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| 1 | |
A self-employed shoe repairman's business is analyzed by the perfect competition model. His revenue is exactly equal to his average total costs as measured by the economists so he has not made any economic profit, yet he seems to be living on adequate income. How do we account for this set of circumstances? |
| | A) | We assume he is living off of past savings or transfer income. |
| | B) | We include the opportunity cost of his work as part of the AFC of doing business. |
| | C) | We include the opportunity cost of his work as part of the AVC of doing business. |
| | D) | We include the opportunity cost of his work as part of the MC of doing business, but we do not count that in the ATC. |
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| 2 | |
Which two of the four conditions for perfect competition, are best illustrated by the Iowa corn farmers? |
| | A) | standardized product: price taker |
| | B) | standardized product: perfect information |
| | C) | mobile factors of production: price taker |
| | D) | perfect information: mobile factors of production |
| | E) | price taker: perfect information |
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| 3 | |
The market demand for duct tape is P = 100 – 9Q. ten firms supply the tape and each has a marginal cost function MC = 10Q. What is the going price for duct tape that each producer must take as given and what is the total market quantity produced? |
| | A) | Q = 5.26 and P = 52.7 |
| | B) | Q = 10 and P = 10 |
| | C) | Q = 1 and P = 91 |
| | D) | None of the above is the correct answer. |
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| 4 | |
In problem 11-3 above, all firms together will have _________ producer surplus if the demand shifts making equilibrium output equal to 8. Nothing changes on the cost side of the market. |
| | A) | 80 |
| | B) | 28 |
| | C) | 64 |
| | D) | 32 |
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| 5 | |
If the price in a perfectly competitive market is 10, ATC is 11 and there are no fixed costs, then the |
| | A) | firm should shut down in the short-run. |
| | B) | firm should stay open in the short run but look to change or close in the long-run. |
| | C) | Firm should raise its price to at least 11. |
| | D) | Firm must seek more information before it can answer questions. |
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| 6 | |
Which is false if, in a perfect competition model, a firm is making economic profit? |
| | A) | more resources will flow into the industry in the long-run. |
| | B) | The firm's marginal cost is higher than its ATC. |
| | C) | The firm's ATC will rise until ATC = P. |
| | D) | The firm's price will fall in the long run. |
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| 7 | |
In a perfectly competitive industry at long-run equilibrium |
| | A) | all consumer surplus is bid away. |
| | B) | All producer surplus is bid away. |
| | C) | All economic profit is bid away. |
| | D) | All of the above are bid away as efficiency is reached. |
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| 8 | |
If economic profit becomes significantly positive for a competitive firm because that firm has a uniquely gifted laborer, then |
| | A) | that economic profit can last indefinitely. |
| | B) | Government regulation rather than competition is needed to curb the excessive profit. |
| | C) | The profit will disappear as other firms bid up the price of the gifted laborer. |
| | D) | The laborer will feel exploited and will leave the industry after which the economic profit disappears. |
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| 9 | |
The industry supply curve is P = .5Q. What is the price elasticity of supply in this industry if the quantity of output is 10? (Use absolute values.) |
| | A) | elastic |
| | B) | inelastic |
| | C) | unitary elasticity |
| | D) | The elasticity cannot be calculated without more information on price. |
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| 10 | |
In a constant cost industry where the long-run supply curve is horizontal and the LAC curve is U-shaped, an increase in demand will, in the long run, |
| | A) | increase the size of each firm and decrease the number of firms in the industry. |
| | B) | increase the number of firms in the industry but not the size of existing firms. |
| | C) | lead to a lower price, larger firms, and more of them. |
| | D) | lead to any one of the above because the outcome is indeterminate. |
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| 11 | |
The market demand for wedding reception meals is P = 100 – 0.1Q. Ten restaurants in town supply the meals and each has a marginal cost function MC = 1Q. The meals are perfect substitutes for each other. What is the going price for these meals that each restaurant will take as given and what is the total market quantity produced? |
| | A) | Q = 50 and P = 50 |
| | B) | Q = 500 and P = 50 |
| | C) | Q = 91 and P = 9 |
| | D) | None of the above is the correct answer. |
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| 12 | |
Given a market demand curve P = 480 – 10Q and a market supply curve MC = 2Q, how much producer surplus is generated in the entire market? |
| | A) | 1,600 |
| | B) | 3,200 |
| | C) | 8,400 |
| | D) | 11,600 |
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| 13 | |
Economic and accounting profit usually differ primarily because |
| | A) | the opportunity cost of the owners time is included as a cost in calculating economic profit but is not included in accounting calculations of profit. |
| | B) | Employee labor costs are not counted in the former but are counted in the latter. |
| | C) | Rental costs of land are valued much higher in accounting profit than they are in economic profit. |
| | D) | Accounting overestimates capital costs and economic accounting tends to underestimate capital costs. |
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Answer the following 3 questions by examining the graph below.
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| 14 | |
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In the graph above the firm |
| | A) | is pursuing a profit maximizing position if it produces at 0d where it makes normal but no economic profits. |
| | B) | is breaking even if it produces at either 0a or 0d. |
| | C) | is making no economic profit if it produces at 0b. |
| | D) | should shut down at any output less than 0b. |
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| 15 | |
In the graph above we can be sure that the shutdown point of the firm is at |
| | A) | the output 0b. |
| | B) | the output 0a. |
| | C) | a point to the left of 0b. |
| | D) | a point to the left of 0a. |
| | E) | a point that cannot be narrowed down to the options above because the AVC is not known. |
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| 16 | |
If demand increased in the market for X above, in the short-run we would expect to see |
| | A) | the firm increase its output but price to stay the same. |
| | B) | The price rise and the firm increase its output. |
| | C) | New firms enter to make up the shortage in the market. |
| | D) | The firm increase output and profit because the ATC will go down as production goes up. |
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| 17 | |
Market supply is the horizontal summation of |
| | A) | the average variable cost function of the firms in the market. |
| | B) | The average total cost function of the firms in the market. |
| | C) | The marginal cost function of the firms in the market. |
| | D) | None of the above since it is derived from total market data rather than data from individual firms. |
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| 18 | |
Exchange in a market brings benefits to both consumer and producer if it is voluntary and well informed. From the graph of a market below, what is the value of the net benefits from exchange to both consumer and producer? <![CDATA[<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/free/0078021693/236468/chap11_2.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (6.0K)</a>]]>
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| | A) | 150 |
| | B) | 100 |
| | C) | 250 |
| | D) | 400 |
| | E) | 625 |
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| 19 | |
A pecuniary diseconomy refers to |
| | A) | inefficiencies that result from constantly changing firm size to keep up with the market pressures. |
| | B) | Inefficiencies that result from firms being off their profit maximizing output levels because output maximizing is the goal. |
| | C) | Cost increases that result from supplier price increases as an industry expands. |
| | D) | Inefficiencies that result because the realities in the real world do not match the assumptions of the ideal perfectly competitive economy. |
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| 20 | |
Which statement about perfectly competitive markets is false? |
| | A) | Innovations do not occur frequently because economic profits cannot be reaped from the effort. |
| | B) | If firms have U shaped long-run ATC curves and input prices stay constant, then, over time, firms will pass along to the consumer an entire per unit tax that might be levied on the firm. |
| | C) | Agricultural price supports tend to bid up the price of land in the long run. |
| | D) | The long run supply curve of the industry is more likely to be horizontal that the short run supply curve of any given firm. |
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