Question 1

Creative destruction is least beneficial to

Accepted Answer

A)  workers in the "destroyed" industries.
B)  workers in the "created" industries.
C)  consumers.
D)  society as a whole.Blooms: UnderstandE) A) and D)
F) B) and C)

Question 2

Which of the following will not hold true for a competitive firm in long-run equilibrium?

Accepted Answer

A)  P equals AFC.
B)  P equals minimum ATC.
C)  MC equals minimum ATC.
D)  P equals MC.E) C) and D)
F) A) and D)

Question 3

A constant-cost industry is one in which

Accepted Answer

A)  a higher price per unit will not result in an increased output.
B)  if 100 units can be produced for $100, then 150 can be produced for $150, 200 for $200, and so forth.
C)  the demand curve and therefore the unit price and quantity sold seldom change.
D)  the total cost of producing 200 or 300 units is no greater than the cost of producing 100 units.E) B) and D)
F) B) and C)

Question 4

Suppose that Betty's Beads is a typical firm operating in a perfectly competitive market.Currently Betty's MR = $15, MC = $12, ATC = $10, and AVC = $8.Based on this information, we can conclude that

Accepted Answer

A)  Betty's is in long-run equilibrium.
B)  potential new firms will be encouraged by Betty's success to enter the market.
C)  some existing firms in this market will leave.
D)  potential new firms will be discouraged by Betty's struggles and not enter the market.E) A) and B)
F) C) and D)

Question 5

If a purely competitive firm is currently facing a situation where the price of its product is lower than the average variable cost, but it believes that the market demand for its product will increase soon, then

Accepted Answer

A)  the firm will produce a low level of output in the short run and leave the industry in the long run.
B)  the firm will shut down in the short run and leave the industry in the long run.
C)  the firm will produce a low level of output in the short run but expand its plant in the long run as demand increases.
D)  the firm will shut down in the short run, but stay in the industry in the long run if it expects the product price to rise high enough soon.E) A) and B)
F) A) and C)

Question 6

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.

Accepted Answer

A) True 
 B)False

Question 7

The long-run supply curve under pure competition will be

Accepted Answer

A)  downward-sloping in a decreasing-cost industry and upward-sloping in an increasing-cost industry.
B)  horizontal in a constant-cost industry and downward-sloping in an increasing-cost industry.
C)  vertical in a constant-cost industry and upward-sloping in a decreasing-cost industry.
D)  upward-sloping in an increasing-cost industry and vertical in a constant-cost industry.E) A) and B)
F) B) and D)

Question 8

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.

Accepted Answer

A) True 
 B)False

Question 9

Suppose the market for corn is a purely competitive, constant-cost industry that is in long-run equilibrium.Now assume that an increase in consumer demand occurs.After all resulting adjustments have been completed, the new equilibrium price will be

Accepted Answer

A)  the same as the initial equilibrium price, but the new industry output will be greater than the original output.
B)  greater than the initial price, and the new industry output will be greater than the original output.
C)  less than the initial price, but the new industry output will be greater than the original output.
D)  the same as the initial equilibrium price, and the industry output will remain unchanged.E) All of the above
F) None of the above

Question 10

(Consider This)  The average life expectancy of a U.S.business is approximately

Accepted Answer

A)  2 years.
B)  9.5 years.
C)  10.2 years.
D)  22 years.E) All of the above
F) A) and B)

Question 11

An underallocation of resources is occurring in a purely competitive industry whenever the price of the product is greater than marginal cost.

Accepted Answer

A) True 
 B)False

Question 12

Suppose losses cause industry X to contract and, as a result, the prices of relevant inputs decline.Industry X is

Accepted Answer

A)  a constant-cost industry.
B)  a decreasing-cost industry.
C)  an increasing-cost industry.
D)  encountering X-inefficiency.E) None of the above
F) A) and C)

Question 13

(Consider This)  Which of the following statements is true about U.S.firms?

Accepted Answer

A)  Over half are bankrupt within the first two years after starting up.
B)  Over half are bankrupt within the first five years after starting up.
C)  Nearly 65 percent last 10 years or more.
D)  The life expectancy of a U.S.firm is approximately 22 years.E) C) and D)
F) B) and C)

Question 14

When there is allocative efficiency in a purely competitive market for a product, the minimum price producers are willing to accept is

Accepted Answer

A)  less than marginal benefit.
B)  greater than marginal cost.
C)  equal to the amount of efficiency or deadweight losses.
D)  equal to the maximum price consumers are willing to pay.E) A) and B)
F) None of the above

Question 15

If a purely competitive firm is facing a situation where the price of its product is lower than the average cost, then all of the following apply, except

Accepted Answer

A)  the firm is suffering losses, and if things are not expected to improve, the firm will leave the industry.
B)  the firm may be earning some accounting profits, but less than what it could earn elsewhere.
C)  other firms will want to enter the industry because of the positive economic profits.
D)  the firm may earn economic profits in the long run if it expands its plant in order to exploit economies of scale.E) B) and C)
F) A) and C)

Question 16

Suppose a firm in a purely competitive market discovers that the price of its product is above its minimum AVC point but everywhere below ATC.Given this, the firm

Accepted Answer

A)  minimizes losses by producing at the minimum point of its AVC curve.
B)  maximizes profits by producing where MR = ATC.
C)  should close down immediately.
D)  should continue producing in the short run but leave the industry in the long run if the situation persists.E) All of the above
F) B) and D)

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

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.

Accepted Answer

A) True 
 B)False

Question 19

Creative destruction is

Accepted Answer

A)  the process by which large firms buy up small firms.
B)  the process by which new firms and new products replace existing dominant firms and products.
C)  a term coined many years ago by Adam Smith.
D)  applicable to planned economies but not to market economies.E) B) and D)
F) None of the above

Question 20

Assume a purely competitive increasing-cost industry is initially in long-run equilibrium and that an increase in consumer demand occurs.After all economic adjustments have been completed, product price will be

Accepted Answer

A)  lower, but total output will be larger than originally.
B)  higher, and total output will be larger than originally.
C)  lower, and total output will be smaller than originally.
D)  higher, but total output will be smaller than originally.E) None of the above
F) A) and B)

Exam 11: Pure Competition in the Long Run

If a purely competitive firm is facing a situation where the price of its product is lower than the average cost, then all of the following apply, except

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Suppose the market for corn is a purely competitive, constant-cost industry that is in long-run equilibrium.Now assume that an increase in consumer demand occurs.After all resulting adjustments have been completed, the new equilibrium price will be

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(Consider This) The average life expectancy of a U.S.business is approximately

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Suppose losses cause industry X to contract and, as a result, the prices of relevant inputs decline.Industry X is

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Creative destruction is least beneficial to

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(Consider This) Which of the following statements is true about U.S.firms?

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

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The long-run supply curve under pure competition will be

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Which of the following will not hold true for a competitive firm in long-run equilibrium?

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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.

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When there is allocative efficiency in a purely competitive market for a product, the minimum price producers are willing to accept is

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Assume a purely competitive increasing-cost industry is initially in long-run equilibrium and that an increase in consumer demand occurs.After all economic adjustments have been completed, product price will be

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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.

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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.

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Creative destruction is

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Suppose that Betty's Beads is a typical firm operating in a perfectly competitive market.Currently Betty's MR = $15, MC = $12, ATC = $10, and AVC = $8.Based on this information, we can conclude that

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An underallocation of resources is occurring in a purely competitive industry whenever the price of the product is greater than marginal cost.

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A constant-cost industry is one in which

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If a purely competitive firm is currently facing a situation where the price of its product is lower than the average variable cost, but it believes that the market demand for its product will increase soon, then

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Suppose a firm in a purely competitive market discovers that the price of its product is above its minimum AVC point but everywhere below ATC.Given this, the firm

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