Deck 9: Perfectly Competitive Markets

Question 1

One characteristic of perfect competition is:

A)a differentiated product.
B)many firms.
C)restricted entry.
D)preferred access to resources.

Answer 1

B

Question 2

A decreasing-cost industry is characterized by:

A)more firms than an increasing-cost industry.
B)some type of economies of scale.
C)accounting profit net of the minimum return on invested capital demanded by the firm's investors.
D)some type of diseconomies of scale.

Answer 2

B

Question 3

Suppose that for last year, Sarah's small business earned an accounting profit of $70,000 and an economic profit of $20,000. What can we correctly infer about Sarah's business?

A)The difference between Sarah's total opportunity costs and her accounting costs is $50,000.
B)Sarah's explicit costs were $50,000
C)Sarah's total opportunity cost of her resources was $50,000.
D)Sarah's firm cannot be maximizing profit.

Answer 3

A

Question 4

Characteristics of a short-run perfectly competitive equilibrium always include:

A)zero profits.
B)the condition that marginal cost is greater than average cost.
C)the condition that homogeneous firms are producing the same level of output.
D)the condition that sunk costs are zero.

Question 5

Which of the following will not be true of a perfectly competitive market?

A)Each individual buyer or seller has an imperceptible effect on the market price.
B)A new firm may incur a cost upon entering a market but has access to the same technology and inputs as established firms.
C)Different consumers may pay different prices for the same product.
D)Buyers and sellers take the market price as given when making purchasing or production decisions.

Question 6

Suppose that, at the current level of output, a firm in a perfectly competitive market is producing at a level such that price exceeds marginal cost, P > MC. Marginal cost is normally shaped (U-shaped). The firm:

A)is currently maximizing profit since it is charging a price higher than marginal cost.
B)could increase profit by lowering the level of output.
C)could increase profit by increasing the level of output.
D)cannot increase profit without raising price.

Question 7

Suppose a $1 tax is levied on each unit of output in a perfectly competitive industry, we know that:

A)the number of firms in the industry will increase in the long run as long as the demand curve is downward sloping.
B)the number of firms in the industry will decrease in the long run as long as the demand curve is downward sloping.
C)firms will no longer produce at the bottom of the average cost curve in long run equilibrium.
D)firms will no longer produce at the top of the average cost curve in long run equilibrium.

Question 8

, where q is output. Sunk fixed costs are 56 and nonsunk fixed costs are 144. What is the minimum level of average nonsunk cost?

A)6
B)50
C)56
D)144

Question 9

Which of the following statements about marginal revenue for a perfectly competitive firm is incorrect, where TR stands for total revenue, P stands for price, and q stands for output?

A)
B)
C)
D)Marginal revenue is the rate at which total revenue changes with respect to changes in output.

Question 10

A perfectly competitive firm will always maximize its profit or minimize its loss by:

A)setting marginal cost equal to marginal revenue in order to determine the optimal quantity of output.
B)setting marginal cost above average cost.
C)setting total cost minus total revenue at its maximum level.
D)creating a unique product.

Question 11

An industry in which any potential entrant has access to the same technology and inputs as existing firms is said to be characterized by:

A)open entry.
B)restricted entry.
C)free entry.
D)profitable entry.

Question 12

When the average variable cost curve is "u-shaped" and not everywhere upward or downward sloping, marginal cost will:

A)never intersect the average variable cost curve.
B)never equal marginal revenue.
C)intersect or "bisect" the average variable cost curve at its minimum.
D)always be increasing.

Question 13

Suppose Joe starts his own business. In the first year the business earns $100,000 in revenue and incurs $85,000 in explicit costs. In addition, Joe has a standing offer to come work for his brother for $40,000 per year. Joe's accounting profit is _________ and Joe's economic profit is __________.

A)-$25,000 and $15,000
B)$15,000 and $65,000
C)$15,000 and $60,000
D)$15,000 and -$25,000

Question 14

In a perfectly competitive industry, individual firms act as:

A)price makers.
B)a single, cooperative entity.
C)profit minimizers.
D)price takers.

Question 15

Which of the following is not an assumption of a perfectly competitive market?

A)Fragmented industry
B)Differentiated product
C)Perfect information
D)Equal access to resources

Question 16

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

A)The industry is fragmented.
B)Firms produce undifferentiated products.
C)Consumers have imperfect information.
D)Firms have equal access to resources.

Question 17

For the data in the following table, which level of q will maximize profit?

A)10
B)20
C)30
D)40

Question 18

Sunk costs:

A)will not affect any aspect of decision making by a competitive firm in the short run.
B)are costs that can only be controlled by reducing labor input.
C)affect the shutdown price in that higher sunk costs raise the shutdown price.
D)do not affect the profit or losses of a firm.

Question 19

Economic value added is defined as:

A)the same as accounting profit.
B)total revenue less total explicit costs.
C)accounting profit net of the minimum return on invested capital demanded by the firm's investors.
D)the same as economic profit.

Question 20

A short-run market supply curve in a competitive industry is derived by:

A)multiplying the quantity supplied by each identical firm in the industry times the number of firms at each relevant price.
B)multiplying the quantity supplied by each differentiated firm in the industry times the number of firms at each relevant price.
C)adding market supply and market demand at each relevant price.
D)not usually upward sloping.

Question 21

The market for sweet potatoes consists of 1,000 identical firms. Each firm has a short-run total cost curve of STC = 100 + 100 q + 100q2, and a short-run marginal cost curve of SMC=100+200q where q is output. Suppose that sunk costs are 75 and nonsunk costs are 25. What is the equation of an individual firm's short-run supply curve?

Question 22

Suppose that the tricorder industry is perfectly competitive. The firm of JL Picard is making a short-term economic profit. The firm of WT Riker decides to enter the tricorder industry. However, when the WT Riker firm enters the industry, it bids up some input prices. For this industry, we will likely observe a(n):

A)upward-sloping long-run market supply curve.
B)downward-sloping long-run market supply curve.
C)horizontal long-run market supply curve.
D)vertical long-run market supply curve.

Question 23

Question 24

A perfectly competitive firm's short-run supply curve is determined by the equation:

Question 25

For a perfectly competitive firm, , where q is output. If the market price is equal to 40, at what level of output should the firm operate to maximize profit in the short run?

A)10
B)20
C)30
D)40

Question 26

A fixed cost that the firm cannot avoid if it shuts down and produces zero output must be:

A)an accounting cost.
B)a marginal cost.
C)an equilibrium cost.
D)a sunk cost.

Question 27

Question 28

A)0
B)2
C)6
D)8

Question 29

Which of the following is an example of a fixed cost that is also a sunk cost for a bakery as of January 15?

A)The electric bill for the coming calendar year.
B)An accountant's fees for tax preparation in April.
C)The cost of a one-year lease on a building, signed January 1.
D)The salary of the baker for the month of February.

Question 30

The short-run market supply curve is derived by ________ supplied of the individual firm supply curves.

A)vertically summing the prices and quantities
B)horizontally summing the prices and quantities
C)vertically summing the quantities
D)horizontally summing the quantities

Question 31

Short-run perfectly competitive equilibrium is defined as:

A)the market price and quantity at which quantity demanded equals quantity supplied in the short term.
B)the output level and price where all firms in the market are profit maximizing.
C)the point at which all firms earn zero profits.
D)the point where there is no incentive to enter the market.

Question 32

Question 33

For a perfectly competitive firm, . If the market price is equal to 40, what is the maximum profit the firm can earn?

A)400
B)200
C)100
D)0

Question 34

Question 35

Which of the following does not represent a profit-maximizing condition for a firm operating in a perfectly competitive industry?

Question 36

Sometimes a firm will continue to operate even if that firm incurs short-run negative profits (losses). Which of the following characterizes this situation?

Question 37

Question 38

Question 39

Question 40

The short-run supply curve for a firm operating in perfect competition is:

A)the firm's marginal cost curve.
B)the firm's average variable cost curve.
C)the firm's average variable cost curve above marginal cost.
D)the firm's marginal cost curve above the shut down price.

Question 41

For an individual firm operating in the short run, producer surplus equals the difference between total revenues and total nonsunk costs. Thus,:

A)producer surplus equals economic profit.
B)producer surplus is less than economic profit.
C)producer surplus is greater than economic profit.
D)producer surplus equals economic rent.

Question 42

Which of the following is not true in a long-run perfectly competitive equilibrium?

Question 43

Producer surplus is:

A)always equal to zero for a competitive firm in long run equilibrium.
B)always greater than zero for a competitive firm in long run equilibrium.
C)defined as the area below the supply curve and above the price.
D)defined as the area above the supply curve and above the price.

Question 44

Sunk costs will not affect any aspect of decision making by a competitive firm in the short run.

Question 45

Producer surplus for an individual firm is:

A)total revenue less total variable cost.
B)total revenue less total fixed cost.
C)total revenue less total nonsunk cost.
D)total revenue less total implicit cost.

Question 46

In a perfectly competitive industry, individual firms act as a single, cooperative entity.

Question 47

In a perfectly competitive industry, individual firms act as price makers.

Question 48

Question 49

In the long run, free entry drives the market price to the minimum level of ________, and each firm supplies a quantity equal to its ____________.

A)long-run average cost; price
B)marginal cost; minimum efficient scale
C)long-run average cost; minimum efficient scale
D)marginal cost; price

Question 50

Sunk costs are costs that can only be controlled by reducing labor input.

Question 51

In a perfectly competitive, increasing-cost industry in the long run, economic profit for the industry __________ and economic rent __________.

A)can be positive; can be positive
B)can be positive; equals zero
C)equals zero; can be positive
D)equals zero; equals zero

Question 52

In an increasing cost industry, the long-run market supply curve is:

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

Question 53

For an entire perfectly competitive industry, which of the following statements is incorrect in the long run?

A)Economic profit for the industry equals zero.
B)Producer surplus equals economic rent.
C)Economic profit equals total revenues minus total costs.
D)Producer surplus for the industry equals economic profit for the industry.

Question 54

In a perfectly competitive industry, individual firms act as price takers.

Question 55

In a constant cost industry, which of the following statements is true?

A)The long run market supply curve and the long run firm supply curve are both horizontal.
B)While the long run market supply curve is horizontal, the long run firm supply curve generally is upwards sloping.
C)The long run market supply curve and the long run firm supply curve are both upwards sloping.
D)While the long run market supply curve is upwards sloping, the long run firm supply curve is horizontal.

Question 56

Economic rent can be defined as:

A)always the same as economic profit.
B)the maximum amount that firms would be willing to pay for a fixed input.
C)the minimum amount that firms actually have to pay for a fixed input.
D)the difference between the maximum amount that firms would be willing to pay for a fixed input and the minimum amount that firms actually have to pay for that input.

Question 57

In a perfectly competitive industry, individual firms act as profit minimizers.

Question 58

For an individual firm operating in the long run, producer surplus equals:

A)the difference between total revenues and total opportunity costs.
B)the difference between total revenues and total sunk costs.
C)economic rent.
D)The difference between market demand and market supply.

Question 59

Economic rent is associated with __________; economic profit is associated with _______.

A)a firm; a scarce input
B)a scarce input; a firm
C)a fixed input; a variable input
D)a scarce input; a fixed input

Question 60

Producer surplus for an entire market is:

A)the difference between quantity supplied and quantity demanded.
B)the area below the market demand curve and above the market supply curve.
C)the area below price and above the market supply curve.
D)the area above price and below the market demand curve.

Question 61

In a long-run perfectly competitive equilibrium, firms may earn negative profits.

Question 62

Equal access to resources is a condition in which all firms, including prospective entrants, have access to the same technology and inputs.

Question 63

In a constant cost industry, while the long run market supply curve is upwards sloping, the long run firm supply curve is horizontal.

Question 64

Sunk costs affect the shutdown price in that higher sunk costs raise the shutdown price.

Question 65

A profit-maximizing firm never produces where

Question 66

In a constant cost industry, the long run market supply curve and the long run firm supply curve are both upwards sloping.

Question 67

Each individual buyer or seller has an imperceptible effect on the market price.

Question 68

Sunk costs do not affect the profit or losses of a firm.

Question 69

A new firm may incur a cost upon entering a market but has access to the same technology and inputs as established firms.

Question 70

A characteristic of a perfectly competitive market is that products are undifferentiated. That is, consumers perceive products to be identical.

Question 71

Opportunity cost is included in the definition of economic profit but not in the definition of accounting profit.

Question 72

In a constant cost industry, the long run market supply curve and the long run firm supply curve are both horizontal.

Question 73

Different consumers may pay different prices for the same product.

Question 74

A profit-maximizing firm never produces where

Question 75

In a long-run perfectly competitive equilibrium, is market price and AC is the average cost of a firm.

Question 76

Question 77

Buyers and sellers take the market price as given when making purchasing or production decisions.

Question 78

In a long-run perfectly competitive equilibrium, is market price and MC is the marginal cost of a firm.

Question 79

In a constant cost industry, while the long run market supply curve is horizontal, the long run firm supply curve generally is upwards sloping.

Question 80

A firm can earn a positive accounting profit but a negative economic profit.