Question 1

Assume a purely competitive decreasing-cost industry is initially in long-run equilibrium but then there is a decrease in market demand for the product. After all economic adjustments to this new situation have taken place, product price will be

Accepted Answer

A)  higher, but total output will be lower.
B)  lower, and total output will be lower.
C)  higher, and total output will be higher.
D)  lower, but total output will be higher.E) None of the above
F) A) and B)

Question 2

Resources are efficiently allocated when production occurs at that output at which

Accepted Answer

A)  P equals MR.
B)  P equals AVC.
C)  P exceeds MR.
D)  P equals MC.E) A) and D)
F) None of the above

Question 3

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

Accepted Answer

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.E) C) and D)
F) A) and D)

Question 4

The industry represented by the accompanying graph must be one where

Accepted Answer

A)  resource prices rise when the industry contracts.
B)  resource prices rise when the industry expands.
C)  resource prices fall when the industry contracts.
D)  resource prices are unaffected by the industry's expansion.E) All of the above
F) B) and C)

Question 5

In long-run equilibrium, a competitive firm produces where P = MR = MC = minimum ATC and the firm earns normal economic profits.

Accepted Answer

A) True 
 B)False

Question 6

Allocative efficiency is achieved by equalizing consumer surplus and producer surplus.

Accepted Answer

A) True 
 B)False

Question 7

The theory of creative destruction was advanced many years ago by

Accepted Answer

A)  Bill Gates.
B)  Alfred Marshall.
C)  Joseph Schumpeter.
D)  Adam Smith.E) All of the above
F) A) and D)

Question 8

Refer to the diagram. By producing at output level Q,

Accepted Answer

A)  neither productive nor allocative efficiency is achieved.
B)  both productive and allocative efficiency are achieved.
C)  allocative efficiency is achieved, but productive efficiency is not.
D)  productive efficiency is achieved, but allocative efficiency is not.E) A) and D)
F) None of the above

Question 9

If there is a decrease in demand for a product in a purely competitive industry, it results in an industry contraction that will end when the product price is

Accepted Answer

A)  greater than its marginal cost.
B)  equal to its marginal cost.
C)  less than its marginal cost.
D)  greater than its average cost.E) C) and D)
F) A) and B)

Question 10

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

Accepted Answer

A)  is $10.
B)  is $40.
C)  is $400.
D)  cannot be determined from the information provided.E) C) and D)
F) B) and C)

Question 11

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

Accepted Answer

A)  realize economic profits greater than $0 but less than $25,000.
B)  realize economic profits of $0.
C)  realize economic losses greater than $0 but smaller than $25,000
D)  shut down.E) None of the above
F) All of the above

Question 12

Efficiency or deadweight losses occur in purely competitive markets when P = MC = lowest ATC.

Accepted Answer

A) True 
 B)False

Question 13

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

Accepted Answer

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.E) A) and B)
F) A) and C)

Question 14

A purely competitive firm

Accepted Answer

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.E) A) and B)
F) None of the above

Question 15

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

Accepted Answer

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.E) B) and D)
F) A) and D)

Question 16

Creative destruction is least beneficial to

Accepted Answer

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

Question 17

In the long run for a purely competitive market, firms will earn only normal profits.

Accepted Answer

A) True 
 B)False

Question 18

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

Accepted Answer

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

Question 19

The accompanying graph shows the long-run supply and demand curves in a purely competitive market. We know that when this market reaches equilibrium, the marginal

Accepted Answer

A)  cost equals marginal benefit.
B)  benefit exceeds marginal cost.
C)  cost exceeds marginal benefit.
D)  cost equals zero.E) None of the above
F) A) and C)

Question 20

If the entry or exit of firms does not affect the resource prices in an industry, we refer to it as a

Accepted Answer

A)  fixed-price industry.
B)  price-controlled industry.
C)  constant-cost industry.
D)  price-taking industry.E) A) and D)
F) A) and C)

Exam 11: Pure Competition in the Long Run

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

Correct AnswerverifiedShow Answer

The accompanying graph shows the long-run supply and demand curves in a purely competitive market. We know that when this market reaches equilibrium, the marginal

Correct AnswerverifiedShow Answer

Refer to the diagram. By producing at output level Q,

Correct AnswerverifiedShow Answer

Efficiency or deadweight losses occur in purely competitive markets when P = MC = lowest ATC.

Correct AnswerverifiedShow Answer

Resources are efficiently allocated when production occurs at that output at which

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Allocative efficiency is achieved by equalizing consumer surplus and producer surplus.

Correct AnswerverifiedShow Answer

If the entry or exit of firms does not affect the resource prices in an industry, we refer to it as a

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

A purely competitive firm

Correct AnswerverifiedShow Answer

If there is a decrease in demand for a product in a purely competitive industry, it results in an industry contraction that will end when the product price is

Correct AnswerverifiedShow Answer

Assume a purely competitive decreasing-cost industry is initially in long-run equilibrium but then there is a decrease in market demand for the product. After all economic adjustments to this new situation have taken place, product price will be

Correct AnswerverifiedShow Answer

In long-run equilibrium, a competitive firm produces where P = MR = MC = minimum ATC and the firm earns normal economic profits.

Correct AnswerverifiedShow Answer

The theory of creative destruction was advanced many years ago by

Correct AnswerverifiedShow Answer

The industry represented by the accompanying graph must be one where

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

In the long run for a purely competitive market, firms will earn only normal profits.

Correct AnswerverifiedShow Answer

Creative destruction is least beneficial to

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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