Deck 11: Perfect Competition

Question 1

A standardized product is a product

A)That has many perfect substitutes
B)That is unique to one producer
C)Which is produced according to government regulations
D)Where the demand function is downward sloping for both the firm and the industry

Answer 1

A

Question 2

Say a competitive firm is producing at point where ATC = $10, AVC = $2. If the firm charges $5 for its output, the in the short-run this firm should:

A)Shutdown production
B)Exit the industry
C)Continue to operate
D)Try to reduce its fixed costs

Answer 2

C

Question 3

If firms are price takers this implies

A)That in the short-run economic profits will be zero
B)That the demand curve facing the firm is perfectly elastic
C)That the total revenue curve is horizontal
D)That the marginal revenue curve is upward sloping

Answer 3

B

Question 4

Suppose that Joe had a long term lease which requires him to pay the rent even if he doesn't operate the store.What should Joe do?

A)Quit immediately
B)Keep the job permanently
C)Keep the job until the lease expires
D)It is impossible to say with the information given in the problem

Question 5

Suppose that the store owner gave Joe the store.Now what should he do?

A)Quit his job
B)Keep the job
C)Work part-time
D)It is impossible to say with the information given in the problem

Question 6

Which of the following is not a condition for perfect competition?

A)Firms take prices as given
B)Firms sell a standardized product
C)Firms are protected by barriers to entry
D)Firms have perfect information

Question 7

If a firm's demand curve falls below its AVC curve, then the firm should

A)Shut down now
B)Operate in the short run but not the long run
C)Set price = marginal cost
D)Shutdown in the long-run

Question 8

In a decreasing cost industry, as output grows over time,

A)Prices will fall
B)Prices will rise
C)Prices will stay the same
D)Prices are zero

Question 9

The output where MC = AVC is called the

A)Shutdown point
B)Break-even point
C)Profit maximizing point
D)Revenue maximizing point

Question 10

In the graph above at P*, the firm is making __________ economic profits.

A)Positive
B)Negative
C)Zero
D)An indeterminate level of

Question 11

In the graph above at a price of P*, in the above graph, the profit maximizing level of output is

A)Q*
B)Above Q*
C)Below Q* but above zero
D)Zero

Question 12

The profit maximizing output level for a perfectly competitive firm is always where

A)P = MC
B)P = AVC
C)MC = ATC
D)MC = AVC

Question 13

At the output where MC = ATC = P, the firm

A)Should shutdown
B)Has no economic profit
C)Is profit maximizing
D)Should raise output

Question 14

When the perfectly competitive firm maximizes profits the price of its product always equal

A)average revenue
B)marginal revenue
C)marginal costs
D)all the choices are correct

Question 15

Joe should

A)Quit his job
B)Keep the job
C)Work part-time
D)It is impossible to say with the information given in the problem

Question 16

In the graph above if the price persists at P*, the profit maximizing firm will

A)Shut down immediately
B)Shut down in the long run
C)Operate indefinitely
D)Has a strategy that can not be predicted without an ATC curve

Question 17

Which statement is true of the graph shown?

A)The marginal cost curve should not cross the AFC while it is falling
B)If an ATC curve was drawn in the graph it would intersect the MC curve but not any other curve
C)The shut down point of the firm would be at an output more than Q*
D)The marginal cost curve crosses the AFC curve at the lowest point of the AFC curve

Question 18

If the demand curve falls below the ATC curve but lies above AVC, then the firm should

A)Should shut down
B)Operate in the short run but not the long run
C)Set price = marginal cost
D)Operate in the short run and the long run

Question 19

The demand curve facing a perfectly competitive firm is

A)Infinitely elastic
B)Perfectly inelastic
C)Downward sloping
D)Perfectly elastic

Question 20

In general, economists assume that firms

A)Maximize accounting profit
B)Maximize economic profit
C)Maximize sales
D)Maximize revenue

Question 21

In the long run, the long price in this market will be:

A)P1
B)higher than P1
C)lower than P1
D)we need more information in order to answer

Question 22

In the long run, the typical firm in this market will produce a quantity equal to:

A)q1
B)q2
C)q3
D)Q1

Question 23

When the price is P1, in order to maximize profits this firm must produce a quantity equal to:

A)q1
B)q2
C)q3
D)Q1

Question 24

At point D

A)The firm is maximizing its profit
B)The firm is losing money
C)The firm is breaking even
D)The firm is making money

Question 25

The elasticity of supply is given by

A) $\frac { \Delta \mathrm { Q } } { \Delta \mathrm { P } } \times \frac { \mathrm { P } } { \mathrm { Q } }$
B) $\frac { \mathrm { P } } { \mathrm { Q } } \times \frac { 1 } { \text { slope } }$
C) $\frac { \Delta Q / Q } { \Delta P / P }$
D)All of the above

Question 26

In the long run for a competitive firm,

A)The firm is at the bottom of its short run average cost curve
B)The firm is at the top of its long run average cost curve
C)Marginal cost is greater price
D)The firm is making economic profits

Question 27

Suppose that the supply curve is given by P = Q.What is the elasticity of supply?

A)10
B)1/10
C)1
D)Cannot be determined from the above information

Question 28

Ceteris paribus, In the long run, a tax placed on a perfectly competitive industry will

A)Increase the price of the good by an amount equal to the tax
B)Increase the price of the good by an amount less than the tax
C)Be borne entirely by the firm
D)Be entirely borne by the consumer

Question 29

In the long run, a tax placed on a perfectly competitive industry should

A)Increase the number of firms
B)Decrease the number of firms
C)Not affect the number of firms
D)One cannot tell

Question 30

A pecuniary diseconomy occurs when

A)Supply exceeds demand
B)An expansion of industry output increases the price of an input
C)Higher output levels result in lower unit costs
D)Higher output levels results in the same unit costs

Question 31

The relationship between producer surplus and consumer surplus is.

A)Producer surplus is always greater
B)Consumer surplus is always greater
C)Producer and consumer surplus are always equal
D)Producer surplus may be greater, equal or less than consumer surplus

Question 32

If free entry and exit were not possible,

A)In the long run firms would lose money
B)In the long run firms would make money
C)In the long run firms would break even
D)It is impossible to tell what would happen without more cost and revenue information

Question 33

Other things remaining the same, in the long-run as compared to the short-run

A)Supply elasticity will increase
B)Supply elasticity will decrease
C)Supply elasticity will remain the same
D)One cannot tell

Question 34

In the long run

A)The firm will operate at point B
B)The firm will operate at point C
C)The firm will operate at point D
D)The total revenue curve will change its slope

Question 35

In the graph shown, if the market demand were to shift right, which of the following would occur for the firm?

A)The total cost curve would shift downward
B)The total revenue function would rotate upward
C)The total revenue function would rotate downward
D)The firm would produce less output

Question 36

Producer surplus is given by

A)The area above the supply curve but below the price
B)The area below the supply curve
C)The area below the demand curve but above the price
D)The area below the demand curve

Question 37

In a competitive industry the industry's short-run supply curve is

A)The horizontal sum of the marginal cost curves
B)The vertical sum of the marginal cost curves
C)Determined by the average total cost curve
D)Determined by the average variable cost curve

Question 38

At point A

A)MC = MR
B)The firm is making positive economic profit
C)The firm would do worst by shutting down
D)MC > MR

Question 39

Given to following two points on a supply curve (P = 10, Q = 5; and P = 12, Q = 8), what is the approximate arc elasticity?

A).4
B)2.5
C)1
D)0

Question 40

In the above diagram profit is maximized at point

A)A
B)B
C)C
D)D

Question 41

A firm is currently selling its product at $20 each.It estimates that its average total cost of production is $100 and its average fixed cost is $40.In the short run the firm should

A)Shutdown
B)Continue production at a point where P = MC
C)Hire more employees
D)Buy more capital

Question 42

How many units of output will be produced by a firm operating in this market with a MC = 130Q?

A)2
B)5
C)0.70
D)It is impossible to answer with the information given

Question 43

Producer surplus is

A)The amount of revenue received by the producer below the amount that would have been required for her to supply the product in the short-run
B)The amount of economic profit that would be present if there were no fixed costs in the production process
C)The difference between the marginal revenue and the marginal variable cost of the production process
D)Always equal to producer revenue

Question 44

What is the price charged by each firm and what quantity will each firm produce?

Question 45

In a competitive industry in the long-run, it is likely that

A)Firms with the advantage of location or an especially skilled work crew will be the lone survivors in equilibrium
B)All firms giving their best effort will have the same LAC regardless of location or the unique skills of some workers
C)The firms with the poorest location will be the lone survivors in equilibrium because their location cost will be lowest
D)Only one large efficient firm can survive

Question 46

If a firm is producing where its LMC = price and the LMC is equal to LAC, then it would do better in the long run by

A)Increasing output with its existing plant until LMC equals price
B)Increasing plant size until LMC and SAC are identical and equal to price
C)Decreasing plant size until LAC, SAC and price are equal
D)Changing nothing because it is already at the long run profit maximizing point

Question 47

The expansion of the car manufacturing industry causes an improvement in the assembly line, so reducing charges to each firm in that industry.This is an example of

A)Constant returns to scale
B)A decreasing-cost industry
C)A decreasing returns to scale
D)An increasing-cost industry

Question 48

I get $200 revenue from the sale of my product each day.I rent the factory that I use for $90 a day.The raw materials of the operation cost $115 a day.I do all the work myself.Both jobs are equally attractive as far as the work is concerned.Recently, a competitor offered me $30 a day to work for him.My accounting profit is _____, and my economic profit is ______.

A)-5, -35
B)-35, -35
C)25, -5
D)110, -30

Question 49

Competitive markets result allocative efficiency because they:

A)Maximize the total benefits from exchange
B)Make sure goods are produce at the lowest costs
C)Generate the most benefits for consumers
D)Distribute resources in the most equitable way

Question 50

At market equilibrium, the total (not net) benefit that results from all the transactions is

A)The consumer surplus minus the producer surplus
B)The producer surplus minus the consumer surplus
C)The sum of the producer surplus and the consumer surplus
D)The entire area under the demand curve up to the quantity exchanged

Question 51

In the short run, a tax placed on a perfectly competitive industry should

A)Increase the total amount of the good sold
B)Decrease the total amount of the good sold
C)Not affect the total amount of the good sold
D)Always increase the price

Question 52

In the long run, a tax placed on a perfectly competitive industry should have what effect on the entire market?

A)Increase the total amount of the good sold
B)Decrease the total amount of the good sold
C)Not affect the total amount of the good sold
D)One cannot tell

Question 53

How much profit is each firm making if fixed costs are $375 per firm?

Question 54

A firm's total revenue curve is given by 3Q²- 7Q.The firm

A)Is perfectly competitive
B)May be perfectly competitive
C)Is not perfectly competitive
D)One cannot tell

Question 55

What is the equilibrium price and quantity produced by the industry as a whole?

Question 56

Which is not true of a perfectly competitive market?

A)The typical industry demand curve is downward sloping
B)There is no incentive to innovate since economic profit is zero in the long-run
C)If the long-run average total cost curve is horizontal in the relevant range of production, perfectly competitive firms can be various sizes in long-run equilibrium
D)At long-run equilibrium, economic profit is less than accounting profit

Question 57

In the long-run, any perfectly competitive firm that produces will choose a quantity such that

A)Short-run average cost is minimized
B)Long-run total cost is minimized
C)Long-run marginal cost equals long-run marginal cost
D)Price is greater marginal cost

Question 58

You have a small business that makes $50,000 accounting and economic profit for you.As a disabled person, you must work at home and you did not have other opportunities until your neighbor offers you a job you like equally well for $50,000 and you can do it at home.This means

A)Your accounting profit has gone down and your economic profit has gone up
B)Your economic profit has gone down and your accounting profit has gone up
C)Both your accounting and economic profit have gone down
D)Both your accounting and economic profit have gone up
E)Your economic profit has gone down and your accounting profit has stayed the same

Question 59

Some people advocate price ceilings in certain markets because they seek to

A)Expand the total of consumer and producer surplus which the market generates
B)Redistribute welfare from the producer to the consumer even if overall welfare is sacrificed
C)Redistribute welfare from the consumer to the producer even if welfare is sacrificed
D)Enhance both efficiency and distribution goals with the price ceiling

Question 60

What is the industry supply curve?

A)P = 500 + Q
B)P = 50 + 0.1Q
C)P = -500 + 10P
D)P = 50 + 10 Q

Question 61

The price of the typical MP3 player (such as the iPod) has been going down in the past 10 years. What could explain this consistent drop in the price of MP3 players? Use the model for the long-run competitive firm to illustrate your answer (hint: you need two diagrams here: one showing the LAC for the typical firm, and another showing the long-run supply curve for the industry.)

Question 62

What is the producer and consumer surplus in the entire market?

Question 63

What is the producer surplus for each firm?

Question 64

How can a firm stay in business if it makes no economic profit in the long run?

Question 65

The combination of the DVD player, the flat plasma screen, and the surround sound has revolutionized watching a movie at home.At the same time, advances in technology in the movie theater have raised the standard that the home entertainment alternative must achieve. Think about the effects of these technological changes on competitive markets for goods and services that are influenced by movie going and home movie watching. Identify the market for one related good or service that will expand and one that will contract. Describe in detail the sequence of events as the two markets you've identified respond to the new technologies.

Question 66

Sketch a perfectly competitive firm operating in short-run equilibrium but making economic losses.Put in all the functions necessary to show that the firm should stay in business in the short-run despite the losses.Shade in the area of loss shown by the drawing.