Multiple choice problems related to Supply curve downward sloping demand curve, and Implicit cost.

1. Suppose there is an rise in demand in a perfectly competitive marketplace which was initially in long-run equilibrium. Which of the following statements is false?

a) In the short run, profits will be lower than normal.

b) Consumers have shown that they now consider the good to be more valuable.

c) Over time, the market supply curve will shift right.

d) Resources from other industries will be attracted into the market.

2. Perfectly competitive firms are said to be "small." Which of the following best describes this smallness?

a) The individual firm is unable to affect market price through its output decisions.

b) The individual firm faces a downward-sloping demand curve.

c) The individual firm must have fewer than 10 employees.

d) The individual firm has assets of less than $2 million.

3. In order to maximize its profits, a price-taking firm should produce the level of output at which:

a) marginal revenue = marginal cost.

b) average revenue = average cost.

c) variable revenue = variable cost.

d) total revenue = total cost.

4. A firm encounters its "shutdown point" when:

a) average fixed cost equals price at the profit-maximizing level of output.

b) average variable cost equals price at the profit-maximizing level of output.

c) average total cost equals price at the profit-maximizing level of output.

d) marginal cost equals price at the profit-maximizing level of output.

5. When price is less than average variable cost at the profit-maximizing level of output, a firm should:

a) shutdown, because it cannot even cover all of its variable costs let alone its fixed costs if it stays in business.

b) shutdown, because it will lose nothing in that case.

c) continue to produce the level of output at which marginal revenue equals marginal cost if it is operating in the long run.

d) continue to produce the level of output at which marginal revenue equals marginal cost if it is operating in the short run.

6. Widgets R Us, which is a price-taking firm, is currently producing 250 units of output. The market price is $3 per unit, the marginal cost of the 250th unit is $2.75, average total cost is $3.50 per unit, and average variable cost is $2.50 per unit. Illustrate what advice should you give Widgets R Us?

a) Shut down to minimize losses.

b) Increase output to reduce losses.

c) Decrease output to 200 units.

d) Continue to produce 250 units in the short run.

7. When a perfectly competitive firm is earning zero economic profit:

a) its total revenues equal its total explicit costs.

b) the firm's implicit costs equal $0.

c) its total revenues equal its total implicit costs.

d) the firm is earning what it could earn in its next best alternative.

8. Assume there is a decrease in the market demand for a good sold by price-taking firms that are initially producing the profit-maximizing level of output. How will the market adjust over time?

a) Firms will enter the market, causing price to fall until positive profits are eliminated.

b) Firms will exit the market, causing price to fall until positive profits are eliminated.

c) Firms will exit the market, causing price to rise until losses are eliminated.

d) Firms will enter the market, causing price to rise until losses are eliminated.

9. If farmers operating in the competitive wheat industry are incurring losses, and are not kept in business with government subsidies, which of the following will result?

a) Resources will be reallocated out of the wheat industry into more productive uses.

b) The supply of wheat will fall to near zero and the U.S. will become dependent on foreign suppliers of food.

c) Price and quantity produced will both increase in the long run.

d) Farmers will run economic losses indefinitely, if they are rational.

10. Industry X, which is perfectly competitive, is in long-run equilibrium. Assume a new law is passed that requires employers in industry X to provide health insurance to previously uninsured employees. As a result of this new requirement we would expect to observe:

a) a decrease in price and an increase in total output in industry X.

b) a decrease in price and total output in industry X.

c) an increase in price and total output in industry X.

d) an increase in price and a decrease in total output in industry X.