Question

33.If a firm has diseconomies of scale

a.If it is in a very competitive industry it would be advisable for it to scale back its production level in the long run

b.Average total cost is rising as the firm expands

c.Both a and b

d.Neither a nor b

34.In a perfectly competitive industry

a.Firms produce differentiated “ heterogeneous” products

b.Legal barriers to entry prevent the market from being monopolized

c.Firms must get a patient before producing the product

d.None of the above

35.The difference between a firm’s short run average total cost curve and its long run average total cost curve is that

a.The latter reflects a fixed amount of capital

b.The former rules out diminishing returns to labor

c.The latter reflects all the possible short run average total cost curve

d.All of the above are true

36.A profit seeking competitive firm will want to produce at minimum efficient scale

a.Always

b.Only in the short run

c.if it would have economies of scale at that exact point

d.None of the above

37.A perfectly competitive firms faces

a.Perfectly elestic demand for its output

b.Entry of new competitors in the short run

c.Constant pressures to advertise the special features of its product

d.None of the above

38.Rank the prices prevailing in a competitive decreasing cost industry from the highest to lowest for a case where there is an increased market demand for the product

a.The original price will be highest the price will go down in the short run and go even lower in the long run

b.In the short run the price will become higher than the original price; longer term the price will fall but it will still end up higher than the original price

c.In the short run price will go up in the long run the price will fall and eventually become lower than the original price

d.None of the above

39.A perfectly competitive firm is known as a price taker because

a.It takes the highest price that anyone would be willing to pay for a substitute product

b.Only competitors adhere to the survivor principle

c.It produces a rate of output that makes marginal cost a minimum value

d.it accepts the market price as given

40.The competitive firm maximizes short-run profit by operating where

a.Average cost is at a minimum

b.Total revenue is at a maximum

c.Profit per unit is at a maximum

d.Marginal cost equal price, as long P > AVC

41. If MP1/w > MP k/r then a company could improve its profitability by

a.Becoming more capital intensive

b.Becoming more labor intensive

c.Investing in labor saving devices

d.None of the above

Answer 1

33. c.Both a and b. Diseconomies of scale occur in the long run when production is very large and mismanagement leads to increase in average cost with the increase in output. Thus, it is advisable to decrease production.

34. d.None of the above. The perfectly competitive industry is one where there are a large number of firms who sell a homogenous product at the given price and there are no entry-exit barriers.

36. d.None of the above. In long run, competitive industry earns zero normal profit and produce at the minimum average cost where there is efficiency.

37. a.Perfectly elastic demand for its output. The demand curve for the comptitive firm is horizontally fixed at the market price.

39. d.it accepts the market price as given

40. d.Marginal cost equal price, as long P > AVC