Deck 8: Perfect Competition

Question 1

Market structure analysis allows economists to

A) predict the behavior of firms.
B) create the conditions of competition.
C) eliminate economic profits.
D) remodel the economy.

Answer 1

A

Question 2

Economists categorize industries using all these characteristics EXCEPT the

A) nature of the industry's product.
B) location of the industry.
C) barriers to entry.
D) extent to which individual firms can control prices.

Answer 2

B

Question 3

Economists categorize industries using all these characteristics EXCEPT the

A) total industry sales.
B) number of firms in the industry.
C) potential to earn positive economic profit in the long run.
D) extent to which individual firms can control prices.

Answer 3

A

Question 4

The perfectly competitive market structure assumes all of these EXCEPT

A) ease of entry and exit.
B) identical products.
C) a small number of buyers and sellers.
D) zero economic profit in the long run.

Question 5

Which business exhibits characteristics of a perfectly competitive firm?

A) JorDawn cannot tell which farm the peaches he purchased came from because all the peaches look alike.
B) Donelli's Pizza was voted the best pizza in town by readers of the local newspaper.
C) People who want to open a bank in Kansas must obtain a charter from the U.S. Comptroller of the Currency or the state of Kansas.
D) Devin's new software firm is spending a lot of money on research and development.

Question 6

Han and Micah have just started their own business: a food truck that sells specialty Vietnamese food. Although the start-up costs were low, Han and Micah charge a higher price for their food than their competitors because people from all over the city come to buy their food. What type of market structure do they face?

A) perfect competition
B) monopolistic competition
C) oligopoly
D) monopoly

Question 7

Kellogg, General Mills, Post, and Quaker Oats dominate the cereal market. This industry, which has consistently displayed profits in the long run, is difficult to enter due to brand recognition. The cereal industry is an example of what type of market structure?

A) perfect competition
B) monopolistic competition
C) oligopoly
D) monopoly

Question 8

What is the correct market structures in order from the highest number of sellers to the lowest?

A) perfect competition, monopolistic competition, oligopoly, monopoly
B) oligopoly, perfect competition, monopoly, monopolistic competition
C) perfect competition, oligopoly, monopolistic competition, monopoly
D) monopoly, oligopoly, monopolistic competition, perfect competition

Question 9

Which market structure has many relatively small buyers and sellers, a standardized product, good information for both buyers and sellers, and no barriers to entry or exit?

A) perfect competition
B) monopolistic competition
C) oligopoly
D) monopoly

Question 10

Which market structures share the characteristic of many buyers and sellers?

A) perfect competition and monopolistic competition
B) perfect competition and oligopoly
C) perfect competition and monopoly
D) Perfect competition is the only market structure with many buyers and sellers.

Question 11

A small number of firms that exhibit mutually interdependent decision making is a characteristic of which market structure?

A) perfect competition
B) monopolistic competition
C) oligopoly
D) monopoly

Question 12

Which market structure has little to no barriers to market entry and allows firms that have some control over price?

A) perfect competition
B) monopolistic competition
C) oligopoly
D) monopoly

Question 13

Which market structures definitely have barriers to entry?

A) perfect competition and monopolistic competition
B) monopoly and monopolistic competition
C) monopoly, oligopoly, and monopolistic competition
D) oligopoly and monopoly

Question 14

A characteristic that distinguishes monopoly from oligopoly is

A) long-run economic profits.
B) barriers to market entry.
C) the lack of close substitutes.
D) many buyers and sellers.

Question 15

The main similarity between perfect competition and monopolistic competition is that both

A) have few sellers.
B) make an economic profit in the long run.
C) have many buyers.
D) produce standardized products.

Question 16

Which is NOT a characteristic of a monopoly?

A) There is one firm.
B) There are many close substitutes.
C) There is potential for long-run economic profit.
D) There is substantial producer control over the price.

Question 17

_____ is a market in which there are few firms making mutually interdependent decisions, substantial barriers to entry, and the potential for long-run economic profits.

A) Perfect competition
B) Monopolistic competition
C) Oligopoly
D) Monopoly

Question 18

_____ is a market in which there are no long-run economic profits, little to no barriers to entry or exit, some control over price, and differentiated products.

A) Perfect competition
B) Monopolistic competition
C) Oligopoly
D) Monopoly

Question 19

_____ is a market in which there is no close substitute for the product, the potential for long-run economic profit, and nearly impossible barriers to entry.

A) Perfect competition
B) Monopolistic competition
C) Oligopoly
D) Monopoly

Question 20

There is potential for long-run economic profits in all market structures EXCEPT

A) oligopoly, monopolistic competition, and perfect competition.
B) perfect competition and monopolistic competition.
C) perfect competition.
D) monopoly and oligopoly.

Question 21

In which market structure is interdependent decision making most likely to occur among the firms?

A) monopoly
B) perfect competition
C) oligopoly
D) monopolistic competition

Question 22

Firms in all market structures experience some type of control over price, EXCEPT firms whose market structure is

A) a monopoly.
B) perfect competition.
C) monopolistic competition.
D) an oligopoly.

Question 23

Which characteristic is an assumption in a perfectly competitive market structure?

A) significant barriers to entry and exit
B) products with labels
C) perfect information about the markets
D) a few large buyers and a few large sellers

Question 24

A perfectly competitive firm is a price

A) leader; it can change its price and other firms will adjust.
B) maker; it has the freedom to set the selling price.
C) taker; it must accept the market equilibrium price.
D) taker; it can coordinate its pricing decisions with other firms.

Question 25

Miguel owns a taco shop in a city in which there are many other taco shops. There are no barriers to entry. Miguel can charge a higher price for his food because he uses a special sauce recipe passed down to him from his grandmother. Miguel stays in the taco business because he makes the same profit he would make if he devoted his resources to his next best option. What aspect of Miguel's business indicates that he is not in a perfectly competitive industry?

A) Miguel makes economic profits in the long run.
B) Miguel is one of many taco shop owners.
C) Miguel has some control over his price.
D) Tacos are a homogeneous product.

Question 26

The demand curve for an individual perfectly competitive firm is

A) identical to the market demand curve.
B) perfectly elastic.
C) perfectly inelastic.
D) downward sloping.

Question 27

The demand curve for a perfectly competitive market is

A) downward sloping.
B) perfectly elastic.
C) perfectly inelastic.
D) equal to the marginal cost curve.

Question 28

A perfectly competitive firm

A) will budget money to advertise its product.
B) can adjust the price of the product that it sells, in order to earn more profit.
C) can make an economic profit in the long run.
D) has output that is so small, relative to market supply, that it cannot influence the market price.

Question 29

In a perfectly competitive market, the price of the good or service is determined by

A) the individual producers.
B) the individual consumers.
C) government agencies.
D) market supply and market demand.

Question 30

All of these are characteristics of a perfectly competitive market EXCEPT

A) many buyers and sellers.
B) differentiated products.
C) no barriers to market entry or exit.
D) no control over price.

Question 31

In a perfectly competitive market, individual firms set

A) price and quantity.
B) neither price nor quantity.
C) quantity but not price.
D) price but not quantity.

Question 32

There are nearly 3 billion shares of Facebook stock. Sam, who owns 100 shares of the stock, hopes to raise the market price of the stock by buying another 100 shares. The main reason his endeavor will fail is that

A) he is such a small part of the overall market that his extra demand will have a negligible effect on the market price.
B) Facebook is a monopoly and therefore controls the price of its stock.
C) the Securities and Exchange Commission will intervene if anyone tries to influence stock prices.
D) the other stockholders will attempt to neutralize Sam's efforts.

Question 33

Which firm is MOST likely to operate in a perfectly competitive market?

A) a cable TV company
B) an automobile manufacturer
C) an electric utility company
D) a maple syrup company

Question 34

Which is a characteristic of a perfectly competitive market?

A) no close substitutes for the product
B) mutually interdependent decisions
C) no barriers to market entry or exit
D) potential for long-run economic profit

Question 35

Which is NOT an example of a market close to perfect competition?

A) electricity
B) oranges
C) fresh fish
D) corn to be used for ethanol production

Question 36

The perfectly competitive firm faces a perfectly elastic demand curve because it

A) has the ability to set the price and force consumers to buy their products at that price.
B) has no ability to control price.
C) doesn't; it faces a perfectly inelastic demand curve.
D) doesn't; the demand curve slopes down and to the right.

Question 37

Which statement about a perfect competitor is NOT correct?

A) The products made by a perfectly competitive firm have no close substitutes.
B) The perfectly competitive firm is always a price taker.
C) If an individual firm raises its price, it will lose potential profit.
D) The perfect competitor sells a homogeneous commodity.

Question 38

Which statement is FALSE if goods in an industry are homogenous?

A) The consumer has no preference for one firm's product over another.
B) The producer of each good is unidentifiable.
C) Consumers are willing to pay a higher price for a particular firm's product.
D) There are many identical substitutes for the good.

Question 39

A price taker is a firm that

A) takes the maximum price that each and every consumer is willing to pay.
B) has the ability to control the price it charges.
C) has no control over the market price.
D) takes bribes.

Question 40

The perfectly competitive model assumes that consumers will base their decisions to purchase a product solely on

A) customer service.
B) reputation.
C) quality.
D) price.

Question 41

In the short run

A) the number of firms is fixed.
B) all factors of production are variable.
C) firms will leave the industry if they are not making enough profit.
D) perfectly competitive firms cannot make positive economic profits.

Question 42

In the long run

A) all factors of production are fixed.
B) firms can enter or leave an industry.
C) firms will suffer losses.
D) the firm's plant size is fixed.

Question 43

In the short run

A) the number of firms can change.
B) firms can never earn economic profits.
C) firms can never suffer losses.
D) at least one factor of production is fixed.

Question 44

Which of these would be associated with a perfectly competitive market?

A) a market with many sellers, with each producing a similar though not identical version of a product
B) a market with high costs of entry into the industry
C) a market in which firms sell their product at the market equilibrium price
D) a market in which firms are impacted significantly by the actions of the other firms

Question 45

The market for toothbrushes has 1,000 producers. There are no barriers to entry. Some producers are able to charge higher prices than others because of small differences in their toothbrushes. What type of market exists for toothbrushes?

A) perfect competition
B) monopolistic competition
C) oligopoly
D) monopoly

Question 46

Swadee's Jewelry is one of 600 makers of ruby rings in Thailand. The rings display differences across the companies because each jewelry company has its own designs. Swadee is the fourth-largest producer of ruby rings in Thailand and sells 15% of the ruby rings in the market. Which statement is descriptive of the structure of the ruby ring market in Thailand?

A) It has some characteristics of monopolistic competition except that there are a few firms that have significant market share.
B) It is a perfectly competitive market since there are 600 companies that produce a homogeneous product.
C) The ruby ring market is an oligopoly because one firm has 15% market share.
D) The market cannot be a monopolistic competition or an oligopoly.

Question 47

The market for rice in Asia is supplied by thousands of rice farmers. Although the farms are different in size, none of the farmers produces a significant portion of rice. Consumers and producers are aware of the price at which rice is sold and thus all sellers charge the same price. Consumers do not care which farm produced the rice they purchase. The rice market in Asia is like what market structure?

A) monopoly
B) oligopoly
C) monopolistic competition
D) perfect competition

Question 48

The market for shampoo has 600 producers with no barriers to entry. Price information is easily available to both buyers and producers. There are, however, variations in the features and ingredients of the shampoo across the producers. The biggest producer sells 1% of market output. Which of these is a valid reason the market is NOT perfectly competitive?

A) The producers do not produce equal shares of the output.
B) There are only a few producers.
C) The barriers to entry are relatively low.
D) The product is differentiated across the producers.

Question 49

The five largest firms in a market have output shares of 18%, 16%, 15%, 14%, and 12%. If one of these firms changes its price or product features, the sales of the other firms are noticeably affected. This _____ is associated with the market structure of _____.

A) product differentiation; monopolistic competition
B) barrier to entry; oligopolies
C) mutual interdependence; oligopolies
D) market power; monopolistic competition

Question 50

What is the function of a barrier to entry when used in the description of a market structure?

A) It prevents a consumer from purchasing a product.
B) It prevents a firm from changing its product's features.
C) It makes it difficult for a new firm to join an industry.
D) It makes it difficult for firms to sell their output.

Question 51

Which statement is descriptive of the long run?

A) The firm must pay an electric bill that varies each month as well as a mortgage payment of $10,000 per month.
B) The firm is trying to increase its amount of output by adding an extra shift so that its equipment is in use more hours of the day.
C) A firm is deciding how much of its equipment to sell so that it can reduce its monthly loan payments for equipment.
D) A firm is deciding how many workers to use in its production line.

Question 52

Which of these would be a good example of a homogeneous product?

A) a watt of electricity
B) a toothbrush
C) a bicycle
D) a pair of pants

Question 53

The main reason firms in perfect competition do not advertise their product is because

A) they have no control over the price of their product and would not be able to leverage any brand loyalty.
B) their product is homogenous and doing so would incur a cost without necessarily increasing their own sales.
C) there are too many consumers to reach, making their cost of advertising unaffordable.
D) the low barriers to entry would encourage new firms to enter the market to take advantage of the free advertising.

Question 54

_____ is the change in total revenue that results from the sale of one added unit of product.

A) Marginal revenue
B) Marginal product
C) Total output
D) Total revenue

Question 55

In a perfectly competitive market, price is always equal to a firm's

A) marginal cost.
B) marginal product.
C) marginal revenue.
D) total revenue.

Question 56

Which statement about marginal revenue (MR) is NOT true?

A) MR is the change in total revenue divided by the change in quantity sold.
B) MR is the total revenue divided by the quantity sold.
C) In a perfectly competitive market, MR equals the market price.
D) MR helps to determine the profit-maximizing output for a firm.

Question 57

For a perfectly competitive firm, marginal revenue

A) is equal to the market price.
B) will decrease if the firm increases its sales volume.
C) will increase if the firm increases its sales volume.
D) is equal to the market demand curve.

Question 58

A perfectly competitive firm has total revenues equal to $360 when it produces forty units. What is the marginal revenue for the forty-first unit?

A) $8.78
B) $9
C) $360
D) $369

Question 59

If the firm's price is equal to marginal revenue and average revenue, the market structure of the firm is a(n)

A) perfect competition.
B) oligopoly.
C) monopoly.
D) monopolistic competition.

Question 60

If Annie has sold forty apples in a perfectly competitive market and her total revenue is $80, when she sells her forty-first apple, her marginal revenue will be

A) $2.
B) $20.
C) $0.75.
D) $0.50.

Question 61

Total revenue is equal to

A) marginal cost × quantity.
B) price × quantity.
C) total revenue × quantity.
D) the market price.

Question 62

For a perfectly competitive firm, total revenue is equal to

A) marginal cost × quantity.
B) marginal revenue × quantity.
C) total revenue × quantity.
D) the market price.

Question 63

The reason price equals marginal revenue in a perfectly competitive market is that

A) the law prohibits marginal revenue from diverging from market price.
B) marginal revenue is always equal to marginal cost.
C) since price is constant, the added revenue from selling one more unit is equal to the price.
D) firms adjust output to ensure that the market maintains a steady price.

Question 64

If a perfectly competitive firm has total revenue of $400 when it produces 100 units, and if its total revenue increases to $404 when it produces 101 units, then the marginal revenue of the last unit produced is

A) $404.
B) $4.
C) $1.
D) $0.25.

Question 65

If a perfectly competitive firm has total revenue equal to $400 when it produces 100 units, and if its total revenue rises to $404 when it produces 101 units, then the price charged by the firm is

A) $404.
B) $4.
C) $1.
D) $400.

Question 66

When firm X sells 3 units of product Z, its marginal revenue is $4.67. When it sells 100 units, marginal revenue is $4.67. The firm most likely operates in which market structure?

A) monopoly
B) oligopoly
C) monopolistic competition
D) perfect competition

Question 67

A perfectly competitive firm should continue to produce until

A) MC = TC.
B) MC = P.
C) ATC is at a minimum.
D) MC is at a minimum.

Question 68

Profit maximization will always occur where

A) MC = MR.
B) MC > MR.
C) MC < MR.
D) TC = TR.

Question 69

For firms in perfect competition, profit maximization will always occur where

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

Question 70

If a competitive firm can increase its profits by increasing its output, then the firm's

A) P > MC.
B) MR < MC.
C) P > MR.
D) MC > P.

Question 71

A firm operates in a perfectly competitive industry. At the current level of output, the marginal cost is $26 and the average cost is $23. If the firm can sell its product for $25, the

A) firm should produce more units.
B) firm is maximizing its profits at the current level of output.
C) firm should decrease its output.
D) firm's average total cost is falling.

Question 72

(Table) Based on the table, what is the shape of the demand curve that faces John's Tricycle Company?
$\begin{array}{|c|c|c|}\hline \text { Output } & \begin{array}{c}\text { Marginal } \\\text { Cost }\end{array} & \begin{array}{c}\text { Total } \\\text { Revenue }\end{array} \\\hline 5 & 1,200 & 7,500 \\\hline 6 & 1,300 & 9,000 \\\hline 7 & 1,400 & 10,500 \\\hline 8 & 1,500 & 12,000 \\\hline 9 & 1,600 & 13,500 \\\hline\end{array}$

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

Question 73

(Table) Based on the table, what price does John's Tricycle Company charge for a tricycle?
$\begin{array}{|c|c|c|}\hline \text { Output } & \begin{array}{c}\text { Marginal } \\\text { Cost }\end{array} & \begin{array}{c}\text { Total } \\\text { Revenue }\end{array} \\\hline 5 & 1,200 & 7,500 \\\hline 6 & 1,300 & 9,000 \\\hline 7 & 1,400 & 10,500 \\\hline 8 & 1,500 & 12,000 \\\hline 9 & 1,600 & 13,500 \\\hline\end{array}$

A) $18,500
B) $1,400
C) $1,500
D) The price cannot be determined from the information given.

Question 74

(Table) Based on the table, what is the profit-maximizing output for John's Tricycle Company?
$\begin{array}{|c|c|c|}\hline \text { Output } & \begin{array}{c}\text { Marginal } \\\text { Cost }\end{array} & \begin{array}{c}\text { Total } \\\text { Revenue }\end{array} \\\hline 5 & 1,200 & 7,500 \\\hline 6 & 1,300 & 9,000 \\\hline 7 & 1,400 & 10,500 \\\hline 8 & 1,500 & 12,000 \\\hline 9 & 1,600 & 13,500 \\\hline\end{array}$

A) 6 units
B) 7 units
C) 8 units
D) 9 units

Question 75

(Table) Based on the table, what is total revenue for John's Tricycle Company if it produces at its profit-maximizing output?
$\begin{array}{|c|c|c|}\hline \text { Output } & \begin{array}{c}\text { Marginal } \\\text { Cost }\end{array} & \begin{array}{c}\text { Total } \\\text { Revenue }\end{array} \\\hline 5 & 1,200 & 7,500 \\\hline 6 & 1,300 & 9,000 \\\hline 7 & 1,400 & 10,500 \\\hline 8 & 1,500 & 12,000 \\\hline 9 & 1,600 & 13,500 \\\hline\end{array}$

A) $10,500
B) $0
C) $11,900
D) $12,000

Question 76

If a competitive firm can sell steel for $500 per ton, has an average variable cost of $400 per ton, and a marginal cost of $600 for the last ton produced, the profit-maximizing firm should

A) expand output.
B) reduce output.
C) increase price.
D) cut output to zero.

Question 77

A firm in a perfectly competitive industry is maximizing its profits at 400 units of output. If the marginal revenue and marginal cost are each $35 and the firm's average total cost is $25, this firm's profit is

A) $0.
B) $10.
C) $4,000.
D) $14,000.

Question 78

If a firm produces at a point where marginal revenue exceeds marginal cost, the firm

A) is not maximizing its profits.
B) has an economic loss.
C) is maximizing its profits.
D) breaks even.

Question 79

In the short run, if a firm in a perfectly competitive market is producing at a point where price exceeds marginal cost, the profit-maximizing firm

A) should increase its output.
B) should decrease its output.
C) should not change its output level.
D) is maximizing its profits.

Question 80

For all firms, regardless of the market structure, the profit-maximizing rule is to produce at the point at which marginal revenue

A) equals the price.
B) exceeds the price.
C) equals marginal cost.
D) exceeds marginal cost.