AP Microeconomics - Unit 5 Test

In the short run, if the product price of a perfectly competitive firm is less than the minimum average variable cost, the firm will:

a) raise its price

b) increase its output

c) decrease its output slightly but increase its profit margin

d) lose more by continuing to produce than by shutting down

e) lose less by continuing to produce than by shutting down

lose more by continuing to produce than by shutting down

Which of the following statements best describes the graph below?

a) Economic losses are incurred, and the firm will increase price until no losses are incurred.

b) Economic losses are incurred, and exit of firms from the market will cause prices to increase in the long run.

c) Economic profits are earned, and costs will increase until no profits are earned.

d) Economic profits are earned, and entry of firms into the market will cause prices to decrease in the long run.

e) Economic profits are earned, and neither exit nor entry of firms will occur in the long run.

Economic losses are incurred, and exit of firms from the market will cause prices to increase in the long run

A city council is deciding what price to set for a trip on the city's commuter train line. If the council wants to maximize profits, it will set a price so that:

a) price equals marginal cost

b) price equals average cost

c) price equals marginal revenue

d) marginal revenue equals marginal cost

e) marginal revenue equals average total cost

marginal revenue equals marginal cost

Which of the following are characteristics of a perfectly competitive industry?

I. New firms can enter the industry easily.

II. There is no product differentiation.

III. The industry is perfectly elastic IV. The supply curve of an individual firm in the industry is perfectly elastic.

a) I and II only

b) I and III only

c) U and IV only

d) I, II, and IV only

e) I, III, and IV only

I and II only

A perfectly competitive firm earning economic profits, produces and sells 100 units of output at a price of $20 per unit. If its marginal cost of increasing output to a rate of 101 units is $18, which of the following statements is correct?

a) The total revenue from selling 101 units is the same as the total revenue from selling 100 units.

b) The total profit from selling 101 units is $2 greater than the total profit from selling 100 units.

c) The total cost of producing 101 units is $2 greater than the total cost of producing 100 units.

d)To sell 101 units, the firm must reduce its price below $20.

e) To sell 101 units, the firm must raise its price above $20

The total profit from selling 101 units is $2 greater than the total profit from selling 100 units

Which of the following is true if a perfectly competitive industry is earning zero economic profits in the long run?

a) The level of investment in long-run equilibrium is greater than the efficient level.

b) Relatively few firms are able to survive the competitive pressure in the long run.

c) Some firms will be forced to transfer their resources to more lucrative uses.

d) The resources invested in this industry are earning at least as high a return as they would in any alternative use.

e) Firms will exit until economic profits become positive

The resources invested in this industry are earning at least as high a return as they would in any alternative use

Refer to the chart below. The average total cost to the firm of producing 2 units of output is:

a) $ 35.00

b) $ 85.00

c) $ 95.00

d) $100.00

e) $130.00

$ 95.00

Which of the following best describes a perfectly competitive market?

a) Many small firms producing differentiated products and facing significant barriers to entry

b) Many small firms producing a homogeneous product and facing significant barriers to entry

c) Many small firms producing a homogeneous product and facing no significant barriers to entry

d) A single large firm producing a unique product and facing significant barriers to entry

e) A few large firms producing a differentiated product and facing no significant barriers to entry

Many small firms producing a homogeneous product and facing no significant barriers to entry

Refer to the chart below. If the product price is $85, how many units of output must the firm produce in order to maximize profits?

a) 0

b) 3

c) 4

d) 5

e) 6

5

Refer to the graph below. If marginal revenue is equal to P1, all of the following statements are true EXCEPT:

a) Total revenue will equal total costs.

b) The firm will produce Q1 units of output.

c) The firm will produce the efficient level of output.

d) The firm will earn a normal profit.

e) The firm will increase production in the long-run.

The firm will increase production in the long-run

Suppose that the consumption of a certain product results in benefits to others besides the consumers of the product. Which of the following statements is most likely to be true?

a) The demand for the product is prices inelastic.

b) A perfect competitive industry will not produce the optimal quantity of the product.

c) A perfect competitive industry will not produce the product.

d) Optimality requires that consumers of this product be taxed.

e) Producers of this product earn an economic profit.

A perfect competitive industry will not produce the optimal quantity of the product

In the short run, a profit maximizing firm should shut down if which of the following is true?

a) It is not making an economic profit.

b) It is not making a normal profit.

c) Its total revenue is less than its total cost.

d) Its product price is less than its average variable cost.

e) Its product price is greater than its average total cost.

Its product price is less than its average variable cost

Assume that a competitive industry producing a normal good is in long-run equilibrium. If avenge consumer income decreases which of the following changes will occur?

a) Row A

b) Row B

c) Row C

d) Row D

e) Row E

Row E

In a perfectly competitive industry, the market price of the product is $12. A firm produces at a level of output where average total cost is $16, marginal cost is $16, and average variable cost is $8. To maximize its profit, the firm should:

a) decrease its selling price

b) increase its selling price

c) decrease output but keep producing

d) shutdown

e) leave both price and output unchanged

decrease output but keep producing

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

a) It earns positive economic profit.

b) It is allocatively efficient.

c) It experiences economic losses.

d) It is productively inefficient.

e) It maximizes revenues.

It is allocatively efficient

In most cases the supply curve for a perfectly competitive industry can be described as which of the following?

a) More elastic in the short run than in the long run

b) More elastic in the long run than in the short run

c) Downward sloping in the short run

d) Perfectly inelastic in the long run

e) Perfectly elastic in the short run

More elastic in the long run than in the short run

A perfectly competitive firm is currently in long-run equilibrium. Its total revenue is $100,000, and the average total cost of production is $100. Which of the following can be concluded from this information?

a) The firm's marginal cost is $,1000, and its profit is positive.

b) The firm's marginal cost is $,1000, and its profit is zero.

c) The firm's output is 1,000 units, and its profit is negative.

d) The firm's output is 1,000 units, and its profit is zero.

e) The firm's output is 1,000 units, and its profit is positive.

The firm's output is 1,000 units, and its profit is zero

The table below gives the short-run total cost function for a typical firm in a perfectly competitive industry (This is an FRQ in which you will have to look up the table, its just for studying)

(a) What is the dollar value of the firm's total fixed cost?

(b) Calculate the marginal cost of producing the first unit of output.

(c) If the price the firm receives for its product is $20, indicate the firm's profit maximizing quantity of output and explain how you determined your answer.

(d) Given your results in part c, explain what will happen to the number of firms in the industry in the long run.

(e) Assume that this firm operates in a constant-cost industry and has reached long-run equilibrium. If the government imposes a per-unit tax of $2, indicate what will happen to the firm's profit-maximizing output in the long run.

(a) one point is earned for indicating that TFC is $20

(b) on point is earned for indicating that MC of the first unit is $7

(c) -one point is earned for indicating that profit-maximizing output=4 units (or between 4 and 5 units)

-one point is earned for explaining that MR>MC for all units until Q=5 (or direct calculation of TR=TC)

(d) -one point is earned for concluding that the number of firms will increase

-one point is earned for explaining that profits will attract new firms to enter

(e) one point is earned for stating that there is no change in the profit-maximizing output

Assume that corn is produced in a perfectly competitive market. Farmer Roy is a typical producer of corn.

(a) Assume that Farmer Fred is making zero economic profit in the short run. Draw a correctly labeled side-by side graph for the corn market and for Farmer Fred and show each of the following.

(i) The equilibrium price and quantity for the corn market, labeled as PM1 and QM1, respectively

(ii) The equilibrium quantity for Farmer Roy, labeled as QF1

(b) For Farmer Fred's corn, is the demand perfectly elastic, perfectly inelastic, relatively elastic, relatively inelastic, or unit elastic? Explain.

(c) Corn can be used as an input in the production of ethanol. The demand for ethanol has significantly increased.

(i) Show on your graph in part (a) the effect of the increase in demand for ethanol on the market price and quantity of corn in the short run, labeling the new equilibrium price and quantity as PM2 and QM2, respectively.

(ii) Show on your graph in part (a) the effect of the increase in demand for ethanol on Farmer Fred's quantity of corn in the short run, labeling the quantity as QF2.

(iii) How does the average total cost for Farmer Fred at QF2 compare with PM2?

(d) Corn is also used as an input in the production of cereal. What is the effect of the increased demand for ethanol on the equilibrium price and quantity in the cereal market in the short run? Explain.

(a)

-one point is earned for a correctly labeled graph of the corn market (S,D,Pm1,Qm1)

-one point is earned for the graph of the firm with a horizontal demand curve at Pm1

-one point is earned for showing the profit-maximizing quantity, Qf1, at MC=MR

-one point is earned for showing minimum ATC on the horizontal demand curve at Qf1

(b) one point is earned for stating that the demand curve for Farmer Roy's corn is perfectly elastic because Farmer Roy is a price-taker or because he can sell all that he wants at the market price

(c)

-one point is earned for shifting the market demand curve to the right and showing Pm2 and Qm2

-one point is earned for shifting the firm's demand curve upward to the level of Pm2

-one point is earned for showing the profit-maximizing quantity, Qf2, at MC=new MR

-one point is earned for stating that ATC at Qf2 is lower than Pm2

(d) one point is earned for stating that the equilibrium quantity will decrease and the equilibrium price will increase, because the increase in the price of corn causes a decrease in the supply of cereal