Question 1

Firms are ________ with an economic profit of zero,they will ________ in the industry since they ________ be better off in another industry.
A) satisfied; stay; won't
B) unsatisfied; leave; will
C) satisfied; leave; will
D) unsatisfied; stay; won't

Accepted Answer

In economic terms, a firm with an economic profit of zero is covering all its opportunity costs and earning a normal profit, which is the minimum level of profit needed for it to remain in the industry. Therefore, the firm is satisfied with its position and has no economic incentive to leave the industry, as it wouldn't be better off elsewhere.

Question 2

Sheri is currently purchasing 10 units of a normal good and her indifference curves exhibit diminishing marginal rate of substitution.Suppose there is a decrease in the market price of this good.Then
A) both her utility and her consumer surplus will increase.
B) her consumer surplus will increase, but her utility will remain the same.
C) her utility will increase, but her consumer surplus will remain the same.
D) her consumer surplus will increase, but the change in her utility is unknown without more information.

Accepted Answer

When the market price of a normal good decreases, the consumer gains more purchasing power, which allows them to consume more of the good, moving them to a higher indifference curve. Since Sheri's indifference curves exhibit diminishing marginal rate of substitution, she will be willing to consume more units of the good, and her utility will increase. Additionally, since the market price has decreased, her consumer surplus will also increase. Therefore, both her utility and consumer surplus will increase.

Question 3

Survivability in a perfectly competitive world requires that
A) firms minimize average total cost.
B) firms produce new and different products.
C) firms maximize profit.
D) firms maximize revenue.

Accepted Answer

C

Question 4

In the long run,firms in a competitive market make zero economic profit.This induces most firms to leave the industry.

Accepted Answer

Those firm cannot make themselves better off by moving their resources into another industry because all opportunity cost is covered.

Question 5

Mister Jones was selling his house.The asking price was $220,000,and Jones decided he would take no less than $200,000.After some negotiation,Mister Smith purchased the house for $205,000.Smith's consumer surplus is
A) $5,000.
B) $15,000.
C) $20,000.
D) not able to be calculated from the information given.

Accepted Answer

Consumer surplus is the difference between what a buyer is willing to pay and what they actually pay. The information provided does not specify how much Smith was willing to pay, only the final purchase price. Therefore, Smith's consumer surplus cannot be calculated.

Question 6

The owners of sports franchises often complain that free-agency (open bidding for player services)threatens their profitability and thus their long-run viability.Given your knowledge of perfect competition,which of the following is correct?
A) Team owners might be correct in as much as free-agency bids up the price of players so that economic profits from those players equal zero.
B) Team owners might be correct in as much as free-agency bids up the price of players so that economic profits from those players is negative.
C) Team owners are lying, as free-agent salaries are still much too low.
D) Team owners are telling the truth, as free-agent salaries are much too high.

Accepted Answer

BFree agency can lead to increased competition for players, which can bid up their salaries. In a perfectly competitive market, this could lead to economic profits being driven down to zero (A) or potentially becoming negative (B) if the costs of acquiring and maintaining talent exceed the revenue generated from their performance.

Question 7

You enter a store and buy a bottle of soda.Do you usually receive consumer surplus?
A) Yes, because you wouldn't buy the soda if your willingness to pay would be less than the price.
B) Yes, because you are thirsty.
C) No, because you value other drinks more.
D) No, because you have less money after the transaction.

Accepted Answer

Consumer surplus is the difference between the price that the consumer pays and the maximum amount that they are willing to pay. If the consumer's willingness to pay for the soda is higher than the price, then they will receive consumer surplus. Therefore, if the consumer buys the soda, they are receiving consumer surplus.

Question 8

What is one reason firms might lobby to prevent entry into their market?
A) The long run equilibrium might be characterized by P = MC = ATC.
B) The long run equilibrium might be characterized by P = MC < ATC.
C) The long run equilibrium might be characterized by P > MC = ATC.
D) The long run equilibrium might be characterized by P = MC > ATC.

Accepted Answer

If the long run equilibrium is characterized by P = MC > ATC, it means that firms in the market are making economic profit. Allowing new firms to enter the market would increase competition, driving down prices and reducing the profits of existing firms. Therefore, firms might lobby to prevent entry into their market to protect their profits.

Question 9

Suppose when a market has four firms,average economic profit is $1,000 per month.When the market has five firms,the average economic profit is -$50 per month.This suggests that
A) the long-run equilibrium number of firms is between four and five.
B) the long-run equilibrium number of firms is four.
C) the long-run equilibrium number of firms is five.
D) there is no long-run equilibrium in this market as profits can never be zero.

Accepted Answer

The answer of Suppose when a market has four firms,average...

Question 10

A firm that generates zero economic profit usually has
A) negative business profit.
B) zero business profit.
C) positive business profit.
D) business profit equal to half the total revenue.

Accepted Answer

Economic profit is calculated by subtracting both explicit and implicit costs from total revenue. A firm generating zero economic profit still covers all its costs, including a normal profit (implicit cost), which means it has a positive business profit. Business profit only subtracts explicit costs from total revenue.

Question 11

Which of the following characterizes long-run equilibrium in perfect competition?
A) P = MC = ATC
B) P = MC < ATC
C) P > MC = ATC
D) P = MC > ATC

Accepted Answer

In perfect competition, long-run equilibrium occurs when P (price) equals MC (marginal cost) and ATC (average total cost) at their minimum point. This is because in the long run, firms can adjust their inputs and outputs to minimize their costs and earn only normal profits. Therefore, the correct choice would be A, which states that P = MC = ATC.

Question 12

Suppose a farmer in a perfectly competitive agricultural industry rents land that is uniquely productive in the production of a certain crop.In the long run,
A) the owner of the land receives economic rent while the farmer earns zero economic profit.
B) the owner of the land earns zero economic profit while the farmer receives economic rent.
C) both the farmer and the owner of the land receive economic rent.
D) neither the farmer nor the owner of the land receive economic rent.

Accepted Answer

In a perfectly competitive agricultural industry, in the long run, economic rent goes to the owner of uniquely productive land. The farmer, on the other hand, earns zero economic profit as any additional revenue from selling the crop is cancelled out by the higher rental payments they have to make for the use of the productive land. Therefore, option A is the correct choice.

Question 13

If entry is limited due to a limited input,firms in that market earn long run economic profit.

Accepted Answer

The price of the limited input will be bid up until zero economic profits result in the market that uses the input.

Question 14

Before the DVD,the VCR was a popular format for taping and replaying video.When the DVD was introduced,which of the following most accurately describes the long-run adjustment process in the VCR industry?
A) Costs increased, price increased, demand decreased, quantity decreased, profit decreased.
B) Demand increased, costs increased, price increased, quantity increased, profit decreased.
C) Demand decreased, quantity decreased, price decreased, profit decreased.
D) Demand decreased, price decreased, quantity decreased, profit decreased.

Accepted Answer

C) accurately describes the long-run adjustment process in the VCR industry after the introduction of DVDs. As DVDs became more popular due to their superior quality and convenience, demand for VCRs decreased. This led to a decrease in the quantity of VCRs sold, a decrease in their price due to lower demand, and ultimately a decrease in profit for manufacturers and sellers of VCRs.

Question 15

What is one reason perfectly competitive firms wish to be ever more efficient?
A) Individual firms are awarded by the tax code to be more efficient.
B) Individual firms can better control their costs than the price they can charge.
C) Individual firms can better control their costs than their output levels.
D) Individual firms don't need to be efficient; government policies do not reward efficiency.

Accepted Answer

In a perfectly competitive market, all firms sell an identical product, so they cannot raise prices without losing customers to competitors. Therefore, the only way for firms to increase profits is to reduce costs. By becoming more efficient, firms can control their costs more effectively and potentially earn higher profits.

Question 16

Long-run economic profit does not exist for fixed factors like land because
A) bidding drives up the price of the factor until no economic profit exists.
B) there is no market for such factors.
C) these factors have L-shaped isoquants.
D) these factors will earn economic profits.

Accepted Answer

In the long run, competition and bidding for fixed factors like land increase their prices to the point where any potential economic profit is eliminated. This is because as firms compete for these scarce resources, they are willing to pay more, driving up the cost until it equals the additional revenue generated by using the factor, leaving no room for economic profit.

Question 17

In the long run,competitive firms MUST be profit maximizers because if they do not maximize profits,
A) they will not survive.
B) they will not be price takers.
C) they will attract entry.
D) the profits that they do earn will only cover variable costs.

Accepted Answer

Competitive firms operate in a market environment where there are many other firms producing the same/similar products. In this environment, firms have little or no control over the market price and are considered price takers. Therefore, to survive and stay competitive in the long run, firms must maximize profits by producing the output level where marginal cost equals marginal revenue. Firms that are not profit maximizers will either earn lower profits or incur losses, making it difficult for them to survive in the market. Thus, maximizing profit is essential for the survival of competitive firms.

Question 18

Does a competitive long-run equilibrium require cost-minimization?
A) Yes, if firms fail to be as efficient as their competitors, they are driven out of the market.
B) No, in the long run, firms make zero profits.
C) Yes, if they didn't, even less efficient firms would enter the industry.
D) No, because competition ensures their survival.

Accepted Answer

In a competitive long-run equilibrium, firms must minimize costs to survive. If they are not as efficient as their competitors, they will be driven out of the market due to higher costs and lower profits.

Question 19

If a firm is in a perfectly competitive world but decides to charge a higher price than its competitors,
A) the firm's profits will be zero or negative, and the firm will fail in the long run.
B) the firm's profits will be zero or negative, and the firm will fail in the short run.
C) the firm's profits will be positive or negative, and the firm will fail in the short run.
D) the firm's profits will be positive or negative, and the firm will fail in the long run.

Accepted Answer

In a perfectly competitive market, firms are price takers and must accept the market price. If a firm charges a higher price than its competitors, it will lose all of its customers to the lower-priced competitors. As a result, the firm's profits will be zero or negative, and the firm will fail in the long run.

Question 20

Even if two competitive firms in the same market have different production technologies,they will each earn long-run zero profits.Why?

Accepted Answer

The answer of Even if two competitive firms in the...

Quiz 9: Applying the Competitive Model

Firms are with an economic profit of zero,they will in the industry since they be better off in another industry.

Sheri is currently purchasing 10 units of a normal good and her indifference curves exhibit diminishing marginal rate of substitution.Suppose there is a decrease in the market price of this good.Then

Survivability in a perfectly competitive world requires that

In the long run,firms in a competitive market make zero economic profit.This induces most firms to leave the industry.

Mister Jones was selling his house.The asking price was $220,000,and Jones decided he would take no less than $200,000.After some negotiation,Mister Smith purchased the house for $205,000.Smith's consumer surplus is

The owners of sports franchises often complain that free-agency (open bidding for player services) threatens their profitability and thus their long-run viability.Given your knowledge of perfect competition,which of the following is correct?

You enter a store and buy a bottle of soda.Do you usually receive consumer surplus?

What is one reason firms might lobby to prevent entry into their market?

Suppose when a market has four firms,average economic profit is $1,000 per month.When the market has five firms,the average economic profit is -$50 per month.This suggests that

A firm that generates zero economic profit usually has

Which of the following characterizes long-run equilibrium in perfect competition?

Suppose a farmer in a perfectly competitive agricultural industry rents land that is uniquely productive in the production of a certain crop.In the long run,

If entry is limited due to a limited input,firms in that market earn long run economic profit.

Before the DVD,the VCR was a popular format for taping and replaying video.When the DVD was introduced,which of the following most accurately describes the long-run adjustment process in the VCR industry?

What is one reason perfectly competitive firms wish to be ever more efficient?

Long-run economic profit does not exist for fixed factors like land because

In the long run,competitive firms MUST be profit maximizers because if they do not maximize profits,

Does a competitive long-run equilibrium require cost-minimization?

If a firm is in a perfectly competitive world but decides to charge a higher price than its competitors,

Even if two competitive firms in the same market have different production technologies,they will each earn long-run zero profits.Why?