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11-95
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
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
11-96
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
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.
11-97
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
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.
11-98
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
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
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
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.
11-101
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
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.
11-102
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
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.
11-103
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
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.
11-107
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
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.
