Deck 7: Perfect Competition

Question 1

Suppose a single egg farmer alters the number of eggs she produces but the change in egg output does not have any effect on the market price. This example describes which of the following characteristics of perfect competition?

A) large number of small firms
B) homogeneous product
C) very easy entry and exit
D) mutual interdependence

Answer 1

A

Question 2

Which of the following best illustrates a perfectly competitive market?

A) jeans
B) breakfast cereal
C) electric power
D) soybeans

Answer 2

D

Question 3

Which of the following could be a perfectly competitive market?

A) the market for licensed electricians
B) the market for restaurants with permits to sell alcohol
C) the market for patented pharmaceuticals
D) the market for tradable stocks

Answer 3

D

Question 4

The demand for the product of a competitive price-taker firm is:

A) perfectly inelastic.
B) perfectly elastic.
C) greater than zero but less than one.
D) dependent on the availability of substitutes for the firm's product.

Question 5

In the perfectly competitive market, all firms in the market are assumed to be producing:

A) identical products.
B) differentiated products.
C) products that are heavily advertised.
D) complementary products.

Question 6

Which of the following best explains why a firm in a perfectly competitive market must take the price determined in the market?

A) The short-run average total costs of firms that are price takers will be constant.
B) If a price taker increased its price, consumers would buy from other suppliers.
C) Firms in a price-taker market will have to advertise to increase sales.
D) There are no good substitutes for the product supplied by a firm that is a price taker.

Question 7

Which of the following best illustrates perfect competition?

A) wheat farming
B) orange growers setting quotas under the Sunkist cooperative
C) General Motors advertising campaign for its cars
D) Coca-Cola and Pepsi battling for market share

Question 8

When a product is defined as homogeneous,

A) buyers prefer one seller's product to another's.
B) buyers are indifferent as to which seller's product they buy.
C) sellers are indifferent as to the quantity of the product they sell.
D) sellers have an incentive to charge a price higher than the market price.

Question 9

Which of the following is not a characteristic of the structure of perfectly competitive markets?

A) Each individual firm is small in size relative to the overall market.
B) Few sellers.
C) Homogeneous product.
D) Easy, low cost entry and exit.

Question 10

Which of the following correctly explains why sellers in a perfectly competitive market are price takers?

A) There are few sellers, and so they have the power to take whatever price they want.
B) There are many sellers, and so the market process generates an equilibrium price that cannot be influenced by any one seller. Thus they have no choice but to take the price generated by the market process.
C) Sellers in a competitive market have the power to influence price by colluding with one another and using quotas to limit overall market output and thus raise price.
D) Individual buyers in a competitive market have the power to influence price, and thus can impose prices and other conditions on powerless sellers.

Question 11

Which of the following is true of a perfectly competitive firm?

A) The firm is a price maker.
B) If the firm wishes to maximize profits it will produce an output level in which marginal revenue exceeds marginal cost.
C) The firm will not earn an economic profit in the long run.
D) The firm's short-run supply curve is its MC curve below its AVC curve.

Question 12

Pedro goes to the local farmer's market and is just as happy buying corn from the first vendor as he is from the second vendor. This example describes which of the following characteristics of perfect competition?

A) large number of small firms
B) homogeneous product
C) very easy entry and exit
D) differentiated product

Question 13

The large-number-of-sellers condition of perfect competition is met when

A) there are more sellers than buyers in the market.
B) there are more than 50 firms in the industry.
C) there are more than 100 firms in the industry.
D) each firm is so small relative to the total market that no single firm can influence the market price.

Question 14

If a firm has no ability to influence the market price of its product, it:

A) will go out of business due to losses.
B) is a price-maker.
C) cannot maximize profit.
D) has a horizontal individual demand curve.

Question 15

Bethany decides to build a chicken coop, get some chickens, and start selling fresh eggs in her neighborhood. This example describes which of the following characteristics of perfect competition?

A) large number of small firms
B) homogeneous goods
C) very easy entry and exit
D) imperfect information

Question 16

A firm that is a price taker can:

A) substantially change the market price of its product by changing its level of production.
B) sell all of its output at the market price.
C) sell some of its output at a price higher than the market price.
D) decide what price to charge for its product.

Question 17

In a perfectly competitive market buyers want to buy 20,000 units and sellers want to sell 20,000 units of a product when the price is $50 per unit. ABC Corporation, one seller in this market,

A) will sell a fixed number of units regardless of how the price changes.
B) faces a downward-sloping demand curve for its product.
C) will maximize profit by selling at a price less than $50.
D) faces a perfectly elastic demand curve at a price of $50.

Question 18

A firm in a perfectly competitive market:

A) must take the price that is determined in the market.
B) must reduce its price if it wants to sell a larger quantity.
C) must be large relative to the total market.
D) can exert a major influence on the market price.

Question 19

Which of the following is not a characteristic of a perfectly competitive market?

A) There is a large number of small firms.
B) Firms sell a homogeneous product.
C) Firms can easily enter or exit the market.
D) Firms are price makers, not price takers.

Question 20

Which of the following is a characteristic of a competitive price-taker market?

A) Profit maximizing firms in the market will expand output until price equals average variable cost.
B) The market demand curve for the product is a horizontal line.
C) There are many firms in the market, each producing a small share of total market output.
D) The product produced by each of the firms is differentiated.

Question 21

The point of maximum profit for a business firm is where:

A) P = AC.
B) TR = TC.
C) MR = AR.
D) MR = MC.

Question 22

A perfectly competitive firm sells its output for $100 per unit and marginal cost is $100 per unit. To maximize short-run profit, the firm should:

A) increase output.
B) decrease output.
C) maintain its current output.
D) shut down.

Question 23

What are the characteristics of the perfectly competitive market?

Question 24

A competitive firm maximizes its profits (or minimizes is losses) by producing the quantity where the market price equals the firm's:

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

Question 25

A firm is currently operating where the MC of the last unit produced = $84, and the MR of this unit = $70. What would you advise this firm to do?

A) Shut down.
B) Increase output.
C) Stay at its current output.
D) Decrease output.

Question 26

Suppose product price is fixed at $24; MR = MC at Q = 200; AFC = $6; AVC = $16. What do you advise this firm to do?

A) Increase output.
B) Decrease output.
C) Stay at the current output; the firm is losing $200.
D) Stay at the current output; the firm is earning a profit of $400.

Question 27

If a firm equates MR and MC, then:

A) TR is at a maximum, and TC is at a minimum.
B) output is at a maximum.
C) both TR and TC are at a maximum.
D) profits are at a maximum or losses are at a minimum.

Question 28

In the short run, if a perfectly competitive firm is producing at a price below average total cost, its economic profit is:

A) positive.
B) zero.
C) negative.
D) normal.

Question 29

Under perfect competition, a firm is a price taker because:

A) setting a price higher than the going price results in profits.
B) each firm's product is perceived as different.
C) each firm has a significant market share.
D) setting a price higher than the going price results in zero sales.

Question 30

If a potato farmer expands output, he finds that the increase in total revenue is less than the increase in total costs. This means that:

A) profit is being maximized.
B) he should not have expanded output.
C) he should produce even more output.
D) the firm is wasting resources.

Question 31

A firm is currently operating where the MC of the last unit produced = $64, and the MR of this unit = $70. What would you advise this firm to do?

A) Shut down.
B) Increase output.
C) Stay at current output.
D) Decrease output.

Question 32

Which of the following offers the best explanation of why "marginal revenue equals marginal cost" is the rule that indicates the profit-maximizing output level?

A) If output were reduced from the profit-maximizing level, then the firm would be gaining marginal revenue that exceeds marginal cost, and thus increasing the level of profit.
B) If output were increased from the profit-maximizing level, then the firm would be gaining marginal revenue that is less than the marginal cost incurred in producing this additional unit, and thus reducing the level of profit.
C) Because the firm colludes with other similar firms to set price equal to marginal cost.
D) The marginal revenue is equal to the marginal cost at all levels of output for a perfectly competitive firm.

Question 33

Exhibit 7-1 Quantity and total revenue data for a firm $$\begin{array} { | c | c | } \hline \text { Quantity } & \text { Total Revenue } \\\hline 0 &\$ 0 \\1 & 62 \\2 & 124 \\3 & 186 \\\hline\end{array}$$ Exhibit 7-1 indicates that this firm is operating in which type of market structure?

A) The market structure cannot be determined from the information given.
B) monopoly
C) perfect competition
D) monopolistic competition

Question 34

The profit maximizing or loss minimizing quantity of output for any firm to produce exists at that output level in which:

A) total revenue is maximized.
B) total cost is minimized.
C) marginal cost is minimized.
D) marginal revenue equals marginal cost.

Question 35

In the short-run, if a firm increases output when MR > MC, then:

A) profit will equal zero.
B) profit will increase.
C) profit will decrease.
D) profit will remain the same.

Question 36

Under perfect competition, which of the following are equal at all levels of output?

A) price and marginal cost
B) price and marginal revenue
C) marginal cost and marginal revenue
D) marginal cost and short-run average total cost

Question 37

A profit-maximizing firm will continue to expand output:

A) as long as the revenues from the production and sale of an additional unit exceeds the average cost of the unit.
B) until the average cost of producing the good or service is at a minimum.
C) as long as the revenues from the production and sale of an additional unit exceeds the marginal cost of the unit.
D) until the marginal cost of producing a good or service is at a minimum.

Question 38

Maximizing profit means finding the maximum difference between:

A) TR and TC.
B) MR and MC.
C) price and ATC.
D) ATC and MC.

Question 39

If a firm is currently equating MR and MC and product price = $24, AVC = $22, and ATC = $26, then in the long run this firm:

A) will continue to operate at a loss.
B) will earn a positive profit.
C) will go out of business.
D) should decrease price.

Question 40

A firm operating in a perfectly competitive market is a price taker because:

A) each firm has a significant market share.
B) each firm's product is perceived as different.
C) setting a price higher than the market price results in zero sales.
D) the market demand curve is perfectly elastic.

Question 41

Jerome, the florist, sold 500 bridesmaid's bouquets in June. He estimates his costs that month were ATC = $10, AVC = $6, and MC = $9. If he sold each bouquet at the constant market price of $9, Jerome:

A) made an economic profit of $500.
B) made a loss of $500.
C) should have shut down in June.
D) made a loss of $1,500.

Question 42

In the perfectly competitive market, individual firms exert no effect on the market price. Therefore, the firm's marginal revenue is:

A) zero.
B) an upward-sloping curve.
C) a downward-sloping curve.
D) the same as the firm's demand curve.

Question 43

A sandwich shop owner has the following information: P = MR = $4, ATC = $2, AVC = $1, MC = 4, and Q = 500. From this, she can determine:

A) her profits are not being maximized.
B) she has earned zero economic profits.
C) she has earned economic profits of $1,000.
D) she has earned economic profits of $1,500.

Question 44

Exhibit 7-3 Cost per unit curves

In Exhibit 7-3, if the price of the firm's product is $2.00 per unit, the firm will produce:

A) 5 units per day.
B) 10 units per day.
C) 15 units per day.
D) 20 units per day.

Question 45

Exhibit 7-6 A firm's cost and MC curves

In Exhibit 7-6, if this firm is currently producing 20 units of output, this firm is

A) earning a profit of $10.
B) earning a profit of $.50.
C) losing $10.
D) losing $0.50.

Question 46

If a perfectly competitive firm sells 50 units of output at a market price of $10 per unit, its marginal revenue is:

A) more than $10.
B) less than $10.
C) $10.
D) $500.

Question 47

If a fishing boat owner brings 10,000 fish to market and the market price is $7 per fish, she will have $70,000 in total revenue. If the average variable cost of 10,000 fish is $4 and the fixed cost of the boat is $20,000, what is her profit?

A) $3.
B) $1,000.
C) $3,000.
D) $10,000.

Question 48

Consider a firm with the following cost information: ATC = $15, AVC = $12, and MC = $14. If we know that this firm has decided to produce Q = 20 by following the rule to maximize profits or minimize losses, then the price of the output is:

A) $12.
B) $14.
C) $15.
D) $20.

Question 49

Exhibit 7-3 Cost per unit curves

As shown in Exhibit 7-3, the price at which the firm earns zero economic profit in the short-run is:

A) $1.00 per unit.
B) $1.50 per unit.
C) $2.00 per unit.
D) $4.00 per unit.

Question 50

The neighborhood ice cream shop finds that when it charges $3 per ice cream cone, its total revenues are $90,000. It has total variable costs of $30,000 and total fixed costs of $40,000. From this we can infer the:

A) shop sells 10,000 ice cream cones.
B) price is less than average total cost.
C) economic profits are $20,000.
D) shop will be closed in the long run.

Question 51

Exhibit 7-2 Total revenue and total cost graph

In Exhibit 7-2, economic profit for the firm is at a maximum when output per week equals:

A) 100 units.
B) 200 units.
C) 250 units.
D) 300 units.

Question 52

Exhibit 7-5 A firm's MR and MC curves

In Exhibit 7-5, a firm is currently producing 40 units of output. What would you advise this firm to do?

A) Shut down.
B) Increase output.
C) Decrease price.
D) Decrease output.

Question 53

Exhibit 7-4 Marginal cost and revenue for a firm $$\begin{array} { | c | c | c | } \hline \begin{array} { c } \text { Unit } \\\text { Quantity }\end{array} & \text { Marginal Cost } & \begin{array} { c } \text { Marginal } \\\text { Revenue }\end{array} \\\hline 12 & \$ 5 & \$ 9 \\13 & 6 & 9 \\14 & 7 & 9 \\15 & 8 & 9 \\16 & 9 & 9 \\17 & 10 & 9 \\\hline\end{array}$$ In Exhibit 7-4, what is this firm's profit-maximizing rate of output?

A) 13.
B) 14.
C) 15.
D) 16.

Question 54

A portrait photographer produces output in packages of 100 photos each. If the output sold increases from 600 to 700 photos, total revenue increases from $1,200 to $1,400. The marginal revenue per photo is:

A) $200.
B) $100.
C) $20.
D) $2.

Question 55

The market price for wallets is $20. Your technology is such that at your most efficient production point, the average total cost of producing a wallet is $2.50. Your manager runs into your office and shouts, "Boss!!! Average costs are rising!! Average costs are rising!!" To make a profit-maximizing decision, you should:

A) ask the manager about the average total cost.
B) immediately stop production.
C) completely ignore your manager.
D) ask the manager about the marginal cost.

Question 56

Suppose a company increases production from a point where marginal cost equals average total cost to a point where marginal revenue and marginal cost are equal. Is it a good idea for the company to do this? Why?

A) No, average total costs have increased which means the company is not minimizing losses.
B) Yes, because average variable costs are always less than average total costs.
C) No, the previous level of output was the most efficient because it had the lowest average total cost.
D) Yes, even though the previous level of output had minimized the average total cost, there was still profit to be earned by producing additional units.

Question 57

Marginal revenue is the change in:

A) total profit brought about by selling one more unit of output.
B) The change in price a firm can charge brought about by selling one more unit of output .
C) total revenue brought about by selling one more unit of output.
D) output brought about by a $1 change in product price.

Question 58

If a firm in a competitive industry is making zero economic profit but still producing, it must be the case that:

A) MC = MR > ATC.
B) MC = MR
C) MC = ATC > MR.
D) MC = MR = ATC.

Question 59

Exhibit 7-10 Price and cost data for a firm $$\begin{array} { | c | c | c | c | c | } \hline \text { Q } & \text { P } & \text { AVC } & \text { ATC } & \text { MC } \\\hline 0 & \$ 12 & - & - & - \\1 & 12 & 3 & 5 & 5 \\2 & 12 & 5 & 6 & 7 \\3 & 12 & 7.3 & 8 & 12 \\4 & 12 & 9.5 & 10 & 16 \\\hline\end{array}$$ In Exhibit 7-10, following the rule regarding MR and MC, the most profitable output level is:

A) 1.
B) 2.
C) 3.
D) 4.

Question 60

If the market price is $5 and you are currently producing at a level where average total cost is $3 and falling, you should:

A) produce until the average total cost and average revenue are equal.
B) shut down.
C) produce only enough to cover variable costs.
D) produce where MR = MC.

Question 61

Consider a firm with the following cost and revenue information: ATC = $8, AVC = $7, and MR = MC = $6. If the firm produces Q = 60 in the short run, it:

A) is minimizing losses.
B) makes a total loss of $60.
C) should produce more output.
D) should shut down.

Question 62

Suppose that price is below the minimum average total cost but above the minimum average variable cost. In the short run, a firm that is a price taker would:

A) immediately shut down and get out of the industry.
B) continue to produce a quantity such that marginal revenue equals marginal cost.
C) shut down temporarily, in hopes of restarting in the near future.
D) cut price and expand output in hopes of achieving economies of scale

Question 63

Exhibit 7-8 A firm's cost and marginal revenue curves

In Exhibit 7-8, product price in this market is fixed at $35. This firm is currently operating where MR = MC. What do you advise this firm to do?

A) This firm should shut down.
B) This firm could increase profits by increasing output.
C) This firm could increase profits by decreasing output.
D) This firm should continue to operate at its current output.

Question 64

Suppose the price of a product is less than its average variable cost. When the firm's fixed obligations are completely ended, it will now most likely:

A) make an economic profit.
B) go out of business.
C) expand to a bigger operation.
D) break even.

Question 65

Exhibit 7-9 A firm's cost and marginal revenue curves

In Exhibit 7-9, product price in this market is fixed at $7. This firm is currently operating where MR = MC. What do you advise this firm to do?

A) This firm should shut down.
B) This firm could increase profits by increasing output.
C) This firm could increase profits by decreasing output.
D) This firm should increase price.

Question 66

Exhibit 7-10 Price and cost data for a firm $$\begin{array} { | c | c | c | c | c | } \hline \text { Q } & \text { P } & \text { AVC } & \text { ATC } & \text { MC } \\\hline 0 & \$ 12 & - & - & - \\1 & 12 & 3 & 5 & 5 \\2 & 12 & 5 & 6 & 7 \\3 & 12 & 7.3 & 8 & 12 \\4 & 12 & 9.5 & 10 & 16 \\\hline\end{array}$$ In Exhibit 7-10, the maximum possible total profit is:

A) $36.
B) $24.
C) $12.
D) $8.

Question 67

In the short run, a firm should shut down its business if price is less than:

A) ATC.
B) AR.
C) MC.
D) AVC.

Question 68

Exhibit 7-8 A firm's cost and marginal revenue curves

In Exhibit 7-8, product price in this market is fixed at $35. This firm is currently operating where MR = MC. Which of the following is true ?

A) Price > AVC and this firm should shut down.
B) This firm is earning a profit of zero.
C) This firm could increase profits by increasing output.
D) Price > AVC and the firm should continue producing its current output.

Question 69

In the short run, a firm should shut down its operation if:

A) its losses are less than TFC at the MR = MC point.
B) its losses equal TFC at the MR = MC point.
C) its losses are greater than TFC at the MR = MC point.
D) TR is less than TC.

Question 70

If a firm is operating at a loss in the short run and finds that its price is greater than average variable cost, then

A) it should produce where MR = MC.
B) it should produce zero output.
C) total revenue is greater than total costs.
D) total revenue is less than total variable costs.

Question 71

In the short run, a firm will stay in business as long as:

A) price equals average revenue.
B) marginal revenue is greater than or equal to marginal cost.
C) price exceeds average variable cost.
D) price is less than average variable cost.

Question 72

If a firm shuts down in the short run, it will:

A) incur losses equal to its fixed costs.
B) have total revenue greater than total fixed costs.
C) reduce its losses to zero.
D) do this because P > AVC.

Question 73

If the price of a product is $12, its average total cost is $2 and its average variable cost is $15 at the profit-maximizing output level,  in the short run the firm:

A) should expand output until MR = MC.
B) cannot cover total fixed costs.
C) experiences a loss.
D) must always shut down.

Question 74

The price-taker firm should discontinue production immediately if:

A) the market price exceeds the firm's average total costs.
B) the market price is less than the firm's average variable costs.
C) the market price is less than the firm's average total costs, but greater than its average variable cost.
D) its accounting statement indicates that it is suffering losses.

Question 75

In the short run, why would a firm in a perfectly competitive market shut down production if the prevailing market price falls below the lowest possible average variable cost?

A) At that point (economic) profit is zero.
B) Below that point average revenue becomes less than marginal revenue.
C) Below that point marginal revenue becomes insufficient to pay for avoidable average variable cost.
D) Below that point other firms with similar cost will find it profitable to enter the market and take away demand from the existing firms.

Question 76

Exhibit 7-15 Short-run cost curves for E-Z Care lawn mowing company

In Exhibit 7-15, what market price would cause E-Z-Care to just break even?

A) $6 per lawn.
B) $8 per lawn.
C) $12 per lawn.
D) $16 per lawn.

Question 77

Exhibit 7-10 Price and cost data for a firm $$\begin{array} { | c | c | c | c | c | } \hline \text { Q } & \text { P } & \text { AVC } & \text { ATC } & \text { MC } \\\hline 0 & \$ 12 & - & - & - \\1 & 12 & 3 & 5 & 5 \\2 & 12 & 5 & 6 & 7 \\3 & 12 & 7.3 & 8 & 12 \\4 & 12 & 9.5 & 10 & 16 \\\hline\end{array}$$ In Exhibit 7-10, MR is the same as which column?

A) Q.
B) P.
C) AVC.
D) ATC.
E) MC.

Question 78

Which of the following best describes why a perfectly competitive firm will sometimes continue producing in the short run even if it incurs a loss?

A) As long as price exceeds average variable cost, the loss from producing will be smaller than the loss from shutting down, which is equal to the amount of total fixed costs.
B) Short-run losses turn into long-run profits when there is entry into the market.
C) A perfectly competitive firm should never produce if it incurs a loss because it is unable to influence the market price.
D) If price exceeds average total cost, the loss from covering the fixed costs will be smaller than the loss from covering the variable costs.

Question 79

Exhibit 7-3 Cost per unit curves

If the price of the firm's product in Exhibit 7-3 is $1.50 per unit, which intersects AVC at point B, the firm should:

A) continue to operate because it is earning a positive economic profit.
B) stay in operation for the time being even though it is making an economic loss.
C) shut down temporarily.
D) increase the price.

Question 80

Exhibit 7-3 Cost per unit curves

As shown in Exhibit 7-3, the firm will produce in the short run if the price is at least equal to:

A) $1.00 per unit (point A).
B) $1.50 per unit (point B).
C) $2.00 per unit (point C).
D) $4.00 per unit (point D).