Purdue Econ 251 Exam 2

If Lisa's income rises to $40, which of the following would you expect to see as a result?

Lisa's budget line will shift outward, but the slope won't change

What is the marginal rate of substitution?

The amount of good y a consumer is willing to give up for one more unit of good

x

If the marginal product of labor is greater than the average product of labor, which of the

following would you expect to see as a result?

A decrease in average variable cost

In the long run, if a firm is experiencing economies of scale, which of the following is

true?

Higher output reduces the average cost of production

Firms in perfectly competitive industries are called "price takers" because

The market equilibrium price is unaffected by changes in an individual firm's output

Under which of the following circumstances would a perfectly competitive firm earn

negative economic profit?

If the price is below the average variable cost.

If a firm in a perfectly competitive market is earning negative economic profit, what will

happen in the long run?

Firms will exit the market, which will raise the market equilibrium price, and

profit will rise until it is equal to $0.

There are no barriers to entry in ____________, but there are barriers to entry in

_________.

Perfect competition; Monopoly

Which of the following is perfectly elastic?

Firm demand in perfect competition

The airline industry charges different prices for different seats on a plane. This is an

example of

price discrimination

A single-price monopoly always produces where

Demand is elastic

For a natural monopoly

In the long run, when production increases, average cost decreases

A firm in a monopolistically competitive market maximizes profit in the short run where

MR=MC

Because a monopolistically competitive firm produces a level of output that is below

production efficiency, we say that the firm

Produces with excess capacity

Which of the following markets produces where MB=MC in the market in long run?

Perfect competition

In general, a consumer maximizes utility with a given income where

The relative price of a good is equal to the marginal rate of substitution

When economic profit is positive

New firms have an incentive to enter the industry

If the marginal cost of production is equal to $14 when the average total cost of production is

$18, which of the following would you expect to see?

The average total cost of production will fall below $18 as output increases by one

more unit

In the long run, if a firm is experiencing economies of scale, which of the following is true?

The average cost of production falls as output increases

Perfectly competitive firms earn economic profit that is __________ in the long run

Zero

For a monopoly, when total revenue maximized, which of the following is true?

Marginal revenue is zero

If a monopoly can practice perfect price discrimination, consumer surplus is ___________,

and deadweight loss is _____.

Zero; zero

A natural monopoly is considered "natural" because

It exists in a market where it is cheaper to have one firm produce all of the industry's

output

A natural monopoly can be regulated with marginal cost pricing or average cost pricing. If a

natural monopoly is regulated with marginal cost pricing, which of the following would you

expect to see as a result?

The natural monopoly earns negative economic profit so it will exit the industry

If a natural monopoly is regulated with average cost pricing, which of the following would

you expect to see as a result?

The natural monopoly earns zero economic profit

In perfect competition and monopoly, firms maximize profit by choosing the level of output

where ____________

Marginal revenue equals marginal cost

Allocative efficiency is achieved in what kind of industry?

Perfect competition, Perfectly-price-discriminating monopoly

Allocative efficiency is achieved in an industry when

Total surplus is maximized