Question 1

For a firm in the short run, if the firm produces the quantity at which _____, the firm is earning _____.
A)Price> Average Cost; economic profits
B)Price < Average Cost; zero profit
C)Price = Average Cost; economic losses
D)Price < Average Cost; economic profits.

Accepted Answer

When a firm's price is greater than its average cost, it is earning economic profits because it is selling its product for more than the average cost of producing it.

Question 2

In the short run, a firm makes zero profits if it produces the quantity at which:
A)Price - Average Cost < 0.
B)Price - Average Cost = 0.
C)Price - Average Cost> 0.
D)Price = (TR / Q + TC / Q) × Q.

Accepted Answer

In the short run, a firm makes zero profits when it produces the quantity at which price is equal to average cost (P=AC). This is because at this level of output, the firm covers all of its costs including both variable and fixed costs, but earns no excess profit. If the firm produces at a quantity where price is less than average cost (P<AC), then it will incur losses. If the firm produces at a quantity where price is greater than average cost (P>AC), then it will earn profits. Therefore, the correct answer is B.

Question 3

Alana's Confectionary is located in the East Side Village. When the market price of iced brownies is $5, the profit-maximizing output level is 150 brownies. Her average cost is $4, and her variable cost per unit is $3. Alana's marginal cost is _____, and her short-run profits are _____.
A)$5; $150
B)$5; $300
C)$1; $150
D)$1; $300

Accepted Answer

Alana's marginal cost equals the market price of $5 when she is maximizing profit. Her profit is calculated as (Price - Average Cost) * Quantity = ($5 - $4) * 150 = $150.

Question 4

The assumption of easy entry and exit implies that, in the _____ run, all firms in the industry will earn _____ economic profits.
A)long; zero
B)short; positive
C)short; zero
D)long; positive

Accepted Answer

The assumption of easy entry and exit implies that firms can easily enter or exit the industry depending on economic profits. In the short run, some firms may earn positive economic profits due to various factors, but in the long run, new firms will enter the industry, increasing competition and reducing economic profits to zero for all firms. Therefore, in the long run, all firms in the industry will earn zero economic profits.

Question 5

If firms are making economic losses, then in the long run:
A)the short-run industry supply curve will shift rightward.
B)new firms will enter the industry.
C)industry output will rise, and the price will rise.
D)firms will leave the industry.

Accepted Answer

If firms are making economic losses, they are likely to exit the industry in the long run to avoid further losses. As a result, the industry supply curve will shift leftward, and the price will rise to a level where remaining firms can earn normal profits. This process will continue until the industry reaches a long-run equilibrium, where there are no more economic profits or losses. Therefore, option D is the best choice.

Question 6

Economic profits encourage firms to _____ the industry, and losses encourage firms to _____ the industry.
A)exit; enter
B)enter; enter
C)enter; exit
D)exit; exit

Accepted Answer

Economic profits attract new firms to enter an industry because they see an opportunity to earn profits, while economic losses encourage existing firms to exit the industry to avoid further losses.

Question 7

Suppose that the market for cab rides in a community is initially in long-run equilibrium. Subsequently, an increase in population increases the demand for cab rides. In the short run, the market price will _____, and the number of rides offered by a typical cab driver will _____.
A)rise; rise
B)rise; fall
C)fall; rise
D)fall; fall

Accepted Answer

In the short run, an increase in demand leads to a higher market price due to the upward pressure on prices from increased demand. Additionally, cab drivers are likely to offer more rides to capitalize on the higher prices and increased demand, leading to an increase in the number of rides offered by a typical cab driver.

Question 8

Suppose that the market for cab rides is initially in long-run equilibrium. Subsequently, an increase in population increases the demand for cab rides. In the short run, the typical cab driver is likely to:
A)earn an economic profit.
B)incur an economic loss.
C)have no change in its economic profit.
D)have neither an economic profit nor an economic loss.

Accepted Answer

In the short run, the supply of cabs is fixed, so an increase in demand will cause an increase in price, leading to economic profits for cab drivers. However, in the long run, new firms will enter the market, increasing the supply of cabs and driving down the price, resulting in zero economic profits in the long-run equilibrium.

Question 9

Suppose that the market for cab rides is initially in long-run equilibrium. Subsequently, an increase in population increases the demand for cab rides. In the long run, cab drivers will _____ the market, driving the price of cab rides _____ and the profits of individual drivers _____.
A)enter; up; back to zero
B)enter; down; back to zero
C)leave; up; up
D)leave; up; back to zero

Accepted Answer

An increase in demand will lead to an increase in price in the short run, but in the long run, new cab drivers will enter the market to take advantage of the higher profits. As more drivers enter the market, the supply of cab rides will increase, driving down the price back to the original long-run equilibrium level. The profits of individual drivers will also decrease in the long run as competition increases.

Question 10

Which scenario is MOST likely to cause firms to exit an industry?
A)Consumer preferences for the product strengthen.
B)A technological advance allows firms to produce more efficiently.
C)The price of a key input falls.
D)Consumer incomes fall.

Accepted Answer

If consumer incomes fall, it is likely that demand for goods and services will decrease. This decrease in demand can lead to lower revenues for firms in the industry, making it difficult for them to cover their costs and remain profitable. As a result, some firms may choose to exit the industry.

Question 11

If some firms are incurring economic losses, then in the long run, the:
A)number of firms in the industry will increase.
B)industry supply curve will shift to the right.
C)number of firms in the industry will not change.
D)number of firms in the industry will decrease.

Accepted Answer

If firms are incurring economic losses, they will eventually exit the industry in the long run, leading to a decrease in the number of firms in the industry. This will reduce the industry supply and could potentially lead to an increase in equilibrium price.

Question 12

Suppose that the market for ride-sharing services is initially in long-run equilibrium. Subsequently, a decrease in population decreases the demand for rides. In the short run, the price of rides will _____, and the number of rides offered by a typical ride-sharing firm will _____.
A)rise; rise
B)rise; fall
C)fall; rise
D)fall; fall

Accepted Answer

In the short run, a decrease in demand leads to a lower price for rides as suppliers adjust to reduced demand. Consequently, the number of rides offered by a typical firm will also fall as they respond to decreased demand and lower prices.

Question 13

In a long-run equilibrium, economic profits are:
A)positive.
B)zero.
C)negative.
D)indeterminate.

Accepted Answer

In the long-run equilibrium, firms in a perfectly competitive market make normal profits, which means their economic profits are zero. This occurs because, in the long run, there is free entry and exit of firms, and as firms earn positive economic profits, new firms enter the market, increasing supply and lowering prices until profits are zero. Conversely, if firms earn negative economic profits, some firms will exit the market, reducing supply and increasing prices until all firms earn zero economic profits.

Question 14

Adam's surfboard factory is making positive economic profits. If the price of a surfboard is $900, Adam's output is 300 surfboards per month, and his monthly average cost is $700, what is his monthly profit?
A)$60,000
B)$270,000
C)$210,000
D)$200

Accepted Answer

Adam's monthly profit is calculated by subtracting his total costs from his total revenue. His total revenue is $900 * 300 = $270,000. His total costs are $700 * 300 = $210,000. Therefore, his monthly profit is $270,000 - $210,000 = $60,000.

Question 15

Suppose Naomi's yoga studio charges the market price, which is slightly below Naomi's average cost. This means that Naomi:
A)is breaking even.
B)should shut down immediately.
C)is earning a small economic profit.
D)is incurring a small economic loss.

Accepted Answer

Naomi's yoga studio charging a price slightly below average cost means that the revenue per unit is less than the cost per unit, leading to a situation where the business is not covering its average costs fully, thus incurring a small economic loss.

Question 16

Nikos' lawn-mowing service is a profit-maximizing, competitive firm. If Nikos mows ten lawns per day at a price of $27 per lawn and has a total cost of $280, of which $30 is a fixed cost, what should Nikos do in the short run?
A)Shut down, since he is not covering his fixed costs
B)Continue operating, since he is covering part of his fixed costs and all his variable costs
C)Raise the price, so that he can cover his fixed costs
D)Lower his fixed costs to become more competitive

Accepted Answer

To determine whether Nikos should continue operating in the short run, we need to calculate his total revenue and total variable costs.

Total revenue = Price * Quantity = $27/lawn * 10 lawns = $270

Total variable cost = Total cost - Fixed cost = $280 - $30 = $250

Since total revenue exceeds total variable cost, Nikos is covering his variable costs and generating a profit of $20 ($270 - $250). Therefore, Nikos should continue operating in the short run.

Question 17

In the long run, each firm in an industry will:
A)earn only enough to cover the opportunity costs of all resources used in production.
B)produce where MR is less than MC.
C)offer more than one variation of the same good.
D)set price in coordination with other producers in the market.

Accepted Answer

In the long run, firms in an industry will earn only enough to cover the opportunity costs of all resources used in production because if firms were earning excess profits, new firms would enter the industry, driving down profits and if firms were earning losses, some firms would exit the industry, reducing supply and driving up prices. This process of entry or exit will continue until all firms are earning just enough to cover their opportunity costs. Therefore, in the long run, firms will earn a normal profit, which is the minimum level of profit needed to keep resources employed in the industry. Choices B, C, and D are not necessarily true in the long run for every firm in an industry.

Question 18

Harrison owns a flower shop. Generally, when preferences for a good rise, demand for the good rises. Holding all else constant, this will result in a higher market price, which will lead to _____ in the industry. The latter will in turn _____, leading the price to _____.
A)positive economic profits; attract new firms into; fall
B)economic losses; attract new firms into; fall
C)positive economic profits; cause some firms to leave; rise further
D)economic losses; cause some firms to leave; rise further

Accepted Answer

When preferences for a good rise, demand increases, leading to higher prices and positive economic profits. This attracts new firms into the industry, increasing supply and eventually causing the price to fall.

Question 19

Obstacles that prevent other firms from entering the industry would be called:
A)product differentiation.
B)a barrier to entry.
C)market power.
D)patents and copyrights.

Accepted Answer

A barrier to entry refers to obstacles that prevent other firms from entering an industry, such as high start-up costs, economies of scale, or government regulations. Product differentiation, market power, patents and copyrights can all contribute to a barrier to entry, but they are not the same thing.

Question 20

_____ exist(s) when the value of a good or service to an individual increases as the number of other people using the same good or service increases.
A)Dependence on a scarce resource or input
B)Returns to scale
C)Government-created barriers
D)Network externalities

Accepted Answer

Network externalities, also known as network effects, occur when a product or service becomes more valuable as more people use it. This can create a positive feedback loop, where the more people that use a particular product or service, the more attractive it becomes to others, leading to even more adoption. This phenomenon can be seen in technology products like social media platforms or messaging apps, where the more people using the platform, the more valuable it becomes to users.

Quiz 15: Entry, Exit, and Long-Run Profitability

For a firm in the short run, if the firm produces the quantity at which _, the firm is earning _.

In the short run, a firm makes zero profits if it produces the quantity at which:

Alana's Confectionary is located in the East Side Village. When the market price of iced brownies is $5, the profit-maximizing output level is 150 brownies. Her average cost is $4, and her variable cost per unit is $3. Alana's marginal cost is _, and her short-run profits are _.

The assumption of easy entry and exit implies that, in the _ run, all firms in the industry will earn _ economic profits.

If firms are making economic losses, then in the long run:

Economic profits encourage firms to _ the industry, and losses encourage firms to _ the industry.

Suppose that the market for cab rides in a community is initially in long-run equilibrium. Subsequently, an increase in population increases the demand for cab rides. In the short run, the market price will _, and the number of rides offered by a typical cab driver will _.

Suppose that the market for cab rides is initially in long-run equilibrium. Subsequently, an increase in population increases the demand for cab rides. In the short run, the typical cab driver is likely to:

Suppose that the market for cab rides is initially in long-run equilibrium. Subsequently, an increase in population increases the demand for cab rides. In the long run, cab drivers will ___ the market, driving the price of cab rides _ and the profits of individual drivers ___.

Which scenario is MOST likely to cause firms to exit an industry?

If some firms are incurring economic losses, then in the long run, the:

Suppose that the market for ride-sharing services is initially in long-run equilibrium. Subsequently, a decrease in population decreases the demand for rides. In the short run, the price of rides will _, and the number of rides offered by a typical ride-sharing firm will _.

In a long-run equilibrium, economic profits are:

Adam's surfboard factory is making positive economic profits. If the price of a surfboard is $900, Adam's output is 300 surfboards per month, and his monthly average cost is $700, what is his monthly profit?

Suppose Naomi's yoga studio charges the market price, which is slightly below Naomi's average cost. This means that Naomi:

Nikos' lawn-mowing service is a profit-maximizing, competitive firm. If Nikos mows ten lawns per day at a price of $27 per lawn and has a total cost of $280, of which $30 is a fixed cost, what should Nikos do in the short run?

In the long run, each firm in an industry will:

Harrison owns a flower shop. Generally, when preferences for a good rise, demand for the good rises. Holding all else constant, this will result in a higher market price, which will lead to ___ in the industry. The latter will in turn _, leading the price to ___.

Obstacles that prevent other firms from entering the industry would be called:

_____ exist(s) when the value of a good or service to an individual increases as the number of other people using the same good or service increases.