Deck 7: Firms in Perfectly Competitive Markets

Question 1

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.

Answer 1

True

Question 2

A perfectly competitive firm faces a perfectly elastic demand curve.

Answer 2

True

Question 3

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

Answer 3

False

Question 4

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

Question 5

The position of a perfectly competitive firm's demand curve remains constant with change in the market price.

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

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

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

Question 16

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

Question 17

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

Question 18

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

Question 19

In the long run, a perfectly competitive firm is expected to generate high economic profits.

Question 20

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

Question 21

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

A)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, Brady will have no incentive to minimize per-unit production costs.
C)Since the market dictates the price of his product, Brady has no production decisions to make.
D)It would be senseless for Brady to try to increase sales by lowering the price of his product. His entire output can be sold at the market price.
E)Brady can increase his profits by selling his output at a price above the equilibrium price in the market.

Question 22

Which of the following is true of perfect competition?

A)Since a perfectly competitive firm can sell all it wants at the market price, the firm's demand curve is vertical at the market price over the entire range of output that it could possibly produce.
B)Because perfectly competitive markets have many buyers and sellers, each firm is so small in relation to the industry that its production decisions have no impact on the market price.
C)Since perfectly competitive markets are highly competitive, entering a market is very difficult.
D)Since there are large number of sellers in a perfectly competitive market, slightly differentiated products are considered identical.
E)Since all the products in a perfectly competitive market are identical, sellers can change the price of their product, but not the quantity supplied.

Question 23

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
E)The cell phone industry

Question 24

A perfectly competitive firm is a:

A)price giver.
B)price taker.
C)price maker.
D)output taker.
E)output maker.

Question 25

Which of the following market structures is characterized by many sellers, easy entry, and homogeneous products?

A)Perfect competition
B)Monopolistic competition
C)Oligopoly
D)Monopoly
E)Duopoly

Question 26

Which of the following is true of a perfectly competitive firm?

A)It is difficult for entrepreneurs to become suppliers of a product in a perfectly competitive market structure.
B)A perfectly competitive firm has a perfectly elastic supply curve.
C)In a perfectly competitive market, an individual seller can change his or her price and it will not alter the output he or she sells.
D)A perfectly competitive seller cannot alter the quantity supplied of his or her good.
E)In a perfectly competitive market, producers and consumers have complete knowledge of the market.

Question 27

Which of the following is a reason why a perfectly competitive firm cannot 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.
E)There is only one buyer in the market, and the price is fixed by the buyer.

Question 28

A firm facing a horizontal demand curve:

A)can affect the price it receives for its output.
B)is likely to price its goods below market price.
C)faces a perfectly inelastic demand curve for its product.
D)cannot increase its output even if it wants to.
E)can increase its output as much as it wants at a given price.

Question 29

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.
E)the largest buyer.

Question 30

The value of elasticity of the demand curve facing a perfectly competitive firm:

A)is equal 0.
B)is equal to infinity.
C)is greater than 0 but less than 0.5.
D)is smaller than 0 but more than ─0.5.
E)is equal to 0.5.

Question 31

Perfect competition describes:

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 price-taking firms 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.
E)an industry in which two sellers sell identical goods at an identical price.

Question 32

The 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.
E)shows that the firm can sell its output at any price.

Question 33

Which of the following is a characteristic of perfect competition?

A)Substantial barriers to entry and exit
B)Differentiated products
C)Few sellers
D)Differentiated prices
E)Negligible barriers to entry or exit

Question 34

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 of its output.
E)eliminate other firms from the market.

Question 35

Who among the following is most likely a price taker?

A)A respected heart surgeon
B)An ice cream shop owner located in Atlanta, Georgia
C)A skilled cab driver
D)A Kansas wheat farmer
E)A used car shop owner in New York

Question 36

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 an industry with relative ease.
D)firms compete by varying a product's quality rather than a product's price.
E)all the firms in a market sell their products to a single buyer.

Question 37

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.
E)there is only one buyer in a perfectly competitive market.

Question 38

Which of the following is true of a perfectly competitive industry?

A)In a perfectly competitive industry, the volume of output produced in the industry is determined by the largest individual seller.
B)In a perfectly competitive industry, the volume of output produced in the industry is determined by the largest individual buyer.
C)In a perfectly competitive industry, a firm can determine the quality of its output.
D)In a perfectly competitive industry, a firm can determine the quantity of its output.
E)In a perfectly competitive industry, the quantity of output produced by a firm is determined by the government.

Question 39

A perfectly competitive firm faces a demand curve that is:

A)parallel to the horizontal axis.
B)parallel to the vertical axis.
C)downward sloping.
D)upward sloping.
E)U-shaped.

Question 40

Figure 7-1 shows the market demand curve and an individual firm's demand curve in a perfectly competitive market. In Graph A, the market demand has increased from d₀ to d₁ and, as a result, _____.Figure 7-1

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
D)the firm will be unable to sell any of its output at the new equilibrium price
E)some firms will sell their output at a higher price than others

Question 41

If the market demand curve in a perfectly competitive industry shifts right, the demand curve for each existing firm will:

A)shift up.
B)shift down.
C)shift right.
D)shift left.
E)become negatively sloped.

Question 42

Refer to Figure 7-1. In Graph B, the market demand has decreased from d₀ to d₁ and, as a result, _____.Figure 7-1

A)both the market price and the price of the price-taking firm have increased​
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
D)the firm will be unable to sell any of its output at the new equilibrium price
E)some firms will sell their output at a higher price than others

Question 43

Figure 7-2 shows the relationship among the various costs of a perfectly competitive firm. Suppose the market price equals $88 and the firm is currently producing 600 units of output. In this situation, the firm:Figure 7-2

A)is maximizing profit.
B)should increase production.
C)should decrease production.
D)should shut down.
E)in facing an economic loss.

Question 44

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.
E)its average revenue is less than the market price.

Question 45

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.
E)decrease the price of its product.

Question 46

The marginal revenue for a perfectly competitive firm equals:

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

Question 47

Figure 7-4 shows the relationship among the various costs of a perfectly competitive firm. In the figure, when the market price equals $54, the firm:Figure 7-4

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.
E)should increase its output in order to charge a higher price.

Question 48

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

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

Question 49

Table 7-1 shows revenue and cost data for a perfectly competitive firm. What is the value of the variable Z shown in the table?Table 7-1

A)$0
B)-$38
C)-$35
D)-$40
E)$50

Question 50

If the market demand curve in a perfectly competitive industry shifts left, the demand curve for each existing firm will:

A)shift up.
B)shift down.
C)shift right.
D)shift left.
E)become positively sloped.

Question 51

Refer to Figure 7-1. Graphs A and B together demonstrate the effect that a change in market demand has on the demand curve faced by an individual firm. In this case, the firm is:Figure 7-1

A)producing a differentiated product from other firms in the market.
B)quite large relative to the market output as a whole.
C)a price taker.
D)technologically more advance than other firms in the market.
E)the controller of price in the market.

Question 52

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.
E)the addition to total revenue from selling the entire output to one buyer.

Question 53

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.
E)TR = MR

Question 54

A perfectly competitive firm looking to maximize its profits would want to maximize the difference between:

A)its marginal revenue and its marginal cost.
B)its total revenue and its total cost.
C)its accounting revenue and its accounting cost.
D)its price and its marginal cost.
E)its marginal revenue and its total cost.

Question 55

Figure 7-3 shows the demand, marginal cost, and average cost curves of a perfectly competitive firm. How many units of output per day should the firm produce if it wants to maximize its profits (or minimize its losses)?Figure 7-3

A)30
B)70
C)100
D)0
E)90

Question 56

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

A)is equal to $1.50.
B)is less than $1.50.
C)is greater than $1.50.
D)decreases from $1.50 and reaches zero as the output of the firm increases.
E)increases from zero and reaches $1.50 as the output of the firm increases.

Question 57

For a perfectly competitive firm, average revenue is:

A)equal to the marginal cost of the firm at all levels of output.
B)equal to the marginal revenue of the firm at all levels of output.
C)smaller than price at all levels of output.
D)greater than price at all levels of output.
E)smaller than the marginal revenue of the firm at all levels of output.

Question 58

Table 7-1 shows revenue and cost data for a perfectly competitive firm. What is the value of the variable X shown in the table?Table 7-1

A)$0
B)$50
C)$20
D)$40
E)$10

Question 59

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 at the same level of output because it is generating an economic profit.
D)continue operating even though it is generating an economic loss.
E)increase its output in order to earn more profits.

Question 60

Graphically, the short-run supply curve of a perfectly competitive firm is:

A)identical to the portion of the average variable cost curve that lies above the minimum of the AVC curve.
B)identical to the portion of the average total cost curve that lies above the minimum of ATC curve.
C)the same as the demand curve that lies above the minimum of AVC curve.
D)is identical to the portion of the marginal cost curve that lies above the minimum of the AVC curve.
E)the same as its entire marginal cost curve.

Question 61

Under perfect competition, in long-run equilibrium, _____.

A)all firms suffer economic losses
B)all firms suffer zero economic losses
C)all firms earn positive economic profits
D)barriers prevent the entry of new firms
E)all firms start producing differentiated goods

Question 62

Firms will continue to enter a competitive industry until:

A)the supply curve is vertical.
B)the market price falls below average variable cost.
C)any economic profits have been competed away.
D)any accounting profits have been competed away.
E)the marginal revenue is above the market price.

Question 63

If new entry occurs in a perfectly competitive industry, the demand curve for each existing firm will:

A)shift up.
B)shift down.
C)shift right.
D)shift left.
E)become upward sloping.

Question 64

Figure 7-5 shows cost and revenue curves for a perfectly competitive firm. The short-run _____ for this firm is represented by the area _____.Figure 7-5

A)profit; OP₁Bq
B)loss; OP₁Bq
C)profit; PABP₁
D)loss; PABP₁
E)loss; OPAq

Question 65

Figure 7-6 shows a firm in a perfectly competitive market in the long run. Which of the following is most likely to happen in the given market?Figure 7-6​

A)New firms would be likely to enter, increasing the market price.
B)New firms would be likely to enter, decreasing the market price.
C)Existing firms would be likely to exit, increasing the market price.
D)Existing firms would be likely to exit, decreasing the market price.
E)Firms would neither enter nor exit, and the market price would remain unchanged.

Question 66

A profit-maximizing, perfectly competitive firm would never operate at an output level where:

A)it would not cover all of its variable costs.
B)it was not earning a positive economic profit.
C)it was not earning a zero economic profit.
D)it was not earning an accounting profit.
E)it would not cover all of its fixed costs.

Question 67

Figure 7-8 shows a firm in a perfectly competitive market. Which of the following is most likely to happen in the given market?​Figure 7-8

A)New firms would be likely to enter, increasing the market price.
B)New firms would be likely to enter, decreasing the market price.
C)Existing firms would be likely to exit, increasing the market price.
D)Existing firms would be likely to exit, decreasing the market price.
E)Firms would neither enter nor exit, and the market price would remain unchanged.

Question 68

Which of the following statements is true of a short-run market supply curve?

A)The short-run market supply curve is the summation of all the individual firms' supply curves.
B)The short-run market supply curve is the mean of all the individual firms' supply curves.
C)The short-run market supply curve is the summation of all the individual firms' marginal cost curves.
D)The short-run market supply curve is the mean of all the individual firms' marginal cost curves.
E)The short-run market supply curve is vertical.

Question 69

Which of the following is true of long-run equilibrium under perfect competition?

A)There is no incentive for firms to enter or exit the industry.
B)Economic profit is at its maximum.
C)Long-run marginal cost is minimized.
D)Long-run average total cost is maximized.
E)Some firms suffer economic losses.

Question 70

Figure 7-4 shows the relationship between the various costs of a perfectly competitive firm. In the figure, when the market price equals $105 and the firm sells 675 units of output, the firm:Figure 7-4

A)is earning a normal profit.
B)is earning positive economic profit.
C)is experiencing a loss, but should continue operating temporarily because business conditions may improve.
D)is experiencing a loss and should shut down.
E)should sell more units of its output to earn higher prices.

Question 71

Which of the following is a characteristic of a perfectly competitive industry in long-run equilibrium?

A)A profit-maximizing firm may produce any output level at which P < LRATC.
B)Every firm produces at an output level at which MC > LRATC.
C)Firms will continue to enter or exit the industry.
D)No firm earns an economic profit.
E)Every firm earns an economic profit.

Question 72

If a perfectly competitive industry is neither expanding nor contracting, we would typically expect:

A)accounting profits to be zero.
B)economic profits to be positive.
C)that the price of the good will increase.
D)that the price of the good will decrease.
E)that the price of the good will be stable.

Question 73

Under perfect competition, in long-run equilibrium, _____.​

A)price will equal minimum average fixed cost
B)firms will earn economic profits because of the existence of barriers to entry
C)the demand curve facing individual firms will fall to the level tangent to the minimum average total cost curve
D)firms will produce at the level of output where marginal revenue exceeds marginal cost by the greatest dollar amount
E)each firm will produce and supply equal amount of good

Question 74

A firm receives $10 per unit at an equilibrium level of output of 80 units. The average total cost at 80 units of output is $8. The firm makes a total economic profit of:

A)$120.
B)$160.
C)$100.
D)$80.
E)$640.

Question 75

Figure 7-5 shows cost and revenue curves for a perfectly competitive firm. If P represents the market price for a price-taking firm, the best course of action in the short run for the firm is to:Figure 7-5

A)shut down immediately.
B)continue operating because average total cost exceeds price.
C)continue operating because price exceeds average total cost.
D)continue operating because price exceeds average variable cost.
E)increase its output.

Question 76

A perfectly competitive firm cannot make economic profits in the long run because:

A)it is a price taker.
B)there are no barriers to entry or exit in the industry.
C)it faces a perfectly elastic demand curve.
D)its advertising costs will rise to eliminate any economic profits.
E)consumers will eliminate its profits.

Question 77

The entry of new firms into an industry will:

A)shift the industry supply curve to the right.
B)cause the market price to rise.
C)increase the profits of existing firms in the industry.
D)decrease the total output of the industry.
E)shift the industry supply curve to the left.

Question 78

Figure 7-7 shows a firm in a perfectly competitive market. Which of the following is most likely to happen in the given market?Figure 7-7

A)New firms would be likely to enter, increasing the market price.
B)New firms would be likely to enter, decreasing the market price.
C)Existing firms would be likely to exit, increasing the market price.
D)Existing firms would be likely to exit, decreasing the market price.
E)Firms would neither enter nor exit, and the market price would remain unchanged.

Question 79

Assume that the equilibrium price in a perfectly competitive industry is $4.25. If a firm in this industry produces and sells 10 units with an average total cost of $5.00, it will:

A)make a profit of $0.75.
B)make a profit of $7.50.
C)suffer a loss of $0.75.
D)suffer a loss of $7.50.
E)earn a profit of $9.25.

Question 80

In long-run equilibrium, a perfectly competitive firms produces at the output level at which:

A)total revenue is maximized.
B)long-run marginal cost is minimized.
C)average total cost is minimized.
D)short-run variable cost is minimized.
E)marginal revenue is maximized.