Deck 8: The Theory of Perfect Competition

Question 1

In long run competitive equilibrium:

A)p = q.
B)p = SMC.
C)p = SAVC.
D)p = SAC.

Answer 1

p = SAC.

Question 2

All of the following assumptions apply to perfect competition except:

A)perfect resource mobility.
B)perfect information.
C)small numbers.
D)product homogeneity.

Answer 2

small numbers.

Question 3

suppose there are two individual demand curves; P₁=1/y₁ and P₂=10/y₂ . What is the aggregate demand?

A)Y= 10/P
B)Y= P/11
C)Y= 9/P
D)Y= 11/P

Answer 3

Y= 11/P

Question 4

A Walrasian auctioneer:

A)seeks the highest price a consumer will pay.
B)offers higher prices until excess demand is eliminated.
C)offers lower prices until excess demand is eliminated.
D)offers higher prices until excess supply is eliminated.

Question 5

In short run competitive equilibrium:

A)p = q.
B)p = SAVC.
C)p = SMC.
D)p = SAC.

Question 6

In the long run a competitive firm will:

A)produce where MR = LRATC.
B)have larger output than in the short run.
C)only operates if it earns positive economic profits.
D)have a constant marginal cost.

Question 7

Suppose the variable cost to produce quantity q is TC(q)= q²/10. Suppose the firm is a price- taker and the market price is p = 100; its fixed cost is currently 6600. If this firm wants to stay in business, it has to:

A)reduce its fixed cost to 6,000.
B)do nothing.
C)reduce its fixed cost to zero.
D)reduce its fixed cost to 5,000.

Question 8

A market demand curve:

A)is less elastic than the individual demand curve.
B)has no income effects.
C)is the sum of all individual demand curves.
D)positively sloped.

Question 9

All of the following assumptions apply to perfect competition except:

A)perfect information.
B)large numbers.
C)perfect resource mobility.
D)product heterogeneity.

Question 10

When referring to demand, the extensive margin refers to

A)how much each consumer buys
B)how many consumers are in the market
C)to what extent does elasticity play a role
D)how much is the marginal utility for each consumer

Question 11

There are 100 identical demanders of product y, and the demand function for each individual is y = 10 - p. The production function for any firm is y = min(z₁,z₂). If the prices of z₁ and z₂ depend on aggregate input requirements in the following way: w₁ = z₁/200, w₂ = z₂/200, then the quantity produced in long- run equilibrium is:

A)800.
B)500.
C)700.
D)600.

Question 12

A profit maximizing firm:

A)also minimizes marginal costs.
B)behaves the same as a cost minimizing firm.
C)sets price equal to marginal revenue.
D)sets price equal to marginal cost.

Question 13

Since a perfectly competitive firm is assumed to be a price- taker:

A)its profit function is linear.
B)marginal revenue is less than price.
C)its total- revenue function is linear.
D)its average revenue is less than price.

Question 14

Producer Surplus is:

A)the difference between value and Supply for units traded.
B)the area below Supply for units traded.
C)the difference between price and Supply for units traded.
D)the area below price for units traded.

Question 15

The aggregate gains from trade in a market is equal to

A)consumer surplus plus profit
B)producer surplus plus consumer expenditure
C)the sum of consumers' and producers' surpluses
D)total revenue plus consumer surplus

Question 16

The assumption of large numbers in economics:

A)allows perfect competition to exist.
B)indicates the magnitude of government budget items.
C)eliminates opportunities for price manipulation.
D)refers to the number of consumers needed for a successful product.

Question 17

. Suppose the market demand for fish is: Q=1- P, and the supply of fish is Q=- 2+P, where P is the price per pound of fish. The quantity traded in this market is:

A)2.
B)1.
C)3.
D)0.

Question 18

All of the following assumptions apply to perfect competition except:

A)immobile resources.
B)perfect information.
C)product homogeneity.
D)large numbers.

Question 19

In most markets, prices are determined when suppliers (or demanders)set prices:

A)in many ways, too many to list.
B)independently of each other.
C)and demanders (or suppliers)accept or reject them.
D)after consulting their competitors (or neighbors).

Question 20

In the long run equilibrium:

A)price is equal to the minimum average cost.
B)price is greater than the minimum average variable cost.
C)price is equal to the minimum average fixed cost.
D)price is greater that the minimum average cost.

Question 21

A price taking firm that has TC = 2q² + 10 and faces a market price of Pe = 8 will produce what quantity?

A)4
B)0
C)2
D)6

Question 22

Andrew's demand for fish is: Q_A=12- 3P. Betty's demand for fish is: Q_B=16- 4P and Cathy's demand for fish is: Q_C=20- 5P. Q is the number of pounds of fish and P is the price of fish per pound. If Andrew, Betty and Cathy are the only people living in their village, what is the total market demand for fish in the village?

A)Q=48- 4P
B)Q=48- 12P
C)Q=48- 3P
D)Q=48- 5P

Question 23

Market supply is:

A)is the sum of the individual firm's AVC curves.
B)the relation between price and the total quantity that firms are willing to sell.
C)the level of profit a firm requires to provide a particular quantity.
D)defined only when the firm faces the entire demand curve.

Question 24

A competitive equilibrium:

A)is never Pareto- optimal.
B)requires a price such that quantity demanded equals quantity supplied.
C)is never Walrasian- optimal.
D)is based on the assumption that individuals set prices.

Question 25

The competitive firm's supply curve:

A)gives the profit- maximizing quantity of output for each price.
B)is determined exclusively by the production function.
C)is U- shaped.
D)is its SMC curve.

Question 26

Suppose that short- run SMC = 10 + 2Q for an individual firm in a competitive market. If there are 100 identical firms in this market, then the short- run supply curve can be written as:

A)P = 10 + 200Q.
B)P = 1000 + 2Q.
C)P = 1000 - 200Q.
D)P = 10 + 0.02Q.

Question 27

A perfectly competitive market's short- run supply curve:

A)is the horizontal summation of all firms' short run supply curves.
B)is the horizontal summation of all firms' SMC curves.
C)shows price- output combinations at which firms make normal profits.
D)coincides with a representative firm's SMC curve.

Question 28

A necessary condition for an industry to be in long- run competitive equilibrium is:

A)each firm's profit is positive, but very small.
B)the firm's short- and long- run marginal costs are equal.
C)consumers' surplus is maximized.
D)total revenue is greater than LTC for each firm.

Question 29

If a competitive firm has TC = q³ - 40q² + 430q + 100, what is the minimum price that the firm must receive for its output in order for it to be willing to produce?

A)40
B)30
C)20
D)10

Question 30

In long run equilibrium:

A)no firms enter or leave the market.
B)price and quantity are predictable for long periods of time.
C)firms enter and leave the market.
D)price and quantity are fixed by a Walrasian auctioneer.

Question 31

In the short run marginal product of labor initially rises and then falls there may be two output levels where marginal revenue equals marginal cost. In this case how does a firm choose the appropriate output level?

A)choose the lower of the two output levels
B)choose the point where marginal costs falling
C)choose the point where average cost is minimized
D)choose the point where marginal cost is rising

Question 32

A reservation price:

A)is the maximum amount one would be willing to pay for a good.
B)is the maximum amount one would be willing to accept to give up a good.
C)is the payment needed to make a reservation.
D)is the minimum amount one would be willing to pay for a good.

Question 33

There are 100 identical demanders of product y, and the demand function for each individual is y = 10 - p. The production function for any firm is y = min(z₁,z₂). If the industry were to produce 700 units of y, then aggregate requirements would be:

A)z₁ = 350 and z₂ = 350.
B)z₁ = 500 and z₂ = 500.
C)z₁ = 700 and z₂ = 0 if w₁ < w₂.
D)z₁ = 700 and z₂ = 700.

Question 34

In a constant- cost industry:

A)the firm's TC curve is linear.
B)the short run market supply curve is fixed as firms enter or exit.
C)the long run supply curve is horizontal.
D)the short run market supply curve is horizontal.

Question 35

Producer's surplus:

A)is zero when firms earn zero profits.
B)is equal to the sum of individual firm rents.
C)is the opposite of consumer's surplus.
D)is always larger than consumer's surplus.

Question 36

A firm will not produce in a competitive industry if:

A)price is less than short run SAC.
B)profit is negative.
C)price is less than SMC.
D)price is less than short run SAVC.

Question 37

The market demand is given by P = 108 - 2.5Q. If there are 12 identical firms with TC = 3Q² + 18, what is the profit of each firm?

A)- 8
B)5
C)- 18
D)9

Question 38

Suppose the total cost to produce quantity q is TC(q)= 250 + q²/10. If this firm is a price- taker and the market price is p = 10, then the firm's total cost will be:

A)equal to the marginal revenue.
B)zero.
C)equal to the total revenue.
D)equal to the price.

Question 39

If the initial allocation of wealth and abilities change:

A)the quantities exchanged may change but the prices are unchanged.
B)the quantities exchanged and their prices are unchanged.
C)the quantities exchanged and their prices may change.
D)the quantities exchanged are unchanged but the prices may change.

Question 40

A market is composed of five demanders with the following reservation prices, $30, $25, $40, $75, and four suppliers' supplies with the following reservation prices, $75, $55, $80 and $85. Which of the following is a competitive equilibrium price?

A)$30
B)$40
C)$60
D)$50

Question 41

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

A)All consumers know all prices.
B)The consumers of any given good or service are identical.
C)In any given market, the products of all firms are identical.
D)Individuals consume or produce small parts of output.

Question 42

Which of the following is not assumed about perfectly competitive markets?

A)barriers to entry
B)many buyers and sellers
C)price taking behaviour
D)homogeneous products

Question 43

Since competitive firms are price takers, their profit maximizing problem requires them to choose the quantity which makes:

A)total revenue and STC equal.
B)price and quantity equal to each other.
C)marginal revenue and SMC equal.
D)total revenue and equilibrium price equal.

Question 44

A competitive firm's short run supply curve is its:

A)owner's preference function.
B)SAC curve to the right of its SMC curve.
C)SMC curve above its SAVC curve.
D)SMC curve above its SAC curve.

Question 45

An increase in the price of a variable input employed in a perfectly competitive industry will:

A)shift the short run industry supply curve up and to the left.
B)have no effect on supply under fixed proportions production.
C)reduce the amount produced by each firm in long- run equilibrium.
D)have no effect on long- run equilibrium price under constant- costs.

Question 46

A Walrasian auctioneer:

A)is a real person who helps to clear markets.
B)is someone who sells walruses.
C)is an imaginary price setter in a competitive market.
D)is a middleman.

Question 47

The difference between long run and short run equilibrium is that:

A)in the long run new firms can enter the industry.
B)the short run is less than a year.
C)in the short run new firms can enter the industry.
D)the long run refers to the next generation.

Question 48

In the short run a firm in a competitive market will produce nothing when:

A)price is less than SMC.
B)its maximum profit is negative.
C)price is less than the minimum value of SAVC.
D)STC exceeds total revenue.

Question 49

All of the following assumptions apply to perfect competition except:

A)perfect resource mobility.
B)costly information.
C)product homogeneity.
D)large numbers.

Question 50

If a firm has TC = 2q^3/2 + 18q^1/2 + 66, what is the shutdown price for this firm?

A)2
B)81
C)12
D)9

Question 51

When referring to supply, the intensive margin refers to

A)the marginal cost of production
B)how much each firm produces
C)how intensively they use labor and production
D)how many firms are in the market

Question 52

If a perfectly competitive firm chooses output such that the marginal cost is lower than the market price, the firm will:

A)not be maximizing profits.
B)shut down.
C)not be making a profit.
D)not be covering average variable costs.

Question 53

Suppose that for the individual firm in a competitive market, LRMC = 4Q - 20 and LRAC = 2Q - 20
+ 100/Q. If this is a constant cost industry, then the long- run supply curve will be:

A)horizontal at P = 8 3.
B)horizontal at P = 50.
C)undetermined without knowing the number of firms in the market.
D)vertical at Q = 5.

Question 54

Suppose that TC = 2Q³ - 18Q² + 100Q + 50. If the market price is 32, how much output will the firm produce to maximize profit?

A)10
B)6
C)8
D)0

Question 55

In a constant cost industry:

A)price may be greater than, less than, or equal to Average Cost.
B)the firm's long run supply curve is horizontal.
C)price is determined by a Walrasian auctioneer.
D)the efficient scale of production increases with time.

Question 56

The long- run supply curve for a competitive industry shows:

A)the vertical summation of all MC curves.
B)the horizontal summation of all firms' LMC curves.
C)the quantity demanded at different prices with fixed input- prices.
D)a upward slope under decreasing returns to scale.

Question 57

In a competitive market, the quantity bought and sold is determined by:

A)television advertising.
B)the reservation prices of demanders and suppliers.
C)the reservation prices of demanders alone.
D)the reservation prices of suppliers alone.

Question 58

The efficient scale of production is

A)the minimum level of production where average cost is minimized
B)the output level where marginal revenue equals marginal cost
C)where total revenue is maximized
D)where marginal cost equals average variable cost

Question 59

Suppose the total cost to produce quantity q is TC(q)= 10 + q²/10. If this firm is a price- taker and the market price is p = 10, then the firm's profits will be:

A)250.
B)260.
C)0.
D)240.

Question 60

At the point where profit is maximized

A)marginal product is zero
B)marginal profit is zero
C)marginal cost is zero
D)marginal revenue is zero

Question 61

In an increasing cost industry, the long run supply is:

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

Question 62

If a typical firm has TC given by q² + 5q + 25 and the price in the competitive market is 25, then:

A)there will be entry as firms are making a loss.
B)there will be exit as firm are making a loss.
C)there will be entry as firms are making a profit.
D)there will be exit as firms are making a profit.

Question 63

In the short- run, a competitive firm will produce some output even though its profit is negative if:

A)price exceeds the minimum value of SAVC.
B)price exceeds the minimum value of SMC.
C)it expects prices to increase enough to earn positive profits soon.
D)price exceeds the minimum value of SATC.

Question 64

A newspaper headline asserts: "Rising demand pulls up gold prices". This headline:

A)asserts incorrectly that demand determines price (rather than price determining demand).
B)makes good economic sense.
C)implies that prices will fluctuate indefinitely.
D)implies incorrectly that more gold would be demanded at higher prices.

Question 65

There are 100 identical demanders of product y, and the demand function for each individual is y = 10 - p. The production function for any firm is y = min(z₁,z₂). If the prices of z₁ and z₂ depend on aggregate input requirements in the following way: w₁ = z₁/200, w₂ = z₂/200, then:

A)this is a decreasing cost industry.
B)this is a declining industry.
C)this is a constant cost industry.
D)this is an increasing cost industry.

Question 66

Suppose that 100 firms, each with the supply function Q=0.01P are in a particular market. If the market demand is Q=10- 0.5P then the market price is:

A)0.01.
B)10.
C)0.5.
D)5.

Question 67

In a competitive equilibrium the:

A)quantity demanded is greater than the quantity supplied.
B)quantity supplied is greater than the quantity demanded.
C)numbers of buyers and sellers are equal.
D)quantities supplied and demanded are equal.

Question 68

The short- run competitive equilibrium is efficient because:

A)additional sales will not cover the market value of needed resources.
B)consumer surplus is maximized.
C)no one can be made better off by making someone else worse off.
D)producer surplus is maximized.

Question 69

There are 100 identical demanders of product y, and the demand function for each individual is y = 10 - p. The production function for any firm is y = min(z₁,z₂). If this is a constant cost industry, and if the prices of z₁ and z₂ are each $1, then:

A)long- run equilibrium price is $1.
B)quantity demanded in long- run equilibrium is 998/100.
C)long- run equilibrium price is $3.
D)quantity demanded in long- run equilibrium is 800.

Question 70

The aggregate supply curve is the:

A)vertical sum of suppliers' supply functions.
B)horizontal sum of consumers' supply functions.
C)supply side of the market for sand and gravel.
D)horizontal sum of suppliers' supply functions.

Question 71

Andrew's demand for fish is: Q_A=12- 3P. Betty's demand for fish is: Q_B=16- 4P and Cathy's demand for fish is: Q_C=20- 5P. Q is the number of pounds of fish and P is the price of fish per pound. If Andrew, Betty and Cathy are the only people living in their village, the slope of the village demand for fish is:

A)- 1/12.
B)- 1/4.
C)- 1/5.
D)- 1/3.

Question 72

Andrew's demand for fish is: Q_A=12- 3P. Betty's demand for fish is: Q_B=16- 4P and Cathy's demand for fish is: Q_C=20- 5P. Q is the number of pounds of fish and P is the price of fish per pound. If Andrew, Betty and Cathy are the only people living in their village, and if the price of fish is P=$1 per pound, then Andrew is consuming of the fish in the village?

A)33%.
B)30%.
C)0%.
D)25%.

Question 73

Andrew's demand for fish is: Q_A=12- 3P. Betty's demand for fish is: Q_B=16- 4P and Cathy's demand for fish is: Q_C=20- 5P. Q is the number of pounds of fish and P is the price of fish per pound. If Andrew, Betty and Cathy are the only people living in their village, and if the price of fish is P=$1 per pound, what is the total market demand for fish in the village?

A)Q=12.
B)Q=36.
C)Q=16.
D)Q=20.

Question 74

A necessary condition for an industry to be in long- run competitive equilibrium is:

A)marginal revenue is equal to SAC.
B)price is equal to SAFC.
C)price is equal to the efficient SAC of production.
D)each firm is producing its profit maximizing output.

Question 75

If Demand is given by P = 75 - 3Q and Supply is given by P = 12 + 4Q, then the equilibrium (Q,P)is:

A)(9,48).
B)(11,55).
C)(7,54).
D)(8,44).

Question 76

Suppose the total cost to produce quantity q is TC(q)= q²/10+250. If this firm is a price- taker and the market price is p = 10, then the firm's output will be:

A)240.
B)250.
C)260.
D)0.

Question 77

In a two- person, two- good exchange economy:

A)the competitive equilibrium prices are on the contract curve.
B)the competitive equilibrium allocation is on the budget curve.
C)the competitive equilibrium allocation is Pareto- optimal.
D)there is no competitive equilibrium.

Question 78

There are 100 identical demanders of product y, and the demand function for each individual is y =
10 - p. The production function for any firm is y = min(z₁,z₂). The market demand function is:

A)y = 1000- 100min(z₁,z₂).
B)y = 100(10 - p).
C)y = 100 - 100p.
D)y = 10 - p.

Question 79

In a perfectly competitive industry, an increase in market demand increases:

A)each of the firms' share of total output in the long- run.
B)price in both the short- and the long- run.
C)price in the short- run, but has no effect on the long- run price.
D)quantity supplied in both the short- and the long- run.

Question 80

There are 100 identical demanders of product y, and the demand function for each individual is y = 10 - p. The production function for any firm is y = min(z₁,z₂). The long- run cost function for any firm is:

A)y^*(w₁ + w₂).
B)y^*w₁ if w₁ < w₂.
C)y^*(w₁ + w₂)/2.
D)y^*min(w₁,w₂).