Deck 8: Firms in Perfectly Competitive Markets

Question 1

Which of the following is a characteristic of a monopoly?

A)It is easy for new firms to enter the market.
B)There is only one seller in the market.
C)The product is not unique.
D)The firm has no control over price.

Answer 1

There is only one seller in the market.

Question 2

What is implied by a very large number of small sellers who sell identical products?

A)A multitude of vastly different selling prices.
B)A downward-sloping demand for each seller's product.
C)The inability of one seller to influence price.
D)Chaos in the market.

Answer 2

The inability of one seller to influence price.

Question 3

The demand curve for an individual seller's product in perfect competition is

A)the same as market demand.
B)downward sloping.
C)vertical.
D)horizontal.

Answer 3

horizontal.

Question 4

Why are both buyers and sellers price takers in a perfectly competitive market?

A)Because the price is determined by government intervention and dictated to buyers and sellers.
B)Because each buyer and seller knows it is illegal to conspire to affect price.
C)Because both buyers and sellers in a perfectly competitive market are concerned for the welfare of others.
D)Because each buyer and seller is too small relative to others to independently affect the market price.

Question 5

By what is the price of a seller's product in perfect competition determined?

A)The individual seller.
B)A few of the sellers.
C)Market demand and market supply.
D)The individual demander.

Question 6

Suppose the equilibrium price in a perfectly competitive industry is $15 and a firm in the industry charges $21.Which of the following will happen?

A)The firm's profits will increase.
B)The firm's revenue will increase.
C)The firm will not sell any output.
D)The firm will sell more output than its competitors.

Question 7

An individual seller in perfect competition will not sell at a price lower than the market price because

A)demand for the product will exceed supply.
B)the seller would start a price war.
C)the seller can sell any quantity she wants at the prevailing market price.
D)demand is perfectly inelastic.

Question 8

Which of the following is not a characteristic of a perfectly competitive market structure?

A)There are a very large number of firms that are small compared to the market.
B)All firms sell identical products.
C)There are no restrictions to entry by new firms.
D)There are restrictions on exit of firms.

Question 9

Assume the market for organic produce sold at farmers' markets is perfectly competitive.All else equal, as more farmers choose to produce and sell organic produce at farmers' markets, what is likely to happen to the equilibrium price of the produce and profits of the organic farmers in the long run?

A)The equilibrium price is likely to increase, and profits are likely to remain unchanged.
B)The equilibrium price is likely to remain unchanged, and profits are likely to increase.
C)The equilibrium price is likely to decrease, and profits are likely to decrease.
D)The equilibrium price is likely to increase, and profits are likely to increase.

Question 10

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

A)Wheat production
B)Steel production
C)Electricity production
D)Airplane production

Question 11

Which of the following is a characteristic of an oligopolistic market structure?

A)There are few dominant sellers.
B)Each firm sells a unique product.
C)It is easy for new firms to enter the industry.
D)Each firm need not react to the actions of rivals.

Question 12

Which of the following is not a characteristic of a monopolistically competitive market structure?

A)There is a large number of independently acting small sellers.
B)All sellers sell products that are differentiated.
C)There are low barriers to entry of new firms.
D)Each firm must react to actions of other firms.

Question 13

Jason, a high-school student, mows lawns for families in his neighbourhood.The going rate is $12 for each lawn-mowing service.Jason would like to charge $20 because he believes he has more experience mowing lawns than the many other teenagers who also offer the same service.If the market for lawn mowing services were perfectly competitive, what would happen if Jason raised his price?

A)He would lose some but not all his customers.
B)Initially, his customers might complain but over time they will come to accept the new rate.
C)If Jason raises his price he would lose all his customers.
D)If Jason raises his price, then all others supplying the same service will also raise their prices.

Question 14

Assume the market for organically grown produce is perfectly competitive.All else equal, as farmers find it less profitable to produce and sell organic produce in this market,

A)the demand curve will shift to the left and the equilibrium price will decrease.
B)the supply curve will shift to the left and the equilibrium price will increase.
C)the supply curve will shift to the right, the demand curve will shift to the left, and the equilibrium price will decrease.
D)the supply curve will shift to the left, the demand curve will shift to the left, and the equilibrium price will increase.

Question 15

In perfect competition

A)the market demand curve and the individual's demand are identical.
B)the market demand curve is perfectly inelastic while demand for an individual seller's product is perfectly elastic.
C)the market demand curve is perfectly elastic while demand for an individual seller's product is perfectly inelastic.
D)the market demand curve is downward sloping while demand for an individual seller's product is perfectly elastic.

Question 16

Firms in perfectly competitive industries are unable to control the prices of the products they sell and earn a profit in the long run because

A)Owners of perfectly competitive firms realise that their short-run profits are temporary.Therefore, they either sell their businesses or develop other products that will earn short-run profits.
B)Firms in perfectly competitive industries can use advertising in the short run to persuade consumers that their products are better than those of other firms.But eventually consumers realise that all of the firms sell virtually identical products.
C)Firms from other countries are able to produce similar products at lower costs.
D)Firms in these industries sell identical products.

Question 17

Which of the following characteristics of a farmers' market make it a good example of a perfectly competitive market?

A)Selling product at a farmers' market was very profitable for farmers in the early 2000s.As result, many farmers sold their farms to larger firms.
B)Farmers who sell product at a farmers' market are similar to other entrepreneurs who introduce products that earn short-run profits but invite competition that drives down prices and profits in the long run.
C)Farmers who sell product at a farmers' market are similar to other business owners who take advantage of the willingness of some consumers to pay high prices for new and different products.
D)Farmers selling product at a farmers' market provide a product that is a necessity, rather than a luxury.

Question 18

Both individual buyers and sellers in perfect competition

A)can influence the market price by their own individual actions.
B)can influence the market price by joining with a few of their competitors.
C)have to take the market price as a given.
D)have the market price dictated to them by government.

Question 19

Why is the demand curve for each seller's product in perfect competition horizontal at the market price?

A)Because each seller is too small to affect market price.
B)Because the price is set by the government.
C)Because all the sellers get together and set the price.
D)Because all the demanders get together and set the price.

Question 20

Which of the following is not a characteristic of a perfect competition?

A)Heavy advertising by individual sellers.
B)Homogeneous products.
C)Sellers are price takers.
D)A horizontal demand curve for individual sellers.

Question 21

What demand curve is faced by a perfectly competitive firm?

A)Horizontal.
B)Vertical.
C)Perpendicular to the quantity axis.
D)Perfectly inelastic.

Question 22

Which of the following is not an assumption of perfectly competitive markets?

A)There are many sellers and many buyers, all of which are small relative to the market.
B)Each firm produces a similar but not identical product.
C)There are no barriers to new firms entering the market.
D)The products sold by all firms in the market are identical.

Question 23

Which of the following offers the best reason why restaurants are not considered to be perfectly competitive firms?

A)Restaurants do not sell identical products.
B)Restaurants compete in small market areas - neighbourhoods and cities - rather than in regional or national markets.Therefore, restaurants are not small relative to their market size.
C)Restaurants usually have entry barriers in the form of zoning restrictions and health regulations.
D)Restaurants have significant liability costs that perfectly competitive firms do not have; for example, customers may sue if they suffer from food poisoning.

Question 24

How are a wheat farmer and a firm similar in a perfectly competitive market?

A)Both face vertical demand curves.
B)Both have to lower their prices if a rival firm lowers its price.
C)Both face horizontal demand curves.
D)Both will earn an economic profit if their total revenue equals their total cost.

Question 25

Which of the following describes the difference between the market demand curve for a perfectly competitive industry and the demand curve for a firm in this industry?

A)The market demand curve is a horizontal line; the firm's demand curve is downward sloping.
B)The market demand curve is downward sloping; the firm's demand curve is a vertical line.
C)The market demand curve cannot have a constant slope; the firm's demand curve has a slope equal to zero.
D)The market demand curve is downward sloping; the firm's demand curve is a horizontal line.

Question 26

Firms in perfect competition are price takers because

A)one firm determines the price that all other firms in the industry will charge.
B)consumers have enough market power to set prices.
C)firms accept the price determined by the government.
D)each firm is too small relative to the market to be able to influence price.

Question 27

Why are individual buyers and sellers in perfect competition called price takers?
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Question 28

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

A)The firm cannot make a profit in the short run because it is too small a part of the total market.
B)The firm can make a profit in the long run but not in the short run.
C)The firm can sell as much as it wants without having to lower its price.
D)The firm must lower its price in order to increase quantity demanded.

Question 29

If a perfectly competitive firm raises the price it charges to consumers, which of the following is the most likely outcome?

A)The firm's revenue will not change because some consumers will refuse to pay the higher price.
B)The firm will not sell any output.
C)The firm's total revenue will increase only if the demand for its product is inelastic.
D)The firm's total revenue will increase only if the demand for its product is elastic.

Question 30

The market demand curve in a perfectly competitive market is downward sloping.

Question 31

The market demand curve for a perfectly competitive industry is the horizontal summation of each individual firm's demand curve.

Question 32

A perfectly competitive firm's horizontal demand curve implies that the firm does not have to lower its price to sell more output.

Question 33

Perfectly competitive industries tend to produce low-priced, low-technology products.

Question 34

Suppose the equilibrium price in a perfectly competitive industry is $10 and a firm in the industry charges $12.Which of the following will happen?

A)The firm will sell more output than its competitors.
B)The firm's revenue will increase.
C)The firm will not sell any output.
D)The firm's profits will increase.

Question 35

Which of the following is true of firms that are price takers?

A)Must lower their prices to increase sales.
B)Are able to sell a fixed quantity of output at the market price.
C)Can raise their prices as a result of a successful advertising campaign.
D)Are able to sell all their output at the market price.

Question 36

What assumptions are necessary for a market to be perfectly competitive? Explain why each of these assumptions is important.
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Question 37

To what does the term 'price taker' apply in a perfectly competitive market?

A)Sellers and buyers.
B)Firms but not buyers.
C)Buyers but not sellers.
D)Only the smallest sellers and buyers.

Question 38

Some markets have many buyers and sellers but fall into the category of monopolistic competition rather than perfect competition.The most common reason for this is

A)there are high barriers to entering these markets.
B)firms in these markets sell identical products.
C)firms in these markets make high profits.
D)firms in these markets do not sell identical products.

Question 39

A perfectly competitive firm has to charge the same price as every other firm in the market.Therefore, the firm

A)faces a perfectly inelastic demand curve.
B)is not able to make a profit in the short run.
C)is a price taker.
D)faces a perfectly elastic supply curve.

Question 40

The price a perfectly competitive firm receives for its output

A)is determined by the interaction of the firm and all of the consumers who buy from the firm.
B)is determined by the interaction of all sellers and all buyers in the firm's market.
C)will not change in response to changes in market demand and supply because the firm is a price taker.
D)will be lowered by the firm in order to sell more output.

Question 41

Figure 8.1
Refer to Figure 8.1.If the firm is producing 200 units,

A)it breaks even.
B)it is incurring a loss.
C)it should cut back its output to maximise profit.
D)it should increase its output to maximise profit.

Question 42

Which of the following is not true for a firm in perfect competition?

A)Profit equals total revenue minus total cost.
B)Price equals average revenue.
C)Average revenue is greater than marginal revenue.
D)Marginal revenue equals the change in total revenue from selling one more unit.

Question 43

Table 8.1 Table 8.1 shows the short-run cost data of a perfectly competitive firm that produces plastic camera cases.Assume that output can only be increased in batches of 100 units.
Refer to Table 8.1.Suppose the fixed cost of production rises by $500 and the price per unit is still $8.What happens to the firm's profit-maximising output level?

A)It must fall.
B)It must rise to offset the increased cost.
C)It will remain the same.
D)The firm will shut down.

Question 44

Consider the market for wheat which is a perfectly competitive market.Is the market demand curve the same as the demand curve facing an individual producer? If not, explain how and why they are different? Illustrate your answer graphically.
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Question 45

If the market price is $25 in a perfectly competitive market, what is the marginal revenue from selling the fifth unit?

A)$5.
B)$12.50.
C)$25.
D)$125.

Question 46

If the market price is $25, what is the average revenue of selling five units?

A)$5.
B)$12.50.
C)$25.
D)$125.

Question 47

Figure 8.1
Refer to Figure 8.1.If the firm is producing 700 units,

A)it is making a profit.
B)it is incurring a loss.
C)it should cut back its output to maximise profit.
D)it should increase its output to maximise profit.

Question 48

Table 8.1 Table 8.1 shows the short-run cost data of a perfectly competitive firm that produces plastic camera cases.Assume that output can only be increased in batches of 100 units.
Refer to Table 8.1.If the market price of each camera case is $8, the profit-maximising quantity is

A)300 units
B)400 units
C)500 units
D)600 units

Question 49

Figure 8.1
Refer to Figure 8.1.If the firm is producing 700 units, the amount of its profit or loss is

A)loss of $280
B)loss equivalent to the area A
C)profit equivalent to the area A
D)There is insufficient information to answer the question.

Question 50

Table 8.1 Table 8.1 shows the short-run cost data of a perfectly competitive firm that produces plastic camera cases.Assume that output can only be increased in batches of 100 units.
Refer to Table 8.1.The fixed cost of production is

A)$0
B)$500
C)$1000
D)It cannot be determined.

Question 51

If, for a perfectly competitive firm, price exceeds the marginal cost of production, the firm should

A)increase its output.
B)reduce its output.
C)keep output constant and enjoy the above normal profit.
D)lower the price.

Question 52

Of the following industries, which are perfectly competitive? For those that are not perfectly competitive, explain why.
a.Restaurants
b.Corn
c.University education
d.Local radio and television
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Question 53

A perfectly competitive firm produces 3000 units of a good at a total cost of $36 000.The price of each good is $10.What is the firm's short-run profit or loss?

A)Loss of $6000
B)Profit of $6000
C)Profit of $30 000
D)There is insufficient information to answer the question.

Question 54

Table 8.1 Table 8.1 shows the short-run cost data of a perfectly competitive firm that produces plastic camera cases.Assume that output can only be increased in batches of 100 units.
Refer to Table 8.1.If the market price of each camera case is $8, the firm's total revenue is

A)$2400
B)$3200
C)$4000
D)$4800

Question 55

Figure 8.2
Refer to Figure 8.2.At what output level does the firm break even?

A)Q₁ units.
B)Q₂ units.
C)Q₃ units.
D)Q₄ units.

Question 56

Table 8.1 Table 8.1 shows the short-run cost data of a perfectly competitive firm that produces plastic camera cases.Assume that output can only be increased in batches of 100 units.
Refer to Table 8.1.The firm will not produce in the short run if the output price falls below

A)$8.
B)$4.
C)$3.20.
D)$2.80.

Question 57

If, for the last unit of a good produced by a perfectly competitive firm, MR > MC, then in producing it, the firm

A)added more to total costs than it added to total revenue.
B)added more to total revenue than it added to total cost.
C)is maximising marginal profit.
D)has minimised its losses.

Question 58

Figure 8.2
Refer to Figure 8.2.Suppose the firm is currently producing Q₂ units.What happens if it expands output to Q₃ units?

A)Its profit increases by the size of the vertical distance df.
B)It makes less profit.
C)It incurs a loss.
D)It will be moving toward its profit-maximising output.

Question 59

Table 8.1 Table 8.1 shows the short-run cost data of a perfectly competitive firm that produces plastic camera cases.Assume that output can only be increased in batches of 100 units.
Refer to Table 8.1.If the market price of each camera case is $8 and the firm maximises profit, what is the amount of the firm's profit or loss?

A)$0 (it breaks even)
B)Loss of $1000
C)Profit of $440
D)Loss of $440

Question 60

Figure 8.2
Refer to Figure 8.2.What is the amount of profit if the firm produces Q₂ units?

A)It is equal to the vertical distance c to g.
B)It is equal to the vertical distance c to Q₂.
C)It is equal to the vertical distance g to Q₂.
D)It is equal to the vertical distance c to g multiplied by Q₂ units.

Question 61

What is the relationship among the following variables for a perfectly competitive firm: the market price, average revenue and marginal revenue?

A)Average revenue is equal to the market price; average revenue is greater than marginal revenue.
B)The market price is equal to both average revenue and marginal revenue.
C)Average revenue is equal to marginal revenue; average revenue is greater than the market price.
D)As a firm lowers the market price to sell more output, marginal revenue and average revenue will be less than the market price.

Question 62

For a perfectly competitive firm, to what is average revenue equal?

A)Marginal cost.
B)The market price.
C)Total revenue.
D)Average fixed cost.

Question 63

Mark Frost grows apples in a perfectly competitive market.If we drew a line in a graph that illustrates Mark's total revenue from selling apples, it would be

A)a straight, upward-sloping line.
B)a horizontal line.
C)a straight, downward-sloping line.
D)a curve that is negatively sloped at low levels of output and positively sloped at higher levels of output.

Question 64

If the market price is $40 in a perfectly competitive market, what is the marginal revenue from selling the fifth unit?

A)$8.
B)$20.
C)$40.
D)$200.

Question 65

At the profit-maximising level of output for a perfectly competitive firm,

A)price equals marginal cost.
B)average revenue equals average variable cost, and price equals marginal cost.
C)marginal revenue equals marginal cost, and average total cost equals average fixed cost.
D)price equals average revenue, and marginal cost equals average variable cost.

Question 66

For a firm in a perfectly competitive market, price is

A)equal to both average revenue and marginal revenue.
B)equal to average revenue but greater than marginal revenue.
C)greater than marginal revenue but less than average revenue.
D)less than both average revenue and marginal revenue.

Question 67

To maximise profit, a perfectly competitive firm

A)should sell the quantity of output determined by the interaction between industry demand and supply.
B)should sell the quantity of output that results in a value for total revenue that is equal to total cost.
C)should produce the quantity of output that results in the greatest difference between total revenue and total cost.
D)should produce the quantity of output that results in the greatest difference between marginal revenue and marginal cost.

Question 68

Assume that price is greater than average variable cost.If a perfectly competitive seller is producing at an output where price is $11 and the marginal cost is $14.54, then to maximise profits the firm should

A)continue producing at the current output.
B)produce a larger level of output.
C)produce a smaller level of output.
D)There is not enough information given to answer the question.

Question 69

For a perfectly competitive firm, at profit maximisation

A)market price exceeds marginal cost.
B)total revenue is maximised.
C)marginal revenue equals marginal cost.
D)production must occur where average cost is minimised.

Question 70

At the profit-maximising level of output for a perfectly competitive firm, price equals marginal cost.Which of the following is also true?

A)The difference between total revenue and total cost is the greatest.
B)Total revenue equals total cost.
C)Average revenue equals average total cost.
D)Marginal profit equals marginal cost.

Question 71

A perfectly competitive firm's marginal revenue

A)is greater than price.
B)is less than price because a firm must lower its price to sell more.
C)is equal to price.
D)may be either greater or less than price, depending on the quantity sold.

Question 72

Figure 8.2
Refer to Figure 8.2.Why is the total revenue curve a ray from the origin?

A)Because revenue increases at an increasing rate
B)Because revenue increases at a decreasing rate
C)Because the firm can sell its product at a constant price
D)Because the firm must lower its price to sell more

Question 73

The marginal revenue curve for a perfectly competitive firm

A)is downward sloping.
B)is the same as its demand curve.
C)is perfectly inelastic.
D)is the same as its marginal cost curve.

Question 74

If the market price is $40, what is the average revenue of selling five units?

A)$8.
B)$20.
C)$40.
D)$200.

Question 75

Producing where marginal revenue equals marginal cost is equivalent to producing where

A)average total cost equals average revenue.
B)average fixed cost is minimised.
C)total revenue is equal to total cost.
D)total profit is maximised.

Question 76

In a graph that illustrates a perfectly competitive firm, marginal revenue is

A)a diagonal line that lies below the firm's demand curve.
B)a line that intersects the firm's demand curve from below at its lowest point.
C)a line that intersects the firm's average total cost curve from below at its lowest point.
D)the same as the firm's demand curve.

Question 77

Marginal revenue is

A)total revenue divided by the total quantity of output.
B)the change in profit divided by the change in the quantity of output.
C)the change in total revenue divided by the change in total cost.
D)the change in total revenue divided by the change in the quantity of output.

Question 78

For a perfectly competitive firm, which of the following is not true at profit maximisation?

A)Market price is greater than marginal cost.
B)Marginal revenue equals marginal cost.
C)Total revenue minus total cost is maximised.
D)Price equals marginal cost.

Question 79

In a graph with output on the horizontal axis and total revenue on the vertical axis, the shape of the total revenue curve for a perfectly competitive seller is

A)U-shaped
B)inverted U-shaped
C)a horizontal line
D)a ray from the origin

Question 80

Figure 8.2
Refer to Figure 8.2.What happens if the firm produces more than Q₄ units?

A)Its profit increases.
B)It incurs a loss.
C)Its total revenue is increasing faster than its total cost.
D)It could make a profit or a loss depending on what happens to demand.