Question

12. U-shaped LRAC curves with a horizontal segment surrounding their minimum level exhibit

a. Constant Returns to Scale

b. Increasing Returns to Scale

c. Decreasing Returns to Scale

d. All of the above

13. Economist’s classification of a market’s structure will depend upon

a. The number of firms in the market

b. The diversity of products available to consumers in the market

c. The ease with which a firm could potentially enter or exit the market

d. All of the above

14. In perfect competition, each firm’s individual demand curve for their product is

a. Perfectly inelastic

b. Perfectly elastic

c. Downward sloping

d. Upward sloping

15. If a market is perfectly competitive, which of the following would be inconsistent with a

predicted long run equilibrium condition?

a. The marginal firm is operating at the minimum point on its LRAC curve.

b. The marginal firm is earning $0 economic profit.

c. The marginal firm is earning positive economic profit.

d. All of the above

16. Gloria runs her own candy shop. Last year, she spent $215,000 purchasing candy to sell in her

store and paid $35,000 in rent. She had no other direct costs associated with operating her

business and her total revenues for the year were $295,000. Assume that during the same year, if

she did not run her own shop she would have worked at her friend’s shop for a salary of $50,000.

Gloria’s economic profit was ______and her accounting profit was ______.

a. - $5,000 ; $45,000

b. $60,000 ; $15,000

c. $45,000 ; $80,000

d. $45,000 ; $60,000

17. A firm should shut down in the short run if

a. It cannot earn revenues that cover its total costs

b. It cannot earn revenues that cover its variable costs

c. It cannot earn revenues that cover its fixed costs

d. All of the above

18. The long run market supply curve could be upward sloping in a competitive market due to which

of the following reasons?

a. Expansion of the market’s size increases the demand for the inputs used in production,

pushing their prices higher.

b. Entry and exit of the market is costly for firms.

c. Expansion of the market’s size brings new firms that are less efficient than previously

producing firms.

d. All of the above

Answer 1

12.

When long-run average total cost is same with the increase in the output level, then shows constant return to scale. It means that LRAC curve will be horizontal.

Hence it can be said that U-shaped LRAC curves with a horizontal segment surrounding their minimum level exhibit Constant Returns to Scale.

Hence option a is the correct answer.

13.

Since the economists classify market’s structure based on the number of firms, availability of different quality product and entry and exit of the firm facility.

It means all the three options are correct reason for determining the market structure.

Hence option d is the correct answer.

14.

Since in the perfectly competitive firm, there are large number of buyers and sellers and they sell identical product and price is determined by industry and not by the firm. So any firm or any buyers can buy or sell any quantity of goods at the market price. It means there is no effect of the individual demand or supply of goods on the market price. It means production decisions cannot affect the market price.

The profit-maximizing condition of perfectly competitive firm is

P=MC

Since the demand curve of the perfectly competitive firm is horizontal line.

Hence demand curve is perfectly elastic.

Hence option b is the correct answer.

15.

Since the long-run profit-maximizing condition is

Minimum of LRATC=MC=P

So firm earns zero economic profit in the LR.

Hence it can be said that if a market is perfectly competitive, which of the following would be inconsistent with a predicted long run equilibrium condition the marginal firm is earning positive economic profit.

Hence option c is the correct answer.