CHAPTER 6 QUESTION POOL

Question 1

Question 1:Consider a perfectly competitive market. Assume that firms want to enter themarket in the current situation. Which of the following statements would be in line with thatobservation?

a) Accounting profit is negative; economic profit is negative.
b) Accounting profit is positive; economic profit is positive.
c) Accounting profit iszero; economic profit is positive.
d) Accounting profit is positive; economic profit is negative.

Answer 1

B

Question 2

a) None of the other answers is correct.
b) The marginal cost curve of a firm always intersects the firm’s average fixed cost curve atthe minimum of the average fixed cost curve.
c) The average variable cost curve of a firm always intersects the firm’s marginal cost curveat the minimum of the marginal cost curve.
d) The average fixed cost curve is downward sloping at first and then increases again.

Answer 2

A

Question 3

Consider a firm in a perfectly competitive market. Assume that the market demand for pens is Q (P ) = 650 − 30P and the market supply for pens is Q (P ) = 300 + 40P . The firm has the following cost function C(q) = 2+5q2 (Q refers to market quantities, q to the quantity produced by the firm). What is the quantity q produced by the firm in the short run?

a) 1
b) 0
c) 0.5
d) 0.75

Answer 3

C

Question 4

The long run average cost curve may slope downward due to

a) Noneoftheotheranswersiscorrect. b)economies of scale.
c) decreasing marginal returns.
d) decreasing average fixed costs

Answer 4

B

Question 5

Consider a perfectly competitive market. Initially, the market is in long-run equilibrium. Now there is a demand shock which shifts the market demand curve to the right (assume that this demand curve is not perfectly inelastic). Which of the following statements is correct in the long run?

a) Equilibrium quantity and equilibrium price will be the same compared to the initial equilibrium.
b) Equilibriumquantityandequilibriumpricewillbehigherthanintheinitialequilibrium.
c) Equilibriumquantitywillbehigherandequilibriumpricewillbethesamecomparedtothe initial equilibrium.
d) Equilibriumquantitywillbelowerandequilibriumpricewillbethesamecomparedto the initial equilibrium.

Answer 5

C

Question 6

Consider a perfectly competitive market. Market demand is Q (P ) = 2451 − 4P . All firms on the market are identical with cost function C (q ) = 20q 2 + 4q + 500 (q denotes the production of the individual firm, Q is the market quantity produced by all firms together). How many firms will there be on the market in long-run equilibrium?

a) 199
b) 327
c) 840
d) 258

Answer 6

B

Question 7

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

a) Thesumofconsumersurplusandproducersurplusisnotmaximizedattheequilibrium.
b) Inequilibrium,itispossibletomakesomeonebetteroffwithoutmakingsomeoneelse worse off.
c) The equilibrium price in a competitive market efficiently allocates scarce resources to participants.
d) Theequilibriumpriceisdeterminedbyafewlargefirmsinthemarket.

Answer 7

C

Question 8

Consider a perfectly competitive market. Assume that firms are exiting the market.Which of the following statements would NOT be in line with this observation?a)Negativ eaccounting profit and negative economic profit.

b) Anaccountingprofitofzeroandanegativeeconomicprofitc)Positiveaccountingprofitandpositiveeconomicprofit.
d) Positiveaccountingprofitandnegativeeconomicprofit

Answer 8

C

Question 9

Consider a firm in a perfectly competitive market. Which statement is correct in the short run?
a) The average fixed cost curve will be upward sloping (assuming that fixed costs are greater
than zero).
b) The supply curve of a firm is the section of the marginal cost curve that lies above the
average variable cost curve.
c) Firms earn zero economic profit.
d) All factors of production can be changed.

Answer 9

B

Question 10

Consider a firm in a perfectly competitive market. Assume that the market demand for pens is
Q (P ) = 6000 − 10P and the market supply for pens is Q (P ) = 5040 + 20P . The firm has the
cost function C (q ) = 3q 2 + 2q + 1 (Q refers to market quantities, q to the quantity produced
by the firm). What is the quantity q produced by the firm in the short run?
a) 0
b) 5
c) 1/9
d) 0.5

Answer 10

B

Question 11

Consider a firm in a perfectly competitive market. Which statement is correct?
a) Marginal revenue is increasing in quantity when the quantity is low and decreasing in
quantity when the quantity is high.
b) Marginal revenue is constant in quantity.
c) Marginal revenue is always decreasing in quantity.
d) Marginal revenue is always increasing in quantity

Answer 11

B

Question 12

Consider a perfectly competitive market. The cost function of a firm in this market
is given by C(q) = 100 + q? + q. What is the market price in the long run equilibrium?
a) 210
b) 100
c) 10
d) 21

Answer 12

D

Question 13

The long run average cost curve will slope down if there are

a) constant returns to scale.
b) decreasing average fixed costs.
c) economies of scale.
d) decreasing marginal product

Answer 13

C

Question 14

Consider our discussion of long run equilibrium in a perfectly competitive market.
Which statement about the long run in a perfectly competitive market is correct?
a) Free entry and exit of firms is no longer possible.
b) Firms will produce positive quantities, but at less than efficient scale.
c) Firms earn positive economic profits in equilibrium.
d) The long run supply curve is horizontal

Answer 14

D

Question 15

Consider a perfectly competitive market in long-run equilibrium. All firms on
the market are identical and have the following cost function C(g) =2q? + 5q + 50 (q denotes
the production of the individual firm, Q is tike market quantity produced by all firms
together).
Market demand is P(Q) = 1025 - 2Q. How many firms are there in the long run equilibrium?
a) 150
b) 100
c) 5
d) 1015

Answer 15

B

Question 16

In general, ____ motivate firms to enter a perfectly competitive market while ____ motivate
firms to exit a perfectly competitive market.
a) economic profits, economic losses
b) accounting profits, economic losses
c) accounting profits, accounting losses
d) None of the other answers is correct.

Answer 16

A

Question 17

Consider the following three different types of costs: average total cost, average
variable cost, and marginal cost. Which of these types of costs change (s) when the fixed cost
changes?
a) Only the average total cost.
b) Only the average total cost and the marginal cost.
c) Only the average variable cost and the marginal cost.
d) None of the other answers is correct

Answer 17

A

Question 18

Consider a firm in a perfectly competitive market. Assume that the market demand for pens is
Q(P) = 680 - 17P and the market supply for pens is Q(P) = 17P.The firm has the cost function
C(g) = 2.5g? + 8 (Q refers to market quantities, q to the quantity produced by the firm). What
is the quantity q produced by the firm in the short run?
a) 6
b) 4
c) 0
d) 2

Answer 18

B

Question 19

Consider a firm in a perfectly competitive market. If the firm shuts down in the short run and
produces no output it incurs a loss equal to its
a) marginal costs.
b) total variable costs.
c) marginal revenue.
d) fixed costs.

Answer 19

D

Question 20

Consider a perfectly competitive market. The cost function of a firm in this market is given by
�(�) = 40� − �! + 0.01�”. The current market price is 20. In the long run equilibrium,
a) there will be more firms than there currently are on the market.
b) there will less firms than there currently are on the market.
c) the number of firms will not change, but the total quantity produced by all firms together
(i.e., Q) will be lower.
d) the number of firms will not change, but the total quantity produced by all firms together
(i.e., Q) will be higher

Answer 20

A

Question 21

Which of the following is true for a firm that enjoys economies of scale?

a) Marginal revenue is falling as output increases.
b) Average total cost is falling as output increases.
c) Marginal cost is constant as output increases.
d) Marginal cost is increasing as output increases

Answer 21

B

Question 22

Consider a perfectly competitive market. The demand curve is given by Q(P): 360 -8P. The
market supply curve is Q(P) = 30 + 3P. How high is the consumer surplus?
a) 900
b) 19800
c) 14360
d) 15

Answer 22

A

Question 23

Consider the perfectly competitive market for corn and the discussion of long-run equilibrium
in the book. The market is initially in its long-run equilibrium at P1 and Q1. Then there is a
(permanent) change in consumers’ preferences that shifts the demand curve for corn to the
right. Which of the following statements is correct?
a) In the short run firms will make an economic loss, this will induce firms to drop out of the
market causing the supply curve to shift to the left.
b) In the short run firms will make an economic profit, this will induce firms to enter the
market. In the new long run equilibrium the quantity will be higher than Q1, the price
will be P1.
c) In the short run the price will not change, but in the long run more firms will enter the
market to fulfill the higher demand.
d) In the short run firms will make an economic profit, this will induce firms to enter the
market. In the new long run equilibrium the price will be higher than P1, the quantity
will be Q1.

Answer 23

B

Question 24

Consider our discussion of long run equilibrium in a perfectly competitive market. Which
statement about the long run in a perfectly competitive market is correct?
a) Firms earn positive economic profits in equilibrium.
b) The long run market supply curve is horizontal.
c) Firms make a negative accounting profit in equilibrium.
d) Free entry and exit of firms is no longer possible.

Answer 24

B

Question 25

Which of the following statements is NOT correct?
a) Marginal product decreases with specialization among workers.
b) The Law of Diminishing returns states that successive increases in input eventually lead to
less additional output.
c) A negative marginal product implies that overall production decreases as more workers are
hired (assuming that workers are the variable factor of production).
d) In the short run a firm can only change some of its inputs.

Answer 25

A

Question 26

If a firm has fixed costs, it will always be the case that

a) its average fixed cost will decrease as it produces more output.
b) its average variable cost will equal its average total cost.
c) its average total cost will be lower than its marginal cost.
d) its marginal cost will be constant.

Answer 26

A

Question 27

Consider the market for gingerbread men which is perfectly competitive. The demand for
gingerbread men is given by Q(P) = 80 − 5P. Market price is given by P = 10. What is the
consumer surplus in the market?
a) 90
b) 180
c) 1550
d) 300

Answer 27

A

Question 28

In all the market structures we discussed, marginal revenue is

a) the extra revenue that results from selling one extra unit.
b) always positive.
c) always equal to price.
d) total revenue divided by output.

Answer 28

A