Deck 6: Perfect Competition

Question 1

Consumers do not have a strong preference for the output of one seller over that of another in a perfectly competitive market because

A) there a large number of firms in the market.
B) the firms sell a standardized product.
C) there are no barriers to entry.
D) an individual firm has control over price.

Answer 1

the firms sell a standardized product.

Question 2

A market where individual firms cannot affect the market price of their good is most likely

A) a monopoly market.
B) an oligopoly market.
C) a monopolistically competitive market.
D) a perfectly competitive market.

Answer 2

a perfectly competitive market.

Question 3

A market in which firms sell a homogeneous product and cannot influence market price is most likely

A) a perfectly competitive market.
B) an oligopoly.
C) a monopolistically competitive market.
D) a monopoly market.

Answer 3

a perfectly competitive market.

Question 4

Who are the price takers in a perfectly competitive market?

A) both the buyers and the sellers
B) the buyers
C) neither the buyers nor the sellers
D) the sellers

Question 5

A perfectly competitive firm can

A) affect the market price for its good.
B) sell as much as it can produce at the market price.
C) prevent entry of other firms into their market.
D) collude with its competitors to set prices.

Question 6

Firms in a perfectly competitive market

A) sell a differentiated product.
B) sell homogeneous products.
C) usually have large advertising budgets.
D) try to attract customers away from their competitors.

Question 7

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

A) a large number of firms in a market
B) selling a standardized product
C) substantial barriers to entry
D) an individual firm having no control over price

Question 8

Which of the following is the best example of a perfectly competitive firm?

A) DeBeers Diamond Company
B) your local cable television company
C) Tino's Italian Eatery, a local restaurant
D) Jones's wheat farm in eastern Washington

Question 9

A firm that can sell as much as it can produce at the market price is likely operating in

A) a perfectly competitive market.
B) a monopoly market.
C) a monopolistically competitive market.
D) an oligopoly market.

Question 10

Which of the following statements about a perfectly competitive market is INCORRECT?

A) There are many sellers, each supplying a small quantity.
B) There are many buyers, each purchasing a small quantity.
C) The market sell homogeneous products.
D) Buyers and sellers cannot enter exit the market freely.

Question 11

In a market for a homogeneous good, if sellers and buyers can enter or exit a market freely, the market is most likely

A) an oligopoly.
B) a monopolistically competitive market.
C) a monopoly.
D) a perfectly competitive market.

Question 12

What is the characteristic of a perfectly competitive firm that causes it to be a price taker?

A) many buyers and sellers
B) homogeneous product
C) free entry and exit
D) Both A and B are correct.

Question 13

A price taker is a buyer or a seller who

A) takes the market price as given.
B) buys or sells only at a price where profits can be made.
C) accepts whatever price that the government legislates as the price of the good or service.
D) has the ability to influence the equilibrium price in the market.

Question 14

A perfectly competitive market

A) is dominated by one firm.
B) consists of at most five firms.
C) is made up of a large number of firms.
D) consists of only one firm.

Question 15

In which of the following market structures do you find many sellers?

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

Question 16

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

A) a small number of firms in a market
B) selling a standardized product
C) no barriers to entry
D) an individual firm having no control over price

Question 17

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

A) a large number of firms in a market
B) selling a standardized product
C) no barriers to entry
D) all of the above

Question 18

In which of the following market structures do you find no barriers to entry?

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

Question 19

A price maker is a buyer or a seller who

A) takes the market price as given.
B) buys or sells only at a price where profits can be made.
C) accepts whatever price that the government legislates as the price of the good or service.
D) has the ability to influence the equilibrium price in the market.

Question 20

How does the firm-specific demand curve in a perfectly competitive market compare to that in a monopoly?

A) The firm-specific demand curve in a perfectly competitive market is horizontal. The demand curve in a monopoly is downward sloping.
B) They are the same.
C) The firm-specific demand curve in a perfectly competitive market is horizontal. The demand curve in a monopoly is upward sloping.
D) The firm-specific demand curve in a perfectly competitive market is vertical. The demand curve in a monopoly is horizontal.

Question 21

What are the characteristics of monopolies?

Question 22

Toby sells wheat in a perfectly competitive market. The demand curve for Toby's wheat is

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

Question 23

Monopolistically competitive industries are characterized by no barriers to entry.

Question 24

What are the characteristics of oligopoly?

Question 25

Farmer Brown sells her wheat in a perfectly competitive market. Suppose the current market price of wheat is $2.50 per bushel.

A) Farmer Brown can sell as much wheat as she likes at $2.50 per bushel.
B) Farmer Brown can charge any price for her wheat, but will maximize profit if she sells for less than $2.50.
C) Farmer Brown should charge more than $2.50.
D) Farmer Brown can charge more than $2.50 and still sell some wheat.

Question 26

Recall the Application about the wireless phone service provided by thousands of entrepreneurial women in Pakistan to answer the following question(s).
Recall the Application. What makes the wireless telephone market in Pakistan perfectly competitive?

A) There are many buyers and many sellers.
B) Any entrepreneur who invests $310 can enter the market.
C) Wireless phone calls are a standardized product.
D) All of the above are correct.

Question 27

What are the characteristics of perfect competition?

Question 28

Monopolies are characterized by a firm demand curve that is more elastic than the market demand curve.

Question 29

Oligopolies are characterized by many firms.

Question 30

A perfectly competitive market is one where

A) each firm controls the price charged for its product by changing the quantity they produce.
B) each firm sells at the government mandated price.
C) each firm within the market must sell its good at the market price.
D) a firm can affect market price by increasing output.

Question 31

What are the similarities between perfect competition and monopolistic competition?

Question 32

If the demand curve faced by a firm is horizontal, then the firm is ________ and a ________.

A) perfectly competitive; price taker
B) perfectly competitive; price maker
C) a monopoly; price taker
D) monopoly; price maker

Question 33

If a firm is a price taker, the demand curve faced by the firm is

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

Question 34

Perfect competition is characterized by many firms and no barriers to entry.

Question 35

What are the four types of market structure?

Question 36

A perfectly competitive firm has no control over the price that it charges.

Question 37

Recall the Application about the wireless phone service provided by thousands of entrepreneurial women in Pakistan to answer the following question(s).
Recall the Application. Because the average earnings of the "wireless women" in Pakistan are three times the average wage rate, then we would expect that in the long run

A) more entrepreneurs would exit the market.
B) more entrepreneurs would enter the market.
C) the earnings of wireless women would increase.
D) the cost of making a wireless call in Pakistan would increase.

Question 38

In which of the following market structures can you find differentiated products?

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

Question 39

What are the characteristics of monopolistic competition?

Question 40

Recall the Application about the wireless phone service provided by thousands of entrepreneurial women in Pakistan to answer the following question(s).
Recall the Application. What makes the wireless telephone market in the United States NOT perfectly competitive?

A) There are many buyers and many sellers in the United States.
B) It is very expensive to enter the market in the United States.
C) Wireless phone calls are a standardized product.
D) All of the above are correct.

Question 41

Figure 6.1 shows the cost structure of a firm in a perfectly competitive market. If the market price is $40, the firm's profit maximizing output level is

A) 500.
B) 650.
C) 900.
D) 1,200.

Question 42

Compact discs are sold in a perfectly competitive market. The current market price of compact discs is $15. If at the current level of production of compact discs you calculate the marginal cost to your company is also $15, and that AVC is rising, in the short run your company should

A) produce more compact discs.
B) produce fewer compact discs.
C) continue producing the current level of compact discs.
D) raise the price of its compact discs.

Question 43

Alex's Furniture Mart produces and sells tables in a perfectly competitive market. When Alex's Furniture Mart produces and sells 250 tables, its marginal cost is equal to $200, and AVC is rising. If the market price of tables is equal to $150, Alex's Furniture Mart should

A) decrease its level of table production.
B) increase its level of table production.
C) continue producing 250 tables.
D) raise the price of its tables.

Question 44

Figure 6.1 shows the cost structure of a firm in a perfectly competitive market. If the market price is $40 and the firm is currently producing the profit maximizing output level, its total variable cost is

A) $12,500.
B) $14,300.
C) $19,800.
D) $27,000.

Question 45

Jerry's Quarry sells building stone in a perfectly competitive market. At its current level of building stone production, Jerry's Quarry has marginal costs equal to $45, and AVC is rising. If the market price of building stone is $50, Jerry's Quarry should

A) decrease its level of building stone production.
B) continue producing its current level of production.
C) increase its production of building stone.
D) shut down and produce no building stone.

Question 46

Figure 6.1 shows the cost structure of a firm in a perfectly competitive market. If the market price is $40 and the firm is currently producing the profit maximizing output level, its total fixed cost is

A) $2,800.
B) $5,200.
C) $7,200.
D) $9,000.

Question 47

Brodie sells fish in a perfectly competitive market. Suppose the current market price of fish is $4.50 per pound.

A) Brodie can sell as many fish as he can catch at $4.50 per pound.
B) Brodie can charge any price he likes for his fish, but will maximize profit if he sells for less than $4.50.
C) Brodie should charge more than $4.50.
D) Brodie can charge more than $4.50 and still sell some fish.

Question 48

Marginal revenue is equal to price for a perfectly competitive firm because

A) total revenue increases by the price of the good when an additional unit is sold.
B) total revenue increases by less than the price of the good when an additional unit is sold.
C) firms need to lower price to increase the quantity sold.
D) firms can increase price and still increase the quantity sold.

Question 49

Kevin's Golf-a-Rama sells golf balls in a perfectly competitive market. At its current level of golf ball production, Kevin has marginal costs equal to $1, and AVC is rising. If the market price of golf balls is $2, Kevin should

A) decrease the level of golf ball production.
B) continue producing the current level of production.
C) increase the production of golf balls.
D) shut down and produce no golf balls.

Question 50

Figure 6.1 shows the cost structure of a firm in a perfectly competitive market. If the market price is $40 and the firm is currently producing the profit maximizing output level, the firm's profit is

A) $7,200.
B) $9,000.
C) $27,000.
D) $36,000.

Question 51

For the perfectly competitive firm

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

Question 52

Marginal revenue is equal to

A) the change in total revenue from selling one more unit of a good.
B) the number of units sold times the price of the good.
C) the change in average revenue from selling one more unit of a good.
D) all of the above.

Question 53

Kevin's Golf-a-Rama sells golf balls in a perfectly competitive market. At its current level of golf ball production, Kevin has marginal costs equal to $2. If the market price of golf balls is $1, Kevin should

A) decrease the level of golf ball production.
B) continue producing the current level of production.
C) increase the production of golf balls.
D) raise the price of its golf balls.

Question 54

If a firm suffers an economic loss, its

A) price is less than its marginal cost.
B) price is less than its marginal revenue.
C) price is less than its average total cost.
D) none of the above

Question 55

If a firm in a perfectly competitive market is currently producing the output where price = marginal cost > average total cost, the firm is

A) earning a positive profit.
B) earning a zero profit.
C) suffering an economic loss.
D) all of the above.

Question 56

If individual firms face a horizontal demand curve at a given market price

A) price is equal to average total cost.
B) price is equal to marginal cost.
C) price is equal to marginal revenue.
D) price is equal to average variable cost.

Question 57

You sell your good in a perfectly competitive market where the market price is $33.00. When you sell 100 units your total revenue is $3,300. When you sell 101 units

A) total revenue increases by less than $33.
B) total revenue increases by exactly $33.
C) total revenue increases by more than $33.
D) total revenue may increase or decrease.

Question 58

If a firm in a perfectly competitive market is currently producing the output where price = marginal cost = average total cost, the firm is

A) earning a positive economic profit.
B) earning a zero economic profit.
C) suffering an economic loss.
D) all of the above

Question 59

If a firm can maximize its profit by producing the output where price is equal to its marginal cost, the firm is operating in

A) a perfectly competitive market.
B) an oligopolistic market.
C) a monopolistic market.
D) a monopolistically competitive market.

Question 60

You sell your good in a perfectly competitive market where the market price is $7.00. When you sell 100 units your total revenue is $700. When you sell 101 units

A) total revenue increases by less than $7.
B) total revenue increases by exactly $7.
C) total revenue increases by more than $7.
D) total revenue may increase or decrease.

Question 61

In short-run equilibrium for a competitive firm

A) price will not equal marginal revenue.
B) marginal revenue will be greater than marginal cost.
C) price will equal marginal cost.
D) price will be greater than marginal cost.

Question 62

In a perfectly competitive market, if price is less than average total cost, but greater than average variable cost at the level of output where marginal cost equals marginal revenue

A) the firm is earning positive economic profit.
B) the firm is earning negative economic profit.
C) the firm should shut down.
D) We cannot determine whether the firm is earning positive or negative profits.

Question 63

If a perfectly competitive firm charges a price that is equal to its average total cost

A) the firm is earning an economic profit equal to zero.
B) the firm is earning an economic profit greater than zero.
C) the firm is earning an economic profit less than zero.
D) It is not possible to determine anything about the firm's profits.

Question 64

In long-run equilibrium for a competitive firm economic profits

A) will be positive.
B) will be negative
C) will be zero.
D) may be positive, negative, or zero.

Question 65

Figure 6.2
Figure 6.2 shows the cost structure of a firm in a perfectly competitive market. Suppose the current market price is $6 and the firm produces at a given output level. If the firm's total fixed cost increases due to a new government regulation,the short-run response of the firm should be to

A) produce its current output level.
B) decrease its current output level.
C) increase its current output level.
D) There isn't sufficient information.

Question 66

Figure 6.2
Figure 6.2 shows the cost structure of a firm in a perfectly competitive market. If the market price is $10 and the firm chooses the profit maximizing output level, its profit is

A) $1,000.
B) $800.
C) $720.
D) $200.

Question 67

If the market demand increases for a good sold in a perfectly competitive market, individual firms in the market

A) will be able to charge a higher price for their product.
B) will need to lower price in order to remain competitive.
C) will not be able to change their price.
D) will begin earning economic losses.

Question 68

If the firm is incurring losses in the short run, then which of the following is TRUE?

A) P < ATC
B) P > ATC
C) P > MC
D) MC > ATC

Question 69

If a profit-maximizing firm in a perfectly competitive market is currently producing the output where (price - average variable cost) = average fixed cost, the firm is

A) making a positive economic profit.
B) making a zero economic profit.
C) suffering an economic loss.
D) none of the above.

Question 70

If a profit-maximizing firm in a perfectly competitive market is currently producing the output where (price - average variable cost) > average fixed cost, the firm is

A) making a positive economic profit.
B) making a zero economic profit.
C) suffering an economic loss.
D) none of the above.

Question 71

If a profit-maximizing firm in a perfectly competitive market is currently producing the output where (price - average variable cost) < average fixed cost, the firm is

A) making a positive economic profit.
B) making a zero economic profit.
C) suffering an economic loss.
D) none of the above.

Question 72

Figure 6.2
Figure 6.2 shows the cost structure of a firm in a perfectly competitive market. Suppose that market price falls to $6. If the firm produces at an output level that causes it to suffer an economic loss of $120, its average total cost (X) is

A) $8.
B) $7.50.
C) $6.50.
D) $4.

Question 73

If your firm is producing a good at a level where marginal revenue equals marginal cost, and price is greater than average total cost, your firm

A) should shut down and suffer a loss equal to your fixed costs.
B) is earning an economic profit greater than zero.
C) should decrease output.
D) should increase output.

Question 74

Figure 6.1 shows the cost structure of a firm in a perfectly competitive market. If the firm's fixed cost increases by 3,000 due to a new government regulation

A) the marginal cost curve shifts upward.
B) the average variable cost curve shifts upward.
C) the average total cost curve shifts upward.
D) none of the above.

Question 75

In a perfectly competitive market, if price is greater than average total cost at the level of output where marginal cost equals marginal revenue

A) the firm must be in long-run equilibrium.
B) the firm is earning an economic profit greater than zero.
C) the firm is earning an economic profit less than zero.
D) We cannot determine whether the firm is earning positive or negative profits.

Question 76

If the price a firm charges in a perfectly competitive industry is greater than average total cost

A) the firm is earning an economic profit equal to zero.
B) the firm is earning an economic profit greater than zero.
C) the firm is earning an economic profit less than zero.
D) It is not possible to determine anything about profits.

Question 77

Figure 6.2
Figure 6.2 shows the cost structure of a firm in a perfectly competitive market. Suppose the current market price is $10 and the firm produces the profit maximizing output level. If the firm's total fixed cost increases due to a new government regulation, the short-run response of the firm should be to Note: since the question does not restrict the firm's response to the short run, we can't rule out that the rise in fixed cost will push the firm below the breakeven point and that the firm will exit the industry in the long run, thus decreasing its current output level.

A) produce its current output level.
B) increase its current output level.
C) decrease its current output level.
D) There isn't sufficient information.

Question 78

If the price a firm charges in a perfectly competitive industry is less than average total cost

A) the firm is earning positive economic profit.
B) the firm is earning zero economic profit.
C) the firm is earning negative economic profit.
D) It is not possible to determine anything about profits.

Question 79

In short-run equilibrium for a competitive firm economic profits

A) will be positive.
B) will be negative.
C) will be zero.
D) may be positive, negative, or zero.

Question 80

If a competitive firm is in short-run equilibrium, then

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