Question 1

For a ﬁrm to be considered a monopoly, it must _____.
A) take as given the price of the product that is established in the market
B) be the only buyer of a factor of production
C) be the only producer of a good for which there are no close substitutes
D) face only a few competitors that produce similar, but not identical, products

Accepted Answer

A monopoly is defined as a market structure where a single firm is the only producer of a good or service for which there are no close substitutes, giving it significant market power.

Question 2

Which of the following is likely to act as a barrier to entry in a monopoly market?
A) The monopoly ﬁrm makes normal economic proﬁts.
B) The monopoly ﬁrm owns a patent on the good.
C) The number of buyers in the market is large.
D) The good produced by the monopolist is perishable.

Accepted Answer

The monopoly firm owning a patent on the good acts as a barrier to entry because it legally prevents other firms from producing or selling the patented product, thus maintaining the monopoly's market power.

Question 3

In perfect competition, a ﬁrm's _____.
A) average revenue equals average cost
B) total revenue equals total ﬁxed cost
C) price equals marginal revenue
D) average cost equals price

Accepted Answer

In perfect competition, the price of the product is given for all firms, meaning they cannot influence the price by altering the quantity of output they produce. Therefore, the price at which they sell their product is equal to the marginal revenue, which is the additional revenue earned by selling one more unit of the product.

Question 4

Firms are likely to enter a competitive industry when _____.
A) the market price of the good is low
B) existing ﬁrms are making supernormal proﬁts
C) the ﬁxed cost of production is high
D) the costs of economic factors of production are high

Accepted Answer

Firms are attracted to enter a competitive industry when they observe existing firms making supernormal profits, as this indicates potential profitability for new entrants. Supernormal profits are earnings above the normal required rate of return, signaling a lucrative market opportunity.

Question 5

If a ﬁrm experiences such signiﬁcant economies of scale that the market can support only one ﬁrm, the ﬁrm is best described as a(n) _____.
A) oligopolist
B) perfectly competitive ﬁrm
C) natural monopoly
D) monopolistically competitive ﬁrm

Accepted Answer

A natural monopoly occurs when a firm experiences such significant economies of scale that a single firm can supply the entire market at a lower cost than could multiple firms, making it most efficient for only one firm to exist.

Question 6

What will happen in a perfectly competitive market if there is an increase in the cost of labour, ceteris paribus?
A) Firms will now make supernormal proﬁts that will attract new entrants to the market.
B) The short-run average total cost curve will shift upward reducing ﬁrms' proﬁts.
C) The supply curve will shift to the right reducing prices in the market further.
D) The average revenue curve will shift upward by the extent of the increase in labour costs.

Accepted Answer

An increase in the cost of labour, holding other factors constant (ceteris paribus), will increase the production costs for firms. This leads to an upward shift in the short-run average total cost curve, which reduces the profit margins for existing firms in a perfectly competitive market.

Question 7

Which of the following is true of supernormal pro?ts?
A) When the costs of all the factors of economic production are greater than revenues, ?rms earn supernormal pro?ts.
B) As long as there are no barriers to entry, a ?rm in an industry can continue to earn
C) Supernormal pro?ts are ?nancial returns greater than normal pro?ts.
D) In the long run, perfectly competitive ?rms earn supernormal pro?ts.

Accepted Answer

Supernormal profits are defined as financial returns that exceed the normal expected returns, or the minimum level of profit needed for a company to remain competitive in the market.

Question 8

When a perfectly competitive ﬁrm is in equilibrium in the long run, _____.
A) average cost must be lesser than marginal revenue
B) average cost must be greater than marginal revenue
C) average cost must be equal to marginal revenue
D) marginal revenue must be greater than price

Accepted Answer

In the long run, a perfectly competitive firm will adjust its scale of operation such that its average cost (AC) is equal to the price (P), which is also equal to the marginal revenue (MR) due to the nature of perfect competition where P = MR. This condition represents the firm's long-run equilibrium, ensuring no economic profits or losses.

Question 9

In the short run, a perfectly competitive ﬁrm is minimizing losses at an output of 250 units. If the market price is £5 and the average cost is £8 per unit, what is the ﬁrm's total loss?
A) £750
B) £2000
C) £1250
D) £400

Accepted Answer

The firm's total loss is calculated by the difference between the average cost and the market price, multiplied by the quantity of output. Here, it's (£8 - £5) * 250 = £3 * 250 = £750.

Question 10

A ﬁrm is productively eﬃcient in the long run if _____.
A) its marginal cost equals marginal revenue
B) its minimum average variable cost and minimum average total cost curves coincide
C) its minimum average ﬁxed cost and minimum average total cost curves coincide
D) it produces output at the level where average total cost is minimum

Accepted Answer

A firm is considered productively efficient in the long run when it produces output at the lowest possible cost, which occurs at the level where average total cost is at its minimum. This means the firm is operating on the lowest point of its long-run average total cost curve.

Question 11

A competitive ﬁrm will make losses when _____.
A) its short-run average total cost is above the market price
B) its ﬁxed cost is positive but variable costs are negligible
C) the market price is above marginal cost
D) total revenue is greater than total costs

Accepted Answer

A competitive firm will make losses when its short-run average total cost is above the market price, as it cannot cover all its costs at that price.

Question 12

_____ is equal to revenues less raw material costs, wages and depreciation.
A) Accounting pro?t
B) Economic pro?t
C) Surplus value
D) Supernormal pro?t

Accepted Answer

Accounting profit is calculated by subtracting the explicit costs, such as raw material costs, wages, and depreciation, from the total revenues. This gives the net income that the business has earned over a period.

Question 13

In the short run, a perfectly competitive ﬁrm maximizes proﬁts by producing 500 units of output at a price of £10 per unit and an average cost of £8 per unit. What is the total proﬁt earned by the ﬁrm?
A) £400
B) £2
C) £1000
D) £5000

Accepted Answer

Total profit is calculated as (Price - Average Cost) x Quantity. Here, it is (£10 - £8) x 500 = £1000.

Question 14

A competitive ﬁrm is said to be allocatively eﬃcient if _____.
A) it earns supernormal proﬁts
B) its price equals marginal cost
C) its marginal cost equals average cost
D) its average cost is minimum

Accepted Answer

Allocative efficiency in a competitive market occurs when the price of the good equals the marginal cost of production, indicating that resources are being allocated in a way that maximizes the overall benefit to society.

Question 15

Which of the following is true for a perfectly competitive ﬁrm in the long run?
A) There are barriers to entry and exit in the long run.
B) In the long run, price is greater than marginal revenue.
C) Firms make normal proﬁts in the long run.
D) The long-run supply curve is horizontal.

Accepted Answer

In a perfectly competitive market, firms can enter and exit the market freely in the long run, leading to only normal profits being made. This is because any economic profits attract new firms, increasing supply and driving prices down until only normal profits are earned.

Question 16

A proﬁt-maximizing ﬁrm is producing an output of 300 units where price is £10 per unit and average total cost is £8 per unit. Given that the ﬁrm operates in a perfectly competitive market, which of the following is likely to be true?
A) The ﬁrm will stop production and exit the market.
B) The ﬁrm will sell each unit of the product at a higher price.
C) The market supply curve will shift to the right.
D) The existing ﬁrms will exit the industry.

Accepted Answer

In a perfectly competitive market, if a firm is making a profit (as indicated by the price per unit being higher than the average total cost per unit), it signals to other potential firms that there are profits to be made in this market. This will likely attract new firms into the market, increasing the overall market supply, which is represented by a rightward shift in the market supply curve.

Question 17

In the short run, a competitive ﬁrm will maximize proﬁts by expanding output when _____.
A) average total cost is greater than price
B) marginal cost is greater than price
C) price is greater than marginal cost
D) price is greater than average total cost

Accepted Answer

In the short run, a competitive firm maximizes profits by producing where price equals marginal cost (P = MC). If price is greater than marginal cost, the firm can increase profits by expanding output until P = MC.

Question 18

Normal economic pro?ts are:
A) the same as positive accounting pro?ts.
B) the average rate of return which can be gained in the economy.
C) positive for a competitive ?rm in the long run.
D) revenues less raw material costs, wages and depreciation.

Accepted Answer

Normal economic profits are considered to be the average rate of return that can be expected from alternative investments in the economy. This is essentially the opportunity cost of capital.

Question 19

Suppose a perfectly competitive ﬁrm is making supernormal proﬁts. What is likely to happen in the long run?
A) The ﬁrm will have to shut down production.
B) The ﬁrm can increase its supernormal proﬁts if it increases its output.
C) The ﬁrm will continue to make supernormal proﬁts.
D) New entrants will compete away the ﬁrm's supernormal proﬁts.

Accepted Answer

In a perfectly competitive market, supernormal profits attract new entrants, increasing supply and driving down prices until only normal profits are made.

Question 20

In the long run, the supply curve for a perfectly competitive industry:
A) will shift to the right if new ﬁrms enter the industry.
B) is the sum of all individual ﬁrms' average total cost curves.
C) is horizontal at the market price.
D) is the same as the marginal cost curve over all levels of output.

Accepted Answer

In a perfectly competitive industry, the long-run supply curve will shift to the right if new firms enter the industry. This is because the entry of new firms increases the total quantity of goods or services supplied at any given price, effectively shifting the supply curve to the right. The other options do not accurately describe the long-run supply curve in a perfectly competitive industry.

Quiz 5: Market Structure and Firm Performance

For a ﬁrm to be considered a monopoly, it must _____.

Which of the following is likely to act as a barrier to entry in a monopoly market?

In perfect competition, a ﬁrm's _____.

Firms are likely to enter a competitive industry when _____.

If a ﬁrm experiences such signiﬁcant economies of scale that the market can support only one ﬁrm, the ﬁrm is best described as a(n) _____.

What will happen in a perfectly competitive market if there is an increase in the cost of labour, ceteris paribus?

Which of the following is true of supernormal pro?ts?

When a perfectly competitive ﬁrm is in equilibrium in the long run, _____.

In the short run, a perfectly competitive ﬁrm is minimizing losses at an output of 250 units. If the market price is £5 and the average cost is £8 per unit, what is the ﬁrm's total loss?

A ﬁrm is productively eﬃcient in the long run if _____.

A competitive ﬁrm will make losses when _____.

_____ is equal to revenues less raw material costs, wages and depreciation.

In the short run, a perfectly competitive ﬁrm maximizes proﬁts by producing 500 units of output at a price of £10 per unit and an average cost of £8 per unit. What is the total proﬁt earned by the ﬁrm?

A competitive ﬁrm is said to be allocatively eﬃcient if _____.

Which of the following is true for a perfectly competitive ﬁrm in the long run?

A proﬁt-maximizing ﬁrm is producing an output of 300 units where price is £10 per unit and average total cost is £8 per unit. Given that the ﬁrm operates in a perfectly competitive market, which of the following is likely to be true?

In the short run, a competitive ﬁrm will maximize proﬁts by expanding output when _____.

Normal economic pro?ts are:

Suppose a perfectly competitive ﬁrm is making supernormal proﬁts. What is likely to happen in the long run?

In the long run, the supply curve for a perfectly competitive industry: