Page 1
1.
Consider a perfectly competitive firm in the short run. Assume that it is sustaining
economic losses but continues to produce at the profit-maximizing (loss-minimizing)
output. Which statement is false?
A)
Marginal cost is less than average total cost.
B)
Marginal cost is equal to marginal revenue.
C)
Price is equal to marginal cost.
D)
Marginal cost is less than average variable cost.
2.
Zoe, the owner of Zoe’s Bakery, determines that, at her optimal level of production in
the short run, P < ATC and P > AVC. In the short run, Zoe should:
A)
continue to operate, even though she is taking an economic loss.
B)
continue to operate, as she is making an economic profit.
C)
shut down immediately, as she is taking an economic loss.
D)
raise the price until she has maximized her profits.
3.
A perfectly competitive small organic farm produces 1,000 cauliflower heads in the
short run. At this quantity, ATC = $6 and AFC = $2. The market price is $3 per head and
is equal to MC. To maximize profits or minimize losses, this farm should:
A)
increase output in the short run.
B)
reduce output but continue to produce in the short run.
C)
shut down in the short run.
D)
do nothing because it is already maximizing profits.
4.
If the price is below average total cost, then in the short run a perfectly competitive firm
should:
A)
shut down.
B)
continue to produce to minimize losses.
C)
raise price.
D)
There is not enough information given to answer this question.
5.
During the summer, Alex runs a mowing service, and lawn mowing is a perfectly
competitive industry. In the short run, Alex will shut down if the:
A)
total revenues can’t cover fixed costs.
B)
total revenues can’t cover variable costs.
C)
total revenues can’t cover total costs.
D)
price exceeds the average total cost.
Page 2
6.
Many furniture stores run “going out of business” sales but never actually go out of
business. Assume that furniture is sold in a perfectly competitive market. For a furniture
firm to actually shut down in the short run, the price of furniture must be _____ than the
_____ average variable cost.
A)
higher; maximum
B)
lower; minimum
C)
higher; minimum
D)
lower; maximum
7.
The short-run supply curve for a perfectly competitive firm is its:
A)
demand curve above its marginal revenue curve.
B)
marginal revenue curve to the right of its marginal cost curve.
C)
marginal cost curve above its average variable cost curve.
D)
average total cost curve below its marginal cost curve.
8.
The lowest point on a perfectly competitive firm’s short-run supply curve corresponds to
the minimum point on the _____ curve.
A)
ATC
B)
AVC
C)
AFC
D)
MC
9.
If the price is consistently below the average variable cost, then in the short run a
perfectly competitive firm should:
A)
raise the price.
B)
sell more output.
C)
shut down.
D)
lower the price to sell more.
10.
A perfectly competitive firm will incur an economic loss but will continue to produce a
positive quantity of output in the short run if the price is:
A)
less than marginal cost.
B)
less than average variable cost.
C)
greater than average total cost.
D)
greater than average variable cost and less than average total cost.
Page 3
11.
If the price is greater than the average variable cost and less than the average total cost
at the profit-maximizing quantity of output in the short run, a perfectly competitive firm
will:
A)
produce at an economic loss.
B)
produce at an economic profit.
C)
shut down production.
D)
produce more than the profit-maximizing quantity.
12.
The short-run shut-down price is the:
A)
price at which economic profit is zero.
B)
minimum of the AVC curve.
C)
intersection of the MC and ATC curves.
D)
minimum of the AFC curve.
13.
For a perfectly competitive firm, the short-run supply curve is the:
A)
entire MC curve.
B)
rising part of the MC curve beginning at the shut-down point.
C)
rising part of the MC curve beginning where the firm starts earning economic
profit.
D)
MC curve below the shut-down point.
14.
A perfectly competitive firm will continue producing in the short run as long as it can
cover its _____ cost.
A)
total
B)
average fixed
C)
variable
D)
fixed
15.
The short-run supply curve for a perfectly competitive firm is the ____ cost curve above
the _____ price.
A)
average total; break-even
B)
average variable; shut-down
C)
marginal; break-even
D)
marginal; shut-down
16.
Which statement is true?
A)
If price falls below average variable cost, the firm will shut down in the short run.
B)
Total revenue and marginal revenue are the same in perfect competition.
C)
Economic profit per unit is found by subtracting MC from price.
D)
Economic profit is always positive in the long run.
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17.
In perfect competition, the profit-maximizing level of output occurs where the:
A)
MR = MC
B)
price < marginal cost above minimum AVC.
C)
MR > MC below minimum AVC.
D)
P = MR above MC.
18.
A perfectly competitive firm will incur an economic loss but will continue producing
output in the short run if the price is:
A)
less than marginal cost.
B)
greater than average fixed cost and less than average variable cost.
C)
greater than average total cost.
D)
greater than average variable cost but less than average total cost.
19.
If the price is greater than the average variable cost and less than the average total cost
at the profit-maximizing quantity of output in the short run, a perfectly competitive firm
will:
A)
continue to produce at an economic loss.
B)
earn an economic profit.
C)
encourage other firms to enter the industry.
D)
produce more than the profit-maximizing quantity.
20.
In the short run, if AVC < P < ATC, a perfectly competitive firm:
A)
produces output and earns an economic profit.
B)
produces output and incurs an economic loss.
C)
does not produce output and earns an economic profit.
D)
does not produce output and earns zero economic profit.
21.
In the short run, a perfectly competitive firm produces output and incurs an economic
loss if:
A)
P > ATC.
B)
P < AVC.
C)
AVC > P > ATC.
D)
AVC < P < ATC.
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22.
A perfectly competitive firm will not produce any output in the short run and will shut
down if the price is:
A)
greater than marginal cost.
B)
less than marginal cost.
C)
less than average variable cost.
D)
greater than average variable cost and less than average total cost.
23.
The shut-down point in the short run is the:
A)
point at which economic profit is zero.
B)
minimum point of AVC.
C)
intersection of the MC and ATC curves.
D)
minimum point of AFC.
24.
If the price is less than the average variable cost at the quantity of output where MR =
MC, in the short run a perfectly competitive firm will:
A)
produce at a loss.
B)
produce at a profit.
C)
shut down production.
D)
produce more than the profit-maximizing quantity.
25.
Assume that in the short run a perfectly competitive firm does not produce output and
has economic losses. This occurs at the quantity where MR = MC and:
A)
P = ATC and FC = 0.
B)
P < AVC and FC > 0.
C)
AVC > P > ATC and FC = 0.
D)
AVC < P < ATC and FC > 0.
26.
In the short run, if P < AVC at the quantity where MR = MC and fixed cost is greater
than zero, a perfectly competitive firm produces _____ and takes an economic _____.
A)
output; profit
B)
output; loss
C)
no output; profit
D)
no output; loss
27.
A firm’s shut-down point is the minimum value of _____ cost.
A)
total
B)
average variable
C)
average total
D)
marginal
Page 6
28.
A perfectly competitive firm’s short-run supply curve is its _____ cost curve above its
intersection with the firm’s _____ cost curve.
A)
average variable; marginal
B)
marginal; average fixed
C)
marginal; average total
D)
marginal; average variable
29.
A perfectly competitive firm’s marginal cost curve above the average variable cost curve
is its _____ curve.
A)
input demand
B)
short-run supply
C)
marginal revenue
D)
total revenue
30.
A competitive firm operating in the short run is maximizing profits and just breaking
even. Its costs include a monthly state license fee of $100 that must be paid for as long
as the firm operates. If the license fee is raised to $150, what should the firm do to
maximize profits in the short run?
A)
increase price
B)
increase output
C)
reduce output
D)
not change output
31.
Lawn mowing is a perfectly competitive industry. Alex’s Lawn-Mowing Service should
shut down in the short run whenever his profits are negative.
A)
True
B)
False
32.
In the short run, the fixed costs of running a farm should play no role in determining the
level of production.
A)
True
B)
False
33.
A perfectly competitive firm’s short-run supply curve is its marginal cost curve above its
intersection with the average variable cost curve.
A)
True
B)
False
Page 7
34.
The short-run individual supply curve for a perfectly competitive firm is given by the
marginal cost curve above minimum average fixed cost.
A)
True
B)
False
35.
Cindy’s Nails operates in the perfectly competitive pedicure industry. The city is
considering requiring nail salons to be certified by a health inspector. The certification
will cost $1,000 annually and is thus a fixed cost. The certification will affect Cindy’s
decision to operate in the long run but will not affect the number of pedicures she
chooses to perform in the short run.
A)
True
B)
False
36.
Why does it make sense for a firm to shut down in the short run if the price falls below
minimum average variable cost?
37.
In the short run, a firm will continue to sell its product as long as:
A)
it is making a positive profit.
B)
the price is greater than average total costs.
C)
the price is greater than average variable costs.
D)
its marginal cost is increasing.
38.
In the short run, a firm will produce as long as the price is greater than its:
A)
ATC.
B)
MC.
C)
MR.
D)
AVC.
39.
In the short run, fixed costs:
A)
are an important feature in a firm’s decision to produce or not produce.
B)
have no impact on a firm’s profit level.
C)
do not exist.
D)
remain constant.
40.
A perfectly competitive firm will produce:
A)
whenever it can.
B)
mostly in the long run and only if price is greater than AFC.
C)
with a loss in the short run if its price is greater than AVC but less than ATC.
D)
only when it earns profits in the short run.
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41.
In the short run, for a perfectly competitive firm, the portion of the MC curve at or
above the shut-down price is also its:
A)
individual short-run supply curve.
B)
ATC curve.
C)
AVC curve.
D)
individual demand curve.
42.
Hank operates a perfectly competitive firm in the long run. For several periods, the
market price has been $20, and his break-even price is $22. Given the chance to change
his fixed costs, Hank should:
A)
stay in the industry since he can cover his fixed costs.
B)
seriously consider exiting the industry since he is consistently making economic
losses.
C)
stay in the industry since he is a perfect competitor and must take the price as
given.
D)
wait for the short-run period.
