Deck 9: Perfect Competition

Question 1

In a perfectly competitive market, the market demand curve is perfectly elastic.

Answer 1

False

Question 2

For the perfectly competitive firm, the demand curve and the marginal revenue curve are one and the same.

Answer 2

True

Question 3

The demand curve faced by a perfectly competitive firm is horizontal at the price determined in the market.

Answer 3

True

Question 4

Popular online publications that have no close substitutes will be more likely to be able to charge for those publications than will a local newspaper.
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Question 5

If the firm is producing a quantity of output for which MC > MR, then the firm should increase production to increase its profits.

Question 6

A perfectly competitive firm will always maximize short-run profits by producing the level of output where average total cost is minimized.

Question 7

In long-run competitive equilibrium, no firm has an incentive to change its plant size.

Question 8

Which of the following is not an assumption of the theory of perfect competition?

A)There are many sellers and many buyers, none of which is large in relation to total sales or purchases.
B)Each firm produces and sells a differentiated product.
C)Buyers and sellers have all relevant information with respect to prices, product quality, and sources of supply.
D)There is easy entry and exit.

Question 9

In order for a firm to earn economic profits, price must exceed average total cost.

Question 10

When a firm produces the quantity of output where price equals marginal cost, it has achieved resource allocative efficiency.

Question 11

A decreasing-cost industry has a long-run supply curve that is upward sloping.

Question 12

A perfectly competitive firm is a price taker .

Question 13

Real-world markets that approximate the four assumptions of the theory of perfect competition include the

A)automobile market.
B)soft drink market.
C)stock market.
D)clothing market.

Question 14

The horizontal demand curve faced by the perfectly competitive firm implies that the firm can sell an infinite amount of the product at the equilibrium price.

Question 15

A perfectly competitive firm should shut down production in the short run if price is less than average fixed cost at the loss-minimizing level of output.

Question 16

In a perfectly competitive market, firms face no barriers to entry or exit.

Question 17

The perfectly competitive firm's short-run supply curve is that portion of its MC curve that lies above its AFC curve.

Question 18

One of the assumptions upon which the theory of perfect competition is built is that each firm produces and sells a heterogeneous product.

Question 19

Profit helps to indicate where resources are best allocated.

Question 20

When the government imposes taxes on firms that are earning high profits, there could be an unintended effect of reducing the supply of goods in that market compared to what the supply would be if the profits were not taxed.

Question 21

In the theory of perfect competition,

A)the market demand curve is horizontal.
B)the single firm faces a horizontal demand curve.
C)the single firm faces a downward-sloping demand curve.
D)the market demand curve is vertical.

Question 22

Exhibit 22-1 ​ Refer to Exhibit 22-1. The marginal revenue curve represented by the information in this table is

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

Question 23

Does a real-world market have to meet all the assumptions of the theory of perfect competition before it is considered a perfectly competitive market?

A)No, probably no real-world market meets all the assumptions of the theory of perfect competition. All that is necessary is that a real-world market behave as if it satisfies all the assumptions.
B)Yes, if a real-world market does not meet the assumptions, then it cannot be considered a perfectly competitive market.
C)Yes, unless it is a new market such as the computer market. New markets are not held to the same assumptions as old, more established markets.
D)No, but it does have to meet the assumption of producing and selling a homogeneous product. It does not have to fully meet the other assumptions.

Question 24

Perfectly competitive firms are price takers for all of the following reasons except that

A)each firm is quite small relative to the total market supply.
B)buyers and sellers have all the necessary information about prices, etc.
C)the product is homogeneous.
D)barriers to exit force firms to sell at the market price.

Question 25

Exhibit 22-1 ​ Refer to Exhibit 22-1. The dollar amounts that go in blanks (C)and (D)are, respectively,

A)$1 and $1.
B)$21 and $21.
C)$4 .90 and $4 .95.
D)$4 and $3.

Question 26

The perfectly competitive firm will seek to produce the level of output for which

A)average variable cost is at a minimum.
B)average total cost is at a minimum.
C)average fixed cost is at a minimum.
D)marginal cost equals marginal revenue.

Question 27

Marginal revenue is

A)total revenue divided by the quantity of output.
B)total profit minus total costs.
C)the change in total output brought about by using an additional unit of a variable input.
D)the change in total revenue brought about by selling an additional unit of the good.
E)the change in total revenue minus the change in total costs.

Question 28

In the theory of perfect competition,

A)sellers of the product are not influenced by other sellers and therefore have virtually complete control over the production and pricing of their product.
B)buyers of the product may have a preference as to whom they purchase from based on brand loyalty.
C)buyers and sellers of the product know everything that there is to know about the product.
D)it can be quite expensive for a firm to enter this type of market, but once the firm is established, it will be a profitable venture.

Question 29

The market demand curve in a perfectly competitive market is

A)downward sloping.
B)upward sloping.
C)perfectly horizontal.
D)perfectly vertical.
E)downward or upward sloping depending upon the type of product offered for sale.

Question 30

A "price taker" is a firm that

A)does not have the ability to control the price of the product it sells.
B)does have the ability, although limited, to control the price of the product it sells.
C)can raise the price of the product (above the market price)and still sell some units of its product.
D)sells a differentiated product.

Question 31

Exhibit 22-1 ​ Refer to Exhibit 22-1. The marginal revenue curve represented by the information in this table is

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

Question 32

Which of the following statements is false ?

A)The perfectly competitive firm's demand curve is horizontal at the market price.
B)The theory of perfect competition is completely and accurately descriptive of most real-world firms.
C)If Firm X does not strictly meet all the assumptions of the theory of perfect competition, but behaves as if it does, then the theory of perfect competition is relevant to it.
D)In perfect competition, the market price is established at the intersection of the market demand and market supply curves.

Question 33

The theory of perfect competition generally assumes that

A)sellers act independently of other sellers, but buyers do not act independently of other buyers.
B)buyers act independently of other buyers, but sellers do not act independently of other sellers.
C)buyers and sellers act independently of other buyers and sellers.
D)neither buyers nor sellers act independently of other buyers and sellers.

Question 34

The demand curve facing a perfectly competitive firm

A)is downward sloping.
B)is upward sloping.
C)is perfectly horizontal.
D)is perfectly vertical.
E)may be downward or upward sloping, depending upon the type of product offered for sale.

Question 35

For a perfectly competitive firm,

A)the marginal revenue curve and the demand curve are the same.
B)the marginal revenue curve and the marginal cost curve are the same.
C)the supply curve and the marginal revenue curve are the same.
D)the demand curve and the marginal cost curve are the same.

Question 36

Perfectly competitive industries are

A)difficult to enter because there are already so many producers in the industry.
B)not particularly appealing or attractive to enter because there tend to be so many buyers that it is difficult to deal with them.
C)relatively easy to enter but not so easy to exit from.
D)relatively easy to enter or exit.

Question 37

Exhibit 22-1 ​ Refer to Exhibit 22-1. The dollar amounts that go in blanks (A)and (B)are, respectively,

A)$1 and $1.
B)$21 and $21.
C)$4.80 and $4.86.
D)$21 and $12.

Question 38

Exhibit 22-1 ​ Refer to Exhibit 22-1. The demand curve facing the firm represented by the information in this table is

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

Question 39

Exhibit 22-1 ​ Refer to Exhibit 22-1. The data in this table are relevant to a perfectly competitive firm because

A)its total revenue is different at different levels of quantities sold.
B)its total revenue is the same at all levels of quantities sold.
C)it doesn't have to lower price to sell additional units of the product.
D)marginal revenue is greater than price.

Question 40

The price at which a perfectly competitive firm sells its product is determined by

A)the individual seller based on his costs of production and his profit margin.
B)all sellers and buyers of the product.
C)the buyers of the product, because there are so many sellers that they cannot agree on a price.
D)the government, because there are so many buyers and sellers of the product that together they cannot agree on the price.

Question 41

Exhibit 22-2 ​

Refer to Exhibit 22-2. If the firm produces the quantity of output at which marginal revenue (MR)equals marginal cost (MC), is it guaranteed maximum profit or minimized loss?

A)Yes, when MR = MC, it follows that MR - MC = 0, and thus the firm maximizes profit and minimizes losses.
B)No, at the quantity of output at which MR = MC, it could be the case that average variable cost is greater than price and the firm would do better to shut down.
C)Yes, when the firm produces the quantity at which MR = MC, it has maximized both revenue and profit.
D)Yes, because if the MC curve is rising, the average total cost curve always lies below it and thus profit is earned.

Question 42

In order for a firm to continue producing, price must exceed __________ and total revenue must exceed __________.

A)marginal cost; total cost
B)ATC; total cost
C)AFC; total fixed cost
D)AVC; total variable costs
E)price; total cost

Question 43

The perfectly competitive firm's short-run supply curve is the

A)upward-sloping portion of its average total cost curve.
B)horizontal portion of its marginal revenue curve.
C)portion of its average variable cost curve that lies above the average fixed cost curve.
D)upward-sloping portion of its marginal cost curve.
E)portion of its marginal cost curve that lies above its average variable cost curve.

Question 44

In the short-run, if P

A)increase production to the output level at which P = ATC.
B)continue producing at a loss.
C)shut down.
D)continue producing at a profit.
E)There is not enough information to answer the question.

Question 45

If, for the last unit of a good produced by a perfectly competitive firm, MR > MC, then in producing that unit the firm

A)added more to total costs than it added to total revenue.
B)added more to total revenue than it added to total costs.
C)added an equal amount to both total revenue and total costs.
D)maximized profits or minimized losses.

Question 46

Exhibit 22-3 ​
Refer to Exhibit 22-3. What quantity of output should the profit-maximizing firm produce?

A)41 units
B)42 units
C)44 units
D)45 units
E)46 units

Question 47

Exhibit 22-4 ​

Refer to Exhibit 22-4. The market equilibrium price is P₁ and the firm produces Q₁. At this level of output, average variable cost and average total cost are indicated by the dots. Given this situation, the firm is

A)receiving a profit equal to area 3.
B)taking a loss equal to area 2 + area 3.
C)earning total revenue equal to area 1 +  area 2.
D)receiving a profit equal to area 2.

Question 48

A perfectly competitive firm should increase its level of production as long as

A)total revenue is less than total cost.
B)the total revenue curve is rising.
C)marginal revenue is greater than marginal cost.
D)the marginal revenue curve is rising.

Question 49

Consider the following data: equilibrium price = $12.50, quantity of output produced = 1,000 units, average total cost = $15, and average variable cost = $13. What will the firm do and why?

A)Shut down in the short run, because price is below average variable cost.
B)Shut down in the short run, because it will be taking a loss of $2,500 if it continues to produce which is less than the loss it will earn if it shuts down.
C)Continue to produce in the short run, because price is greater than average variable cost.
D)Continue to produce in the short run, because firms are always stuck with having to produce in the short run.

Question 50

Consider the following data: equilibrium price = $15, quantity of output produced = 10,000 units, average total cost = $12, and average variable cost $7. Given this data, total revenue is __________, total cost is __________, and total fixed cost is __________.

A)$15,000; $12,000; $7,000
B)$150,000; $120,000; $70,000
C)$15,000; $12,000; $5,000
D)$150,000; $120,000; $50,000

Question 51

Consider the following data: equilibrium price = $40, quantity of output produced = 100 units, average total cost = $47, and average variable cost = $37. What should the firm do and why?

A)Shut down in the short run, because it is taking a loss of $700.
B)Continue to produce in the short run, because price is greater than average variable cost.
C)Shut down in the short run, because average variable cost is less than average total cost.
D)Continue to produce in the short run, because firms are always stuck with having to produce in the short run.

Question 52

Exhibit 22-2 ​

Refer to Exhibit 22-2. For the firm that faces the demand curve in the exhibit,

A)marginal revenue is increasing.
B)price equals marginal revenue.
C)if the firm maximizes profits, it produces the quantity of output at which average total cost equals marginal cost.
D)marginal revenue equals marginal cost at all levels of output.

Question 53

Exhibit 22-3 ​ Refer to Exhibit 22-3. Based upon the information provided in this table, what is the maximum profit this firm can earn?

A)$65
B)$16
C)$6
D)$308

Question 54

If MR > MC, then

A)profits are being maximized.
B)the firm is producing too much of the good to be maximizing profits.
C)the firm can increase its profits (or minimize its losses)by increasing output.
D)the firm must be incurring losses.

Question 55

Exhibit 22-4 ​

Refer to Exhibit 22-4. The firm sells its product at P₁ and produces Q₁. Given this situation,

A)total variable cost is equal to area 1.
B)total revenue is equal to area 1.
C)total cost is equal to area 2 + area 3.
D)total variable cost is equal to area 1 + area 3.

Question 56

Exhibit 22-3 ​ Refer to Exhibit 22-3. Is it possible for this firm to produce "too much" in the short-run (in terms of profitability)?

A)Any quantity above 42 units is too much.
B)Any quantity above 44 units is too much.
C)Any quantity above 40 units is too much.
D)There is not enough information provided to answer this question.

Question 57

For a perfectly competitive firm, profit maximization (or loss minimization)occurs at the level of output at which

A)MR = MC.
B)MR = AVC.
C)P = ATC.
D)MR = ATC.

Question 58

Exhibit 22-2 ​

Refer to Exhibit 22-2. What quantity of output does the profit-maximizing (or loss-minimizing)firm produce?

A)Q₁, where marginal cost is less than marginal revenue.
B)Q₂, where marginal cost is equal to marginal revenue.
C)Q₃, where marginal cost is greater than marginal revenue.
D)Q₄, which maximizes the difference between marginal cost and marginal revenue.

Question 59

Exhibit 22-3 ​
Refer to Exhibit 22-3. What is the increase in profit that would result from producing 43 units of the product rather than producing 40 units?

A)$60
B)$48
C)$28
D)$16
E)$10

Question 60

The perfectly competitive firm should produce in the

A)short run if price is below average variable cost.
B)long run if price is below average variable cost.
C)short run if price is below average total cost but above average variable cost.
D)long run if price is below average total cost but above average variable cost.

Question 61

Exhibit 22-4 ​

Refer to Exhibit 22-4. The firm sells its product at P₁ and produces Q₁. Given this situation,

A)total variable cost is equal to area 2 + area 3.
B)total revenue is equal to area 1 + area 2.
C)total cost is equal to area 1 + area 2 + area 3.
D)profit equals area 1.

Question 62

Why must profits be zero in long-run competitive equilibrium?

A)If profits are not zero, firms will enter or exit the industry.
B)If profits are not zero, firms will produce higher-quality goods.
C)If profits are not zero, marginal revenue will rise.
D)If profits are not zero, marginal cost will rise.

Question 63

Is it possible for a perfectly competitive firm to be maximizing profits, but not achieving resource allocative efficiency?

A)Definitely yes, because it is impossible to achieve both at the same time.
B)Yes, it is possible, but it is not possible to minimize losses without also achieving resource allocative efficiency.
C)No, it is not possible, because the output at which MR = MC is also the output at which P = MC.
D)There is not enough information to answer this question.

Question 64

Assume a decreasing-cost industry that is initially in long-run competitive equilibrium. A decrease in demand will cause a(n)__________ in prices and profits, and as a result, firms will __________ the industry, causing the market supply curve to shift __________,which, in turn, will eventually cause the equilibrium price to be __________ before.

A)a decrease; exit; rightward; lower than
B)an increase; enter; rightward; higher than
C)a decrease; exit; leftward; higher than
D)an increase; enter; rightward; the same as
E)an increase; exit; leftward; lower than

Question 65

As firms exit an industry, the industry supply curve shifts __________ and the equilibrium price __________ until long-run competitive equilibrium is established and the surviving firms are earning __________ economic profits.

A)leftward; rises; zero
B)leftward; falls; positive
C)leftward; rises; positive
D)rightward; falls; negative
E)rightward; rises; positive

Question 66

Resources are allocated efficiently when

A)the exchange value of the resources to demanders is greater than the opportunity cost of the resources.
B)the marginal benefit to demanders of the resources in the goods they purchase is less than the marginal cost to suppliers of the resources they use in producing the goods.
C)firms produce the quantity of output at which price is equal to marginal cost.
D)firms produce the quantity of output at which price is greater than marginal cost.

Question 67

The short-run industry supply curve is the

A)horizontal summation of the short-run supply curves for all firms in the industry.
B)vertical summation of the short-run supply curves for all firms in the industry.
C)average of the short-run supply curves for all firms in the industry.
D)same as that of the typical firm in the industry.

Question 68

Resource allocative efficiency occurs when a firm

A)minimizes costs of production yet charges the highest possible price.
B)produces the quantity of output at which price exceeds average total cost by the greatest amount.
C)produces the quantity of output at which price equals marginal cost.
D)produces the quantity of output at which price equals average total cost.
E)produces the quantity of output at which price equals average variable cost.

Question 69

Suppose one firm in a perfectly competitive industry experiences an increase in its costs of production. Which of the following best describes the most likely long run adjustment to this situation?

A)Eventually, all firms in the industry will also experience this same increase in costs.
B)Eventually, the price of the product will increase, and consumers will pay for the increase in costs.
C)The firm in question may suffer losses and exit the industry.
D)Eventually, all firms in the industry will experience a decrease in costs.

Question 70

If an industry is in long-run competitive equilibrium and experiences a decrease in demand, then as a result the equilibrium price will __________, which will cause the representative firm's __________ curve to shift downward and some firms will __________ the industry.

A)rise; marginal cost; enter
B)fall; marginal cost; enter
C)rise; marginal revenue; enter
D)fall; demand; exit
E)fall; marginal cost; exit

Question 71

Assume a constant-cost industry that is initially in long-run competitive equilibrium. An increase in demand will cause a(n)__________ in prices and profits, and as a result, firms will __________ the industry, causing the market supply curve to shift __________, which, in turn, will eventually cause the equilibrium price to be __________ before.

A)decrease; exit; leftward; lower than
B)increase; enter; rightward; higher than
C)decrease; exit; rightward; higher than
D)increase; enter; rightward; the same as
E)increase; exit; leftward; lower than

Question 72

Which of the following conditions does not characterize long-run competitive equilibrium?

A)Economic profit is zero.
B)Price is greater than marginal cost.
C)No firm has an incentive to change its plant size.
D)No firm has an incentive to produce more or less output.

Question 73

Exhibit 22-4 ​

Refer to Exhibit 22-4. Where can you find the lowest price that will motivate the firm to produce Q₁ in the short run?

A)at the horizontal line running to "ATC"
B)at the horizontal line running to "AVC"
C)P₁
D)$0

Question 74

Firm X is producing the quantity of output at which marginal revenue equals marginal cost. It is earning

A)a positive economic profit.
B)an economic loss.
C)a normal profit.
D)There is not enough information to answer the question.

Question 75

A constant-cost industry has a long-run (industry)supply curve that is

A)upward sloping.
B)downward sloping.
C)horizontal.
D)U-shaped.

Question 76

Demand increases in an increasing-cost industry that is initially in long-run competitive equilibrium. After full adjustment, price will be

A)equal to its original level.
B)below its original level.
C)above its original level.
D)There is not enough information to answer the question.

Question 77

When the perfectly competitive firm produces the quantity of output at which marginal revenue equals marginal cost, it naturally

A)produces the quantity of output at which marginal cost equals price, since for the perfectly competitive firm price equals marginal revenue.
B)produces the quantity of output at which short-run average total cost equals price, since for the perfectly competitive firm short-run average total cost equals marginal revenue.
C)earns a profit, since equating marginal revenue and marginal cost guarantees profit.
D)takes a loss.

Question 78

Assume the following for a certain industry: (l)there is no incentive for firms to enter or exit the industry; (2)for some firms in the industry, short-run average total cost is greater than long-run average total cost at the level of output where marginal revenue equals marginal cost; (3)all firms in the industry are currently producing the quantity of output at which marginal revenue equals marginal cost. Is the industry in long-run competitive equilibrium?

A)Yes.
B)No, because of number 2.
C)No, because of numbers 2 and 3.
D)No, because of numbers 1 and 2.
E)No, because of numbers 1, 2, and 3.

Question 79

If the perfectly competitive firm is producing an output level at which price equals marginal cost, it is

A)earning profits.
B)taking losses.
C)earning normal profit.
D)There is not enough information to answer the question.

Question 80

If firms are earning zero economic profits, they must be producing at an output level at which

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