Deck 12: Firms in Perfectly Competitive Markets

Question 1

Perfectly competitive firms earn zero economic profit in the long run.

Answer 1

True

Question 2

In the long run,a perfectly competitive firm is expected to generate either an economic profit or an economic loss.

Answer 2

False

Question 3

A firm that is earning zero economic profits has a strong incentive to exit the industry.

Answer 3

False

Question 4

In a constant cost industry,the cost curves of individual firms will shift upward as the industry output expands.

Question 5

As an industry's output increases,the industry's demand for the inputs that it uses will also increase.

Question 6

In long-run equilibrium,a perfectly competitive firm produces the output level that minimizes average total cost.

Question 7

In short-run equilibrium in a perfectly competitive market,firms always make zero economic profit.

Question 8

It is relatively easy for firms to enter and exit a perfectly competitive market.

Question 9

A perfectly competitive firm faces a perfectly elastic demand curve.

Question 10

The market demand curve in a perfectly competitive industry is downward sloping,while the demand curve faced by an individual perfectly competitive firm is horizontal.

Question 11

The market demand curve in a perfectly competitive industry is horizontal,while the demand curve faced by an individual perfectly competitive firm is downward sloping.

Question 12

The behavior of an individual perfectly competitive firm has a perceptible influence on the market price.

Question 13

In order to maximize profits,a firm should produce the level of output at which total revenue is maximized.

Question 14

Perfect competition is characterized by a large number of buyers and sellers with identical products and no significant barriers to entry.

Question 15

Whenever marginal revenue is greater than marginal cost,a profit-maximizing firm should reduce its output.

Question 16

The demand curve faced by a perfectly competitive firm is vertical.

Question 17

Economic profits in a perfectly competitive industry will encourage entry of new firms,which will shift the market supply curve to the right.

Question 18

If price is less than the average variable cost,firms that seek to maximize profit should shut down.

Question 19

In a perfectly competitive market,marginal revenue is the same as the market price.

Question 20

Firms should shut down in the short run whenever price is less than the average total cost.

Question 21

Marginal revenue for a perfectly competitive firm equals:

A) the addition to total cost from producing one more unit of output.
B) average revenue at all levels of output.
C) marginal cost at all levels of output.
D) average total cost at all levels of output.

Question 22

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

A) There is free entry into and exit from the market.
B) Individual firms can exert a perceptible influence on the market price.
C) Firms in the market produce a differentiated product.
D) All of the above are true.

Question 23

Which of the following is a characteristic of perfect competition?

A) substantial barriers to entry
B) differentiated products
C) few sellers
D) none of the above

Question 24

A perfectly competitive firm is a:

A) price giver.
B) price taker.
C) price maker.
D) price leader.

Question 25

Perfect competition is the term used to describe:

A) an industry in which a few price-taking firms produce identical products.
B) an industry in which numerous price-taking firms produce identical products.
C) an industry in which firms are price takers and compete for market share by varying the qualitative characteristics of products.
D) an industry in which numerous firms are price makers and produce identical products.

Question 26

A firm sells grapefruit in a perfectly competitive market at a price of $1.50 per pound.The firm's marginal revenue:

A) equals $1.50.
B) is less than $1.50.
C) is greater than $1.50.
D) cannot be determined from the information provided.

Question 27

Which market structure is characterized by many sellers,easy entry,and homogeneous products?

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

Question 28

Why can't a firm in a perfectly competitive industry charge a price above the market-clearing price?

A) Government-imposed price ceilings prevent prices from being raised.
B) Firms in a perfectly competitive industry face significant barriers to entry.
C) Perfectly competitive firms are price searchers.
D) Numerous competitors produce the same product and charge the market price.

Question 29

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

A) Firms advertise in order to distinguish their products and increase market share.
B) Firms earn zero economic profit in the long run.
C) Competing products are virtually identical.
D) Firms are price takers.

Question 30

Firms in perfectly competitive markets:

A) are price takers.
B) are price makers.
C) influence price by varying the quality of output.
D) sell heterogeneous products.

Question 31

A perfectly competitive firm faces a demand curve that is:

A) horizontal and perfectly inelastic.
B) horizontal and perfectly elastic.
C) vertical and perfectly inelastic.
D) vertical and perfectly elastic.

Question 32

Marginal revenue is:

A) the additional cost incurred from producing one more unit of output.
B) the addition to total profit from selling one more unit of output.
C) the addition to total revenue from selling one more unit of output.
D) the addition to total output from hiring one more unit of labor.

Question 33

Which of the following is a characteristic of perfect competition?

A) homogeneous products
B) many sellers
C) many buyers
D) all of the above

Question 34

The demand curve facing a perfectly competitive firm is:

A) perfectly inelastic.
B) perfectly elastic.
C) unit elastic.
D) downward sloping.

Question 35

In the perfectly competitive model,all firms are assumed to be producing:

A) products that are heavily advertised.
B) differentiated products.
C) identical products.
D) complementary products.

Question 36

Which of the following is a characteristic of perfect competition?

A) substantial barriers to entry
B) homogeneous products
C) few sellers
D) each firm has significant control over the market

Question 37

Which of the following most closely resembles a perfectly competitive market?

A) the airline industry
B) the soft drink industry
C) the wheat market
D) long-distance telephone service

Question 38

Which of the following best resembles a perfectly competitive market?

A) a stock market
B) the book publishing industry
C) the steel industry
D) the used car industry

Question 39

The perfectly competitive model assumes that:

A) individual sellers can influence the market price.
B) sellers can increase their total revenue by raising prices.
C) firms can enter and exit the industry with relative ease.
D) firms compete by varying a product's quality rather than a product's price.

Question 40

A firm that is a price taker:

A) competes with other producers who produce differentiated products.
B) must be a relatively large producer compared to other firms in the market.
C) can exert a major influence on the overall market.
D) will lose all sales if it prices its product in excess of the market equilibrium price.

Question 41

If a price-taking firm selling in a competitive market raises the price of its product above the market-clearing price,it will:

A) increase its profits.
B) maintain its profit base since the demand for the product is inelastic.
C) be able to increase its sales.
D) not be able to sell any output.

Question 42

A firm facing a horizontal demand curve:

A) cannot affect the price it receives for its output.
B) is unlikely to price its goods below market price.
C) faces a perfectly elastic demand curve for its product.
D) is characterized by all of the above.

Question 43

A competitive firm facing a perfectly elastic demand curve can:

A) increase price without losing any sales.
B) sell all of its output at any price it chooses.
C) sell all of its output at the market price.
D) sell more output only by reducing its price.

Question 44

In the short run,a perfectly competitive firm will maximize profit by producing where:

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

Question 45

Exhibit 12-1 Refer to Exhibit 12-1.In Graph B,the market demand has decreased from d₀ to d₁,and as a result:

A) both the market price and the price of the price-taking firm have increased to $5.
B) both the market price and the price of the price-taking firm have fallen to $4.
C) the quantity of goods transacted in the market has fallen from Q₁ to Q₀.
D) at the new equilibrium price, the firm will be unable to sell any of its output.

Question 46

If a profit-maximizing firm finds that price exceeds average variable cost and marginal cost is greater than marginal revenue,it should:

A) reduce output, but continue producing in the short run.
B) increase output.
C) shut down.
D) not alter its production level since it is earning a profit.

Question 47

Exhibit 12-1 Refer to Exhibit 12-1.In Graph A,the market demand has increased from d₀ to d₁,and as a result:

A) both the market price and the price of the price-taking firm have risen to $6.
B) both the market price and the price of the price-taking firm have fallen to $5.
C) the quantity of goods transacted in the market has fallen from Q₁ to Q₀.
D) at the new equilibrium price, the firm will be unable to sell any of its output.

Question 48

If a profit-maximizing firm finds that price exceeds average variable cost and marginal revenue is greater than marginal cost,it should:

A) reduce output, but continue producing in the short run.
B) increase output.
C) shut down.
D) not alter its production level since it is earning a profit.

Question 49

In the short run,if a firm's price is greater than its AVC but less than its ATC,the firm should:

A) shut down immediately because it is generating an economic loss.
B) shut down temporarily because it is generating an economic loss.
C) continue operating because it is generating an economic profit.
D) continue operating even though it is generating an economic loss.

Question 50

The horizontal demand curve facing an individual firm in a perfectly competitive market:

A) violates the law of demand, which states that demand curves slope downward.
B) is a reflection of the firm's small size relative to the total market.
C) is maintained only with the help of high barriers to entry.
D) is a reflection of the inelastic demand for its product.

Question 51

In a perfectly competitive industry,influence over price is exerted by:

A) individual sellers.
B) individual buyers.
C) the largest firms.
D) the forces of market supply and demand.

Question 52

Which of the following is most likely to be a price taker?

A) a respected heart surgeon
B) an ice cream shop owner located in Atlanta, Georgia
C) a beachside tourist resort
D) a Kansas wheat farmer

Question 53

Farmer Brady sells wheat in a market where sellers are price takers.Which of the following is true in regard to Farmer Brady's production and pricing decisions?

A) Farmer Brady will be able to increase the total revenue from the sale of his wheat if he increases the price of the wheat.
B) Since the market dictates the price of his product, Farmer Brady will have no incentive to minimize per-unit production costs.
C) Since the market dictates the price of his product, Farmer Brady has no production decisions to make.
D) It would be senseless for Farmer Brady to try to increase sales by lowering the price of his product. His entire output can be sold at the market price.

Question 54

When the marginal cost of a price-taking firm is less than the market price of its product,the firm should:

A) expand output (provided that price is not less than average variable cost).
B) reduce output (provided that price is not less than average variable cost).
C) maintain output (provided that price is not less than average variable cost).
D) charge more than the market price.

Question 55

"I'm losing money,but since my fixed costs are so high,I simply cannot afford to shut down." If the firm were attempting to maximize profit,this decision may be:

A) correct if price is less than average variable cost.
B) incorrect because a firm experiencing economic losses should never continue to operate.
C) correct if the firm is covering all of its variable costs.
D) incorrect since a firm should shut down whenever price falls below average total cost in the short run.

Question 56

Exhibit 12-1 Refer to Exhibit 12-1.Graphs A and B together demonstrate the effect that a change in market demand has on the demand curve faced by a firm that is:

A) producing a homogeneous product.
B) very small relative to the market output as a whole.
C) a price taker.
D) all of the above.

Question 57

A price-taking firm will tend to expand its output as long as price exceeds average variable cost and:

A) its marginal revenue is positive.
B) its marginal revenue is greater than the market price.
C) its marginal revenue is less than the market price.
D) its marginal cost is less than the market price.

Question 58

A profit-maximizing firm in a perfectly competitive market will always produce a quantity of output that:

A) minimizes the per-unit cost of production.
B) is expected to maximize total revenue.
C) maximizes the amount by which total revenue exceeds total cost.
D) brings average total cost and price into equality.

Question 59

For a perfectly competitive firm,average revenue is:

A) equal to marginal cost at all levels of output.
B) equal to marginal revenue at all levels of output.
C) equal to price at all levels of output.
D) characterized by both (b) and (c).

Question 60

A perfectly competitive firm has no influence over price because:

A) its output is insignificant relative to the market as a whole.
B) antitrust laws constrain perfectly competitive firms.
C) consumers establish the prices of products.
D) it is unaware of the demand curve it faces.

Question 61

Exhibit 12-2 Refer to Exhibit 12-2.When the market price equals $54,the firm:

A) should shut down.
B) should continue operating temporarily despite an economic loss because the firm is able to cover all of its variable costs.
C) should continue operating temporarily despite an economic loss because the firm is able to cover a portion of its fixed costs.
D) should continue operating because the firm is making a profit.

Question 62

Exhibit 12-3 Refer to Exhibit 12-3.If the market price increased to $5 in Graph B,this firm should:

A) immediately shut down.
B) increase output.
C) decrease output.
D) continue producing the same level of output.

Question 63

Exhibit 12-5 Refer to Exhibit 12-5.The lowest price at which the firm can earn at least zero economic profit is:

A) $60.
B) $45.
C) $30.
D) $10.

Question 64

Exhibit 12-3 Refer to Exhibit 12-3.Total revenue for the firm in Graph C equals:

A) $120.
B) $150.
C) $600.
D) $720.

Question 65

Exhibit 12-2 Refer to Exhibit 12-2.When the market price equals $105,and the firm sells 675 units of output,the firm:

A) is earning a normal profit.
B) is earning positive economic profits.
C) is experiencing a loss, but should continue operating temporarily because business conditions may improve.
D) is experiencing a loss and should shut down.

Question 66

A profit-maximizing firm that is operating in the short run will sell an additional unit of output as long as:

A) as doing so reduces the firm's per-unit costs.
B) doing so reduces the firm's marginal costs.
C) doing so adds more to revenue than it adds to cost.
D) there is additional plant capacity with which to produce.

Question 67

Exhibit 12-3 Refer to Exhibit 12-3.If the market price decreased to $4.70 in Graph B,this firm should:

A) immediately shut down if price is greater than average variable cost.
B) increase output.
C) decrease output.
D) continue producing the same level of output.

Question 68

Exhibit 12-3 Refer to Exhibit 12-3.Graph A exhibits a price-taking firm:

A) experiencing an economic loss of $80.
B) making an economic profit of $80.
C) making an economic profit of $400.
D) experiencing an economic loss of $400.

Question 69

Exhibit 12-5 Refer to Exhibit 12-5.A profit-maximizing firm in a perfectly competitive industry will produce ____ units of output if the market price equals $10.

A) 450
B) 0
C) 650
D) 800

Question 70

Exhibit 12-5 Refer to Exhibit 12-5.A profit-maximizing firm in a perfectly competitive industry will produce ____ units of output if the market price equals $45.

A) 800
B) 650
C) 450
D) 200

Question 71

If a perfectly competitive firm is operating in the short run and seeks to maximize profit,the firm should:

A) increase output whenever marginal cost is less than average total cost.
B) increase output whenever marginal revenue is less than marginal cost.
C) choose the output where per-unit profit is greatest.
D) increase output whenever price exceeds marginal cost.

Question 72

Exhibit 12-2 Refer to Exhibit 12-2.Suppose the market price equals $88 and the firm is currently producing 600 units of output.In this situation,the firm:

A) is maximizing profit.
B) should increase production of output in order to maximize profit.
C) should decrease production of output in order to maximize profit.
D) should shut down in order to minimize economic losses.

Question 73

Exhibit 12-3 Refer to Exhibit 12-3.Graph C exhibits a price-taking firm:

A) experiencing an economic loss of $120.
B) making an economic profit of $120.
C) making an economic profit of $720.
D) experiencing an economic loss of $600.

Question 74

Exhibit 12-4 Refer to Exhibit 12-4.What is the value of the variable Z shown in the table?

A) $0
B) -$38
C) -$35
D) -$40

Question 75

The short-run supply curve of a perfectly competitive firm is:

A) the average variable cost curve.
B) the average total cost curve.
C) the same as the demand curve.
D) marginal cost above average variable cost.

Question 76

What is the maximum amount of profit the perfectly competitive firm depicted below could earn in the short run?

A) $900
B) $1,120
C) $1,260
D) $2,000

Question 77

Exhibit 12-3 Refer to Exhibit 12-3.Total revenue for the firm in Graph A equals:

A) $40.
B) $80.
C) $320.
D) $400.

Question 78

What is the maximum amount of profit the perfectly competitive firm depicted below could earn in the short run?

A) $40
B) $55
C) $200
D) $220

Question 79

Exhibit 12-3 Refer to Exhibit 12-3.Graph B exhibits a price-taking firm:

A) which will lose money when the market price equals $4.90.
B) which will make an economic profit when the market price equals $4.90.
C) which will break even when the market price equals $4.90.
D) which will shut down when the market price equals $4.90.

Question 80

Exhibit 12-4 Refer to Exhibit 12-4.What is the value of the variable X shown in the table?

A) $0
B) $50
C) $20
D) $40