ECONOMICS

35. Refer to Figure 14-8. If there are 200 identical firms in this market, what level of output will be supplied to the

market when price is $2.00?

a. 2,000

b. 10,000

c. 20,000

d. 40,000

36. When new firms enter a perfectly competitive market,

a. demand increases.

b. the short-run market supply curve shifts right.

c. the short-run market supply curve shifts left.

d. existing firms will increase prices to keep the new firms from entering.

37. If there is an increase in market demand in a perfectly competitive market, then in the short run

a. there will be no change in the demand curves faced by individual firms in the market.

b. the demand curves for firms will shift downward.

c. the demand curves for firms will become more elastic.

d. profits will rise.

38. If there is an increase in market demand in a perfectly competitive market, then in the short run prices will

a. rise.

b. remain unchanged at the minimum of average total cost.

c. fall.

d. remain unchanged at the minimum of marginal cost.

12

Scenario 14-3

As part of an estate settlement Mary received $1 million. She decided to use the money to purchase a small

business in Anywhere, USA. Her business operates in a perfectly competitive industry. If Mary would have

invested the $1 million in a risk-free bond fund she could have made $100,000 each year. She also quit her job

with Lucky.Com Inc. to devote all of her time to her new business; her salary at Lucky.Com Inc. was $75,000 per

year.

39. Refer to Scenario 14-3. What are Mary’s opportunity costs of operating her new business?

a. $25,000

b. $75,000

c. $100,000

d. $175,000

40. When firms are neither entering nor exiting a perfectly competitive market,

a. total revenue must equal total variable cost for each firm.

b. economic profits must be zero.

c. price must equal average variable cost for each firm.

d. Both a and c are correct.

Figure 14-10

41. Refer to Figure 14-10. If the price is P3 in the short run, what will happen in the long run?

a. Nothing. The price is consistent with zero economic profits, so there is no incentive for

firms to enter or exit the industry.

b. Individual firms will earn positive economic profits in the short run, which will entice

other firms to enter the industry.

c. Individual firms will earn negative economic profits in the short run, which will cause

some firms to exit the industry.

d. Because the price is below the firm’s average variable costs, the firms will shut down.

42. The production decisions of perfectly competitive firms follow one of the Ten Principles of Economics, which

states that rational people

a. consider sunk costs.

b. equate prices to the average costs of production.

c. will eventually leave markets that experience zero profit.

d. think at the margin.

13

43. Charles’s Car Wash has average variable costs of $2 and average total costs of $3 when it produces 100 units of

output (car washes). The firm’s total variable cost is

a. $100.

b. $200.

c. $300.

d. $500.

44. Marginal cost is equal to

a. TC/Q.

b. ATC/Q.

c. TC/Q.

d. Q/TC.

45. A firm has a fixed cost of $500 in its first year of operation. When the firm produces 100 units of output, its total

costs are $3,500. When it produces 101 units of output, its total costs are $3,750. What is the marginal cost of

producing the 101st unit of output?

a. $250

b. $275

c. $340.91

d. $350

Table 13-5

The Flying Elvis Copter Rides

Quantity Total

Cost

Fixed

Cost

Variable

Cost

Marginal

Cost

Average

Fixed

Cost

Average

Variable

Cost

Average

Total

Cost

0 $50 $50 $0 — — — —

1 $150 A B C D E F

2 G H I $120 J K L

3 M N O P Q $120 R

46. Refer to Table 13-5. What is the value of A?

a. $25

b. $50

c. $100

d. $200

47. Refer to Table 13-5. What is the value of B?

a. $25

b. $50

c. $100

d. $200

48. Refer to Table 13-5. What is the value of C?

a. $25

b. $50

c. $100

d. $200

14

Table 13-6

Quantity

of Output

Fixed

Cost

Variable

Cost

0 $20 $0

1 $20 $10

2 $20 $40

3 $20 $80

4 $20 $130

5 $20 $200

6 $20 $300

49. Refer to Table 13-6. What is the average fixed cost of producing 5 units of output?

a. $4

b. $5

c. $40

d. $44

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