Question 1

Why doesn't a perfectly competitive firm charge a price slightly higher than the industry price in order to earn extra profit?

Accepted Answer

A perfectly competitive firm is producing a product that is identical to the output of each of its competitors.Additionally, it is only one firm of many in the market.Thus, no buyer would pay a price above the industry rate in order to buy from one particular firm; instead, the consumer would simply buy from one of the many other firms.

Question 2

Figure 10-4
  
-Figure 10-4 shows the industry's supply and demand curves in panel (1) and the cost curves of a firm in the industry in panel (2).At S₁, the firm is

Accepted Answer

A)  preparing to shut down. 
B)  incurring losses. 
C)  earning zero economic profits. 
D)  earning economic profit greater than zero. 
A)  preparing to shut down. 
B)  incurring losses. 
C)  earning zero economic profits. 
D)  earning economic profit greater than zero. D

Question 3

In the short run, a perfectly competitive firm can make a profit, a loss, or shut down.

Accepted Answer

A) True 
 B)False  True

Question 4

Which of the following decisions cannot be taken by a firm in a perfectly competitive market?

Accepted Answer

A)  Market exit decision 
B)  Market price of the product 
C)  Quantity of output it can produce 
D)  Entering a market 
A)  Market exit decision 
B)  Market price of the product 
C)  Quantity of output it can produce 
D)  Entering a market

Question 5

A perfectly competitive firm will not operate where MC = MR but at MC = AC.

Accepted Answer

A) True 
 B)False

Question 6

Describe the process that would occur in the long run in a competitive industry if there were economic profits.Illustrate this with a diagram.

Accepted Answer

The diagram should look like Figure 10-7

Question 7

Perfectly competitive firms ____ earn zero economic profit in long-run equilibrium because ____.

Accepted Answer

A)  always; firms in perfectly competitive industries always maximize output and so flood the market until the equilibrium price of output is driven to zero 
B)  sometimes; the demand curve for an individual perfectly competitive firm may or may not cross the company's long-run average total cost curve at its lowest point 
C)  always; firms enter whenever their economic profit is positive and exit whenever it's negative, so in long-run equilibrium economic profit must always be zero 
D)  never; no firm would be willing to produce if it received zero economic profit 
A)  always; firms in perfectly competitive industries always maximize output and so flood the market until the equilibrium price of output is driven to zero 
B)  sometimes; the demand curve for an individual perfectly competitive firm may or may not cross the company's long-run average total cost curve at its lowest point 
C)  always; firms enter whenever their economic profit is positive and exit whenever it's negative, so in long-run equilibrium economic profit must always be zero 
D)  never; no firm would be willing to produce if it received zero economic profit

Question 8

A perfectly competitive firm has a horizontal demand curve because it can sell as much as it wants at the market price.

Accepted Answer

A) True 
 B)False

Question 9

A subsidy to firms intended to reduce pollution in an industry would

Accepted Answer

A)  shift the LRAC curve upward. 
B)  have the same impact on the firm as a tax. 
C)  likely drive some existing firms from the industry. 
D)  likely have the paradoxical effect of increasing pollution in the industry in the long run. 
A)  shift the LRAC curve upward. 
B)  have the same impact on the firm as a tax. 
C)  likely drive some existing firms from the industry. 
D)  likely have the paradoxical effect of increasing pollution in the industry in the long run.

Question 10

In the short run, a perfectly competitive firm can make a profit, a loss, or go out of business.

Accepted Answer

A) True 
 B)False

Question 11

The perfectly competitive firm has no influence over price because

Accepted Answer

A)  its output is so insignificant relative to the market as a whole. 
B)  anti-trust laws constrain perfectly competitive firms. 
C)  consumers establish the prices of products. 
D)  it doesn't know its demand curve. 
A)  its output is so insignificant relative to the market as a whole. 
B)  anti-trust laws constrain perfectly competitive firms. 
C)  consumers establish the prices of products. 
D)  it doesn't know its demand curve.

Question 12

Figure 10-2
  
-Figure 10-2 shows demand and short-run cost curves for a perfectly competitive firm.At its profit-maximizing level of output, the firm's short-run TC is represented by area

Accepted Answer

A)  ADFO. 
B)  BGHC. 
C)  BGIO. 
D)  ADGIO. 
A)  ADFO. 
B)  BGHC. 
C)  BGIO. 
D)  ADGIO.

Question 13

Perfectly competitive firms are known for being "price makers."

Accepted Answer

A) True 
 B)False

Question 14

Perfect competition is characterized by numerous firms.

Accepted Answer

A) True 
 B)False

Question 15

A tax on polluting firms

Accepted Answer

A)  would shift the LRAC curve upward. 
B)  would shift the LRAC curve downward. 
C)  would have the same impact on the firm as a subsidy. 
D)  tends to have the perverse effect of increasing pollution. 
A)  would shift the LRAC curve upward. 
B)  would shift the LRAC curve downward. 
C)  would have the same impact on the firm as a subsidy. 
D)  tends to have the perverse effect of increasing pollution.

Question 16

A perfectly competitive firm will always maximize profits by producing where

Accepted Answer

A)  per-unit costs are lowest. 
B)  total costs and total revenue are equal. 
C)  P = MC. 
D)  P = AC. 
A)  per-unit costs are lowest. 
B)  total costs and total revenue are equal. 
C)  P = MC. 
D)  P = AC.

Question 17

Figure 10-8
  
-In the short run, the firm in Figure 10-8 will shut down if the price falls below

Accepted Answer

A)  $8. 
B)  $6. 
C)  $5. 
D)  $1. 
A)  $8. 
B)  $6. 
C)  $5. 
D)  $1.

Question 18

What is the relationship between the long-run industry supply curve and the short-run supply curve in a perfectly competitive market?

Accepted Answer

The long-run industry supply curve evolv

Question 19

Perfectly competitive markets feature relatively high barriers to entry.

Accepted Answer

A) True 
 B)False

Question 20

Graphically show a firm earning a profit; shade the appropriate profit rectangle.Explain how the profit formula represented by the rectangle is analogous to TR - TC.

Accepted Answer

Figure 10-11 shows price (= MR) above mi

Exam 10: The Firm and the Industry under Perfect Competition

Why doesn't a perfectly competitive firm charge a price slightly higher than the industry price in order to earn extra profit?

Figure 10-4 -Figure 10-4 shows the industry's supply and demand curves in panel (1) and the cost curves of a firm in the industry in panel (2).At S₁, the firm is

In the short run, a perfectly competitive firm can make a profit, a loss, or shut down.

Which of the following decisions cannot be taken by a firm in a perfectly competitive market?

A perfectly competitive firm will not operate where MC = MR but at MC = AC.

Describe the process that would occur in the long run in a competitive industry if there were economic profits.Illustrate this with a diagram.

Perfectly competitive firms ____ earn zero economic profit in long-run equilibrium because ____.

A perfectly competitive firm has a horizontal demand curve because it can sell as much as it wants at the market price.

A subsidy to firms intended to reduce pollution in an industry would

In the short run, a perfectly competitive firm can make a profit, a loss, or go out of business.

The perfectly competitive firm has no influence over price because

Figure 10-2 -Figure 10-2 shows demand and short-run cost curves for a perfectly competitive firm.At its profit-maximizing level of output, the firm's short-run TC is represented by area

Perfectly competitive firms are known for being "price makers."

Perfect competition is characterized by numerous firms.

A tax on polluting firms

A perfectly competitive firm will always maximize profits by producing where

Figure 10-8 -In the short run, the firm in Figure 10-8 will shut down if the price falls below

What is the relationship between the long-run industry supply curve and the short-run supply curve in a perfectly competitive market?

Perfectly competitive markets feature relatively high barriers to entry.

Graphically show a firm earning a profit; shade the appropriate profit rectangle.Explain how the profit formula represented by the rectangle is analogous to TR - TC.

What Is Economics?

The Economy: Myth and Reality

The Fundamental Economic Problem: Scarcity and Choice

Supply and Demand: An Initial Look

Consumer Choice: Individual and Market Demand

Demand and Elasticity

Production, Inputs, and Cost: Building Blocks for Supply Analysis

Output, Price, and Profit: The Importance of Marginal Analysis

Securities: Business Finance, and the Economy: The Tail that Wags the Dog?

Monopoly

Between Competition and Monopoly

Limiting Market Power: Regulation and Antitrust

The Case for Free Markets I: The Price System

The Shortcomings of Free Markets

The Market's Prime Achievement: Innovation and Growth

Externalities, the Environment, and Natural Resources

Taxation and Resource Allocation

Pricing the Factors of Production

Labor and Entrepreneurship: The Human Inputs

Poverty, Inequality, and Discrimination

An Introduction to Macroeconomics

The Goals of Macroeconomic Policy

Economic Growth: Theory and Policy

Aggregate Demand and the Powerful Consumer

Demand-Side Equilibrium: Unemployment or Inflation?

Bringing in the Supply Side: Unemployment and Inflation?

Managing Aggregate Demand: Fiscal Policy

Money and the Banking System

Monetary Policy: Conventional and Unconventional

The Financial Crisis and the Great Recession

The Debate over Monetary and Fiscal Policy

Budget Deficits in the Short and Long Run

The Trade-Off between Inflation and Unemployment

International Trade and Comparative Advantage

The International Monetary System: Order or Disorder?

Exchange Rates and the Macroeconomy

Filters

Perfectly competitive firms earn zero economic profit in long-run equilibrium because .