1. In a constant cost industry, P = AC = $20. Which sequence of events follows an increase in demand?
a. P = AC, firms make no economic profit, existing firms leave output unchanged, new firms enter the industry, profits remain normal, P = AC = $20.
b. P > AC, firms make an economic profit, existing firms expand output, new firms enter the industry, the short-run supply curve shifts left, price falls until profits return to $0.
c. P > AC, firms make an economic profit, existing firms expand output, new firms enter the industry, the short-run supply curve shifts right, price falls until profits return to $0.
d. P < AC, firms suffer an economic loss, existing firms reduce output, new firms enter the industry, the short-run supply curve shifts right, price falls until profits exceed $0.
2. Describe the supply curve of a constant cost industry.
a. Upward sloping
b. Flat
c. Downward sloping, then upward sloping
d. Downward sloping
3. At the profit-maximizing output level P = MC, if P > AC then firms can earn an above-normal profit, causing entry into the industry. True or false?
4. In a competitive market, the amount of a good that is produced is such that social surplus is:
a. Minimized
b. Maximized
c. Zero
d. Hidden