Deck 11: Pure Competition in the Long Run

Question 1

If a purely competitive firm is producing at the MR = MC output level and earning an economic profit,then:

A) the selling price for this firm is above the market equilibrium price.
B) new firms will enter this market.
C) some existing firms in this market will leave.
D) there must be price fixing by the industry's firms.

Answer 1

new firms will enter this market.

Question 2

Assume a purely competitive firm is maximizing profit at some output at which long-run average total cost is at a minimum.Then:

A) the firm is earning an economic profit.
B) there is no tendency for the firm's industry to expand or contract.
C) allocative but not productive efficiency is being achieved.
D) other firms will enter this industry.

Answer 2

there is no tendency for the firm's industry to expand or contract.

Question 3

A constant-cost industry is one in which:

A) resource prices fall as output is increased.
B) resource prices rise as output is increased.
C) resource prices remain unchanged as output is increased.
D) small and large levels of output entail the same total costs.

Answer 3

resource prices remain unchanged as output is increased.

Question 4

An increasing-cost industry is associated with:

A) a perfectly elastic long-run supply curve.
B) an upsloping long-run supply curve.
C) a perfectly inelastic long-run supply curve.
D) an upsloping long-run demand curve.

Question 5

Which of the following distinguishes the short run from the long run in pure competition?

A) Firms can enter and exit the market in the long run but not in the short run.
B) Firms attempt to maximize profits in the long run but not in the short run.
C) Firms use the MR = MC rule to maximize profits in the short run but not in the long run.
D) The quantity of labor hired can vary in the long run but not in the short run.

Question 6

When a purely competitive firm is in long-run equilibrium:

A) marginal revenue exceeds marginal cost.
B) price equals marginal cost.
C) total revenue exceeds total cost.
D) minimum average total cost is less than the product price.

Question 7

Which of the following statements is correct?

A) The long-run supply curve for a purely competitive increasing-cost industry will be upsloping.
B) The long-run supply curve for a purely competitive increasing-cost industry will be perfectly elastic.
C) The long-run supply curve for a purely competitive industry will be less elastic than the industry's short-run supply curve.
D) The long-run supply curve for a purely competitive decreasing-cost industry will be upsloping.

Question 8

Assume a purely competitive increasing-cost industry is initially in long-run equilibrium and that an increase in consumer demand occurs.After all economic adjustments have been completed,product price will be:

A) lower,but total output will be larger than originally.
B) higher and total output will be larger than originally.
C) lower and total output will be smaller than originally.
D) higher,but total output will be smaller than originally.

Question 9

Which of the following is true concerning purely competitive industries?

A) There will be economic losses in the long run because of cut-throat competition.
B) Economic profits will persist in the long run if consumer demand is strong and stable.
C) In the short run,firms may incur economic losses or earn economic profits,but in the long run they earn normal profits.
D) There are economic profits in the long run but not in the short run.

Question 10

Suppose a purely competitive,increasing-cost industry is in long-run equilibrium.Now assume that a decrease in consumer demand occurs.After all resulting adjustments have been completed,the new equilibrium price:

A) and industry output will be less than the initial price and output.
B) will be greater than the initial price,but the new industry output will be less than the original output.
C) will be less than the initial price,but the new industry output will be greater than the original output.
D) and industry output will be greater than the initial price and output.

Question 11

We would expect an industry to expand if firms in that industry are:

A) earning normal profits.
B) earning economic profits.
C) breaking even.
D) earning accounting profits.

Question 12

Long-run competitive equilibrium:

A) is realized only in constant-cost industries.
B) will never change once it is realized.
C) is not economically efficient.
D) results in zero economic profits.

Question 13

A constant-cost industry is one in which:

A) a higher price per unit will not result in an increased output.
B) if 100 units can be produced for $100,then 150 can be produced for $150,200 for $200,and so forth.
C) the demand curve and therefore the unit price and quantity sold seldom change.
D) the total cost of producing 200 or 300 units is no greater than the cost of producing 100 units.

Question 14

A purely competitive firm:

A) must earn a normal profit in the short run.
B) cannot earn economic profit in the long run.
C) may realize either economic profit or losses in the long run.
D) cannot earn economic profit in the short run.

Question 15

In a purely competitive industry:

A) there will be no economic profits in either the short run or the long run.
B) economic profits may persist in the long run if consumer demand is strong and stable.
C) there may be economic profits in the short run but not in the long run.
D) there may be economic profits in the long run but not in the short run.

Question 16

Assume a purely competitive,increasing-cost industry is in long-run equilibrium.If a decline in demand occurs,firms will:

A) leave the industry,price will decrease,and quantity produced will increase.
B) enter the industry and price and quantity will both increase.
C) leave the industry and price and output will both increase.
D) leave the industry and price and output will both decline.

Question 17

Which of the following statements is correct?

A) Economic profits induce firms to enter an industry;losses encourage firms to leave.
B) Economic profits induce firms to leave an industry;profits encourage firms to leave.
C) Economic profits and losses have no significant impact on the growth or decline of an industry.
D) Normal profits will cause an industry to expand.

Question 18

The primary force encouraging the entry of new firms into a purely competitive industry is:

A) normal profits earned by firms already in the industry.
B) economic profits earned by firms already in the industry.
C) government subsidies for start-up firms.
D) a desire to provide goods for the betterment of society.

Question 19

Which of the following will not hold true for a competitive firm in long-run equilibrium?

A) P equals AFC.
B) P equals minimum ATC.
C) MC equals minimum ATC.
D) P equals MC.

Question 20

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:

A) minimizes losses by producing at the minimum point of its AVC curve.
B) maximizes profits by producing where MR = ATC.
C) should close down immediately.
D) should continue producing in the short run but leave the industry in the long run if the situation persists.

Question 21

Resources are efficiently allocated when production occurs where:

A) marginal cost equals average variable cost.
B) price is equal to average revenue.
C) price is equal to marginal cost.
D) price is equal to average variable cost.

Question 22

Assume that a decline in consumer demand occurs in a purely competitive industry that is initially in long-run equilibrium.We can:

A) predict that the new price will be greater than the original price.
B) predict that the new price will be less than the original price.
C) predict that the new price will be the same as the original price.
D) not compare the original and the new prices without knowing what cost conditions exist in the industry.

Question 23

Suppose that an industry's long-run supply curve is downsloping.This suggests that:

A) it is an increasing-cost industry.
B) relevant inputs have become more expensive as the industry has expanded.
C) technology has become less efficient as a result of the industry's expansion.
D) it is a decreasing-cost industry.

Question 24

Suppose an increase in product demand occurs in a decreasing-cost industry.As a result:

A) the new long-run equilibrium price will be lower than the original long-run equilibrium price.
B) equilibrium quantity will decline.
C) firms will eventually leave the industry.
D) the new long-run equilibrium price will be higher than the original price.

Question 25

Purely competitive industry X has constant costs and its product is an inferior good.The industry is currently in long-run equilibrium.The economy now goes into a recession and average incomes decline.The result will be:

A) an increase in output and in the price of the product.
B) an increase in output,but not in the price,of the product.
C) a decrease in the output,but not in the price,of the product.
D) a decrease in output and in the price of the product.

Question 26

The term allocative efficiency refers to:

A) the level of output that coincides with the intersection of the MC and AVC curves.
B) minimization of the AFC in the production of any good.
C) the production of the product mix most desired by consumers.
D) the production of a good at the lowest average total cost.

Question 27

An increasing-cost industry is the result of:

A) higher resource prices that occur as the industry expands.
B) a change in the industry's minimum efficient scale.
C) X-inefficiency.
D) the law of diminishing returns.

Question 28

A purely competitive firm is precluded from making economic profits in the long run because:

A) it is a "price taker."
B) its demand curve is perfectly elastic.
C) of unimpeded entry to the industry.
D) it produces a differentiated product.

Question 29

The MR = MC rule applies:

A) in the short run but not in the long run.
B) in the long run but not in the short run.
C) in both the short run and the long run.
D) only to a purely competitive firm.

Question 30

Allocative efficiency is achieved when the production of a good occurs where:

A) P = minimum ATC.
B) P = MC.
C) P = minimum AVC.
D) total revenue is equal to TFC.

Question 31

If the price of product Y is $25 and its marginal cost is $18:

A) Y is being produced with the least-cost combination of resources.
B) society will realize a net gain if less of Y is produced.
C) resources are being underallocated to Y.
D) resources are being overallocated to Y.

Question 32

A firm is producing an output such that the benefit from one more unit is more than the cost of producing that additional unit.This means the firm is:

A) producing more output than allocative efficiency requires.
B) producing less output than allocative efficiency requires.
C) achieving productive efficiency.
D) producing an inefficient output,but we cannot say whether output should be increased or decreased.

Question 33

Suppose losses cause industry X to contract and,as a result,the prices of relevant inputs decline.Industry X is:

A) a constant-cost industry.
B) a decreasing-cost industry.
C) an increasing-cost industry.
D) encountering X-inefficiency.

Question 34

In a decreasing-cost industry:

A) there will be no firm entry because the increased supply will reduce the long-run equilibrium price.
B) the law of demand does not apply.
C) greater demand leads to higher long-run equilibrium prices.
D) lower demand leads to higher long-run equilibrium prices.

Question 35

When LCD televisions first came on the market,they sold for at least $1,000,and some for much more.Now many units can be purchased for under $400.These facts imply that:

A) the LCD television industry was once competitive but is now monopolistic.
B) fewer firms produce LCD televisions than was the case five or ten years ago.
C) the demand curve for LCD televisions has shifted leftward.
D) the LCD television industry is a decreasing-cost industry.

Question 36

The term productive efficiency refers to:

A) any short-run equilibrium position of a competitive firm.
B) the production of the product mix most desired by consumers.
C) the production of a good at the lowest average total cost.
D) fulfilling the condition P = MC.

Question 37

Under what conditions would an increase in demand lead to a lower long-run equilibrium price?

A) The firms in the market are part of a decreasing-cost industry.
B) The firms in the market produce an inferior good.
C) Potential new firms in the market are not attracted by economic profits.
D) Increases in demand cannot lead to lower long-run equilibrium prices.

Question 38

If a purely competitive constant-cost industry is realizing economic profits,we can expect industry supply to:

A) increase,output to increase,price to decrease,and profits to decrease.
B) increase,output to increase,price to increase,and profits to decrease.
C) decrease,output to decrease,price to increase,and profits to increase.
D) increase,output to decrease,price to decrease,and profits to decrease.

Question 39

If the long-run supply curve of a purely competitive industry slopes upward,this implies that the prices of relevant resources:

A) will fall as the industry expands.
B) are constant as the industry expands.
C) rise as the industry contracts.
D) rise as the industry expands.

Question 40

A decreasing-cost industry is one in which:

A) contraction of the industry will decrease unit costs.
B) input prices fall or technology improves as the industry expands.
C) the long-run supply curve is perfectly elastic.
D) the long-run supply curve is upsloping.

Question 41

Allocative efficiency occurs whenever:

A) consumer surplus is maximized.
B) it is impossible to produce a net benefit for society by changing the combination of goods and services produced.
C) firms have maximized their profits.
D) it is impossible to make someone in society better off without making someone else worse off.

Question 42

Which of the following is an example of creative destruction?

A) An economic recession forces firms out of business.
B) Automobile production causes the wagon industry to shut down.
C) Apple earns more economic profits than other manufacturers of MP3 players.
D) Starbucks shuts down stores to create greater demand for its remaining outlets.

Question 43

If for a firm P = minimum ATC = MC,then:

A) neither allocative efficiency nor productive efficiency is being achieved.
B) productive efficiency is being achieved,but allocative efficiency is not.
C) both allocative efficiency and productive efficiency are being achieved.
D) allocative efficiency is being achieved,but productive efficiency is not.

Question 44

Which of the following would not be expected to occur in a purely competitive market in long-run equilibrium?

A) Consumer and producer surplus will be minimized.
B) P = MC = lowest ATC.
C) The maximum willingness to pay for the last unit equals the minimum acceptable price for that unit.
D) We would expect all of these to occur in the long run in a purely competitive market.

Question 45

Which of the following outcomes is consistent with a purely competitive market in long-run equilibrium?

A) Consumer and producer surplus will be maximized.
B) P = MC = lowest AVC.
C) The minimum willingness to pay equals the maximum acceptable price.
D) We would expect all of these to occur in the long run in a purely competitive market.

Question 46

If production is occurring where marginal cost exceeds price,the purely competitive firm will:

A) maximize profit,but resources will be underallocated to the product.
B) maximize profit,but resources will be overallocated to the product.
C) fail to maximize profit and resources will be overallocated to the product.
D) fail to maximize profit and resources will be underallocated to the product.

Question 47

If a purely competitive firm is producing where price exceeds marginal cost,then:

A) the firm will fail to maximize profit,but resources will be efficiently allocated.
B) the firm will fail to maximize profit and resources will be overallocated to the product.
C) the firm will fail to maximize profit and resources will be underallocated to the product.
D) resources will be underallocated to the product,but the firm will maximize profit.

Question 48

(Consider This)Approximately what percentage of start-up firms in the United States go bankrupt within the first two years?

A) 3.5.
B) 10.2.
C) 22.
D) 53.

Question 49

Creative destruction is least beneficial to:

A) workers in the "destroyed" industries.
B) workers in the "created" industries.
C) consumers.
D) society as a whole.

Question 50

Entrepreneurs in purely competitive industries:

A) have no incentive to innovate because in the long run they will earn no economic profits.
B) innovate to lower operating costs and generate short-run economic profits.
C) utilize pricing strategies to generate short-run economic profits.
D) rarely try to innovate because of a lack of financial resources.

Question 51

The theory of creative destruction was advanced many years ago by:

A) Bill Gates.
B) Alfred Marshall.
C) Joseph Schumpeter.
D) Adam Smith.

Question 52

Which of the following conditions is true for a purely competitive firm in long-run equilibrium?

A) P > MC = minimum ATC.
B) P > MC > minimum ATC.
C) P = MC = minimum ATC.
D) P < MC < minimum ATC.

Question 53

The process by which new firms and new products replace existing dominant firms and products is called:

A) monopolistic competition.
B) mergers and acquisitions.
C) process innovation.
D) creative destruction.

Question 54

In long-run equilibrium,purely competitive markets:

A) minimize total cost.
B) maximize the sum of consumer surplus and producer surplus.
C) yield economic profits to most sellers.
D) inevitably degenerate into monopoly in increasing-cost industries.

Question 55

Creative destruction is:

A) the process by which large firms buy up small firms.
B) the process by which new firms and new products replace existing dominant firms and products.
C) a term coined many years ago by Adam Smith.
D) applicable to planned economies but not to market economies.

Question 56

(Consider This)Which of the following statements is true about U.S.firms?

A) Over half are bankrupt within the first two years after starting up.
B) Over half are bankrupt within the first five years after starting up.
C) Nearly 65 percent last 10 years or more.
D) The life expectancy of a U.S.firm is approximately 22 years.

Question 57

Innovations that lower production costs or create new products:

A) are rare in competitive industries.
B) discourage new firms from entering the industry.
C) often generate short-run economic profits that do not last into the long run.
D) usually generate long-run economic profits for the innovator.

Question 58

Under pure competition in the long run:

A) neither allocative efficiency nor productive efficiency is achieved.
B) both allocative efficiency and productive efficiency are achieved.
C) productive efficiency is achieved,but allocative efficiency is not.
D) allocative efficiency is achieved,but productive efficiency is not.

Question 59

Assume that society places a higher value on the last unit of X produced than the value of the resources used to produce that unit.With no spillovers,this information means that:

A) total cost is greater than total revenue.
B) price is greater than marginal cost.
C) marginal cost is greater than price.
D) resources are being overallocated to X.

Question 60

(Consider This)The average life expectancy of a U.S.business is approximately:

A) 2 years.
B) 5.5 years.
C) 10.2 years.
D) 22 years.

Question 61

(Last Word)"Patent trolls:"

A) block firms from acquiring patents on intellectual property.
B) buy up patents in order to collect royalties and sue other companies.
C) legally challenge new patent applications in an effort to extract rents.
D) promote innovation by keeping firms from having a stranglehold on intellectual property.

Question 62

The process by which new firms and new products destroy existing dominant firms and their products is called creative destruction.

Question 63

When entrepreneurs in competitive industries successfully innovate to lower production costs,it usually results in long-run economic profits for the firm.

Question 64

Marginal cost is a measure of the alternative goods that society forgoes in using resources to produce an additional unit of some specific product.

Question 65

Because the equilibrium position of a purely competitive seller entails an equality of price and marginal costs,competition produces an efficient allocation of economic resources.

Question 66

(Last Word)Eliminating patents would tend to:

A) stimulate innovation in all industries.
B) discourage innovation in all industries.
C) encourage innovation in products made up of many different technologies but discourage innovation of easy-to-copy products requiring large R&D costs to create.
D) discourage innovation in products made up of many different technologies but encourage innovation of easy-to-copy products requiring large R&D costs to create.

Question 67

(Last Word)Patents are most likely to infringe on innovation:

A) for products that incorporate many different technologies into a single product.
B) of simple,easy-to-copy products.
C) in the pharmaceutical industry.
D) when they cause creative destruction.

Question 68

The long-run supply curve for a decreasing-cost industry is downsloping.

Question 69

After all long-run adjustments have been completed,a firm in a competitive industry will produce that level of output where average total cost is at a minimum.