Deck 7: Market Structure: Perfect Competition

Question 1

In the case of the perfectly competitive firm:

A) marginal revenue equals the market price.
B) marginal revenue is greater than the market price.
C) marginal revenue is less than the market price.
D) marginal revenue is equal to, less than, or greater than market price depending on the level of output.

Answer 1

A

Question 2

All of the following are characteristics of a perfectly competitive market except:

A) a large number of sellers.
B) perfectly elastic demand.
C) a homogeneous product.
D) barriers to entry.

Answer 2

D

Question 3

A firm encounters its "shutdown point" when:

A) average total cost equals price at the profit-maximizing level of output.
B) average variable cost equals price at the profit-maximizing level of output.
C) average fixed cost equals price at the profit-maximizing level of output.
D) marginal cost equals price at the profit-maximizing level of output.

Answer 3

B

Question 4

The perfectly competitive firm:

A) makes its profit-maximizing decision only on the basis of output.
B) faces a downward-sloping demand function.
C) can influence market price only in a downward direction.
D) cannot earn any economic profits because it faces a horizontal demand curve.

Question 5

The demand curve faced by the individual perfectly competitive firm is:

A) downward sloping.
B) upward sloping.
C) horizontal.
D) vertical.

Question 6

In order to maximize its profits, a price-taking firm should produce the level of output at which:

A) total revenue = total cost.
B) average revenue = average cost.
C) variable revenue = variable cost.
D) marginal revenue = marginal cost.

Question 7

Which of the following is not a characteristic of perfect competition?

A) Large number of firms in the industry.
B) Outputs of the firms are perfect substitutes for one another.
C) Firms face downward-sloping demand functions.
D) No barriers to entry or exit.

Question 8

Consumers don't care which supplier they buy from in a perfectly competitive market because:

A) the outputs of the firms in a perfectly competitive market are all the same.
B) the consumers have no choice regarding who they buy from.
C) price is always low enough that the choice of supplier doesn't matter.
D) all of the above.

Question 9

Assume a perfectly competitive firm is producing a level of output at which MR < MC. What should the firm do to maximize its profits?

A) The firm should do nothing  it wants to maximize the difference between MR and MC in order to maximize its profits.
B) The firm should decrease output.
C) The firm should increase price.
D) The firm should increase output.

Question 10

Assume a perfectly competitive firm is producing a level of output at which MR < MC. What will happen as the firm moves to its profit-maximizing equilibrium?

A) Marginal revenue will rise.
B) Marginal revenue will fall.
C) Marginal cost will rise.
D) Marginal cost will fall.

Question 11

Perfectly competitive firms are said to be "small." Which of the following best describes this smallness?

A) The individual firm must have fewer than 10 employees.
B) The individual firm faces a downward-sloping demand curve.
C) The individual firm has assets of less than $2 million.
D) The individual firm is unable to affect market price through its output decisions.

Question 12

Assume at the firm's profit-maximizing level of output P = AVC. In this case, the firm will be:

A) earning a positive economic profit.
B) earning economic profit = 0.
C) incurring an economic loss.
D) breaking even.

Question 13

The manager of a perfectly competitive firm has to decide:

A) the quantity of output the firm should produce.
B) the price the firm should charge for its output.
C) the quantity of output the firm should produce and the price it should charge.
D) neither the quantity of output the firm should produce nor the price it should charge because the market makes both of these decisions.

Question 14

When a firm is producing at the profit maximizing level of out put and P > ATC, the firm is:

A) breaking even.
B) incurring an economic loss.
C) earning an economic profit.
D) earning a profit or incurring a loss depending on the level of total fixed costs.

Question 15

The market structure that is most different from the model of perfect competition is:

A) monopolistic competition.
B) monopsony
C) oligopoly.
D) monopoly.

Question 16

Which of the following statements is correct?

A) Economic profit is the difference between total revenue and the full opportunity cost of all the resources used in production.
B) Economic profit is the difference between total revenue and explicit costs.
C) Economic profit is generally greater than accounting profit.
D) Economic profit is the difference between total revenue and implicit costs.

Question 17

Marginal revenue is equal to:

A) the change in price divided by the change in output.
B) the change in quantity divided by the change in price.
C) the change in P x Q due to a one unit change in output.
D) price, but only if the firm is a price searcher.

Question 18

The demand curve faced by the individual perfectly competitive firm is:

A) perfectly elastic.
B) perfectly inelastic.
C) unit elastic.
D) elastic or inelastic depending on price.

Question 19

Which of the following statements regarding a price-taking firm is correct?

A) Demand = average revenue > marginal revenue.
B) Demand = marginal revenue > average revenue.
C) Demand = price = average revenue = marginal revenue.
D) Demand = price > average revenue > marginal revenue.

Question 20

As described in the text, which of the following statements best describes the the strategy of many potato growers since 2005 ?

A) Growers have worked together to reduce supply and stabilize demand. As a result, equilibrium price has been propped up and allowed farmers to earn what they consider a decent profit.
B) Growers have continued to compete vigorously with each other, causing prices and profits to decrease.
C) Growers have restricted supply so much that there is now a severe shortage of potatoes in the United States.
D) because efforts by potato growers to restrict supply are illegal in the United States, they have focused exclusively on increasing demand to increase their profits.

Question 21

By shutting down when price is less than average variable cost at the profit-maximizing level of output, a perfectly competitive firm will limit its losses to its:

A) total variable costs.
B) total costs.
C) total fixed costs.
D) marginal costs.

Question 22

The perfectly competitive firm's supply curve:

A) coincides with its perfectly elastic demand curve.
B) is perfectly inelastic at the market price.
C) is the firm's marginal cost curve above the minimum point on the AVC curve.
D) is the firm's average total cost curve above the shutdown point.

Question 23

A perfectly competitive firm will maximize profits or minimize losses) so long as price marginal revenue) is:

A) greater than marginal cost.
B) greater than average fixed cost.
C) greater than average total cost.
D) greater than average variable cost.

Question 24

Which of the following statements is definitely true when price is less than average total cost for a firm producing the profit-maximizing level of output in the short run?

A) The firm is running a loss in an accounting sense, so that total revenue is less than total explicit costs.
B) The firm will minimize its losses by shutting down.
C) The firm will be earning negative total revenue.
D) The firm is incurring an economic loss.

Question 25

Assume there is an increase in the number of consumers in the market for a good sold by perfectly competitive firms that are initially producing the profit-maximizing level of output. For the individual firm, this would result in:

A) a decrease in both price and the profit-maximizing quantity of output.
B) a decrease in price and increase in the profit-maximizing quantity of output.
C) an increase in both price and the profit-maximizing quantity of output.
D) an increase in price and decrease in profit-maximizing quantity of output.

Question 26

Assume a perfectly competitive firm is producing 300 units of output, P = $10, ATC of the 300^th unit is $11, marginal cost of the 300^th unit = $10, and AVC of the 300^th unit = $9. Based on this information, the firm is:

A) earning an economic profit of $300.
B) earning an economic profit of $600.
C) incurring a loss of $300 and should shut down.
D) incurring a loss of $300, but should continue to operate in the short run.

Question 27

Assume that at the current market price, a perfectly competitive firm's profit-maximizing level of output yields total revenues that are just equal to total costs. Which of the following statements applies to this firm?

A) The firm should shut down right now.
B) The firm should continue to operate in the short run to minimize losses, but shut down if things don't improve over the long run.
C) The firm is earning zero economic profit and should continue to operate.
D) The firm should increase its explicit costs to reduce its tax burden.

Question 28

Widgets R Us, which is a price-taking firm, is currently producing 250 units of output. The market price is $3 per unit, the marginal cost of the 250th unit is $2.75, average total cost is $3.50 per unit, and average variable cost is $2.50 per unit. What advice should you give Widgets R Us?

A) Increase output to reduce losses.
B) Continue to produce 250 units in the short run.
C) Shut down to minimize losses.
D) Decrease output to 200 units.

Question 29

Assume there is a decrease in the market demand for a good sold by price-taking firms that are initially producing the profit-maximizing level of output. For the individual firm, this would result in:

A) a decrease in both price and the profit-maximizing quantity of output.
B) a decrease in price and increase in the profit-maximizing quantity of output.
C) an increase in both price and the profit-maximizing quantity of output.
D) an increase in price and decrease in the profit-maximizing quantity of output.

Question 30

When price is greater than average variable cost but less than average total cost at the profit-maximizing level of output, a firm should:

A) continue to produce the level of output at which marginal revenue equals marginal cost.
B) increase output to minimize its losses.
C) reduce output to the level at which price equals average variable cost to minimize its losses.
D) shutdown to minimize its losses.

Question 31

Assume that as the firms in a perfectly competitive industry expand output, the prices of productive inputs increase. All else constant, this would cause the individual firms' marginal cost curves to and the market supply curve to become .

A) shift down; flatter
B) shift down; steeper
C) shift up; flatter
D) shift up; steeper

Question 32

Assume a perfectly competitive firm is producing 500 units of output, P = $7, ATC of the 500^th unit is $6, marginal cost of the 500^th unit = $7, and AVC of the 500^th unit = $5. Based on this information, the firm is:

A) earning an economic profit of $500.
B) earning an economic profit of $1,000.
C) incurring a loss of $500.
D) incurring a loss of $1,000.

Question 33

By continuing to operate when price is greater than average variable cost but less than average total cost, a firm limits its losses to:

A) $0.
B) its total fixed costs.
C) the difference between its total fixed cost and the amount by which total revenue exceeds total variable costs.
D) its total variable costs.

Question 34

Assume there is a decrease in the market demand for a good sold by price-taking firms that are initially producing the profit-maximizing level of output. How will the market adjust over time?

A) Firms will enter the market, causing price to rise until losses are eliminated.
B) Firms will enter the market, causing price to fall until positive profits are eliminated.
C) Firms will exit the market, causing price to rise until losses are eliminated.
D) Firms will exit the market, causing price to fall until positive profits are eliminated.

Question 35

Assume a perfectly competitive firm is producing 300 units of output, P = $10, ATC of the 300^th unit is $8, marginal cost of the 300^th unit = $10, and AVC of the 300^th unit = $6. Based on this information, the firm is:

A) earning an economic profit of $600.
B) earning an economic profit of $1,200.
C) incurring a loss of $600.
D) incurring a loss of $1,200.

Question 36

When a perfectly competitive firm is in long-run equilibrium:

A) its total revenues equal the sum of its total explicit and implicit costs costs.
B) the firm is operating at the minimum of its LRAC curve.
C) the firm is earning zero economic profit.
D) All of the above.

Question 37

If a market is perfectly competitive and is in long-run equilibrium, which of the following conditions does not hold?

A) Price is equal to the minimum long-run average cost of production.
B) Economic profit equals zero.
C) The value of the last unit of output produced is equal to the value of the resources used to produce it.
D) There is an incentive for additional firms to enter the market because existing firms are earning revenues in excess of the explicit costs of production.

Question 38

A perfectly competitive firm will minimize its losses by shutting down when:

A) P < AVC at the profit-maximizing level of output.
B) P < ATC at the profit-maximizing level of output.
C) P < MC at the profit-maximizing level of output.
D) P < TFC at the profit-maximizing level of output.

Question 39

Which of the following is not an option for the perfectly competitive firm in the short run?

A) Increase its level of production.
B) Decrease its level of production.
C) Shut down.
D) Exit the market altogether.

Question 40

When price is less than average variable cost at the profit-maximizing level of output, a firm should:

A) continue to produce the level of output at which marginal revenue equals marginal cost if it is operating in the short run.
B) continue to produce the level of output at which marginal revenue equals marginal cost if it is operating in the long run.
C) shutdown, because it will lose nothing in that case.
D) shutdown, because it cannot even cover all of its variable costs let alone its fixed costs if it stays in business.

Question 41

Assume that goods X and Y are substitutes and are produced in perfectly competitive markets. If there is a decrease in the supply of good X, which of the following will happen in the market for good Y in the long run?

A) Firms will exit, causing market price to rise.
B) Firms will enter, causing market price to fall.
C) Price will be higher at the new long-run equilibrium as a result of entry into the market.
D) The firms that were already in the industry will continue to earn positive economic profit.

Question 42

Assume the firms in a perfectly competitive industry are initially in long-run equilibrium and the cost of labor increases. In the short run, this will cause firms in the industry to:

A) reduce output and incur a loss.
B) reduce output and earn a positive economic profit.
C) increase output and incur a loss.
D) increase output and earn a positive economic profit.

Question 43

Industry Y is a perfectly competitive industry. Assume that as a result of changes in other markets there is a twenty percent increase in the price of variable inputs used by firms in industry Y. After all adjustments have taken place, we would expect the equilibrium price in industry Y to:

A) decrease and the number of firms to increase.
B) decrease and the number of firms to decrease.
C) increase and the number of firms to increase.
D) increase and the number of firms to decrease.

Question 44

Suppose a perfectly competitive firm, which is initially in long-run equilibrium experiences a decrease in the wages it must pay its employees. In the short run, which of the following will occur?

A) ATC will shift up and MC will shift down, causing the firm to incur a loss.
B) ATC will shift down and MC will shift up, causing the firm to earn a positive economic profit.
C) ATC and MC will shift down, causing the firm to earn a positive economic profit.
D) ATC and MC will shift up, causing the firm to incur a loss.

Question 45

Assume that there is an improvement in the technology used by firms in a perfectly competitive industry that is initially in long-run equilibrium. In the short run this would cause:

A) an increase in the firm's economic profit.
B) a decrease in the firm's economic profit.
C) no change in the firm's economic profit.
D) cannot be determined with the information given.

Question 46

Assume a perfectly competitive firm is in long-run equilibrium and there is a decrease in market demand for the firm's output. Which of the following will occur?

A) Existing firms will maintain the original level of output, but they will shift their cost functions down in the short run.
B) Existing firms will raise price to cover the reduction in quantity demanded and maintain total revenue in the short run.
C) Existing firms will reduce output in the short run.
D) Market price will be above its original level.

Question 47

Assume the firms in a perfectly competitive industry are initially in long-run equilibrium and the cost of labor increases. How will the market adjust over time?

A) Firms will enter the market, causing price to rise until losses are eliminated.
B) Firms will enter the market, causing price to fall until positive profits are eliminated.
C) Firms will exit the market, causing price to rise until losses are eliminated.
D) Firms will exit the market, causing price to fall until positive profits are eliminated.

Question 48

Assume there is an increase in demand in a perfectly competitive market that was initially in long-run equilibrium. Which of the following statements is false?

A) Consumers have shown that they now consider the good to be more valuable.
B) In the short run, profits will be lower than normal.
C) Resources from other industries will be attracted into the market.
D) Over time, the market supply curve will shift right.

Question 49

Which of the following statements regarding the agricultural industry is correct?

A) Economies of scale and consolidation have significantly reduced the degree of competition in the industry.
B) Corporate farms now control more than 50 percent of the market for each of the major crops.
C) The largest 5 percent of growers of any particular product are characterized by a small number of interdependent producers.
D) Although farming has become increasingly concentrated over the last 70 years, it is still a highly competitive industry.

Question 50

If farmers operating in the competitive wheat industry are incurring losses, and are not kept in business with government subsidies, which of the following will result?

A) Price and quantity produced will both increase in the long run.
B) Resources will be reallocated out of the wheat industry into more productive uses.
C) Farmers will run economic losses indefinitely, if they are rational.
D) The supply of wheat will fall to near zero and the U.S. will become dependent on foreign suppliers of food.

Question 51

What is the "most efficient capacity" for the perfectly competitive firm?

A) The plant size at which LRAC is at its minimum.
B) The plant size at which any of the SRATC curves are tangent to the LRAC curve.
C) The plant size at which MR = MC.
D) The plant size for which Price = AR.

Question 52

Which of the following statements regarding the trucking industry is correct?

A) Over the past several years, losses and exit from the industry have substantially reduced the degree of competition in the industry.
B) The trucking industry most closely resembles an oligopoly.
C) Even though there is a high degree of competition, firms in the trucking industry are able to sustain positive economic profits as a result of a substantial degree of product differentiation.
D) Between 1999 and 2007, the behavior of firms in the trucking industry closely matched the outcome predicted by the model of perfect competition.

Question 53

As the level of competition in an industry increases, the price-cost margin approaches:

A) 0.
B) 1.
C) 10.
D) infinity.

Question 54

Suppose a perfectly competitive firm is in long-run equilibrium and there is a decrease in demand. Suppose also that the firm operates in an industry in which the prices of productive inputs vary with the level of output, increasing when output increases and decreasing when output decreases. Which of the following will occur at the new long-run equilibrium?

A) Price will be lower than it was at the initial long-run equilibrium.
B) Price will be the same as it was at the initial long-run equilibrium.
C) Price will be higher than it was at the initial long-run equilibrium.
D) The industry supply function will shift to the right.

Question 55

Which of the following is not a characteristic of the broiler chicken industry?

A) A significant degree of industry concentration, with the four largest firms producing 40 percent of the industry's output.
B) A significant degree of real and subjective product differentiation.
C) An inability of individual firms to have any influence market price.
D) A significant amount of advertising.

Question 56

Assume goods X and Y are complements and are produced in perfectly competitive markets. All else constant, an increase in demand for good X would cause:

A) a decrease in the number of firms that produce good X.
B) an increase in the number of firms that produce good Y.
C) a decrease in the number of firms that produce good Y.
D) no effect on the number of firms that produce either good.

Question 57

The term "industry concentration:"

A) refers to the degree of product differentiation in an industry.
B) is a measure of how many firms produce the total output of an industry.
C) refers to how capital or labor intensive a particular industry is.
D) is a measure of how many customers purchase the total output of an industry.

Question 58

Industry X, which is perfectly competitive, is in long-run equilibrium. Assume a new law is passed that requires employers in industry X to provide health insurance to previously uninsured employees. As a result of this new requirement we would expect to observe:

A) a decrease in price and an increase in total output in industry X.
B) a decrease in price and total output in industry X.
C) an increase in price and a decrease in total output in industry X.
D) an increase in price and total output in industry X.

Question 59

Assume that goods X and Y are substitutes and are produced in perfectly competitive markets. All else constant, in the short run, a decrease in the supply of good X would cause:

A) an increase in the demand for good Y.
B) a decrease in the demand for good Y.
C) an increase in the supply of good Y.
D) a decrease in supply of good Y.

Question 60

When a perfectly competitive market has fully adjusted to demand and supply conditions, all of the following are true except:

A) P = MC.
B) P = the minimum of SRATC.
C) P = the minimum of LRAC.
D) P = the minimum of AVC.

Question 61

In the model of the perfectly competitive firm, the firm's fixed costs are equal to its implicit costs of production.

Question 62

Assume a firm is currently producing 800 units of output, P = $10, MC = $10, ATC = $8, and AVC = $6. In this case, the firm is maximizing its profit, which equals $1,600.

Question 63

The characteristic of ease of entry and exit ensures that perfectly competitive firms will be able to earn positive economic profits over the long run.

Question 64

The elasticity of supply is measured by:

A) the quantity supplied divided by price.
B) the change in quantity supplied divided by the change in price.
C) the percentage change in quantity supplied divided by the percentage change in quantity demanded.
D) the percentage in quantity supplied divided by the percentage change in price.

Question 65

A perfectly competitive firm will earn a positive economic profit so long as price is greater than average total cost at the profit-maximizing level of output.

Question 66

The perfectly competitive firm's supply curve is that portion of the marginal cost curve that lies above the firm's average total cost curve.

Question 67

A perfectly competitive market is characterized by a large number of small firms that produce a differentiated product.

Question 68

The elasticity of demand for a particular perfectly competitive firm's output is positively related to the number of firms supplying the market.

Question 69

Perfectly competitive firms are referred to as price takers because the individual firm is so small relative to the market that its output decisions will not have any effect on the market-determined price.

Question 70

Assume a firm is facing the following situation: At Q = 1,000, P = $10, MC = $10, ATC = $18, and AVC = $16. This firm should shut down and, in so doing, limit its losses to $2,000.

Question 71

If the level of output produced by the firms in a perfectly competitive market has no effect on the prices of the inputs used by the firms, the market supply curve will be flatter than the supply curve for an individual firm in the market.

Question 72

Assume the elasticity of of supply for a particular good has been estimated to equal 1.8. In this case, a 10 percent increase in product price would cause the quantity supplied to:

A) decrease by 1.8 percent.
B) increase by 1.8 percent.
C) decrease by 18 percent.
D) increase by 18 percent.

Question 73

As the case study in the text illustrates, individual firms in the potato industry have a great deal of market power.

Question 74

A firm has reached its shutdown point when price is equal to minimum average total cost.

Question 75

Assume the market price is greater than average total cost at the perfectly competitive firm's
profit-maximizing level of output. In this case, the firm is earning positive economic profits, which act as an incentive for new firms to enter the market.

Question 76

Assume that at the current level of output produced by a perfectly competitive firm, MR = $7.50 and MC =
$6. In order to maximize its profit, the firm should increase output.

Question 77

When a firm decides to shut down in the short run, its losses are limited to its fixed costs.

Question 78

The individual firm maximizes its total profit by producing the level of output at which the difference between marginal revenue and marginal cost is as large as possible.

Question 79

Assume that at the current level of output, price equals marginal revenue, but is less than average total cost. So long as price is greater than average variable cost, the firm should continue to operate in the short run to minimize its losses.

Question 80

In the short run, a perfectly competitive firm can earn positive, zero, or negative profit depending on the market price of the firm's output.