Deck 12: Competition and the Invisible Hand

Question 1

Which of the following statements is TRUE? I. A free market minimizes the total costs of producing output. II. In a free marke III. Every firm faces the same price in a competitive market.

A) I and II only
B) III only
C) I and III only
D) I, II, and III

Answer 1

D

Question 2

Profit maximization occurs when:

A) TR > TC.
B) MR = MB.
C) MC = AC.
D) P = AD.

Answer 2

B

Question 3

Suppose that you own two farms on which to grow corn. In order to lower the cost of production, you determine to increase production on Farm 1 and reduce it on Farm 2. This implies that the marginal cost of production on Farm 1 is:

A) greater than the marginal cost of production on Farm 2.
B) less than the marginal cost of production on Farm 2.
C) equal to the marginal cost of production on Farm 2.
D) The difference of the marginal costs between the two farms cannot be determined.

Answer 3

B

Question 4

Since all competitive firms produce wherever marginal cost equals the market price for the product, we can conclude that: I. all competitive firms produce at the same marginal cost level. II. all competitive firms produce the same quantity. III. all competitive firms make normal profit.

A) I only
B) I and II only
C) II and III only
D) All of the answers are correct.

Question 5

Since a competitive firm sets MR = P to determine all quantities in the short run, we can conclude that:

A) each firm in the industry faces very large fixed costs.
B) the demand curve faced by each individual competitive firm is perfectly elastic.
C) the demand curve faced by each individual competitive firm is downward sloping.
D) the industry demand curve is perfectly elastic.

Question 6

A competitive firm maximizes profit when marginal cost:

A) equals the price.
B) is less than the price.
C) is greater than the price.
D) is minimized.

Question 7

For a competitive firm, which of the following conditions describes the profit maximization condition? I. P = MC II. MR = MC III. TR = TC

A) II only
B) I and II only
C) II and III only
D) I, II, and III

Question 8

Reference: Ref 12-1 (Table: Oil Pumps) Refer to the table. An oil producer owns two pumps: Oil Pump One and Oil Pump Two. If the market price of oil is $20 per barrel, how many barrels of oil get produced?

A) 4
B) 14
C) 10
D) 6

Question 9

The elimination principle illustrates the idea that:

A) above-normal profits will be eliminated by decreases in demand due to high prices.
B) losses will be eliminated by the innovation of new products.
C) above-normal profits will be eliminated by the entry of new firms into the industry.
D) losses will be eliminated by firms decreasing their costs.

Question 10

Reference: Ref 12-1 (Table: Oil Pumps) Refer to the table. Suppose that we want to produce seven barrels of oil. To minimize costs, we should produce:

A) all seven barrels of oil from Oil Pump Two.
B) three barrels of oil from Oil Pump One and four barrels of oil from Oil Pump Two.
C) one barrel of oil from Oil Pump One and six barrels of oil from Oil Pump Two.
D) all seven barrels of oil from Oil Pump One.

Question 11

Which of the following statements is TRUE regarding profit maximization in competitive markets? I. When all firms pursue profits, none of them achieve profits. II. When all firms pursue profits, only the most innovative will achieve profits. III. Production is divided in such a way that total costs of production are minimized.

A) I only
B) II only
C) I and III only
D) II and III only

Question 12

Suppose that you own two farms on which to grow corn. Farm 2 has a lower marginal cost of producing corn than Farm 1. To lower total cost of production, you should produce:

A) all on Farm 1.
B) all on Farm 2.
C) some on Farm 1 and some on Farm 2.
D) neither on Farm 1 nor on Farm 2.

Question 13

Suppose that Sandy owns a farm in North Carolina and Pat owns a farm in Iowa, and Sandy's farm is generally more productive than Pat's. If both Sandy and Pat sell their corn in the same market, Sandy should produce the output at the marginal cost that is:

A) less than the marginal cost of Pat's production.
B) equal to the marginal cost of Pat's production.
C) greater than the marginal cost of Pat's production.
D) equal to total revenue in the market.

Question 14

In a competitive market with four firms (indicated as Firm 1, Firm 2, Firm 3, and Firm 4), which of the following is the condition that enables all sellers to maximize profit?
A. P = ATC for all firms
B. Profit = Total Revenue - Total Cost for all firms
C.
D. MC is minimized in all firms.

Question 15

A free market can naturally allocate production across firms in an industry to minimize total costs due to:

A) market power.
B) regulation.
C) the invisible hand.
D) externality.

Question 16

In a competitive industry, entry and exit decisions:

A) allow some firms to earn above-normal profits in the long run.
B) ensure that labor and capital move across industries to optimally balance production.
C) rely on demand signals, not price signals.
D) move capital and labor away from profitable industries in order to maximize the total value of production.

Question 17

Reference: Ref 12-1 (Table: Oil Pumps) Refer to the table. Suppose that this market is producing six barrels of oil from Oil Pump One and two barrels of oil from Oil Pump Two. What happens to the total costs of production if we produce one less barrel of oil from Oil Pump One and one more barrel of oil from Oil Pump Two?

A) The total costs of production fall by $16.00.
B) The total costs of production rise by $7.00.
C) The total costs of production fall by $30.
D) The total costs of production rise by $14.

Question 18

The pursuit of profits in a competitive market:

A) minimizes total industry costs.
B) minimizes total value of production.
C) leads to higher prices.
D) maximizes producer surplus at the expense of consumer surplus.

Question 19

In a competitive industry:

A) all firms will earn above-normal profits if demand is high.
B) the opportunity cost of production is zero.
C) profits are only attainable in the long run to those firms able to innovate at the lowest cost.
D) resources move across firms in such a way that the total value of production is maximized.

Question 20

Consider industries X and Y. Industry X has total revenue of $100 million and total costs of $77 million. Industry Y has total revenue of $80 million and total costs of $40 million. We should expect that:

A) prices are higher in Industry X.
B) resources will move from Industry Y to Industry X.
C) labor and capital will move from Industry X to Industry Y.
D) firms in both industries will shut down operations.

Question 21

The elimination principle:

A) holds in all places and in all times.
B) says that below-normal profits may be eliminated by the entry of new firms.
C) depends on government protection.
D) says that above-normal profits are eliminated by entry and below-normal profits are eliminated by exit.

Question 22

Stating that marginal revenue equals price is equivalent to saying that marginal revenue equals marginal cost at all levels of output.

Question 23

When the size of the production is the most efficient:

A) total cost is at the minimum.
B) average cost is at the minimum.
C) marginal cost is at the minimum.
D) fixed cost is at the minimum.

Question 24

Since no one can be sure that profits are commonplace, to earn above-normal profits an entrepreneur must:

A) be eloquent.
B) innovate.
C) rely on government subsidies.
D) know economics.

Question 25

Explain how market entry affects the profit level of a competitive firm.

Question 26

Explain two ways in which the competitive industry displays the actions of the invisible hand.

Question 27

The elimination principle, a general feature of competitive markets, tells us that:

A) below-normal profits may be permanent.
B) above-normal profits may be permanent.
C) above-normal profits are temporary.
D) above-normal profits result in firms exiting the industry.

Question 28

According to the elimination principle:

A) above-normal profits are eliminated by exit.
B) below-normal profits are eliminated by entry.
C) there is a uniform rate of profit above the normal level in all competitive industries.
D) resources are always moving toward an increase in consumer welfare.

Question 29

Stating that marginal revenue equals price is equivalent to saying that marginal cost equals price for the profit maximizing quantity.