Optional practice questions (Chapter 8)
1) A horizontal demand curve for a firm implies that
A) the products of that firm are very different from other firms' products.
B) the firm is selling in a competitive market.
C) the market the firm is operating in is not competitive.
D) the firm is a monopoly.
2) A special license is required to operate a taxi in many cities. The number of licenses is restricted. More drivers want
licenses than are issued. This describes a non-perfectly competitive market because
A) firms cannot freely enter and exit the market.
B) the government generates revenue from the licenses.
C) taxi services are very different.
D) transaction costs are high.
3) A small business owner earns $40,000 in revenue annually. The explicit annual costs equal $10,000. The owner could
work for someone else and earn $20,000 annually. The owner's business profit is ________ and the economic profit is
________.
A) $10,000, $10,000
B) $30,000, $10,000
C) $30,000, -$10,000
D) $10,000, -$10,000
4) If a competitive firm maximizes short-run profits by producing some quantity of output, which of the following must
be true at that level of output?
A) p ≥ AC
B) AC = MC
C) p = MC
D) All of the above
5) If a profit-maximizing firm finds that, at its current level of production, MR < MC, it will
A) operate at a loss.
B) decrease output.
C) increase output.
D) shut down.
6) Suppose TC = 10 + (0.1 ∗q2) and MC=0.2q. If p = 10, the firm's profits will be
A) 260.
B) 240.
C) 250.
D) -10 because the firm will shut down.
7) In deciding whether to operate in the short run, the firm must be concerned with the relationship between price of the
output and
A) total fixed cost.
B) average variable cost.
C) total cost.
D) the number of buyers.
8) The above figure shows the cost curves for a typical firm in a competitive market. If the market price is $10 per unit, the
firm will earn profits of
A) 0.
B) 90.
C) 120.
D) 300.
9) The above figure shows the cost curves for a typical firm in a competitive market. If there are 200 identical firms,
estimate the market quantity supplied when p = 4.
A) 35.
B) 700.
C) 800.
D) 0.
10) In the long run, profits will equal zero in a competitive market because of
A) the availability of information.
B) identical products being produced by all firms.
C) constant returns to scale.
D) free entry and exit.
11) Which of the following statements is (are) TRUE about competitive firms in the long run?
A) economic profit = 0
B) p = AC
C) p = MC
D) All of the above.
12) Long-run market supply curves are downward sloping if
A) input prices fall as the industry expands.
B) firms are identical.
C) the number of firms is restricted in the long run.
D) All of the above.
13) Suppose that for each firm in the competitive market for potatoes, long-run average cost is minimized at $0.50 per
pound when 200 pounds are grown. The market demand for potatoes is Q = 5,000/p. If all firms are identical, then how
many firms will this industry sustain in the long run?
A) 25
B) 50
C) 100
D) There is not enough information to answer.
14) Suppose market demand is Q = 300 - 5p. If all firms have LRAC = 20 - 2q + 2
identical firms will there be when this industry is in long-run equilibrium?
and LRMC=20-3q+4q2, how many
15) Suppose there are 1000 identical wheat farmers. For each, TC = 10 + q2 and MC=2q. Market demand is Q = 600,000 100p. Derive the short-run equilibrium Q, q, and p. Does the typical firm earn a short-run profit?