$$Economic\ Profit = Total\ Revenue - (Out\text{-}of\text{-}pocket\ Cost + Opportunity\ Cost)$$

Question 1

Which of the following best describes the long-run supply curve in a perfectly competitive market?

Accepted Answer

It is perfectly elastic at the minimum long-run average total cost.

Question 2

Suppose the long-run market price for toys is below the minimum long-run average total cost (ATC) for all firms. What should a firm do?

Accepted Answer

Exit the market, since there is no scale at which the firm can make non-negative economic profit.

Question 3

Which formula correctly defines economic profit?

Accepted Answer

$$Economic\ Profit = Total\ Revenue - (Out	ext{-}of	ext{-}pocket\ Cost + Opportunity\ Cost)$$

Question 4

If a firm in the oil industry faces a market price equal to its minimum long-run ATC, what is its economic profit?

Accepted Answer

$$Economic\ Profit = 0$$

Question 5

Which of the following is NOT a condition for perfect competition in the long run?

Accepted Answer

Firms produce differentiated products.

Question 6

What happens to the price elasticity of supply as the time horizon increases?

Accepted Answer

It increases because factors of production become more flexible.

Question 7

A firm is currently earning supernormal profits in a competitive market. What is the expected long-run outcome?

Accepted Answer

New firms will enter, increasing supply and driving economic profit to zero.

Question 8

Which of the following best explains why the long-run supply curve in a perfectly competitive market is perfectly elastic?

Accepted Answer

Free entry and exit ensure that any quantity can be supplied at the minimum long-run ATC.

Question 9

Suppose a firm in the oil industry can double all its inputs and finds that output more than doubles. What is this an example of?

Accepted Answer

Economies of scale

Question 10

If a firm doubles all inputs and output exactly doubles, what is this called?

Accepted Answer

Constant returns to scale

Question 11

Which of the following is a consequence of diseconomies of scale?

Accepted Answer

Increasing inputs leads to less than proportional increases in output.

Question 12

In the short run, which cost must a firm still pay even if it shuts down production?

Accepted Answer

Fixed cost

Question 13

Which equation represents profit for a firm?

Accepted Answer

$$Profit = Total\ Revenue - Total\ Cost$$

Question 14

If the market price is above the minimum long-run ATC, what will happen in a perfectly competitive industry?

Accepted Answer

Firms will enter the market, increasing supply until price equals minimum long-run ATC.

Question 15

Which of the following best describes accounting profit?

Accepted Answer

$$Accounting\ Profit = Total\ Revenue - Out	ext{-}of	ext{-}pocket\ Cost$$

Question 16

Which of the following is true about economic profit in the long run under perfect competition?

Accepted Answer

Economic profit is zero, but accounting profit may be positive.

Question 17

Suppose the oil industry faces a finite resource constraint. What happens to the long-run supply curve as the resource becomes scarce?

Accepted Answer

The long-run supply curve becomes upward sloping as extraction costs rise.

Question 18

Which of the following best explains why firms cannot replicate efficient scale forever?

Accepted Answer

Diseconomies of scale eventually occur due to management difficulties and fixed inputs.

Question 19

If the price elasticity of supply is defined as $$\frac{\%\ \Delta Q_s}{\%\ \Delta P}$$, what does a value greater than 1 indicate?

Accepted Answer

Supply is elastic; quantity supplied responds more than proportionally to price changes.

Question 20

A firm in the toy industry observes that the long-run market price is greater than its minimum long-run ATC. What should the firm do?

Accepted Answer

Stay in the toy industry, as it can earn non-negative economic profit.

Long-Run Supply in Microeconomics: Cost Curves, Elasticity, and Market Dynamics

Study Guide - Practice Questions