Question 1

If all firms in a perfectly competitive industry are earning a normal profit, then:

Accepted Answer

A) new firms will enter the industry. 
B) existing firms will exit the industry. 
C) there is no incentive for firms to enter or exit the industry. 
D) the market supply curve will shift to the left. 
A) new firms will enter the industry. 
B) existing firms will exit the industry. 
C) there is no incentive for firms to enter or exit the industry. 
D) the market supply curve will shift to the left.

Question 2

Which of the following is an example of the rationing function of price?

Accepted Answer

A) Switching from a Ph.D. in economics to one in finance because finance salaries are higher 
B) Bill Gates purchasing the Mona Lisa for $5 billion 
C) A firm attempting to lower its explicit costs 
D) Government price controls 
A) Switching from a Ph.D. in economics to one in finance because finance salaries are higher 
B) Bill Gates purchasing the Mona Lisa for $5 billion 
C) A firm attempting to lower its explicit costs 
D) Government price controls

Question 3

The No-Cash-on-the-Table Principle states that there are:

Accepted Answer

A) never unexploited opportunities available to individuals. 
B) never unexploited opportunities available to individuals in equilibrium. 
C) sometimes unexploited opportunities available to individuals in equilibrium. 
D) always unexploited opportunities available to individuals. 
A) never unexploited opportunities available to individuals. 
B) never unexploited opportunities available to individuals in equilibrium. 
C) sometimes unexploited opportunities available to individuals in equilibrium. 
D) always unexploited opportunities available to individuals.

Question 4

Suppose a small island nation imports sugar for its population at the world price of $1,500 per ton. The domestic market for sugar is shown below.  
  If the government provides a subsidy of $500 per ton, then consumer surplus will be ________ per day.

Accepted Answer

A) $1,000 
B) $4,000 
C) $8,000 
D) $9,000 
A) $1,000 
B) $4,000 
C) $8,000 
D) $9,000

Question 5

Last year Christine worked as a consultant. She hired an administrative assistant for $15,000 per year and rented office space (utilities included)for $3,000 per month. Her total revenue for the year was $100,000. If Christine hadn't worked as a consultant, she would have worked at a real estate firm earning $40,000 a year. Christine's opportunity cost of working as a consultant last year was ________.

Accepted Answer

A) $15,000 
B) $51,000 
C) $40,000 
D) $36,000 
A) $15,000 
B) $51,000 
C) $40,000 
D) $36,000

Question 6

Which of the following is NOT necessarily true in a market equilibrium?

Accepted Answer

A) Price represents the value of an extra unit of consumption. 
B) Both rich and poor have adequate access to the good. 
C) Price represents the cost of an extra unit of production. 
D) All mutually beneficial trades have been made. 
A) Price represents the value of an extra unit of consumption. 
B) Both rich and poor have adequate access to the good. 
C) Price represents the cost of an extra unit of production. 
D) All mutually beneficial trades have been made.

Question 7

If all firms in a perfectly competitive industry are experiencing economic losses, then:

Accepted Answer

A) some firms will exit the industry, until economic profit is positive. 
B) some firms will exit the industry, until accounting profit equals zero. 
C) all existing firms will stay in the industry, hoping for better times. 
D) some firms will exit the industry, until economic profit equals zero. 
A) some firms will exit the industry, until economic profit is positive. 
B) some firms will exit the industry, until accounting profit equals zero. 
C) all existing firms will stay in the industry, hoping for better times. 
D) some firms will exit the industry, until economic profit equals zero.

Question 8

In perfectly competitive markets, an implication of entry and exit in response to economic profit and loss is that:

Accepted Answer

A) firms must earn positive economic profit in the long run. 
B) firms will produce the quantity that minimizes average variable costs in the short run. 
C) firms will produce the quantity that minimizes average total costs in the long run. 
D) market demand is completely elastic. 
A) firms must earn positive economic profit in the long run. 
B) firms will produce the quantity that minimizes average variable costs in the short run. 
C) firms will produce the quantity that minimizes average total costs in the long run. 
D) market demand is completely elastic.

Question 9

Suppose a small island nation imports sugar for its population at the world price of $1,500 per ton. The domestic market for sugar is shown below.   With no subsidy, what is consumer surplus?

Accepted Answer

A) $1,000 per day 
B) $4,000 per day 
C) $8,000 per day 
D) $9,000 per day 
A) $1,000 per day 
B) $4,000 per day 
C) $8,000 per day 
D) $9,000 per day

Question 10

If resources are misallocated in a perfectly competitive market, then, in the long run, profit opportunities will:

Accepted Answer

A) bring about a more efficient allocation of resources. 
B) bring about a less efficient allocation of resources. 
C) not bring about a reallocation of resources unless there is government regulation. 
D) not bring about a reallocation of resources unless firms are subsidized. 
A) bring about a more efficient allocation of resources. 
B) bring about a less efficient allocation of resources. 
C) not bring about a reallocation of resources unless there is government regulation. 
D) not bring about a reallocation of resources unless firms are subsidized.

Question 11

Refer to the figure below.   If this market is unregulated, the economic surplus received by consumers is:

Accepted Answer

A) $4. 
B) $8. 
C) $16. 
D) $24. 
A) $4. 
B) $8. 
C) $16. 
D) $24.

Question 12

Assume that all firms in this industry have identical cost curves, and that the market is perfectly competitive.   If the market supply curve is given by S3, then what will happen to the market supply curve in the long run?

Accepted Answer

A) It will stay at S3, but the quantity supplied will increase. 
B) It will shift to S2. 
C) It will shift to S1. 
D) It will stay at S3, but the quantity supplied will decrease. 
A) It will stay at S3, but the quantity supplied will increase. 
B) It will shift to S2. 
C) It will shift to S1. 
D) It will stay at S3, but the quantity supplied will decrease.

Question 13

An example of an implicit cost is:

Accepted Answer

A) interest paid on a bank loan used to purchases equipment. 
B) wages paid to a family member who works at the firm. 
C) the value of a spare bedroom turned into a home office. 
D) operating costs of a company-owned car. 
A) interest paid on a bank loan used to purchases equipment. 
B) wages paid to a family member who works at the firm. 
C) the value of a spare bedroom turned into a home office. 
D) operating costs of a company-owned car.

Question 14

The figure below depicts the short-run market equilibrium in a perfectly competitive market and the cost curves for a representative firm in that market. Assume that all firms in this market have identical cost curves.   The long-run market equilibrium quantity in this industry is:

Accepted Answer

A) 300. 
B) 500. 
C) 700. 
D) more than 700. 
A) 300. 
B) 500. 
C) 700. 
D) more than 700.

Question 15

In an industry with free entry and exit, positive economic profit:

Accepted Answer

A) indicates a market failure. 
B) can never occur. 
C) cannot be sustained indefinitely. 
D) can be sustained indefinitely. 
A) indicates a market failure. 
B) can never occur. 
C) cannot be sustained indefinitely. 
D) can be sustained indefinitely.

Question 16

Refer to the figure below.   If a price ceiling were imposed at $4, producer surplus would be:

Accepted Answer

A) $24. 
B) $16. 
C) $8. 
D) $4. 
A) $24. 
B) $16. 
C) $8. 
D) $4.

Question 17

One assumption of the perfectly competitive model is free entry and exit. This assumption most directly leads to the implication that:

Accepted Answer

A) firms will have to spend money on advertising. 
B) positive economic profit is only possible in the short run. 
C) firms will compete on the basis of better service rather than lower prices. 
D) a long-run equilibrium cannot be achieved. 
A) firms will have to spend money on advertising. 
B) positive economic profit is only possible in the short run. 
C) firms will compete on the basis of better service rather than lower prices. 
D) a long-run equilibrium cannot be achieved.

Question 18

In a market with barriers to entry:

Accepted Answer

A) firms will earn zero economic profit in the long run. 
B) economic profit will not fall to zero in the long run. 
C) prices will direct productive resources toward underserved markets. 
D) the implications of Adam Smith's theory of the invisible hand can be expected to hold. 
A) firms will earn zero economic profit in the long run. 
B) economic profit will not fall to zero in the long run. 
C) prices will direct productive resources toward underserved markets. 
D) the implications of Adam Smith's theory of the invisible hand can be expected to hold.

Question 19

If the demand curve fails to capture all of the benefits of consumption, then the:

Accepted Answer

A) equilibrium price will be efficient but the equilibrium quantity will be inefficiently large. 
B) equilibrium price will be inefficiently low. 
C) government needs to impose regulations that require more consumption. 
D) equilibrium price will be inefficiently high. 
A) equilibrium price will be efficient but the equilibrium quantity will be inefficiently large. 
B) equilibrium price will be inefficiently low. 
C) government needs to impose regulations that require more consumption. 
D) equilibrium price will be inefficiently high.

Question 20

The allocative function of price is to:

Accepted Answer

A) distribute scarce goods and services to those consumers who value them the most highly. 
B) ensure that firms in perfectly competitive markets earn an economic profit. 
C) direct resources away from markets that are overcrowded and toward markets that are underserved. 
D) provide subsidies to low-income families so they can purchase essential goods and services. 
A) distribute scarce goods and services to those consumers who value them the most highly. 
B) ensure that firms in perfectly competitive markets earn an economic profit. 
C) direct resources away from markets that are overcrowded and toward markets that are underserved. 
D) provide subsidies to low-income families so they can purchase essential goods and services.

Exam 7: Efficiency, Exchange, and the Invisible Hand in Action

If all firms in a perfectly competitive industry are earning a normal profit, then:

Which of the following is an example of the rationing function of price?

The No-Cash-on-the-Table Principle states that there are:

Suppose a small island nation imports sugar for its population at the world price of $1,500 per ton. The domestic market for sugar is shown below. If the government provides a subsidy of $500 per ton, then consumer surplus will be ________ per day.

Which of the following is NOT necessarily true in a market equilibrium?

If all firms in a perfectly competitive industry are experiencing economic losses, then:

In perfectly competitive markets, an implication of entry and exit in response to economic profit and loss is that:

Suppose a small island nation imports sugar for its population at the world price of $1,500 per ton. The domestic market for sugar is shown below. With no subsidy, what is consumer surplus?

If resources are misallocated in a perfectly competitive market, then, in the long run, profit opportunities will:

Refer to the figure below. If this market is unregulated, the economic surplus received by consumers is:

Assume that all firms in this industry have identical cost curves, and that the market is perfectly competitive. If the market supply curve is given by S3, then what will happen to the market supply curve in the long run?

An example of an implicit cost is:

The figure below depicts the short-run market equilibrium in a perfectly competitive market and the cost curves for a representative firm in that market. Assume that all firms in this market have identical cost curves. The long-run market equilibrium quantity in this industry is:

In an industry with free entry and exit, positive economic profit:

Refer to the figure below. If a price ceiling were imposed at $4, producer surplus would be:

One assumption of the perfectly competitive model is free entry and exit. This assumption most directly leads to the implication that:

In a market with barriers to entry:

If the demand curve fails to capture all of the benefits of consumption, then the:

The allocative function of price is to:

Thinking Like an Economist

Comparative Advantage

Supply and Demand

Elasticity

Demand

Perfectly Competitive Supply

Monopoly, Oligopoly, and Monopolistic Competition

Games and Strategic Behavior

An Introduction to Behavioral Economics

Externalities, Property Rights, and the Environment

The Economics of Information

Labor Markets, Poverty, and Income Distribution

Public Goods and Tax Policy

International Trade and Trade Policy

Macroeconomics: The Birds Eye View of the Economy

Measuring Economic Activity: GDP and Unemployment

Measuring the Price Level and Inflation

Economic Growth, Productivity, and Living Standards

The Labor Market: Workers, Wages, and Unemployment

Saving and Capital Formation

Money Prices and the Federal Reserve

Financial Markets and International Capital Flows

Short-Term Economic Fluctuations: An Introduction

Spending and Output in the Short Run

Stabilizing the Economy: The Role of the Fed

Aggregate Demand, Aggregate Supply, and Inflation

Exchange Rates and the Open Economy

Filters