A) The good is a necessity.
B) The good has few substitutes.
C) The good constitutes a small portion of the consumer’s budget.
D) The good has many substitutes available.
The price elasticity of demand is higher when there are many substitutes available because consumers can easily switch to a different product if the price increases. Conversely, necessities or goods with few substitutes tend to have lower elasticity.
A) Continue to produce at a loss in the short run.
B) Shut down temporarily until the market improves.
C) Exit the market if the losses persist.
D) Increase production to cover its fixed costs.
In the long run, firms in perfect competition can only survive if they earn zero or positive economic profits. If losses persist, firms will exit the market, which reduces supply and drives the price up, eliminating the losses.
A) A consumer changes their demand for a good based on a change in the price of a substitute.
B) A consumer substitutes one good for another in response to a price change, holding real income constant.
C) The price of a good changes, leading to an increase in total income.
D) A change in income results in a change in demand for normal goods.
The substitution effect occurs when the price of a good changes, causing consumers to substitute that good with a cheaper alternative, assuming income remains constant. This effect causes the quantity demanded of the original good to change.
A) Minimum wage.
B) Agricultural price supports.
C) Rent controls.
D) Minimum price for gasoline.
A price floor sets a minimum price, such as the minimum wage or agricultural price supports, ensuring that the price doesn’t fall below a certain level. Rent controls, however, are a price ceiling, which sets a maximum price below the equilibrium to protect consumers from excessively high rent prices.
A) Operating in perfect competition.
B) Operating under monopolistic competition.
C) A price taker.
D) Likely a monopoly.
A firm that is making an economic profit while its marginal revenue equals marginal cost (MR = MC) is more likely to be a monopoly or a firm in an oligopolistic market. In perfect competition or monopolistic competition, economic profits tend to disappear in the long run due to entry or competition.
A) The law of supply.
B) The law of demand.
C) A shift in the demand curve.
D) A change in consumer preferences.
The law of demand states that, all else being equal, when the price of a good decreases, the quantity demanded increases. This negative relationship is the basis of the demand curve’s downward slope.
A) A change in the price of the good.
B) A change in consumer preferences.
C) A change in the cost of production.
D) A change in the income of consumers.
A shift in the supply curve is caused by factors that affect production costs, such as changes in input prices, technology, or taxes. A change in price results in a movement along the supply curve, not a shift.
A) The firm’s marginal cost is equal to its average total cost.
B) The firm can earn positive economic profits.
C) The firm’s average total cost curve is above its marginal cost curve.
D) The firm produces at a level where average total cost is maximized.
In the long run under perfect competition, firms operate where marginal cost (MC) equals average total cost (ATC). This ensures that firms earn zero economic profit, as price equals ATC.
A) Firms can earn supernormal profits in the long run.
B) Firms produce differentiated products.
C) There is free entry and exit of firms.
D) Firms have price-setting power.
In a perfectly competitive market, there are no barriers to entry or exit. This allows firms to enter the market when profits are high and exit when they are incurring losses, ensuring zero economic profits in the long run.
A) Increase output.
B) Decrease output.
C) Keep output the same.
D) Increase price.
When marginal cost is greater than marginal revenue, the firm is producing too much and should decrease output to maximize profit or minimize losses.
A) Consumers are not sensitive to price changes.
B) Consumers are highly responsive to price changes.
C) The quantity demanded remains the same regardless of price.
D) The price of the good is fixed.
A perfectly elastic demand curve (horizontal) implies that consumers will buy any quantity of the good at a specific price, but if the price increases even slightly, the quantity demanded drops to zero.
A) Is always higher than marginal cost.
B) Is always equal to marginal revenue.
C) Can be equal to marginal cost in the long run.
D) Cannot be reduced without losing customers.
In a monopoly, the firm has market power and sets the price above marginal cost to maximize profits. This is different from perfect competition, where price equals marginal cost.
A) Firms earn positive economic profits.
B) Firms earn zero economic profits, as price equals average total cost.
C) Firms are forced to exit the market.
D) Barriers to entry prevent new firms from entering..
In the long run, firms in perfect competition earn zero economic profits. The entry of new firms drives the price down until it equals average total cost, resulting in zero profits.
A) Increase its price to maximize profits.
B) Continue producing in the short run if it can cover its average variable cost.
C) Shut down immediately to avoid further losses.
D) Reduce output to reduce losses.
A public good is characterized by non-rivalry (one person’s consumption does not reduce the amount available for others) and non-excludability (it is difficult or impossible to prevent anyone from using it). Examples include national defense and public parks.
A) Firms produce homogeneous products.
B) There are many firms and no barriers to entry.
C) Firms can set prices freely.
D) Firms are price takers.
Monopolistic competition is characterized by many firms producing differentiated products, with low barriers to entry. While firms have some degree of price-setting power, they are not price takers like in perfect competition.