Deck 8: Perfect Competition

Question 1

Part of the ACCC's role is to:

A) improve efficiency in markets by promoting competitive pricing.
B) encourage adherence to fair trading practices.
C) inform the public about the Trade Practices Act.
D) do all the above.

Answer 1

D

Question 2

Assume that the market equilibrium is 100 units at the price of $70. What is the price each firm can charge if each produces 10 units of output?

A) $7
B) $0.7
C) $70
D) $700

Answer 2

C

Question 3

Marginal analysis is used to determine:

A) the maximum profit by comparing maximum revenue and marginal cost.
B) the profit maximising output.
C) the market price resulting from a one unit change in output.
D) the change in the total cost as the price changes.

Answer 3

B

Question 4

Because a competitive firm is a price taker, it:

A) can set its own prices.
B) faces a demand curve that is relatively inelastic.
C) enjoys high barriers to entry.
D) faces a demand curve that is perfectly elastic.

Question 5

The body charged with increasing or maintaining competition in the Australian economy is:

A) the ACCC.
B) the Treasury.
C) the Reserve Bank of Australia.
D) the Australian Prudential Regulation Authority.

Question 6

In a perfectly competitive market, firms:

A) produce a differentiated product.
B) can enter free but exit is costly.
C) extensively advertise to attract more buyers.
D) produce a homogeneous product.

Question 7

Under perfect competition, no matter how much output is produced, the total revenue curve is a:

A) positively sloped line.
B) negatively sloped line.
C) horizontal straight line.
D) U-shaped curve.

Question 8

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

A) There is a large number of small firms.
B) Firms sell a homogeneous product.
C) Firms can easily enter or exit the market.
D) Firms are price makers, not price takers.

Question 9

If a perfectly competitive firm sells 50 units of output at a market price of $10 per unit, its marginal revenue is:

A) more than $10.
B) less than $10.
C) $10.
D) $5300.

Question 10

Which of the following is not a characteristic of perfect competition?

A) Ease of entry and exit.
B) A few large firms dominate the market.
C) The product is homogeneous.
D) There are many buyers.

Question 11

Under perfect competition, which of the following are the same (equal) at all levels of output?

A) Market price and marginal cost.
B) Market price and marginal revenue.
C) Marginal cost and marginal revenue.
D) Total cost and total revenue.

Question 12

If a firm can easily enter and exit the market it operates in which market?

A) Perfectly competitive.
B) Monopolistically competitive.
C) Monopolistic.
D) Oligopolistic.

Question 13

Perfectly competitive markets are characterised by:

A) a large number of producers and consumers.
B) very strong barriers to entry and exit.
C) firms selling a quality product.
D) many different products.

Question 14

One of the characteristics of perfect competition is that:

A) some firms can influence price.
B) firms depend on each other in setting the output.
C) firms produce a differentiated product.
D) consumers do not distinguish between the sellers.

Question 15

Firms in a perfectly competitive market:

A) compete with each other by undercutting the prices.
B) compete with each other by offering customers a slightly different product.
C) reduce the output so they can increase the price.
D) do not advertise.

Question 16

Under perfect competition, a firm is a price taker because:

A) setting a price higher than the going price results in profits.
B) each firm's product is perceived as different.
C) each firm has a significant market share.
D) setting a price higher than the marginal cost results in zero sales.

Question 17

A firm operating in a perfectly competitive market is a price taker because:

A) the firm has a significant market share.
B) every firm sells slightly different product.
C) it can set a price higher than the average market price.
D) it cannot influence the price.

Question 18

Perfect competition requires that resources be:

A) the highest quality for consumers.
B) fixed over the short run but free over the long run.
C) completely mobile to freely enter or exit the market.
D) completely unmovable and enjoy the economies of scale.

Question 19

One of the characteristics of the perfectly competitive market is:

A) a small number of large firms.
B) firms that sell a heterogeneous product.
C) sellers and buyers both can increase the price on the market.
D) there is a large number of small firms.

Question 20

Under perfect competition, which of the following determine the market equilibrium?

A) Price and marginal cost.
B) Both demand and supply.
C) Marginal cost and average revenue.
D) Total cost and a number of suppliers.

Question 21

A perfectly competitive firm has control over:

A) the number of firms in the market.
B) market conditions.
C) the price at which to sell.
D) the quantity of output to produce.

Question 22

Narrbegin Exhibit 7.2 Cost per unit curves

-As shown in Exhibit 7.2, the firm will produce in the short run if the price is at least equal to:

A) $1 per unit.
B) $1.50 per unit.
C) $2 per unit.
D) $3 per unit.

Question 23

Narrbegin Exhibit 7.1 Total revenue and total cost graph

-In Exhibit 7.1, economic profit for the firm is at a maximum when output per week equals:

A) 0 units.
B) 100 units.
C) 200 units.
D) 250 units.

Question 24

Narrbegin Exhibit 7.2 Cost per unit curves

-In Exhibit 7.2, if the price of the firm's product is $3 per unit, the firm will:

A) suffer a loss.
B) enjoy a profit.
C) be indifferent about whether to produce or not to produce.
D) have to increase the levels of production.

Question 25

Narrbegin Exhibit 7.3 A firm's cost and marginal revenue curves

-In Exhibit 7.3, when the price is $2, the profit-maximising (or loss-minimising) firm:

A) should shut down and produce zero.
B) should produce output equal to four.
C) is making an economic profit of $8.
D) should try to produce more output.

Question 26

Narrbegin Exhibit 7.1 Total revenue and total cost graph

-In Exhibit 7.1, if output is 200 units per week, economic profit for the firm is:

A) zero.
B) at its minimum.
C) at its maximum.
D) average.

Question 27

A perfectly competitive firm minimises losses in the short run by producing at the output level at which:

A) total loss is a minimum.
B) total revenue equals marginal cost.
C) total revenue is at a minimum.
D) marginal cost is less than marginal revenue.

Question 28

Narrbegin Exhibit 7.2 Cost per unit curves

-As shown in Exhibit 7.2, the price at which the firm earns zero economic profit in the short run is:

A) $1 per unit.
B) $1.50 per unit.
C) $4 per unit.
D) $2 per unit.

Question 29

Narrbegin Exhibit 7.3 A firm's cost and marginal revenue curves

-In Exhibit 7.3, when the price is $5, the firm:

A) is making an economic profit of $21.
B) should produce output equal to seven.
C) is breaking even.
D) should shut down.

Question 30

Assume that a firm's marginal revenue just barely exceeds marginal cost. What should the firm do under these conditions?

A) Expand output.
B) Contract output.
C) Maintain output.
D) There is insufficient information to answer the question.

Question 31

A firm in a perfectly competitive market faces:

A) its own upward-sloping demand curve.
B) its own downward-sloping demand curve.
C) a market demand curve.
D) a perfectly elastic demand curve.

Question 32

Narrbegin Exhibit 7.2 Cost per unit curves

-In Exhibit 7.2, if the price of the firm's product is $2.00 per unit, the firm will produce:

A) five units per day.
B) 10 units per day.
C) 15 units per day.
D) 20 units per day.

Question 33

Narrbegin Exhibit 7.1 Total revenue and total cost graph

-In Exhibit 7.1, the firm will produce at which level of output:

A) zero.
B)150.
C)350.
D) 250.

Question 34

In the short run, if a perfectly competitive firm is producing at a price above average total cost, its economic profit must be:

A) positive.
B) zero.
C) negative.
D) normal.

Question 35

Narrbegin Exhibit 7.1 Total revenue and total cost graph

-In Exhibit 7.1, if output is between 100 and 200 units per week, economic profit for the firm is:

A) zero.
B) negative or zero.
C) at its maximum.
D) positive or zero.

Question 36

A perfectly competitive firm in the short run maximises its profit by producing the output where:

A) average cost equals price.
B) marginal product equals marginal revenue.
C) total profit is at maximum.
D) total profit is at minimum.

Question 37

Total revenue is computed as:

A) the product price times the quantity.
B) the product cost times the quantity.
C) the product price minus the product cost.
D) the product marginal cost times the price.

Question 38

Assume the market equilibrium price is $100. In a perfectly competitive market, some firms can sell a good at the price of $120 and:

A) undercut their competitors.
B) therefore they can influence the price.
C) force their competitors to reduce output.
D) risk selling zero output.

Question 39

A perfectly competitive firm always set the price:

A) equal to market cost of production.
B) below the equilibrium market price.
C) above the equilibrium market price.
D) equal to the equilibrium market price.

Question 40

A sandwich shop owner has the following information: P = $4, ATC = $2, AVC = $1, MC = 4 and Q = 500. From this, she can determine:

A) her profits are not being maximised.
B) she has earned zero economic profits.
C) she has earned economic profits of $1000.
D) she has earned economic profits of $1500.

Question 41

Narrbegin Exhibit 7.3 A firm's cost and marginal revenue curves

-In Exhibit 7.3, when the output is eight units, the firm:

A) has a profit.
B) should not operate.
C) should ask for a higher price.
D) should produce more.
E) is operating at the minimum ATC.

Question 42

Consider a firm with the following cost and revenue information: ATC = $8, AVC = $6, MR = $6 and MC = $6. If the firm produces Q = 60 units in the short run, it:

A) is minimising losses.
B) makes a total loss of $60.
C) should produce more output.
D) is indifferent concerning whether to keep operating or shut down.

Question 43

If the price of a product falls below average total cost in the short run, the firm:

A) has an economic profit.
B) cannot cover total fixed costs.
C) experiences a loss.
D) must always shut down.

Question 44

Narrbegin Exhibit 7.4 Marginal revenue and cost per unit curves

-As shown in Exhibit 7.4, the short-run supply curve for the firm corresponds to which segment of its marginal cost curve?

A) C and all points above.
B) B and all points above.
C) A and all points above.
D) A to C only.

Question 45

If there is no level of output at which the firm earns a profit, the firm should:

A) shut down.
B) perform an analysis regarding whether to operate or not.
C) diversify.
D) try to push the price up.

Question 46

Assume that the market price is $10 and the minimum AVC is $15. The firm should:

A) increase production.
B) continue to operate at the same level.
C) decrease production.
D) shut down.

Question 47

If a competitive firm suffers loss, it should:

A) always shut down.
B) shut down if its losses are greater than total fixed costs.
C) shut down if its total fixed costs are greater than losses.
D) raise its price.

Question 48

If ATC = $20, AVC = $12, MR = $15 and MC = $15, then the result for the perfectly competitive firm would be:

A) making a short-run loss.
B) making a short-run profit.
C) breaking even.
D) shutting down.

Question 49

If the market price is equal to the average variable cost, the firm should:

A) keep operating or shut down.
B) increase the output.
C) change fixed inputs.
D) increase the price.

Question 50

At an output level of 100 units, TC = $1000, TVC = $500, MC = $3 and MR = $3, the short-run result/s for the perfectly competitive firm will be:

A) making a short-run loss of $500.
B) breaking even, as MC = MR.
C) shutting down and incurring a loss of $1000.
D) making a loss of $1000 but continuing to operate.

Question 51

If ATC = $20, AVC = $15, AFC = $5, MC = $15 and MR = $15, then a perfectly competitive firm should:

A) decrease output because MR> AFC.
B) increase output because ATC > MR.
C) shut down if the price will be below AVC.
D) maximize its profit because MR = MC.

Question 52

If ATC = $10, AVC = $8, market price = $25 and MC = $25, then the result for a perfectly competitive firm will:

A) be making a short-run loss.
B) be making a short-run profit.
C) be breaking even.
D) be shutting down.

Question 53

The firm in a perfectly competitive market will:

A) set the price lower than the variable cost of producing the product or service to gain a market share.
B) set the price higher than the fixed cost of producing the product or service but lower than the variable cost to prevent competition.
C) set the price as low as possible to prevent competition.
D) set the price higher than the variable cost of producing the product or service.

Question 54

Narrbegin Exhibit 7.4 Marginal revenue and cost per unit curves

-As shown in Exhibit 7.4, the firm will produce in the short run if the price per unit is at least equal to:

A) $10.
B) $15.
C) $20.
D) $30.

Question 55

If a firm is operating at a loss in the short run and finds that its price is greater than average variable cost, then in the short run:

A) it should produce where MR = MC.
B) it should produce zero output.
C) it should go out of business.
D) total revenue is less than total variable costs.

Question 56

If a firm's MR currently equals MC and product price = $24, AVC = $22 and ATC = $26, then in the long run this firm:

A) will continue to operate at a loss.
B) will earn a positive profit.
C) will go out of business.
D) should increase output.

Question 57

Suppose the market demand for second-hand books has decreased to the level less than the average total cost. The firm will:

A) reduce its losses to zero.
B) produce at the output level where ATC = MC.
C) produce at the level of output that keeps its losses to a minimum.
D) increase its output to make up for losses.

Question 58

At an output level of 500 units, ATC = $10, AVC = $5, MR = $3 and MC = $3, the result for the perfectly competitive firm will be:

A) making a loss of ($5 - $3) 500 = $1000.
B) a decrease in output, so MC > MR.
C) making a short-run loss of $2500.
D) an increased output, so MR > MC.

Question 59

If ATC = $25, AVC = $20, TFC = $600, MR = $15 and MC = $15, then the result for the perfectly competitive firm will be:

A) a loss of $10 per unit.
B) a loss of $600.
C) continuing to operate because it covers its variable costs.
D) breaking even because MR = MC.

Question 60

The firm in a perfectly competitive market will:

A) set the price as high as possible to make maximum profit.
B) use different rules for loss minimisation and for profit maximisation.
C) use non-price competition techniques like advertising to sell more.
D) try to keep the average total cost below the market price.

Question 61

Narrbegin Exhibit 7.8

-According to Exhibit 7.8, the output level of the short-run equilibrium for this firm is:

A)1200.
B)100.
C)110.
D) 120.

Question 62

As the marginal revenue curve moves upward the perfectly competitive firm will:

A) change the selection of products it offers to the customers.
B) change its output and will be able to charge a higher price.
C) change its output but will not be able to change the price.
D) change its price and will not change its output.

Question 63

A perfectly competitive firm's short-run supply curve is the:

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

Question 64

Narrbegin Exhibit 7.7

-According to Exhibit 7.7, the short-run equilibrium output level for this perfectly competitive firm is:

A)1000.
B)100.
C)120.
D) 130.

Question 65

The perfectly competitive industry's short-run market supply curve is the sum of:

A) the outputs that each of the firms will supply at the highest price.
B) the outputs that each of the firms will supply at the lowest price.
C) the outputs that each of the firms will supply at the price below average variable cost.
D) the outputs that each of the firms will supply at each possible price.

Question 66

Narrbegin Exhibit 7.5 Short-run profit and loss

-According to Exhibit 7.5, this firm will be making a short-run loss, but will continue to produce when the price is:

A) between $15 and $20.
B) between $25 and $13.
C) between $20 and $25.
D) between $15 and $13.

Question 67

For a perfectly competitive firm, short-run equilibrium is determined by:

A) the point where P = MC.
B) the point where P = ATC.
C) the point where P = AVC.
D) the point where MC = ATC.

Question 68

How long will the state of short-run equilibrium remain unchanged?

A) Forever.
B) Until some factors change.
C) Six months.
D) One year.

Question 69

Narrbegin Exhibit 7.5 Short-run profit and loss

-According to Exhibit 7.5, a perfectly competitive firm will be making a short-run loss but still keep operating if price drops below:

A) $20.
B) $15.
C) $13.
D) $25.

Question 70

Narrbegin Exhibit 7.6

-According to Exhibit 7.6, if MR = $20, the result for a perfectly competitive firm will be:

A) making a short-run profit.
B) making a short-run loss of $10 per unit.
C) making a short-run loss.
D) making a short-run loss of $5

Question 71

Above the shutdown point, a competitive firm's supply curve coincides with its:

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

Question 72

Narrbegin Exhibit 7.7

-Refer to Exhibit 7.7. The short-run results for this firm are:

A) a positive economic profit.
B) a normal profit.
C) a quasi-loss.
D) such a large loss it should shut down.

Question 73

Narrbegin Exhibit 7.6

-Refer to Exhibit 7.6. If market price is $22, the firm should:

A) increase the price.
B) increase the output.
C) decrease the output.
D) shut down.
E) continue to operate.

Question 74

Narrbegin Exhibit 7.7

-According to Exhibit 7.7, the firm's short-run economic profit will be:

A) zero.
B) $260.
C) $520.
D) indeterminate from the information given.

Question 75

The market curve derived for the perfectly competitive market is based on the following assumptions:

A) input prices remain unchanged as output expands.
B) output prices remain unchanged as output expands.
C) input prices reduce as output expands.
D) input prices increase as output expands.

Question 76

A perfectly competitive industry's short-run market supply curve is derived from:

A) horizontal summation of the short-run supply curves of major firms in the industry.
B) horizontal summation of the long-run supply curves of all firms in the industry.
C) vertical summation of the short-run supply curves of all firms in the industry.
D) horizontal summation of the short-run supply curves of all firms in the industry.

Question 77

A perfectly competitive firm's supply curve follows the upward-sloping segment of its marginal cost curve above the:

A) average total cost curve.
B) average variable cost curve.
C) average fixed curve.
D) average price curve.

Question 78

A perfectly competitive firm's short-run supply curve is the part of its marginal cost curve that is:

A) upward-sloping.
B) above its average variable cost.
C) above the average fixed cost.
D) below the average fixed cost.

Question 79

Narrbegin Exhibit 7.5 Short-run profit and loss

-According to Exhibit 7.5, if the price of the good is $17, then the result for the perfectly competitive firm will be:

A) making a long-run profit.
B) making a long-run loss and so it will shut down.
C) making a short-run loss but it will continue to produce.
D) making a normal profit.
E) indeterminate.

Question 80

Narrbegin Exhibit 7.7

-According to Exhibit 7.7, given the short-run equilibrium of this firm, we would expect in the long run:

A) the market supply curve to shift to the left.
B) the price to increase.
C) firms to exit the industry.
D) new firms to enter the industry.