1) The main decision for a profit maximizing perfectly competitive firm is not what ________ but what ________.

• A.level of output to produce; price to charge
• B.price to charge; level of output to produce
• C.level of output to produce; total revenue to achieve
• D.price to charge; total cost to achieve

2)If an individual perfectly competitive firm charges a price below the industry equilibrium price, it will

• A.not sell anything.
• B.sell part of what it produces.
• C.sell all that it produces and gain more revenue than competing firms will.
• D.sell all that it produces but gain less revenue than competing firms will.

3)Marginal revenue is the

• A.ratio of total revenue to quantity.
• B.difference between total revenue and total costs.
• C.added revenue that a firm takes in when it increases output by one additional unit.
• D.additional profit the firm earns when it sells an additional unit of output.

4)The profit-maximizing level for all firms, regardless of industry structure, is the output level where

• A.TR = MC.
• B.P = MC.
• C.ATC = P.
• D.MC = MR

5)A firm in a perfectly competitive industry is producing 50 units, its profit-maximizing quantity. Industry price is $2, total fixed costs are $25, and total variable costs are $40. The firm's economic profit is

• A.$15.
• B.$30.
• C.$35.
• D.$60.

6)If P = MC and MC > ATC, then a perfectly competitive firm will earn ________ profits.

• A.positive
• B.zero
• C.negative
• D.break even

7)Which of the following is most likely to be a variable cost for a firm?

• A.The interest payments made on loans
• B.The franchiser's fee that a restaurant must pay to the national restaurant chain
• C.The monthly rent on office space that it leased for a year
• D.The payroll taxes that are paid on employee wages

8)A firm will begin to experience diminishing marginal productivity at the point where

• A.marginal cost increases.
• B.marginal cost decreases.
• C.marginal product increases.
• D.both marginal cost decreases and marginal product increases.

9)Diminishing marginal productivity implies

• A.decreasing average variable costs.
• B.decreasing marginal costs.
• C.increasing marginal costs.
• D.decreasing average fixed costs.

10)Because marginal cost is always ________ in the short run, total variable cost always ________ when output increases.

• A.positive; increases
• B.positive; decreases
• C.negative; increases
• D.negative; decreases

11)Assume firms break even in an industry. New investors ________ attracted to the industry and current ones ________ running away from it.

• A.are not; are not
• B.are not; are
• C.are; are not
• D.are; are

12)SCENARIO 1: Amy borrowed $20,000 from her parents to open a bagel shop. She pays her parents a 5% yearly return on the money they lent her. Her other yearly fixed costs equal $9,000. Her variable costs equal $30,000. In her first year, Amy sold 40,000 dozen at a price of $1.50 per dozen.

Amy's profit is

• A.$0.
• B.$20,000.
• C.$30,000.
• D.$50,000.

13)SCENARIO 2: Investors put up $520,000 to construct a building and purchase all equipment for a new restaurant. The investors expect to earn a minimum return of 10 per cent on their investment. The restaurant is open 52 weeks per year and serves 900 meals per week. The fixed costs are $1,000 per week to investors and $1,000 per week in other fixed costs. Variable costs include wages, $1,000 per week, materials, electricity, etc, $600 per week. The restaurant charges $5 on average per meal.

The normal return prorated per week is

• A.$600
• B.$1,000
• C.$3,600
• D.$4,500

14)SCENARIO 2: Investors put up $520,000 to construct a building and purchase all equipment for a new restaurant. The investors expect to earn a minimum return of 10 per cent on their investment. The restaurant is open 52 weeks per year and serves 900 meals per week. The fixed costs are $1,000 per week to investors and $1,000 per week in other fixed costs. Variable costs include wages, $1,000 per week, materials, electricity, etc, $600 per week. The restaurant charges $5 on average per meal.

Total fixed costs per week are

• A.$1,000
• B.$2,000
• C.$3,000
• D.$4,500

15)SCENARIO 2: Investors put up $520,000 to construct a building and purchase all equipment for a new restaurant. The investors expect to earn a minimum return of 10 per cent on their investment. The restaurant is open 52 weeks per year and serves 900 meals per week. The fixed costs are $1,000 per week to investors and $1,000 per week in other fixed costs. Variable costs include wages, $1,000 per week, materials, electricity, etc, $600 per week. The restaurant charges $5 on average per meal.

Total variable costs per week are

• A.$600
• B.$1,000
• C.$1,600
• D.$2,000

16)SCENARIO 2: Investors put up $520,000 to construct a building and purchase all equipment for a new restaurant. The investors expect to earn a minimum return of 10 per cent on their investment. The restaurant is open 52 weeks per year and serves 900 meals per week. The fixed costs are $1,000 per week to investors and $1,000 per week in other fixed costs. Variable costs include wages, $1,000 per week, materials, electricity, etc, $600 per week. The restaurant charges $5 on average per meal.

Total cost per week is

• A.$1,000
• B.$1,600
• C.$2,000
• D.$3,600

17)A firm will choose to operate rather than shut down as long as

• A.price is greater than or equal toAFC.
• B.AFC is greater thanAVC.
• C.price is greater than or equal toAVC.
• D.AVC is greater thanMC

18)If TR > TVC but TR < TC, a firm would ________ in the short run and ________ in the long run.

• A.operate; expand
• B.operate; leave the industry
• C.shut down; expand
• D.shutdown; leave the industry

19)If a perfectly competitive firm operates in the short run and expands in the long run, then the firm's short run condition is

• A.TR>TC.
• B.TR>TVC and TR
• C.TR
• D.TR

20) For a perfectly competitive industry, an improvement in technology will cause

• A.a movement up the short-run industry supply curve.
• B.a movement down the short-run industry supply curve.
• C.the industry short-run supply curve to shift to the right.
• D.the industry short-run supply curve to shift to the left.

21)In the long run firms will expand as long as there are more ________ and new firms will enter the industry as long as they earn ________.

• A.economies of scale; zero profits
• B.economies of scale; positive economic profits
• C.diseconomies of scale; zero profits
• D.diseconomies of scale; positive economic profits

22)In long run equilibrium for a perfectly competitive industry, firms earn ________ economic profits and produce ________.

• A.zero; efficiently
• B.zero; inefficiently
• C.positive; efficiently
• D.positive; inefficiently

23)In the short run average costs eventually increase because of ________, and in the long run average costs eventually increase because of ________.

• A.diminishing marginal productivity; diseconomies of scale
• B.diseconomies of scale; diminishing marginal productivity
• C.constant returns to scale; decreasing returns to scale
• D.increasing returns to scale; diseconomies of scale

24)The relationship between the price that a perfectly competitive firm can charge buyers and the firm's marginal revenue is that the price is ________ marginal revenue over all output.

• A.above
• B.below
• C.equal to
• D.sometimes above and sometimes below

25)If a firm is producing whereMR>MC,

• A.the revenue gained by producing one more unit of output exceeds the cost incurred by doing so.
• B.the revenue gained by producing one more unit of output equals the cost incurred by doing so.
• C.the revenue gained by producing one more unit of output is less than the cost incurred by doing so.
• D.the firm is already maximizing profits because revenue is being increased by more than costs.

26)An industry is in ________ if firms have an incentive to enter or exit in the ________ run.

• A.disequilibrium; short
• B.disequilibrium; long
• C.equilibrium; short
• D.equilibrium; long

27)If a firm's long-run average cost curve declines as output increases, then

• A.small firms and large firms will have identical average costs.
• B.there should be a large number of firms in the industry.
• C.small firms would have lower average costs of production than large firms.
• D.there should be only one firm in the industry.

28)The Supply Room, a mail-order school supply store, grew rapidly. As a result of achieving a much larger size, the Supply Room is able to realize (1) volume discounts when buying from its suppliers, and (2) lower transportation costs by shipping in bulk. The best explanation of

this is that the Supply Room seems to be experiencing

• A.economies of scale.
• B.constant returns to scale.
• C.diseconomies of to scale.
• D.ways to get around the law of diminishing marginal produuctivity.

29)Assume the peanut industry, a perfectly competitive industry, is in long-run equilibrium with a market price of $5. If demand for peanuts increases and this industry is a constant-cost industry (with no external economies or diseconomies of scale), then long-run equilibrium will be reestablished at a price

• A.greater than $5.
• B.less than $5.
• C.equal to $5.
• D.either greater than or less than $5, depending on the number of firms that enter the industry.