Deck 8: Perfect Competition

Question 1

In a market with perfectly competitive firms, how is the individual firms demand curve drawn?

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

Answer 1

a horizontal line

Question 2

Which of the following is most likely a price taker?

A) a Saskatchewan wheat farmer
B) a respected heart surgeon
C) an ice cream shop owner located in Sudbury, Ontario
D) a beachside tourist resort

Answer 2

a Saskatchewan wheat farmer

Question 3

What is the most socially efficient market structure in the long run?

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

Answer 3

perfect competition

Question 4

What can we conclude about a competitive firm facing a perfectly elastic demand curve?

A) It can sell more output only by reducing its price.
B) It can sell all of its output at any price it chooses.
C) It can increase its price without losing any sales.
D) It can sell all of its output at the market price.

Question 5

What does the perfectly competitive model assume?

A) Individual sellers can influence the market price.
B) Firms compete by varying a product's quality rather than a product's price.
C) Firms can enter and exit the industry with relative ease.
D) Sellers can increase their total revenue by raising prices.

Question 6

What is the term "perfect competition" used to describe?

A) an industry in which numerous price-taking firms produce identical products
B) an industry in which a few price-taking firms produce identical products
C) an industry in which firms are price takers and compete for market share by varying the qualitative characteristics of products
D) an industry in which numerous firms are price makers and produce identical products

Question 7

Why can't a firm in a perfectly competitive industry charge a price above the market-clearing price?

A) Government-imposed price ceilings prevent prices from being raised.
B) Perfectly competitive firms are price searchers.
C) Numerous competitors produce the same product and charge the market price.
D) Firms in a perfectly competitive industry face significant barriers to entry.

Question 8

Which of the following best describes firms in perfectly competitive markets?

A) They influence price by varying the quality of output.
B) They are price makers.
C) They are price takers.
D) They sell heterogeneous products.

Question 9

Which of the following most closely resembles a perfectly competitive market?

A) the soft drink industry
B) the wheat market
C) the airline industry
D) long-distance telephone service

Question 10

Which of the following is a property of the demand curve facing a perfectly competitive firm?

A) It is unit elastic.
B) It is downward sloping.
C) It is perfectly inelastic.
D) It is perfectly elastic.

Question 11

Which of the following best describes a firm facing a horizontal demand curve?

A) It can reduce the price it charges to increase its sales.
B) It can increase its revenue by raising its price.
C) It is unlikely to price its goods below market price.
D) It faces a perfectly inelastic demand curve for its product.

Question 12

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

A) Firms earn zero economic profit in the long run.
B) Competing products are virtually identical.
C) Firms are price takers.
D) Firms advertise in order to distinguish their products and increase market share.

Question 13

Which of the following is a characteristic of a perfectly competitive market?

A) There is free entry into and exit from the market.
B) Individual firms can exert a perceptible influence on the market price.
C) Each firm faces a downward-sloping demand curve.
D) Firms in the market produce a differentiated product.

Question 14

What is an individual, perfectly competitive firm?

A) A firm that is a price maker.
B) A firm that may increase its price without losing sales.
C) A firm that sells a product that is differentiated from those of its competitors.
D) A firm that has no perceptible influence on the market price.

Question 15

Which market structure is characterized by many sellers, easy entry, and homogeneous products?

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

Question 16

In the perfectly competitive model, what are all firms assumed to be producing?

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

Question 17

Which of the following best describes a firm that is a price taker?

A) It will lose all sales if it prices its product in excess of the market equilibrium price.
B) It competes with other producers who produce differentiated products.
C) It can exert a major influence on the overall market.
D) It must be a relatively large producer compared to other firms in the market.

Question 18

In a perfectly competitive industry, what influences the price?

A) the forces of supply and demand
B) individual sellers
C) the largest firms
D) individual buyers

Question 19

What is a perfectly competitive firm?

A) a price giver
B) a price taker
C) a price leader
D) a price maker

Question 20

Which of the following best resembles a perfectly competitive market?

A) the book publishing industry
B) the used car industry
C) a stock market
D) the steel industry

Question 21

For a perfectly competitive firm, which of the following does NOT describe average revenue?

A) It is equal to total revenue divided by the number of units sold.
B) It is equal to marginal cost at all levels of output.
C) It is equal to price at all levels of output.
D) It is equal to marginal revenue at all levels of output.

Question 22

When a firm is operating in a perfectly competitive market, which of the following best describes marginal revenue?

A) It is equal to zero when the market is in long-run equilibrium.
B) It is equal to price.
C) It is equal to the change in output divided by the change in total revenue.
D) It is always less than price.

Question 23

Which of the following best describes the marginal revenue of a perfectly competitive firm?

A) It is constant as output increases and is equal to price.
B) It increases as output increases.
C) It decreases as output increases.
D) It increases as output increases and is equal to price.

Question 24

Why does a perfectly competitive firm NOT have influence over price?

A) Antitrust laws constrain perfectly competitive firms.
B) Its output is insignificant relative to the market as a whole.
C) Consumers establish the prices of products.
D) It is unaware of the demand curve it faces.

Question 25

Farmer Brady sells wheat in a market where sellers are price takers. Which of the following is Farmer Brady's ideal production and pricing strategy?

A) It would be senseless for Farmer Brady to try to increase sales by lowering the price of his product since his entire output can be sold at the market price.
B) Since the market dictates the price of his product, Farmer Brad has no incentive to minimize per-unit production costs.
C) Since the market dictates the price of his product, Farmer Brady has no production decisions to make.
D) If Farmer Brady increases the price of his wheat, he will be able to increase the total production.

Question 26

FIGURE 8-2

Refer to Figure 8-2. The firm is now able to sell more of its lawn care services at a higher price. As a result of this, in what timeframe will the firm be able to earn economic profits?

A) in the short run only
B) at no time, since perfectly competitive firms always earn zero economic profits
C) in the long run
D) as long as it keeps its costs constant

Question 27

A firm sells apples in a perfectly competitive market at a price of $1.50 per kilogram. What is the firm's marginal revenue?

A) It is equal to $1.00.
B) It is equal to $1.50.
C) It is greater than $1.50.
D) It is less than $1.00.

Question 28

What is marginal revenue for a perfectly competitive firm equal to?

A) the addition to total cost from producing one more unit of output
B) marginal cost at all levels of output
C) average total cost at all levels of output
D) average revenue at all levels of output

Question 29

FIGURE 8-1

Refer to Figure 8-1. In Graph B, what is the result of the market demand decreasing from D₀ to D₁?

A) Both the market price and the price of the price-taking firm have increased to $5.
B) At the new equilibrium price, the firm will be unable to sell any of its output.
C) Both the market price and the price of the price-taking firm have fallen to $4.
D) The quantity of goods transacted in the market has fallen from Q1 to Q0.

Question 30

What will occur if a price-taking firm selling in a competitive market raises the price of its product above the market-clearing price?

A) It will maintain its profit base since the demand for the product is inelastic.
B) It will be able to increase its sales.
C) It will increase its profits.
D) It will not be able to sell any output.

Question 31

FIGURE 8-2

Refer to Figure 8-2. As a result of the change illustrated by Graph C, what is the individual firm now experiencing in Graph D?

A) no change in revenues
B) a loss in sales
C) an economic loss
D) economic profits

Question 32

Which of the following describes the horizontal demand curve facing an individual firm in a perfectly competitive market?

A) It is a reflection of the inelastic demand for its product.
B) It is maintained only with the help of high barriers to entry.
C) It is a reflection of the firm's small size relative to the total market.
D) It violates the law of demand, which states that demand curves slope downward.

Question 33

How will a profit-maximizing firm in a perfectly competitive market react to an increase in the short-run market demand curve?

A) It will increase output because the marginal revenue curve shifts upwards.
B) It will purchase more capital to increase its output.
C) It will decrease output because more firms will enter the industry.
D) It won't react because its demand curve is perfectly elastic.

Question 34

FIGURE 8-1

Refer to Figure 8-1. Graphs A and B together demonstrate the effect that a change in market demand has on the demand curve. Which of the following describes the firm that faces this situation?

A) It is a firm that is capable of changing the market price.
B) It is a firm that is producing a unique product.
C) It is a firm that is a price taker.
D) It is a firm that is capable of making long-run economic profits.

Question 35

FIGURE 8-1

Refer to Figure 8-1. In Graph A, what is the result of the market demand increasing from D₀ to D₁?

A) The quantity of goods transacted in the market has fallen from Q1 to Q0.
B) Both the market price and the price of the price-taking firm have fallen to $5.
C) Both the market price and the price of the price-taking firm have risen to $6.
D) At the new equilibrium price, the firm will be unable to sell any of its output.

Question 36

What is marginal revenue?

A) the addition to total revenue from selling one more unit of output
B) the addition to total output from hiring one more unit of labour
C) the addition to total profit from selling one more unit of output
D) the additional cost incurred from producing one more unit of output

Question 37

FIGURE 8-2

Refer to Figure 8-2. Using Graph C (a movement from D₀ to D₁), which of the following statements does NOT describe the diagram?

A) There has been an increase in supply in the market.
B) The equilibrium price in the market has increased from P0 to P1.
C) There has been an increase in demand in the market.
D) There has been a change in quantity supplied from Q0 to Q1.

Question 38

If a firm produces in the short run, at what output are profits maximized?

A) where marginal revenue is at its maximum
B) where marginal revenue is equal to marginal cost
C) where marginal revenue exceeds marginal cost by the greatest amount
D) where marginal revenue is less than marginal cost

Question 39

In a price taker's market, how does the elasticity of the market demand curve compare with the elasticity of a single firm's demand curve?

A) Both demand curves have the same elasticity.
B) The firm's demand curve is perfectly elastic, while the elasticity of demand at the industry level varies along a downward-sloping curve.
C) The firm's elasticity of demand varies along a downward-sloping curve, while the industry demand curve is perfectly elastic.
D) Both demand curves are perfectly elastic.

Question 40

At what output does a perfectly competitive firm maximize its profit?

A) when marginal cost equals average total cost
B) when average cost equals average revenue
C) when total revenue equals total cost
D) when marginal cost equals marginal revenue

Question 41

TABLE 8-1

Refer to Table 8-1. What is the value of the variable X?

A) $0
B) $50
C) $20
D) $40

Question 42

Under what circumstances will a price-taking firm tend to expand its output?

A) when its price exceeds average variable cost and its marginal revenue is less than the market price
B) when its price exceeds average variable cost and its marginal revenue is greater than the market price
C) when its price exceeds average variable cost and its marginal revenue is positive
D) when its price exceeds average variable cost and its marginal cost is less than the market price

Question 43

TABLE 8-1

Refer to Table 8-1. What is the AFC of producing two units of output?

A) $0
B) $25
C) $50
D) $100

Question 44

FIGURE 8-3

Refer to Figure 8-3. Suppose the market price equals $88 and the firm is currently producing 600 units of output. In this situation, what can we conclude about the firm?

A) It is maximizing profit.
B) It should increase production of output in order to maximize profit.
C) It should decrease production of output in order to maximize profit.
D) It should shut down in order to minimize economic losses.

Question 45

What quantity of output will a profit-maximizing firm in a perfectly competitive market always produce at?

A) at a quantity that maximizes the amount by which total revenue exceeds total cost
B) at a quantity that brings average total cost and price into equality
C) at a quantity that minimizes the per-unit cost of production
D) at a quantity that is expected to maximize total revenue

Question 46

TABLE 8-1

Refer to Table 8-1. What is the AVC of producing three units of output?

A) $15
B) $31.66
C) $45
D) $50

Question 47

FIGURE 8-3

Refer to Figure 8-3. When the market price equals $105 and the firm sells 675 units of output, what can we conclude about the firm?

A) It is experiencing a loss, but should continue operating temporarily because business conditions may improve.
B) It is earning positive economic profits.
C) It is earning a normal profit.
D) It is experiencing a loss and should shut down.

Question 48

If a profit-maximizing firm finds that price exceeds average variable cost and marginal revenue is greater than marginal cost, what action should it take?

A) not alter its production level, since it is earning a profit
B) reduce output, but continue producing in the short run
C) shut down
D) increase output

Question 49

If a perfectly competitive firm is operating in the short run and seeks to maximize profit, what action should the firm take?

A) Choose the output where per-unit profit is greatest.
B) Increase output whenever price exceeds marginal cost.
C) Increase output whenever marginal revenue is less than marginal cost.
D) Increase output whenever marginal cost is less than average total cost.

Question 50

FIGURE 8-4

Refer to Figure 8-4. What does Graph B illustrate?

A) a price-taking firm that will lose money when the market price equals $4.90
B) a price-taking firm that will break even when the market price equals $4.90
C) a price-taking firm that will shut down when the market price equals $4.90
D) a price-taking firm that will make an economic profit when the market price equals $4.90

Question 51

Under what circumstance will a firm in a perfectly competitive industry expand output?

A) as long as marginal cost is less than marginal revenue
B) as long as marginal revenue is less than average revenue
C) as long as marginal revenue is less than average total cost
D) as long as marginal cost is less than average total cost

Question 52

FIGURE 8-3

Refer to Figure 8-3. When the market price equals $54, what action should the firm take?

A) Continue operating temporarily despite an economic loss, because the firm is able to cover all of its variable costs.
B) Continue operating, because the firm is making a profit.
C) Shut down.
D) Continue operating temporarily despite an economic loss, because the firm is able to cover a portion of its fixed costs.

Question 53

TABLE 8-1

Refer to Table 8-1. What is the value of the variable Y?

A) $0
B) $12
C) $16
D) $28

Question 54

TABLE 8-1

Refer to Table 8-1. What is the value of the variable Z?

A) -$40
B) -$38
C) -$35
D) $0

Question 55

TABLE 8-1

Refer to Table 8-1. What is the value of the variable V?

A) $0
B) $50
C) $20
D) $70

Question 56

When the marginal cost of a price-taking firm is less than the market price of its product, what action should the firm take?

A) charge more than the market price
B) expand output (provided that price is not less than average variable cost)
C) reduce output (provided that price is not less than average variable cost)
D) maintain output (provided that price is not less than average variable cost)

Question 57

If a profit-maximizing firm finds that price exceeds average variable cost and marginal cost is greater than marginal revenue, what action should it take?

A) reduce output, but continue producing in the short run
B) shut down
C) increase output
D) not alter its production level, since it is earning a profit

Question 58

FIGURE 8-4

Refer to Figure 8-4. If the market price increased to $5 in Graph B, what action should this firm take?

A) Decrease the production of output.
B) Immediately shut down.
C) Continue producing the same level of output.
D) Increase the production of output.

Question 59

FIGURE 8-4

Refer to Figure 8-4. What does Graph A illustrate?

A) a price-taking firm making a profit of $400
B) a price-taking firm making a profit of $80
C) a price-taking firm experiencing a loss of $400
D) a price-taking firm experiencing a loss of $80

Question 60

TABLE 8-1

Refer to Table 8-1. What is the value of the variable W?

A) $0
B) $50
C) $62
D) $64

Question 61

FIGURE 8-6

Refer to Figure 8-6. How is the short-run loss for this firm represented?

A) PABP1
B) 0P1Aq
C) 0P1Bq
D) 0PAq

Question 62

Darlene runs a fruit and vegetable stand in a medium-sized community where there are many such stands. Her weekly total revenue equals $2000. Her weekly total cost of running the stand equals $3500, consisting of $2500 of variable costs and $1000 of fixed costs. What would an economist likely advise Darlene to do?

A) Keep the stand open for a while longer, because she is covering all of her variable costs and some of her fixed costs.
B) Keep the stand open, because it is generating an economic profit.
C) Keep the stand open for a while longer, because she is covering all of her fixed costs and some of her variable costs.
D) Shut down as quickly as possible in order to minimize her losses.

Question 63

The figure below shows the price, marginal cost, and average cost curves of a perfectly competitive firm.
FIGURE 8-5

Refer to Figure 8-5. How many units of output per day should the firm produce if it wants to maximize its profits (i.e., minimize its losses)?

A) 0
B) 30
C) 70
D) 100

Question 64

Darlene runs a fruit and vegetable stand in a medium-sized community where there are many such stands. Her weekly total revenue equals $3500. Her weekly total cost of running the stand equals $3500, consisting of $2500 of variable costs and $1000 of fixed costs. What would an economist likely advise Darlene to do?

A) Shut down as quickly as possible, because the stand is generating losses.
B) Keep the stand open for a while longer, because she is covering all of her variable costs and some of her fixed costs.
C) Keep the stand open, because it is generating a normal profit.
D) Keep the stand open for a while longer, because she is covering all of her fixed costs and some of her variable costs.

Question 65

FIGURE 8-6

Refer to Figure 8-6. If P represents the market price for a price-taking firm, what is the best course of action in the short run for the firm?

A) Shut down immediately.
B) Continue operating because average total cost exceeds price.
C) Continue operating because average variable cost exceeds price.
D) Continue operating because price exceeds average variable cost.

Question 66

FIGURE 8-4

Refer to Figure 8-4. What is total revenue for the firm in Graph C?

A) $120
B) $150
C) $600
D) $720

Question 67

FIGURE 8-4

Refer to Figure 8-4. What are total costs for the firm in Graph B at a market price of $4.90?

A) $4.90
B) $470
C) $500
D) $490

Question 68

The figure below shows the price, marginal cost, and average cost curves of a perfectly competitive firm.
FIGURE 8-5

Refer to Figure 8-5. What is the profit earned each day by a profit-maximizing (loss-minimizing) firm?

A) -$200
B) -$150
C) -$50
D) $0

Question 69

FIGURE 8-4

Refer to Figure 8-4. What is total revenue for the firm in Graph B at a market price of $4.90?

A) $0
B) $4.90
C) $490
D) $500

Question 70

FIGURE 8-6

Refer to Figure 8-6. What area represents total revenue for the firm when price equals P?

A) 0qAP
B) 0P1B
C) 0P1Bq
D) PABP1

Question 71

Darlene runs a fruit and vegetable stand in a medium-sized community where there are many such stands. Her weekly total revenue equals $3000. Her weekly total cost of running the stand equals $3500, consisting of $2500 of variable costs and $1000 of fixed costs. What would an economist likely advise Darlene to do?

A) Keep the stand open for a while longer, because she is covering all of her variable costs and some of her fixed costs.
B) Keep the stand open for a while longer, because she is covering all of her fixed costs and some of her variable costs.
C) Shut down as quickly as possible in order to minimize her losses.
D) Keep the stand open, because it is generating an economic profit.

Question 72

"I'm losing money, but since my fixed costs are so high, I simply cannot afford to shut down." If the firm were attempting to maximize profit, what can we conclude about this decision?

A) It may be incorrect since a firm should shut down whenever price falls below average total cost in the short run.
B) It may be incorrect because a firm experiencing economic losses should never continue to operate.
C) It may be correct if the firm is covering all of its variable costs and expects the price of its product to rise in the near future.
D) It may be correct if price is less than average variable cost.

Question 73

For a perfectly competitive firm in short-run equilibrium, if the price is between AVC and ATC, what can we conclude?

A) that economic profits will be negative
B) that accounting profits will be negative
C) that the firm will not produce
D) that the loss will be equal to total fixed costs

Question 74

Under what circumstances will a profit-maximizing firm that is operating in the short run sell an additional unit of output?

A) as long as doing so reduces the firm's per-unit costs
B) as long as doing so adds more to revenue than it adds to cost
C) as long as there is additional plant capacity with which to produce
D) as long as doing so reduces the firm's marginal costs

Question 75

The figure below shows the price, marginal cost, and average cost curves of a perfectly competitive firm.
FIGURE 8-5

Refer to Figure 8-5. What action should the firm take?

A) They should keep operating temporarily in order to minimize losses, since price exceeds average total cost.
B) They should keep operating temporarily in order to minimize losses, since price exceeds average variable cost.
C) They should shut down in order to minimize losses.
D) They should decrease output to 30 units, since marginal revenue exceeds marginal cost by the greatest dollar amount at that level of output.

Question 76

FIGURE 8-4

Refer to Figure 8-4. What is total revenue for the firm in Graph A?

A) $40
B) $80
C) $320
D) $400

Question 77

What is the short-run supply curve of a perfectly competitive firm?

A) the marginal cost above average variable cost
B) the average total cost curve
C) the average variable cost above the average fixed cost
D) the same as the demand curve

Question 78

FIGURE 8-4

Refer to Figure 8-4. If the market price decreased to $4.70 in Graph B, what action should this firm take?

A) Continue producing the same level of output.
B) Increase the production of output.
C) Immediately shut down if price is greater than average variable cost.
D) Decrease the production of output.

Question 79

A perfectly competitive firm's supply curve is the upward-sloping portion of the marginal cost curve. What does this lie above?

A) the marginal revenue
B) the average fixed cost
C) the average variable cost
D) the average total cost

Question 80

FIGURE 8-4

Refer to Figure 8-4. What does Graph C exhibit?

A) a price-taking firm experiencing a loss of $600
B) a price-taking firm experiencing a loss of $120
C) a price-taking firm making a profit of $120
D) a price-taking firm making a profit of $720