Deck 5: Extreme Markets I: Perfect Competition

Question 1

If the cost of production of the firms in a perfectly competitive market differs the resulting long-run supply curve will be an upward rising step function.

Answer 1

True

Question 2

The breakeven price of a perfectly competitive firm is obtained at the point of intersection between the marginal revenue and marginal cost curves.

Answer 2

False

Question 3

Which of the following is true in a perfectly competitive market?

A)The sellers can partially influence the price level in the market.
B)All firms have identical costs.
C)Entry or exit of new sellers into the market is restricted.
D)Buyers and sellers have incomplete information about the product and the market.

Answer 3

C

Question 4

In a perfectly competitive market, firms are not restricted from entering or leaving an industry in response to profits or losses.

Question 5

In a perfectly competitive market, buyers are completely aware of the asking prices of sellers but sellers are unaware of the bids placed by buyers.

Question 6

In the long run, producers do not incur any fixed cost as all inputs are variable.

Question 7

Even when two goods are perfect substitutes one can sell at a premium over the other depending on the tastes and preferences of the consumers.

Question 8

In a perfectly competitive market, the demand curve faced by each firm is:

A)highly inelastic.
B)perfectly elastic.
C)perfectly inelastic.
D)less elastic.

Question 9

Assume that there are two types of perfectly competitive firms whose cost of production differ.An increase in input prices will lead to an exodus of high cost firms before low cost ones.

Question 10

When a perfectly competitive firm is in long-run equilibrium, it and all other firms are on the lowest point of their average cost curves.

Question 11

Assume that buyers are aware of the similarities between the products sold by two dairy farms.The dairy producers can still practice price discrimination through advertisement and salesmanship.

Question 12

The long-run supply curve of a market for eggs is perfectly inelastic.

Question 13

A fall in demand for a commodity in a perfectly competitive market will shift the long-run supply curve to the right.

Question 14

The economists of the Federal Trade Commission suggested rejection of Coke's merger with Dr.Pepper as it could:

A)increase overall competition in the soft drinks industry.
B)lower Coke's share in the carbonated and soft drinks market.
C)reduce the profitability of the entire soft drinks industry.
D)allow Coke to profitably raise its prices by 5 to 10 percent.

Question 15

Assume that a rise in petroleum prices increases the cost of milk transportation from the dairies to the market.We can expect the long-run supply curve in this industry to shift downward.

Question 16

A set of producers is competitive if:

A)the good produced by one can be differentiated from the other.
B)each supplies a complement of what the others produce.
C)each supplies a substitute for what the others produce.
D)the good produced by one can be used as an input by other producers.

Question 17

Firms in a perfectly competitive market usually enter or leave an industry in the short-run and not in the long-run.

Question 18

If there are only a few producers of substitutes for Good X, a merger between producers of Good X and any one of them could significantly _____ for Good X.

A)decrease the elasticity of demand.
B)increase the elasticity of supply.
C)decrease the elasticity of supply.
D)increase the elasticity of demand.

Question 19

The long run supply curve to a market depends on the characteristics of the firms that currently operate in it.Thus, the latter will be more elastic than the short-run supply curve.

Question 20

In the market for oranges, availability of substitutes limits a single seller's power over price.

Question 21

Figure 5-1
In the figure given below MC denotes the marginal cost and AC denotes the average cost of a firm under perfect competition.
Refer to Figure 5-1.Which of the following points represents the long-run equilibrium price-output combination?

A)E0
B)E3
C)E1
D)E2

Question 22

If the cost of production incurred by two producers in a competitive industry differs, the long-run supply curve:

A)will be a downward sloping step function.
B)will be an upward rising step function.
C)will be a horizontal line at the market price.
D)will be a vertical line at the equilibrium output.

Question 23

A(n) _____ perceives the demand for its own output as horizontal at the market price, so it can produce as much or as little as it wants without affecting that price.

A)oligopolist
B)monopsonist
C)monopolist
D)perfect competitor

Question 24

Which of the following conditions define the short-run for any industry?

A)Firms do not incur a fixed cost.
B)Firms incur both fixed as well as variable costs.
C)Firms can easily enter and leave the market.
D)Firms can enter but cannot leave the market.

Question 25

Table 5-1

Refer to Table 5-1.Suppose the price of the commodity increases to $8 per unit.Which of the following situations will be observed in the market?

A)Type C firms will enter the market and drive up the price level to $10 per unit.
B)Type B firms will enter the market and drive down the price level to $6 per unit.
C)Type A firms will continue to supply the entire output earning supernormal profit.
D)Type A firms will leave the market while Type B firms will take their place.

Question 26

Figure 5-1
In the figure given below MC denotes the marginal cost and AC denotes the average cost of a firm under perfect competition.
Refer to Figure 5-1.What will be the long run effect of the increase in demand (from Q₀ to Q₁) in this market?

A)The profit earned by the firm will increase.
B)The firm will break even at the new equilibrium.
C)The loss incurred by the firm will decrease.
D)The firm will shut down completely.

Question 27

Table 5-1

Refer to Table 5-1.Suppose the price level in the market is at $6 per unit and the quantity demanded is 3,500 units.However, an increase in the fuel costs drives up the variable cost incurred by both Type A and Type B firms by $2.50 per unit.Which of the following situations will arise?

A)Type A firms will be able to supply the 3,500 units demanded and will earn a profit.
B)Type A firms will leave the market until the price level increases to cover the variable cost.
C)Both Type A and Type B firms will reduce production until the price level increases to cover the variable cost.
D)Both Type A and Type B firms will increase production to lower the average variable cost.

Question 28

Economists consider the model of perfect competition useful because:

A)it is a standard for analyzing producer and consumer benefits.
B)its assumptions exactly fit into actual conditions in some markets.
C)its assumptions can be easily replaced with realistic ones.
D)it is a standard for analyzing consumer choices.

Question 29

Figure 5-2
Given below is a perfectly competitive firm under long run equilibrium.AC and MC represent the average cost and the marginal cost incurred by the firm.P₀ is the equilibrium price level while Q₀ is the equilibrium output.
Refer to Figure 5-2.What will be the impact of the rise in raw materials cost on the long-run supply curve of this industry?

A)The long-run supply curve will shift upward.
B)The long-run supply curve will shift downward.
C)The long-run supply curve will remain unchanged.
D)The long-run supply curve will change into an upward rising step function.

Question 30

The long-run supply curve of a perfectly competitive market is a:

A)an upward rising step function.
B)a downward sloping step function.
C)a vertical line at the market price.
D)a horizontal line at the market price.

Question 31

Figure 5-2
Given below is a perfectly competitive firm under long run equilibrium.AC and MC represent the average cost and the marginal cost incurred by the firm.P₀ is the equilibrium price level while Q₀ is the equilibrium output.
Refer to Figure 5-2.Suppose the cost of raw materials used in production increases.Which of the following changes will be observed?

A)Both the AC and the MC curves will shift upward.
B)Only the MC curve will shift upward.
C)Only the AC curve will shift downward.
D)Both the AC and the MC curves will shift downward.

Question 32

Figure 5-1
In the figure given below MC denotes the marginal cost and AC denotes the average cost of a firm under perfect competition.
Refer to Figure 5-1.Suppose the demand for the commodity increases to Q₁, what will be the effect on the price level in the short run?

A)The price level will rise above $5.
B)The price level will remain at $3.
C)The price level will rise above $3 but will remain below $5.
D)The price level will rise to $5.

Question 33

Figure 5-1
In the figure given below MC denotes the marginal cost and AC denotes the average cost of a firm under perfect competition.
Refer to Figure 5-1.What will be the effect of the increase in demand (from Q₀ to Q₁) on the short run supply curve?

A)The short-run supply curve will shift to the right.
B)The short-run supply curve will shift to the left.
C)The short-run supply curve will become steeper.
D)The short-run supply curve will become flatter.

Question 34

Table 5-1

Refer to Table 5-1.Suppose the demand for the commodity rises from 3,200 units to 3,500 units and the market price increases to $5.Which of the following situations will be observed?

A)Type A will supply 3,200 units and earn normal profits while Type B will supply the remaining at a loss.
B)Type A and Type B firms will jointly supply 3,500 units and both will break even.
C)Type A firms will supply 3,200 units and Type B will supply the rest.
D)Type A firms will supply 3,500 units and earn supernormal profit.

Question 35

Figure 5-1
In the figure given below MC denotes the marginal cost and AC denotes the average cost of a firm under perfect competition.
Refer to Figure 5-1.What will be the long-run impact of the increase in demand (from Q₀ to Q₁) on the price level in this industry?

A)The price level will decline below $3.
B)The price level will be at $3.
C)The price level will be at $5.
D)The price level will rise above $5.

Question 36

The short-run supply curve of a perfectly competitive industry with firms having identical costs is:

A)a horizontal line at the market price.
B)a vertical line at the equilibrium output.
C)an upward rising curve.
D)a downward sloping step function.

Question 37

Which of the following conditions define a perfectly competitive market?

A)The transaction costs are very high.
B)Information is available to participants at a high cost.
C)The product is homogenous.
D)There are limited number of buyers and sellers.

Question 38

Figure 5-2
Given below is a perfectly competitive firm under long run equilibrium.AC and MC represent the average cost and the marginal cost incurred by the firm.P₀ is the equilibrium price level while Q₀ is the equilibrium output.
Refer to Figure 5-2.What impact will the increase in raw material cost have on the long-run equilibrium price level?

A)The equilibrium price level will be stable at P0 and the firms will break even.
B)The equilibrium price level will fall below P0 and the firms will incur a loss.
C)The equilibrium price level will rise above P0 and the firms will break even.
D)The equilibrium price level will rise above P0 and the firms will earn profit.

Question 39

Table 5-1

Refer to Table 5-1.Suppose initially 3,200 units are demanded at a price of $3 per unit.What will be the quantity of output supplied by each type of firm in the market?

A)Type A and Type B will jointly supply 3,000 units while Type C will supply 200 units.
B)Type A firms will supply 3,000 units, while the remaining 200 units will be supplied by Type B.
C)Type A firms will supply the entire 3,200 units, while Type B and Type C firms will not enter the market.
D)Type A and Type B will each supply 1,600 units, Type C will not enter the market.

Question 40

Figure 5-1
In the figure given below MC denotes the marginal cost and AC denotes the average cost of a firm under perfect competition.
Refer to Figure 5-1.When the demand increases to Q₁, in the short run the firm will be:

A)earning a loss.
B)earning a profit.
C)operating at the break-even point.
D)operating at the shut-down point.

Question 41

If the long-run market supply curve is perfectly elastic, a decrease in variable cost will:

A)shift the supply curve upward to a higher market-clearing price level.
B)shift the supply curve downward to a lower market-clearing price level.
C)shift the supply curve to the right to a higher market-clearing output.
D)shift the supply curve to the left to a lower market-clearing output.

Question 42

Assume that recent oil exploration coupled with a fall in demand reduced petroleum imports of a nation to zero.We can expect:

A)the domestic price of petroleum to fall below the world price.
B)the world price of petroleum to fall to equal the domestic price.
C)petroleum exported by the domestic producers to increase.
D)petroleum exported by the domestic producers to decrease.

Question 43

State any two properties of the perfectly competitive market.

Question 44

When the existing firms in a competitive industry have different operating costs:

A)the highest-cost firm in operation breaks even, while the low cost firms will earn profit.
B)the highest-cost firm in operation breaks even, while the low cost firms leave the industry.
C)the low cost firms earn a larger profit than the high-cost firms.
D)the highest-cost firms will incur a deadweight loss.

Question 45

Figure 5-3
In the figure given below, D₁ and D₂ represent the demand curves for land before and after the ethanol program respectively.SRS is the short-run supply curve of land.
Refer to Figure 5-3.What will be the shape of the long-run supply curve of land suitable for corn farming?

A)The long-run supply curve of land suitable for corn farming will be perfectly inelastic.
B)The long-run supply curve of land suitable for corn farming will be perfectly elastic.
C)The long-run supply curve of land suitable for corn farming will be less elastic than the short-run supply curve.
D)The long-run supply curve of land suitable for corn farming will be more elastic than the short-run supply curve.

Question 46

Assume that the government of a nation rations the crude oil available to car owners each month which reduces the overall demand for petroleum.However, the nation continues to import oil from the world market.Which of the following will be observed in the oil market?

A)The world price of petroleum would decline.
B)The domestic price of petroleum would decline.
C)The domestic price of petroleum would increase.
D)The world price of petroleum will remain unaffected.

Question 47

Assume that the government of a nation prohibits producers from extracting crude oil from some domestic oil fields.Which of the following will be witnessed in the market for crude oil?

A)The domestic and world price of crude oil would remain unaffected.
B)The domestic price of crude oil would increase.
C)Oil import from the world market would decline.
D)The world price of crude oil would increase.

Question 48

How is the short-run supply curve of a perfectly competitive market different from the long-run supply curve?

Question 49

Which of the following situations resulted from the North American Free Trade Agreement (NAFTA)?

A)The cost of tortillas in Mexico decreased.
B)Corn export to the U.S.from Mexico declined.
C)Corn export to the U.S.from Mexico increased.
D)The cost of tortillas in the U.S.increased.

Question 50

Assume that the world price of Commodity X is $9 per unit while its domestic price is $8, and the marginal cost of production is $6 per unit.If the government imposes a price ceiling of $7 on domestic output:

A)the import of Commodity X from the world market would stop.
B)the world price of Commodity X would decline.
C)a surplus of Commodity X would accumulate in the domestic market.
D)a shortage of Commodity X would be observed in the domestic market.

Question 51

Which of the following products witnessed a high growth in the number of producers within a few years of market introduction, but was followed by a fast and substantial shakeout?

A)Tortilla
B)Penicillin
C)Livestock
D)Fastfood

Question 52

Assume that the world price of Good A is $8 per unit while its domestic price is $6, and the marginal cost incurred by domestic producers for producing one unit of Good A is $5.If the government imposes a tax of $3 per unit on domestic producers, which of the following situations will be observed?

A)The tax will increase the price of Good A in the domestic market.
B)The tax will increase the world price of Good A.
C)The tax will decrease the profit earned by domestic producers.
D)The tax will decrease the price of Good A in the domestic market.

Question 53

Suppose the cost of raw materials used by the cotton industry rises to a larger extent compared to the increase in demand in the market.Which of the following situations will arise?

A)The incidence of the higher cost will fall completely on the consumers.
B)The incidence of the higher cost will fall completely on the high cost firms.
C)The incidence of the higher cost will fall completely on the low cost firms.
D)The incidence of the higher cost will fall partially on the consumers and partially on the sellers.

Question 54

Suppose a legislation passed by the government encourages domestic oil exploration thereby reducing petroleum imports substantially.If the cost of production is uniform for all producers, which of the following will be observed in the petroleum market?

A)The world price of petroleum would decline.
B)The domestic price of petroleum would decline.
C)The world price of gasoline will remain unaffected.
D)Crude oil consumption in the domestic and the world market would decrease.

Question 55

How is the short run response to a change in demand or cost condition different from the long run response in a perfectly competitive market?

Question 56

Figure 5-3
In the figure given below, D₁ and D₂ represent the demand curves for land before and after the ethanol program respectively.SRS is the short-run supply curve of land.
Refer to Figure 5-3.What will be the impact of the ethanol program on the long-run equilibrium price level for land suitable for corn cultivation?

A)The price level will settle between $6 and $9.
B)The price level will settle at $6.
C)The price level will settle at $9.
D)The price level will be above $9.

Question 57

Figure 5-3
In the figure given below, D₁ and D₂ represent the demand curves for land before and after the ethanol program respectively.SRS is the short-run supply curve of land.
Refer to Figure 5-3.What will be the shape of the long-run supply curve of land suitable for corn farming?

A)The long-run supply curve of land suitable for corn farming will be perfectly inelastic.
B)The long-run supply curve of land suitable for corn farming will be perfectly elastic.
C)The long-run supply curve of land suitable for corn farming will be less elastic than the short-run supply curve.
D)The long-run supply curve of land suitable for corn farming will be more elastic than the short-run supply curve.

Question 58

If firms in a perfectly competitive market have dissimilar cost curves what will be the shape of the long-run supply curve?

Question 59

Which of the following commodities have a high short-run own-price elasticity of supply?

A)Livestock
B)Petroleum
C)Food crops
D)Diamonds

Question 60

Suppose beer producers in Munich became aware of the low price of one barrel of beer in the domestic market relative to that in the United States.What will be the impact of this price difference?

A)Beer production in Munich will decline.
B)Price of beer in the domestic market will increase.
C)Beer production in the U.S.will increase.
D)Beer consumption in the domestic market will increase.

Question 61

State two characteristics of the long-run equilibrium under perfect competition.

Question 62

Why do economists prefer to use the model of perfect competition in most economic analysis?

Question 63

Describe the long-run adjustment to a change in demand in a perfectly competitive market where firms operate with two types of cost structures.

Question 64

When will the long-run supply curve of a perfectly competitive market shift upward?

Question 65

What is the short-run breakeven point of operation in a perfectly competitive market?

Question 66

State some of the policies adopted by the U.S.government to check petroleum prices.

Question 67

Discuss the conditions that define perfect competition.

Question 68

Was the U.S.government able to control the world petroleum prices? Support your choice with suitable reasons.