Mercer Practice Test 2 - Version 1 PDF

Student name:\_\_\_\_\_\_\_\_\_\_ **TRUE/FALSE - Write \'T\' if the statement is true and \'F\' if the statement is false.** 1. At zero units of output, a firm\'s variable costs are zero. - true - false 2. Average fixed costs diminish continuously as output increases. - true - false...

Student name:\_\_\_\_\_\_\_\_\_\_ **TRUE/FALSE - Write \'T\' if the statement is true and \'F\' if the statement is false.** 1. At zero units of output, a firm\'s variable costs are zero. - true - false 2. Average fixed costs diminish continuously as output increases. - true - false 3. Economic profit is found by subtracting accounting costs from total revenue. - true - false 4. A firm\'s economic profit is usually higher than its accounting profit. - true - false 5. A firm\'s economic profit cannot be higher than its accounting profit. - true - false 6. Normal profit is an implicit cost. - true - false 7. Economic profits are usually larger than accounting profits. - true - false 8. If a firm produces zero output in the short run, then its profits will also be zero. - true - false 9. In the long run, a firm can increase its output quantity, but it will be limited by the size of its existing production plant. - true - false 10. When diminishing marginal returns starts occurring, the addition of successive units of a variable resource to a fixed resource will cause the firm\'s production to diminish. - true - false 11. Over the range of positive, but diminishing, marginal returns for an input, the total product curve increases at a decreasing rate. - true - false 12. If the average product of labor equals 4 at all levels of output, the marginal product of labor is also equal to 4 at all levels of output. - true - false 13. When the total product is at its maximum level, the marginal product is zero. - true - false 14. When total product is increasing at a decreasing rate, marginal product is positive, but falling. - true - false 15. The short-run marginal-cost curve is upward-sloping because of the law of diminishing marginal returns. - true - false 16. Marginal product is highest where marginal cost is lowest. - true - false 17. When a firm increases its output, its average fixed costs will stay constant. - true - false 18. When average costs are increasing, marginal costs are greater than average costs. - true - false 19. If a firm increases all its inputs by 10 percent and its output increases by 15 percent, the firm is experiencing diseconomies of scale. - true - false 20. Oligopoly firms may produce either standardized or differentiated products. - true - false 21. The term *imperfect competition* refers to every market structure besides pure competition. - true - false 22. Firms in a monopolistically competitive industry have no reason to engage in nonprice competition because their products are uniquely different from other sellers in the market. - true - false 23. A key distinguishing feature between purely competitive and monopolistically competitive industries is whether products are standardized or differentiated. - true - false 24. Monopolistically competitive industries are more like monopoly industries than they are purely competitive industries. - true - false 25. In maximizing profit, a firm will always produce that output where total revenues are at a maximum. - true - false 26. The short-run supply curve slopes upward because producers must be compensated for rising marginal costs. - true - false **MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question.** 27. Economic cost can best be defined as A. any contractual obligation that results in a flow of money expenditures from an enterprise to resource suppliers. B. any contractual obligation to labor or material suppliers. C. a payment that must be made to obtain and retain the services of a resource. D. all costs exclusive of payments to fixed factors of production. 28. Economic cost can best be defined as E. any contractual obligation that results in a flow of money expenditures from an enterprise to resource suppliers. F. those payments for resources that involve an obvious cash transaction. G. the income the firm must provide to resource suppliers to attract resources from alternative uses. H. the opportunity cost of using a resource already owned by the firm. 29. Which of the following is an example of an economic cost? I. wage payments to workers J. the opportunity cost of the building owned by the firm that could be rented out K. the income the entrepreneur must receive to continue to operate the business L. All of these are economic costs. 30. Which of the following is not an example of an economic cost? M. wage payments to workers N. the sales of the firm O. the income the entrepreneur must receive to continue to operate the business P. All of these are economic costs. 31. Which of the following is an example of an opportunity cost to a firm? Q. All of these are opportunity costs. R. the income the firm could have earned by leasing out its capital to another firm S. the payment the entrepreneur must receive to continue to operate the business T. payments to providers of raw materials 32. An explicit cost is U. omitted when accounting profits are calculated. V. a money payment made for resources not owned by the firm itself. W. an implicit cost to the resource owner who receives that payment. X. always in excess of a resource\'s opportunity cost. 33. Which of the following definitions is *correct*? Y. Accounting profit + economic profit = normal profit. Z. Economic profit − accounting profit = explicit costs. A. Economic profit = accounting profit − implicit costs. B. Economic profit − implicit costs = accounting profits. 34. Which of the following statements is *correct*? C. A firm\'s economic profit cannot exceed its accounting profit. D. A firm\'s accounting profit cannot exceed its economic profit. E. A firm\'s economic profit cannot exceed its normal profit. F. A firm\'s accounting profit cannot exceed its normal profit. 35. To economists, the main difference between the short run and the long run is that G. the law of diminishing returns applies in the long run, but not in the short run. H. in the long run all resources are variable, while in the short run *at least* one resource is fixed. I. fixed costs are more important to decision making in the long run than they are in the short run. J. in the short run all resources are fixed, while in the long run all resources are variable. 36. Suppose it takes a particular company one year to change all of its inputs, including its plant capacity. If, over a two-year period, the firm makes no changes to its plant capacity K. the firm is operating in the short run, but not the long run. L. it is operating in the long run as long as it changed at least one input. M. it is still operating in the long run because the period of time is long enough for the firm to make those changes. N. it is operating in the long run as long as it changed its level of output. 37. The amount of calendar time associated with the long run O. is less than that associated with the immediate market period. P. varies from industry to industry. Q. is the same for all firms. R. is, by definition, any length of time greater than one year. 38. The long run is characterized by S. the relevance of the law of diminishing returns. T. at least one fixed input. U. insufficient time for firms to enter or leave the industry. V. the ability of the firm to change its plant size. 39. Marginal product is defined as the W. change in total revenue divided by change in total product. X. change in total product divided by change in labor input. Y. change in total cost divided by change in labor input. Z. total product divided by units of labor. 40. Average product is defined as the A. total revenue divided by total product. B. change in total product divided by change in labor input. C. change in total cost divided by change in labor input. D. total product divided by units of labor. 41. Dividing total product by the units of labor is a measure of E. labor productivity. F. average product. G. output per unit of labor. H. all of these. 42. Use the following data to answer the question. --------------------- ------------------- **Inputs of Labor** **Total Product** 0 0 1 10 2 22 3 36 4 48 5 58 6 66 7 63 --------------------- ------------------- I. second J. third K. fourth L. seventh 43. Use the following data to answer the question. --------------------- ------------------- **Inputs of Labor** **Total Product** 0 0 1 10 2 22 3 36 4 48 5 58 6 66 7 63 --------------------- ------------------- M. third N. fourth O. sixth P. seventh 44. Use the following data to answer the question. --------------------- ------------------- **Inputs of Labor** **Total Product** 0 0 1 20 2 46 3 76 4 110 5 142 6 166 7 180 --------------------- ------------------- Q. second R. third S. fourth T. fifth 45. Use the following data to answer the question. --------------------- ------------------- **Inputs of Labor** **Total Product** 0 0 1 20 2 46 3 76 4 110 5 142 6 166 7 180 --------------------- ------------------- U. four V. five W. six X. seven 46. Use the following data to answer the question. --------------------- ------------------- **Inputs of Labor** **Total Product** 0 0 1 23 2 85 3 150 4 220 5 325 6 380 7 400 --------------------- ------------------- Y. four Z. seven A. five B. six 47. Answer the question on the basis of the following cost data. ------------ ---------------- **Output** **Total Cost** 0 \$ 24 1 33 2 41 3 48 4 54 5 61 6 69 ------------ ---------------- C. \$12. D. \$8. E. \$24. F. \$45. 48. Answer the question on the basis of the following cost data. ------------ ---------------- **Output** **Total Cost** 0 \$ 24 1 33 2 41 3 48 4 54 5 61 6 69 ------------ ---------------- G. \$7. H. \$24. I. \$16. J. \$8. 49. Answer the question on the basis of the following cost data. ------------ ---------------- **Output** **Total Cost** 0 \$ 40 1 50 2 58 3 63 4 68 5 75 6 90 7 112 ------------ ---------------- K. \$7. L. \$15. M. \$35. N. \$90. 50. Answer the question on the basis of the following cost data. ------------ ---------------- **Output** **Total Cost** 0 \$ 50 1 60 2 68 3 73 4 88 5 100 6 100 7 122 ------------ ---------------- O. \$45. P. \$90. Q. \$25. R. \$12. 51. A natural monopoly exists when S. unit costs are minimized by having one firm produce an industry\'s entire output. T. several formerly competing producers merge to become the only firm in an industry. U. short-run average total cost curves are tangent to long-run average total-cost curves. V. minimum efficient scale is attained at a small level of output. 52. Economists would describe the U.S. automobile industry as W. purely competitive. X. an oligopoly. Y. monopolistically competitive. Z. a pure monopoly. 53. Economists would describe the U.S. market for patented pharmaceuticals as A. purely competitive. B. a pure monopoly. C. monopolistically competitive. D. an oligopoly. 54. Economists would describe the U.S. market for automobiles as E. a pure monopoly. F. an oligopoly. G. monopolistically competitive. H. purely competitive. 55. In which of the following market structures is there clear-cut mutual interdependence with respect to price-output policies? I. pure monopoly J. oligopoly K. monopolistic competition L. pure competition 56. In which of the following market structures is there clear-cut mutual interdependence with respect to pricing? M. monopolistic competition N. oligopoly O. pure competition P. pure monopoly 57. Which of the following industries most closely approximates pure competition? Q. agriculture R. farm implements S. clothing T. steel 58. Which of the following industries most closely approximates pure competition? U. financial markets V. retail trade W. wireless service providers X. space travel 59. Economists use the term *imperfect competition* to describe Y. all industries that produce standardized products. Z. any industry in which there is no nonprice competition. A. a pure monopoly only. B. those markets that are not purely competitive. 60. In which of the following industry structures is the entry of new firms the most difficult? C. pure monopoly D. oligopoly E. monopolistic competition F. pure competition 61. An industry comprising 40 firms, none of which has more than 3 percent of the total market for a differentiated product, is an example of G. monopolistic competition. H. oligopoly. I. pure monopoly. J. pure competition. 62. An industry comprising 40 firms, each with about 2--3 percent of the total market for a differentiated product, is an example of K. monopolistic competition. L. oligopoly. M. pure monopoly. N. pure competition. 63. An industry comprising 100 firms, each with about 1 percent of the total market for a standardized product, is an example of O. pure competition. P. oligopoly. Q. monopolistic competition. R. pure monopoly. 64. An industry comprising four firms, each with about 25 percent of the total market for a product, is an example of S. monopolistic competition. T. oligopoly. U. pure monopoly. V. pure competition. 65. An industry comprising a very large number of sellers producing a standardized product is known as W. monopolistic competition. X. oligopoly. Y. pure monopoly. Z. pure competition. 66. An industry comprising a small number of firms, each of which considers the potential reactions of its rivals in making price-output decisions, is called A. monopolistic competition. B. oligopoly. C. pure monopoly. D. pure competition. 67. Firms seek to maximize E. per-unit profit. F. total revenue. G. total profit. H. market share. 68. A competitive firm in the short-run can determine the profit-maximizing (or loss-minimizing) output by equating I. price and average total cost. J. price and average fixed cost. K. marginal revenue and marginal cost. L. price and marginal revenue. 69. In the short-run, a purely competitive firm that seeks to maximize profit will produce M. where the demand and the ATC curves intersect. N. where total revenue exceeds total-cost by the maximum amount. O. that output at which economic profits are zero. P. at any point where the total revenue and total-cost curves intersect. 70. ch10\_q34\_q35\_png.ext\ Refer to the short-run data in the accompanying graph. The profit-maximizing output for this firm is Q. above 440 units. R. 440 units. S. 320 units. T. 100 units. 71. \ Refer to the short-run data in the accompanying graph. Which of the following is correct? U. This firm will maximize its profit at 440 units of output. V. Any level of output between 100 and 440 units will yield an economic profit. W. This firm\'s marginal revenue rises with output. X. Any level of output less than 100 units or greater than 440 units is profitable. 72. A competitive firm will maximize profits at that output at which Y. total revenue exceeds total cost by the greatest amount. Z. total revenue and total cost are equal. A. price exceeds average total cost by the largest amount. B. the difference between marginal revenue and price is at a maximum. 73. ch10\_q37\_to\_q42\_png.ext\ Curve (1) in the diagram is a purely competitive firm\'s C. total-cost curve. D. total revenue curve. E. marginal revenue curve. F. total economic profit curve. 74. \ Curve (2) in the diagram is a purely competitive firm\'s G. total-cost curve. H. total revenue curve. I. marginal revenue curve. J. total economic profit curve. 75. ch10\_q37\_to\_q42\_png.ext\ Curve (3) in the diagram is a purely competitive firm\'s K. total-cost curve. L. total revenue curve. M. marginal revenue curve. N. total economic profit curve. 76. \ Curve (4) in the diagram is a purely competitive firm\'s O. total-cost curve. P. total revenue curve. Q. marginal revenue curve. R. total profit curve. 77. ch10\_q37\_to\_q42\_png.ext\ Refer to the diagram. Other things equal, an increase of product price would be shown as S. an increase in the steepness of curve (3), an upward shift in curve (2), and an upward shift in curve (1). T. a decrease in the steepness of curve (3), a downward shift in curve (2), and an upward shift in curve (1). U. a downward shift in curve (4) and an upward shift in curve (1), with no changes in curves (2) and (3). V. an upward shift in curve (2) only. 78. \ The firm represented by the diagram would maximize its profit where W. curves (2) and (1) intersect. X. curve (1) touches the horizontal axis for the second time. Y. the vertical distance between curves (3) and (4) is the greatest. Z. curves (3) and (4) intersect. 79. A firm reaches a *break-even point* (normal profit position) where A. marginal revenue cuts the horizontal axis. B. marginal cost intersects the average variable-cost curve. C. total revenue equals total variable-cost. D. total revenue and total cost are equal. 80. When a firm is maximizing profit, it will necessarily be E. maximizing profit per unit of output. F. maximizing the difference between total revenue and total cost. G. minimizing total cost. H. maximizing total revenue. 81. In the short-run, the individual competitive firm\'s supply curve is that segment of the I. average variable cost curve lying below the marginal-cost curve. J. marginal-cost curve lying above the average variable cost curve. K. marginal revenue curve lying below the demand curve. L. marginal-cost curve lying between the average total cost and average variable cost curves. 82. Which of the following is *not* a valid generalization concerning the relationship between price and costs for a purely competitive seller in the short run? M. Price must be at least equal to average total cost. N. Price times quantity produced must be equal to or greater than total variable cost for some level of output or the firm will close down in the short-run. O. Price may be equal to, greater than, or less than average total cost. P. Price must be equal to or greater than minimum average variable cost for the firm to continue producing. 83. A purely competitive firm\'s short-run supply curve is Q. perfectly elastic at the minimum average total-cost. R. upsloping and equal to the portion of the marginal cost curve that lies above the average variable cost curve. S. upsloping and equal to the portion of the marginal cost curve that lies above the average total-cost curve. T. upsloping only when the industry has constant costs. 84. The lowest point on a purely competitive firm\'s short-run supply curve corresponds to U. the minimum point on its ATC curve. V. the minimum point on its AVC curve. W. the minimum point on its AFC curve. X. the minimum point on its MC curve. 85. ch10\_q63\_to\_q66\_png.ext\ Refer to the diagram for a purely competitive producer. The lowest price at which the firm should produce (as opposed to shutting down) is Y. *P*~1~. Z. *P*~2~. A. *P*~3~. B. *P*~4~. 86. \ Refer to the diagram for a purely competitive producer. The firm\'s short-run supply curve is C. the *abcd* segment and above on the MC curve. D. the *bcd* segment and above on the MC curve. E. the *cd* segment and above on the MC curve. F. not shown. 87. The short-run supply curve of a purely competitive producer is based primarily on its G. AVC curve. H. ATC curve. I. AFC curve. J. MC curve. 88. ------------------- ------------------------ --------------------------- ------------------------ ------------------- **Total Product** **Average Fixed Cost** **Average Variable Cost** **Average Total Cost** **Marginal Cost** 1 \$ 100.00 \$ 17.00 \$ 117.00 \$ 17 2 50.00 16.00 66.00 15 3 33.33 15.00 48.33 13 4 25.00 14.25 39.25 12 5 20.00 14.00 34.00 13 6 16.67 14.00 30.67 14 7 14.29 15.71 30.00 26 8 12.50 17.50 30.00 30 9 11.11 19.44 30.55 35 10 10.00 21.60 31.60 41 11 9.09 24.00 33.09 48 12 8.33 26.67 35.00 56 ------------------- ------------------------ --------------------------- ------------------------ ------------------- K. ----------- ---------- **Price** **Q~s~** \$ 50 12 42 10 36 8 32 8 20 6 13 0 ----------- ---------- L. ----------- ---------- **Price** **Q~s~** \$ 50 12 42 11 36 9 32 8 20 6 13 5 ----------- ---------- M. ----------- ---------- **Price** **Q~s~** \$ 50 11 42 10 36 9 32 8 20 6 13 0 ----------- ---------- N. ----------- ---------- **Price** **Q~s~** \$ 50 11 42 10 36 9 32 8 20 6 13 5 ----------- ---------- 89. ------------------- ------------------------ --------------------------- ------------------------ ------------------- **Total Product** **Average Fixed Cost** **Average Variable Cost** **Average Total Cost** **Marginal Cost** 1 \$ 100.00 \$ 17.00 \$ 117.00 \$ 17 2 50.00 16.00 66.00 15 3 33.33 15.00 48.33 13 4 25.00 14.25 39.25 12 5 20.00 14.00 34.00 13 6 16.67 14.00 30.67 14 7 14.29 15.71 30.00 26 8 12.50 17.50 30.00 30 9 11.11 19.44 30.55 35 10 10.00 21.60 31.60 41 11 9.09 24.00 33.09 48 12 8.33 26.67 35.00 56 ------------------- ------------------------ --------------------------- ------------------------ ------------------- ----------- ----------------------- **Price** **Quantity Demanded** \$ 50 3,000 42 6,000 36 9,000 32 11,000 20 14,000 13 19,500 ----------- ----------------------- O. \$32. P. \$42. Q. \$36. R. \$20. 90. ------------------- ------------------------ --------------------------- ------------------------ ------------------- **Total Product** **Average Fixed Cost** **Average Variable Cost** **Average Total Cost** **Marginal Cost** 1 \$ 100.00 \$ 17.00 \$ 117.00 \$ 17 2 50.00 16.00 66.00 15 3 33.33 15.00 48.33 13 4 25.00 14.25 39.25 12 5 20.00 14.00 34.00 13 6 16.67 14.00 30.67 14 7 14.29 15.71 30.00 26 8 12.50 17.50 30.00 30 9 11.11 19.44 30.55 35 10 10.00 21.60 31.60 41 11 9.09 24.00 33.09 48 12 8.33 26.67 35.00 56 ------------------- ------------------------ --------------------------- ------------------------ ------------------- ----------- ----------------------- **Price** **Quantity Demanded** \$ 50 11,000 42 14,000 36 17,500 32 21,000 20 26,000 13 32,000 ----------- ----------------------- S. \$50. T. \$32. U. \$36. V. \$42. 91. ch10\_q82\_to\_q85\_png.ext\ In the provided diagram, the short-run supply curve for this firm is the W. entire MC curve. X. segment of the AVC curve lying to the right of the MC curve. Y. segment of the MC curve lying to the right of output level *k*. Z. segment of the MC curve lying to the right of output level *h*. 92. The short-run supply curve for a purely competitive industry can be found by A. multiplying the AVC curve of the representative firm by the number of firms in the industry. B. adding horizontally the AVC curves of all firms. C. summing horizontally the segments of the MC curves lying above the AVC curve for all firms. D. adding horizontally the immediate market period supply curves of each firm. 93. \ Refer to the accompanying diagram. The firm\'s supply curve is the segment of the E. MC curve above its intersection with the AVC curve. F. MC curve above its intersection with the ATC curve. G. AVC curve above its intersection with the MC curve. H. ATC curve above its intersection with the MC curve. 94. In a purely competitive industry, I. there will be no economic profits in either the short run or the long run. J. economic profits may persist in the long run if consumer demand is strong and stable. K. there may be economic profits in the short run but not in the long run. L. there may be economic profits in the long run but not in the short run. 95. Balin's Burger Barn operates in a perfectly competitive market. Balin's is currently earning economic profits of \$20,000 per year. Based on this information, we can conclude that M. Balin's profits will discourage new firms from entering. N. Balin's will increase its market price over the coming months. O. Balin's is operating in the short-run, but not the long-run. P. Balin's is operating in the long run. 96. Ahmed's Auto Shop operates in a perfectly competitive market. Ahmed is currently earning accounting profits of \$30,000 per year. Based on this information, we can conclude Q. Ahmed's profits will discourage new firms from entering the market. R. Ahmed's profits will encourage new firms to enter the market. S. Ahmed is operating in the short run, but not the long run. T. nothing about whether Ahmed should continue producing in the long run. 97. Maria's Mattress Mart operates in a perfectly competitive market. Maria is currently experiencing economic losses of \$5,000 per year. Based on this information, we can conclude U. Maria's losses will discourage new firms from entering the market. V. Maria's losses will encourage new firms to enter the market. W. Maria is operating in long-run equilibrium. X. Maria should raise her prices to become profitable. 98. Suppose a firm in a purely competitive market discovers that the price of its product is above its minimum AVC point but everywhere below ATC. Given this, the firm Y. minimizes losses by producing at the minimum point of its AVC curve. Z. maximizes profits by producing where MR = ATC. A. should close down immediately. B. should continue producing in the short-run but leave the industry in the long-run if the situation persists. 99. Karlee's Kreations sells handbags in a purely competitive market. Karlee's is currently breaking even. Based on this information, we can conclude that Karlee's Kreations C. must be operating in long-run equilibrium. D. will leave this market in the long-run because no economic profits are being earned. E. will continue operating in this market only if the market price rises. F. may be operating in either short-run or long-run equilibrium. 100. Which of the following is true concerning purely competitive industries? G. There will be economic losses in the long run because of cut-throat competition. H. Economic profits will persist in the long run if consumer demand is strong and stable. I. In the short-run, firms may incur economic losses or earn economic profits, but in the long-run they earn normal profits. J. There are economic profits in the long run but not in the short run. 101. If a purely competitive firm is producing at the MR = MC output level and earning an economic profit, then K. the selling price for this firm is above the market equilibrium price. L. new firms will enter this market. M. some existing firms in this market will leave. N. there must be price fixing by the industry\'s firms. 102. If a purely competitive firm is producing at the MR = MC output level and breaking even, then O. the number of firms in the industry should remain stable. P. new firms will enter this market. Q. some existing firms in this market will leave. R. there must be price fixing by the industry\'s firms. 103. If a purely competitive firm is producing at the MR = MC output level and experiencing an economic loss, then S. the selling price for this firm is below the short-run market equilibrium price. T. new firms will enter this market. U. some existing firms in this market will leave. V. the industry as a whole should shut down. 104. Augi's Art Shack sells art supplies in a perfectly competitive market. The firm is currently realizing economic profits of \$25,000 in the short-run. In the long-run we would expect Augi's to W. realize economic profits greater than \$0 but less than \$25,000. X. realize economic profits of \$0. Y. realize economic losses greater than \$0 but smaller than \$25,000. Z. shut down. 105. Hermione's Hair Salon sells hair-care products in a perfectly competitive market. The firm is currently realizing economic losses of \$8,000 in the short-run. In the long-run we would expect Hermione's to A. realize positive economic profits. B. attract new firms into the market. C. continue to produce even if the losses persist. D. exit the market if these losses persist. 106. Hermione\'s Hair Salon sells haircare products in a perfectly competitive market. The firm is currently realizing economic profits of \$5,000 in the short run. In the long run we would expect Hermione\'s to E. realize positive economic profits. F. continue to produce even if the losses persist. G. exit the market. H. attract new firms to the market. 107. Long-run adjustments in purely competitive markets primarily take the form of I. variations in the cost curves of different firms in the market. J. entry or exit of firms in the market. K. evolution of the market from a constant-cost to an increasing-cost industry. L. product differentiation. 108. Long-run competitive equilibrium M. is realized only in constant-cost industries. N. will never change once it is realized. O. is not economically efficient. P. results in zero economic profits. 109. Suppose that Betty's Beads is a typical firm operating in a perfectly competitive market. Currently Betty's MR = \$15, MC = \$12, ATC = \$10, and AVC = \$8. Based on this information, we can conclude that Q. Betty's is in long-run equilibrium. R. Betty's experience will encourage new firms to enter the market. S. Betty's experience will encourage some existing firms in this market to leave. T. Betty's experience will discourage firms from entering the market. 110. Suppose that Betty\'s Beads is a typical firm operating in a perfectly competitive market. Currently Betty\'s MR = \$18, MC = \$15, ATC = \$20, and AVC = \$12. Based on this information, we can conclude that U. Betty\'s is in long-run equilibrium. V. Betty\'s is suffering short-run economic losses that could be reduced by reducing output and sales. W. Betty\'s is earning short-run economic profits that could be increased by expanding output and sales. X. Betty\'s is suffering short-run economic losses that could be reduced by increasing output and sales. 111. Suppose that Betty's Beads is a typical firm operating in a perfectly competitive market. Currently Betty's MR = \$15, MC = \$12, ATC = \$10, and AVC = \$8. Based on this information, we can conclude that Y. Betty's is in long-run equilibrium. Z. Betty's is maximizing short-run economic profits. A. Betty's experience will encourage some existing firms in this market to leave. B. Betty's is earning short-run economic profits that could be increased by expanding output and sales. 112. Suppose that Betty's Beads is a typical firm operating in a perfectly competitive market. Currently Betty's MR = \$15, MC = \$15, ATC = \$12, and AVC = \$10. Based on this information, we can conclude that C. Betty's is in both short-run and long-run equilibrium. D. Betty's is in short-run equilibrium, but not long-run equilibrium. E. Betty's experience will encourage some existing firms in this market to leave. F. Betty is earning short-run economic profits that could be increased by expanding output and sales. 113. We would expect an industry to expand if firms in that industry are G. earning normal profits. H. earning economic profits. I. breaking even. J. earning accounting profits. 114. We would expect an industry to expand if firms in that industry are K. earning economic profits. L. earning normal profits. M. breaking even. N. earning accounting profits. 115. Which of the following statements is *correct*? O. Economic profits induce firms to enter an industry; losses encourage firms to leave. P. Economic profits induce firms to leave an industry; profits encourage firms to leave. Q. Economic profits and losses have no significant impact on the growth or decline of an industry. R. Normal profits will cause an industry to expand. 116. -------------------------------- ---------------- **Quantity (number of units)** **Total Cost** 100 \$ 100 150 150 200 200 250 250 300 300 -------------------------------- ---------------- S. an industry incapable of reaching long-run equilibrium. T. a constant-cost industry. U. an increasing-cost industry. V. a decreasing-cost industry. 117. -------------------------------- ---------------- **Quantity (number of units)** **Total Cost** 100 \$ 100 200 150 300 200 400 250 500 300 -------------------------------- ---------------- W. an industry incapable of reaching long-run equilibrium. X. a constant-cost industry. Y. an increasing-cost industry. Z. a decreasing-cost industry. 118. -------------------------------- ---------------- **Quantity (number of units)** **Total Cost** 100 \$ 100 200 150 300 200 400 250 500 300 -------------------------------- ---------------- A. an industry incapable of reaching long-run equilibrium. B. a constant-cost industry. C. an increasing-cost industry. D. a decreasing-cost industry. 119. -------------------------------- ---------------- **Quantity (number of units)** **Total Cost** 100 \$ 100 140 150 170 200 190 250 200 300 -------------------------------- ---------------- E. an industry incapable of reaching long-run equilibrium. F. a constant-cost industry. G. an increasing-cost industry. H. a decreasing-cost industry. 120. Which of the following will *not* hold true for a competitive firm in long-run equilibrium? I. *P* equals AFC. J. *P* equals minimum ATC. K. MC equals minimum ATC. L. *P* equals MC. 121. Assume a purely competitive increasing-cost industry is initially in long-run equilibrium, producing 10 million units at a market price of \$5.00. Suppose that an increase in consumer demand occurs. After all economic adjustments have been completed, which output and price combination is most likely to occur? M. 11 units at a price of \$4.75 N. 12 units at a price of \$5.50 O. 9.5 units at a price of \$4.50 P. 9 units at a price of \$5.25 122. Assume a purely competitive increasing-cost industry is initially in long-run equilibrium, producing 15 million units at a market price of \$10.00. Suppose that an increase in consumer demand occurs. After all economic adjustments have been completed, which output and price combination is most likely to occur? Q. 16 units at a price of \$9.75. R. 14 units at a price of \$10.25. S. 17 units at a price of \$10.50. T. 14.5 units at a price of 9.50. 123. A purely competitive firm U. must earn a normal profit in the short-run. V. cannot earn economic profit in the long-run. W. may realize either economic profit or losses in the long-run. X. cannot earn economic profit in the short-run. 124. ch11\_tb25to27\_png.ext\ Refer to the diagrams, which pertain to a purely competitive firm producing output *q* and the industry in which it operates. Which of the following is *correct*? Y. The diagrams portray neither long-run nor short-run equilibrium. Z. The diagrams portray both long-run and short-run equilibrium. A. The diagrams portray short-run equilibrium but not long-run equilibrium. B. The diagrams portray long-run equilibrium but not short-run equilibrium. 125. \ Refer to the diagrams, which pertain to a purely competitive firm producing output *q* and the industry in which it operates. In the long-run we should expect C. firms to enter the industry, market supply to rise, and product price to fall. D. firms to leave the industry, market supply to rise, and product price to fall. E. firms to leave the industry, market supply to fall, and product price to rise. F. no change in the number of firms in this industry. 126. ch11\_tb25to27\_png.ext\ Refer to the diagrams, which pertain to a purely competitive firm producing output *q* and the industry in which it operates. The predicted long-run adjustments in this industry might be offset by G. a decline in product demand. H. an increase in resource prices. I. a technological improvement in production methods. J. entry of new firms into the industry. 127. Assume a purely competitive firm is maximizing profit at some output at which long-run average total cost is at a minimum. Then K. the firm is earning an economic profit. L. there is no tendency for the firm\'s industry to expand or contract. M. allocative but not productive efficiency is being achieved. N. other firms will enter this industry. 128. A purely competitive firm is precluded from making economic profits in the long-run because O. it is a \"price taker.\" P. its demand curve is perfectly elastic. Q. of unimpeded entry to the industry. R. it produces a differentiated product. 129. \ The diagram shows the average total-cost curve for a purely competitive firm. At the long-run equilibrium level of output, this firm\'s total revenue S. is \$10. T. is \$40. U. is \$400. V. cannot be determined from the information provided. 130. Q13252726414314741-1.ext\ The diagram shows the average total cost curve for a purely competitive firm. At the long-run equilibrium level of output, this firm\'s total revenue W. is \$400. X. cannot be determined from the information provided. Y. is \$40. Z. is \$10. 131. \ The diagram shows the average total-cost curve for a purely competitive firm. At the long-run equilibrium level of output, this firm\'s total cost A. is \$10. B. is \$40. C. is \$400. D. cannot be determined from the information provided. 132. ch11\_tb41to43\_png.ext\ The diagram shows the average total-cost curve for a purely competitive firm. At the long-run equilibrium level of output, this firm\'s marginal cost E. is \$400. F. is \$40. G. is \$10. H. cannot be determined from the information provided. 133. \ The diagram shows the average total-cost curve for a purely competitive firm. At the long-run equilibrium level of output, this firm\'s marginal revenue I. is \$10. J. is \$40. K. is \$400. L. cannot be determined from the information provided. 134. ch11\_tb41to43\_png.ext\ The diagram shows the average total-cost curve for a purely competitive firm. At the long-run equilibrium level of output, this firm\'s economic profit M. is zero. N. is \$400. O. is \$200. P. cannot be determined from the information provided. 135. The MR = MC rule applies Q. in the short-run but not in the long-run. R. in the long-run but not in the short-run. S. in both the short-run and the long-run. T. only to a purely competitive firm. 136. \ The diagram portrays U. a competitive firm that should shut down in the short run. V. the equilibrium position of a competitive firm in the long-run. W. a competitive firm that is realizing an economic profit. X. the loss-minimizing position of a competitive firm in the short-run. 137. ch11\_tb59to64\_png.ext\ If the competitive firm depicted in this diagram produces output *Q*, it will Y. suffer an economic loss. Z. earn a normal profit. A. earn an economic profit. B. achieve productive efficiency but not allocative efficiency. 138. Which of the following conditions is true for a purely competitive firm in long-run equilibrium? C. *P*\> MC = minimum ATC. D. *P*\> MC\> minimum ATC. E. *P* = MC = minimum ATC. F. *P*\< MC\< minimum ATC. **\ Answer Key\ **Test name: Mercer practice test-2 1. TRUE 2. TRUE 3. FALSE 4. FALSE 5. TRUE 6. TRUE 7. FALSE 8. FALSE 9. FALSE 10. FALSE 11. TRUE 12. TRUE 13. TRUE 14. TRUE 15. TRUE 16. TRUE 17. FALSE 18. TRUE 19. FALSE 20. TRUE 21. TRUE 22. FALSE 23. TRUE 24. FALSE 25. FALSE 26. TRUE 27. C 28. C 29. D Economic costs include all payments necessary to obtain resources, whether they are explicit or implicit costs. 30. B Economic costs include all payments necessary for a firm to obtain resources, whether they are explicit or implicit costs. Because sales of the firm are not payments by the firm, they are not part of the economic costs. 31. A All production costs, whether explicit or implicit, are opportunity costs, as they all represent payments for resources for which there were alternative uses. 32. B 33. C 34. A Accounting profit is total revenue minus explicit costs. To find economic profit, one then has to take accounting profit and deduct implicit costs. Because economic profit always involves the subtraction of implicit costs, economic profit cannot be larger than accounting profit. As essentially the sum of the implicit costs, the normal profit can be greater than, less than, or equal to either the accounting profit or economic profit. 35. B 36. C The long run is defined as a period of time long enough to adjust all inputs. It doesn't mean that any or all inputs must change, just that they all can be changed. Even if the firm makes no changes to its inputs or output, it's still operating in the long run if the period allows for everything to change. 37. B 38. D 39. B The definition and corresponding formula for marginal product is change in total product divided by change in labor input. 40. D The definition and corresponding formula for average product is total product divided by units of labor. 41. D Labor productivity, average product, and output per unit of labor are all different ways of expressing the same thing, so all are found by dividing total product by the units of labor. 42. C 43. D 44. D Diminishing returns begins when the marginal product begins to fall. The marginal product of the third unit is 30 (= 76 -- 46), the marginal product of the fourth unit is 34 (= 110 -- 76), and the marginal product of the fifth unit is 32 (= 142 -- 110), so diminishing returns begins with the fifth unit of labor. 45. B Average product is total product divided by the number of units of labor at a given total product. In this case, average product is maximized at five units of labor (28.4 = 142 ÷ 5). 46. C Average product is total product divided by the number of units of labor at a given total product. In this case, average product is maximized at five units of labor (65 = 325 ÷ 5). 47. B Marginal cost (MC) is the change in total cost from producing an additional unit. If, for example, producing the sixth unit raises total cost from \$61 to \$69, then marginal cost is \$8 (= 69 − 61). 48. A Marginal cost (MC) is the change in total cost from producing an additional unit. If, for example, producing the third unit raises total cost from \$41 to \$48, then marginal cost is \$7 (= \$48 − \$41). 49. A Marginal cost (MC) is the change in total cost from producing an additional unit. If, for example, producing the fifth unit raises total cost from \$68 to \$75, then marginal cost is \$7 (= 75 − 68). 50. D Marginal cost (MC) is the change in total cost from producing an additional unit. If, for example, producing the fifth unit raises total cost from \$88 to \$100, then marginal cost is \$12 (= \$100 − \$88). 51. A 52. B 53. B 54. B 55. B 56. B 57. A 58. A 59. D 60. A 61. A 62. A The four market structures (pure competition, monopolistic competition, oligopoly, and pure monopoly) are classified by the number of firms in the industry, the degree of control any individual firm has over price (as represented by its share of the total market), and whether the product is standardized or differentiated. If, for example, 40 firms each control only 2--3 percent of the market for a differentiated product, that meets the criteria for monopolistic competition. 63. A The four market structures (pure competition, monopolistic competition, oligopoly, and pure monopoly) are classified by the number of firms in the industry, the degree of control any individual firm has over price (as represented by its share of the total market), and whether the product is standardized or differentiated. If, for example, 40 firms each control only 2--3 percent of the market for a differentiated product, that meets the criteria for monopolistic competition. 64. B 65. D 66. B 67. C 68. C 69. B 70. C 71. B 72. A 73. D 74. C 75. B 76. A 77. A 78. C 79. D 80. B 81. B 82. A 83. B 84. B 85. B 86. B 87. D 88. C 89. C Equilibrium price is found where quantity supplied equals quantity demanded. At higher price points, firms and the market will be willing to provide more output, and a supply schedule can be derived from the set of quantity supplied values corresponding to each price. In this problem, at a price of \$50, firms maximize profit producing 11 units of output (11,000 for the market). At \$42, quantity supplied is 10,000, at \$36, 9,000, etc. Quantity supplied and quantity demanded are equal at 9,000 units at a price of \$36. 90. A Equilibrium price is found where quantity supplied equals quantity demanded. At higher price points, firms and the market will be willing to provide more output, and a supply schedule can be derived from the set of quantity supplied values corresponding to each price. The quantity a firm will supply to the market is where marginal cost is equal to marginal revenue (= price) (or where marginal cost is as close as possible to price without exceeding it). In this problem, at a price of \$50, firms maximize profit producing 11 units of output each (11,000 for the market). At \$42, quantity supplied is 10,000, at \$36, 9,000, etc. Quantity supplied and quantity demanded are equal at 11000 units at a price of \$50. 91. D 92. C 93. A 94. C 95. C 96. D 97. A 98. D 99. D 100. C 101. B 102. A 103. C 104. B In perfectly competitive markets, firm entry and exit will eliminate economic profits and losses in the long run. Regardless of how much economic profit Augi realizes in the short run, she will break even (zero economic profit) in the long run. 105. D 106. D 107. B 108. D 109. B In perfectly competitive markets, economic profits attract new firms and losses discourage entry (and cause exit). Firms earning economic profits will have marginal revenues (MR) greater than average total cost (ATC); losses occur when MR \< ATC (remember that price = MR in perfectly competitive markets). 110. D In perfectly competitive markets, economic profits attract new firms and losses discourage entry (and cause exit). Firms earning economic profits will have marginal revenues (MR) greater than average total cost (ATC); losses occur when MR \< ATC (remember that price = MR in perfectly competitive markets). 111. B In perfectly competitive markets, economic profits attract new firms and losses discourage entry (and cause exit). Firms earning economic profits will have marginal revenues (MR) greater than average total cost (ATC); losses occur when MR \< ATC (remember that price = MR in perfectly competitive markets). 112. B In perfectly competitive markets, economic profits attract new firms and losses discourage entry (and cause exit). Firms earning economic profits will have marginal revenues (MR) greater than average total cost (ATC); losses occur when MR \< ATC (remember that price = MR in perfectly competitive markets). 113. B 114. A 115. A 116. B Industries are constant-cost, increasing-cost, or decreasing-cost industries based on what happens to ATC as output expands in the long-run. If ATC does not change, it is a constant-cost industry; if ATC rises it is increasing-cost; if ATC falls with expanding output, it signifies a decreasing cost industry. If, for example, producing 100 units cost \$100, 200 units cost \$200, and so forth, then the ATC is unchanged as the industry grows---a constant-cost industry. 117. B 118. D 119. B 120. A 121. B Industries are constant-cost, increasing-cost, or decreasing-cost industries based on what happens to ATC as output expands in the long-run. How equilibrium price and quantity respond to an increase in consumer demand depend on whether the industry is constant-, increasing-, or decreasing-cost. In an increasing-cost industry, for example, an increase in consumer demand will increase both quantity and price. As firms produce more goods to satisfy growing demand, the resulting higher costs necessitate an increase in price. 122. C Industries are constant-cost, increasing-cost, or decreasing-cost industries based on what happens to ATC as output expands in the long run. How equilibrium price and quantity respond to an increase in consumer demand depend on whether the industry is constant-, increasing-, or decreasing-cost. In an increasing-cost industry, for example, an increase in consumer demand will increase both quantity and price. As firms produce more goods to satisfy growing demand, the resulting higher costs necessitate an increase in price. 123. B 124. C 125. C 126. C 127. B 128. C 129. C 130. A 131. C 132. C 133. A 134. A 135. C 136. B 137. B 138. C