Deck 8: Competitive Firms and Markets

Question 1

A horizontal demand curve for a firm implies that

A)the firm is a monopoly.
B)the market the firm is operating in is not competitive.
C)the firm is selling in a competitive market.
D)the products of that firm are very different from other firms' products.

Answer 1

the firm is selling in a competitive market.

Question 2

The short run is

A)usually 3-6 months.
B)dependent on the characteristics of the industry.
C)when a firm has to decide whether or not to exit.
D)identical to the long run for most firms.

Answer 2

dependent on the characteristics of the industry.

Question 3

Economists define a market to be competitive when the firms

A)spend large amounts of money on advertising to lure customers away from the competition.
B)watch each other's behavior closely.
C)are price takers.
D)All of the above.

Answer 3

are price takers.

Question 4

Firms that exhibit price-taking behavior

A)wait for other firms to set price, take it as given, and charge a higher price.
B)have outputs that are too small to influence market price and thus take it as given.
C)take pricing behavior in their own hands.
D)are independently capable of setting price.

Question 5

If all conditions for a perfectly competitive market are met

A)firms face sunk cost when entering the market.
B)firms' demand curves are horizontal.
C)the market demand curve is horizontal.
D)the firms' demand curves are downward sloping.

Question 6

If a firm operates in a perfectly competitive market, then it will most likely

A)advertise its product on television.
B)take the price of its product as determined by the market.
C)have a difficult time obtaining information about the market price.
D)have an easy time keeping other firms out of the market.

Question 7

The perfectly competitive model makes a lot of fairly unrealistic assumptions. Why do economics text books still talk a lot about this model?

A)Many markets are close to being perfectly competitive.
B)It is an important model to use as a benchmark to compare other markets structures to.
C)Perfectly competitive markets maximize societal welfare.
D)All of the above.

Question 8

In the short run

A)firms will shut down if operating at a loss.
B)profit maximizing firms have identical short run supply curves.
C)firms may choose to operate at a loss.
D)most firms have short run supply curves that are the same as their long run supply curves.

Question 9

If a firm happened to be the only seller of a particular product, it might behave as a price taker as long as

A)buyers have full information about the firm's price.
B)the transaction costs of doing business with this firm are low.
C)there are many buyers.
D)there is free entry and exit.

Question 10

In a competitive market, if buyers did not know all the prices charged by the many firms

A)all firms still face horizontal demand curves.
B)firms sell a differentiated product.
C)demand curves can be downward sloping for some or all firms.
D)the number of firms will most likely decrease.

Question 11

The model of perfect competition is valuable for

A)prediction.
B)comparison to other markets.
C)Either A or B.
D)None of the above.

Question 12

If consumers view the output of any firm in a market to be identical to the output of any other firm in the market, the demand curve for the output of any given firm

A)will be identical to the market demand curve.
B)will be horizontal.
C)will be vertical.
D)cannot be determined from the information given.

Question 13

In a perfectly competitive market

A)firms can freely enter and exit.
B)firms sell a differentiated product.
C)transaction costs are high.
D)All of the above.

Question 14

A market's structure is described by

A)the number of firms in the market.
B)the ease with which firms can enter and exit the market.
C)the ability of firms to differentiate their product.
D)All of the above.

Question 15

In a perfectly competitive market

A)buyers are price-takers.
B)buyers view products from different firms as differentiated.
C)individual buyers have horizontal demand curves.
D)firms' demand curves are vertical.

Question 16

If a firm is a price taker, then its marginal revenue will always equal

A)price.
B)total cost.
C)zero.
D)one.

Question 17

In the absence of any government regulation on price, if a firm has no power to set price on its own, one can safely conclude

A)the demand curve for the firm's product is horizontal.
B)there aren't many firms in the industry.
C)the market is in long-run equilibrium.
D)the firms in this industry are not profitable.

Question 18

Which of the following are NOT characteristics of a competitive market?

A)There is freedom of entry and exit.
B)There are zero transaction costs.
C)There are only one or two sellers.
D)Buyers and sellers have complete information.

Question 19

The short run is

A)a period of time in which at least one input cannot be varied.
B)when firms are stuck with sunk costs, unlike the long run.
C)treated the same way as the long run.
D)a period of time when no inputs can be varied.

Question 20

Which of the following products would be sold in a competitive market?

A)Smartphones
B)Shoes
C)Brent crude oil
D)Motorcycles

Question 21

A "stair-like" market supply curve is the result of

A)higher cost firms charging a higher price for their products.
B)firms having different costs.
C)firms shutting down in the long run.
D)average variable costs that are higher than average fixed costs.

Question 22

In a short run competitive equilibrium

A)the market demand curve is horizontal.
B)the market demand curve is downward sloping.
C)the market demand curve is perfectly inelastic.
D)All of the above are possible.

Question 23

A firm should always shut down if its revenue is

A)declining.
B)less than its average fixed costs.
C)less than its total costs.
D)less than its avoidable costs.

Question 24

In deciding whether to operate in the short run, the firm must be concerned with the relationship between price of the output and

A)total cost.
B)average variable cost.
C)total fixed cost.
D)the number of buyers.

Question 25

If a competitive firm finds that it maximizes short-run profits by shutting down, which of the following must be TRUE?

A)p < AVC for all levels of output.
B)p < AVC only for the level of output at which p = MC.
C)p < AVC only if the firm has no fixed costs.
D)The firm will earn zero profit.

Question 26

A profit maximizing firm selects output such that

A)average profit is maximized.
B)total profit is maximized.
C)marginal profit is maximized.
D)Both A and B.

Question 27

If the market price is above a firm's average cost at the quantity produced,

A)the firm operates and makes a profit.
B)the firm operates and makes zero economic profit.
C)the market price of the firm's inputs will rise.
D)total profit is maximized.

Question 28

If market price is greater than the minimum of AVC but below the minimum of AC, then

A)the firm will shut down.
B)revenue covers variable costs and some of the fixed costs and profit is positive.
C)revenue covers variable costs and some of the fixed costs, although profit is negative.
D)economic profit is zero.

Question 29

If firms in a competitive market have different cost functions, then

A)there is no short run market supply curve.
B)the market supply curve reflects those firms' operating envelopes, even in the short run.
C)some of the firms will shut down because their costs are too high to compete.
D)the firms' marginal costs will be different at the market price.

Question 30

If market price is greater than or equal to the minimum of AVC but below the minimum of AC, then

A)the firm will shut down.
B)the firm will operate because its loss is less than if it shuts down.
C)revenue is lower than variable costs.
D)profit is positive and so the firm will operate.

Question 31

If a competitive firm cannot earn profit at any level of output during a given short-run period, then which of the following is LEAST likely to occur?

A)It will shut down in the short run and wait until the price increases sufficiently.
B)It will exit the industry in the long run.
C)It will operate at a loss in the short run.
D)It will minimize its loss by decreasing output so that price exceeds marginal cost.

Question 32

The above figure shows the cost curves for a typical firm in a market and three possible market supply curves. If there are 100 identical firms, the market supply curve is best represented by

A)curve A.
B)curve B.
C)curve C.
D)either curve A or B, but definitely not C.

Question 33

In a perfectly competitive market with 100 identical firms producing at market price p1

A)the supply curve is flatter than if there were only 50 identical firms.
B)the supply curve is more elastic than if there were only 50 identical firms.
C)the firms have identical marginal costs.
D)All of the above.

Question 34

In a perfectly competitive market with 75 non-identical firms producing at market price p1

A)the supply curve is flatter than if there were only 35 identical firms.
B)the supply curve is more elastic than if there were only 25 identical firms.
C)the supply curve is more inelastic than if the firms were identical.
D)All of the above.

Question 35

If a specific (per unit)tax is implemented

A)the firm's average cost curve shifts up, resulting in lower profits.
B)the after-tax marginal cost curve shifts, resulting in lower quantity produced.
C)there is less profit per unit sold.
D)All of the above.

Question 36

Which of the following statements about profit maximizing firms in a competitive market is FALSE?

A)Firms earn no economic profit in the long run.
B)Marginal revenue does not have to equal marginal cost.
C)p - MC = 0.
D)Price equals marginal revenue.

Question 37

There are currently N identical firms in a market. If it is a perfectly competitive market, the short-run market supply curve at any given price

A)is N times the supply of an individual firm.
B)is N - 1 times the supply of an individual firm.
C)is N plus the supply of an individual firm.
D)cannot be determined from the information provided.

Question 38

If a firm cannot earn profits in the short run, it will shut down.

Question 39

The competitive firm's supply curve is equal to

A)its marginal cost curve.
B)the portion of its marginal cost curve that lies above AC.
C)the portion of its marginal cost curve that lies above AVC.
D)the portion of its marginal cost curve that lies above AFC.

Question 40

An increase in the cost of an input will result in

A)a leftward shift in the firm's supply curve.
B)an upward shift of the firm's marginal cost curve.
C)a leftward shift of the market supply curve.
D)All of the above.

Question 41

Suppose that for each firm in the competitive market for potatoes, long-run average cost is minimized at $0.20 per pound when 500 pounds are grown. The demand for potatoes is Q = 10,000/p. If the long-run supply curve is horizontal, then how many pounds of potatoes will be consumed in total?

A)0
B)500
C)10,000
D)50,000

Question 42

Suppose that for each firm in the competitive market for potatoes, long-run average cost is minimized at $0.20 per pound when 500 pounds are grown. The demand for potatoes is Q = 10,000/p. If the long-run supply curve is horizontal, then how much will consumers spend, in total, on potatoes?

A)$0
B)$500
C)$10,000
D)$50,000

Question 43

Assuming a horizontal long-run market supply curve, which of the following statements is (are)TRUE about competitive firms in the long run?

A)p = MC
B)p = AC
C)profit = 0
D)All of the above.

Question 44

In the long run

A)the firm shuts down if revenue is less than its avoidable costs.
B)marginal profit is greater than zero.
C)if economic profit is zero.
D)supply curves are identical to the short run supply curves.

Question 45

In the long run, profits will equal zero in a competitive market because of

A)constant returns to scale.
B)identical products being produced by all firms.
C)the availability of information.
D)free entry and exit.

Question 46

With identical firms, constant input prices, and all the other characteristics of a competitive market

A)the long run equilibrium price is the minimum of the average cost curve.
B)a shift in demand will change the equilibrium price and quantity.
C)the long run and short run equilibria are identical.
D)Both A and B.

Question 47

A firm will enter a competitive market when

A)it can gather market share at the expense of incumbent firms.
B)it would not be the last firm entering.
C)it can earn a positive long-run profit.
D)the long-run supply curve is upward sloping.

Question 48

Which is an important aspect of the perfectly competitive market that leads to long run equilibrium?

A)perfect information
B)freedom of entry and exit
C)price taking behavior
D)homogeneous products

Question 49

A competitive firm's supply curve is identical to its marginal cost curve.

Question 50

If firms in a competitive market are NOT identical, then an increase in cost will

A)shift marginal cost to the right.
B)push the most inefficient firms out of the market.
C)push the most efficient firms out of the market.
D)Need more information.

Question 51

Suppose that for each firm in the competitive market for potatoes, long-run average cost is minimized at $0.20 per pound when 500 pounds are grown. If the long-run supply curve is horizontal, then

A)some firms will enjoy long-run profits because they operate at minimum average cost.
B)the long-run price will be $0.20 per pound.
C)each consumer will purchase $100 worth of potatoes.
D)the long-run price will be set just above $0.20 per pound.

Question 52

Long-run market supply curves are downward sloping if

A)firms are identical.
B)the number of firms is restricted in the long run.
C)input prices fall as the industry expands.
D)All of the above.

Question 53

Like the short run

A)the long run supply curve is the sum of the individual firms' supply curves.
B)the maximum number of firms in the market is fixed.
C)firms operate only if they make a positive profit.
D)All of the above.

Question 54

Long-run market supply curves are upward sloping if

A)firms are identical.
B)the number of firms is unrestricted in the long run.
C)input prices rise as the industry expands.
D)All of the above.

Question 55

If firms in a competitive market are identical, then the long-run market supply curve will be

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

Question 56

A firm will exit a competitive market when

A)costs force the marginal cost curve to shift to the left.
B)the long-run profit would be negative.
C)it can earn only earn a zero long-run profit.
D)Both B and C.

Question 57

If firms in a competitive market are NOT identical, then the long-run market supply curve will be

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

Question 58

Suppose there are 1000 identical wheat farmers. For each, TC = 10 + q². Derive the market supply curve.

Question 59

Suppose there are 1000 identical wheat farmers. For each, TC = 10 + q². Market demand is Q = 600,000 - 100p. Derive the short-run equilibrium Q, q, and p. Does the typical firm earn a short-run profit?

Question 60

Long-run market supply curves are upward sloping if

A)firms are identical.
B)the number of firms is restricted in the long run.
C)input prices fall as the industry expands.
D)All of the above.

Question 61

If the shutdown rule, p < AVC, is the same in the short run and the long run, explain why the shutdown prices may be different.

Question 62

In the long run, firms in a competitive market

A)shut down because profit goes to zero.
B)lose money.
C)are not profit maximizing.
D)earn zero economic profit.

Question 63

Currently, when a consumer purchases a "green" automobile, the U.S. government gives the consumer a rebate. When the rebate program expires, we would expect

A)producer surplus to increase.
B)consumer surplus to drop.
C)consumer surplus to remain unchanged, since they pay the price and only get the rebate later.
D)producers to stop making "green" automobiles.

Question 64

Market consumer surplus

A)is the area under the demand curve and above market price, up to the quantity actually bought.
B)is equal to total market revenue minus cost.
C)does not depend on the quantity sold.
D)is the area under the market price and above the marginal cost curve.

Question 65

With identical firms, constant input prices, and all the other characteristics of a competitive market

A)a shift in demand has no effect on the long-run average cost and so there is no change in equilibrium price and quantity.
B)a shift in demand will change the equilibrium price and quantity.
C)a shift in demand has no effect on the long-run average cost, resulting in a change in equilibrium quantity but not price.
D)a shift in demand has no effect on the long-run average cost, resulting in a change in equilibrium price but not quantity.

Question 66

If a market is NOT perfectly competitive, then government intervention

A)is always justifiable.
B)will usually decrease economic well-being.
C)guarantees that societal well-being will be maximized.
D)may increase economic well-being.

Question 67

The above figure shows the market demand curve for mobile telecommunications (time spent on a mobile phone). If the price were zero, consumer surplus would equal

A)$301.00.
B)$924.50.
C)$1,225.50.
D)$1,250.00.

Question 68

Producer surplus is equal to

A)the area under the supply curve.
B)the difference between price and average cost for all units sold.
C)the difference between price and marginal cost for all units sold.
D)the firm's profit when fixed costs exist.

Question 69

Mary purchased a stuffed animal toy for $5. After a few weeks, someone offered her $100 for the toy. Mary refused. One can conclude that Mary's consumer surplus from the toy is

A)less than $5.
B)at least $95.
C)at least $100.
D)$105.

Question 70

Mister Jones was selling his house. The asking price was $220,000, and Jones decided he would take no less than $200,000. After some negotiation, Mister Smith purchased the house for $205,000. Smith's consumer surplus is

A)$5,000.
B)$15,000.
C)$20,000.
D)not able to be calculated from the information given.

Question 71

The long-run supply curve in a competitive market is upward-sloping.

Question 72

The above figure shows the market demand curve for mobile telecommunications (time spent on a mobile phone). At the current price of $0.35 per minute, consumer surplus equals

A)$301.00.
B)$924.50.
C)$1,225.50.
D)$1,250.00.

Question 73

A consumer's marginal willingness to pay

A)changes with price.
B)is equal to the marginal value to the consumer of the last unit of output.
C)is the minimum price a consumer will pay for the last unit of output.
D)is the first derivative of the demand curve.

Question 74

The above figure shows the market demand curve for mobile telecommunications (time spent on a mobile phone). If the price were $2.50, consumer surplus would equal

A)$301.00.
B)$924.50.
C)$1,225.50.
D)$0

Question 75

Consumer surplus

A)is the difference between what a consumer pays for a good and the producer's cost.
B)is the extra money a consumer pays above the minimum necessary price for the producer to produce it.
C)is the difference between what a consumer would willingly pay for a good and the price actually paid.
D)equals zero in the long run.

Question 76

Producer surplus equals

A)total revenue minus total variable cost.
B)total revenue minus the sum of all marginal cost.
C)profit plus fixed cost.
D)All of the above.

Question 77

Assume a consumer has a horizontal demand curve for a product. His consumer surplus from buying the product

A)is maximized.
B)can't be calculated.
C)equals zero.
D)Need more information.

Question 78

Government intervention in a perfectly competitive market

A)reduces economic well-being.
B)is an illustration of the "invisible hand theorem."
C)increases economic well-being.
D)guarantees maximized well-being.

Question 79

Consumers seek to maximize

A)profits.
B)expected consumer surplus.
C)expenditures.
D)choice.

Question 80

The above figure shows the market demand curve for mobile telecommunications (time spent on a mobile phone). The current price is $0.35 per minute. If the price were to increase by ten cents per minute, consumer surplus would

A)fall to $820.
B)fall by $84.
C)fall by $58.
D)fall to $369.