The Ultimate Quiz On Microeconomics

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  • 1/31 Questions

    A firm maximizes profit when it produces output up to the point where marginal cost equals marginal revenue.

    • True
    • False
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About This Quiz

Explore key concepts of microeconomics with this Ultimate Quiz. Assess your understanding of market structures, revenue relationships, and profit maximization strategies. Ideal for learners aiming to deepen their economic insights.

The Ultimate Quiz On Microeconomics - Quiz

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  • 2. 

    If the price of a good rises 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.

    • True

    • False

    Correct Answer
    A. True
    Explanation
    When the price of a good rises above the minimum average total cost of production, it indicates that the existing firms in the market are earning positive economic profits. This attracts new firms to enter the market, hoping to also earn profits. The increased competition from these new entrants leads to an increase in the supply of the good, which in turn causes the price to decrease. Eventually, the price will be driven back down to the minimum average total cost of production, where economic profits are zero. Therefore, the statement is true.

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  • 3. 

    If a competitive firm is producing a level of output where marginal revenue exceeds marginal cost, the firm could increase profits if it:

    • Increased production

    • Decreased production

    • Maintained production at the current level

    • Temporarily shut down

    Correct Answer
    A. Increased production
    Explanation
    If a competitive firm is producing a level of output where marginal revenue exceeds marginal cost, it means that the firm is earning 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 earn more revenue than the cost of production, thereby increasing its profits. Therefore, increasing production is the correct answer.

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  • 4. 

    In a competitive market, both buyers and sellers are price takers.

    • True

    • False

    Correct Answer
    A. True
    Explanation
    In a competitive market, both buyers and sellers are price takers because they have no control over the price of the goods or services being exchanged. They must accept the prevailing market price, which is determined by the forces of supply and demand. This means that neither buyers nor sellers can individually influence the price and must adjust their behavior accordingly.

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  • 5. 

    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. 

    • True

    • False

    Correct Answer
    A. True
    Explanation
    If the price firms receive for their output is below their average total costs of production in the long run, it means that they are not generating enough revenue to cover their costs. This situation is unsustainable for firms, as they will continue to incur losses. As a result, some firms will be forced to exit the market in order to avoid further losses and potential bankruptcy. This process of exiting the market allows the remaining firms to potentially increase their market share and achieve profitability. Therefore, the statement is true.

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  • 6. 

    For a competitive firm, marginal revenue equals the price of the goods it sells.

    • True

    • False

    Correct Answer
    A. True
    Explanation
    The statement is true because for a competitive firm, the price of the goods is determined by the market and the firm has no control over it. In a perfectly competitive market, the firm is a price taker, meaning it has to accept the prevailing market price. Therefore, the firm's marginal revenue, which is the additional revenue earned from selling one more unit of a good, will be equal to the price of the goods it sells.

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  • 7. 

    In the long run, if firms are identical and there is free entry and exit in the market, all firms in the market operate at their efficient scale.

    • True

    • False

    Correct Answer
    A. True
    Explanation
    In a market with identical firms and free entry and exit, all firms will operate at their efficient scale in the long run. This is because in a competitive market, firms have an incentive to maximize their profits by producing at the quantity where marginal cost equals marginal revenue. If firms are not operating at their efficient scale, they would either be producing too much, resulting in higher costs and lower profits, or producing too little, missing out on potential profits. Therefore, in the long run, firms will adjust their production levels to reach their efficient scale.

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  • 8. 

    In the short run, the market supply curve for a good is the sum of the quantities supplied by each firm at each price.

    • True

    • False

    Correct Answer
    A. True
    Explanation
    In the short run, each firm has a fixed level of production capacity, and the market supply curve is determined by adding up the quantities supplied by each firm at each price. This is because in the short run, firms cannot easily enter or exit the market, so the market supply is determined by the existing firms. Therefore, the statement is true.

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  • 9. 

    If a competitive firm sells three times the amount of output, its total revenue also increases by a factor of three.

    • True

    • False

    Correct Answer
    A. True
    Explanation
    This statement is true because total revenue is calculated by multiplying the price of the product by the quantity sold. If a competitive firm sells three times the amount of output, the quantity sold increases by a factor of three. Since the price remains constant, multiplying the quantity by three will also result in the total revenue increasing by a factor of three. Therefore, the statement is true.

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  • 10. 

    The competitive firm maximizes profit when it produces output up to the point where:

    • Marginal cost equals total revenue

    • Marginal revenue equals average revenue

    • Marginal cost equals marginal revenue

    • Price equals average variable cost

    Correct Answer
    A. Marginal cost equals marginal revenue
    Explanation
    The correct answer is "marginal cost equals marginal revenue". In order to maximize profit, a competitive firm needs to produce at a level where the additional cost of producing one more unit (marginal cost) is equal to the additional revenue generated from selling that unit (marginal revenue). This is because if marginal cost is greater than marginal revenue, producing more units would result in a decrease in profit. Conversely, if marginal cost is less than marginal revenue, producing more units would result in an increase in profit. Therefore, the firm maximizes profit by producing up to the point where marginal cost equals marginal revenue.

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  • 11. 

    For a competitive firm, marginal revenue is:

    • Equal to the price of the good sold

    • Average revenue divided by the quantity sold

    • Total revenue divided by the price

    • Equal to the quantity of the good sold

    Correct Answer
    A. Equal to the price of the good sold
    Explanation
    The correct answer is "equal to the price of the good sold." In a competitive market, a firm is a price taker, meaning it has no control over the price and must accept the market price. As a result, the marginal revenue earned by the firm from selling an additional unit of the good is equal to the price of the good. This is because in a competitive market, the firm can sell any quantity at the market price, so the marginal revenue is the same as the price.

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  • 12. 

    If a competitive firm is producing a level of output where marginal revenue exceeds marginal cost, the firm could increase profits if it:

    • Increased production

    • Decreased production

    • Maintained production at the current level

    • Temporarily shut down

    Correct Answer
    A. Increased production
    Explanation
    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 incurred in producing that unit. This indicates that the firm is operating below its profit-maximizing level of output. By increasing production, the firm can continue to earn additional revenue that exceeds the additional cost, thereby increasing its profits.

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  • 13. 

    If a competitive firm doubles its output, its total revenue:

    • More than doubles

    • Doubles

    • Less than doubles

    • Cannot be determined because the price of the good may rise or fall

    Correct Answer
    A. Doubles
    Explanation
    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, meaning it cannot influence the price of the good. Therefore, when the firm increases its output, it sells twice as many units at the same price, resulting in double the total revenue.

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  • 14. 

    If marginal cost exceeds marginal revenue at a firm's current level of output, the firm can increase profit if I increases its level of output.

    • True

    • False

    Correct Answer
    A. False
    Explanation
    If the marginal cost exceeds the marginal revenue at a firm's current level of output, increasing the level of output would not increase profit. This is because the cost of producing an additional unit would be higher than the revenue generated from selling that unit. Therefore, increasing the level of output would only result in further losses for the firm.

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  • 15. 

    The only requirement for a market to be perfectly competitive is for the market to have many buyers and sellers.

    • True

    • False

    Correct Answer
    A. False
    Explanation
    A market being perfectly competitive requires more than just many buyers and sellers. Perfect competition also necessitates that all firms sell identical products, there is free entry and exit for firms, perfect information is available to all participants, and firms are price takers rather than price setters. Therefore, the statement is false as it overlooks these additional requirements for perfect competition.

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  • 16. 

    Which of the following is not a characteristic of a competitive market? 

    • There are many buyers and sellers in the market

    • The goods offered for sale are largely the same

    • Firms can freely enter or exit the market

    • Firms generate small but positive economic profits in the long run

    • All of the above are characteristics of a competitive market

    Correct Answer
    A. Firms generate small but positive economic profits in the long run
    Explanation
    In a competitive market, firms compete with each other to attract buyers. This competition drives prices down, resulting in small or no economic profits in the long run. Therefore, the statement "Firms generate small but positive economic profits in the long run" is not a characteristic of a competitive market.

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  • 17. 

    The long-run market supply curve:

    • Is always more elastic than the short-run market supply curve

    • Is always less elastic than the short-run market supply curve

    • Has the same elasticity as the short-run market supply curve

    • Is always perfectly elastic

    Correct Answer
    A. Is always more elastic than the short-run market supply curve
    Explanation
    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. In the short run, firms may face constraints such as fixed plant and equipment, limited labor availability, or contracts with suppliers that prevent them from easily changing their output. However, in the long run, firms can make adjustments to their production processes, expand or contract their facilities, and enter or exit the market. This increased flexibility allows for a greater response to changes in price, resulting in a more elastic supply curve.

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  • 18. 

    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.

    • True

    • False

    Correct Answer
    A. False
    Explanation
    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, it will continue to operate in the short run, even though it may be incurring losses. This is because in the short run, firms are able to cover their variable costs and contribute towards their fixed costs, even if they are not able to cover all their costs of production. Shutting down would only be a viable option if the price falls below the average variable costs.

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  • 19. 

    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

    • Downward sloping

    • Upward sloping

    • Perfectly inelastic

    Correct Answer
    A. Perfectly elastic
    Explanation
    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 means that any increase or decrease in the price of the good will have no effect on the quantity supplied by the firms in the market. Since all firms have the same cost structures and can easily access the necessary inputs, they can quickly adjust their production levels to meet any changes in demand without any constraints. Thus, the supply curve will be perfectly elastic.

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  • 20. 

    The short-run market supply curve is more elastic than the long-run market supply curve.

    • True

    • False

    Correct Answer
    A. False
    Explanation
    The short-run market supply curve is actually less elastic than the long-run market supply curve. In the short run, firms have limited ability to adjust their production levels in response to changes in price. This means that the quantity supplied is relatively fixed and less responsive to price changes, resulting in a less elastic supply curve. In the long run, however, firms have more flexibility to adjust their production levels, including entering or exiting the market. This greater flexibility allows for a more elastic supply curve, as firms can more easily respond to changes in price by adjusting their production levels.

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  • 21. 

    In the long run, perfectly competitive firms earn small but positive economic profits.

    • True

    • False

    Correct Answer
    A. False
    Explanation
    In the long run, perfectly competitive firms earn zero 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. If firms were earning positive economic profits, new firms would enter the market, increasing competition and driving down prices until profits are reduced to zero. Therefore, the statement that perfectly competitive firms earn small but positive economic profits in the long run is false.

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  • 22. 

    In the long run, some firms will exit the market if the price of the good offered for sale is less than:

    • Marginal revenue

    • Marginal cost

    • Average revenue

    • Average total cost

    Correct Answer
    A. Average total cost
    Explanation
    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 such a situation, it becomes unsustainable for the firm to continue operating in the market, leading to its exit. Therefore, the price being lower than the average total cost is a signal for firms to leave the market.

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  • 23. 

    A competitive firm's long-run supply curve is the portion of its marginal-cost curve that lies above its average-variable-cost curve.

    • True

    • False

    Correct Answer
    A. False
    Explanation
    A competitive firm's long-run supply curve is not the portion of its marginal-cost curve that lies above its average-variable-cost curve. In fact, a competitive firm's long-run supply curve is the portion of its marginal-cost curve that lies above its average-total-cost curve. This is because in the long run, all costs, including fixed costs, are variable and should be taken into account when determining the firm's supply curve.

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  • 24. 

    A competitive firm's short-run supply curve is the portion of its marginal cost curve that lies above its average-total-cost curve.

    • True

    • False

    Correct Answer
    A. False
    Explanation
    The statement is false because a competitive firm's short-run supply curve is the portion of its marginal cost curve that lies above its average variable cost curve, not its average total cost curve. The average total cost curve includes both fixed and variable costs, while the short-run supply curve only considers variable costs. Therefore, the correct answer is false.

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  • 25. 

    In the short run, the competitive firm's supply curve is the:

    • Entire marginal-cost curve

    • Portion of the marginal-cost curve that lies above the average-total-cost curve

    • Portion of the marginal-cost curve that lies above the average-variable-cost curve

    • Upward-sloping potion of the average-total-cost curve

    • Upward-sloping portion of the average-variable-cost curve

    Correct Answer
    A. Portion of the marginal-cost curve that lies above the average-variable-cost curve
    Explanation
    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 continue to produce as long as the price exceeds the average variable cost. Once the price falls below the average variable cost, the firm will shut down production. Therefore, the supply curve is determined by the marginal cost curve above the average variable cost curve.

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  • 26. 

    In the long run, the competitive firm's supply curve is the:

    • Entire marginal-cost curve

    • Portion of the marginal-cost curve that lies above the average-total-cost curve

    • Portion of the marginal-cost curve that lies above the average-total-cost curve

    • Upward-sloping portion of the average-total-cost curve

    • Upward-sloping portion of the average-variable-cost curve

    Correct Answer
    A. Portion of the marginal-cost curve that lies above the average-total-cost curve
    Explanation
    The correct answer is "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 produce at a level where its marginal cost is equal to its average total cost. Therefore, the supply curve will only include the portion of the marginal cost curve that lies above the average total cost curve.

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  • 27. 

    A grocery store should close at night if the: 

    • Total costs of staying open are greater than the total revenue due to staying open

    • Total costs of staying open are less than the total revenue due to staying open

    • Variable costs of staying open are greater than the total revenue due to staying open

    • Variable costs of staying open are less than the total revenue due to staying open

    Correct Answer
    A. Variable costs of staying open are greater than the total revenue due to staying open
    Explanation
    This answer suggests that if the variable costs of staying open (such as electricity, labor, and inventory) are higher than the total revenue generated by staying open, it would be more profitable for the grocery store to close at night. This means that the expenses incurred during the night outweigh the income generated, resulting in a loss for the store.

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  • 28. 

    Which of the following markets would most closely satisfy the requirements for a competitive market? 

    • Gold bullion

    • Electricity

    • Cable television

    • Soda

    • All of the above represent competitive markets

    Correct Answer
    A. Gold bullion
    Explanation
    Gold bullion would most closely satisfy the requirements for a competitive market because it is a highly traded commodity with many buyers and sellers. In a competitive market, there are numerous participants who can freely enter or exit the market, leading to a large number of potential buyers and sellers. Additionally, there is no single entity or group that can control the price or supply of gold bullion, further ensuring competition among market participants.

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  • 29. 

    If the long-run market supply curve for a good is perfectly elastic, an increase in the demand for that goodwill, in the long run, cause:

    • An increase in the price of the good and an increase in the number of firms in the market

    • An increase in the price of the good but no increase in the number of firms in the market

    • An increase in the number of firms in the market but no increase in the price of the good

    • No impact on either the price of the good or the number of firms in the market

    Correct Answer
    A. An increase in the number of firms in the market but no increase in the price of the good
    Explanation
    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 the demand for that good will not lead to an increase in the price of the good because new firms can easily enter the market to meet the increased demand. However, the increase in demand will result in an increase in the number of firms in the market as existing firms and new entrants seek to take advantage of the higher demand.

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  • 30. 

    In long-run equilibrium in a competitive market, firms are operating at:

    • The minimum of their average-total-cost curves

    • The intersection of marginal cost and marginal revenue

    • Their efficient scale

    • Zero economic profit

    • All of the above

    Correct Answer
    A. All of the above
    Explanation
    In long-run equilibrium in a competitive market, firms are operating at all of the above conditions. They are operating at the minimum of their average-total-cost curves, which means they are producing at the most efficient level of output. They are also operating at the intersection of marginal cost and marginal revenue, which ensures that they are maximizing their profits. Additionally, they are operating at their efficient scale, which means they are producing at the level that minimizes their costs per unit of output. Finally, they are earning zero economic profit, indicating that they are not making any excess profits and are just covering their costs.

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  • 31. 

    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:

    • Perfectly elastic

    • Downward sloping

    • Upward sloping

    • Perfectly inelastic

    Correct Answer
    A. Upward sloping
    Explanation
    If an input necessary for production is in limited supply, it means that there is a scarcity of the input. When the industry expands, the demand for this input increases, which leads to higher costs for all existing firms in the market. As a result, the long-run market supply curve for the good will be upward sloping. This is because as the industry expands, firms have to pay more for the limited input, causing an increase in the cost of production and therefore a higher price for the good in the long run.

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  • Mar 20, 2023
    Quiz Edited by
    ProProfs Editorial Team
  • Feb 19, 2015
    Quiz Created by
    Masownk
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