Ch. 4

Question 1

For a market for a good or service to exist,
A. there must be a group of buyers and sellers.
B. there must be a specific time and place at which the good or service is traded.
C. there must be a high degree of organization present.
D. All of the above are correct.

Answer 1

A. there must be a group of buyers and sellers.

Question 1

In a market economy,
A. supply determines demand and demand, in turn, determines prices.
B. demand determines supply and supply, in turn, determines prices.
C. the allocation of scarce resources determines prices and prices, in turn, determine supply and demand.
D. supply and demand determine prices and prices, in turn, allocate the economy’s scarce resources.

Answer 1

D. supply and demand determine prices and prices, in turn, allocate the economy’s scarce resources.

Question 2

The market for ice cream is
A. a monopolistic market.
B. a highly competitive market.
C. a highly organized market.
D. both (B) and (C) are correct.

Answer 2

B. a highly competitive market.

Question 3

In a competitive market, the price of a product
A. is determined by buyers and the quantity of the product produced is determined by sellers.
B. is determined by sellers and the quantity of the product produced is determined by buyers.
C. and the quantity of the product produced are both determined by sellers.
D. None of the above is correct.

Answer 3

D. None of the above is correct.

Question 4

Which of the following is not a characteristic of a perfectly competitive market?
A. Sellers set the price of the product.
B. There are many sellers.
C. Buyers must accept the price the market determines.
D. All of the above are characteristics of a perfectly competitive market.

Answer 4

A. Sellers set the price of the product.

Question 5

In a perfectly competitive market, at the market price,
A. buyers cannot buy all they want and sellers cannot sell all they want.
B. buyers cannot buy all they want, but sellers can sell all they want.
C. buyers can buy all they want, but sellers cannot sell all they want.
D. buyers can buy all they want and sellers can sell all they want.

Answer 5

D. buyers can buy all they want and sellers can sell all they want.

Question 6

Which of the following is not a reason perfect competition is a useful simplification, despite the diversity of market types we find in the world?
A. Perfectly competitive markets are the easiest to analyze because everyone participating in the market takes the price as given by market conditions.
B. Some degree of competition is present in most markets.
C. There are many buyers and many sellers in all types of markets.
D. Many of the lessons that we learn by studying supply and demand under perfect competition apply in more complicated markets as well.

Answer 6

C. There are many buyers and many sellers in all types of markets.

Question 7

Which of the following is not held constant in a demand schedule?
A. income
B. tastes
C. price
D. expectations

Answer 7

C. price

Question 8

When we move along a given demand curve,
A. only price is held constant.
B. income and price are held constant.
C. all non-price determinants of demand are held constant.
D. all determinants of quantity demanded are held constant.

Answer 8

C. all non-price determinants of demand are held constant.

Question 9

The demand curve for hot dogs
A. shifts when the price of hot dogs changes because the price of hot dogs is measured on the vertical axis of the graph.
B. shifts when the price of hot dogs changes because the quantity demanded of hot dogs is measured on the horizontal axis of the graph.
C. does not shift when the price of hot dogs changes because the price of hot dogs is measured on the vertical axis of the graph.
D. does not shift when the price of hot dogs changes because the quantity demanded of hot dogs is measured on the horizontal axis of the graph.

Answer 9

C. does not shift when the price of hot dogs changes because the price of hot dogs is measured on the vertical axis of the graph.

Question 10

Two goods are substitutes when a decrease in the price of one good
A. decreases the demand for the other good.
B. decreases the quantity demanded of the other good.
C. increases the demand for the other good.
D. increases the quantity demanded of the other good.

Answer 10

A. decreases the demand for the other good.

Question 11

A higher price for bagels would result in a(n)
A. increase in the demand for bagels.
B. decrease in the demand for bagels.
C. increase in the demand for muffins.
D. decrease in the demand for muffins.

Answer 11

C. increase in the demand for muffins.

Question 12

Which of the following might cause the demand curve for an inferior good to shift to the left?
A. a decrease in income
B. an increase in the price of a substitute
C. an increase in the price of a complement
D. None of the above is correct.

Answer 12

C. an increase in the price of a complement

Question 13

Which of the following is not held constant in a supply schedule?
A. technology
B. the price of the good
C. the prices of inputs
D. expectations

Answer 13

B. the price of the good

Question 14

An increase in the price of a good would
A. increase the supply of the good.
B. increase the amount purchased by buyers.
C. give producers an incentive to produce more.
D. decrease both the quantity demanded of the good and the quantity supplied of the good.

Answer 14

C. give producers an incentive to produce more.

Question 15

Workers at a bicycle assembly plant currently earn the mandatory minimum wage. If the federal government increases the minimum wage by $1.00 per hour, then it is likely that the
A. demand for bicycle assembly workers will increase.
B. supply of bicycles will shift to the right.
C. supply of bicycles will shift to the left.
D. firm must increase output to maintain profit levels.

Answer 15

C. supply of bicycles will shift to the left.

Question 16

An increase in the price of rubber coincides with an advance in the technology of tire production. As a result of these two events,
A. the demand for tires decreases and the supply of tires increases.
B. the demand for tires is unaffected and the supply of tires decreases.
C. the demand for tires is unaffected and the supply of tires increases.
D. None of the above is necessarily correct.

Answer 16

D. None of the above is necessarily correct.

Question 17

When the price of a good is lower than the equilibrium price,
A. a surplus will exist.
B. buyers desire to purchase more than is produced.
C. sellers desire to produce and sell more than buyers wish to purchase.
D. quantity supplied exceeds quantity demanded.

Answer 17

B. buyers desire to purchase more than is produced.

Question 18

If there is a shortage of farm laborers, we would expect
A. the wage of farm laborers to increase.
B. the wage of farm laborers to decrease.
C. the price of farm commodities to decrease.
D. a decrease in the demand for substitutes for farm labor.

Answer 18

A. the wage of farm laborers to increase.

Question 19

Refer to Figure 4-12. All else equal, the destruction of thousands of turkeys would cause a move
A. from D to D𝐴
B. from D to D𝐵
C. from x to y.
D. from y to x.

Answer 19

C. from x to y.

Question 20

Saddle shoes are not popular right now, so very few are being produced. If saddle shoes become popular, then how will this affect the market for saddle shoes?
A. The supply curve for saddle shoes will shift right, which will create a shortage at the current price. That will increase price, which will decrease quantity demanded and increase quantity supplied. The new market equilibrium will be at a higher price and higher quantity.
B. The supply curve for saddle shoes will shift right, which will create a surplus at the current price. That will decrease price, which will increase quantity demanded and decrease quantity supplied. The new market equilibrium will be at a lower price and higher quantity.
C. The demand curve for saddle shoes will shift right, which will create a shortage at the current price. That will increase price, which will decrease quantity demanded and increase quantity supplied. The new market equilibrium will be at a higher price and higher quantity.
D. The demand curve for saddle shoes will shift right, which will create a surplus at the current price. That will decrease price, which will increase quantity demanded and decrease quantity supplied. The new market equilibrium will be at a lower price and higher quantity.

Answer 20

C. The demand curve for saddle shoes will shift right, which will create a shortage at the current price. That will increase price, which will decrease quantity demanded and increase quantity supplied. The new market equilibrium will be at a higher price and higher quantity.

Question 21

Equilibrium quantity will unambiguously decrease when
A. demand increases and supply does not change, when demand does not change and supply decreases, and when both demand and supply decrease.
B. demand increases and supply does not change, when demand does not change and supply increases, and when both demand and supply decrease.
C. demand decreases and supply does not change, when demand does not change and supply increases, and when both demand and supply decrease.
D. demand decreases and supply does not change, when demand does not change and supply decreases, and when both demand and supply decrease.

Answer 21

D. demand decreases and supply does not change, when demand does not change and supply decreases, and when both demand and supply decrease.

Question 22

Suppose that Juan Carlos is filling out a survey that he received in the mail. The survey asks him what he would do if the price of his favorite toothpaste increased. Juan Carlos reports that he would switch to a different brand. The survey asks what he would do if the price of all toothpastes increased. Juan Carlos reports that he must use toothpaste, so he would have to adjust his spending elsewhere. These examples illustrate the importance of
A. changes in total revenue in determining the price elasticity of demand.
B. a necessity versus a luxury in determining the price elasticity of demand.
C. the definition of a market in determining the price elasticity of demand.
D. the time horizon in determining the price elasticity of demand.

Answer 22

C. the definition of a market in determining the price elasticity of demand.

Question 23

For a particular good, a 5 percent increase in price causes a 15 percent decrease in quantity demanded. Which of the following statements is most likely applicable to this good?
A. There are many substitutes for this good.
B. The good is a necessity.
C. The market for the good is broadly defined.
D. The relevant time horizon is short.

Answer 23

A. There are many substitutes for this good.

Question 24

The flatter the demand curve through a given point, the
A. greater the price elasticity of demand at that point.
B. smaller the price elasticity of demand at that point.
C. closer the price elasticity of demand will be to the slope of the curve.
D. greater the absolute value of the change in total revenue when there is a movement from that point upward and to the left along the demand curve.

Answer 24

A. greater the price elasticity of demand at that point.

Question 25

Pierre says that he will spend exactly 75 cents a day on candy bars, regardless of the price of candy bars. Pierre’s demand for candy bars is
A. perfectly elastic.
B. unit elastic.
C. perfectly inelastic.

Answer 25

B. unit elastic.

Question 26

When we move upward and to the left along a linear, downward-sloping demand curve, price elasticity of demand
A. first becomes smaller, then larger.
B. always becomes larger.
C. always becomes smaller.
D. first becomes larger, then smaller.

Answer 26

B. always becomes larger.

Question 27

Suppose that demand is inelastic within a certain price range. For that price range,
A. an increase in price would increase total revenue because the decrease in quantity demanded is proportionately less than the increase in price.
B. an increase in price would decrease total revenue because the decrease in quantity demanded is proportionately greater than the increase in price.
C. a decrease in price would increase total revenue because the increase in quantity demanded is proportionately smaller than the decrease in price.
D. a decrease in price would not affect total revenue.

Answer 27

A. an increase in price would increase total revenue because the decrease in quantity demanded is proportionately less than the increase in price.

Question 28

How does total revenue change as one moves downward and to the right along a linear demand curve?
A. It always increases.
B. It always decreases.
C. It first increases, then decreases.
D. It is unaffected by a movement along the demand curve.

Answer 28

C. It first increases, then decreases.

Question 29

When demand is unit elastic, price elasticity of demand equals
A. 1, and total revenue and price move in the same direction.
B. 1, and total revenue and price move in opposite directions.
C. 1, and total revenue does not change when price changes.
D. 0, and total revenue does not change when price changes.

Answer 29

C. 1, and total revenue does not change when price changes.

Question 30

If the demand curve is linear and downward sloping, which of the following statements is not correct?
A. Demand is more elastic on the lower part of the demand curve than on the upper part.
B. Different pairs of points on the demand curve can result in different values of the price elasticity of demand.
C. Different pairs of points on the demand curve result in identical values of the slope of the demand curve.
D. Starting from a point on the upper part of the demand curve, an increase in price leads to a decrease in total revenue.

Answer 30

A. Demand is more elastic on the lower part of the demand curve than on the upper part.

Question 31

Suppose the point labeled B is the “halfway point” on the demand curve and it corresponds to a price of $5.00. Then, between prices of $4.99 and $5.01, the price elasticity of demand is
A. less than 1 but greater than zero.
B. equal to 1.
C. greater than 1.
D. equal to zero.

Answer 31

B. equal to 1.

Question 32

The section of the demand curve from B to C represents the (Refer to Figure 5-4)
A. elastic section of the demand curve.
B. inelastic section of the demand curve.
C. unit elastic section of the demand curve.
D. perfectly elastic section of the demand curve.

Answer 32

B. inelastic section of the demand curve.

Question 33

If the cross-price elasticity of two goods is positive, then the two goods are
A. substitutes.
B. complements.
C. normal goods.
D. inferior goods.

Answer 33

A. substitutes.

Question 34

A linear, upward-sloping supply curve has
A. a constant slope and a changing price elasticity of supply.
B. a changing slope and a constant price elasticity of supply.
C. both a constant slope and a constant price elasticity of supply.
D. both a changing slope and a changing price elasticity of supply.

Answer 34

A. a constant slope and a changing price elasticity of supply.

Question 35

Some firms eventually experience problems with their capacity to produce output as their output levels increase. For these firms,
A. market power is substantial.
B. supply is perfectly inelastic.
C. supply is more elastic at low levels of output and less elastic at high levels of output.
D. supply is less elastic at low levels of output and more elastic at high levels of output.

Answer 35

C. supply is more elastic at low levels of output and less elastic at high levels of output.

Question 36

The price elasticity of supply along a typical supply curve is
A. constant.
B. equal to zero.
C. higher at low levels of quantity supplied and lower at high levels of quantity supplied.
D. lower at low levels of quantity supplied and higher at high levels of quantity supplied.

Answer 36

C. higher at low levels of quantity supplied and lower at high levels of quantity supplied.

Question 37

Which of the following statements is not valid when supply is perfectly elastic?
A. The elasticity of supply approaches infinity.
B. The supply curve is horizontal.
C. Very small changes in price lead to very large changes in quantity supplied.
D. The time period under consideration is more likely a short period rather than a long period.

Answer 37

D. The time period under consideration is more likely a short period rather than a long period.

Question 38

Which of the following statements is not valid when the market supply curve is vertical?
A. Market quantity supplied does not change when the price changes.
B. Supply is perfectly inelastic.
C. An increase in market demand will increase the equilibrium quantity.
D. An increase in market demand will increase the equilibrium price.

Answer 38

C. An increase in market demand will increase the equilibrium quantity.

Question 39

A decrease in supply will cause the largest increase in price when
A. both supply and demand are inelastic.
B. both supply and demand are elastic.
C. demand is elastic and supply is inelastic.
D. demand is inelastic and supply is elastic.

Answer 39

A. both supply and demand are inelastic.

Question 40

A decrease in supply will cause the smallest increase in price when
A. both supply and demand are inelastic.
B. demand is elastic and supply is inelastic.
C. both supply and demand are elastic.
D. demand is inelastic and supply is elastic.

Answer 40

C. both supply and demand are elastic.

Question 41

Knowing that the demand for wheat is inelastic, if all farmers voluntarily did not plant wheat on 10 percent of their land, then
A. consumers of wheat would buy more wheat.
B. wheat farmers would suffer a reduction in their total revenue.
C. wheat farmers would experience an increase in their total revenue.
D. the demand for wheat would decrease.

Answer 41

C. wheat farmers would experience an increase in their total revenue.

Question 42

The change in equilibrium price will be (Refer to Scenario 5-2)
A. greater in the aged cheddar cheese market than in the bread market.
B. greater in the bread market than in the aged cheddar cheese market.
C. the same in the aged cheddar cheese and bread markets.
D. Any of the above could be correct.

Answer 42

A. greater in the aged cheddar cheese market than in the bread market.

Question 43

A binding price floor will reduce a firm’s total revenue
A. always.
B. when demand is elastic.
C. when demand is inelastic.
D. never.

Answer 43

B. when demand is elastic.

Question 44

A tax on the sellers of popcorn
A. increases the size of the popcorn market.
B. decreases the size of the popcorn market.
C. has no effect on the size of the popcorn market.
D. may increase, decrease, or have no effect on the size of the popcorn market.

Answer 44

B. decreases the size of the popcorn market.

Question 45

Suppose sellers of liquor are required to send $1.00 to the government for every bottle of liquor they sell. Further, suppose this tax causes the price paid by buyers of liquor to rise by $0.80 per bottle. Which of the following statements is correct?
A. This tax causes the supply curve for liquor to shift upward by $1.00 at each quantity of liquor.
B. The effective price received by sellers is $0.20 per bottle less than it was before the tax.
C. Eighty percent of the burden of the tax falls on buyers.
D. All of the above are correct.

Answer 45

D. All of the above are correct.

Question 46

Suppose there is currently a tax of $50 per ticket on airline tickets. Sellers of airline tickets are required to pay the tax to the government. If the tax is reduced from $50 per ticket to $30 per ticket, then
A. the demand curve will shift upward by $20, and the price paid by buyers will decrease by less than $20.
B. the demand curve will shift upward by $20, and the price paid by buyers will decrease by $20.
C. the supply curve will shift downward by $20, and the effective price received by sellers will increase by less than $20.
D. the supply curve will shift downward by $20, and the effective price received by sellers will increase by $20.

Answer 46

C. the supply curve will shift downward by $20, and the effective price received by sellers will increase by less than $20.

Question 47

Suppose that in a particular market, the supply curve is highly elastic and the demand curve is highly inelastic. If a tax is imposed in this market, then
A. the buyers will bear a greater burden of the tax than the sellers.
B. the sellers will bear a greater burden of the tax than the buyers.
C. the buyers and sellers are likely to share the burden of the tax equally.
D. the buyers and sellers will not share the burden equally, but it is impossible to determine who will bear the greater burden of the tax without more information.

Answer 47

A. the buyers will bear a greater burden of the tax than the sellers.

Question 48

Suppose that the demand for picture frames is inelastic and the supply of picture frames is elastic. A tax of $1 per frame levied on picture frames will increase the price paid by buyers of picture frames by
A. less than $0.50.
B. $0.50.
C. between $0.50 and $1.
D. $1.

Answer 48

C. between $0.50 and $1

Question 49

If the government wants to reduce smoking, it should impose a tax on
A. buyers of cigarettes.
B. sellers of cigarettes.
C. either buyers or sellers of cigarettes.
D. whichever side of the market is less elastic.

Answer 49

C. either buyers or sellers of cigarettes.

Question 50

When the government places a tax on a product:
A. the cost of the tax to buyers and sellers will be less than the revenue raised from the tax by the government.
B. the cost of the tax to buyers and sellers will equal the revenue raised from the tax by the government.
C. the cost of the tax to buyers and sellers exceeds the revenue raised from the tax by the government.
D. without additional information, such as the elasticity of demand for this product, it is impossible to compare tax cost with tax revenue.

Answer 50

C. the cost of the tax to buyers and sellers exceeds the revenue raised from the tax by the government.

Question 51

Deadweight loss measures the
A. loss in a market to buyers and sellers that is not offset by an increase in government revenue.
B. loss in revenue to the government when buyers choose to buy less of the product.
C. loss of efficiency in a market as a result of government intervention.
D. lost revenue to businesses because of higher prices to consumers from the tax.

Answer 51

A. loss in a market to buyers and sellers that is not offset by an increase in government revenue.

Question 52

The larger the deadweight loss of taxation, the
A. more people will choose to not buy the product.
B. more the burden of the tax will fall on the buyer and not the seller.
C. more the burden of the tax will fall on the seller and not the buyer.
D. larger the cost of any government program.

Answer 52

D. larger the cost of any government program.

Question 53

Total surplus with a tax is equal to
A. consumer surplus and producer surplus.
B. consumer surplus minus producer surplus.
C. consumer surplus, producer surplus, and total surplus.
D. consumer surplus, producer surplus, and tax revenue.

Question 54

If the supply of a good is relatively elastic, changing the price causes
A. a relatively small change in the amount that buyers are willing to buy.
B. a relatively small change in the amount sellers are willing to sell.
C. a relatively large change in the amount sellers are willing to sell.
D. no change in the amount sellers are willing to sell.

Answer 54

C. a relatively large change in the amount sellers are willing to sell.?

Question 55

If the supply of land is fixed, a tax on land would be paid
A. entirely by the landowners.
B. entirely by the renters or users of the land.
C. partly by landowners and partly by land users.
D. only by workers.

Answer 55

A. entirely by the landowners.

Question 56

The Laffer curve indicates each of the following EXCEPT
A. income tax collections will be very low if income tax rates are very low.
B. income tax collections will be very low if income tax rates are very high.
C. income tax collections will be at a maximum if income tax rates are at some intermediate level between very low and very high.
D. income tax collections will be very high if income tax rates are very high.

Answer 56

D. income tax collections will be very high if income tax rates are very high.

Question 57

Suppose that policymakers are considering placing a tax on either of two markets. In Market A, the tax will have a significant effect on the price consumers pay, but it will not affect equilibrium quantity very much. In Market B, the same tax will have only a small effect on the price consumers pay, but it will have a large effect on the equilibrium quantity. In which market will the tax have a larger deadweight loss?
A. Market A
B. Market B
C. Deadweight loss will be the same in both markets.
D. There is not enough information to answer the question.

Answer 57

B. Market B

Question 58

Consumer surplus is
A. a concept that helps us make normative statements about the desirability of market outcomes.
B. represented on a graph by the area below the demand curve and above the price.
C. a good measure of economic welfare if buyers’ preferences are the primary concern.
D. All of the above are correct.

Answer 58

D. All of the above are correct.

Question 59

Who experiences the largest loss of consumer surplus when the price of the good increases from $20 to $22?
A. Quilana
B. Wilbur
C. Ming-la
D. All three buyers experience the same loss of consumer surplus.

Answer 59

D. All three buyers experience the same loss of consumer surplus.

Question 60

If Cathy’s Coffee Emporium sells its product in a competitive market, then
A. the price of that product depends on the quantity of the product that Cathy’s Coffee Emporium produces and sells because Cathy’s Coffee Emporium’s demand curve is downward sloping.
B. Cathy’s Coffee Emporium’s total revenue must be proportional to its quantity of output.
C. Cathy’s Coffee Emporium’s total cost must be a constant multiple of its quantity of output.
D. Cathy’s Coffee Emporium’s total revenue must be equal to its average revenue.

Answer 60

B. Cathy’s Coffee Emporium’s total revenue must be proportional to its quantity of output.

Question 61

Changes in the output of a perfectly competitive firm, without any change in the price of the product, will change the firm’s
A. total revenue.
B. marginal revenue.
C. average revenue.
D. All of the above are correct.

Answer 61

A. total revenue.

Question 62

Which of the following statements regarding a competitive firm is correct?
A. Because demand is downward sloping, if a firm increases its level of output, the firm will have to charge a lower price to sell the additional output.
B. If a firm raises its price, the firm may be able to increase its total revenue even though it will sell fewer units.
C. By lowering its price below the market price, the firm will benefit from selling more units at the lower price than it could have sold by charging the market price.
D. For all firms, average revenue equals the price of the good.

Answer 62

D. For all firms, average revenue equals the price of the good.

Question 63

For a firm operating in a competitive industry, which of the following statements is not correct?
A. Price equals average revenue.
B. Price equals marginal revenue.
C. Total revenue is constant.
D. Marginal revenue is constant.

Answer 63

C. Total revenue is constant.

Question 64

If the market elasticity of demand for potatoes is -0.3 in a perfectly competitive market, then the individual farmer’s elasticity of demand
A. will also be -0.3.
B. depends on how large a crop the farmer produces.
C. will range between -0.3 and -1.0.
D. will be infinite.

Answer 64

D. will be infinite.

Question 65

Comparing marginal revenue to marginal cost
(i) reveals the contribution of the last unit of production to total profit.
(ii) is helpful in making profit-maximizing production decisions.
(iii) tells a firm whether its fixed costs are too high.

A. (i) only
B. (i) and (ii) only
C. (ii) and (iii) only
D. (i) and (iii) only

Answer 65

B. (i) and (ii) only

Question 66

A certain competitive firm sells its output for $20 per unit. The 50th unit of output that the firm produces has a marginal cost of $22. Production of the 50th unit of output does not necessarily
A. increase the firm’s total revenue by $20.
B. increase the firm’s total cost by $22.
C. decrease the firm’s profit by $2.
D. increase the firm’s average variable cost by $0.44.

Answer 66

D. increase the firm’s average variable cost by $0.44.

Question 67

A competitive firm has been selling its output for $20 per unit and has been maximizing its profit, which is positive. Then, the price rises to $25, and the firm makes whatever adjustments are necessary to maximize its profit at the now-higher price. Once the firm has adjusted, its
A. quantity of output is higher than it was previously.
B. average total cost is higher than it was previously.
C. marginal revenue is higher than it was previously.
D. All of the above are correct.

Answer 67

D. All of the above are correct.

Question 68

The marginal revenue from producing the 3rd unit equals
(i) $5.
(ii) the price.
(iii) the marginal cost.

A. (i) only
B. (i) and (ii) only
C. (ii) only
D. (i), (ii), and (iii)

Answer 68

B. (i) and (ii) only

Question 69

If marginal cost exceeds marginal revenue, the firm
A. is most likely to be at a profit-maximizing level of output.
B. should increase the level of production to maximize its profit.
C. should reduce its average fixed cost in order to lower its marginal cost.
D. may still be earning a positive accounting profit.

Answer 69

D. may still be earning a positive accounting profit.

Question 70

When marginal revenue equals marginal cost, the firm
A. should increase the level of production to maximize its profit.
B. may be minimizing its losses rather than maximizing its profit.
C. must be generating positive economic profits.
D. must be generating positive accounting profits.

Answer 70

B. may be minimizing its losses rather than maximizing its profit.

Question 71

A profit-maximizing firm in a competitive market will always make marginal adjustments to production as long as
A. average revenue is greater than average total cost.
B. average revenue is equal to marginal cost.
C. marginal cost is greater than average total cost.
D. price is above or below marginal cost.

Answer 71

D. price is above or below marginal cost.

Question 72

Profit-maximizing firms enter a competitive market when existing firms in that market have
A. total revenues that exceed fixed costs.
B. total revenues that exceed total variable costs.
C. average total costs that exceed average revenue.
D. average total costs less than market price.

Answer 72

D. average total costs less than market price.

Question 73

A profit-maximizing firm in a competitive market is currently producing 200 units of output. It has average revenue of $9 and average total cost of $7. It follows that the firm’s
A. average total cost curve intersects the marginal cost curve at an output level of less than 200 units.
B. average variable cost curve intersects the marginal cost curve at an output level of less than 200 units.
C. profit is $400.
D. All of the above are correct.

Question 74

If a competitive firm is currently producing a level of output at which profit is not maximized, then it must be true that
A. marginal revenue exceeds marginal cost.
B. marginal cost exceeds marginal revenue.
C. total cost exceeds total revenue.
D. None of the above is correct.

Answer 74

D. None of the above is correct.

Question 75

Susan quit her job as a teacher, which paid her $36,000 per year, in order to start her own catering business. She spent $12,000 of her savings, which had been earning 10 percent interest per year, on equipment for her business. She also borrowed $12,000 from her bank at 10 percent interest, which she also spent on equipment. For the past several months, she has spent $1,000 per month on ingredients and other variable costs. Also, for the past several months, she has earned $4,500 in monthly revenue.
A. In the short run, Susan should shut down her business, and in the long run she should exit the industry.
B. In the short run, Susan should continue to operate her business, but in the long run she should exit the industry.
C. In the short run, Susan should continue to operate her business, but in the long run she will probably face competition from newly entering firms.
D. In the short run, Susan should continue to operate her business, and she is also in long-run equilibrium.

Answer 75

C. In the short run, Susan should continue to operate her business, but in the long run she will probably face

Question 76

Suppose a firm operates in the short run at a price above its average total cost of production. In the long run, the firm should expect
A. new firms to enter the market.
B. the market price to fall.
C. its profits to fall.
D. All of the above are correct.

Answer 76

D. All of the above are correct.

Question 77

Winona’s Fudge Shoppe is maximizing profits by producing 1,000 pounds of fudge per day. If Winona’s fixed costs unexpectedly increase and the market price remains constant, then the short-run profit-maximizing level of output
A. is less than 1,000 pounds.
B. is still 1,000 pounds.
C. is more than 1,000 pounds.
D. becomes zero.

Answer 77

B. is still 1,000 pounds.

Question 78

Consider a firm operating in a competitive market. The firm is producing 40 units of output, has an average total cost of production equal to $5, and is earning $240 economic profit in the short run. What is the current market price?
A. $9
B. $10
C. $11
D. $12

Answer 78

C. $11