4. Which of the following statements about marginal revenue for a perfectly competitive firm is incorrect? A) TR

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1 Name: Date: 1. Which of the following will not be true of a perfectly competitive market? A) Buyers and sellers will have an imperceptible effect on the market. B) Firms can freely enter and exit the market. C) Different consumers may pay different prices. D) Buyers and sellers are price takers in the market. 2. Economic profit is defined as A) The same as accounting profit. B) Total revenue less total explicit costs. C) Total revenue less total opportunity costs. D) Total revenue less total explicit and implicit costs. 3. Identify the truthfulness of the following statements. I. A firm can earn a positive accounting profit but a negative economic profit. II. Opportunity cost is included in the concept of economic profit but not in the definition of accounting profit. A) Both I and II are true. B) Both I and II are false. C) I is true; II is false. D) I is false; II is true. 4. Which of the following statements about marginal revenue for a perfectly competitive firm is incorrect? A) TR MR = Q. B) MR = P C) Marginal revenue is constant. D) Marginal revenue is the rate at which total revenue changes with respect to changes in output. 5. A fixed cost that the firm cannot avoid if it shuts down and produces zero out put is A) Non-sunk field cost. B) Avoidable cost. C) Equilibrium cost. D) Sunk fixed cost. Page 1

2 6. Which of the following represents a profit-maximizing condition for a firm operating in a perfectly competitive industry? A) P = MC. B) MC = MR. C) MC must be increasing. D) All of the above are true. 7. In the short run, the firm's shut-down price occurs at A) The minimum of the firm's average total cost curve. B) The minimum of the firm's average variable cost curve. C) Where the firm's average variable cost curve intersects marginal cost. D) Both b) and c) are true. 8. Identify the truthfulness of the following statements. A) I) A profit-maximizing firm never produces where P < AVC. II) A profit-maximizing firm never produces where P < AC. B) Both I and II are true. C) Both I and II are false. D) I is true; II is false. E) I is false; II is true. 9. A perfectly competitive firm's short-run supply curve is A) P = AC where P SMC. B) P = AVC where P SMC. C) P = SMC where P AC. D) P = SMC where P AVC. 10. The short-run market supply curve is derived by supplied of the individual firm supply curves. A) Vertically summing the prices and quantities. B) Horizontally summing the prices and quantities. C) Vertically summing the quantities. D) Horizontally summing the quantities. 11. In an increasing cost industry, the long-run supply curve is A) Downward sloping. B) Horizontal. C) Upward sloping. D) Vertical. Page 2

3 12. In a perfectly competitive, increasing-cost industry in the long run, economic profit for the industry and economic rent. A) Can be positive; can be positive. B) Can be positive; equals zero. C) Equals zero; can be positive. D) Equals zero; equals zero. 13. Which of the following statements regarding a competitive market is accurate? A) In general, the externalities prevalent in perfectly competitive markets prevent these markets from reaching an efficient equilibrium. B) In the long run, a perfectly competitive market allocates resources efficiently. C) The consumer surplus in a perfectly competitive market could be improved on through government intervention. D) Lowering the equilibrium price in a competitive market also lowers consumer surplus in the market. 14. In a perfectly competitive market, which of the following will not occur as a result of an excise tax? A) The market will under-produce relative to the efficient level. B) Consumer surplus will be higher than with no tax since the tax is imposed on suppliers. C) Producer surplus will be lower than with no tax. D) The tax causes a deadweight loss. 15. Which of the following statements regarding a price ceiling in a perfectly competitive market is incorrect? A) Price ceiling set a lower bound on the allowable price in a market. B) The will be excess demand resulting from the price ceiling. C) The market will underproduce relative to the efficient level. D) Consumer surplus may either increase or decrease with a price ceiling. 16. In a perfectly competitive market, a production quota A) Sets a minimum level of production that domestic firms must produce. B) Has the effect of keeping the market price below the equilibrium level. C) Will create excess supply in the market. D) Creates no deadweight loss. Page 3

4 17. Acreage limitations are used by the government because A) The government is concerned that agricultural production is too high. B) They raise the market price of an agricultural product without the surpluses associated with price supports. C) The government is concerned that agricultural prices are too high. D) They are an effective way to feed poor people. 18. In a perfectly competitive market, an import quota A) Sets a minimum level of production that domestic firms must produce. B) Sets a minimum level of imports for a country. C) Sets a maximum level of production that domestic firms may produce. D) Sets a maximum level of imports into a country. 19. In a constant-cost industry, the long-run market supply curve is A) Upward sloping. B) Horizontal. C) Downward sloping. D) Vertical. 20. Producer surplus for an individual firm is A) Total revenue less total variable cost. B) Total revenue less total fixed cost. C) Total revenue less total non-sunk cost. D) Total revenue less total implicit cost. Page 4

5 Answer Key 1. C 2. D 3. A 4. A 5. D 6. D 7. D 8. C 9. D 10. D 11. C 12. C 13. B 14. B 15. A 16. C 17. B 18. D 19. B 20. C Page 5

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