The Ultimate Microeconomics Proficiency Test!
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Human beings' wants are unlimited, and the resources required to meet them are most often scarce. Understanding how to allocate the limited resources to meet the unlimited desires of a firm or an individual forms the basis of microeconomics. Take up the microeconomics proficiency and test your understanding of how firms survive in a competitive market. All the best!
Questions and Answers
- 1.
The only requirement for a market to be perfectly competitive is for the market to have many buyers and sellers
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
A market being perfectly competitive requires more than just having many buyers and sellers. In addition to a large number of market participants, perfect competition also necessitates that all firms sell identical products, have perfect information about prices and market conditions, have easy entry and exit into the market, and that firms are price takers rather than price setters. Therefore, the statement that the only requirement for a market to be perfectly competitive is many buyers and sellers is false.Rate this question:
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- 2.
For a competitive firm, marginal revenue equals the price of the goods it sells
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
In a competitive market, a firm is a price taker, meaning it has no control over the market price. The firm can only sell its goods at the prevailing market price. Therefore, the marginal revenue earned by the firm from selling an additional unit of output is equal to the price of the goods it sells. This is because the firm can sell as much quantity as it wants at the market price without affecting the price. Hence, the statement is true.Rate this question:
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- 3.
If a competitive firm sells three times the amount of output, its total revenue also increases by a factor of three
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
When a competitive firm sells three times the amount of output, its total revenue will also increase by a factor of three. This is because in a competitive market, the price is determined by the market and remains constant. Therefore, when the firm increases its output, it will sell more units at the same price, resulting in a proportional increase in total revenue.Rate this question:
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- 4.
A firm maximizes profit when it produces output up to the point where marginal cost equals marginal revenue
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
The statement is true because maximizing profit occurs when a firm produces output up to the point where the additional cost of producing one more unit (marginal cost) is equal to the additional revenue generated from selling one more unit (marginal revenue). This is because producing beyond this point would result in higher costs than the revenue generated, leading to a decrease in profit. Therefore, the firm maximizes profit by producing up to the point where marginal cost equals marginal revenue.Rate this question:
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- 5.
If marginal cost exceeds marginal revenue at a firm's current level of output, the firm can increase profit if it increases its level of output
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
If the marginal cost exceeds the marginal revenue at a firm's current level of output, it means that the cost of producing an additional unit is higher than the revenue generated from selling that unit. In this situation, increasing the level of output would only result in higher costs without generating enough revenue to cover them, leading to a decrease in profit. Therefore, the statement is false.Rate this question:
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- 6.
A competitive firm's short-run supply curve is the portion of its marginal cost curve that lies above its average-total-cost curve
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
The statement is false because the short-run supply curve of a competitive firm is determined by the portion of its marginal cost curve that lies above its average variable cost curve, not the average total cost curve. The average total cost curve includes both fixed and variable costs, while the short-run supply curve only considers the variable costs. Therefore, the correct answer is false.Rate this question:
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- 7.
A competitive firm's long-run supply curve is the portion of its marginal-cost curve that lies above its average-variable-cost curve
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
A competitive firm's long-run supply curve is actually the portion of its marginal-cost curve that lies above its average-total-cost curve, not the average-variable-cost curve. In the long run, a competitive firm can adjust all of its inputs, including fixed costs, so the relevant cost curve is the average-total-cost curve. Therefore, the correct answer is False.Rate this question:
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- 8.
In the short run, if the price a firm receives for a good is above its average variable costs but below its average total costs of production, the firm will temporarily shut down
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
In the short run, if the price a firm receives for a good is above its average variable costs but below its average total costs of production, the firm will not temporarily shut down. Instead, the firm will continue to operate in the short run, even though it is not covering all of its costs. This is because the firm is still able to cover its variable costs, which are the costs that can be adjusted in the short run. However, if the price falls below the average variable costs, the firm may choose to temporarily shut down.Rate this question:
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- 9.
In a competitive market, both buyers and sellers are price takers
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
In a competitive market, buyers and sellers are considered price takers because they have no control over the market price. They must accept the prevailing price set by the market forces of supply and demand. This means that individual buyers and sellers have little to no influence on the price and must adjust their behavior accordingly. This characteristic of a competitive market ensures that no single buyer or seller can manipulate prices to their advantage, promoting fair competition.Rate this question:
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- 10.
In the long run, if the price firms receive for their output is below their average total costs of production, some firms will exit the market.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
If the price that firms receive for their output is lower than their average total costs of production, it means that they are not making enough profit to cover their expenses. In the long run, this situation is unsustainable for firms, as they cannot continue operating at a loss indefinitely. Therefore, some firms will be forced to exit the market in order to avoid further losses. This is a natural process that occurs in competitive markets, as firms that cannot compete effectively will be driven out of the market.Rate this question:
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- 11.
In the short run, the market supply curve for a good is the sum of the quantities supplied by each firm at each price.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
In the short run, each firm has a fixed amount of resources and cannot easily adjust its production level. Therefore, the market supply curve is determined by adding up the quantities supplied by each firm at each price. This is because each firm's supply curve represents the quantity it is willing and able to produce at different prices. By summing up these individual firm supply curves, we can obtain the overall market supply curve for the good. Therefore, the statement is true.Rate this question:
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- 12.
The short-run market supply curve is more elastic than the long-run market supply curve.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
The short-run market supply curve is less elastic than the long-run market supply curve because in the short run, firms have limited flexibility to adjust their production levels due to fixed inputs, such as capital and technology. This means that changes in price will have a relatively smaller effect on the quantity supplied. In the long run, however, firms can adjust all inputs, including capital and technology, allowing them to be more responsive to price changes and resulting in a more elastic supply curve.Rate this question:
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- 13.
In the long run, perfectly competitive firms earn small but positive economic profits.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
In the long run, perfectly competitive firms do not earn economic profits. This is because in a perfectly competitive market, there are no barriers to entry or exit, and firms can freely enter or exit the market. As a result, if firms were earning economic profits, new firms would enter the market, increasing competition and driving down prices until profits are reduced to zero. Therefore, in the long run, perfectly competitive firms earn zero economic profits, not small but positive ones.Rate this question:
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- 14.
In the long run, if firms are identical and there are free entry and exit in the market, all firms in. the market operates at an efficient scale.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
In a market with identical firms and free entry and exit, all firms have the opportunity to enter or exit the market freely based on their profitability. This means that over time, firms that are not operating at an efficient scale will exit the market, leaving only those firms that are able to produce at the most efficient scale. Therefore, in the long run, all firms in the market will operate at an efficient scale.Rate this question:
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- 15.
If the price of a good rise above the minimum average total cost of production, positive economic profits will cause new firms to enter the market, which drives the price back down to the minimum average total cost of production.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
When the price of a good rises above the minimum average total cost of production, it indicates that firms are making positive economic profits. This attracts new firms to enter the market, as they see an opportunity to make profits. The entry of new firms increases the supply of the good, which leads to a higher competition and a decrease in price. Eventually, the price will be driven back down to the minimum average total cost of production, where firms are making zero economic profits. Therefore, the statement is true.Rate this question:
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- 16.
Which of the following is not a characteristic of a competitive market?
- A.
There are many buyers and sellers in the market
- B.
The goods offered for sale are largely the same
- C.
Firms can freely enter or exit the market
- D.
Firms generate small but positive economic profits in the long run
- E.
All of the above are characteristics of a competitive market
Correct Answer
D. Firms generate small but positive economic profits in the long runExplanation
In a competitive market, firms are not expected to generate small but positive economic profits in the long run. Instead, in a truly competitive market, firms are expected to earn zero economic profits in the long run. This is because in a competitive market, there are many buyers and sellers, the goods offered for sale are largely the same, and firms can freely enter or exit the market. These conditions create intense competition, driving prices down and eliminating any potential for long-term economic profits.Rate this question:
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- 17.
Which of the following markets would most closely satisfy the requirements for a competitive market?
- A.
Gold bullion
- B.
Electricity
- C.
Cable television
- D.
Soda
- E.
All of the above represent competitive markets
Correct Answer
A. Gold bullionExplanation
Gold bullion would most closely satisfy the requirements for a competitive market because it is a widely traded commodity with many buyers and sellers. In a competitive market, there is free entry and exit, meaning that new sellers can easily enter the market and compete with existing sellers. Additionally, there is perfect information, meaning that buyers and sellers have access to all relevant information about prices and products. Gold bullion meets these criteria as it is traded on global exchanges with numerous buyers and sellers, and information about prices and quality is readily available.Rate this question:
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- 18.
If a competitive firm doubles its output, its total revenue
- A.
More than doubles
- B.
Doubles
- C.
Less than doubles
- D.
Cannot be determined because the price of the good may rise or fall
Correct Answer
B. DoublesExplanation
When a competitive firm doubles its output, its total revenue also doubles. This is because in a competitive market, the firm is a price taker and the price remains constant. Therefore, when the firm increases its output, it sells twice as many units at the same price, resulting in a doubling of total revenue.Rate this question:
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- 19.
For a competitive firm, marginal revenue is:
- A.
Equal to the price of the good sold
- B.
Average revenue divided by the quantity sold
- C.
Total revenue divided by the price
- D.
Equal to the quantity of the good sold
Correct Answer
A. Equal to the price of the good soldExplanation
Marginal revenue refers to the change in total revenue that occurs from selling one additional unit of a good. In a competitive market, a firm is a price taker, meaning it cannot influence the price of the good. Therefore, the firm's marginal revenue will be equal to the price of the good sold because selling one more unit will not change the price.Rate this question:
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- 20.
The competitive firm maximizes profit when it produces output up to the point where:
- A.
Marginal cost equals total revenue
- B.
Marginal revenue equals average revenue
- C.
Marginal cost equals marginal revenue
- D.
Price equals average variable cost
Correct Answer
C. Marginal cost equals marginal revenueExplanation
The correct answer is "marginal cost equals marginal revenue." This is because in order to maximize profit, a competitive firm should produce up to the point where the additional cost of producing one more unit (marginal cost) is equal to the additional revenue generated from selling one more unit (marginal revenue). This ensures that the firm is not incurring any unnecessary costs and is maximizing its profit by balancing the costs and revenues.Rate this question:
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- 21.
If a competitive firm is producing a level of output where marginal revenue exceeds marginal cost, the firm could increase profits if it:
- A.
Increased production
- B.
Decreased production
- C.
Maintained production at the current level
- D.
Temporarily shut down
Correct Answer
A. Increased productionExplanation
If a competitive firm is producing a level of output where marginal revenue exceeds marginal cost, increasing production would lead to higher profits. This is because when marginal revenue is greater than marginal cost, each additional unit produced brings in more revenue than it costs to produce. Therefore, by increasing production, the firm can generate additional revenue that exceeds the additional costs, resulting in higher profits.Rate this question:
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- 22.
If a competitive firm is producing a level of output where marginal revenue exceeds marginal cost, the firm could increase profits if it:
- A.
Increased production
- B.
Decreased production
- C.
Maintained production at the current level
- D.
Temporarily shut down
Correct Answer
A. Increased productionExplanation
If a competitive firm is producing a level of output where marginal revenue exceeds marginal cost, it means that the firm is generating more revenue from each additional unit produced than the cost of producing that unit. This indicates that the firm is not yet maximizing its profits. By increasing production, the firm can continue to benefit from the higher marginal revenue and further increase its profits. Therefore, increasing production would be the most profitable choice for the firm in this scenario.Rate this question:
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- 23.
In the short run, the competitive firm's supply curve is the:
- A.
Entire marginal-cost curve
- B.
Portion of the marginal-cost curve that lies above the average-total-cost curve
- C.
Portion of the marginal-cost curve that lies above the average-variable-cost curve
- D.
Upward-sloping potion of the average-total-cost curve
- E.
Upward-sloping portion of the average-variable-cost curve
Correct Answer
C. Portion of the marginal-cost curve that lies above the average-variable-cost curveExplanation
In the short run, the competitive firm's supply curve is the portion of the marginal-cost curve that lies above the average-variable-cost curve. This is because in the short run, a competitive firm will only produce if the price of the good is higher than its average variable cost. The portion of the marginal-cost curve that lies above the average-variable-cost curve represents the level of output where the firm is covering all of its variable costs and making a positive contribution towards its fixed costs.Rate this question:
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- 24.
In the long run, the competitive firm's supply curve is the:
- A.
Entire marginal-cost curve
- B.
Portion of the marginal-cost curve that lies above the average-total-cost curve
- C.
Portion of the marginal-cost curve that lies above the average-total-cost curve
- D.
Upward-sloping portion of the average-total-cost curve
- E.
Upward-sloping portion of the average-variable-cost curve
Correct Answer
B. Portion of the marginal-cost curve that lies above the average-total-cost curveExplanation
The correct answer is the portion of the marginal-cost curve that lies above the average-total-cost curve. This is because in the long run, a competitive firm will only continue to produce if it can cover all of its costs, including both variable and fixed costs. Therefore, the firm's supply curve will only include the portion of the marginal-cost curve that lies above the average-total-cost curve, as this represents the level of output where the firm is able to cover all of its costs and make a profit.Rate this question:
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- 25.
A grocery store should close at night if the:
- A.
Total costs of staying open are greater than the total revenue due to staying open
- B.
Total costs of staying open are less than the total revenue due to staying open
- C.
Variable costs of staying open are greater than the total revenue due to staying open
- D.
Variable costs of staying open are less than the total revenue due to staying open
Correct Answer
C. Variable costs of staying open are greater than the total revenue due to staying openExplanation
The explanation for the correct answer is that if the variable costs of staying open (such as electricity, wages, and inventory) are greater than the total revenue generated during the night, it would result in a net loss for the grocery store. In this scenario, it would be more financially prudent for the store to close at night to avoid incurring further costs.Rate this question:
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- 26.
The long-run market supply curve:
- A.
Is always more elastic than the short-run market supply curve
- B.
Is always less elastic than the short-run market supply curve
- C.
Has the same elasticity as the short-run market supply curve
- D.
Is always perfectly elastic
Correct Answer
A. Is always more elastic than the short-run market supply curveExplanation
The long-run market supply curve is always more elastic than the short-run market supply curve because in the long run, firms have more flexibility to adjust their production levels and inputs. They can enter or exit the market, build new factories, and make changes to their technology and processes. This means that in response to changes in price, firms in the long run can more easily adjust their production and supply a larger quantity. Therefore, the long-run market supply curve is more elastic, reflecting the greater responsiveness of firms to price changes in the long run.Rate this question:
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- 27.
In the long run, some firms will exit the market if the price of the good offered for sale is less than:
- A.
Marginal revenue
- B.
Marginal cost
- C.
Average revenue
- D.
Average total cost
Correct Answer
D. Average total costExplanation
In the long run, firms will exit the market if the price of the good offered for sale is less than the average total cost. This is because if the price is lower than the average total cost, the firm will not be able to cover all its costs and will incur losses. In order to remain profitable, firms need to at least cover their average total cost, including both fixed and variable costs. If they cannot do so, it is more beneficial for them to exit the market and allocate their resources elsewhere.Rate this question:
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- 28.
If all firms in a market have identical cost structures and if inputs used in the production of the good in that market are readily available, then the long-run market supply curve for that good should be:
- A.
Perfectly elastic
- B.
Downward sloping
- C.
Upward sloping
- D.
Perfectly inelastic
Correct Answer
A. Perfectly elasticExplanation
If all firms in a market have identical cost structures and if inputs used in the production of the good in that market are readily available, then the long-run market supply curve for that good should be perfectly elastic. This is because in a perfectly competitive market, firms can easily enter or exit the market without incurring any additional costs. As a result, if there is an increase in demand for the good, new firms can quickly enter the market and increase the supply, causing the supply curve to be perfectly elastic and responsive to changes in demand.Rate this question:
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- 29.
If an input necessary for production is in limited supply so that an expansion of the industry raises costs for all existing firms in the market, then the long-run market supply curve for a good could be:
- A.
Perfectly elastic
- B.
Downward sloping
- C.
Upward sloping
- D.
Perfectly inelastic
Correct Answer
C. Upward slopingExplanation
If an input necessary for production is in limited supply and an expansion of the industry raises costs for all existing firms, it implies that as the industry expands, there is increased competition for the limited input, causing its price to rise. This increase in input costs will lead to higher production costs for all firms in the market. In the long run, firms may find it less profitable to enter or expand in the industry due to the higher costs, resulting in a less responsive supply curve. As a result, the long-run market supply curve for the good will be upward sloping.Rate this question:
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- 30.
If the long-run market supply curve for a good is perfectly elastic, an increase in the demand for that good, will in the long run, cause:
- A.
An increase in the price of the good and an increase in the number of firms in the market
- B.
An increase in the price of the good but no increase in the number of firms in the market
- C.
An increase in the number of firms in the market but no increase in the price of the good
- D.
No impact on either the price of the good or the number of firms in the market
Correct Answer
C. An increase in the number of firms in the market but no increase in the price of the goodExplanation
If the long-run market supply curve for a good is perfectly elastic, it means that firms can easily enter or exit the market without affecting the price. Therefore, an increase in demand for the good will not lead to an increase in the price of the good. However, since the demand has increased, it creates an incentive for new firms to enter the market, resulting in an increase in the number of firms. Therefore, the correct answer is that there will be an increase in the number of firms in the market but no increase in the price of the good.Rate this question:
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- 31.
In long-run equilibrium in a competitive market, firms are operating at:
- A.
The minimum of their average-total-cost curves
- B.
The intersection of marginal cost and marginal revenue
- C.
Their efficient scale
- D.
Zero economic profit
- E.
All of the above
Correct Answer
E. All of the aboveExplanation
In long-run equilibrium in a competitive market, firms are operating at the minimum of their average-total-cost curves because they have optimized their production and minimized costs. They are also operating at the intersection of marginal cost and marginal revenue, which ensures that they are producing the quantity where the additional cost of producing one more unit is equal to the additional revenue generated from selling that unit. Additionally, firms are operating at their efficient scale, which is the level of production where they are maximizing efficiency and minimizing waste. Finally, in long-run equilibrium, firms are earning zero economic profit, as any profit above this level would attract new entrants into the market, driving down prices. Therefore, all of the above statements are true in long-run equilibrium in a competitive market.Rate this question:
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Mar 21, 2023Quiz Edited by
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Feb 20, 2011Quiz Created by
Emy_2
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