Exercise 4

1. Perfect competition is a market in which there are _____ firms, each selling _____
products; many buyers; _____ to the entry of new firms into the industry; no
advantage to established firms; and buyers and sellers _____ about prices.
A. many; identical; barriers; have no information
B. many; identical; no barriers; are well informed
C. few; differentiated; barriers; are well informed
D. few; differentiated; no barriers; have no information
Who of the following is a price taker?
A. Sam works in an R&D company holding a patent on technology, which has
raised the price of a device to $2,000.
B. Ralph, a fruit seller, sells apples at a market price of $3.50 a pound.
C. Sandy has set the price of her own designer clothes.
D. Megan buys vegetables from the local grocery outlet.
A firm's total revenue is the _____ of its output multiplied by the _____.
A. price; number of units of output sold
B. price; profit
C. quantity; cost
D. additional unit; cost
Dave sells 4 gallons of milk at $5 per gallon. If he increases his sales to 5 gallons at
the same price per gallon, calculate Dave's marginal revenue from selling milk.
A. $4
B. $5
C. $20
D. $25

2. In perfect competition, what is the relationship between the demand for the firm's
output and the market demand?
In a perfectly competitive market, the market demand is _______ and the demand
faced by the individual firm is _______.
A. perfectly elastic; shown by a downward-sloping curve
B. shown by a downward-sloping curve; shown by a downward-sloping curve
C. shown by a downward-sloping curve; perfectly elastic and the firm takes the
market price as given
D. perfectly elastic; perfectly elastic
3. In perfect competition, a firm's marginal revenue curve is the same as another
curve. What is that curve?
Clara sells handbags in a perfectly competitive market. The price of a handbag is
$50. Draw Clara's marginal revenue curve. Label it.

Clara's marginal revenue curve _______.

A. is also the market demand curve
B. shows that demand for Clara's handbags is perfectly inelastic
C. is also her firm's demand curve because the price remains the same regardless
of how many purses she sells
D. is also her firm's total revenue curve because total revenue remains the same
regardless of how many purses she sells
4. Lin's makes fortune cookies that are identical to those made by dozens of other
firms, and there is free entry in the fortune cookie market. Buyers and sellers are
well informed about prices.
If fortune cookies sell for $10 a box and Lin's offers its cookies for sale at $10.50 a
box, how many boxes does it sell?
If fortune cookies sell for $10 a box and Lin's offers its cookies for sale at $10.50 a
box, Lin's sells _______.
A. zero boxes
B. as many boxes as he wants
C. to upscale restaurants only
D. many boxes if he advertises
If fortune cookies sell for $10 a box and Lin's offers its cookies for sale at $9.50 a
box, how many boxes does it sell?
If fortune cookies sell for $10 a box and Lin's offers its cookies for sale at $9.50 a
box, Lin's sells _______.
A. as many boxes as he wants
B. zero boxes
C. to fast-food restaurants only
D. to his competitors, who then resell the cookies for $10 a box
5. In a perfectly competitive market, the price of a handsaw is $25. When a firm
maximizes its profit, it produces 6 handsaws a day.
Draw the marginal revenue curve. Label it.
Draw the marginal cost curve that illustrates the profit-maximizing output. Label it.
Draw a point at the profit-maximizing output and price.

Why does a firm in perfect competition produce the quantity at which marginal
cost equals price?
A firm produces the quantity at which marginal cost equals price because when
marginal cost is greater than price, the firm _______.
A. is at its shutdown point
B. can increase economic profit by producing 1 less handsaw
C. can increase economic profit by producing 1 more handsaw
D. is maximizing economic profit
6. Draw the marginal revenue curve for a firm in perfect competition that produces
rubber boots when the market price is $10 per pair. Label it.
Draw the marginal cost curve. Label it.
Draw the average variable cost curve if the price occurs at minimum average
variable cost. Label it.
Draw a point to indicate the shutdown point.

What is the lowest price at which a firm produces an output? Explain why.
The lowest price at which a firm will produce is the price at minimum _______
because at this price its loss equals _______.
A. average total cost; zero
B. average variable cost; total fixed cost
C. average fixed cost; total variable cost
D. total cost; zero

7. What is the relationship between a firm's supply curve, its marginal cost curve, and
its average variable cost curve?
A firm's supply curve is its _______.
A. marginal cost curve above minimum average total cost
B. marginal cost curve above minimum average variable cost
C. average total cost curve above its minimum average total cost
D. average variable cost curve above its minimum average variable cost
8. The table shows the total cost of producing sweaters in Henry's factory.

The market for sweaters is perfectly competitive, and the price of a sweater is
$22.50. What is Henry's profit-maximizing output?
Henry's profit-maximizing output is _______.
A. 3 sweaters an hour
B. 4 sweaters an hour
C. zero sweaters an hour
D. 2 sweaters an hour

9. Najran Cement Shuts Down Second Production Line

On March 9, 2017, a second production line of Najran Cement was temporarily
shut down as a result of the poor market situation. The Saudi Arabian company
stated that any financial effect of this decision will be publicly announced.
Explain what is meant by the term "financial effect," used in the news clip. Think
in terms of TFC, TVC, and TC.
The "financial effect" is the effect of the shutdown, which _______.
A. eliminates total variable cost and decreases total cost but does not change
total fixed cost
B. decreases total fixed cost, total variable cost, and total cost
C. decreases total variable cost and increases total fixed cost so that total cost
remains unchanged
D. does not change total fixed cost, total variable cost, or total cost
Explain what is meant by the financial effect of the shutdown in terms of profit
maximization or loss minimization.
The financial effect of the shutdown is profit maximization or loss minimization
when market price _____. The shutdown decision is temporary because Najran will
reopen the production line when market price is greater than _____.
A. is less than average total cost; average fixed cost
B. equals marginal cost; average variable cost
C. is less than average fixed cost; average total cost
D. is less than average variable cost; average variable cost
10.

The top graph shows a perfectly competitive market. Demand increases and the
demand curve shifts rightward from D Subscript 0 to D Subscript 1. The bottom
graph shows the cost curves and the marginal revenue curve of an individual firm
when demand is D Subscript 0.
In the bottom graph, draw the new MR curve when demand increases to D 1. Label
it.
Draw a point to show the new price and the new quantity produced by the firm.
Draw a shape that shows the firm's economic profit. Label it.
11. The table provides data on a competitive market: the demand schedule (top two
rows) and a firm's average and marginal cost schedules (lower four rows).

What is the firm's shutdown point?

A firm will stop producing an output in the short run when the market price of the
good is _______.
A. below minimum AVC
B. equals MC
C. below minimum ATC
D. equals ATC
This firm's shutdown point is at a market price of $_______ per unit and its profit-
maximizing output is _______ units.
If there are 1,000 identical firms in the market, what is the market supply curve?
The firm's supply curve is its _______ curve above _______.
A. MC; minimum ATC
B. MC; the shutdown point
C. AVC; minimum AVC
D. ATC; the shutdown point
The market supply curve is the sum of the 1,000 firms' _______ curves.
A. ATC
B. supply
C. AVC
If there are 1,000 identical firms in the market, what is the market price and
quantity?
If there are 1,000 identical firms in the market, the market price is $_______ per
unit and the quantity is _______ units.
With 1,000 firms, will firms enter or exit?
With 1,000 firms, firms will _______.
A. enter
B. Exit
 Under what condition will firms enter?
Firms will enter as long as _______.
A. the market price exceeds MC
B. the market price equals ATC at the quantity produced
C. ATC at the profit-maximizing quantity exceeds MC
D. the market price exceeds the firm's ATC
What do we know about the long-run equilibrium in perfect competition?
In long-run equilibrium, economic profit is _______ and _______.
A. zero; the market price equals the firm's minimum ATC
B. negative; the market price equals the firm's TFC
C. positive; the market price exceeds the firm's minimum ATC
D. zero; the market price equals the firm's AVC
What is the long-run equilibrium price, quantity, and number of firms?
The long-run equilibrium price is $_______ per unit, quantity is _______ units, and
number of firms is _______.

12. The graph shows the marginal cost, average total cost, and marginal revenue
curves for Lou's Lattes.

How many lattes does Lou's produce?

What is Lou's economic profit or economic loss?
Lou's produces _______ lattes an hour and _____________________ (make an
economic profit / incurs an economic loss) of $_______ an hour.
13. Dark Clouds Loom for Farmers as Corn Price Languishes
Global corn acreage expanded by 18 percent over the past 10 years and Minnesota
farms are producing a near-record amount of corn at a time when its price is low.
Why did the price of corn fall in 2016?
Corn prices fell in 2016 because _______.
A. the demand for corn decreased
B. the fixed cost of producing corn decreased
C. the supply of corn increased
D. after years of setting their own corn prices, farmers became price takers
The graph shows the cost curves and the marginal revenue curve of an individual
corn farmer at long-run equilibrium.

The price of corn fell in 2016.

Draw the farmer's new marginal revenue curve. Label it.
Draw a point at the new profit-maximizing price and quantity.
Draw a shape that shows the farmer's economic profit or loss. Label it.
14. What triggers entry in a competitive market?
Entry is triggered in a competitive market when existing firms are _______.
A. charging a price above the market equilibrium price
B. making an economic profit
C. incurring an economic loss
D. failing to maximize profit
Describe the process that ends further entry.
A. New firms enter, supply increases, and the price falls until in the long run all
firms are making normal profit. Market output increases and the output of
each individual firm decreases.
B. Some firms exit, supply increases, and the price falls until in the long run all
firms are making normal profit. Market output increases and the output of
each individual firm increases.
C. New firms enter, supply decreases, and the price rises until in the long run all
firms are making greater economic profit. Market output increases and the
output of each individual firm decreases.
D. Some firms exit, supply decreases, and the price rises until in the long run all
firms are making greater economic profit. Market output decreases and the
output of each individual firm decreases.

15. When some firms exit a market in which firms incur economic losses, how do the
market supply curve and the market price change?
When some firms exit a market in which firms incur economic losses, the market
supply curve shifts _______ and the market price _______.
A. rightward; falls
B. leftward; falls
C. rightward; rises
D. leftward; rises
What happens to each remaining firm's economic loss?
Each remaining firm's economic loss _______.
A. remains unchanged
B. increases
C. decreases
16. The graph shows the costs of Quick Copy, one of the many copy shops near campus.

The market price of copying one page is 10 cents.

In the long run, firms ______ the market, the market price is ______cents a page
and the equilibrium quantity is ______ pages an hour.
A. enter; 2; 20
B. exit; 6; 60
C. enter; 6; 60
D. exit; 10; 80
17. Describe what happens to output, price, and economic profit in the short run and
in the long run in a competitive market following an increase in demand.
A market with constant costs is in long-run equilibrium when it experiences an
increase in demand.
In the short run, firms in the market _______. In the long run, some firms _______
the market.
A. incur an economic loss; exit
B. make an economic profit; enter
C. make an economic profit; exit
D. break even; enter
Market supply _______ and the market price _______.
A. increases; falls until it reaches each firms' minimum average total cost
B. decreases; rises until it reaches each firms' minimum average total cost
C. decreases; rises until it reaches minimum each firms' average variable cost
D. increases; rises
Market output _____ and in the long run each remaining firm makes _____ profit.
A. decreases; a positive economic
B. increases; a positive economic
C. decreases; zero economic
D. increases; zero economic

18. State the conditions that must be met for resources to be allocated efficiently.
Resources are allocated efficiently when _______.
A. marginal social benefit equals marginal social cost, and the economy is
producing the goods and services that people value most highly
B. people are consuming the maximum possible quantity of goods and services
C. marginal social benefit equals marginal social cost, and wealth is distributed
equally among all consumers
D. firms are making positive economic profit
19. Describe the choices that consumers make and explain why consumers are
efficient on the market demand curve.
Consumers choose _______. Consumers are efficient on the market demand curve
because _______.
A. to buy a good or service only if they will receive a consumer surplus; every
point on the market demand curve maximizes consumer surplus
B. to allocate their budgets to get the most value possible out of them; we derive
a consumer's demand curve by finding how the best budget allocation changes
as the price of a good changes
C. to maximize profit; they only purchase goods and services that they can afford
D. to purchase goods and services made with the newest technology; the market
demand curve traces out the same path as the marginal revenue curve

20. How does monopoly arise?

A monopoly arises when a firm produces a good or service for which _______
substitutes exist, and the firm _______.
A. close; can influence the market price
B. close; is protected by a barrier that prevents other firms from selling that good
or service
C. no close; is protected by a barrier that prevents other firms from selling that
good or service
D. no close; produces an output at which diseconomies of scale exist

21. How does a natural monopoly differ from a legal monopoly?

A natural monopoly is a market in which _______. A legal monopoly is a market in
which _______.
A. close substitutes exist but a natural barrier to entry protects the firm from
potential competition; a firm could practice price discrimination but is unable
to do so due to the granting of a public franchise, government license, patent,
or copyright
B. economies of scale enable one firm to supply the entire market at the lowest
possible cost; competition and entry are restricted by the granting of a public
franchise, government license, patent, or copyright
C. a significant portion of a natural resource is owned by one firm; competition
has been deemed to be legal and in the best interest of consumers
D. demand is perfectly elastic due to economies of scale; many producers of
similar products lobby the government to restrict entry to new firms
22. Which of the following firms is most likely to be a monopoly?
A. a shoe store
B. a local fast-food restaurant
C. a local distributor of electricity
D. a computer store
23. How does a single-price monopoly determine the price it will charge its customers?
A single-price monopoly _______.
A. produces the quantity at which marginal revenue equals marginal cost and sets
the price equal to marginal revenue at that quantity
B. produces the quantity at which marginal revenue equals marginal cost and
charges the highest price consumers will pay for that quantity from the
demand curve
C. produces the quantity at which average total cost is minimized and charges the
highest price consumers will pay for that quantity from the demand curve
D. charges the price from the demand curve that corresponds to the quantity
where the price elasticity of demand equals 1
Grannie's is the only cake bakery on Coastal Island.
The graph shows Grannie's demand curve, marginal revenue curve, and marginal
cost curve.

Grannie's profit-maximizing price is _______ a cake and its profit- maximizing

output is _______ cakes a week.
A. $36; 2
B. $28; 12
C. $16; 12
D. $16; 24
24. What is the relationship between price, marginal revenue, and marginal cost when
a single-price monopoly is maximizing profit?
When a monopoly produces the profit-maximizing quantity, _______.
A. marginal revenue, marginal cost, and price are all equal
B. marginal cost is minimized, and marginal revenue equals price
C. price is greater than marginal revenue, which is greater than marginal cost
D. marginal revenue equals marginal cost, and price is greater than marginal
revenue
The graph shows the cost and revenue conditions facing Liza's Pizzeria, the sole
pizza place in Cloudland.

Draw an arrow to show the difference between marginal revenue and price at the
profit-maximizing quantity.

25. Why can a monopoly make a positive economic profit even in the long run?
A monopoly can make positive economic profit in the long run because _______.
A. new technology constantly lowers costs for the monopoly firm and for its
competitors
B. barriers to entry prevent other firms from entering the market and sharing the
profit
C. other firms eventually exit the market until the one remaining firm is making
an economic profit
D. eventually demand will increase and prices will rise
26. Tanya's Tattoos is local monopoly. Columns 1 and 2 of the table set out the market
demand schedule and columns 2 and 3 set out the total cost schedule.

What quantity does Tanya's produce to maximize profit?

Tanya's produces the quantity at which _______.
The table shows part of the demand schedule for tattoos. Fill in the boxes.

If Tanya's Tattoos is a single-price monopoly, what is Tanya's profit-maximizing

quantity? What price does Tanya's charge?
Tanya's profit-maximizing quantity is _______ tattoos an hour. Tanya charges
$_______ per tattoo.
If Tanya's Tattoos is a single-price monopoly, what are its economic profit and
producer surplus?
Tanya's economic profit is $_______ and its producer surplus is $_______ an hour.
27. The graph shows the demand curve for pizza in an isolated town that has only one
pizzeria.

Draw the corresponding marginal revenue curve. Make your curve intersect both
axes and label it.
Choose the correct statement.
A. For a monopoly, total revenue equals marginal revenue multiplied by the
quantity sold.
B. Marginal revenue equals total revenue divided by quantity sold.
C. For a monopoly, marginal revenue equals price.
D. When price is lowered to sell one more unit, the lower price results in a
revenue loss and the increased quantity sold results in a revenue gain.

28. Sam's Surfboards is the sole renter of surfboards on Big Wave Island.
What can we conclude if marginal revenue is positive at the actual number of
surfboard rentals made each hour?
If marginal revenue is positive at the actual number of surfboard rentals made each
hour, then _______.
A. the demand for surfboard rentals is elastic
B. the demand for surfboard rentals is unit elastic
C. the demand for surfboard rentals is inelastic
D. Sam's Surfboards can increase economic profit by increasing the number of
rentals
29. Does a monopoly produce on the elastic or inelastic range of the market demand
curve?
A monopoly _______.
A. never produces an output in the elastic range of the market demand because
it could charge a higher price, produce a smaller quantity, and increase its profit
B. always produces output in the inelastic range of the market demand
C. never produces an output in the inelastic range of the market demand because
it could charge a higher price, produce a smaller quantity, and increase its profit
D. usually produces the quantity at which market demand is unit elastic, and at
that quantity total revenue is maximized

30. The graph shows the demand curve for the output of a single-price monopoly and
the firm's costs.

Draw a point on the MC curve that indicates the quantity produced by the firm.
Label it 1.
Draw a point that indicates the price charged by the firm and the quantity
produced. Label it 2.
If the monopoly produces a quantity at which marginal revenue exceeds marginal
cost, _______.
A. demand is inelastic
B. economic profit is maximized
C. economic profit increases if output decreases
D. economic profit increases if output increases
31. Roxie's Movie Theater is the only one in town.
The table gives the demand schedule for movie tickets.

Roxie's is a single-price monopoly and the marginal cost of showing a movie is $6.
What is Roxie's movie ticket price and how many movie tickets a week will Roxie's
sell?
Roxie's will charge _______ a movie ticket and will sell _______ movie tickets a
week.
A. $6; 400
B. $15; 100
C. $9; 300
D. $12; 200

32. Why is a single-price monopoly inefficient?

A single-price monopoly is inefficient because _______ at the quantity produced.
A. marginal social benefit is maximized
B. marginal social benefit exceeds marginal social cost
C. marginal social cost exceeds marginal social benefit
D. marginal social cost is minimized
33. Minnie's Mineral Springs is a single-price monopoly. The graph shows Minnie's
demand curve, marginal revenue curve, and marginal cost curve, and the profit-
maximizing price and output.

Use the graph to determine the producer surplus generated from Minnie's Mineral
Springs' water production and consumption.
Is Minnie's an efficient producer of water? Explain.
The producer surplus generated from Minnie's Mineral Springs' water production
and consumption is shown on the graph as Area _______.
A. A
B. B
C. C
D. A + B
Minnie's _______ the efficient quantity of water because at the quantity produced
_______.
A. does not produce; producer surplus is greater than consumer surplus
B. produces; producer surplus is maximized
C. produces; Minnie's maximizes economic profit
D. does not produce; marginal social benefit exceeds marginal social cost and a
deadweight loss arises
Suppose that new wells were discovered nearby to Minnie's and Minnie's faced
competition from new producers. Explain what would happen to Minnie's output,
price, and profit.
When new wells are discovered and Minnie's faces competition from new
producers, _______.
A. the market supply of water increases and the market price falls, so Minnie's
produces more output so that at the lower price her economic profit remains
unchanged
B. Minnie makes no changes because she is already maximizing economic profit
C. the market supply of water increases and the market price falls, so Minnie's
produces less output, charges a lower price, and makes a smaller economic
profit
D. the market demand for water increases and the market price rises, so Minnie's
produces more output, charges a higher price, and makes a larger economic
profit
34. The graph illustrates the demand for haircuts and the costs of producing haircuts.

Draw a point to indicate the profit-maximizing output and price if this market is
perfectly competitive. Label the competitive equilibrium EC.
Draw a point to indicate the profit-maximizing output and price if the haircut
producer is a single-price monopoly. Label the monopoly equilibrium EM.
How do we redefine the curves in the graph when a perfectly competitive industry
is taken over by a single firm?
When a perfectly competitive industry is taken over by a single firm, the
competitive industry's ______ curve becomes the monopoly's ______ curve.
A. average total cost; supply
B. supply; marginal cost
C. average total cost; marginal cost
D. marginal revenue; demand