ARE Final Exam Questions And Correct Answers (A+)
Why would a firm that is incurring losses decide to produce anything at all?
If a firm in a perfectly competitive industry is incurring losses then it may choose to
produce in the short run because - ANSWER Price exceeds average variable cost, so
losses are smaller than they would be by shutting down
A perfectly competitive firm should shut down in the short run if - ANSWER Price is
below minimum average variable cost
If a perfectly competitive firm finds that it is producing an output level where price is
above average variable cost but less than marginal cost, it should - ANSWER Decrease
its output
Assuming no fixed costs are avoidable in the short run, a perfectly competitive firm's
short-run supply curve is - ANSWER The part of its marginal cost curve that lies above
its average variable cost curve
What is the difference between economic profit and producer surplus - ANSWER
Economic profit includes fixed costs but producer surplus does not
Because industry X is perfectly competitive, all of the firms in the industry are earning
zero economic profit. If the price of the product falls, no firm can remain in business.
This statement is - ANSWER Incorrect because firms will leave the industry in the long
run, and as supply decreases, the price will increase to the lowest point on the long-run
average cost curve.
Producer surplus for a perfectly competitive firm equals - ANSWER Profit plus total fixed
, cost, the area above the supply curve and under market price, and revenue minus total
variable cost
In the long-run equilibrium all the firms in the industry earn zero economic profit. Why is
this true?
All firms in perfectly competitive industries earn zero economic profit in the long run
because - ANSWER A positive profit would induce firms to enter, decreasing price and
profit, and a negative profit would induce firms to exit, increasing price and profit
Why do firms enter an industry when they know that in the long run economic profit will
be zero?
Firms would enter an industry if the profit will eventually be zero because economic
profit - ANSWER Signifies that a firm is earning as much as it could in its next best
activity
The decline in the number of automobile producers during the twentieth century is at
least part the result of - ANSWER Economies of scale, where the long-run average cost
of production falls as output increases and some firms are thus able to sell at a lower
price
If all the firms in a perfectly competitive market are identical, which one of the following
is NOT a condition for long-run equilibrium in the market? -ANWER Price is above
average cost for all firms
Suppose the vitamin industry is perfectly competitive. When a new medical study
reveals that taking vitamins extends both the quality and length of life, demand for
vitamins soars. As a result of this vitamin producers' profits will - ANSWER Increase in
the short-run but fall to zero in the long-run
Suppose the supply curve for a good were perfectly inelastic. If the government
imposed a price ceiling below the market-clearing price, would deadweight loss arise?
Explain. - ANSWER No. Because the supply curve is vertical, the market-clearing
Why would a firm that is incurring losses decide to produce anything at all?
If a firm in a perfectly competitive industry is incurring losses then it may choose to
produce in the short run because - ANSWER Price exceeds average variable cost, so
losses are smaller than they would be by shutting down
A perfectly competitive firm should shut down in the short run if - ANSWER Price is
below minimum average variable cost
If a perfectly competitive firm finds that it is producing an output level where price is
above average variable cost but less than marginal cost, it should - ANSWER Decrease
its output
Assuming no fixed costs are avoidable in the short run, a perfectly competitive firm's
short-run supply curve is - ANSWER The part of its marginal cost curve that lies above
its average variable cost curve
What is the difference between economic profit and producer surplus - ANSWER
Economic profit includes fixed costs but producer surplus does not
Because industry X is perfectly competitive, all of the firms in the industry are earning
zero economic profit. If the price of the product falls, no firm can remain in business.
This statement is - ANSWER Incorrect because firms will leave the industry in the long
run, and as supply decreases, the price will increase to the lowest point on the long-run
average cost curve.
Producer surplus for a perfectly competitive firm equals - ANSWER Profit plus total fixed
, cost, the area above the supply curve and under market price, and revenue minus total
variable cost
In the long-run equilibrium all the firms in the industry earn zero economic profit. Why is
this true?
All firms in perfectly competitive industries earn zero economic profit in the long run
because - ANSWER A positive profit would induce firms to enter, decreasing price and
profit, and a negative profit would induce firms to exit, increasing price and profit
Why do firms enter an industry when they know that in the long run economic profit will
be zero?
Firms would enter an industry if the profit will eventually be zero because economic
profit - ANSWER Signifies that a firm is earning as much as it could in its next best
activity
The decline in the number of automobile producers during the twentieth century is at
least part the result of - ANSWER Economies of scale, where the long-run average cost
of production falls as output increases and some firms are thus able to sell at a lower
price
If all the firms in a perfectly competitive market are identical, which one of the following
is NOT a condition for long-run equilibrium in the market? -ANWER Price is above
average cost for all firms
Suppose the vitamin industry is perfectly competitive. When a new medical study
reveals that taking vitamins extends both the quality and length of life, demand for
vitamins soars. As a result of this vitamin producers' profits will - ANSWER Increase in
the short-run but fall to zero in the long-run
Suppose the supply curve for a good were perfectly inelastic. If the government
imposed a price ceiling below the market-clearing price, would deadweight loss arise?
Explain. - ANSWER No. Because the supply curve is vertical, the market-clearing
