Deck 8: Perfect Competition

Question 1

It is said that in a perfectly competitive market, raising the price of a firm's product from the prevailing market price of $179.00 to $199.00, _______.

A) will likely cause the firm to reach its shutdown point immediately
B) will cause the firm to recover some of its opportunity costs
C) could likely result in a notable loss of sales to competitors
D) is a sure sign the firm is raising the given price in the market

Answer 1

could likely result in a notable loss of sales to competitors

Question 2

If the quality differences of similar products are mostly imperceptible to the average consumer's eyes, which of the following will most likely play a major role in influencing the decisions of purchasers?

A) price of competing products
B) size of competing products
C) purchaser's opportunity cost
D) geographic origin of products

Answer 2

price of competing products

Question 3

If a firm's revenues do not cover its average variable costs, then that firm has reached its _______.

A) price taking point
B) shutdown point
C) marginal point
D) opportunity margin

Answer 3

shutdown point

Question 4

The term _______ refers to a firm operating in a perfectly competitive market that must take the prevailing market price for its product.

A) price setter
B) business entity
C) price taker
D) trend setter

Question 5

Idaho farmers can sell as large a quantity of their potato crop as they wish,

A) if they set their own price in the short run, but in the long run, the market sets the price.
B) provided each is willing to accept the prevailing market price.
C) if they set their own price in the long run, but in the short run, the market sets the price.
D) provided quality is perceptible and determines the market price.

Question 6

A perfectly competitive industry is a

A) realistic extreme.
B) hypothetical assumption.
C) hypothetical extreme.
D) realistic assumption.

Question 7

An _______ is calculated by subtracting the firm's costs from its total revenues, _______.

A) accounting profit; excluding opportunity cost
B) accounting profit; including opportunity cost
C) economic profit; excluding opportunity cost
D) opportunity cost; including economic profit

Question 8

If a perfectly competitive firm is a price taker, then

A) pressure from competing firms will force acceptance of the prevailing market price.
B) it must be a relatively small player compared to its competitors in the overall market.
C) it can increase or decrease its output without affecting overall quantity supplied in the market.
D) quality differences will be very perceptible and will play a major role in purchasers' decisions.

Question 9

When a business adopts a strategy of reducing and/or discontinuing production in response to a sustained pattern of losses, it is

A) considering opportunity costs.
B) preparing to exit operations.
C) preparing to reach its shutdown point.
D) considering capital investments.

Question 10

In the _______, the perfectly competitive firm will react to losses by _______.

A) short run; reducing production or shutting down
B) long run; reducing production or shutting down
C) short run; increasing physical inputs
D) long run; increasing capital inputs

Question 11

In the _______, the perfectly competitive firm will seek out _______.

A) long run; the quantity of output where profits are highest
B) short run; profits by ignoring the concept of total cost analysis
C) short run; the quantity of output where profits are highest
D) long run; methods to reduce production and shut down

Question 12

Why would a profit-seeking firm need to tailor its decisions about the quantity of labor inputs that it purchases?

A) to produce the highest profitable quantity of output at the lowest possible marginal cost
B) deciding what quantity to produce is one of the major choices a profit-seeking firm makes
C) the quantity of labor is the only variable cost choice a profit-seeking firm can make
D) to produce the profit-maximizing quantity of output at the lowest possible average cost

Question 13

The fact that a consumer is not required to buy the goods that a given firm produces, as well as the fact that the consumer might want the goods a firm produces, but may choose to buy from other firms instead

A) will reduce the revenue a firm receives and it should shut down.
B) means the firm has reached it shutdown point and should exit.
C) is part of the process to a sustained pattern of profits.
D) are two stark realities any business firm must recognize.

Question 14

Economic profit can be derived from calculating total revenues minus all of the firm's costs,

A) excluding its opportunity costs.
B) including its opportunity costs.
C) including its marginal revenue.
D) excluding its marginal revenue.

Question 15

In the _______, if profits are not possible, the perfectly competitive firm will seek out the quantity of output where _______.

A) long run; increasing production
B) short run; fixed costs can be reduced
C) short run; losses are smallest
D) long run; fixed costs can be eliminated

Question 16

In the _______, the perfectly competitive firm will react to profits by _______.

A) short run; increasing quality of products
B) long run; tailoring their quality controls
C) short run; reducing its labor inputs
D) long run; increasing its production

Question 17

Firms operating in a market situation that creates _______, sell their product in a market with other firms who produce identical or extremely similar products.

A) a perfect monopoly
B) perfect competition
C) an oligopoly
D) a free-market

Question 18

Why are some producers forced to sell their products at the prevailing market price?

A) price takers find market analysis is too costly
B) they are very small players in the overall market
C) high degree of similarity to competitor's products
D) they can increase output without affecting quality

Question 19

A manufacturer would likely make an _______ in a market following the long-run process of beginning and expanding production in response to .

A) accounting profit; a strategy to grow profits
B) accounting profit; an incentive for profit
C) entry; a sustained pattern of profits
D) entry; an incentive to add to profits

Question 20

In economics, the term "shutdown point" refers to the point where the

A) marginal cost curve crosses the total revenue curve.
B) average variable cost curve crosses the total revenue curve.
C) average variable cost curve crosses the marginal cost curve.
D) marginal cost curve crosses the average variable cost curve.

Question 21

If marginal cost is rising in a competitive firm's short-run production process and its average variable cost is falling as output is increased, then

A) marginal cost is above average variable cost.
B) marginal cost is below average fixed cost.
C) marginal cost is below average variable cost.
D) average fixed cost is constant.

Question 22

If the price that a firm charges is higher than its _______ cost of production for that quantity produced, then the firm will earn profits.

A) marginal
B) variable
C) average
D) fixed

Question 23

When I'MaGoldMiner chooses what quantity of gold each of it/s mines will produce over the next 12 months, this quantity, along with the prices prevailing in the market for output and inputs, will

A) determine the company's annual revenue, variable costs and its profits.
B) no longer be dictated by the forces of demand and supply.
C) have no effect on the market forces of demand and supply.
D) determine the company's total revenue, total costs, and its profits.

Question 24

Temperatures have persisted below freezing levels in Florida throughout the months of December and January. As a result, demand for electricity sharply increased and the price of electricity rose sharply. The price of coal also rose. In these circumstances, any resulting shifts in the supply curves for coal miners and electricity producers

A) will determine what price to produce at given the market demand.
B) at all levels of output shifts marginal costs to the right.
C) can also be interpreted as shifts of their respective marginal cost curves.
D) shifts marginal costs to the right enabling both to produce more at any given market price.

Question 25

Kate's 24-Hour Breakfast Diner menu offers one item, a $5.00 breakfast special. Kate's costs for servers, cooks, electricity, food, etc. average out to $3.95 per meal. Her costs for rent, insurance cleaning supplies and business license average out to $1.25 per meal. Since the market is highly competitive, Kate should

A) raise her prices above the perfectly competitive level set by the market.
B) keep the business open in the short-run, but plan to go out of business in the long-run.
C) keep the business open in the short-run, and plan to expand the business in the long-run.
D) lay-off her staff, break her lease, and close the business down immediately.

Question 26

If a graph is used to compare total revenue and total cost of a perfectly competitive firm, then the horizontal axis of the graph will represent the _______ and the vertical axis will represent _______.

A) price, measured in dollars; quantity of goods produced
B) total costs measured in dollars; quantity of goods produced
C) quantity produced; both total revenue and total costs, measured in dollars.
D) quantity produced; total revenue and total variable costs, measured in dollars.

Question 27

For a perfectly competitive firm, the marginal cost curve is identical to the firm's _______,.

A) demand curve
B) supply curve
C) average total cost curve
D) average variable cost curve

Question 28

If a competitive firm experiences a shift in costs of production that decreases marginal costs at all levels of output,

A) expanding output levels at any given price will be profitable.
B) producing less at any market price will off-set marginal cost .
C) the firm's marginal cost curve will shift to the left.
D) the firm's demand curve will also shift to the left.

Question 29

In economic terms, a practical approach to maximizing profits requires an examination of how changes in production affect _______ and _______.

A) total revenue; total cost
B) marginal revenue; marginal cost
C) total revenue; marginal cost
D) marginal revenue; total cost

Question 30

What happens in a perfectly competitive industry when economic profit is greater than zero?

A) existing firms may expand their operations
B) firms may move along their LRAC curves to new outputs
C) there may be pressure on the market price to fall
D) new firms may enter the industry and all of the above

Question 31

Given the data provided in the table below, what will the amount of profit be for production at quantity Q) level 7?

A) -$10.00
B) zero
C) -$5.00
D) $1.00

Question 32

In a free market economy, firms operating in a perfectly competitive industry are said to have only one major choice to make. Which of the following correctly sets out that choice?

A) what quantity to produce
B) what price to charge
C) what quantity of labor is needed
D) what quality to produce

Question 33

I'maSolarPanelCo. manufactures and distributes solar panels in the US market. Two years ago, it had 5 US competitors, but government stimulus in the industry has encouraged 7 new US competitors to enter the market. In these circumstances, I'maSolarPanelCo.'s price for its output

A) can be tailored to exceed the price of its inputs.
B) is dictated by the forces of demand and supply.
C) can be tailored to meet the price of its inputs.
D) can be set by management to maximize profits.

Question 34

I'maGoldMiner has benefited from a record rise in gold prices in the global commodities market. While the price of its output is highly influenced by market speculation, if it wants to increase production to take advantage of the current profit-maximizing opportunity, the company

A) must accept market price for its physical capital inputs.
B) must reduce what it pays for inputs that make up its costs of production.
C) must reduce production to encourage speculators to drive gold prices higher.
D) must alter the price of its labor inputs to maximize profits.

Question 35

Given the data provided in the table below, the total revenue (TR) for production at quantity Q) level 4 equals

A) zero
B) $1.00
C) $15.00
D) $20.00

Question 36

If the price that a firm charges is lower than its _______ of production, the firm will suffer losses.

A) average cost
B) marginal cost
C) fixed cost
D) variable cost

Question 37

Given the data provided in the table below, what will the fixed costs equal for production at quantity Q) level 4?

A) $35.00
B) $4.00
C) $36.00
D) $9.00

Question 38

Given the data provided in the table below, what will the marginal revenue equal for production at quantity Q) level 4?

A) $20.00
B) $15.00
C) $5.00
D) $1.00

Question 39

Under perfect competition, any profit-maximizing producer faces a market price equal to its

A) average costs
B) marginal costs
C) total costs
D) variable costs

Question 40

Given the data provided in the table below, what will the marginal cost equal for production at quantity Q) level 4?

A) $5.00
B) $4.00
C) $1.00
D) $3.00

Question 41

In Sam's greenhouse operation, labor is the only short term variable input. After completing a cost analysis, if the marginal product of labor is the same for each unit of labor, this will imply that

A) the average product of labor is always equal to the marginal product of labor.
B) the average product of labor is always greater that the marginal product of labor.
C) the average product of labor is always less than the marginal product of labor.
D) as more labor inputs are used, the average product of labor inputs will fall.

Question 42

The table below sets out the amount of capital needed for certain investment projects and the rate of return for each project. What is this firm's demand for physical capital if their hurdle rate is 5%?

A) $11 million
B) $12 million
C) $23 million
D) $33 million

Question 43

In order to produce 100 oatmeal cookies, GoodieCookieCo incurs an average total cost of $0.25 per cookie. The company's marginal cost is constant at $0.10 for all oatmeal cookies produced. The total cost to produce 50 oatmeal cookies is

A) $25
B) $20
C) $50
D) $60

Question 44

If accounting profits for a firm are 20% of output, and the opportunity cost of financial capital is 8% of output, then what do the firm's economic profits equal?

A) 6% of output
B) 10% of output
C) 12% of output
D) 8% of output

Question 45

Refer to the table below. In this instance, confirmation that this firm is operating in a perfectly competitive market can readily be ascertained by the fact that its

A) marginal cost is increasing.
B) total cost is increasing.
C) economic profits are zero.
D) marginal revenue is constant.

Question 46

If a firm is producing so that the point chosen along the production possibility frontier is socially preferred, then that firm is said to have reached its

A) allocative efficiency
B) productive efficiency
C) utility-maximizing efficiency
D) minimum price efficiency

Question 47

Briefly explain the nature of a perfectly competitive firm. Briefly discuss the effects of new entrants into a perfectly competitive market on existing firms that have profits in the short run.

Question 48

When a firm uses retained profits to invest in more energy efficient equipment, an economist would calculate the _______ of investing in physical capital.

A) typical hurdle rate
B) opportunity cost
C) degree of risk
D) hurdle rate premium

Question 49

Refer to the table below. In this instance, expansion of output

A) causes input prices to rise as demand for inputs increases.
B) leaves input prices constant as demand for inputs increases.
C) causes diseconomies of scale to occur.
D) occurs because of increasing returns to scale.

Question 50

The table below sets out the amount of capital needed for certain investment projects and the rate of return for each project. What is this firm's demand for physical capital if their hurdle rate is 8%?

A) $1.5 million
B) $2 million
C) $250,000
D) $500,000

Question 51

When a firm makes plans for investments in physical capital, it compares the _______ on these investments with _______.

A) projected rates of return; the cost of financial capital to the firm
B) present inputs of physical capital; future hurdle rates
C) present inputs of physical capita; future marginal revenue product
D) projected rates of return; the competitive pressures for labor

Question 52

Briefly explain what a market will show if perfectly competitive firms produce at the minimum of the long-run average cost curve and explain why this happens. Briefly explain what the market will illustrate when perfectly competitive firms produce at the quantity where P = MC and explain why this happens.

Question 53

Which of the following can be thought of as an adjustment for the risks involved with respect to the cost of a firm acquiring financial capital?

A) higher retained earnings from past profits
B) cost of financial capital paid by a firm
C) imposition of hurdle rates of interest
D) tax credits for physical capital investments

Question 54

Even when competitive firms are unable to calculate marginal revenue product directly, _______ will push wage rates toward the marginal revenue product of labor.

A) planned future investment in physical capital
B) the pressures of competition in the labor market
C) the marginal workers ongoing skills training
D) wages that exceed workers' net revenue product

Question 55

Neil's Bakery is famous for its giant cinnamon buns. The bakery has fixed costs of $100. Neil must pay each worker a wage of $10.00 per hour and each works an 8 hour shift. He earns $2 for each cinnamon bun that is sold. The following table shows how many cinnamon buns he can sell, depending on the number of workers he hires. Refer to the table below. To maximize his profits in this competitive market, how many workers should he hire?

A) 2 workers
B) 3 workers
C) 4 workers
D) 5 workers

Question 56

Briefly describe what the effect of producing a greater quantity of products will be in relation to a perfectly competitive firm.

Question 57

In order to produce 100 pairs of oven gloves, Marcia incurs an average total cost of $2.50 per pair. Marcia's marginal cost is constant at $10.00 for every pair of oven gloves produced. The total cost to produce 50 pairs of oven gloves is

A) $250.00
B) $500.00
C) $300.00
D) $200.00

Question 58

If the average product for six workers is fifteen and the marginal product of the seventh worker is eighteen, then

A) marginal product is rising.
B) marginal product is falling.
C) average product is rising.
D) average product is falling.

Question 59

In economics, labor demand is synonymous with

A) market demand.
B) average demand.
C) marginal demand.
D) derived demand.

Question 60

In a perfectly competitive market setting, which of the following would be a true statement?

A) Market price automatically sets itself exactly at equilibrium.
B) Market price rarely trends toward the equilibrium value.
C) Wage rates mirror marginal revenue product levels exactly.
D) Wage rates trend toward marginal revenue product levels.

Question 61

Briefly contrast how firms in a perfectly competitive market will respond to long-run profits and losses. Include an explanation of each response affects the price level.

Question 62

Briefly contrast when losses will be the smallest for a perfectly competitive firm based on total revenues with when losses for such a firm will be smallest based on marginal revenue.

Question 63

Briefly explain how the zero profit point and the shutdown point for a firm operating in a perfectly competitive market are each determined.

Question 64

Briefly discuss physical capital investment and long-run average cost in relation to a perfectly competitive market.

Question 65

Briefly explain what is meant by: 1) account profit; 2) economic profit; and 3) zero economic profit.

Question 66

Briefly explain the relationship between market price and a firm's profitability in perfectly competitive market.