Deck 9: Applying the Competitive Model

Question 1

Even if two competitive firms in the same market have different production technologies,they will each earn long-run zero profits.Why?

Answer 1

The firm that has more productive resources will have the cost of those resources bid up by the marketplace.The more productive the resource,the more expensive it will be.This price is bid up until the firm's profits are zero.The firm with less productive resources will also have zero profits because it is not paying as much for its resources.There is no such thing as a free lunch or a free productivity gain for competitive firms.

Question 2

In the long run,competitive firms MUST be profit maximizers because if they do not maximize profits,

A) they will not survive.
B) they will not be price takers.
C) they will attract entry.
D) the profits that they do earn will only cover variable costs.

Answer 2

A

Question 3

If a firm is in a perfectly competitive world but decides to charge a higher price than its competitors,

A) the firm's profits will be zero or negative, and the firm will fail in the long run.
B) the firm's profits will be zero or negative, and the firm will fail in the short run.
C) the firm's profits will be positive or negative, and the firm will fail in the short run.
D) the firm's profits will be positive or negative, and the firm will fail in the long run.

Answer 3

A

Question 4

Does a competitive long-run equilibrium require cost-minimization?

A) Yes, if firms fail to be as efficient as their competitors, they are driven out of the market.
B) No, in the long run, firms make zero profits.
C) Yes, if they didn't, even less efficient firms would enter the industry.
D) No, because competition ensures their survival.

Question 5

If entry is limited due to a limited input,firms in that market earn long run economic profit.

Question 6

Survivability in a perfectly competitive world requires that

A) firms minimize average total cost.
B) firms produce new and different products.
C) firms maximize profit.
D) firms maximize revenue.

Question 7

You enter a store and buy a bottle of soda.Do you usually receive consumer surplus?

A) Yes, because you wouldn't buy the soda if your willingness to pay would be less than the price.
B) Yes, because you are thirsty.
C) No, because you value other drinks more.
D) No, because you have less money after the transaction.

Question 8

Suppose a farmer in a perfectly competitive agricultural industry rents land that is uniquely productive in the production of a certain crop.In the long run

A) the owner of the land receives economic rent while the farmer earns zero economic profit.
B) the owner of the land earns zero economic profit while the farmer receives economic rent.
C) both the farmer and the owner of the land receive economic rent.
D) neither the farmer nor the owner of the land receive economic rent.

Question 9

In the long run,firms in a competitive market make zero economic profit.This induces most firms to leave the industry.

Question 10

Long-run economic profit does not exist for fixed factors like land because

A) bidding drives up the price of the factor until no economic profit exists.
B) there is no market for such factors.
C) these factors have L-shaped isoquants.
D) these factors will earn economic profits.

Question 11

Sheri is currently purchasing 10 units of a normal good and her indifference curves exhibit diminishing marginal rate of substitution.Suppose there is a decrease in the market price of this good.Then

A) both her utility and her consumer surplus will increase.
B) her consumer surplus will increase, but her utility will remain the same.
C) her utility will increase, but her consumer surplus will remain the same.
D) her consumer surplus will increase, but the change in her utility is unknown without more information.

Question 12

Which of the following characterizes long-run equilibrium in perfect competition?

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

Question 13

What is one reason firms might lobby to prevent entry into their market?

A) The long run equilibrium might be characterized by P = MC = ATC.
B) The long run equilibrium might be characterized by P = MC < ATC.
C) The long run equilibrium might be characterized by P > MC = ATC.
D) The long run equilibrium might be characterized by P = MC > ATC.

Question 14

The owners of sports franchises often complain that free-agency (open bidding for player services)threatens their profitability and thus their long-run viability.Given your knowledge of perfect competition,which of the following is correct?

A) Team owners might be correct in as much as free-agency bids up the price of players so that economic profits from those players equal zero.
B) Team owners might be correct in as much as free-agency bids up the price of players so that economic profits from those players is negative.
C) Team owners are lying, as free-agent salaries are still much too low.
D) Team owners are telling the truth, as free-agent salaries are much too high.

Question 15

Mister Jones was selling his house.The asking price was $220,000,and Jones decided he would take no less than $200,000.After some negotiation,Mister Smith purchased the house for $205,000.Smith's consumer surplus is

A) $5,000.
B) $15,000.
C) $20,000.
D) not able to be calculated from the information given.

Question 16

Before the DVD,the VCR was a popular format for taping and replaying video.When the DVD was introduced,which of the following most accurately describes the long-run adjustment process in the VCR industry?

A) Costs increased, price increased, demand decreased, quantity decreased, profit decreased.
B) Demand increased, costs increased, price increased, quantity increased, profit decreased.
C) Demand decreased, quantity decreased, price decreased, profit decreased.
D) Demand decreased, price decreased, quantity decreased, profit decreased.

Question 17

A firm that generates zero economic profit usually has

A) negative business profit.
B) zero business profit.
C) positive business profit.
D) business profit equal to half the total revenue.

Question 18

What is one reason perfectly competitive firms wish to be ever more efficient?

A) Individual firms are awarded by the tax code to be more efficient.
B) Individual firms can better control their costs than the price they can charge.
C) Individual firms can better control their costs than their output levels.
D) Individual firms don't need to be efficient; government policies do not reward efficiency.

Question 19

Suppose when a market has four firms,average economic profit is $1,000 per month.When the market has five firms,the average economic profit is -$50 per month.This suggests that

A) the long-run equilibrium number of firms is between four and five.
B) the long-run equilibrium number of firms is four.
C) the long-run equilibrium number of firms is five.
D) there is no long-run equilibrium in this market as profits can never be zero.

Question 20

Firms are ________ with an economic profit of zero,they will ________ in the industry since they ________ be better off in another industry.

A) satisfied, stay, won't
B) unsatisfied, leave, will
C) satisfied, leave, will
D) unsatisfied, stay, won't

Question 21

If lower-income households spend a greater share of their income on cigarettes than do higher-income households,then a tax that raises the price of cigarettes will

A) cause lower-income households to incur a greater loss of consumer surplus than that incurred by higher-income households.
B) cause higher-income households to incur a greater loss of consumer surplus than that incurred by lower-income households.
C) raise consumer surplus among higher-income households.
D) cause consumer surplus to decline among smokers, but the relative impact cannot be determined from the given information.

Question 22

The change in total welfare from a 10% increase in price will depend only on the elasticity of demand.

Question 23

Sarah and David both have linear demand curves for lemonade.Sarah's demand curve for lemonade intersects David's demand curve at a price of 50 cents per glass.Sarah's demand curve is more inelastic than David's.A change in the price of lemonade from 50 cents to 25 cents per glass will

A) decrease Sarah's consumer surplus more than David's.
B) decrease David's consumer surplus more than Sarah's.
C) increase Sarah's consumer surplus more than David's.
D) increase David's consumer surplus more than Sarah's.

Question 24

Sally is shopping for textbooks at the beginning of the semester.What is one reason she might decide to not purchase a textbook?

A) Her expected producer surplus is positive.
B) Her expected consumer surplus is negative.
C) Her expected consumer surplus is positive.
D) Her expected profits are positive.

Question 25

The above figure shows the market demand curve for telecommunication while driving one's car (time spent on the car phone).The current price is $0.35 per minute.If the price were to increase by ten cents per minute,consumer surplus would

A) fall to $820.
B) fall by $84.
C) fall by $58.
D) fall to $369.

Question 26

What is one reason it might be difficult to dissuade people from pirating music off the Internet?

A) Consumer surplus is very high when music is pirated.
B) In general, consumers get a rush from "stealing."
C) Consumers mistakenly believe that the Internet is public domain.
D) Producer surplus is very low when music is pirated.

Question 27

Sarah's demand curve for shoes has the same slope as Pete's; however,it lies to the right of Pete's.An increase in the price of shoes will cause

A) Sarah to incur a greater loss of consumer surplus than Pete will.
B) Pete to incur a greater loss of consumer surplus than Sarah will.
C) Sarah and Pete to incur the same loss of consumer surplus.
D) Sarah's demand curve to shift closer to Pete's.

Question 28

The above figure shows the market demand curve for telecommunication while driving one's car (time spent on the car phone).If the price were zero,consumer surplus equals

A) $301.00.
B) $924.50.
C) $1,225.50.
D) $1,250.00.

Question 29

Assume a consumer has a horizontal demand curve for a product.His consumer surplus from buying the product

A) is maximized.
B) can't be calculated.
C) equals zero.
D) Need more information.

Question 30

The above figure shows the market demand curve for telecommunication while driving one's car (time spent on the car phone).If the price were $2.50,consumer surplus equals

A) $301.00.
B) $924.50.
C) $1,225.50.
D) $0

Question 31

Suppose consumers of cigarettes can be classified into two groups: heavy users and light users.Heavy users purchase more cigarettes and are less sensitive to price changes relative to light users.To determine whether a heavy user suffers a greater loss of consumer surplus than a light user does when the price of cigarettes increases,one would need to know

A) each group's average income.
B) the actual quantities purchased by each.
C) each individual's price elasticity of demand.
D) no additional information.

Question 32

The above figure shows the market demand curve for telecommunication while driving one's car (time spent on the car phone).At the current price of $0.35 per minute,consumer surplus equals

A) $301.00.
B) $924.50.
C) $1,225.50.
D) $1,250.00.

Question 33

Consumer surplus from a given purchase is the difference between what one was willing to pay for that purchase and what was actually paid.

Question 34

Consumers seek to

A) maximize profits.
B) maximize expected consumer surplus.
C) minimize expenditures.
D) maximize choice.

Question 35

In the long-run equilibrium in perfect competition,consumer surplus is

A) positive.
B) negative.
C) zero.
D) less than producer surplus.

Question 36

As the price of a good increases,the loss in consumer surplus is larger,

A) the more elastic demand is.
B) the more money previously spent on the good.
C) the less money previously spent on the good.
D) the smaller the price increase.

Question 37

Consumers often purchase products that,afterward,they regret purchasing.This can be explained by

A) consumers trying products to determine if their consumer surplus increases.
B) consumers trying products to determine if firm advertising is honest.
C) consumers trying to minimize expenditures.
D) consumers trying to maximize choice.

Question 38

Joe's demand for spring water can be represented as p = 10 - Q (where p is measured in $/gallon and Q is measured in gallons).He recently discovered a spring where water can be obtained free of charge.His consumer surplus from this water is

A) $0.
B) $50.
C) $100.
D) unknown based upon the information provided.

Question 39

Consumers who are more sensitive to changes in price suffer a greater loss of consumer surplus from any given price increase.

Question 40

Mary purchased a stuffed animal toy for $5.After a few weeks,someone offered her $100 for the toy.Mary refused.One can conclude that Mary's consumer surplus from the toy is

A) less than $5.
B) at least $95.
C) at least $100.
D) $105.

Question 41

Economists claim that measuring society's welfare as CS + PS

A) is inappropriate since ultimately everyone is a consumer.
B) is valid only when the same person could be either a consumer or a producer.
C) treats the gains to consumers and producers equally.
D) is not commonly accepted.

Question 42

Producer surplus equals total revenue minus the sum of all marginal cost.

Question 43

Suppose the market supply curve for wheat is shown in the above figure.Calculate the producer surplus when price is $2 per bushel.If legislation mandates that the price be $1 per bushel,what is the resulting loss in producer surplus?

Question 44

Producer surplus is the sum of the profits earned by all firms in a market.

Question 45

Producer surplus equals

A) total revenue minus total variable cost.
B) total revenue minus the sum of all marginal cost.
C) profit plus fixed cost.
D) All of the above.

Question 46

Producer surplus is equal to

A) the area under the supply curve.
B) the difference between price and average cost for all units sold.
C) the difference between price and marginal cost for all units sold.
D) the firm's profit when fixed costs exist.

Question 47

In the short run,if a firm operates,it earns a profit of $500.The fixed costs of the firm are $100.This firm has a producer surplus of

A) $500.
B) $100.
C) $400.
D) $600.

Question 48

Ann and Bill each spend $30 per month on cigarettes when the price is $1 per pack.Draw a graph to illustrate that the consumer with the less elastic demand will suffer the greater loss of consumer surplus when the price of cigarettes increases.Explain and label the figure.

Question 49

In the long-run equilibrium in perfect competition,

A) producer surplus is positive.
B) producer surplus is negative.
C) producer surplus is greater than consumer surplus.
D) producer surplus is less than consumer surplus.

Question 50

If a firm enjoys producer surplus in perfectly competitive Market A of $1000 and would enjoy producer surplus in perfectly competitive Market B of $1200,the firm would consider moving to Market B if

A) fixed costs are greater than $100 in Market A.
B) fixed costs are less than $200 in Market B.
C) fixed costs are less than $300 but greater than $200 in Market B.
D) fixed costs in Market B are less than the fixed costs in Market A plus $200.

Question 51

When is the profit a firm earns equal to the producer surplus? Explain.

Question 52

Assume the price of tomatoes increases.Which of the following causes would correspond to greater producer surplus?

A) an increase in supply
B) an increase in costs
C) a decrease in supply
D) an increase in demand

Question 53

Figure 9.6 shows an individual's demand curve for time per month spent telecommunicating while driving (talking on the car phone.)A car phone is useless except for talking with somebody who is not in the car.If calls are priced at ten cents per minute,what is the consumer surplus derived from talking? What is the most this person would pay for the car phone? Explain.

Question 54

In a perfectly competitive market the long-run demand and supply curves are Q = 12 - P and Q = 5P respectively.Producer surplus in this market equals

A) 0.
B) 5.
C) 10.
D) It cannot be determined without more information.

Question 55

Advocates of steel tariffs to protect U.S.steel firms realize that when imposing such tariffs,the gains of firms are outweighed by the losses to consumers..This implies that

A) such advocates value producer surplus more than consumer surplus.
B) such advocates want to help consumers.
C) such advocates value consumer surplus more than producer surplus.
D) such advocates value producer surplus and consumer surplus equally.

Question 56

Suppose the market supply curve is p = 5Q.At a price of 10,producer surplus equals

A) 50.
B) 25.
C) 12.50.
D) 10.

Question 57

Mister Jones was selling his house.The asking price was $220,000,and Jones decided he would take no less than $200,000.After some negotiation,Mister Smith purchased the house for $205,000.Jones' producer surplus is

A) $5,000.
B) $15,000.
C) $20,000.
D) not able to be calculated from the information given.

Question 58

The difference between producer surplus and profit is always the associated with

A) opportunity costs.
B) total costs.
C) variable costs.
D) fixed costs.

Question 59

Assume government policy increases the demand for corn.

A) The consumer surplus of corn buyers will increase.
B) The producer surplus of corn growers will decrease.
C) The producer surplus of corn growers will increase.
D) The producer surplus of corn growers will not change.

Question 60

Suppose the market supply curve is p = 5 + Q.At a price of 10,producer surplus equals

A) 50.
B) 25.
C) 12.50.
D) 10.

Question 61

Giving presents at Christmas does NOT generate a deadweight loss if

A) all gift are money.
B) everybody gets exactly what they want.
C) nobody can be made better off by returning the gift and purchasing a different one.
D) All of the above.

Question 62

What is one reason activists might lobby the government to force firms to produce more output than they normally would in a perfectly competitive market?

A) They value consumer surplus more than producer surplus.
B) They value producer surplus more than consumer surplus.
C) They seek to avoid future regulation.
D) They seek to minimize total surplus.

Question 63

If a market produces a level of output below the competitive equilibrium,then

A) social welfare is not maximized.
B) consumer surplus might still be maximized.
C) the actual price will be below the equilibrium price.
D) social welfare might still be enhanced if a price ceiling keeps price below the competitive price.

Question 64

A competitive market maximizes social welfare because in a competitive market,

A) profits are zero.
B) price equals marginal cost of the last unit produced.
C) price equals average cost of the last unit produced.
D) there is free entry and exit.

Question 65

While producing less than the competitive output decreases social welfare,the same cannot be said about producing more than the competitive output.

Question 66

In a competitive market,the demand and supply curves are Q = 12 - P and Q = 5P,respectively.If output is fixed at Q = 11,what is the amount of the resulting deadweight loss?

A) 0
B) 0.6
C) 11.4
D) 15

Question 67

The deadweight loss associated with output less than the competitive level can be determined by

A) subtracting the competitive level producer surplus from the producer surplus associated with less output.
B) subtracting the consumer surplus from the producer surplus associated with less output.
C) summing the consumer and producer surplus associated with less output.
D) summing the change in the total consumer and producer surplus from moving from the competitive level of output to less output.

Question 68

Explain why the competitive output maximizes welfare.

Question 69

In a competitive market,the demand and supply curves are Q = 12 - P and Q = 5P,respectively.If output is fixed at Q = 5,what is the amount of the resulting deadweight loss?

A) 0
B) 5
C) 10
D) It cannot be determined without more information.

Question 70

If a market produces a level of output that exceeds the competitive equilibrium output,then

A) social welfare will be higher.
B) producer surplus will be higher.
C) marginal cost will exceed price.
D) All of the above.

Question 71

Suppose an industry trade group has convinced legislators that a price floor should be used so that producer surplus is maximized in the market for milk.The group argues that such a policy would save the "family farm." Assuming a downward-sloping linear demand curve and a horizontal long-run supply curve,determine the resulting price,output and social welfare from such a policy.Compare this result to the competitive equilibrium.

Question 72

The services of real estate brokers are provided in a competitive market.If the state Board of Realtors enacts several requirements that limit the number of real estate brokers,which of the following is most likely to occur?

A) Consumer surplus will increase.
B) Producer surplus will increase.
C) Entry of new brokers will increase.
D) Social welfare will increase.

Question 73

If activists successfully lobbied government to force firms to produce more output than they normally would in a perfectly competitive market,

A) consumer surplus would decline.
B) producer surplus would increase.
C) taxation would solve the problem.
D) total surplus in the market would decline.

Question 74

If in a market the last unit of output was sold at a price higher than marginal cost,

A) producers are better off producing more.
B) consumers are better off if less of the product is sold.
C) social welfare is not maximized.
D) the unit increased total profit.

Question 75

The services of real estate brokers are provided in a competitive market.If the state Board of Realtors enacts several requirements that limit the number of real estate brokers,which of the following is most likely to occur?

A) The supply curve of real estate brokers will shift to the left.
B) The supply curve of real estate brokers will shift to the right.
C) Social welfare will remain unchanged.
D) The supply curve will remain unchanged.

Question 76

If an economist states that not enough of a good is being produced,she usually means that

A) not everyone can afford the good.
B) price exceeds marginal cost.
C) consumer surplus equals zero.
D) at equilibrium, some people who still wish to sell the good cannot find a buyer.

Question 77

Deadweight loss occurs when

A) producer surplus is greater than consumer surplus.
B) the maximum level of total welfare is not achieved.
C) consumer surplus is reduced.
D) an inferior good is consumed.

Question 78

What is one reason activists might lobby the government for regulation limiting the production of a product to less than would normally be in a perfectly competitive market?

A) They value consumer surplus more than producer surplus.
B) They value producer surplus more than consumer surplus.
C) They seek to avoid future regulation.
D) They seek to minimize total surplus.

Question 79

As the quantity produced of a good increases,the social welfare generated by that good increases.

Question 80

Suppose a consumer advocacy group has convinced legislators that vitamin pills should be free to consumers.Such a policy would enhance the health of the citizenry,they argue.Assuming a downward-sloping linear demand curve and a horizontal long-run supply curve,determine the resulting output and social welfare from such a policy.Compare this result to the competitive equilibrium.