Deck 5: Perfect Competition

Question 1

Which of the following is a basic characteristic of perfect competition?

A)the obstructed operation of the forces of supply and demand
B)a large number of buyers and sellers
C)significant entry and exit barriers
D)significant use of advertising to promote products
E)only a few businesses selling a particular product

Answer 1

B

Question 2

A business's market power will be greater if its:

A)rivals are large in number
B)demand curve is characterized as perfectly elastic
C)size is large in relation to its industry
D)ability to affect the price of the product it sells is limited
E)there are no barriers to entry in the market

Answer 2

C

Question 3

Marginal revenue may be defined as the:

A)change in product price associated with the sale of one more unit of output
B)change in average revenue associated with the sale of one more unit of output
C)difference between product price and average cost
D)change in total revenue associated with the sale of one more unit of output
E)total revenue divided by the number of units of output produced

Answer 3

D

Question 4

A perfectly competitive business's average revenue equals:

A)its total revenue
B)its marginal revenue divided by price
C)total revenue divided by price
D)its marginal revenue
E)its price divided by total revenue

Question 5

An industry composed of three firms,each of which considers the potential reactions of its rivals in making pricing decisions,yet is not concerned with the potential entry of other firms,can best be described as:

A)perfect competition
B)a monopoly
C)an oligopoly
D)monopolistic competition
E)competitive monopoly

Question 6

The shape of the demand curve faced by an individual business in a perfectly competitive market is the result of:

A)advertising
B)the sale of a product that is distinct from others
C)mutual interdependence
D)existing entry barriers
E)the business's inability to affect price

Question 7

In which of the following market structures is the entry of new businesses the most difficult?

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

Question 8

An entry barrier that involves illegal pricing strategies is:

A)increasing returns to scale
B)advertising
C)legal obstacles
D)restricted ownership of resources
E)predatory pricing

Question 9

Entry barriers can be the result of:

A)inelastic demand
B)legal obstacles
C)perfectly competitive markets
D)the availability of close substitutes
E)perfectly elastic demand

Question 10

Which of the following industries most closely approximates a monopoly?

A)the insurance industry
B)the restaurant industry
C)agriculture
D)fishing
E)a public utility

Question 11

For a perfectly competitive business,total revenue:

A)is average revenue divided by quantity
B)graphs as a straight line, parallel to the vertical axis
C)graphs as a straight line, parallel to the horizontal axis
D)is average revenue divided by price
E)increases by a constant dollar amount as output rises

Question 12

A perfectly competitive seller is:

A)both a price-maker and a price-taker
B)a price-taker
C)a price-maker
D)neither a price-maker nor a price-taker
E)sometimes a price-taker, but usually a price-maker

Question 13

Monopolistic competition resembles perfect competition to the extent that:

A)non-price competition is emphasized in both
B)both involve the production of standard products
C)both involve the production of differentiated products
D)entry barriers are either weak or non-existent in both
E)entry barriers are strong in both

Question 14

The demand curve of an individual perfectly competitive business is:

A)horizontal at a price set by the business
B)downward-sloping with price set solely by the forces of supply and demand
C)perfectly inelastic
D)horizontal at a price set by the forces of market supply and demand
E)upward-sloping with price set solely by the forces of supply and demand

Question 15

An entry barrier that involves cost advantages is:

A)advertising
B)legal obstacles
C)restricted ownership of resources
D)market experience
E)a patent

Question 16

A perfectly competitive business's demand curve is a(n):

A)downward-sloping straight line reflecting the law of demand
B)straight line parallel to the horizontal axis
C)upward-sloping straight line reflecting the constant value of price as output increases
D)straight line parallel to the vertical axis
E)downward-sloping convex curve

Question 17

If a business in a perfectly competitive industry is confronted with an equilibrium price of $5,its marginal revenue:

A)may be either greater or less than $5
B)will also be $5
C)will be less than $5, but a positive number
D)will be greater than $5
E)will be negative

Question 18

The type of market in which businesses possess the least market power is a(n):

A)monopoly, as it has no competitors
B)oligopoly, as each business's size is large relative to the industry
C)monopolistically competitive market, as each business differentiates its products
D)perfectly competitive market, as each business is a price-taker
E)competitive monopoly, because it combines both competition and monopoly

Question 19

Price is constant or "given" to the individual business selling in a perfectly competitive market because:

A)the business's demand curve is downward-sloping
B)of product differentiation reinforced by extensive advertising
C)each seller is a price-taker
D)there are no good substitutes for its product
E)of the significance of barriers to entry

Question 20

Which of the following industries most closely resembles perfect competition?

A)agriculture
B)farming implements
C)clothing
D)steel
E)brewing

Question 21

At the profit-maximizing point,total profit is:

A)fgab
B)egac
C)0fbn
D)efbc
E)0ecn

Question 22

Which of the following is characteristic of a perfectly competitive seller's demand curve?

A)price and marginal revenue are equal at all levels of output
B)average revenue is less than price
C)its elasticity is "1" at all levels of output
D)it is the same as the market demand curve
E)it is perfectly inelastic

Question 23

Assume the XYZ Corporation is producing 20 units of output.It is selling this output in a perfectly competitive market at $10 per unit.Its fixed costs are $100 and its average variable cost is $3 at 20 units of output.On the basis of this information we can say that the corporation:

A)should close down in the short run
B)is maximizing its profits
C)is realizing an economic loss of $60
D)is realizing an economic profit of $40
E)is realizing an economic profit of $60

Question 24

The profit-maximizing output rule applies:

A)only to monopolistically competitive businesses
B)only when the business is a "price-taker"
C)only to monopolies
D)only to perfectly competitive businesses
E)to businesses in all types of industries

Question 25

The profit-maximizing output is:

A)0n
B)0k
C)0h
D)zero, as the business would suffer a loss
E)0e

Question 26

Refer to this diagram for a perfectly competitive producer.If product price is P₃:

A)the business will be maximizing its profits
B)the business will realize a normal profit
C)economic profits will be positive
D)the business has reached its shutdown point
E)the business will be making an economic profit

Question 27

The following data confront a business:

$\begin{array}{cc}\text { Output }&\text { Marginal Revenue } &\text { Marginal Cost } \\0&16 & 10 \\2&16 & 9 \\3&16 & 13 \\4&16 & 15 \\5&16 & 21\\6\end{array}$

-If a business chooses to produce 5 units of output:

A)the last unit produced will add $5 to profit
B)the last unit produced will subtract from profit
C)profits will be maximized
D)it will continue to increase output since each additional unit produced adds to profit
E)the last unit of output will add $16 to profit

Question 28

The short-run supply curve for a perfectly competitive industry can be found by:

A)multiplying the AVC curve of the representative business at each output level by the number of businesses in the industry
B)adding horizontally the AVC curves of all businesses in the industry
C)summing horizontally the segments of the MC curves lying above the AVC curves for all businesses in the industry
D)adding horizontally the AC curves of all the businesses in the industry
E)adding vertically the AC curves of all the businesses in the industry

Question 29

The short-run supply curve for this producer in a perfectly competitive market is the:

A)entire MC curve
B)segment of the AVC curve lying to the right of the MC curve
C)segment of the MC curve lying above the AC curve
D)segment of the AC curve lying to the right of the MC curve
E)segment of the MC curve lying above the AVC curve

Question 30

If a perfectly competitive business closes down in the short run:

A)its loss will be zero
B)it will realize a normal profit
C)it will realize a loss equal to its variable costs
D)it will realize a profit equal to its fixed costs
E)it will realize a loss equal to its fixed costs

Question 31

A business will maximize profits at the output at which:

A)the excess of total cost over total revenue is greatest
B)total revenue and total cost are equal
C)price exceeds average cost by the largest amount
D)the difference between marginal revenue and price is at a maximum
E)the excess of total revenue over total cost is greatest

Question 32

Refer to this diagram for a perfectly competitive producer.The lowest price at which the business should produce (as opposed to closing down)is:

A)P₁
B)P₂
C)P₃
D)P₄
E)0

Question 33

The following data confront a business:

$\begin{array}{cc}\text { Output }&\text { Marginal Revenue } &\text { Marginal Cost } \\0&16 & 10 \\2&16 & 9 \\3&16 & 13 \\4&16 & 15 \\5&16 & 21\\6\end{array}$

-A perfectly competitive business reaches a breakeven point where:

A)marginal cost intersects the average variable cost curve
B)total revenue equals variable cost
C)normal profits are zero
D)price equals minimum average cost
E)marginal cost is at a minimum

Question 34

The profit-maximizing output rule can be used to determine an output level that will:

A)guarantee the business a profit
B)ensure a business's profit is positive
C)maximize a business's loss
D)result in a profit closest to zero at all times
E)minimize a business's loss

Question 35

Suppose that,in running your business,you find that the price of your product is less than AVC.Given this information you should:

A)minimize your losses by producing where P = MC
B)maximize your profits by producing where P = MC
C)close down because, by producing, your losses will exceed your fixed costs
D)close down because total revenue exceeds variable costs
E)close down because total revenue exceeds total cost

Question 36

Refer to this diagram for a perfectly competitive producer.The business will produce at a loss at all prices.

A)above P₁
B)above P₃
C)above P₄
D)between P₂ and P₃
E)between P₁ and P₂

Question 37

When a business is maximizing profits it will necessarily be:

A)maximizing profit per unit of output
B)maximizing the difference between total revenue and total cost
C)minimizing total cost
D)maximizing total revenue
E)maximizing average revenue

Question 38

The short-run shutdown point for a perfectly competitive business occurs at the point where:

A)price equals minimum AVC
B)total revenue is less than total cost
C)the business stops making an economic profit
D)price equals minimum AC
E)price equals minimum MC

Question 39

The notion that a business should produce up to the point at which the added revenue from the sale of an extra unit of output is equal to the added cost of producing it is known as the:

A)output-maximizing rule
B)profit-maximizing output rule
C)shutdown rule
D)breakeven rule
E)output-minimizing rule

Question 40

The following data confront a business:

$\begin{array}{cc}\text { Output }&\text { Marginal Revenue } &\text { Marginal Cost } \\0&16 & 10 \\2&16 & 9 \\3&16 & 13 \\4&16 & 15 \\5&16 & 21\\6\end{array}$

-A profit-maximizing business will produce that quantity of output:

A)at which price equals marginal revenue
B)equal to 4 units
C)equal to 5 units
D)at which marginal revenue exceeds marginal cost by the widest margin
E)equal to 3 units

Question 41

The demand for a resource depends primarily upon:

A)the supply of that resource
B)the elasticity of supply of complementary inputs
C)marginal resource cost
D)the elasticity of supply of substitute inputs
E)the demand for the product that it helps to produce

Question 42

Resources are distributed in a way that maximizes the overall satisfaction of consumers when production occurs at the point at which:

A)marginal cost intersects average variable cost
B)the price that consumers are willing to pay is equal to average revenue
C)the price that consumers are willing to pay is equal to marginal cost
D)the price that consumers are willing to pay is equal to average variable cost
E)price is equal to total revenue

Question 43

The labour demand curve of a business in a perfectly competitive labour market:

A)slopes downward because the elasticity of demand is always less than unity
B)slopes downward because of declining marginal product
C)is perfectly elastic at the prevailing wage rate
D)slopes downward because of diminishing marginal utility
E)slopes upward because of the business's ability to set its resource price

Question 44

A business will find it profitable to hire workers up to the point at which:

A)marginal resource cost equals the wage rate
B)the wage rate equals product price
C)marginal product equals marginal revenue product
D)marginal resource cost is equal to their marginal revenue product
E)marginal resource cost exceeds the wage rate by the largest amount

Question 45

In the long run,we should expect:

A)businesses to enter the industry, market supply to increase, and product price to fall
B)businesses to leave the industry, market supply to decrease, and product price to rise
C)businesses to leave the industry, market supply to increase, and product price to rise
D)no change in the number of businesses in this industry
E)businesses to enter the industry, market supply to decrease, and product price to rise

Question 46

Marginal revenue product measures the:

A)amount by which the extra output of one more unit of a resource increases a business's total revenue
B)decline in product price that a business must accept in order to sell the extra output of one more unit of a resource
C)increase in total resource cost that results from the hiring of one extra unit of a resource
D)increase in total revenue that results from the production of one more unit of output
E)decrease in total resource cost that results from the hiring of one extra unit of a resource

Question 47

Resource pricing is important to economists mostly because:

A)resource prices are a major determinant of peoples' incomes
B)resource prices reflect social customs
C)resource prices, along with resource productivity, are important to households in minimizing their costs
D)resource markets are affected by a wide array of factors
E)resource prices are determined largely by governments

Question 48

If one worker can pick $30 worth of grapes and two workers together can pick $50 worth of grapes,we can say that the marginal revenue product of:

A)each worker is $25
B)the first worker is $25
C)the first worker is $20
D)the second worker is $30
E)the second worker is $20

Question 49

In resource markets:

A)businesses borrow money from households
B)households sell economic resources to businesses
C)businesses sell services to households
D)businesses sell raw materials to households
E)households buy economic resources from businesses

Question 50

The marginal revenue product curve is:

A)always vertical
B)the business's resource demand schedule
C)the business's resource supply schedule
D)upward-sloping
E)always horizontal

Question 51

When perfectly competitive businesses practice minimum cost pricing,they are:

A)making zero economic profits and passing on all possible cost savings to consumers
B)fulfilling the condition P = MC
C)in their short-run equilibrium position
D)minimizing average fixed costs
E)minimizing average variable cost

Question 52

In a perfectly competitive resource market:

A)marginal revenue for a product must always equal its price
B)the business is a price-maker
C)the business's resource demand curve is horizontal
D)the business's resource demand curve is vertical
E)the business's resource supply curve is horizontal

Question 53

The most important determinant of resource prices is:

A)social customs
B)intervention by governments
C)the interaction of demand and supply
D)intervention by labour unions
E)intervention by landowners

Question 54

In a perfectly competitive resource market:

A)resource suppliers are price-makers
B)producers set the resource's price
C)there are many producers demanding the resource but only a few resource suppliers
D)producers have no effect on the prevailing price of the resource
E)there are many resource suppliers but only a few businesses demanding the resource

Question 55

Marginal resource cost can be defined as:

A)the increase in total resource cost associated with the production of one more unit of output
B)the increase in total resource cost associated with the hiring of one more unit of the resource
C)total resource cost divided by the number of units of the resource employed
D)the change in total revenue associated with the employment of one more unit of the resource
E)the increase in total output associated with the hiring of one more unit of the resource

Question 56

Marginal productivity theory states that:

A)businesses demand resources based on resource supply
B)resources are used by businesses based on how much extra profit the resources provide
C)with each additional unit of output, resource costs decrease
D)the productivity of a business depends on the profits it can earn in the future
E)resource supply is based on resource demand

Question 57

Which of the following statements is correct?

A)The diagrams portray neither long-run nor short-run equilibrium.
B)The diagrams portray both long-run and short-run equilibrium.
C)The diagrams portray short-run equilibrium, but not long-run equilibrium.
D)The diagrams portray long-run equilibrium, but not short-run equilibrium.
E)The diagrams both portray intermediate-run equilibrium

Question 58

Marginal-cost pricing is achieved when the production of a good occurs at that point where:

A)the price that consumers are willing to pay equals minimum AC
B)the price that consumers are willing to pay equals MC
C)P = minimum AVC
D)total revenue is equal to FC
E)P = minimum MC

Question 59

In Canada,professional football players earn much higher incomes than do professional soccer players.This can best be explained by the fact that:

A)most football players are good soccer players while the reverse is not true
B)consumer demand for football games is greater than for soccer games
C)football and soccer games are highly substitutable products for most consumers
D)the marginal product of soccer players exceeds that of football players
E)there are more professional soccer players in Canada than there are professional football players

Question 60

The marginal product of labour is:

A)the output of the least-skilled worker
B)the amount any given worker adds to the business's total output
C)a worker's output multiplied by the price at which each unit of output can be sold
D)the amount any given worker contributes to the business's total revenue
E)the output of the most-skilled worker

Question 61

Consider the following table:

$\begin{array} { | l | l | l | l | l | l | l | l | } \hline \text { Employment } & 0 & 1 & 2 & 3 & 4 & 5 & 6 \\\hline \text { Total Product } & 0 & 12 & 22 & 30 & 36 & 40 & 42 \\\hline \text { Product Price } ( \$ ) & 3 & 3 & 3 & 3 & 3 & 3 & 3 \\\hline\end{array}$

-On the basis of this data,we can say that the business is:

A)selling its product in a perfectly competitive market
B)selling its product in an imperfectly competitive market
C)hiring workers in a perfectly competitive market
D)hiring workers in an imperfectly competitive market
E)hiring its workers in a monopolistic market

Question 62

Joseph Schumpeter's theories paralleled Karl Marx's as both:

A)saw entrepreneurs as the driving force behind economic progress
B)used only the tools of economic theory to support their beliefs
C)saw the process of "creative destruction" as necessary for economic growth
D)predicted the downfall of capitalism
E)were opposed to capitalist exploitation

Question 63

The labour market demand curve is:

A)obtained by horizontally adding the marginal revenue product curves of all businesses in the market
B)a graph showing the workers demanded at each product price
C)identical to the marginal resource cost curve
D)horizontal at the prevailing market wage rate
E)vertical at the equilibrium level of employment

Question 64

Marginal productivity theory is directly applicable:

A)only in labour markets
B)to labour and natural resources because both can be measured in standardized units
C)to entrepreneurship because it is an intangible resource
D)to all economic resources as it is always possible to calculate the marginal revenue product
E)only in natural resource markets

Question 65

According to Joseph Schumpeter,most real world markets are characterized by:

A)small perfectly competitive businesses
B)large perfectly competitive businesses
C)small oligopolistic businesses
D)large oligopolistic businesses
E)large monopolies

Question 66

Consider the following table:

$\begin{array} { | l | l | l | l | l | l | l | l | } \hline \text { Employment } & 0 & 1 & 2 & 3 & 4 & 5 & 6 \\\hline \text { Total Product } & 0 & 12 & 22 & 30 & 36 & 40 & 42 \\\hline \text { Product Price } ( \$ ) & 3 & 3 & 3 & 3 & 3 & 3 & 3 \\\hline\end{array}$

-If the business is hiring workers under perfectly competitive conditions at a wage rate of $10,it will choose to employ:

A)1 worker
B)2 workers
C)3 workers
D)5 workers
E)6 workers

Question 67

In a perfectly competitive labour market,a business's labour supply curve is:

A)vertical
B)upward-sloping because businesses are price-takers in the resource market
C)represented by the marginal revenue product curve
D)horizontal at the equilibrium wage for labour
E)downward-sloping

Question 68

Assume the Apex Manufacturing Company is perfectly competitive in both the hiring of labour and in the sale of its product.We would expect its labour demand curve to be:

A)vertical at the current level of employment
B)horizontal at the going wage rate
C)upward-sloping
D)downward-sloping
E)nonexistent

Question 69

An employer in a perfectly competitive market should hire additional labour as long as:

A)the wage rate exceeds average product
B)the wage rate is less than MP
C)average product exceeds MP
D)MC exceeds MR
E)the MRP exceeds the wage rate

Question 70

Consider the following table:

$\begin{array} { | l | l | l | l | l | l | l | l | } \hline \text { Employment } & 0 & 1 & 2 & 3 & 4 & 5 & 6 \\\hline \text { Total Product } & 0 & 12 & 22 & 30 & 36 & 40 & 42 \\\hline \text { Product Price } ( \$ ) & 3 & 3 & 3 & 3 & 3 & 3 & 3 \\\hline\end{array}$

-If the business is hiring workers under perfectly competitive conditions at a wage rate of $22,it will choose to employ:

A)1 worker
B)2 workers
C)3 workers
D)4 workers
E)5 workers

Question 71

The labour market supply curve:

A)can be obtained by adding all individual businesses' resource supply curves
B)is horizontal at the prevailing market wage rate
C)shows the total number of workers offering their services in the labour market at each possible wage
D)is downward-sloping, as workers will offer more of their services the higher the wage they receive for them
E)is vertical at the equilibrium level of employment