal to the average fixed cost of the industry.
B) the long-run market price is less than the minimum average cost of the industry.
C) the long-run market price is more than the minimum average cost of the industry because of free entry
and exit of firms.
D) the long-run market price is equal to the minimum average cost of the industry because of free entry
and exit of firms.
Answer: D
Difficulty: Easy
10) In a perfectly competitive market, all firms in the long run earn:
A) positive economic profit.
B) positive accounting profit.
C) zero economic profit.
D) zero accounting profit.
Answer: C
Difficulty: Easy
11) In the long run, under perfect competition:

A) firms earn positive economic profit because of economies of scale.
B) firms earn positive accounting profit because of government regulations.
C) firms earn zero economic profit because of free entry and exit of firms.
D) firms earn negative economic profit because of free entry and exit of firms.
Answer: C
Difficulty: Easy
37
12) A ________ is a payment or a tax break used as an incentive for an agent to complete an activity.
A) tariff
B) subsidy
C) wage
D) rent
Answer: B
Difficulty: Easy
Topic: Evidence-Based Economics
13) In a perfectly competitive market, firms in the long run earn zero economic profits. Why?
Answer: In a perfectly competitive market, firms in the long run earn zero economic profits because of
free entry and exit. Whenever a few firms earn positive economic profits, it acts as an incentive for new
firms to enter the market. As there are no entry and exit restrictions in a perfectly competitive market,
firms can enter and exit at their will. The entry of new firms into the market shifts the market supply
curve to the right, which causes a fall in the market price. This process continues until the market price
equals the minimum average total cost of the market and all firms earn zero economic profits. Similarly,
when firms are earning negative economic profits, a few firms will leave the market shifting the market
supply to the left, and thus increasing the price. This process will continue until all existing firms in the
market earn zero economic profits. Zero economic profit means that all opportunity costs are covered,
including even a normal profit. This means that the firm is paying all of its bills and covering its implicit
costs, including the normal return on its investment. Such a firm is earning enough of an accounting
profit to keep it in the industry–no more and no less.
Difficulty: Medium
38
14) A firm is interested in entering a perfectly competitive market where all its competitors have cost
structures identical to this firm and are earning positive economic profits. Using graphs, comment on the
long-run profitability of the firms in this scenario.
Answer: All the firms with identical cost structures earn zero economic profits in the long run.
In the graph, D1 and S1 represent the initial industry supply and demand curves. The price determined at
the intersection of the two curves is P2 which is higher than the minimum average total cost curve of the
industry, ATC. Therefore, existing firms earn positive economic profits. Being attracted by the positive
profits earned by the existing firms, new firms enter the market in the long run. Similar to the firm in
question, there will be other firms who would want to enter the market. The entry of new firms will shift
the industry supply curve outward. New firms will continue to enter and supply will continue to
increase. This will continue until the supply curve reaches S 2 and the market price equals the minimum
average total cost of the industry. Therefore, the free entry and exit of firms will push the long-run price
down to the minimum average cost of the industry and the firms at that point earn zero profits.
Whenever the price is greater than the minimum average cost of the industry, the firms in the industry
earn positive economic profits, which attracts more firms into the market, and the price falls until all
firms earn zero economic profits.
Difficulty: Medium
Topic: Firm Entry
Appendix: When Firms Have Different Cost Structures
1) In a perfectly competitive market, a marginal entrant:

A) earns positive economic profits in the long run.
B) is the first firm to enter a market.
C) is indifferent between entering and not entering.
D) determines the market price of the good it produces.
Answer: C
Difficulty: Medium
Topic: Appendix: When Firms Have Different Cost Structures
39
A) The marginal entrant in a market earns the highest profit.
B) The marginal entrant has the lowest cost among all firms in the market.
C) Difference in technology and experience can lead to firms having non-identical costs even under
perfect competition.
D) In a market which has identical cost structures for all firms, there is possibility of positive economic
profits in both the short run and the long run.
Answer: C
Difficulty: Easy
3) In a competitive industry where different firms have different cost structures, the industry supply
curve is:
A) upward sloping.
B) downward sloping.
C) vertical.
D) horizontal.
Answer: A
Difficulty: Easy
4) In a competitive industry some firms earn positive economic profits while some earn zero economic
profit in the long run because:
A) there exist free entry and exit of firms.
B) the firms have different cost structures.
C) the firms sell their output at different prices.
D) the industry supply curve is perfectly elastic.
Answer: B
Difficulty: Medium
5) Which of the following statements is true of the short run?

A) Identical firms can enjoy positive economic profits.
B) Identical firms face a downward sloping supply curve.
C) Non-identical firms face a downward sloping supply curve.
D) Non-identical firms cannot enjoy positive economic profits.
Answer: A
Difficulty: Easy
40
6) Which of the following statements is true of the long run?
A) Identical firms can enjoy positive economic profits.
B) Identical firms face an upward sloping supply curve.
C) Non-identical firms can enjoy positive economic profits.
D) Non-identical firms face a horizontal supply curve.
Answer: C
Difficulty: Easy
7) Is it true that in the long run it is impossible for firms functioning in a perfectly competitive market to
earn positive economic profits? Explain your answer.
Answer: No, even in a perfectly competitive market, firms may earn positive economic profits in the long
run. This happens when firms do not have identical cost structures. For example, whenever there is an
increase in demand for a good in the market, the price of the good goes up. This encourages new firms to
enter the market, but these newer firms have a higher cost of production than the incumbent firms. As
such, the equilibrium price in the market equals the average total cost of the marginal entrant, i.e. the
entrant who earns zero economic profits. This results in an upward-sloping supply curve and causes the
price to be above the average total cost of the firms with a lower average total cost of production. As such,
even in the long run these low cost firms can earn positive economic profits.
Difficulty: Medium
8) Why is the profitability of firms under perfect competition different when they have non-identical cost
structures in comparison to identical cost structures?
Answer: When firms have non-identical cost structures, the pattern of entry into the industry is different
from when they have identical cost structures. In the former case, it is the set of firms with the lowest
average total cost curve that enters the market first and earns highest economic profits. The next set of
firms which enter have a higher average total cost than the initial lot of market entrants. Eventually a firm
with even higher average total cost curve enters the market and this firm earns zero economic profits.
This firm is called the marginal entrant, as it is indifferent between entering the market and staying out of
the market. The price in the market is equal to the marginal entrant's long-run average total cost since for
any price below this price there is absolutely no incentive for the firm to enter. Because the price equals
the long-run average total cost curve of the marginal entrant and not the minimum average total cost
curve of the industry, the market supply curve is upward sloping and not horizontal. On the other hand,
in case of a market where all firms have an identical cost structure, the long-run price equals the
minimum average total cost of the industry which is the same for all firms. Hence, the market supply
curve in this case is horizontal and there are no economic profits in the long run. Since, in case of non-
identical cost structures, firms face an upward-sloping market supply curve even in the long run, it
allows for low-cost firms to make positive economic profits.
Difficulty: Hard
41
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of four rings, since the ancestor of the
insects is believed to have consisted of
similar rings, each ring bearing a pair of
unspecialized legs.
The typical mouth parts of an insect
(Fig. 123) named in order from above, are (1)
an upper lip (labrum, ol), (2) a pair of biting
jaws (mandibles, ok), (3) a pair of grasping Fig. 122.—Yellow Fever
jaws (maxillæ, A, B), and (4) a lower lip Mosquito, showing head,
(labium, m, a, b). The grasping jaws bear two thorax, abdomen.
pairs of jointed jaw fingers (maxillary palpi,
D, C), and the lower lip bears a pair of
similar lip fingers (labial palpi, d). The biting jaws move sideways;
they usually have several pointed notches which serve as teeth. Why
should the grasping jaws be beneath the chewing jaws? Why is it
better for the lower lip to have fingers than the upper lip? Why are
the fingers (or palpi) jointed? (Watch a grasshopper or beetle eating.)
Why does an insect need grasping jaws?
The chest, or thorax, consists of three rings (Fig. 124) called the
front thorax (prothorax), middle thorax (mesothorax) and hind
thorax (metathorax), or first, second, and third rings. The first ring
bears the first pair of legs, the second ring bears the second pair of
legs and the upper or front wings, and the third ring bears the third
pair of legs and the under or hind wings.
The six feet of insects are characteristic of them, since no other
adult animals have that number, the spider having eight, the crayfish
and crabs having ten, the centipedes still more, while birds and
beasts have less than
six. Hence the
insects are
sometimes called the
Six-Footed class
(Hexapoda). The
insects are the only
animals that have
the body in three
divisions. Man,
beasts, and birds
Fig. 123.—Mouth
Parts of Beetle.
have only two
divisions (head and
trunk). Worms are Fig. 124.—External
of a Beetle.
Parts
not divided.
Define the class insecta
by the two facts characteristic of them (i.e. possessed
by them alone), viz.: Insects are animals with ————
and ————. Why would it be ambiguous to include
“hard outer skeleton” in this definition? To include
“bilateral symmetry”? “Segmented body”? The
definition of a class must include all the individuals
Fig. 125.—Leg of the class, and exclude all the animals that do not
of Insect. belong to the class.
The leg of an insect (Fig. 125) has five
joints (two short joints, two long, and the foot). Named in
order from above, they are (1) the hip (coxa), (2) thigh ring
(trochanter), (3) thigh (femur), (4) the shin (tibia), (5) the
foot, which has five parts. Which of the five joints of a
wasp’s leg (Fig. 161) is thickest? Slenderest? Shortest? One
joint (which?) of the foot (Fig. 161) is about as long as the
other four joints of the foot combined. Is the relative length Fig. 126.—Foot of
of the joints of the leg the same in grasshoppers, beetles, Fly, with climbing
etc., as in the wasp (Figs.)? Figure 125 is a diagram of an pads.
insect’s leg cut lengthwise. The leg consists of thick-walled
tubes (o, n) with their ends held together by thin, easy-wrinkling membranes
which serve as joints. Thus motion is provided for at the expense of strength. When
handling live insects they should never be held by the legs, as the legs come off very
easily. Does the joint motion of insects most resemble the motion of hinge joints or
ball-and-socket joints? Answer by tests of living insects. There are no muscles in
the foot of an insect. The claw is moved by a muscle (m) in the thigh with which it
is connected by the long tendon (z, s, t, v). In which part are the breathing
muscles? As the wings are developed from folds of the dorsal skin, the wing has
two layers, an upper and a lower layer. These inclose the so-called “nerves” or ribs
of the wing, each of which consists of a blood tube inclosed in an air tube.
The abdomen in various species consists of from five to eleven
overlapping rings with their fold-like joints between them. Does each
ring overlap the ring in front or the one behind it?
The food
tube (Fig. 127)
begins at the
mouth, which
usually bears
salivary glands
(4, Fig. 127,
which
represents
internal organs
of the
grasshopper).
The food tube
expands first
Fig. 127.—Viscera of into a croplike
Grasshopper. Key in text. enlargement; Fig. 128.—Air Tubes of
Compare with Fig. 114. Insect.
next to this is
an organ (6,
Fig. 127), which resembles the gizzard in birds, as its inner wall is
furnished with chitinous teeth (b, Fig. 114). These reduce the food
fragments that were imperfectly broken up by the biting jaws before
swallowing. Glands comparable to the liver of higher animals open
into the food tube where the stomach joins the small intestine. At the
junction of the small and the large intestine (9) are a number of fine
tubes (8) which correspond to kidneys and empty their secretion into
the large intestine.
The breathing organs of the insects are peculiar to them (see
Fig. 128). They consist of tubes which are kept open by having in
their walls continuous spirals of horny material called chitin. Most
noticeable are the two large membranous tubes filled with air and
situated on each side of the body. Do these tubes extend through the
thorax? (Fig. 128.) The air reaches these two main tubes by a number
of pairs of short windpipes, or tracheas, which begin at openings
(spiracles). In which division are the spiracles most numerous? (Fig.
128.) Which division is without spiracles? Could an insect be
drowned, i.e. smothered, by holding its body under water? Could it
be drowned by immersing all of it but its head? The motion of the air
through the breathing tubes is caused by a bellowslike motion of the
abdomen. This is readily observed in grasshoppers, beetles, and
wasps. As each ring slips into the ring in front of it, the abdomen is
shortened, and the impure air, laden with carbon dioxide, is forced
out. As the rings slip out, the abdomen is extended and the fresh air
comes in, bringing oxygen.
The Circulation.—
Near the dorsal surface of
the abdomen (Fig. 131)
extends the long, slender
heart (Fig. 129). The heart
has divisions separated by
valvelike partitions. The
blood comes into each of Fig. 130.—Diagrams of Evolution
the heart compartments of Pericardial Sac around insect’s
Fig. 129. through a pair of openings. heart from a number of veins
— The heart contracts from (Lankester).
Insect’s the rear toward the front,
Heart driving the blood forward. The blood contains bodies
(plan).
corresponding to the white corpuscles of human blood, but
lacks the red corpuscles and the
red colour. The blood is sent even
to the wings. The veins in the
wings consist of horny tubes
inclosing air tubes surrounded by
Fig. 131.—Position of Insect’s Heart, blood spaces, and the purification
food tube, and nerve chain. of the blood takes place
throughout the course of the
circulation. Hence the imperfect
circulation is no disadvantage. The perfect provision for supplying
oxygen explains the remarkable activity of which insects are capable
and their great strength, which, considering their size, is unequalled
by any other animals.
The Nervous System.—The
heart in backboned animals, e.g.
man, is ventral and the chief
nerve trunk is dorsal. As already
stated, the heart of an insect is
dorsal; its chief nerve chain,
Fig. 133.—
consisting of a double row of
Feeler of ganglia, is near the ventral
a beetle. surface (Fig. 131). All the ganglia
are below the food tube except
the first pair in the head, which
are above the gullet. This pair may be said
to correspond somewhat to the brain of
backboned animals; the nerves from the Fig. 132.—Nervous
eyes and the feelers lead to it. With social System of Bee.
insects, as bees and ants, it is large and
complex (Fig. 132). In a typical insect they are the largest ganglia.
The Senses.—The sense of smell of most insects is believed to be
located in the feelers. The organ of hearing is variously located in
different insects. Where is it in the grasshopper? The organs of sight
are highly developed, and consist of two compound eyes on the side
of the head and three simple eyes on the top or front of the head
between the compound eyes. The simple eye has nerve cells,
pigments, and a lens resembling the lens in the eyes of vertebrates
(Fig. 134). The compound eye (Fig. 135) has thousands of facets,
usually hexagonal, on its surface, the facets being the outer ends of
cones which have their inner ends directed toward the centre of the
eye. It is probable that the large, or compound, eyes of insects only
serve to distinguish bright objects from dark objects. The simple eyes
afford distinct images of objects within a few inches of the eye. In
general, the sight of insects, contrary to what its complex sight
organs would lead us to expect, is not at all keen. Yet an insect can fly
through a forest without striking a twig or branch. Is it better for the
eyes that are immovable in the head to be large or small? Which has
comparatively larger eyes, an insect or a beast?
Inherited Habit, or Instinct.—Insects and other animals
inherit from their parents their particular form of body and of organs
which perform the different functions. For example, they inherit a
nervous system with a
structure similar to that
of their parents, and
hence with a tendency
to repeat similar
impulses and acts.
Repeated acts constitute
a habit, and an Fig. 134.—
inherited habit is called Diagram of
an instinct. Moths, for simple eye of
example, are used to insect.
Fig. 135.—Compound Eye of finding nectar in the L, lens; N, optic

Insect. night-blooming flowers, nerve.
most of which are white.
1, hexagonal facets of The habit of going to
crystalline cones. 6, blood white flowers is transmitted in the
vessel in optic nerve.
structure of the nervous system; so we
say that moths have an instinct to go to
white objects; it is sometimes more obscurely expressed by saying
they are attracted or drawn thereby.
Instincts are not Infallible.—They are trustworthy in only one
narrow set of conditions. Now that man makes many fires and lights
at night, the instinct just mentioned often causes the death of the
moth. The instinct to provide for offspring is necessary to the
perpetuation of all but the simplest animals. The dirt dauber, or mud
wasp, because of inherited habit, or instinct, makes the cell of the
right size, lays the egg, and provides food for offspring that the
mother will never see. It seals stung and semiparalyzed spiders in the
cell with the egg. If you try the experiment of removing the food
before the cell is closed, the insect will bring more spiders; if they are
removed again, a third supply will be brought; but if taken out the
third time, the mud wasp will usually close the cell without food, and
when the egg hatches the grub will starve.
The Development of Insects.—The growth and the moulting of
the grasshopper from egg to adult has been studied. All insects do
not develop exactly by this plan. Some hatch from the egg in a
condition markedly different from the adult. The butterfly’s egg
produces a wormlike caterpillar which has no resemblance to the
butterfly. After it grows it forms an inclosing case in which it spends
a quiet period of development and comes out a butterfly. This change
from caterpillar to butterfly is called the metamorphosis. The life of
an insect is divided into four stages: (1) egg, (2) larva, (3) pupa, and
(4) imago, or perfect insect (Figs. 136, 137, 138).
The egg stage is one of
development, no nourishment
being absorbed. The larval
stage is one of voracious
feeding and rapid growth. In
the pupa stage no food is
taken and there is no growth
Fig. 137.— in size, but rapid development Fig. 136.—Measuring
Pupa of a takes place. In the perfect worm, the larva of a moth.
mosquito. stage food is eaten, but no
growth in size takes place. In this stage the eggs are
produced. When there is very little resemblance between the larva
and the imago, and no pupal stage, the metamorphosis, or change, is
said to be complete. When, as with the grasshopper, no very marked
change takes place between the larva and the imago, there being no
pupal stage, the metamorphosis is said to be incomplete. By studying
the illustrations and specimens, and by thinking of your past
observations of insects, determine which of the insects in the
following list have a complete metamorphosis: beetle, house fly,
grasshopper, butterfly, cricket, wasp.
Fig. 138.—The Four Stages of a Botfly, all enlarged.
a, egg on hair of horse (bitten off and swallowed); b, larva; c,

larva with hooks for holding to lining of stomach; d, pupal
stage, passed in the earth; e, adult horse fly.
RECOGNITION-CHARACTERS FOR THE
PRINCIPAL ORDERS OF ADULT WINGED
INSECTS
(All are wingless when young, and wingless adult forms occur in all
the orders: order Aptera lacks wing-bearing thoracic structures.)
A single pair of wings is characteristic of the order Diptera.
A jointed beak, that is sheath-like, inclosing the other mouth parts,
is characteristic of the order Hemiptera.
A coiled sucking proboscis and a wing covering of dust-like
microscopic scales are characteristic of the order Lepidoptera.
Horny sheath-like fore wings, covering the hind wings and
meeting in a straight line down the middle of the back, will
distinguish the order Coleoptera.
Hind wings folded like a fan beneath the thickened and
overlapping fore wings, will distinguish most members of the order
Orthoptera.
The possession of a sting (in females) and of two pairs of thin
membranous wings—the small hind wing hooked to the rear margin
of the fore wing—will distinguish the common Hymenoptera.
Besides these, there remain a number of groups most of which
have in the past been included under the order Neuroptera, among
which the Mayflies will be readily recognized by the lack of mouth
parts and by the possession of two or three long tails; the dragon flies
by the two pairs of large wings, enormous eyes, and minute bristle-
like antennæ; the scorpion flies, by the possession of a rigid beak,
with the mouth parts at its tip; the caddis flies, by their hairy wings
and lack of jaws; the lace wings, by the exquisite regularity of the
series of cross veins about the margin of their wings, etc.
Exercise in the Use of the Table or Key.—Write the name of
the order after each of the following names of insects:—
Fig. 139.—May Fly. What order (see table)?
Fig. 140.—Silver
Scale. (Order?)
Wasp (Fig. 122)

Weevil (Fig. 163)
Squash bug (Fig. 184)
Ant lion (Fig. 170)
Dragon fly (Fig. 177)
Ichneumon fly (Fig. 159)
House fly (Fig. 172)
Flea (Fig. 173)
Silver scale or earwig (Fig. 140)
Codling moth (Fig. 141)
Botfly (Fig. 138)
Moths and Butterflies.—Order ____? Why ____ (p. 82)?

The presence of scales on the wings is a never-failing test of a moth
or a butterfly. The wings do not fold at all. They are so large and the
legs so weak and delicate that the butterfly keeps its balance with
difficulty when walking in the wind.
The maxillæ are developed to form the long sucking proboscis.
How do they fit together to form a tube? (See Fig. 147.) The proboscis
varies from a fraction of an inch in the “miller” to five inches in some
tropical moths, which use it to extract nectar from long tubular
flowers. When not in use, it is held coiled like a watch spring under
the head (Fig. 148). The upper lip (labrum), under lip (labium), and
lip fingers (labial palpi) are very small, and the mandibles small or
wanting (Fig. 146).
The metamorphosis is complete, the contrast between the
caterpillar or larva of the moth and the butterfly and the adult form
being very great. The caterpillar has the three pairs of jointed legs
typical of insects; these are found near the head (Fig. 141). It has also
from three to five pairs of fleshy unjointed prolegs, one pair of which
is always on the last segment. How many pairs of prolegs has the
silkworm caterpillar? (Fig. 143.) The measuring worm, or looper?
(Fig. 136.) The pupa has a thin shell. Can you see external signs of
the antennæ, wings, and legs in this stage? (Fig. 143.) The pupa is
concealed by protective coloration and is sometimes inclosed in a
silken cocoon which was spun by the caterpillar before the last
moult. Hairy caterpillars are uncomfortable for birds to eat. The
naked and brightly marked ones (examples of warning coloration)
often contain an acrid and distasteful fluid. The injuries from
lepidoptera are done in the caterpillar stage. The codling moth (Fig.
141) destroys apples to the estimated value of $6,000,000 annually.
The clothes moth (Fig. 171) is a household pest. The tent caterpillar
denudes trees of their leaves. The only useful caterpillar is the
silkworm (Fig. 143). In Italy and Japan many of the country
dwellings have silk rooms where thousands of these caterpillars are
fed and tended by women and children. Why is the cabbage butterfly
so called? Why can it not eat cabbage? Why does sealing clothes in a
paper bag prevent the ravages of the clothes moth?
Flight of Lepidoptera.—Which appears to use more exertion to
keep afloat, a bird or a butterfly? Explain why. Of all flying insects
which would more probably be found highest up mountains? How
does the butterfly suddenly change direction of flight? Does it usually
fly in a straight or a zigzag course? Advantage of this? Bright colours
are protective, as lepidoptera are in greatest danger when at rest on
flowers. Are the brightest colours on upper or under side of wings of
butterfly? Why? (Think of the colours in a flower.) Why is it better
for moths to hold their wings flat out when at rest? Where are moths
during the day? How can you test whether the colour of the wings is
given by the scales?
State how moths and butterflies differ in respect to: body,
wings, feelers, habits.
Insects and Flowers.—Perhaps we are indebted to insects for
the bright colours and sweet honey of flowers. Flowers need insects
to carry their pollen to other flowers, as cross-fertilization produces
the best seeds. The insects need the nectar of the flowers for food,
and the bright colours and sweet odours are the advertisements of
the flowers to attract insects. Flowers of brightest hues are the ones
that receive the visits of insects. Moths, butterflies, and bees carry
most pollen (see Beginners’ Botany, Chap. VI).
Comparative Study.—Make a table like this, occupying entire
page of notebook, leaving no margins, and fill in accurately:—
Grasshopper Butterfly Fly Dragon Beetle Bee
pp. Fly p. pp. 90, pp.
92, 93 91 88,
93 89
Number and kind
of wings
Description of legs
Antennæ (length,
shape, joints)
Biting or sucking
mouth parts
Complete or
incomplete
metamorphosis.
To the Teacher: These illustrated studies require slower and more careful
study than the text. One, or at most two, studies will suffice for a lesson. The
questions can be answered by studying the figures.
Figs. 141–148. Illustrated Study of Lepidoptera.—Study the stages in the

development of codling moth, silkworm moth, and cabbage butterfly.
Where does each lay its eggs? What does the larva of each feed upon? Describe
the pupa of each. Describe the adult forms. Find the spiracles and prolegs on the
silkworm. Compare antennæ of moth and butterfly. Which has larger body
compared to size of wings?
Describe the scales from a butterfly’s
wings as seen under microscope (144).
How are the scales arranged on moth’s
wing (145)? By what part is scale
attached to wing? Do the scales
overlap?
Study butterfly’s head and proboscis
(Figs. 146–148). What shape is
compound eye? Are the antennæ
jointed? Is the proboscis jointed? Why
not call it a tongue? (See text.)
Which mouth parts have almost
disappeared? What is the shape of cut
ends of halves of proboscis? How are
the halves joined to form a tube?
If you saw a butterfly on a flower, for
what purpose would you think it was
there? What, if you saw it on a leaf?
How many spots on fore wing of female
Fig. 141.—Codling Moth, from egg to cabbage butterfly? (Fig. 124, above.)
adult. (See Farmers’ Bulletin, p. 95.) Does the silkworm chrysalis fill its
cocoon?
Figs. 149–161. Illustrated Study
of Bees and their Kindred.—Head
of worker (Fig. 149): o, upper lip; ok,
chewing jaws; uk, grasping jaws; kt,
jaw finger; lt, lip finger; z, tongue.
How do heads of drone (150) and
queen (151) differ as to mouth, size of
the two compound eyes, size and
position of the three simple eyes? Is
the head of a worker more like head of
drone or head of queen? Judging by
the head, which is the queen, drone,
and worker in Figs. 154–156? Which of
the three is largest? Smallest?
Broadest?
Figure 152 shows hind leg of worker.
What surrounds the hollow, us, which Fig. 142.—Cabbage Butterfly, male and
serves as pollen basket? The point, fh, female, larva and pupa.
is a tool for removing wax which is
secreted (c, Fig. 157) between rings on
abdomen. In Fig. 158, find relative positions of heart, v, food tube, and nerve
chain. Is crop, J, in thorax
or abdomen? In this
nectar is changed to
honey, that it may not
spoil. Compare nerve
chain in Fig. 132.
Compare the cells of
bumble bee (Fig. 153) with
those of hive bee. They
differ not only in shape
but in material, being
made of web instead of
wax, and they usually
contain larvæ instead of
honey. Only a few of the
queens among bumble
bees and wasps survive
the winter. How do ants
and honey bees provide
for the workers also to
survive the winter? Name
all the social insects that
you can think of. Do they
all belong to the same
Fig. 143.—Life History of Silkworm. order?
The ichneumon fly
shown enlarged in Fig. 159
lays its eggs under a caterpillar’s skin. What becomes of the eggs? The true size of
the insect is shown by the cross lines at a. The eggs are almost microscopic in size.
The pupæ shown (true size) on caterpillar are sometimes mistaken for eggs. The
same mistake is made about the pupa cases of ants. Ichneumon flies also use tree-
borers as “hosts” for their eggs and larva. Is this insect a friend of man?
The digging wasp (Figs. 160 and 161) supplies its larva with caterpillars and
closes the hole, sometimes using a stone as pounding tool. Among the few other
uses of tools among lower animals are the elephant’s use of a branch for a fly
brush, and the ape’s use of a walking stick. This wasp digs with fore feet like a dog
and kicks the dirt out of the way with its hind feet.
Are the wings of bees and wasps more closely or less closely veined than the
wings of dragon flies? (Fig. 177.)
Illustrated Study of Beetles.
Illustrated Study of Beetles (Figs. 162–169).—Write the life history of the
Colorado beetle, or potato bug (Fig. 169), stating where the eggs are laid and
describing the form and
activities of each stage (the
pupal stage, b, is passed in the
ground).
Do the same for the May
beetle (Figs. 167–168). (It is a
larva—the white grub—for
three years; hogs root them
up.) Beetles, like moths, may
be trapped with a lantern set
above a tub of water.
Fig. 145.—Scales Where does a Scarab (or
on Moth’s Wing. sacred beetle of the
Egyptians), also called tumble
bug (Fig. 164), lay its eggs (Fig. 165)? Why?
How does the click beetle, or jack snapper (Fig.
166), throw itself into the air? For what purpose?
The large proboscis of the weevil (Fig. 163) is
used for piercing a hole in which an egg is laid in Fig. 144.—Scales from
grain of corn, boll of cotton, acorn, chestnut, plum, Butterflies’ Wings, as seen
etc. under microscope.
How are the legs and body of the diving beetle
suited for swimming (Fig. 162)?
Describe its larva.
What is the shape of the lady bug (Fig. 97)? It
feeds upon plant lice (Fig. 185). Is any beetle of
benefit to man?
Fig. 148.—
Head of
Butterfly
(side view).
Fig. 146.—
Head of
Butterfly.
Fig. 147.—Section of
Proboscis of butterfly showing
Fig. 149. lapping joint and dovetail joint.
Fig. 151. Fig. 150.

Fig. 153.
Fig. 152.
Fig. 155. Fig. 154.
Fig. 157.
Fig. 156.
Fig. 158.—Anatomy of bee.
Fig. 159.—Ichneumon fly.

Fig. 161.—Wasp using pebble.
From Peckham’s “Solitary Wasps,”

Houghton, Mifflin & Co.
Fig. 160.
Fig. 163.—
Weevil.
Fig. 162.—Diving beetle (Dytiscus), with larva, a.

Fig. 165.
Fig. 164.
Fig. 166.—Click beetle.
Fig. 168. Fig. 167.—May Beetle.

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6.1 Sellers in a Perfectly Competitive Market

1) Which of the following statements is true of a perfectly competitive market?

2) In a perfectly competitive market:

6) A firm is said to be a price-taker if:

7) Price in a perfectly competitive market:

1) The goal of a seller is primarily to:

2) Net benefits of sellers represent their:

3) Which of the following is NOT an element of a seller's decision-making process in a perfectly

4) A business entity that produces goods or services is referred to as a(n):

5) The process by which inputs are transformed to outputs is referred to as:

7) Which of the following statements is true of the short run?

8) In the long run:

9) Which of the following inputs can be changed in the short run?

10) Which of the following statements is true of the long run?

Output per day (pairs) Number of Workers

19) Increases in marginal product of labor can be attributed to:

20) Specialization is the result of:

21) Which of the following is an example of specialization?

24) Which of the following refers to diminishing marginal returns?

Number of Loaves Number of workers

29) Total cost of production refers to the:

40) Marginal cost is the change in:

45) The marginal cost curve intersects:

46) Total revenue earned from the sale of a good is:

49) The equilibrium price in a market occurs where the:

50) Marginal revenue:

52) Profits equal:

54) A firm will maximize profit at the level of output where:

55) In a perfectly competitive market:

59) Which of the following is true?

61) Is it possible for an input to have a negative marginal product?

65) Consider the following two scenarios:

Answer: The values are shown in the table below.

Quantity Sold Total Cost Total Revenue Marginal Marginal

6.3 From the Seller's Problem to the Supply Curve

1) A supply curve shows the relationship between:

2) Which of the following is true about price elasticity of supply?

9) A good with a perfectly inelastic supply has a price elasticity of supply:

10) As the amount of inventories maintained by a firm increases:

15) Exit of a firm refers to:

18) Which of the following is an example of a variable cost?

6.4 Producer Surplus

1) Graphically, producer surplus is the:

4) The total producer surplus in the entire market is given by the:

1) Which of the following statements is true?

2) Which of the following statements is true?

6) In the long run, a firm should exit when:

7) The long-run supply curve of a firm is:

6.6 From The Firm to the Market: Long-Run Competitive Equilibrium

3) Free entry is said to exist in an industry when:

Moths and Butterflies.—Order ? Why (p. 82)?