Pepperdine University

FINC 655

Chapter 9

Multiple Choice Questions

1)In the long-run, which of the following outcomes is most likely for a firm?

1. 1. Zero accounting profits but positive economic profits [ firms do not earn positive economic profit in the long-run]
   2. Zero accounting profits [zero accounting profit implies negative economic profit, and firms do not earn negative economic profit in the long-run]
   3. Positive accounting profits and positive economic profits [ firms do not earn positive economic profit in the long- run]
   4. Zero economic profits but positive accounting profits [in the long-run economic profit is driven to zero]

2. At the individual firm level, which of the following types of firms faces a downward-sloping demand curve?
   1. Both a perfectly competitive firm and a monopoly firm [the demand curve for the output of a perfectly competitive firm is flat]
   2. Neither a perfectly competitive firm nor a monopoly firm [one of the two types does face a downward-sloping demand curve]
   3. A perfectly competitive firm but not a monopoly firm [the demand curve for the output of a perfectly competitive firm is flat]

1. 4. A monopoly firm but not a perfectly competitive firm [monopoly firms face a downward-sloping demand curve]

3. Which of the following types of firms are guaranteed to make positive economic profit?
   1. Both a perfectly competitive firm and a monopoly [in the long-run, economic profit for both types of firms will be zero]
   2. Neither a perfectly competitive firm nor a monopoly [no firm is guaranteed to make positive economic profit]
   3. A perfectly competitive firm but not a monopoly [in the long-run, economic profit for competitive firms will be zero]
   4. A monopoly but not a perfectly competitive firm [in the long-run, economic profit for monopoly firms will be zero]

4. What is the main difference between a competitive firm and a monopoly firm?
   1. The number of customers served by the firm [competitive firms and monopoly firms may or may not have similar numbers of customers]
   2. Monopoly firms are more efficient and therefore have lower costs. [monopoly firms may or may not have lower costs]
   3. Monopoly firms can generally earn positive profits over a longer period of time. [this profit is a reward for doing something unique, innovative, or creative—something that gives the firm less elastic demand.]
   4. Monopoly firms enjoy government protection from competition. [not necessarily; other factors can contribute to the lack of rivals]

5. Which of the products below is closest to operating in a perfectly competitive industry?
   1. Nike shoes [branding of the shoes reduces the “closeness” of substitute products]
   2. Cotton [agricultural commodities are close to perfectly competitive industries]
   3. Perdue Chicken [branding of the chicken reduces the “closeness” of substitute products]
   4. Restaurants [branding and other differentiation efforts reduce the “closeness” of substitute restaurants]

6. A firm in a perfectly competitive market (a price taker) faces what type of demand curve?
   1. Unit elastic [a unit elastic demand curve is downward sloping; firms in perfectly competitive markets do not face unit elastic or downward sloping demand curves]
   2. Perfectly inelastic [demand is not inelastic for competitive firms]
   3. Perfectly elastic [the demand curve for the output of a perfectly competitive firm is perfectly elastic (flat)]
   4. None of the above [one of the answers is ]

7. A perfectly competitive firm’s profit maximizing price is $15. At MC=MR, the output is 100 units. At this level of production, average total costs are $12. The firm’s profits are
   1. $300 in the short run and long run [long-run profit will be driven down to zero]
   2. $300 in the short-run and zero in the long run [(15-12)*100. Long run profit is always driven to zero.]
   3. $500 in the short-run and long-run [short-run profit will be price minus average cost times quantity; long-run profit will be driven down to zero]
   4. $500 in the short-run and zero in the long run [short-run profit will be price minus average cost times quantity]

8. What would happen to revenues if a firm in a perfectly competitive industry raised prices?
   1. They would increase [a competitive firm can only sell at the industry price]
   2. They would increase but profit would decrease [a competitive firm can only sell at the industry price]
   3. They would increase along with profit [a competitive firm can only sell at the industry price]
   4. They would fall to zero [a competitive firm can only sell at the industry price. If the firm raises price, it would sell nothing]

9. If a firm in a perfectly competitive industry is experiencing average revenues greater than average costs, in the long-run
   1. some firms will leave the industry and price will rise [firms are unlikely to leave if revenues are greater than costs]
   2. some firms will enter the industry and price will rise [price is unlikely to increase if firms enter the industry]
   3. some firms will leave the industry and price will fall [firms are unlikely to leave if revenues are greater than costs; if they did leave, price would not fall]
   4. some firms will enter the industry and price will fall [firms will be attracted to the higher-than-average revenues. As more firms enter the industry, supply will increase and price will fall.]