Question 1

All of the following statements apply to a purely competitive market in the long run, except

Accepted Answer

A)   in the long run, all inputs are variable in quantity.
B)   firms can expand their plant capacities in the long run.
C)   total fixed costs remain constant even when output expands in the long run.
D)   firms may enter or leave the industry in the long run.

Question 2

If production is occurring where marginal cost exceeds price, the purely competitive firm will

Accepted Answer

A)   maximize profit, but resources will be underallocated to the product.
B)   maximize profit, but resources will be overallocated to the product.
C)   fail to maximize profit and resources will be overallocated to the product.
D)   fail to maximize profit and resources will be underallocated to the product.

Question 3

Suppose that a competitive firm finds that in its short-run equilibrium situation, its marginal cost is higher than its average total cost. If things are not expected to change and there are constant returns to scale, then the firm will exit the industry in the long
run.

Accepted Answer

A) True 
 B)False

Question 4

A constant-cost industry is one in which

Accepted Answer

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

Question 5

Resources are efficiently allocated when production occurs where

Accepted Answer

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

Question 6

If a purely competitive firm is facing a situation where the price of its product is lower than the average cost, then all of the following apply, except

Accepted Answer

A)   the firm is suffering losses, and if things are not expected to improve, the firm will leave the industry.
B)   the firm may be earning some accounting profits, but less than what it could earn elsewhere.
C)   other firms will want to enter the industry because of the positive economic profits.
D)   the firm may earn economic profits in the long run if it expands its plant in order to exploit economies of scale.

Question 7

A patent is the legal right granted to a firm that allows it to

Accepted Answer

A)   make copies of other firm's products.
B)   be the sole buyer of a particular product or resource.
C)   sell its new product exclusively for a set number of years.
D)   be the exclusive distributor of a particular imported product.

Question 8

Which of the following is not a factor that automatically pushes firms in pure competition to earn only normal profits in the long run?

Accepted Answer

A)   entry of new firms
B)   exit of some firms
C)   changes in the firms' plant size
D)   changes in the market demand

Question 9

Producer surplus is the difference between the market price a producer receives for a product and the minimum price producers are willing to accept for a product.

Accepted Answer

A) True 
 B)False

Question 10

In a decreasing-cost industry,

Accepted Answer

A)   there will be no firm entry because the increased supply will reduce the long-run equilibrium price.
B)   the law of demand does not apply.
C)   greater demand leads to higher long-run equilibrium prices.
D)   lower demand leads to higher long-run equilibrium prices.

Question 11

When new firms enter a purely competitive industry, the market supply curve will shift to the left.

Accepted Answer

A) True 
 B)False

Question 12

Assume the market for ball bearings is purely competitive. Currently, each of the firms in this market is earning positive economic profits. In the long run, as adjustments occur in the industry, we can expect the market price of ball bearings to

Accepted Answer

A)   increase and individual firms' profits to decrease.
B)   increase and individual firms' profits to increase.
C)   decrease and individual firms' profits to increase.
D)   decrease and individual firms' profits to decrease.

Question 13

Which of the following is an example of creative destruction?

Accepted Answer

A)   An economic recession forces firms out of business.
B)   Automobile production causes the wagon industry to shut down.
C)   Apple earns more economic profits than other manufacturers of MP3 players.
D)   Starbucks shuts down stores to create greater demand for its remaining outlets.

Question 14

The short-run supply curve of a purely competitive industry tends to be steeper than the long-run supply curve.

Accepted Answer

A) True 
 B)False

Question 15

Creative destruction is least beneficial to

Accepted Answer

A)   workers in the "destroyed" industries.
B)   workers in the "created" industries.
C)   consumers.
D)   society as a whole.

Question 16

The term allocative efficiency refers to

Accepted Answer

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

Question 17

What happens in a decreasing-cost industry when some firms leave and the industry's output contracts?

Accepted Answer

A)   The average cost will increase.
B)   The average cost will decrease.
C)   The total cost will decrease.
D)   The product price will decrease.

Question 18

When a competitive firm sees losses because the product price falls below the minimum average cost of production at its current plant, it may decide to expand if there are economies of scale.

Accepted Answer

A) True 
 B)False

Question 19

If the representative firm in a purely competitive industry is in short-run equilibrium and, at its current output level, its marginal cost exceeds its average total cost, then we can conclude that

Accepted Answer

A)   the firm is suffering economic losses.
B)   the firm is not maximizing profits in the short run.
C)   some firms will exit the industry in the long run.
D)   other firms will enter the industry in the long run.

Question 20

When LCD televisions first came on the market, they sold for at least $1,000, and some for much more. Now many units can be purchased for under $400. These facts imply that

Accepted Answer

A)   the LCD television industry was once competitive but is now monopolistic.
B)   fewer firms produce LCD televisions than was the case five or ten years ago.
C)   the demand curve for LCD televisions has shifted leftward.
D)   the LCD television industry is a decreasing-cost industry.

Exam 11: Pure Competition in the Long Run

When LCD televisions first came on the market, they sold for at least $1,000, and some for much more. Now many units can be purchased for under $400. These facts imply that

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Suppose that a competitive firm finds that in its short-run equilibrium situation, its marginal cost is higher than its average total cost. If things are not expected to change and there are constant returns to scale, then the firm will exit the industry in the long run.

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Assume the market for ball bearings is purely competitive. Currently, each of the firms in this market is earning positive economic profits. In the long run, as adjustments occur in the industry, we can expect the market price of ball bearings to

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All of the following statements apply to a purely competitive market in the long run, except

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Creative destruction is least beneficial to

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A patent is the legal right granted to a firm that allows it to

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The short-run supply curve of a purely competitive industry tends to be steeper than the long-run supply curve.

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If the representative firm in a purely competitive industry is in short-run equilibrium and, at its current output level, its marginal cost exceeds its average total cost, then we can conclude that

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A constant-cost industry is one in which

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If production is occurring where marginal cost exceeds price, the purely competitive firm will

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Producer surplus is the difference between the market price a producer receives for a product and the minimum price producers are willing to accept for a product.

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In a decreasing-cost industry,

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When new firms enter a purely competitive industry, the market supply curve will shift to the left.

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The term allocative efficiency refers to

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Which of the following is an example of creative destruction?

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When a competitive firm sees losses because the product price falls below the minimum average cost of production at its current plant, it may decide to expand if there are economies of scale.

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Which of the following is not a factor that automatically pushes firms in pure competition to earn only normal profits in the long run?

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Resources are efficiently allocated when production occurs where

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If a purely competitive firm is facing a situation where the price of its product is lower than the average cost, then all of the following apply, except

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What happens in a decreasing-cost industry when some firms leave and the industry's output contracts?

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