Question 1

Firms in long-run equilibrium in a perfectly competitive industry will produce at the low points of their average total cost curves because:&#10;A)free entry implies that long-run profits will be zero no matter how much each firm produces.&#10;B)firms seek maximum profits and to do so they must choose to produce where average costs are minimized.&#10;C)firms maximize profits and free entry implies that maximum profits will be zero.&#10;D)firms in the industry desire to operate efficiently.

Accepted Answer

firms maximize profits and free entry implies that maximum profits will be zero.

Question 2

A market for a product for which demanders are willing to pay more than costs of production may not arise because of:&#10;A)high transactions costs.&#10;B)strict price controls.&#10;C)the inability of producers to gain economies of scale.&#10;D)foreign countries dominating a domestic market for a product.

Accepted Answer

When there are high transactions costs, it can make it difficult or costly for buyers and sellers to find each other and make a transaction. This can make it difficult or prohibitively expensive for a market to emerge, even if there is demand for the product. As a result, buyers may not be willing to pay more than the costs of production, and producers may not be able to find buyers willing to pay a premium, leading to no market for the product.

Question 3

The short-run market supply curve is:&#10;A)the horizontal summation of each firm's short-run supply curve.&#10;B)the vertical summation of each firm's short-run supply curve.&#10;C)the horizontal summation of each firm's short-run average cost curve.&#10;D)the vertical summation of each firm's short-run average cost curve.

Accepted Answer

The short-run market supply curve is the horizontal summation of each firm's short-run supply curve. This is because in the short run, the number of firms in the market remains constant and each firm has a fixed supply curve which is added horizontally to form the market supply curve.

Question 4

A demand curve will shift out for any of the following reasons except that:&#10;A)preference for a good increases.&#10;B)price of a substitute falls.&#10;C)income rises.&#10;D)price of a complement falls.

Accepted Answer

A shift in the demand curve occurs due to changes in non-price factors. If the price of a substitute falls, it makes the substitute more attractive relative to the good in question, potentially decreasing demand for the original good rather than shifting its demand curve outwards. Increases in preferences, incomes, and a fall in the price of complements generally increase demand, shifting the demand curve outwards.

Question 5

The market demand curve for any good is:&#10;A)independent of individuals' demand curves for the good.&#10;B)the vertical summation of individuals' demand curves.&#10;C)the horizontal summation of individuals' demand curves.&#10;D)derived from the firm's marginal cost of production.

Accepted Answer

The market demand curve for any good is derived by horizontally summing the individual demand curves of all consumers in the market. This process aggregates the quantities demanded by all individuals at each price level to determine the total market demand.

Question 6

Long-run producer surplus in a perfectly competitive industry accrues mainly to:&#10;A)suppliers of inputs with inelastic supply curves.&#10;B)suppliers of inputs with elastic supply curves.&#10;C)firms' owners.&#10;D)marginal consumers.

Accepted Answer

In a perfectly competitive industry, long-run producer surplus mainly accrues to suppliers of inputs with inelastic supply curves because their limited availability and lack of close substitutes allow these suppliers to maintain higher prices and profits over time.

Question 7

Under perfect competition,if an industry is characterized by positive economic profits in the short run:&#10;A)firms will leave the market in the long run and the short-run supply curve will shift outward.&#10;B)firms will enter the market in the long run and the short-run supply curve will shift outward.&#10;C)firms will enter the market in the long run and the short-run supply curve will shift inward.&#10;D)firms will leave the market in the long run and the short-run supply curve will shift inward.

Accepted Answer

In the short run, positive economic profits signal that the price of the good is above the average total cost of production for firms in the industry. This attracts new firms to enter the market in search of these profits. This increase in the number of firms shifts the short-run supply curve outward, causing the market price to decrease. As the market price decreases, the economic profits of each individual firm decrease as well. In the long run, firms will continue to enter the market as long as there are positive economic profits, which eventually leads to a situation where the market price is equal to the minimum point of the average total cost curve. At this point, there are no more economic profits to be made and firms have no incentive to enter or exit the market. Therefore, in the long run, the number of firms in the industry will have adjusted such that economic profits are driven to zero and the market is in a state of equilibrium.

Question 8

Price controls:&#10;A)are always popular with consumers because they lower prices.&#10;B)create shortages.&#10;C)increase producer surplus because firms can now sell a greater quantity of a good at a lower price.&#10;D)are necessary to preserve equity.

Accepted Answer

Price controls create shortages because when the government sets a price below the equilibrium price, a surplus in demand occurs. This, in turn, causes shortages as consumers quickly buy up the existing supply.

Question 9

In a competitive market,an efficient allocation of resources is characterized by:&#10;A)a price greater than the marginal cost of production.&#10;B)the possibility of further mutually beneficial transactions.&#10;C)the largest possible sum of consumer and producer surplus.&#10;D)a value of consumer surplus equal to that of producer surplus.

Accepted Answer

An efficient allocation of resources in a competitive market is one where the sum of consumer and producer surplus is maximized. This represents a situation where both consumers and producers are able to receive the greatest benefit possible from the allocation of resources. In this scenario, prices are equal to the marginal cost of production, ensuring that resources are used in the most efficient manner possible. The possibility of further mutually beneficial transactions (option B) is not necessarily a characteristic of an efficient allocation of resources, as it may not be possible to engage in additional transactions without negatively impacting the market equilibrium. Similarly, while a price greater than the marginal cost of production (option A) may be beneficial for producers, it does not necessarily lead to an efficient allocation of resources. Finally, while an equal value of consumer and producer surplus (option D) is desirable, it does not necessarily represent the most efficient allocation of resources.

Question 10

A deadweight loss of consumer and/or producer surplus occurs when:&#10;A)producers fail to maximize profits.&#10;B)mutually beneficial transactions cannot be completed.&#10;C)consumers do not maximize their utility.&#10;D)the price of inputs increases.

Accepted Answer

Deadweight loss occurs when mutually beneficial transactions cannot be completed. This can be due to various factors such as taxes, price floors or ceilings, and other government interventions that distort the market. In such situations, both consumers and producers lose out on potential gains from trade, resulting in a loss of surplus.

Question 11

If the market for hula-hoops is characterized by a very inelastic supply curve and a very elastic demand curve,an inward shift in the supply curve would be reflected primarily in the form of:&#10;A)higher prices.&#10;B)higher output.&#10;C)lower prices.&#10;D)lower output.

Accepted Answer

The answer of If the market for hula-hoops is characterized...

Question 12

If a 1 percent increase in price leads to a .7 percent increase in quantity supplied,the short-run supply curve is:&#10;A)elastic.&#10;B)inelastic.&#10;C)unit elastic.&#10;D)perfectly inelastic.

Accepted Answer

The answer of If a 1 percent increase in price...

Question 13

Long-run elasticity of supply is defined as:&#10;A)percentage change in quantity demanded in the long run divided by percentage change in price.&#10;B)percentage change in price divided by percentage change in quantity demanded in the long run.&#10;C)percentage change in quantity supplied in the long run divided by percentage change in price.&#10;D)percentage change in price divided by percentage change in quantity demanded in the long run

Accepted Answer

The answer of Long-run elasticity of supply is defined as:&#10;A)percentage...

Question 14

In the very short run:&#10;A)new firms may enter an industry.&#10;B)existing firms may change the quantity they are supplying.&#10;C)price and quantity supplied are absolutely fixed.&#10;D)quantity supplied is absolutely fixed.

Accepted Answer

The answer of In the very short run:&#10;A)new firms may...

Question 15

For an increasing cost industry,the long-run supply curve has a(n)_____ elasticity of supply.&#10;A)infinite&#10;B)negative&#10;C)positive&#10;D)zero

Accepted Answer

The answer of For an increasing cost industry,the long-run supply...

Question 16

One example of Ricardian rent is:&#10;A)rent paid to landlords under price controls.&#10;B)the difference between the price of a highly demanded unique piece of artwork and the opportunity cost of maintaining it.&#10;C)the amount paid to a seller above the equilibrium price of tourist class tickets in order to receive higher quality seats in first class.&#10;D)the price rise of wool from a disease among sheep.

Accepted Answer

The answer of One example of Ricardian rent is:&#10;A)rent paid...

Question 17

If the market for bottled spring water is characterized by a very elastic supply curve and a very inelastic demand curve,an outward shift in the supply curve would be reflected primarily in the form of:

A)higher prices.
B)higher output.
C)lower prices.
D)lower output.

Accepted Answer

The answer of If the market for bottled spring water...

Question 18

An increase in the price of good x will be accompanied by:&#10;A)a shift in the market demand curve for good x.&#10;B)a shift in the market demand curve for good y (a substitute for good x).&#10;C)a movement along the market demand curve for good x.&#10;D)both b and c

Accepted Answer

The answer of An increase in the price of good...

Question 19

A change in the distribution of income that leaves total income constant will not shift the market demand curve for a product providing:&#10;A)everyone has an income elasticity of demand of zero for the product.&#10;B)everyone has the same income elasticity of demand for the product.&#10;C)individuals have differing income elasticities for the product,but the average income elasticity for income gainers is equal to the average income elasticity for income losers.&#10;D)any of the above conditions occur.

Accepted Answer

The answer of A change in the distribution of income...

Question 20

Suppose that the price elasticity of demand for a product is -1 and that the price elasticity of supply is +1.Assume also that the income elasticity of demand is +2.Then an increase in income of 10% will raise equilibrium price by:

A)10%.
B)5%.
C)20%.
D)an annual amount that cannot be determined.

Accepted Answer

The answer of Suppose that the price elasticity of demand...

Question 21

An increase in the price of an input to a perfectly competitive industry will:&#8203;&#10;A)&#8203;increase price and reduce the number of firms.&#10;B)&#8203;increase price and increase the number of firms.&#10;C)&#8203;increase price and have an ambiguous effect on the number of firms.&#10;D)&#8203;reduce the number of firms and have an ambiguous effect on price.

Accepted Answer

The answer of An increase in the price of an...

Question 22

In the long run,the greater burden of a specific tax will usually be absorbed by:&#10;A)consumers.&#10;B)the party-consumers or producers-with the more elastic demand/supply curve.&#10;C)the party with the least elastic demand/supply curve.&#10;D)shareholders and employees of the firm in the form of reduced dividends and wages.

Accepted Answer

The answer of In the long run,the greater burden of...

Question 23

refer to a market in which quantity demanded is given by and quantity supplied by
If a small unit tax is imposed on this market,the effect of this tax on the price suppliers receive will be greatest when:

A)d is small and b is large.
B)d and b are both small.
C)d and b are both large.
D)d is large and b is small.

Accepted Answer

The answer of refer to a market in which quantity...

Question 24

One way to minimize the excess burden resulting from a specific tax is to:&#10;A)tax only wealthy firms and individuals.&#10;B)spread the tax over many goods and services.&#10;C)tax goods for which either supply or demand is inelastic.&#10;D)tax luxury items such as yachts and sports cars.

Accepted Answer

The answer of One way to minimize the excess burden...

Question 25

In the short run,specific taxes on a firm result in:&#10;A)price increases which may not persist in the long run.&#10;B)an increase in consumer surplus because the tax permits spending in additional government services.&#10;C)shortages of the good being taxed.&#10;D)an increase in producer surplus because of the rise in price.

Accepted Answer

The answer of In the short run,specific taxes on a...

Question 26

In the short run,a sales tax is:&#10;A)wholly absorbed by the producer.&#10;B)shared between the consumer and the producer.&#10;C)deferred until the market is able to re-establish an equilibrium price.&#10;D)wholly absorbed by the consumer.

Accepted Answer

The answer of In the short run,a sales tax is:&#10;A)wholly...

Question 27

When prices drop in response to a decline in demand for an increasing cost industry:&#10;A)producer surplus will increase but rents may decrease.&#10;B)rent earned by elastically supplied inputs will decline by more than rent earned by inelastically supplied inputs.&#10;C)rent earned by elastically supplied inputs will decline by less than rent earned by inelastically supplied inputs.&#10;D)both producer surplus and rents will increase.

Accepted Answer

The answer of When prices drop in response to a...

Question 28

refer to a market in which quantity demanded is given by and quantity supplied by
If a small unit tax is imposed on this market,the effect of this tax on the price suppliers receive will be greatest when:

A)d is small and b is large.
B)d and b are both small.
C)d and b are both large.
D)d is large and b is small.

Accepted Answer

The answer of refer to a market in which quantity...

Question 29

The excess burden of a tax is:&#10;A)the amount by which the price of a good increases.&#10;B)the loss of consumer and producer surplus that is not transferred to the government.&#10;C)the amount by which a person's after-tax income decreases as a result of the new tax.&#10;D)the welfare costs to firms forced to leave the market due to an inward shift of the demand curve.

Accepted Answer

The answer of The excess burden of a tax is:&#10;A)the...

Question 30

refer to a market in which quantity demanded is given by and quantity supplied by
In this market,equilibrium price is given by:

A)

B)

C)

D)

Accepted Answer

The answer of refer to a market in which quantity...

Question 31

Per-unit transaction costs:&#10;A)may cause the demand and supply curves to shift either inward or outward depending on the value obtained from transaction agents.&#10;B)refer only to the commission paid to a third-party for each transaction made.&#10;C)are absorbed by the party seeking the transaction.&#10;D)have the same effect on behavior as do lump-sum transaction costs;the difference in terminology is purely definitional.

Accepted Answer

The answer of Per-unit transaction costs:&#10;A)may cause the demand and...

Question 32

If quantity supplied is either greater or less than the equilibrium quantity,then all of the following are true except:&#10;A)total loss of surplus will depend on the shape of the demand and supply curves.&#10;B)the resulting loss of consumer surplus will depend on the price of the good.&#10;C)total loss of surplus will depend on the price of the good.&#10;D)there will be an inefficient allocation of resources.

Accepted Answer

The answer of If quantity supplied is either greater or...

Deck 10: The Partial Equilibrium Competitive Model