978-1259723223 Test Bank TBChap011 Part 6

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AACSB: Knowledge Application

Ac c e s s i b ili t y :

Keyboard Navigation

Blooms: Understand

Diff icult y:

02 Medium

Learning Objective: 11–05 Discuss creative destruction and the profit incentives for innovation.

Test Bank: II

Topic:

Technological Advance and Competition

187. A patent is the legal right granted to a firm that allows it to

188. A patent gives a firm the power to charge a price that

189. The plusses and minuses of the patent system include the following except

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several patents.

190. The fact that the life expectancy of a US business is rather short—just 10.2 years—is a

reflection of the consequences of

True / False Questions

191. In the long run for a purely competitive market, firms may enter or exit the industry, but the

firms that stay in the industry will maintain their initial plant sizes.

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

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TRUE

193. When a profit-maximizing competitive firm decides to produce at a loss because its price is

below average cost but above average variable cost, that is a long-run decision.

194. In purely competitive market, the entry and exit of firms will push price toward equality

with marginal revenue.

195. When a competitive firm is in long-run equilibrium, its accounting profits are greater than

zero.

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AACSB: Knowledge Application

Ac c e s s i b ili t y :

Keyboard Navigation

Blooms: Understand

Diff icult y:

02 Medium

Learning Objective: 11–02 Describe how profits and losses drive the long-run adjustment

process of pure competition.

Test Bank: II

Topic:

The Long-Run Adjustment Process in Pure Competition

196. When a competitive firm sees losses because the product price falls below the minimum

average cost of production at its current plant, it may decide to expand if there are economies of

scale.

197. When a competitive firm sees the price fall below the minimum possible average total cost

in the long run, then it will decide that it could do better by moving to a different industry.

198. Suppose that a competitive firm finds that in its short-run equilibrium situation, its marginal

cost is higher than its average total cost. If things are not expected to change and there are

constant returns to scale, then the firm will exit the industry in the long

run.

199. It is possible for a competitive firm that is maximizing profits in the short run to make its

profits even bigger in the long run by expanding its plant, assuming that the product price stays

the same.

200. In the long run, assuming that market demand stays the same, if firms in a competitive

industry expand, then the product price will tend to fall as a result.

201. In long-run equilibrium, a competitive firm produces where P = MR = MC = minimum

ATC and the firm earns normal economic profits.

11-100

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AACSB: Knowledge Application

Ac c e s s i b ili t y :

Keyboard Navigation

Blooms: Understand

Diff icult y:

02 Medium

Learning Objective: 11–02 Describe how profits and losses drive the long-run adjustment

process of pure competition.

Test Bank: II

Topic:

The Long-Run Adjustment Process in Pure Competition

202. When firms in a purely competitive industry are earning profits that are greater than normal,

the supply of the product will tend to decrease in the long run.

203. When new firms enter a purely competitive industry, the market supply curve will shift to

the left.

204. When some firms leave a purely competitive industry, the market supply curve will shift in

such a way that the remaining firms’ profits will increase.

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written consent of McGraw-Hill Education.

Blooms: Understand

Diff icult y:

02 Medium

Learning Objective: 11–02 Describe how profits and losses drive the long-run adjustment

process of pure competition.

Test Bank: II

Topic:

The Long-Run Adjustment Process in Pure Competition

205. In the long run, pure competition forces firms to produce at the minimum possible average

total cost and the firms will charge a product price equal to that cost.

206. A purely competitive firm that is earning positive profits in its short-run equilibrium

situation will continue to earn positive profits at the long-run equilibrium.

207. The short-run supply curve of a purely competitive industry tends to be steeper than the

long-run supply curve.

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Learning Objective: 11–03 Explain the differences between constant-cost, increasing-cost, and

decreasing-cost industries.

Test Bank: II

Topic:

Long-Run Supply Curves

208. The long-run supply curve for a competitive, decreasing-cost industry is downward–

sloping.

209. The reason why the long-run supply curve for a purely competitive industry may be

upward-sloping is because of diminishing marginal returns.

210. An upward-sloping long-run supply curve indicates a constant-cost industry.

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Topic:

Long-Run Supply Curves

211. Productive efficiency refers to a condition where marginal cost is equal to marginal revenue

in the long run.

212. An underallocation of resources is occurring in a purely competitive industry whenever the

price of the product is greater than marginal cost.

213. In pure competition, resources are optimally or efficiently allocated when production

occurs at the output level where P = MC.

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214. Consumer surplus is the difference between the maximum price a consumer is willing to

pay for a good and the market price of the product.

215. Producer surplus is the difference between the market price a producer receives for a

product and the minimum price producers are willing to accept for a product.

216. Competitive markets produce equilibrium prices and quantities that minimize the sum of

consumer and producer surpluses.

217. If the price in a competitive market falls and goes below the equilibrium price, then

consumer surplus might increase, but producer surplus will definitely decrease.

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

lowest ATC.

219. The operation of the invisible hand means the pursuit of private interests promotes social

interests in pure competition.

220. The transformative effects of competition that foster the development of new products or

new production methods benefit everyone in society.

221. From the viewpoint of a firm, competition can come even from other firms that are not in

the same industry.

222. Creative destruction is something that our society should try to avoid, through government

regulation of business.

223. Creative destruction entails both costs as well as benefits to society.

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Test Bank: II

Topic:

Technological Advance and Competition

224. The costs of competition‘s creative destruction are often widespread, while the benefits

often accrue to only a few.

225. Some economists are now proposing that patents may be detrimental to technological

advance in industries with complicated multiple-component products.