Deck 13: Perfect Competition

Question 1

In a perfectly competitive market, many firms produce many different varieties of the same product.

Answer 1

False

Question 2

The existence of positive economic profits in an industry attracts new entrants into the industry.

Answer 2

True

Question 3

In the short run when the number of firms in the market is fixed, the market supply curve is just the horizontal sum of all the firms' marginal cost curves.

Answer 3

True

Question 4

A firm will continue to operate in the long run as long as price exceeds long-run average variable cost.

Question 5

The marginal cost curve is a competitive firm's supply curve; it shows how many units of output a firm will be willing to sell at different prices.

Question 6

Firms continue to produce (illegally) counterfeit computer software and documentation. Some of the illegal copies are Microsoft products, though Microsoft still has a large share of the market for its products. The presence of enforced copyright protection laws indicates that the market for Microsoft software cannot be considered a competitive market because:

A) the products of pirates are not identical to those of Microsoft.
B) pirate producers are not profit-maximizing entrepreneurial firms.
C) buyers are not price takers.
D) there are significant barriers to entry.

Question 7

Each firm in perfect competition:

A) sets quantity based on market price.
B) follows the pricing decisions of other firms.
C) follows the output of other firms.
D) follows the reactions of competitors.

Question 8

In a perfectly competitive market, firms set:

A) prices and quantities.
B) prices but not quantities.
C) quantities but not prices.
D) neither prices nor quantities.

Question 9

In a perfectly competitive market, economic forces are controlled by government policy makers.

Question 10

Which of the following is one of the necessary conditions for perfect competition?

A) Diminishing utility
B) No barriers to entry
C) Differentiated products
D) Indivisible setup costs

Question 11

In a perfectly competitive market, market prices are determined by:

A) individual producers.
B) market supply and market demand.
C) the entrepreneur.
D) individual consumers.

Question 12

If long-run average total cost exceeds marginal revenue, a perfectly competitive firm will incur losses.

Question 13

In perfect competition, price is equal to marginal revenue.

Question 14

The profit-maximizing output level minimizes average total cost.

Question 15

Because only competitive firms are price takers, only competitive firms have supply curves.

Question 16

For a perfectly competitive firm, the profit-maximizing output level occurs where marginal cost equals price.

Question 17

An increase in market price, given a fixed number of firms, causes market supply to shift to the right.

Question 18

Perfectly competitive firms:

A) are price takers, since they are not large enough to influence the market price.
B) are individually able to influence the market price.
C) will succeed by charging a price higher than that charged by the rest of the market.
D) can influence the prices of other firms in the same industry by altering their own prices.

Question 19

Barriers to entry:

A) do not affect the number of firms in an industry.
B) exist only in perfectly competitive markets.
C) restrict the number of firms in an industry.
D) limit output in an industry.

Question 20

An assumption of a competitive market is that both buyers and sellers are price takers. When we go to the mall to shop for clothing or to the grocery to buy food, what do we usually observe?

A) Both buyers and sellers are usually price takers.
B) Buyers are often price takers, but sellers are usually price makers.
C) Buyers are often price makers, but sellers are usually price takers.
D) Both buyers and sellers are usually price makers.

Question 21

If the marginal revenue of the next unit a firm produces is $50 and its marginal cost is $35, a firm should:

A) reconsider past production decisions.
B) decrease production.
C) increase production.
D) hold production constant.

Question 22

In a perfectly competitive market, the demand curve faced by an individual firm is:

A) perfectly inelastic.
B) relatively inelastic.
C) perfectly elastic.
D) relatively elastic.

Question 23

Suppose a perfectly competitive firm can increase its profits by increasing its output. Then it must be true that the firm's:

A) marginal revenue is less than its marginal cost.
B) price exceeds its marginal revenue.
C) price exceeds its marginal cost.
D) marginal cost exceeds its marginal revenue.

Question 24

Refer to the graph shown. To maximize profit, this perfectly competitive firm should produce:

A) 30 units of output.
B) 40 units of output.
C) 50 units of output.
D) 60 units of output.

Question 25

Refer to the graph shown. If the firm increases output from 30 to 40, total revenue will increase:

A) more than total cost, and so profit will increase.
B) more than total cost, and so profit will decrease.
C) less than total cost, and so profit will increase.
D) less than total cost, and so profit will decrease.

Question 26

To maximize profits, a perfectly competitive firm should produce where marginal:

A) cost equals total revenue.
B) cost exceeds marginal revenue.
C) cost equals marginal revenue.
D) revenue exceeds marginal cost.

Question 27

Suppose a perfectly competitive firm can increase its profits by reducing its output. Then it must be the case that the firm's:

A) marginal revenue equals its marginal cost.
B) price exceeds its marginal cost.
C) price exceeds its marginal revenue.
D) marginal cost exceeds its marginal revenue.

Question 28

The demand curve for a firm in perfect competition is equal to its:

A) marginal cost curve.
B) marginal revenue curve.
C) average total cost curve.
D) average fixed cost curve.

Question 29

Suppose a perfectly competitive firm's marginal revenue is $10 and its marginal cost is $11. Under these circumstances the firm:

A) is maximizing profit and should not change output.
B) is not maximizing profit and should increase output.
C) is not maximizing profit and should reduce output.
D) needs to know the market price before it can determine whether it is maximizing profit.

Question 30

Refer to the graph shown. If the firm increases output from 50 to 60, total revenue will increase:

A) more than total cost, and so profit will increase.
B) more than total cost, and so profit will decrease.
C) less than total cost, and so profit will increase.
D) less than total cost, and so profit will decrease.

Question 31

Marginal revenue is equal to:

A) total revenue divided by its output.
B) marginal cost.
C) the change in total revenue associated with a change in quantity.
D) the change in total profits associated with a change in quantity.

Question 32

The profit-maximizing condition for a perfectly competitive firm is:

A) MR = P.
B) MR = AVC.
C) P = MC.
D) P = AVC.

Question 33

A perfectly competitive firm facing a price of $50 decides to produce 500 widgets. Its marginal cost of producing the last widget is $50. If the firm's goal is maximize profit, it should:

A) produce more widgets.
B) produce fewer widgets.
C) continue producing 500 widgets.
D) shut down.

Question 34

A perfectly competitive firm's marginal revenue is:

A) less than the selling price.
B) greater than the selling price.
C) equal to the selling price.
D) sometimes below and sometimes above the selling price.

Question 35

The market demand curve for a product produced in a perfectly competitive industry is normally:

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

Question 36

Refer to the graph shown. Currently, if this perfectly competitive firm is maximizing profit, the market price is:

A) $6.50 and marginal revenue for the firm is $5.00
B) $5.00 and marginal revenue for the firm is $3.00
C) $5.00 and marginal revenue for the firm is $5.00
D) $6.50 and marginal revenue for the firm is $6.50

Question 37

Refer to the graph shown. The marginal cost of producing the 60th unit is:

A) $6.50.
B) $5.00.
C) $3.00.
D) $3.50.

Question 38

As long as marginal cost is below marginal revenue, a perfectly competitive firm should:

A) increase production.
B) hold production constant.
C) decrease production.
D) reconsider past production decisions.

Question 39

A perfectly competitive firm facing a price of $10 decides to produce 100 units. If its marginal cost of producing the last unit is $12 and it is seeking to maximize profit, the firm should:

A) produce more units.
B) produce fewer units.
C) continue producing 100 units.
D) shut down.

Question 40

Refer to the graph shown. If the firm increases output from 40 to 50, total revenue will increase:

A) more than total cost, and so profit will increase.
B) more than total cost, and so profit will decrease.
C) less than total cost, and so profit will increase.
D) less than total cost, and so profit will decrease.

Question 41

Refer to the graph shown. What area represents total economic profits?

A) DAFM
B) CBWT
C) MFWT
D) DABC

Question 42

Refer to the graph shown. What distance represents average profits?

A) AB
B) BF
C) AF
D) FW

Question 43

Refer to the graph shown. If market price is currently $7.00 per unit, this perfectly competitive firm will maximize profit by producing:

A) 450 units of output.
B) 650 units of output.
C) 850 units of output.
D) between 550 and 650 units of output.

Question 44

Refer to the table shown. If the market price is $6, a perfectly competitive profit-maximizing firm will produce: $$\begin{array} { | c | c | } \hline \text { Quantity } & \text { Marginal Cast } \\\hline 1 & \$ 3 \\\hline 2 & 5 \\\hline 3 & 7 \\\hline 4 & 9 \\\hline\end{array}$$

A) 1 unit of output.
B) 2 units of output.
C) 3 units of output.
D) 4 units of output.

Question 45

Refer to the table shown. If the market price is $8, a perfectly competitive profit-maximizing firm will produce: $$\begin{array} { | c | c | } \hline \text { Quantity } & \text { Marginal Cast } \\\hline 1 & \$ 3 \\\hline 2 & 5 \\\hline 3 & 7 \\\hline 4 & 9 \\\hline\end{array}$$

A) 1 unit of output.
B) 2 units of output.
C) 3 units of output.
D) 4 units of output.

Question 46

Refer to the graph shown depicting a perfectly competitive firm. If average variable cost is $3 at quantity 450, points A through E represent the:

A) firm's total cost curve.
B) firm's total revenue curve.
C) demand for the firm's product.
D) firm's supply curve.

Question 47

Refer to the graph shown. If market price increases from $5.00 per unit to $6.00 per unit, a profit-maximizing perfectly competitive firm will:

A) increase output from 650 to 750.
B) decrease output from 750 to 650.
C) continue to produce 650 units.
D) produce 850 units of output.

Question 48

Refer to the graph shown. What level of output should the perfectly competitive firm produce to maximize profits?

A) 7.
B) 8.
C) 6.
D) 4.

Question 49

Refer to the graph shown. A perfectly competitive firm would never operate if the price dropped to which segment of the marginal cost curve?

A) AC.
B) CD.
C) DE.
D) CE.

Question 50

Refer to the table shown. The maximum profit that the perfectly competitive firm represented by the above data could earn is: $$\begin{array} { | c | c | c | } \hline \text { Quantity } & \text { Tatal Cast } & \text { Tatal Revenue } \\\hline 10 & \$ 25 & 50 \\\hline 20 & 60 & 100 \\\hline 30 & 105 & 150 \\\hline 40 & 160 & 200 \\\hline\end{array}$$

A) $25.
B) $35.
C) $45.
D) $55.

Question 51

Refer to the graph shown. If market price is currently $5.00 per unit, this perfectly competitive firm will maximize profit by producing:

A) 450 units of output.
B) 650 units of output.
C) 850 units of output.
D) between 550 and 650 units of output.

Question 52

To maximize profits, a perfectly competitive firm should do all the following except:

A) produce until economic profits are maximized.
B) produce until marginal cost equals price.
C) produce until marginal revenue equals marginal cost.
D) produce until per-unit profits are maximized.

Question 53

A perfectly competitive firm will be profitable if price at the profit-maximizing quantity is above:

A) MC.
B) AVC.
C) ATC.
D) AFC.

Question 54

Based on the information shown, a perfectly competitive profit-maximizing firm would produce: $$\begin{array} { | c | c | c | } \hline \text { Quantity } & \text { Total Cost } & \text { Tatal Revenue } \\\hline 10 & \$ 25 & 50 \\\hline 20 & 60 & 100 \\\hline 30 & 105 & 150 \\\hline 40 & 160 & 200 \\\hline\end{array}$$

A) 10 units of output.
B) 20 units of output.
C) 30 units of output.
D) 40 units of output.

Question 55

Refer to the graph shown. If market price is currently $3.00 per unit, this perfectly competitive firm will maximize profit by producing:

A) 450 units of output.
B) 650 units of output.
C) 850 units of output.
D) between 550 and 650 units of output.

Question 56

To maximize profits, a perfectly competitive firm should produce until:

A) price is greater than average total cost.
B) marginal cost is equal to price.
C) average total cost is minimized.
D) per unit profits are maximized.

Question 57

The supply curve of a perfectly competitive firm is:

A) the marginal cost curve only if price exceeds average variable cost.
B) the marginal cost curve only if price exceeds average total cost.
C) the average total cost curve only if price exceeds average variable cost.
D) nonexistent.

Question 58

Refer to the graph shown. The supply curve for the perfectly competitive firm is best represented by the segment:

A) AB.
B) BD.
C) CE.
D) DE.

Question 59

Refer to the table shown. If the market price is $4, a perfectly competitive profit-maximizing firm will produce: $$\begin{array} { | c | c | } \hline \text { Quantity } & \text { Marginal Cast } \\\hline 1 & \$ 3 \\\hline 2 & 5 \\\hline 3 & 7 \\\hline 4 & 9 \\\hline\end{array}$$

A) 1 unit of output.
B) 2 units of output.
C) 3 units of output.
D) 4 units of output.

Question 60

Refer to the graph shown. If market price decreases from $7.00 per unit to $6.00 per unit, a profit-maximizing perfectly competitive firm will:

A) increase output from 650 to 750.
B) decrease output from 850 to 750.
C) continue to produce 850 units.
D) produce 850 units of output.

Question 61

Refer to the graph shown, which depicts a perfectly competitive firm. To maximize profit, the firm represented will produce:

A) 40 units of output.
B) 90 units of output.
C) 110 units of output.
D) 130 units of output.

Question 62

Refer to the graph shown. To maximize profit, this firm should produce:

A) 120 units of output.
B) 250 units of output.
C) 450 units of output.
D) 525 units of output.

Question 63

Refer to the graph shown. If the firm is producing 250 units of output, profit is equal to:

A) $38.
B) -$38.
C) $0.
D) $30.

Question 64

Refer to the graph shown. If the firm is producing 120 units of output, profit is equal to:

A) $38.
B) −$38.
C) $0.
D) $30.

Question 65

Refer to the graph shown. What price represents the shutdown price?

A) P₁
B) P₂
C) P₃
D) P₄

Question 66

Refer to the graph shown. Suppose the market price is $4. At this price, a perfectly competitive firm should:

A) continue to produce in the short run but shut down in the long run.
B) continue to produce in both the short run and the long run.
C) shut down in the short run but continue production in the long run.
D) shut down immediately.

Question 67

Refer to the graph shown, which depicts a perfectly competitive firm. When maximizing profit, the firm represented will earn per-unit profit roughly equal to:

A) $2.00.
B) $5.
C) $7.50
D) $10.

Question 68

If a perfectly competitive firm finds that price is less than average variable cost, it should:

A) not adjust output if marginal cost equals price.
B) shut down immediately.
C) increase output until price equals marginal cost.
D) decrease output until price equals marginal cost.

Question 69

Total profit is maximized at the output level at which the:

A) vertical distance between the total revenue curve and the total cost curve is maximized.
B) total cost and total revenue curves intersect.
C) area between the total revenue and total cost curves is greatest.
D) vertical distance between the total revenue and total cost curves is minimized.

Question 70

Refer to the graph shown. If this perfectly competitive firm is producing 120 units of output, the market price is equal to:

A) $48.
B) 2.50.
C) $0.40.
D) impossible to determine with the information given.

Question 71

Refer to the graph shown. If the market price is P₂, the firm will produce:

A) Q₂ and incur a loss.
B) Q₃ and earn a profit.
C) Q₃ and break even.
D) Q₄ and incur a loss.

Question 72

Refer to the graph shown. If the market price is P₄, the firm will produce:

A) Q₂ and incur a loss.
B) Q₃ and break even.
C) Q₃ and earn a profit.
D) Q₄ and earn a profit.

Question 73

Refer to the graph shown. Suppose that the market price is $5. At this price, a perfectly competitive firm should:

A) continue to produce in the short run but shut down in the long run.
B) continue to produce in both the short run and the long run.
C) shut down in the short run but continue production in the long run.
D) shut down immediately.

Question 74

Refer to the graph shown. Suppose the market price is $3. At this price, a perfectly competitive firm should:

A) continue to produce in the short run but shut down in the long run.
B) continue to produce in both the short run and the long run.
C) shut down in the short run but continue production in the long run.
D) shut down immediately.

Question 75

Refer to the graph shown. If the market price is $4, a perfectly competitive firm:

A) breaks even.
B) earns a profit.
C) incurs a loss but can still cover its variable costs and some of its fixed costs.
D) incurs a loss and cannot cover its variable costs.

Question 76

Refer to the graph shown. If the firm is producing 450 units of output, profit is equal to:

A) $38.
B) −$30.
C) $0.
D) $30.

Question 77

Refer to the graph shown. If the market price is $3, a perfectly competitive firm:

A) breaks even.
B) earns a profit.
C) incurs a loss but can still cover its variable costs and some of its fixed costs.
D) incurs a loss and cannot cover its variable costs.

Question 78

Refer to the graph shown. If the firm is producing 525 units of output, profit is equal to:

A) $38.
B) −$38.
C) $0.
D) $30.

Question 79

Refer to the graph shown, which depicts a perfectly competitive firm. When it is maximizing profit, the total profit earned by the firm represented is:

A) $220.
B) $275.
C) $330.
D) $605.

Question 80

Refer to the graph shown. If the market price is P₄, the maximum profit the firm can earn is:

A) Q₄ multiplied by P₄.
B) Q₃ multiplied by P₃.
C) Q₄ multiplied by the difference between P₄ and P₃.
D) Q₃ multiplied by the difference between P₃ and P₂.