ECO 101 - If a business firm is earning more than would be necessary

QUESTION 1

1. If a business firm is earning more than would be necessary for the business to continue operations in the long run, then
2. A.total cost exceeds total revenue.
3. B.total cost is less than accounting profit.
4. C.accounting profit is zero.
5. D.economic profit is less than accounting profit.
6. E.the firm is earning an economic profit.

12 points

QUESTION 2

1. In a perfectly competitive market, the presence of short-run economic profits would, in the long run, cause economic profits to
2. A.continue.
3. B.decline but be larger than zero.
4. C.disappear because market costs increased.
5. D.disappear because the market-supply curve has shifted to the right.
6. E.disappear because firms are able to take advantage of economies of scale.

12 points

QUESTION 3

1. In the long run, if total cost exceeds total revenue, a profit-maximizing firm will
2. A.go out of business.
3. B.produce if it can cover fixed cost.
4. C.shut down if it is earning less than normal profit.
5. D.shut down if marginal cost exceeds marginal revenue.
6. E.continue to produce if marginal revenue exceeds marginal cost.

12 points

QUESTION 4

1. Which of the following statements concerning predictions of the perfect competition model is nottrue?
2. A.Entry into the market will occur whenever economic profits are being earned.
3. B.If the market price is below the minimum point on the ATC curve, firms will leave the market.
4. C.Firms will leave the market when they are earning only enough to cover their opportunity costs.
5. D.Firms will leave the market whenever economic losses are being incurred.
6. E.If the market price is above the minimum point on the ATC curve, firms will enter the market.

QUESTION 5

1. This graph represents the cost and revenue curves of a firm in a perfectly competitive market.

According to the graph shown, if a firm is producing at Q3:

A.profits are being maximized.

B.average total costs exceed the market price.

C.the firm should expand production.

D.All of these are true.

QUESTION 6

1. If the demand increases in a perfectly competitive market, in the short run the supply curve will:
2. A.increase.
3. B.decrease.
4. C.not change.
5. D.either increase or decrease.

QUESTION 7

1. This graph represents the cost and revenue curves of a firm in a perfectly competitive market.

According to the graph shown, if a firm is producing at Q2, and it is identical to others in the market:

A.profits are not being maximized.

B.firms will enter this market.

C.economic profits are zero.

D.All of these are true.

QUESTION 8

1. In the long run, in a perfectly competitive industry
2. A.price is equal to firms' minimum ATC
3. B.price is below firms' minimum AVC.
4. C.price is below firms' minimum ATC.
5. D.price is above firms' minimum ATC.
6. E.price exceeds marginal cost.

12 points

QUESTION 9

1. If zero economic profit is being earned in a perfectly competitive market,
2. A.firms will temporarily shut down.
3. B.firms will enter the market.
4. C.firms will leave the market.
5. D.firms will permanently shut down.
6. E.no firms will enter or leave the market.

12 points

QUESTION 10

1. In the long run, a perfectly competitive market will
2. A.have entry of firms if economic profits are positive.
3. B.have exit of firms if economic profits are negative.
4. C.have entry and exit of firms until economic profits are zero.
5. D.have normal economic profits in long-run equilibrium.
6. E.All of the above.

QUESTION 1

1. Ethan enjoys buying books and going to the movies. He has income of $150 to spend on these two goods each month. The price of a book is $15 and the price of going to the movies is also $15. He currently consumes four books and six movies a month. If the price of a book increases to $20, then:
2. A.the substitution and income effects would both predict Ethan would consume more of both goods.
3. B.the substitution and income effects would both predict Ethan would consume less of both goods.
4. C.the substitution effect would predict Ethan would consume more books and less movies, and the income effect would predict he would consume less of both.
5. D.the substitution effect would predict Ethan would consume less books and more movies and the income effect would predict he would consume less of both.

QUESTION 2

1. Nick has $300 a month to spend on detailing his sports car or buying bottles of good wine. It costs $100 to have his car detailed and $50 for a bottle of wine. He currently buys four bottles of wine and has his car detailed once a month. If the price of detailing his car decreased to $75, Nick's budget constraint:
2. A.would shift straight outward, because he is relatively wealthier.
3. B.would rotate and change slope because relative prices have changed.
4. C.would shift straight inward because he is relatively wealthier.
5. D.One cannot determine what would happen without knowing Nick's marginal utility of each good.

QUESTION 5

1. A budget line identifies combinations of two goods that a consumer
2. A.will purchase, given his or her preferences.
3. B.has purchased, given his or her income and prices.
4. C.wants to purchase.
5. D.will purchase if the prices are low enough.
6. E.is able to purchase, given his or her income and prices.

QUESTION 6

1. A budget line indicates different combinations of two products that can be purchased by a consumer with a given budget.
2. A.True
3. B.False

QUESTION 7

1. Which of the following is an assumption associated with indifference curves?
2. A.They are positively sloped.
3. B.The marginal utility of any product is negative.
4. C.They intersect.
5. D.People are rational.
6. E.There is an increasing marginal rate of substitution of good X for good Y.

QUESTION 8

1. A budget line indicates
2. A.how a demand curve can be derived.
3. B.different combinations of two products that provide a consumer with the same level of utility.
4. C.different combinations of two products that can be purchased by a consumer with a given budget.
5. D.the same thing as an indifference curve.
6. E.varying budgets that a consumer can afford to spend on two products.

QUESTION 9

1. With an increase in income, the consumer will maximize utility on a new indifference curve that represents a higher level of utility.
2. A.True
3. B.False

QUESTION 10

1. When maximizing utility, the consumer wants to be on the indifference curve farthest from the origin, while staying on his or her budget constraint.
2. A.True
3. B.False