Multiple Choice Answers

1. In the short run
a. Exising firms do NOT face limits imposed by a fixed input.
b. All firms have costs that they must bear regardless of their output.
c. New firms can enter an industry.
d. Existing firms can exit an industry.

2. If land becomes more valuable in residential use than in commercial use,
a. The supply of land available for commercial use should decrease and the supply of land for residential use should increase.
b. There can be no change in the allocation of land because land is fixed in supply.
c. There will be no change in the allocation of land, as there is no responsiveness to price changes by suppliers of land.
d. The supply of land for commercial use will become perfectly elastic and the supply of land for residential use will become perfectly inelastic.

3. In the short run,
a. All firms that earn a loss will shut down.
b. If current firms are earning a profit, new firms will enter the industry.
c. Firms act to minimize losses or maximize profits.
d. All of the above are correct.

4. The short-run industry supply curve for a perfectly competitive industry is the
a. Horizontal sum of the individual firms’ marginal cost curves above AVC.
b. Vertical sum of the individual firms’ marginal cost curves above AVC.
c. Horizontal sum of the individual firms’ marginal cost curves above ATC.
d. Vertical sum of the individual firms’ marginal cost curves above ATC.

5. When a large amount of output is produced per unit of the input, the input is said to exhibit
a. High productivity.
b. Low productivity.
c. Marginal productivity.
d. Derived productivity.

6. Economists usually assume that _____ is a fixed input in the ____ run.
a. Labor, short.
b. Capital, short.
c. Labor, long.
d. Capital, long.
7. A firm that is earning positive profits in the short run has an incentive to ___ its scale of operation in the long run.
a. Expand.
b. Contract.
c. Not change.
d. Encourage another firm to expand.

8. Tony’s Lawn Service uses only one variable input, fertilizer. The firm’s demand curve for fertilizer in the short run is the inputs
a. Total product curve.
b. Marginal product curve.
c. Marginal revenue product curve.
d. Total cost curve.

9. Salaries of NFL quarterbacks, like Tom Brady, are
a. Too high.
b. Relative to the additional revenues team owners expect to enjoy as a result of having them on the team roster.
c. The result of perfectly competitive markets.
d. All of the above are correct.

10. If economic profit is zero, a firm
a. Earns a negative rate of return.
b. Will leave the industry.
c. Earns a positive but below normal rate of return.
d. Earns exactly a normal rate of return.