TEST I: MULTIPLE CHOICE. Below are given questions along with their multiple choices’ answers.
Read the statement carefully and shade the letter that represents your best answers on the ANSWER
SHEET. (Erasures are not allowed)
1. Preferences have just shifted away from beef and into mutton. If you are a sheep rancher, the best
profit-maximizing strategy is to
A) shut down.
B) produce as much as possible to earn profits in the short run.
C) shift some of your ranching capacity into cattle raising.
D) cut prices to increase market share.
2. The condition P = MC implies that
A) there is no consumer surplus for any consumer.
B) an individual who values the product at more than P will receive consumer surplus.
C) an individual who values the product at less than P will receive consumer surplus.
D) the amount of consumer surplus is infinite.
3. Under perfect competition, the efficient level of output is produced because
A) government regulates the output level that must be produced.
B) firms earn only a normal profit in the long run.
C) firms can earn an economic profit in the long run.
D) price equals marginal cost.
4. Under perfect competition, the person that ends up with the marginal unit is the person that values it
A) at an amount above its price.
B) at an amount lower than its price.
C) exactly at its price.
D) above its marginal cost.
5. ________ reflects household willingness to pay, and ________ reflects the opportunity cost of the
resources needed to produce a good.
A) Marginal utility; price
B) Price; marginal cost
C) Price; average total cost
D) Demand; price
6. Society will produce the efficient mix of output if all firms equate
A) price and marginal cost.
B) price and average total cost.
C) marginal cost and average total cost.
D) price and marginal revenue.
7. A household ________ as long as the utility from the good's consumption is less than its market price.
A) will only buy a good
B) will always buy a good
C) should never buy a good
D) should never sell a good
8. ________ is the cost of using resources to produce another unit of a good.
A) Marginal revenue
B) Marginal cost
C) Price
D) Total cost
9. ________ is a good measure of what society gives up by using resources to produce more of a good or
service.
A) Marginal revenue
B) Marginal revenue product
C) Marginal cost
D) Total cost of production
10. Under perfect competition,
A) resources are allocated among firms equitably.
B) final products are distributed among households equitably.
C) the system produces the goods and services consumers want.
D) All of the above are correct.
11. Which of the following industries is most likely to be monopolistically competitive?
A) The automobile industry
B) The steel industry
C) The car repair industry
D) The electrical generating industry
12. Which of the following is a criticism of the theory of monopolistic competition?
A) It is difficult to define a monopolistically competitive market and to determine the firms and products
that comprise it.
B) When product differentiation is slight, each firm's demand curve is nearly horizontal so the perfectly
competitive solution provides an adequate approximation to the monopolistically competitive solution.
C) When there are strong brand preferences and few producers of many differentiated products, or when
there are many producers but only a few compete as rivals for any given consumer, then the oligopoly
solution provides an adequate approximation to the monopolistically competitive solution.
D) All of the above are correct.
13. Product variation refers to
A) an activity undertaken by a firm to increase demand.
B) a problem with quality control that tends to decrease demand.
C) an activity undertaken by a firm to make demand more price inelastic.
D) None of the above is correct.
14. If an imperfectly competitive firm is producing a level of output where marginal cost is equal to
marginal revenue, marginal revenue is below average variable cost, and price is equal to average total
cost, then the firm is
A) in long-run equilibrium.
B) in short-run equilibrium.
C) minimizing short-run average total cost.
D) breaking even.
15. The demand curve faced by a monopolistically competitive firm is
A) perfectly elastic.
B) elastic.
C) unit elastic.
D) inelastic.
16. The long-run supply curve of a perfectly competitive firm
A) is equal to that portion of the long-run marginal cost curve that is above the relevant short-run average
variable cost curve.
B) is equal to that portion of the long-run marginal cost curve that is above the relevant short-run average
total cost curve.
C) is equal to that portion of the long-run average total cost curve that is above the relevant short-run
average variable cost curve.
D) None of the above is correct.
17. The short-run supply curve of a perfectly competitive firm
A) is equal to that portion of the short-run marginal cost curve that is above the average variable cost
curve.
B) is equal to that portion of the short-run marginal cost curve that is above the average total cost curve.
C) is equal to that portion of the short-run average total cost curve that is above the average variable cost
curve.
D) None of the above is correct.
18. When a perfectly competitive industry is in long-run equilibrium, all firms in the industry
A) earns zero economic profits.
B) produces a level of output where short-run marginal cost is equal to short-run average total cost.
C) produces a level of output where long-run marginal cost is equal to long-run average cost.
D) All of the above are correct.
19. A perfectly competitive firm should reduce output or shut down in the short run if market price is
equal to marginal cost and price is
A) greater than average total cost.
B) less than average total cost.
C) greater than average variable cost.
D) less than average variable cost.
20. Which of the following markets comes close to satisfying the assumptions of a perfectly competitive
market structure?
A) The stock market.
B) The market for agricultural commodities such as wheat or corn.
C) The market for petroleum and natural gas.
D) All of the above come close to satisfying the assumptions of perfect competition.
TEST II. TRUE or FALSE. Shade letter A if the statement is correct, shade letter B if it says otherwise.
(Erasures are not allowed)
21. Market structure refers to the competitive environment in which the buyers and sellers of a product
operate. A
22. If a market is perfectly competitive, then the market demand curve must be infinitely price elastic. B
23. If the firms in an industry are price takers, then every firm in the industry faces a horizontal demand
curve. A
24. Under perfect competition, changes in market supply do not affect market price. B
25. Commodities that sell for the same price are referred to as homogeneous. B
26. Most commodities are traded on perfectly competitive markets. B
27. Product price on a competitive market is determined by the intersection of the market demand curve
with the market supply curve. A
28. If a firm in a perfectly competitive industry charges a higher price than that charged by other firms in
the industry it will be unable to sell any of its output. A
29. The demand curve faced by a perfectly competitive firm is horizontal. A
30. A perfectly competitive firm's demand curve is above its marginal revenue curve. B
31. The only choice available to a perfectly competitive firm that is producing efficiently is what price to
charge in order to maximize profits. B
32. Every profit-maximizing firm should produce a level of output where marginal revenue is equal to
marginal cost. A
33. A perfectly competitive firm maximizes profit by producing a level of output where marginal cost is
equal to price. A
34. If a perfectly competitive firm is producing a level of output where its marginal cost is greater than
market price, it should raise its price. B
35. If a perfectly competitive firm is producing a level of output where price is equal to marginal cost and
greater than average variable cost, then it should cease production in the short run. B
36. The shut-down pointof a perfectly competitive firm is at the minimum point on its short-run average
variable cost curve. A
37. The supply curve of a perfectly competitive firm is identical to the portion of its marginal cost curve
that is above its average total cost curve. B
38. If a perfectly competitive firm is in long-run equilibrium, then it is earning an economic profit of zero.
A
39. If a perfectly competitive firm is in long-run equilibrium, then market price is equal to short-run
marginal cost, short-run average total cost, long-run marginal cost, and long-run average total cost. A
40. If firms in a perfectly competitive industry are earning economic profits greater than zero, then more
firms will enter the industry. A