Question 1

Which of the following best describes the shutdown point for a perfectly competitive firm in the short run?

Accepted Answer

The point where price equals the minimum average variable cost.

Question 2

Suppose a firm in a perfectly competitive industry is earning positive economic profits in the short run. What is the likely long-run outcome for this industry?

Accepted Answer

New firms will enter the industry, increasing supply and driving prices down until profits are zero.

Question 3

A firm’s long-run average cost curve (LRAC) is downward sloping over a range of output. What does this indicate?

Accepted Answer

The firm is experiencing economies of scale.

Question 4

If a hospital expands from 60 beds to 300 beds and its average cost per bed decreases, this is an example of:

Accepted Answer

Economies of scale

Question 5

Which equation correctly expresses the relationship between average total cost (ATC), total cost (TC), and quantity (q)?

Accepted Answer

$$ATC = \frac{TC}{q}$$

Question 6

What is the minimum efficient scale (MES)?

Accepted Answer

The smallest size at which the long-run average cost curve is at its minimum.

Question 7

In the short run, a firm should continue to operate even if it is making losses as long as:

Accepted Answer

Total revenue is greater than total variable cost.

Question 8

Which of the following best describes a constant-cost industry?

Accepted Answer

An industry where average costs remain unchanged as the industry grows.

Question 9

If the long-run industry supply curve (LRIS) slopes downward, what does this indicate?

Accepted Answer

The industry is a decreasing-cost industry with external economies.

Question 10

Walmart’s ability to offer lower prices than competitors is primarily due to:

Accepted Answer

Economies of scale from bulk buying and spreading fixed costs over many stores.

Question 11

Suppose the price of a hot dog license in Central Park increases by $1,500 per year. If a vendor sells 1,000 hot dogs annually, by how much must the price per hot dog increase to cover the license cost?

Accepted Answer

$$1.50$$

Question 12

Which of the following is true about the short-run supply curve of a perfectly competitive firm?

Accepted Answer

It is the portion of the marginal cost curve that lies above the average variable cost curve.

Question 13

If a firm is producing at the optimal scale of plant, what is true?

Accepted Answer

It is minimizing its long-run average cost.

Question 14

Which of the following best explains why the number of hospital beds in the U.S. decreased after consolidation?

Accepted Answer

Hospitals experienced economies of scale, reducing the need for as many small hospitals.

Question 15

In a long-run competitive equilibrium, which of the following is true?

Accepted Answer

Firms earn zero economic profit and no incentive exists for entry or exit.

Question 16

If an industry experiences external diseconomies as it expands, what will happen to the long-run industry supply curve?

Accepted Answer

It will slope upward.

Question 17

A firm faces the following costs: total fixed cost = $$500, total variable cost = 1$$,000, and total revenue = $1,200. Should the firm continue to operate in the short run?

Accepted Answer

Yes, because total revenue exceeds total variable cost.

Question 18

Which of the following is NOT a source of economies of scale?

Accepted Answer

Managerial inefficiency as the firm grows.

Question 19

If a firm’s long-run average cost curve is flat over a range of output, what does this imply?

Accepted Answer

The firm is experiencing constant returns to scale.

Question 20

Which of the following best describes the long-run adjustment mechanism in a perfectly competitive industry?

Accepted Answer

Firms enter or exit the industry in response to profit opportunities, moving the industry toward zero economic profit.

Long-Run Costs and Output Decisions in Perfect Competition

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