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OSP SOE8 TB 06 - test bank

Principles of economic (Saudi Electronic University)

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Chapter 6 Perfect Competition

6.1 Preview of the Four Market Structures

1) What characteristic of a perfectly competitive firm that causes it to be a price taker?

A) many buyers and sellers
B) homogeneous product
C) free entry and exit
D) Both A and B are correct.
Answer: D

2) Which of the following is NOT a characteristic of a perfectly competitive market?

A) a large number of firms in a market
B) selling a standardized product
C) substantial barriers to entry
D) an individual firm having no control over price
Answer: C

3) Which of the following is/are NOT a characteristic of a perfectly competitive market?

A) a small number of firms in a market
B) selling a standardized product
C) no barriers to entry
D) an individual firm having no control over price
Answer: A

4) Which of the following is a characteristic of a perfectly competitive market?

A) a large number of firms in a market
B) selling a standardized product
C) no barriers to entry
D) all of the above
Answer: D

5) Consumers do not have a strong preference for the output of one seller over that of another in
a perfectly competitive market because:
A) there a large number of firms in the market.
B) the firms sell a standardized product.
C) there are no barriers to entry.
D) an individual firm has control over price.
Answer: B

6) A perfectly competitive market:

A) is dominated by one firm.
B) consists of at most five firms.
C) is made up of a large number of firms.
D) consists of only one firm.
Answer: C

7) Who are the price takers in a perfectly competitive market?

A) both the buyers and the sellers
B) the buyers
C) neither the buyers nor the sellers
D) the sellers
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Answer: A

8) A price taker is a buyer or a seller who:

A) takes the market price as given.
B) buys or sells only at a price where profits can be made.
C) accepts whatever price that the government legislates as the price of the good or service.
D) has the ability to influence the equilibrium price in the market.
Answer: A

9) A price maker is a buyer or a seller who:

A) takes the market price as given.
B) buys or sells only at a price where profits can be made.
C) accepts whatever price that the government legislates as the price of the good or service.
D) has the ability to influence the equilibrium price in the market.
Answer: D

10) Firms in a perfectly competitive market:

A) sell a differentiated product.
B) sell homogeneous products.
C) usually have large advertising budgets.
D) try to attract customers away from their competitors.
Answer: B

11) A market in which firms sell a homogeneous product and cannot influence market price is
most likely:
A) a perfectly competitive market.
B) an oligopoly.
C) a monopolistically competitive market.
D) a monopoly market.
Answer: A

12) In a market for a homogeneous good, if sellers and buyers can enter or exit a market freely,
the market is most likely:
A) an oligopoly.
B) a monopolistically competitive market.
C) a monopoly.
D) a perfectly competitive market.
Answer: D

13) Which of the following statements about a perfectly competitive market is INCORRECT?
A) There are many sellers, each supplying a small quantity.
B) There are many buyers, each purchasing a small quantity.
C) The market sells homogeneous products.
D) Buyers and sellers cannot enter exit the market freely.
Answer: D

14) Which of the following is the best example of a perfectly competitive firm?
A) DeBeers Diamond Company
B) your local cable television company
C) Tino's Italian Eatery, a local restaurant
D) Jones's wheat farm in eastern Washington
Answer: D
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15) A firm that can sell as much as it can produce at the market price is likely operating in:
A) a perfectly competitive market.
B) a monopoly
C) a monopolistically competitive market.
D) an oligopoly
Answer: A

16) A perfectly competitive firm can:

A) affect the market price for its good.
B) sell as much as it can produce at the market price.
C) prevent entry of other firms into their market.
D) collude with its competitors to set prices.
Answer: B

17) A market where individual firms cannot affect the market price of their good is most likely:
A) a monopoly
B) an oligopoly
C) a monopolistically competitive market.
D) perfectly competitive
Answer: D

18) How does the firm-specific demand curve in a perfectly competitive market compare to that
in a monopoly?
A) The firm-specific demand curve in a perfectly competitive market is horizontal. The demand
curve in a monopoly is downward sloping.
B) They are the same.
C) The firm-specific demand curve in a perfectly competitive market is horizontal. The demand
curve in a monopoly is upward sloping.
D) The firm-specific demand curve in a perfectly competitive market is vertical. The demand
curve in a monopoly is horizontal.
Answer: A

19) In which of the following market structures do you find many sellers?
A) monopolistic competition
B) perfect competition
C) monopoly
D) Both A and B are correct
Answer: D

20) In which of the following market structures do you find only one seller?
A) a monopoly
B) an oligopoly
C) a monopolistic competition
D) a perfectly competitive market
Answer: A

21) In which of the following market structures do you find barriers to entry?
A) a monopoly
B) a perfectly competitive market
C) a monopolistic competition
D) Both A and B are correct
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Answer: A

22) In which of the following market structures do you find no barriers to entry?
A) perfect competition
B) monopolistic competition
C) monopoly
D) Both A and B are correct
Answer: D

23) In which of the following market structures can you find differentiated products?
A) monopoly
B) perfect competition
C) oligopoly
D) monopolistic competition and oligopoly
Answer: D

24) Which of the following firms is considered a monopoly?

A) The U.S. Postal Service
B) Taco Bell
C) United Airlines
D) Macy's Department Store
Answer: A

25) Which of the following firms is in an oligopoly?

A) Verizon (a cellular phone company)
B) United Airlines (an airline company)
C) Marlboro (a cigarette manufacturer)
D) All of the above are in an oligopolistic market structure.
Answer: D

26) Which of the following firms is in a monopolistically competitive market?

A) Oral-B (a toothbrush manufacturer)
B) the U.S. Postal Service
C) Marlboro (a cigarette manufacturer)
D) United Airlines (an airline company)
Answer: A

27) If a firm is a price taker, the demand curve faced by the firm is:
A) horizontal.
B) vertical.
C) downward sloping.
D) upward sloping.
Answer: A

28) If the demand curve faced by a firm is horizontal, then the firm is ________ and a ________.
A) perfectly competitive; price taker
B) perfectly competitive; price maker
C) a monopoly; price taker
D) a monopoly; price maker
Answer: A

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29) A perfectly competitive market is one where:

A) each firm controls the price charged for its product by changing the quantity they produce.
B) each firm sells at the government mandated price.
C) each firm within the market must sell its good at the market price.
D) a firm can affect market price by increasing output.
Answer: C

30) Toby sells wheat in a perfectly competitive market. The demand curve for Toby's wheat is:
A) horizontal.
B) vertical.
C) downward sloping.
D) U-shaped.
Answer: A

Recall the Application about the wireless phone service provided by thousands of
entrepreneurial women in Pakistan to answer the following question(s).

31) Recall the Application. What makes the wireless telephone market in Pakistan perfectly
competitive?
A) There are many buyers and many sellers
B) Any entrepreneur who invests $310 can enter the market.
C) Wireless phone calls are a standardized product.
D) All of the above are correct.
Answer: D

32) Recall the Application. What makes the wireless telephone market in the United States NOT
perfectly competitive?
A) There are many buyers and many sellers in the United States.
B) It is very expensive to enter the market in the United States.
C) Wireless phone calls are a standardized product.
D) All of the above are correct.
Answer: B

33) Recall the Application. Because the average earnings of the "wireless women" in Pakistan
are three times the average wage rate, then we would expect that in the long run:
A) more entrepreneurs would exit the market.
B) more entrepreneurs would enter the market.
C) the earnings of wireless women would increase.
D) the cost of making a wireless call in Pakistan would increase.
Answer: B

34) A perfectly competitive firm has no control over the price that it charges.
Answer: TRUE

35) Oligopolies are characterized by many firms.

Answer: FALSE

36) Monopolistically competitive industries are characterized by no barriers to entry.

Answer: TRUE

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37) Monopolies are characterized by a firm demand curve that is more elastic than the market
demand curve.
Answer: FALSE

38) Perfect competition is characterized by many firms and no barriers to entry.

Answer: TRUE

39) What are the characteristics of perfect competition?

Answer: Perfectly competitive industries have many firms, a homogeneous product, no barriers
to entry, and demand is perfectly elastic.

40) What are the four types of market structure?

Answer: monopoly, oligopoly, monopolistic competition, and perfect competition

41) What are the characteristics of monopolies?

Answer: A monopoly has one firm, a unique product, the firm faces the market demand curve,
and there are large barriers to entry.

42) What are the characteristics of oligopoly?

Answer: Oligopolies have a few firms, a homogeneous or differentiated product, less elastic
demand than competitive or monopolistically competitive firms, and large barriers to entry.

43) What are the characteristics of monopolistic competition?

Answer: Monopolistically competitive industries have many firms, differentiated products, no
barriers to entry, and face elastic (but not perfectly elastic) demand curves.

44) What are the similarities between perfect competition and monopolistic competition?
Answer: In both market structures, there are many buyers and sellers and there are no barriers to
entry.

6.2 The Firm's Short-Run Output Decision

1) Farmer Brown sells her wheat in a perfectly competitive market. Suppose the current market
price of wheat is $2.50 per bushel.
A) Farmer Brown can sell as much wheat as she likes at $2.50 per bushel.
B) Farmer Brown can charge any price for her wheat, but will maximize profit if she sells for
less than $2.50.
C) Farmer Brown should charge more than $2.50.
D) Farmer Brown can charge more than $2.50 and still sell some wheat.
Answer: A

2) Brodie sells fish in a perfectly competitive market. Suppose the current market price of fish is
$4.50 per pound.
A) Brodie can sell as many fish as he can catch at $4.50 per pound.
B) Brodie can charge any price he likes for his fish, but will maximize profit if he sells for less
than $4.50.
C) Brodie should charge more than $4.50.
D) Brodie can charge more than $4.50 and still sell some fish.
Answer: A

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3) You sell your good in a perfectly competitive market where the market price is $7.00. When
you sell 100 units your total revenue is $700. When you sell 101 units:
A) total revenue increases by less than $7.
B) total revenue increases by exactly $7.
C) total revenue increases by more than $7.
D) total revenue may increase or decrease.
Answer: B

4) You sell your good in a perfectly competitive market where the market price is $33.00. When
you sell 100 units your total revenue is $3,300. When you sell 101 units:
A) total revenue increases by less than $33.
B) total revenue increases by exactly $33.
C) total revenue increases by more than $33.
D) total revenue may increase or decrease.
Answer: B

5) Marginal revenue is equal to price for a perfectly competitive firm because:

A) total revenue increases by the price of the good when an additional unit is sold.
B) total revenue increases by less than the price of the good when an additional unit is sold.
C) firms need to lower price to increase the quantity sold.
D) firms can increase price and still increase the quantity sold.
Answer: A

6) If individual firms face a horizontal demand curve at a given market price:

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

7) For the perfectly competitive firm:

A) price always equals average cost.
B) price always equals marginal cost.
C) price always equals marginal revenue.
D) price always equals average variable cost.
Answer: C

8) Marginal revenue is equal to:

A) the change in total revenue from selling one more unit of a good.
B) the number of units sold times the price of the good.
C) the change in average revenue from selling one more unit of a good.
D) all of the above.
Answer: A

9) If a firm can maximize its profit by producing the output where price is equal to its marginal
cost, the firm is operating in:
A) a perfectly competitive market.
B) an oligopolistic market.
C) a monopolistic market.
D) a monopolistically competitive market.
Answer: A

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10) If a firm suffers an economic loss, its:

A) price is less than its marginal cost.
B) price is less than its marginal revenue.
C) price is less than its average total cost.
D) none of the above
Answer: C

11) Jerry's Quarry sells building stone in a perfectly competitive market. At its current level of
building stone production, Jerry's Quarry has marginal costs equal to $45, and AVC is rising. If
the market price of building stone is $50, Jerry's Quarry should:
A) decrease its level of building stone production.
B) continue producing its current level of production.
C) increase its production of building stone.
D) shut down and produce no building stone.
Answer: C
Diff: 2

12) Kevin's Golf-a-Rama sells golf balls in a perfectly competitive market. At its current level of
golf ball production, Kevin has marginal costs equal to $1, and AVC is rising. If the market price
of golf balls is $2, Kevin should:
A) decrease the level of golf ball production.
B) continue producing the current level of production.
C) increase the production of golf balls.
D) shut down and produce no golf balls.
Answer: C

13) Kevin's Golf-a-Rama sells golf balls in a perfectly competitive market. At its current level of
golf ball production, Kevin has marginal costs equal to $2. If the market price of golf balls is $1,
Kevin should:
A) decrease the level of golf ball production.
B) continue producing the current level of production.
C) increase the production of golf balls.
D) raise the price of its golf balls.
Answer: A

14) Alex's Furniture Mart produces and sells tables in a perfectly competitive market. When
Alex's Furniture Mart produces and sells 250 tables, its marginal cost is equal to $200, and AVC
is rising. If the market price of tables is equal to $150, Alex's Furniture Mart should:
A) decrease its level of table production.
B) increase its level of table production.
C) continue producing 250 tables.
D) raise the price of its tables.
Answer: A

15) Suppose Blu-ray discs are sold in a perfectly competitive market. The current market price of
Blu-ray discs is $15. If at the current level of production of compact discs you calculate the
marginal cost to your company is also $15, and that AVC is rising, in the short run your company
should:
A) produce more Blu-ray discs.
B) produce fewer Blu-ray discs.
C) continue producing the current level of Blu-ray discs.
D) raise the price of its Blu-ray discs.
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Answer: C

16) If a firm in a perfectly competitive market is currently producing the output where price =
marginal cost = average total cost, the firm is:
A) earning a positive economic profit.
B) earning a zero economic profit.
C) suffering an economic loss.
D) all of the above
Answer: B

17) If a firm in a perfectly competitive market is currently producing the output where price =
marginal cost > average total cost, the firm is:
A) earning a positive profit.
B) earning a zero profit.
C) suffering an economic loss.
D) all of the above
Answer: A

Figure 6.1

18) Figure 6.1 shows the cost structure of a firm in a perfectly competitive market. If the market
price is $40, the firm's profit-maximizing output level is:
A) 500.
B) 650.
C) 900.
D) 1,200.
Answer: C

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19) Figure 6.1 shows the cost structure of a firm in a perfectly competitive market. If the market
price is $40 and the firm is currently producing the profit-maximizing output level, its total
variable cost is:
A) $12,500.
B) $14,300.
C) $19,800.
D) $27,000.
Answer: C
Diff: 2

20) Figure 6.1 shows the cost structure of a firm in a perfectly competitive market. If the market
price is $40 and the firm is currently producing the profit-maximizing output level, its total fixed
cost is:
A) $2,800.
B) $5,200.
C) $7,200.
D) $9,000.
Answer: C

21) Figure 6.1 shows the cost structure of a firm in a perfectly competitive market. If the market
price is $40 and the firm is currently producing the profit-maximizing output level, the firm's
profit is:
A) $7,200.
B) $9,000.
C) $27,000.
D) $36,000.
Answer: B

22) Figure 6.1 shows the cost structure of a firm in a perfectly competitive market. If the firm's
fixed cost increases by 3,000 due to a new government regulation:
A) the marginal cost curve shifts upward.
B) the average variable cost curve shifts upward.
C) the average total cost curve shifts upward.
D) none of the above
Answer: C

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Figure 6.2

23) Figure 6.2 shows the cost structure of a firm in a perfectly competitive market. If the market
price is $10 and the firm chooses the profit-maximizing output level, its profit is:
A) $1,000.
B) $800.
C) $720.
D) $200.
Answer: D

24) Figure 6.2 shows the cost structure of a firm in a perfectly competitive market. Suppose the
current market price is $10 and the firm produces the profit-maximizing output level. If the
firm's total fixed cost increases due to a new government regulation, the short-run response of
the firm should be to:
(Note: since the question does not restrict the firm's response to the short run, we can't rule out
that the rise in fixed cost will push the firm below the breakeven point and that the firm will exit
the industry in the long run, thus decreasing its current output level.)
A) produce its current output level.
B) increase its current output level.
C) decrease its current output level.
D) There isn't sufficient information.
Answer: A

25) Figure 6.2 shows the cost structure of a firm in a perfectly competitive market. Suppose that
market price falls to $6. If the firm produces at an output level that causes it to suffer an
economic loss of $120, its average total cost (X) is:
A) $8.
B) $7.50.
C) $6.50.
D) $4.
Answer: B

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26) Figure 6.2 shows the cost structure of a firm in a perfectly competitive market. Suppose the
current market price is $6 and the firm produces at a given output level. If the firm's total fixed
cost increases due to a new government regulation, the short-run response of the firm should be
to:
(Note: since the question does not restrict the firm's response to the short run, we can't rule out
that the rise in fixed cost will push the firm below the breakeven point and that the firm will exit
the industry in the long run, thus decreasing its current output level.)
A) produce its current output level.
B) decrease its current output level.
C) increase its current output level.
D) There isn't sufficient information.
Answer: A

27) If a profit-maximizing firm in a perfectly competitive market is currently producing the

output where (price - average variable cost) > average fixed cost, the firm is:
A) making a positive economic profit.
B) making a zero economic profit.
C) suffering an economic loss.
D) none of the above
Answer: A

28) If the firm is incurring losses in the short run, then which of the following is true?
A) P < ATC
B) P > ATC
C) P > MC
D) MC > ATC
Answer: A

29) If a profit-maximizing firm in a perfectly competitive market is currently producing the

output where (price - average variable cost) < average fixed cost, the firm is:
A) making a positive economic profit.
B) making a zero economic profit.
C) suffering an economic loss.
D) none of the above
Answer: C

30) If a profit-maximizing firm in a perfectly competitive market is currently producing the

output where (price - average variable cost) = average fixed cost, the firm is:
A) making a positive economic profit.
B) making a zero economic profit.
C) suffering an economic loss.
D) none of the above
Answer: B

31) If your firm is producing a good at a level where marginal revenue equals marginal cost, and
price is greater than average total cost, your firm:
A) should shut down and suffer a loss equal to your fixed costs.
B) is earning an economic profit greater than zero.
C) should decrease output.
D) should increase output.
Answer: B

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32) If the price a firm charges in a perfectly competitive industry is greater than average total
cost:
A) the firm is earning an economic profit equal to zero.
B) the firm is earning an economic profit greater than zero.
C) the firm is earning an economic profit less than zero.
D) it is not possible to determine anything about profits.
Answer: B

33) If the price a firm charges in a perfectly competitive industry is less than average total cost:
A) the firm is earning positive economic profit.
B) the firm is earning zero economic profit.
C) the firm is earning negative economic profit.
D) it is not possible to determine anything about profits.
Answer: C

34) In a perfectly competitive market, if price is greater than average total cost at the level of
output where marginal cost equals marginal revenue:
A) the firm must be in long-run equilibrium.
B) the firm is earning an economic profit greater than zero.
C) the firm is earning an economic profit less than zero.
D) We cannot determine whether the firm is earning positive or negative profits.
Answer: B

35) In a perfectly competitive market, if price is less than average total cost, but greater than
average variable cost at the level of output where marginal cost equals marginal revenue:
A) the firm is earning positive economic profit.
B) the firm is earning negative economic profit.
C) the firm should shut down.
D) We cannot determine whether the firm is earning positive or negative profits.
Answer: B

36) If a competitive firm is in short-run equilibrium, then:

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

37) In short-run equilibrium for a competitive firm:

A) price will not equal marginal revenue.
B) marginal revenue will be greater than marginal cost.
C) price will equal marginal cost.
D) price will be greater than marginal cost.
Answer: C

38) In short-run equilibrium for a competitive firm, economic profits:

A) will be positive.
B) will be negative.
C) will be zero.
D) may be positive, negative, or zero.
Answer: D

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39) If a perfectly competitive firm charges a price that is equal to its average total cost:
A) the firm is earning an economic profit equal to zero.
B) the firm is earning an economic profit greater than zero.
C) the firm is earning an economic profit less than zero.
D) It is not possible to determine anything about the firm's profits.
Answer: A

40) If the market demand increases for a good sold in a perfectly competitive market, individual
firms in the market:
A) will be able to charge a higher price for their product.
B) will need to lower price in order to remain competitive.
C) will not be able to change their price.
D) will begin earning economic losses.
Answer: A

41) In long-run equilibrium for a competitive firm, economic profits:

A) will be positive.
B) will be negative.
C) will be zero.
D) may be positive, negative, or zero.
Answer: C

Recall the Application about the break-even price for growing switchgrass, a perennial
grass that is native to the U.S. plains states and is used to create biofuel, to answer the
following question(s).

42) Recall the Application. If the minimum average total cost for switchgrass farmers is $55 per
ton and the minimum average variable cost is $40 per ton, then at a price of $35 per ton in the
short run the switchgrass farmer will:
A) shut down, that is, bring no switchgrass to market.
B) operate and lose money.
C) make a zero economic profit.
D) make a positive economic profit.
Answer: A

43) Recall the Application. If the minimum average total cost for switchgrass farmers is $55 per
ton and the minimum average variable cost is $40 per ton, then at a price of $50 per ton in the
short run the switchgrass farmer will:
A) shut down, that is, bring no switchgrass to market.
B) operate and lose money.
C) make a zero economic profit.
D) make a positive economic profit.
Answer: B

44) Recall the Application. If the minimum average variable cost for switchgrass farmers is $40
per ton and the current price is $35 per ton, in the long run the switchgrass farmer will:
A) exit the industry.
B) operate and lose money.
C) make a positive economic profit.
D) make a zero economic profit.
Answer: A
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45) A perfectly competitive firm that is maximizing profit produces the quantity of output at
which price equals marginal cost.
Answer: TRUE
Diff: 1

46) Suppose that the market price of sugar is 25 cents per pound and a farmer's marginal cost of
producing sugar is 28 cents per pound. The farmer should increase her sugar production.
Answer: FALSE

47) For a perfectly competitive firm, price always equals marginal revenue.
Answer: TRUE

48) For a perfectly competitive firm, price always equals marginal cost.
Answer: FALSE
Diff: 1

49) A perfectly competitive firm maximizes profit where marginal revenue or pice equals
marginal cost.
Answer: TRUE

50) If marginal revenue is $10 and marginal costs is $8, the firm should increase its output.
Answer: TRUE

51) If marginal revenue is $8 and marginal costs is $10, the firm should increase its output.
Answer: FALSE

52) In the short run, a firm that is incurring losses would always be better off if it keeps
producing.
Answer: FALSE

53) What is marginal revenue?

Answer: Marginal revenue is the change it total revenue from selling one more unit of output.

6.3 The Firm's Shut-Down Decision

1) Which of the following is true about a perfectly competitive firm in the long run and in the
short run?
A) The supply curve in the short run is usually steeper than the supply curve in the long run.
B) The supply curve in the short run is usually flatter than the supply curve in the long run.
C) The demand curve in the short run is usually steeper than the marginal cost curve in the long
run.
D) The supply curve in the short run is usually steeper than the average total cost curve in the
long run.
Answer: A

2) A firm will not shut down in the short run as long as\ it is at the point where MR = MC and:
A) P > AVC.
B) P > ATC.
C) P > MC.
D) P > AFC.
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Answer: A

3) A firm will not shut down in the long run as long as the firm's revenue:
A) is larger than the firm's variable cost.
B) is greater than the firm's marginal cost.
C) is greater than the fixed cost.
D) is less than the total cost.
Answer: A

4) If in the short run the firm incurs zero marginal cost, then the firm will:
A) never shut down.
B) shut down if the price is greater than the average variable cost.
C) shut down if the price is less than the average total cost.
D) shut down if the marginal cost equals the marginal revenue.
Answer: A

5) If average total cost > average variable cost > price, a profit-maximizing firm in a perfectly
competitive market should:
A) continue to produce its current output level.
B) shut down in the short run.
C) increase its output level to minimize its loss.
D) none of the above
Answer: B

6) A firm will not shut down in the short run as long as price exceeds:
A) average fixed cost at the level of output where marginal revenue equals marginal cost.
B) average variable cost at the level of output where marginal revenue equals marginal cost.
C) marginal cost at the level of output where marginal revenue equals marginal cost.
D) total revenue at the level of output where marginal revenue equals marginal cost.
Answer: B

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Figure 6.3

7) Figure 6.3 shows the cost structure of a firm in a perfectly competitive market. If the market
price is $3 and the firm produces the output where MR = MC, its profit is:
A) -$300.
B) -$600.
C) -$900.
D) -$1,200.
Answer: D

8) Figure 6.3 shows the cost structure of a firm in a perfectly competitive market. If the market
price is $3 and the firm shuts down in the short run, its profit is:
A) -$300.
B) -$600.
C) -$900.
D) -$1,200.
Answer: C

9) Figure 6.3 shows the cost structure of a firm in a perfectly competitive market. Assume the
market price is $3 and the firm is currently producing 100 units. If the firm produces zero units
in the short run, it will reduce its economic loss by:
A) $300.
B) $600.
C) $900.
D) $1,200.
Answer: A

10) Figure 6.3 shows the cost structure of a firm in a perfectly competitive market. The price at
which the firm is just as well off either operating or shutting down is:
A) $3.
B) $4.50.
C) $6.
D) $10.
Answer: B

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11) Figure 6.3 shows the cost structure of a firm in a perfectly competitive market. The firm will
stay in the market in the long run only if the market price is greater than or equal to:
A) $4.50.
B) $6.
C) $10.
D) $15.
Answer: C

12) Figure 6.3 shows the cost structure of a firm in a perfectly competitive market. If the market
price is $6, then the firm will:
A) be better off producing 150 units than shutting down.
B) be better off exiting the market and using the resources for other production activities.
C) be better off shutting down in the short run and waiting until the market price rises above $10.
D) none of the above
Answer: B

Output (Q) Total Fixed Cost Total Variable Cost

0 20 0
1 20 5
2 20 7
3 20 10
4 20 15
5 20 21

Table 6.1

13) Table 6.1 shows the cost structure of a firm in a perfectly competitive market. If the market
price is $3:
A) the firm suffers a loss and is better off shutting down.
B) the firm suffers a loss but is better off producing the output level where MR = MC.
C) the market price is greater than the minimum average variable cost.
D) none of the above
Answer: A

14) Table 6.1 shows the cost structure of a firm in a perfectly competitive market. If the market
price is $5,
A) the firm suffers a loss but is better off producing at the output where MR = MC.
B) the firm suffers a loss and is better off shutting down.
C) the market price is lower than its marginal cost at the profit-maximizing output level.
D) the market price is lower than the average variable cost at the profit-maximizing output level.
Answer: A

15) In the short run, the firm should shut down when:
A) price is equal to the average total cost of production.
B) price is less than the minimum of the average variable cost of production.
C) price is equal to the minimum of the marginal cost of production.
D) price is equal to the minimum of the average total cost of production.
Answer: B

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16) You are hired by Jimbo's Potato Farm to determine when Jimbo should shut down and
produce no potatoes in the short run. Jimbo sells his potatoes in a perfectly competitive market.
You tell Jimbo to shut down if:
A) total cost is less than total revenue when marginal revenue equals marginal cost.
B) price is less than average variable cost when marginal revenue equals marginal cost.
C) price is less than average total cost when marginal revenue equals marginal cost.
D) marginal revenue is less than marginal cost.
Answer: B

17) Suppose Tim's Cowboy boot factory produces in a perfectly competitive market. Suppose the
average total cost of cowboy boots is $65, the average variable cost of cowboy boots is $60, and
the price of cowboy boots is $62. If the firm is producing the level of output where marginal cost
equals price, then in the short run the firm:
A) should shut down.
B) should continue to produce since total revenue exceeds total variable cost.
C) is earning a positive economic profit.
D) can increase profit by increasing output.
Answer: B

18) Suppose Robin's Clock Works produces in a perfectly competitive market. Suppose the
average total cost of clocks is $95, the average variable cost of clocks is $90, and the price of
clocks is $85. If the firm is producing the level of output where marginal cost equals price, then
in the short run the firm:
A) should shut down.
B) should continue to produce since total revenue exceeds total variable cost.
C) is earning a positive economic profit.
D) can increase profit by increasing output.
Answer: A

19) If your firm is producing a good at a level where marginal revenue equals marginal cost, and
price is less than average variable cost, then in the short run your firm should:
A) shut down and suffer a loss equal to your fixed costs.
B) continue to produce, but increase output.
C) continue to produce the same amount.
D) continue to produce, but decrease output.
Answer: A

20) If your firm is producing a good at a level where marginal revenue equals marginal cost, and
price is between average variable cost and average total cost, then in the short run your firm
should:
A) shut down and suffer a loss equal to your fixed costs.
B) continue to produce, but increase output.
C) continue to produce at the same level of output.
D) continue to produce, but decrease output.
Answer: C

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21) A perfectly competitive firm is producing a good at a level where P = $30 and MC = $30.
The firm will continue to produce in the short run as long as:
A) AVC is less than $30.
B) AFC is less than $30.
C) price does not increase.
D) ATC is greater than $30.
Answer: A

22) A perfectly competitive firm is producing a good at a level where P = $90 and MC = $90.
The firm will continue to produce as long as:
A) AVC is less than $90.
B) AFC is less than $90.
C) price does not increase.
D) ATC is greater than $90.
Answer: A

23) If price is less than average variable cost at a level of output where marginal revenue is equal
to marginal cost, then in the short run the firm:
A) should shut down.
B) should produce the level of output where marginal revenue equals marginal cost.
C) should gather more data to determine whether to shut down.
D) will produce only if they can decrease their fixed costs.
Answer: A

24) Suppose your firm is operating in a perfectly competitive market, and that the minimum
average variable cost of producing your good is $13. If the price of the good is $15, your firm
should:
A) supply the amount of the good where the marginal cost of production is equal to $15.
B) not produce anything since the price is above the minimum of average variable cost.
C) not consider price when determining the amount to sell.
D) not do any of the above.
Answer: A

25) Suppose your firm is operating in a perfectly competitive market, and that the minimum
average variable cost of producing your good is $30. If the price of the good is $32, your firm
should:
A) not produce anything since the price is above the minimum of average variable cost.
B) not consider price when determining the amount to sell.
C) supply the amount of the good where the marginal cost of production is equal to $32.
D) supply the amount of the good where the marginal cost of production is $30.
Answer: C

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26) If a firm has already paid or has agreed to pay for something, we call that cost:
A) a fixed cost.
B) a spent cost.
C) a sunk cost.
D) a lost cost.
Answer: C

27) In the short run, a firm considers its fixed cost as a(n):
A) sunk cost.
B) variable cost.
C) implicit cost.
D) marginal cost.
Answer: A
Diff: 1
Topic: Fixed Costs and Sunk Costs
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

Recall the Application about the shutdown price for coal to answer the following
question(s).

28) Recall the Application. Because the higher cost of keeping workers safe was the reason why
4 West Mine was shut down, then those costs are considered a part of:
A) variable costs.
B) fixed costs.
C) total revenues.
D) marginal revenues.
Answer: A
Diff: 1
Topic: Application 3, Shutting Down a Coal Mine
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

29) According to the Application, there are still some mines that are in operation in the United
States. Because 4 West Mine has now shut down, what must be true about 4 West Mine and the
other operational mines?
A) 4 West Mine's AVC is higher than the other remaining mines.
B) 4 West Mine's AVC is lower than the other remaining mines.
C) 4 West Mine's ATC is higher than the other remaining mines.
D) 4 West Mine's ATC is lower than the other remaining mines.
Answer: A
Diff: 1
Topic: Application 3, Shutting Down a Coal Mine
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition
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30) A firm should shut down in the short run if it s revenue is smaller than its variable costs.
Answer: TRUE
Diff: 1
Topic: Total Revenue, Variable Cost, and the Shut-Down Decision
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

31) A firm should shut down in the short run if it s AVC is less than the price it receives per unit
of the good.
Answer: FALSE
Diff: 1
Topic: Total Revenue, Variable Cost, and the Shut-Down Decision
Skill: Definition
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

32) Firms earning negative profits in the short run should always shut down.
Answer: FALSE
Diff: 1
Topic: Total Revenue, Variable Cost, and the Shut-Down Decision
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

33) Firms that shut down must be earning negative profits in the short run.
Answer: TRUE
Diff: 1
Topic: Total Revenue, Variable Cost, and the Shut-Down Decision
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

34) A firm with total revenue of $500, total cost of $700, and variable cost of $400 should
continue to operate its production facility.
Answer: TRUE
Diff: 1
Topic: Total Revenue, Variable Cost, and the Shut-Down Decision
Skill: Analytical
AACSB: Analytical Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

35) Perfectly competitive firms always produce the quantity that minimizes average total cost in
the short run.
Answer: FALSE
Diff: 1
Topic: Total Revenue, Variable Cost, and the Shut-Down Decision
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Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

36) In the short run a manufacturing firm's production equipment is a sunk cost.
Answer: TRUE
Diff: 1
Topic: Fixed Costs and Sunk Costs
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

37) Why does it make sense for unprofitable firms to stay in business?
Answer: Even if a firm is losing money, it might still be better off producing. If the firm can
recover its variable costs and some of its fixed costs by producing (that is, if the price it can
receive exceeds the average variable cost of production), then it loses less by producing
optimally than by shutting down and eating its fixed costs.
Diff: 2
Topic: Total Revenue, Variable Cost, and the Shut-Down Decision
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

38) Suppose that a firm maximizes its profits by producing a quantity of 20 units. The market
price is $5. The firm's variable costs are $70 and its fixed costs are $40. What should the firm do
in the short run? In the long run?
Answer: Alas, the firm is earning negative profits in the short run. However, the firm is better
off producing and losing $10 than shutting down and losing $40. So it should produce in the
short run. In the long run, the firm need not renew its fixed cost obligations, and it will shut
down.
Diff: 2
Topic: Total Revenue, Variable Cost, and the Shut-Down Decision
Skill: Analytical
AACSB: Analytical Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

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39) Explain why a firm's shut-down decision does not incorporate the fixed costs of the
production facility.
Answer: A firm's fixed costs are fixed no matter how many units of output the firm produces.
Thus, the fixed costs of a production facility are not avoidable even when the firm is not using its
production facility.
Diff: 2
Topic: Total Revenue, Variable Cost, and the Shut-Down Decision
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

Figure 6.4

40) Figure 6.4 represents a perfectly competitive firm's costs. Illustrate the firm's shut-down
price on the graph. Explain.
Answer: The firm's shut-down price is defined as the price at which the firm is indifferent
between operating and shutting down. In Figure 9.4, the shut-down price is $10. At the shut-
down price, marginal cost equals price and average variable cost also equals the price. Therefore,
marginal cost also equals average variable cost, and so the shut-down price is at the minimum
point of the SAVC curve.
Diff: 2
Topic: Total Revenue, Variable Cost, and the Shut-Down Decision, graphing
Skill: Analytical
AACSB: Analytical Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

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6.4 Short-Run Supply Curves

1) A firm's marginal cost curve above the minimum of the average variable cost curve is also:
A) the firm's demand for production curve.
B) the firm's producer surplus curve.
C) the firm's short-run supply curve.
D) the market supply curve.
Answer: C
Diff: 1
Topic: The Firm's Short-Run Supply Curve
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

2) The firm's short-run supply curve shows the relationship between the price of a good and the:
A) quantity demanded of that good.
B) quantity supplied of that good.
C) willingness of consumers to purchase the good.
D) firm's capacity output.
Answer: B
Diff: 1
Topic: The Firm's Short-Run Supply Curve
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

3) A firm's short-run supply curve is the firm's:

A) marginal revenue curve.
B) marginal cost curve above the minimum point of the average total cost curve.
C) marginal cost curve above the minimum point of the average variable cost curve.
D) average cost curve, below the minimum point of the marginal cost curve.
Answer: C
Diff: 1
Topic: The Firm's Short-Run Supply Curve
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

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4) A firm's short-run supply curve is the firm's marginal cost above:

A) the shut-down point.
B) the zero-profit point.
C) zero
D) the point of diminishing returns.
Answer: A
Diff: 1
Topic: The Firm's Short-Run Supply Curve
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

5) The relationship between the market price of a good and the quantity supplied of that good by
a firm in the short run is the firm's:
A) short-run supply curve.
B) average cost schedule.
C) total revenue minus total cost schedule.
D) optimal production level.
Answer: A
Diff: 1
Topic: The Firm's Short-Run Supply Curve
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

6) A perfectly competitive firm's marginal cost curve above the minimum of the average variable
cost curve is its:
A) short-run supply curve.
B) average cost schedule.
C) capacity output schedule.
D) total revenue minus total cost schedule.
Answer: A
Diff: 1
Topic: The Firm's Short-Run Supply Curve
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

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7) The supply curve for a perfectly competitive market:

A) is the summation of all the average cost curves of each firm in a market.
B) is the summation of all the marginal cost curves, above the minimum of the average variable
cost curve, from all the individual firms in the market.
C) is not related to the supply curves of individual firms.
D) is independent of price.
Answer: B
Diff: 1
Topic: The Short-Run Market Supply Curve
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

8) The summation of all individual firm marginal cost curves above the minimum of the average
variable cost curve:
A) is the market shut-down point.
B) is the market demand curve.
C) is the market marginal revenue curve.
D) is the market supply curve.
Answer: D
Diff: 1
Topic: The Short-Run Market Supply Curve
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

9) Suppose that 100 firms operate in a perfectly competitive industry and each firm has the same
technology and cost structure. If each firm maximizes profits by selling 20 units of output at
$5.00, then the quantity supplied in the market at $5.00 is:
A) 2,000.
B) less than 2,000.
C) greater than 2,000.
D) zero.
Answer: A
Diff: 1
Topic: The Short-Run Market Supply Curve
Skill: Analytical
AACSB: Analytical Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

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10) Which of the following is true for a perfectly competitive market in short-run equilibrium?
A) The quantity supplied equals the quantity demanded.
B) The typical firm earns zero economic profit.
C) The typical firm will always make a positive profit.
D) All of the above are correct.
Answer: A
Diff: 2
Topic: Market Equilibrium
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

11) Which of the following is true for a perfectly competitive market in long-run equilibrium?
A) There is no incentive for new firms to enter the market.
B) Each firm in the market earns zero economic profit.
C) There is no incentive for existing firms to leave the market.
D) All of the above are correct.
Answer: D
Diff: 2
Topic: Market Equilibrium
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

Recall the Application about the supply of shipping services to answer the following
question(s).

12) Recall the Application. The short-run supply curve for shipping services is:
A) positively sloped.
B) negatively sloped.
C) perfectly vertical.
D) perfectly horizontal.
Answer: A
Diff: 1
Topic: Application 4, Short-Run Supply Curve for Cargo
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

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13) Recall the Application. The reason why the short-run supply curve for cargo is upward
sloping is that its:
A) marginal cost is upward sloping.
B) market demand curve is upward sloping.
C) average fixed cost is upward sloping.
D) All of the above are correct.
Answer: A
Diff: 1
Topic: Application 4, Short-Run Supply Curve for Cargo
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

14) Recall the Application. As the price per ton of cargo drops low enough that it does not cover
the AVC of smaller inefficient ships, then the smaller, more inefficient ships will decide to:
A) shut-down.
B) raise the price they charge.
C) make up for it by raising their speeds.
D) make up for it by accepting more cargo.
Answer: A
Diff: 1
Topic: Application 4, Short-Run Supply Curve for Cargo
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

15) According to the Application, at a relatively low freight rate, only the ________ efficient
ships operate, and they save on cost by traveling at a ________ speed.
A) most; fast
B) most; slow
C) least; fast
D) least; slow
Answer: B
Diff: 1
Topic: Application 4, Short-Run Supply Curve for Cargo
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

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16) A firm's short-run supply curve shows the relationship between price and quantity supplied.
Answer: TRUE
Diff: 1
Topic: The Firm's Short-Run Supply Curve
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

17) A firm's short-run supply curve is its marginal cost curve above its average total cost curve.
Answer: FALSE
Diff: 1
Topic: The Firm's Short-Run Supply Curve
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

18) A firm's short-run supply curve is its marginal cost curve above its average variable cost
curve.
Answer: TRUE
Diff: 2
Topic: The Firm's Short-Run Supply Curve
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

19) A firm's short-run supply curve is its marginal cost curve above the shut-down point.
Answer: TRUE
Diff: 1
Topic: The Firm's Short-Run Supply Curve
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

20) A competitive firm's short-run supply curve is perfectly elastic.

Answer: FALSE
Diff: 1
Topic: The Firm's Short-Run Supply Curve
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

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21) The short-run market supply curve shows the relationship between the market price and the
quantity supplied in the short run.
Answer: TRUE
Diff: 1
Topic: The Short-Run Market Supply Curve
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

22) If there are 100 identical firms in a perfectly competitive industry, and the typical firm
supplies 50 units of output at a price of $30, the industry output is 5,000 units at a price of $30.
Answer: TRUE
Diff: 2
Topic: The Short-Run Market Supply Curve
Skill: Analytical
AACSB: Analytical Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

23) In the long run, each firm in a perfectly competitive market earns zero economic profit.
Answer: TRUE
Diff: 1
Topic: Market Equilibrium
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

24) Describe and explain a perfectly competitive firm's short-run supply curve.
Answer: A perfectly competitive firm's short-run supply curve is the portion of its marginal cost
curve that lies above the minimum of its average variable cost curve. A profit-maximizing firm
will always produce a quantity such that price is equal to marginal cost, provided that the price of
the product is high enough so that it can cover its variable costs and at least part of its fixed
costs. This means that price must exceed the minimum of average variable cost. Thus, by using
the part of the marginal cost curve that lies above the minimum of average variable cost, we can
determine the quantity that a firm will produce at every given price. This is precisely what the
firm's supply curve is.
Diff: 2
Topic: The Firm's Short-Run Supply Curve
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

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Figure 6.4

25) Figure 6.4 represents a perfectly competitive firm's costs. Illustrate the firm's short-run
supply curve on the graph. Explain.
Answer: The firm's short-run supply curve is the part of its short-run marginal cost curve above
the shut-down price. On Figure 9.4, the shut-down price is $10, which is at the minimum point of
the SAVC curve. Thus, the firm's short-run supply curve is the part of its SMC curve above that
point.
Diff: 2
Topic: The Firm's Short-Run Supply Curve, graphing
Skill: Analytical
AACSB: Analytical Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

6.5 The Long-Run Supply Curve for an Increasing-Cost Industry

1) An increasing-cost industry is one in which the average cost of production ________ as the
total output of the industry ________.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) None of the above; there are no increasing-cost industries.
Answer: A
Diff: 1
Topic: Long-Run Supply Curves for an Increasing-Cost Industry
Skill: Definition
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

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2) Costs increase with output in an increasing-cost industry because:

A) input prices increase as the industry competes for scarce resources.
B) firms may be forced to use less productive inputs.
C) the firms become monopolies.
D) Both A and B are correct.
Answer: D
Diff: 2
Topic: Long-Run Supply Curves for an Increasing-Cost Industry
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

3) Heterogeneous inputs in a perfectly competitive market will cause the industry to face
________ costs because as the firm produces a larger quantity, it is forced to use ________
productive inputs.
A) increasing; less
B) decreasing; less
C) increasing; more
D) decreasing; more
Answer: A
Diff: 2
Topic: Long-Run Supply Curves for an Increasing-Cost Industry
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

4) In an increasing-cost industry, the long-run market supply curve is:

A) positively sloped.
B) negatively sloped.
C) vertical.
D) horizontal.
Answer: A
Diff: 1
Topic: Drawing the Long-Run Market Supply Curve
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

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5) Increasing cost industries are consistent with ________ in the long run.
A) the law of supply
B) the law of diminishing marginal product
C) the law of demand
D) None of the above are correct.
Answer: A
Diff: 1
Topic: Drawing the Long-Run Market Supply Curve
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

6) Which of the following is an example of an increasing cost industry?

A) coffee
B) sugar
C) apartments
D) All of the above are correct.
Answer: D
Diff: 1
Topic: Drawing the Long-Run Market Supply Curve
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

Recall the Application about the production of coffee in China to answer the following
question(s).

7) According to the Application, farmers in the city of Pu'er, China currently earn more growing
________ than they do growing ________.
A) tea; coffee
B) rice; coffee
C) coffee; tea
D) rice; tea
Answer: C
Diff: 1
Topic: Application 5, Chinese Coffee Growers Obey the Law of Supply
Skill: Fact
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

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8) Recall the Application. Farmers in the city of Pu'er, China, by changing the acreage devoted to
coffee production, illustrate the law of supply in that the ________ in the price of coffee
________ the quantity supplied.
A) increase; increased
B) increase; decreased
C) decrease; increased
D) decrease; decreased
Answer: A
Diff: 1
Topic: Application 5, Chinese Coffee Growers Obey the Law of Supply
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

9) One reason for increasing costs industries is that as an industry grows, it drives up the prices
of inputs.
Answer: TRUE
Diff: 1
Topic: Long-Run Supply Curves for an Increasing-Cost Industry
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

10) An increasing cost industry is one where total costs rise as the industry grows.
Answer: FALSE
Diff: 1
Topic: Long-Run Supply Curves for an Increasing-Cost Industry
Skill: Definition
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

11) The long-run supply curve is upward sloping in an increasing cost industry.
Answer: TRUE
Diff: 1
Topic: Drawing the Long-Run Market Supply Curve
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

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12) What is an increasing cost industry?

Answer: An increasing cost industry is an industry in which the average cost of production
increases as total output of the industry increases.
Diff: 1
Topic: Long-Run Supply Curves for an Increasing-Cost Industry
Skill: Definition
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

13) Are increasing cost industries a result of the law of diminishing marginal returns?
Answer: No, the law of diminishing marginal returns cause increasing costs in the short run,
when at least one input is fixed. Increasing cost industries have higher long run marginal costs
for other reasons, such as having limited inputs and firms have varying technologies.
Diff: 2
Topic: Long-Run Supply Curves for an Increasing-Cost Industry
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

14) What is a long-run supply curve?

Answer: A long-run supply curve is a curve showing the relationship between market price and
quantity supplied in the long run.
Diff: 1
Topic: Long-Run Supply Curves for an Increasing-Cost Industry
Skill: Definition
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

15) Firms in the long run do not experience diminishing marginal returns. Then why do some
industries have upward-sloping long-run supply curves?
Answer: In the long run, firms can flexibly scale up or down their production facilities so they
do not experience diminishing marginal returns. However, as an increased number of firms in an
industry expand their production facilities, the prices of some inputs may rise quickly, as their
quantities are limited. Also, some industries face inputs with varying degrees of quality or
productivity. At low prices only low cost producers are able to produce; as price rises firms
facing higher costs are able to start production.
Diff: 2
Topic: Drawing the Long-Run Market Supply Curve
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

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6.6 Short-Run and Long-Run Effects of Changes in Demand

1) If the market demand decreases for a good sold in a perfectly competitive market, firms in the
market:
A) will be able to charge a higher price for their product.
B) will receive a lower price for their product.
C) will not be able to change their price.
D) will not be affected by the change in demand.
Answer: B
Diff: 1
Topic: The Short-Run Response to an Increase in Demand
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

2) Toby sells wheat in a perfectly competitive market. This month Toby receives a lower price
for a bushel of wheat than he did last month. Which of the following might explain this?
A) The market demand for wheat increased.
B) The market demand for wheat decreased.
C) Firms exited the market.
D) Toby's costs have increased.
Answer: B
Diff: 1
Topic: The Short-Run Response to an Increase in Demand
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

3) Toby sells wheat in a perfectly competitive market. This month Toby receives a higher price
for a bushel of wheat than he did last month. Which of the following might explain this?
A) The market demand for wheat increased.
B) The market demand for wheat decreased.
C) Firms entered the market.
D) Toby's costs have decreased.
Answer: A
Diff: 1
Topic: The Short-Run Response to an Increase in Demand
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

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4) Sheila sells corn in a perfectly competitive market. This month Sheila receives a lower price
for a bushel of corn than she did last month. This might have happened because:
A) the market demand increased for corn.
B) the market demand decreased for corn.
C) firms exited the market.
D) Sheila's costs have increased.
Answer: B
Diff: 1
Topic: The Short-Run Response to an Increase in Demand
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

5) Sheila sells corn in a perfectly competitive market. This month Sheila receives a higher price
for a bushel of corn than she did last month. Which of the following might explain this?
A) The market demand increased for corn.
B) The market demand decreased for corn.
C) Firms entered the market.
D) Sheila's costs have decreased.
Answer: A
Diff: 1
Topic: The Short-Run Response to an Increase in Demand
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

6) A perfectly competitive industry is in long-run equilibrium. If demand for the product

increases, we can expect:
A) firms to enter the market.
B) firms to exit the market.
C) no change in the number of firms in the market.
D) There is not enough information to tell what will happen to the number of firms in the market.
Answer: A
Diff: 1
Topic: The Long-Run Response to an Increase in Demand
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

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7) A perfectly competitive industry is in long-run equilibrium. If demand for the product

decreases, we can expect:
A) firms to enter the market.
B) firms to exit the market.
C) no change in the number of firms in the market.
D) There is not enough information to tell what will happen to the number of firms in the market.
Answer: B
Diff: 2
Topic: The Long-Run Response to an Increase in Demand
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

8) A perfectly competitive industry is in long-run equilibrium. If demand for the product

increases, we can expect the price of the good to:
A) rise at first and then fall.
B) fall at first and then rise.
C) rise and remain at the higher price.
D) fall and remain at the lower price.
Answer: A
Diff: 2
Topic: The Long-Run Response to an Increase in Demand
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

9) A perfectly competitive industry is in long-run equilibrium. If demand for the product

decreases, we can expect the price of the good to:
A) rise at first and then fall.
B) fall at first and then rise.
C) rise and remain at the higher price.
D) fall and remain at the lower price.
Answer: B
Diff: 2
Topic: The Long-Run Response to an Increase in Demand
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

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10) Long-run equilibrium for a perfectly competitive industry occurs when:

A) P = MC = ATC.
B) P = MC = AVC.
C) P = MC = AFC.
D) P > MC = ATC.
Answer: A
Diff: 1
Topic: The Long-Run Response to an Increase in Demand
Skill: Definition
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

11) You notice that the price of butter rises and then falls. The best explanation for this is that:
A) demand for butter increased causing price to rise, which attracted other firms to enter the
market causing supply to increase, which caused the price to go back down.
B) demand for butter decreased causing price to rise, which attracted other firms to enter the
market causing supply to increase, which caused the price to go back down.
C) demand for butter increased causing price to rise, which induced other firms to exit the
market causing supply to decrease, which caused the price to go back down.
D) demand for butter increased causing price to rise, which attracted other firms to enter the
market causing supply to decrease, which caused the price to go back down.
Answer: A
Diff: 2
Topic: The Long-Run Response to an Increase in Demand
Skill: Analytical
AACSB: Analytical Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

12) You notice that the price of butter falls and then rises. The best explanation for this is that:
A) demand for butter increased causing price to fall, which attracted other firms to enter the
market causing supply to increase, which caused the price to go back up.
B) demand for butter decreased causing price to fall, which attracted other firms to enter the
market causing supply to increase, which caused the price to go back up.
C) demand for butter decreased causing price to fall, which induced other firms to exit the
market causing supply to decrease, which caused the price to go back up.
D) demand for butter decreased causing price to fall, which attracted other firms to enter the
market causing supply to decrease, which caused the price to go back up.
Answer: C
Diff: 2
Topic: The Long-Run Response to an Increase in Demand
Skill: Analytical
AACSB: Analytical Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

13) If the demand for a product increases, we would expect that price will initially ________,
and eventually ________.
A) rise; fall
B) rise; continue to rise
C) fall; rise
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D) fall; continue to fall

Answer: A
Diff: 2
Topic: The Long-Run Response to an Increase in Demand
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

14) If the demand for a product decreases, we would expect that price will initially ________,
and eventually ________.
A) rise; fall
B) rise; continue to rise
C) fall; rise
D) fall; continue to fall
Answer: C
Diff: 2
Topic: The Long-Run Response to an Increase in Demand
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

15) If the demand for a product in an increasing cost perfectly competitive industry decreases,
we would expect that price in the long run would ________ and the number of firms in the
market would ________.
A) decrease; decrease
B) increase; increase
C) decrease; increase
D) increase; decrease
Answer: A
Diff: 2
Topic: The Long-Run Response to an Increase in Demand
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

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16) If the demand for a product in an increasing cost perfectly competitive industry increases, we
would expect that price in the long run would ________ and the number of firms in the market
would ________.
A) decrease; decrease
B) increase; increase
C) decrease; increase
D) increase; decrease
Answer: B
Diff: 2
Topic: The Long-Run Response to an Increase in Demand
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

17) In a perfectly competitive industry, in the long run:

A) firms earn a positive economic profit.
B) firms earn zero economic profit.
C) firms earn a negative economic profit.
D) firms might earn a positive, zero, or negative economic profit.
Answer: B
Diff: 1
Topic: The Long-Run Response to an Increase in Demand
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

18) One difference between the short run and the long run is that perfectly competitive firms:
A) always earn positive economic profit in the short run, but never in the long run.
B) can earn positive, negative, or zero economic profit in the short run, but will earn zero
economic profit in the long run.
C) earn zero economic profit in the short run, but will earn positive economic profit in the long
run.
D) always earn more economic profit in the long run.
Answer: B
Diff: 1
Topic: The Long-Run Response to an Increase in Demand
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

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Figure 6.5

19) Figure 6.5 shows the short-run and long-run effects of an increase in demand of an industry
with increasing cost. The market is in equilibrium at point A, where 100 identical firms produce
6 units of a product per hour. If the market demand curve shifts to the right, what will happen to
an individual firm's profit?
A) Each firm earns a positive profit at point B.
B) Each firm earns a zero profit at point B because the market is perfectly competitive.
C) The profit of each firm decreases as more firms enter the market and share the benefits of an
increase in demand pushing the market from point A to point B.
D) none of the above
Answer: A
Diff: 2
Topic: The Long-Run Response to an Increase in Demand, graphing
Skill: Analytical
AACSB: Analytical Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

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20) Figure 6.5 shows the short-run and long-run effects of an increase in demand of an industry.
The market is in equilibrium at point A, where 100 identical firms produce 6 units of a product
per hour. If the market demand curve shifts to the right, what will happen to the number of firms
in the industry as the industry moves from point A to point B?
A) It increases.
B) It decreases.
C) It remains the same.
D) either A or B or C
Answer: C
Diff: 2
Topic: The Long-Run Response to an Increase in Demand, graphing
Skill: Analytical
AACSB: Analytical Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

21) Figure 6.5 shows the short-run and long-run effects of an increase in demand of an industry.
The market is in equilibrium at point A, where 100 identical firms produce 6 units of a product
per hour. If the market demand curve shifts to the right, what has happened to an individual
firm's output level at point B?
A) Each firm produces two more units per hour.
B) Each firm produces relatively smaller level of output as more firms enter the market.
C) Each firm will produce the same level of output.
D) none of the above
Answer: A
Diff: 2
Topic: The Long-Run Response to an Increase in Demand, graphing
Skill: Analytical
AACSB: Analytical Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

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22) Figure 6.5 shows the short-run and long-run effects of an increase in demand of an industry.
The market is in equilibrium at point A, where 100 identical firms produce 6 units of a product
per hour. If the market demand curve shifts to the right, which of the following statements is true
in the short run?
A) The market price rises to $12, which is greater than the average total cost.
B) Each existing firm maximizes its profit by producing the output where marginal cost equals
$12.
C) Each existing firm produces two more units per hour, compared to its initial profit-
maximizing output level at point A.
D) All of the above are correct.
Answer: D
Diff: 2
Topic: The Long-Run Response to an Increase in Demand, graphing
Skill: Analytical
AACSB: Analytical Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

23) Figure 6.5 shows the short-run and long-run effects of an increase in demand of an industry.
The market is in equilibrium at point A, where 100 identical firms produce 6 units of a product
per hour. If the market demand curve shifts to the right, which of the following statements is true
in the long run?
A) The market price drops below $12 as more firms enter the market and build more plants.
B) Both existing firms and new firms earn a zero economic profit.
C) All firms in the industry maximize their profits by producing the output where the marginal
cost equals $10.
D) All of the above are correct.
Answer: D
Diff: 2
Topic: The Long-Run Response to an Increase in Demand, graphing
Skill: Analytical
AACSB: Analytical Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

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24) Figure 6.5 shows the short-run and long-run effects of an increase in demand of an industry.
The market is in equilibrium at point A, where 100 identical firms produce 6 units of a product
per hour. Suppose that the market demand curve shifts to the right. Why is the short-run supply
curve steeper than the long-run supply curve?
A) Because production facilities are fixed in the short run.
B) Because each firm experiences diminishing returns in the short run.
C) Because production becomes costlier as firms squeeze more output from the existing
production facilities.
D) All of the above are correct.
Answer: D
Diff: 2
Topic: The Long-Run Response to an Increase in Demand, graphing
Skill: Analytical
AACSB: Analytical Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

25) Figure 6.5 shows the short-run and long-run effects of an increase in demand of an industry.
The industry is:
A) a constant-cost industry.
B) an increasing-cost industry.
C) a decreasing-cost industry.
D) There isn't sufficient information.
Answer: B
Diff: 2
Topic: The Long-Run Response to an Increase in Demand, graphing
Skill: Analytical
AACSB: Analytical Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

Figure 6.6

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26) In Figure 6.6 if price is P3, then the industry will:

A) expand.
B) contract.
C) stay the same size.
D) cease to exist.
Answer: A
Diff: 2
Topic: The Long-Run Response to an Increase in Demand, graphing
Skill: Analytical
AACSB: Analytical Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

27) In Figure 6.6 if price is P2, then the industry will:

A) expand.
B) contract.
C) stay the same size.
D) cease to exist.
Answer: C
Diff: 3
Topic: The Long-Run Response to an Increase in Demand, graphing
Skill: Analytical
AACSB: Analytical Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

28) In Figure 6.6 if price is P1, then the industry will:

A) expand.
B) contract.
C) stay the same size.
D) merge.
Answer: B
Diff: 3
Topic: The Long-Run Response to an Increase in Demand, graphing
Skill: Analytical
AACSB: Analytical Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

29) If perfectly competitive firms are earning positive economic profits in the short run, then in
the long run other firms will enter the market.
Answer: TRUE
Diff: 1
Topic: The Long-Run Response to an Increase in Demand
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

30) In the long-run perfectly competitive equilibrium, firms produce at the minimum of average
total cost.

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Answer: TRUE
Diff: 1
Topic: The Long-Run Response to an Increase in Demand
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

31) An increase in demand will lead to a decrease in supply in the long run.
Answer: FALSE
Diff: 1
Topic: The Long-Run Response to an Increase in Demand
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

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32) An increase in demand will induce entry by firms in the long run.
Answer: TRUE
Diff: 1
Topic: The Long-Run Response to an Increase in Demand
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

33) If firms make a profit in the short run, firms will exit the market in the long run.
Answer: FALSE
Diff: 1
Topic: The Long-Run Response to an Increase in Demand
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

34) It is possible that a firm in a perfectly competitive market earns a negative profit in the long
run.
Answer: FALSE
Diff: 1
Topic: The Long-Run Response to an Increase in Demand
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

35) Consider a perfectly competitive market. What do you expect to happen to the number of
firms and firm profitability in the short run and long run if demand for the product falls?
Answer: In the short run, firms will earn negative profit. In the long run, some of these firms
will exit the industry, lowering market supply, and raising the market price until remaining firms
are earning zero economic profit.
Diff: 2
Topic: The Long-Run Response to an Increase in Demand
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

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36) In a perfectly competitive market, what would you expect to happen to the number of firms
and firm profitability in the short run and long run if demand for the product rises?
Answer: In the short run, firms will earn positive economic profit as price rises. In the long run,
some firms will enter the industry, increasing market supply, and reducing the market price until
all firms are earning zero economic profit.
Diff: 2
Topic: The Long-Run Response to an Increase in Demand
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

37) Explain why perfectly competitive firms make zero economic profit in the long run.
Answer: If perfectly competitive firms are making a positive profit in the short run, this will
attract other firms to enter the market in the long run. This will cause the industry supply to
increase, which will lower the market price. This will continue until all firms are making zero
economic profit. If firms are making negative economic profit in the short run, this will induce
some firms to exit the market in the long run. This will cause the industry supply to decrease,
which will raise the market price. This will continue until the firms that are left are making zero
economic profit.
Diff: 2
Topic: The Long-Run Response to an Increase in Demand
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

6.7 Long-Run Supply for a Constant-Cost Industry

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

A) input prices do not change as output changes in the long run.
B) supply is highly inelastic.
C) the short-run supply curve is horizontal.
D) all of the above
Answer: A
Diff: 1
Topic: Long-Run Supply Curve for a Constant-Cost Industry
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

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2) A constant-cost industry is more likely to arise in a market where:

A) the industry takes only a small portion of the resources available.
B) the industry takes only a large portion of the resources available.
C) inputs have very different levels of quality.
D) firms have large fixed costs and small marginal costs.
Answer: A
Diff: 2
Topic: Long-Run Supply Curve for a Constant-Cost Industry
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

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

A) the demand curve is horizontal.
B) the long-run supply curve is horizontal.
C) the short-run supply curve is horizontal.
D) all of the above
Answer: B
Diff: 1
Topic: Long-Run Supply Curve for a Constant-Cost Industry
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

4) In a constant-cost industry, an increase in price causes:

A) some firms to exit the industry.
B) quantity supplied to remain constant.
C) some firms to enter the industry.
D) price controls.
Answer: C
Diff: 2
Topic: Long-Run Supply Curve for a Constant-Cost Industry
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

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5) In a constant-cost industry, a decrease in price causes:

A) some firms to exit the industry.
B) quantity supplied to remain constant.
C) some firms to enter the industry.
D) price controls.
Answer: A
Diff: 2
Topic: Long-Run Supply Curve for a Constant-Cost Industry
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

6) Which of the following products is the most likely to have constant costs in the long run?
A) ice
B) wine grapes
C) housing
D) copper
Answer: A
Diff: 2
Topic: Hurricane Andrew and the Price of Ice
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

Recall the Application about the price and supply of blueberries to answer the following
question(s).

7) According to the Application, the supply of blueberries in the short run is ________, so an
increase in demand causes the price to ________.
A) flexible; rise
B) flexible; fall
C) inflexible; rise
D) inflexible; fall
Answer: C
Diff: 1
Topic: Application 6, The Upward Jump and Downward Slide of Blueberry Prices
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

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8) According to the Application, as the quantity of blueberries demanded increases, prices

________ in the short run and ________ as supply catches up with demand.
A) rise; stabilize
B) fall; stabilize
C) rise; fall
D) fall; rise
Answer: C
Diff: 1
Topic: Application 6, The Upward Jump and Downward Slide of Blueberry Prices
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

9) According to the Application, the upward jump of the price of blueberries from 2005-2007
followed by the drop in the price of blueberries to $1.44/ lb. shows that blueberries are in:
A) a constant-cost industry.
B) an increasing-cost industry.
C) a decreasing-cost industry.
D) a zero-cost industry.
Answer: A
Diff: 1
Topic: Application 6, The Upward Jump and Downward Slide of Blueberry Prices
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

Recall the Application about the demand and price for margarine to answer the following
question(s).

10) Recall the Application. Between 2000 and 2009, total U.S. consumption of margarine
________ and the price, in real terms, ________.
A) doubled; doubled
B) decreased by roughly half; decreased by roughly half
C) decreased by roughly half; stayed roughly the same
D) doubled; stayed roughly the same
Answer: C
Diff: 1
Topic: Application 7, Economic Detective and the Case of Margarine Prices
Skill: Fact
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

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11) Recall the Application. The reason that the change in demand for margarine did not change
the equilibrium price in the long run is because the margarine industry is an example of
________ industry.
A) a decreasing-cost
B) an increasing-cost
C) a constant-cost
D) a negative-cost
Answer: C
Diff: 1
Topic: Application 7, Economic Detective and the Case of Margarine Prices
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

12) The long-run supply curve is upward sloping in a constant-cost industry.

Answer: FALSE
Diff: 1
Topic: Long-Run Supply Curve for a Constant-Cost Industry
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

13) In a constant-cost industry, inputs prices do not change with changes in output.
Answer: TRUE
Diff: 1
Topic: Long-Run Supply Curve for a Constant-Cost Industry
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

14) Large industries that employ most of the available resources tend to have constant costs in
the long run.
Answer: FALSE
Diff: 2
Topic: Long-Run Supply Curve for a Constant-Cost Industry
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

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15) A constant-cost industry has an infinitely elastic long-run supply curve.

Answer: TRUE
Diff: 2
Topic: Long-Run Supply Curve for a Constant-Cost Industry
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

16) An increase in price causes exit from a constant-cost industry.

Answer: FALSE
Diff: 2
Topic: Long-Run Supply Curve for a Constant-Cost Industry
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

17) What characterizes a constant-cost industry and what causes it to be a constant-cost industry?
Answer: A constant cost industry is one with a horizontal long-run supply curve. The long-run
supply curve is horizontal because input prices do not change with quantity produced.
Diff: 2
Topic: Long-Run Supply Curve for a Constant-Cost Industry
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

18) What happens in the short run and long run in a constant-cost industry such as bags of ice
after a natural disaster like a hurricane?
Answer: In the short run the price of ice rises, maybe dramatically, but in the long run the
quantity rises as the higher price induces more sellers into the market and the price quickly
comes back down to the long-run constant cost.
Diff: 2
Topic: Hurricane Andrew and the Price of Ice
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-13: Explain the relationship between production and profits under
perfect competition

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