Deck 9: Firms in Perfectly Competitive Markets

Question 1

Which of the following is the best example of a perfectly competitive industry?

A)wheat production
B)steel production
C)electricity production
D)airplane production

Answer 1

wheat production

Question 2

Jason,a high-school student,mows lawns for families in his neighborhood.The going rate is $12 for each lawn-mowing service.Jason would like to charge $20 because he believes he has more experience mowing lawns than the many other teenagers who also offer the same service.If the market for lawn mowing services is perfectly competitive,what would happen if Jason raised his price?

A)He would lose some but not all his customers.
B)Initially,his customers might complain but over time they will come to accept the new rate.
C)If Jason raises his price he would lose all his customers.
D)If Jason raises his price,then all others supplying the same service will also raise their prices.

Answer 2

If Jason raises his price he would lose all his customers.

Question 3

Perfect competition is characterized by all of the following except

A)heavy advertising by individual sellers.
B)homogeneous products.
C)sellers are price takers.
D)a horizontal demand curve for individual sellers.

Answer 3

heavy advertising by individual sellers.

Question 4

Both individual buyers and sellers in perfect competition

A)can influence the market price by their own individual actions.
B)can influence the market price by joining with a few of their competitors.
C)have to take the market price as a given.
D)have the market price dictated to them by government.

Question 5

The market demand curve for a perfectly competitive industry is the horizontal summation of each individual firm's demand curve.

Question 6

Which of the following is a characteristic of an oligopolistic market structure?

A)There are few dominant sellers.
B)Each firm sells a unique product.
C)It is easy for new firms to enter the industry.
D)Each firm need not react to the actions of rivals.

Question 7

Assume the market for organic produce sold at farmers' markets is perfectly competitive.All else equal,as more farmers choose to produce and sell organic produce at farmers' markets,what is likely to happen to the equilibrium price of the produce and profits of the organic farmers in the long run?

A)The equilibrium price is likely to increase and profits are likely to remain unchanged.
B)The equilibrium price is likely to remain unchanged and profits are likely to increase.
C)The equilibrium price is likely to decrease and profits are likely to decrease.
D)The equilibrium price is likely to increase and profits are likely to increase.

Question 8

A very large number of small sellers who sell identical products imply

A)a multitude of vastly different selling prices.
B)a downward sloping demand for each seller's product.
C)the inability of one seller to influence price.
D)chaos in the market.

Question 9

An individual seller in perfect competition will not sell at a price lower than the market price because

A)demand for the product will exceed supply.
B)the seller would start a price war.
C)the seller can sell any quantity she wants at the prevailing market price.
D)demand is perfectly inelastic.

Question 10

Assume the market for organically-grown produce is perfectly competitive.All else equal,as farmers find it less profitable to produce and sell organic produce in this market,

A)the demand curve will shift to the left and the equilibrium price will decrease.
B)the supply curve will shift to the left and the equilibrium price will increase.
C)the supply curve will shift to the right,the demand curve will shift to the left,and the equilibrium price will decrease.
D)the supply curve will shift to the left,the demand curve will shift to the left,and the equilibrium price will increase.

Question 11

In perfect competition

A)the market demand curve and the individual's demand are identical.
B)the market demand curve is perfectly inelastic while demand for an individual seller's product is perfectly elastic.
C)the market demand curve is perfectly elastic while demand for an individual seller's product is perfectly inelastic.
D)the market demand curve is downward sloping while demand for an individual seller's product is perfectly elastic.

Question 12

The demand curve for an individual seller's product in perfect competition is

A)the same as market demand.
B)downward sloping.
C)vertical.
D)horizontal.

Question 13

Which of the following is a characteristic of a monopoly?

A)It is easy for new firms to enter the market.
B)There is only one seller in the market.
C)The product is not unique.
D)The firm has no control over price.

Question 14

The price of a seller's product in perfect competition is determined by

A)the individual seller.
B)a few of the sellers.
C)market demand and market supply.
D)the individual demander.

Question 15

A perfectly competitive firm's horizontal demand curve implies that the firm does not have to lower its price to sell more output.

Question 16

Suppose the equilibrium price in a perfectly competitive industry is $15 and a firm in the industry charges $21.Which of the following will happen?

A)The firm's profits will increase.
B)The firm's revenue will increase.
C)The firm will not sell any output.
D)The firm will sell more output than its competitors.

Question 17

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

A)There are a very large number of firms that are small compared to the market.
B)All firms sell identical products.
C)There are no restrictions to entry by new firms.
D)There are restrictions on exit of firms.

Question 18

Which of the following is not a characteristic of a monopolistically competitive market structure?

A)There is a large number of independently acting small sellers.
B)All sellers sell products that are differentiated.
C)There are low barriers to entry of new firms.
D)Each firm must react to actions of other firms.

Question 19

The demand curve for each seller's product in perfect competition is horizontal at the market price because

A)each seller is too small to affect market price.
B)the price is set by the government.
C)all the sellers get together and set the price.
D)all the demanders get together and set the price.

Question 20

Both buyers and sellers are price takers in a perfectly competitive market because

A)the price is determined by government intervention and dictated to buyers and sellers.
B)each buyer and seller knows it is illegal to conspire to affect price.
C)both buyers and sellers in a perfectly competitive market are concerned for the welfare of others.
D)each buyer and seller is too small relative to others to independently affect the market price.

Question 21

Why are individual buyers and sellers in perfect competition called price takers?

Question 22

Figure 9-1
Refer to Figure 9-1.If the firm is producing 200 units,

A)it breaks even.
B)it is making a loss.
C)it should cut back its output to maximize profit.
D)it should increase its output to maximize profit.

Question 23

If the market price is $25,the average revenue of selling five units is

A)$5.
B)$12.50.
C)$25.
D)$125.

Question 24

Figure 9-2
Refer to Figure 9-2.The firm breaks even at an output level of

A)Q₁ units.
B)Q₂ units.
C)Q₃ units.
D)Q₄ units.

Question 25

If,for the last unit of a good produced by a perfectly competitive firm,MR > MC,then in producing it,the firm

A)added more to total costs than it added to total revenue.
B)added more to total revenue than it added to total cost.
C)is maximizing marginal profit.
D)has minimized its losses.

Question 26

Figure 9-1
Refer to Figure 9-1.If the firm is producing 700 units,

A)it is making a profit.
B)it is making a loss.
C)it should cut back its output to maximize profit.
D)it should increase its output to maximize profit.

Question 27

Table 9-1
Table 9-1 shows the short-run cost data of a perfectly competitive firm that produces plastic camera cases.Assume that output can only be increased in batches of 100 units.
Refer to Table 9-1.What is the fixed cost of production?

A)$0
B)$500
C)$1,000
D)It cannot be determined.

Question 28

If,for a perfectly competitive firm,price exceeds the marginal cost of production,the firm should

A)increase its output.
B)reduce its output.
C)keep output constant and enjoy the above normal profit.
D)lower the price.

Question 29

Table 9-1
Table 9-1 shows the short-run cost data of a perfectly competitive firm that produces plastic camera cases.Assume that output can only be increased in batches of 100 units.
Refer to Table 9-1.If the market price of each camera case is $8,what is the firm's total revenue?

A)$2,400
B)$3,200
C)$4000
D)$4,800

Question 30

Which of the following is not true for a firm in perfect competition?

A)Profit equals total revenue minus total cost.
B)Price equals average revenue.
C)Average revenue is greater than marginal revenue.
D)Marginal revenue equals the change in total revenue from selling one more unit.

Question 31

Table 9-1
Table 9-1 shows the short-run cost data of a perfectly competitive firm that produces plastic camera cases.Assume that output can only be increased in batches of 100 units.
Refer to Table 9-1.If the market price of each camera case is $8 and the firm maximizes profit,what is the amount of the firm's profit or loss?

A)$0 (it breaks even)
B)loss of $1,000
C)profit of $440
D)loss of $440

Question 32

Figure 9-2
Refer to Figure 9-2.Suppose the firm is currently producing Q₂ units.What happens if it expands output to Q₃ units?

A)Its profit increases by the size of the vertical distance df.
B)It makes less profit.
C)It incurs a loss.
D)It will be moving toward its profit maximizing output.

Question 33

Figure 9-2
Refer to Figure 9-2.What is the amount of profit if the firm produces Q₂ units?

A)It is equal to the vertical distance c to g.
B)It is equal to the vertical distance c to Q₂.
C)It is equal to the vertical distance g to Q₂.
D)It is equal to the vertical distance c to g multiplied by Q₂ units.

Question 34

If the market price is $25 in a perfectly competitive market,the marginal revenue from selling the fifth unit is

A)$5.
B)$12.50.
C)$25.
D)$125.

Question 35

A perfectly competitive firm produces 3,000 units of a good at a total cost of $36,000.The price of each good is $10.Calculate the firm's short-run profit or loss.

A)loss of $6,000
B)profit of $6,000
C)profit of $30,000
D)There is insufficient information to answer the question.

Question 36

Table 9-1
Table 9-1 shows the short-run cost data of a perfectly competitive firm that produces plastic camera cases.Assume that output can only be increased in batches of 100 units.
Refer to Table 9-1.The firm will not produce in the short run if the output price falls below

A)$8.
B)$4.
C)$3.20.
D)$2.80.

Question 37

Table 9-1
Table 9-1 shows the short-run cost data of a perfectly competitive firm that produces plastic camera cases.Assume that output can only be increased in batches of 100 units.
Refer to Table 9-1.Suppose the fixed cost of production rises by $500 and the price per unit is still $8.What happens to the firm's profit-maximizing output level?

A)It must fall.
B)It must rise to offset the increased cost.
C)It will remain the same.
D)The firm will shut down.

Question 38

Consider the market for wheat which is a perfectly competitive market.Is the market demand curve the same as the demand curve facing an individual producer? If not,explain how and why they are different? Illustrate your answer graphically.

Question 39

Table 9-1
Table 9-1 shows the short-run cost data of a perfectly competitive firm that produces plastic camera cases.Assume that output can only be increased in batches of 100 units.
Refer to Table 9-1.If the market price of each camera case is $8,what is the profit-maximizing quantity?

A)300 units
B)400 units
C)500 units
D)600 units

Question 40

Figure 9-1
Refer to Figure 9-1.If the firm is producing 700 units,what is the amount of its profit or loss?

A)loss of $280
B)loss equivalent to the area A
C)profit equivalent to the area A
D)There is insufficient information to answer the question.

Question 41

In a graph with output on the horizontal axis and total revenue on the vertical axis,what is the shape of the total revenue curve for a perfectly competitive seller?

A)U-shaped
B)inverted U-shaped
C)a horizontal line
D)a ray from the origin

Question 42

Figure 9-4 Figure 9-4 shows the cost and demand curves for a profit-maximizing firm in a perfectly competitive market.
Refer to Figure 9-4.If the market price is $30,should the firm represented in the diagram continue to stay in business?

A)No,it should shut down because it is making a loss.
B)No,it should shut down because it cannot cover its variable cost.
C)Yes,because it is covering part of its fixed cost.
D)Yes,because it is making a profit.

Question 43

Figure 9-3
Refer to Figure 9-3.Suppose the prevailing price is P₁ and the firm is currently producing its loss-minimizing quantity.Identify the area that represents the loss.

A)P₂ deP₁
B)P₃cbP₁
C)P₃caP₀
D)0P₁ bQ₁

Question 44

Assume that price is greater than average variable cost.If a perfectly competitive firm is producing at an output where price is $114 and the marginal cost is $102,then the firm is probably producing more than its profit-maximizing quantity.

Question 45

Figure 9-2
Refer to Figure 9-2.Why is the total revenue curve a ray from the origin?

A)because revenue increases at an increasing rate
B)because revenue increases at a decreasing rate
C)because the firm can sell its product at a constant price
D)because the firm must lower its price to sell more

Question 46

If a perfectly competitive firm's price is above its average total cost,the firm

A)is earning a profit.
B)should shut down.
C)is incurring a loss.
D)is breaking even.

Question 47

Figure 9-4 Figure 9-4 shows the cost and demand curves for a profit-maximizing firm in a perfectly competitive market.
Refer to Figure 9-4.If the market price is $30 and the firm is producing output,what is the amount of the firm's profit or loss?

A)loss of $1,080
B)profit of $1,440
C)loss of $2,520
D)profit of $1,300

Question 48

A perfectly competitive firm earns a profit when price is

A)equal to minimum average total cost.
B)above minimum average total cost.
C)equal to minimum average variable cost.
D)equal to minimum average fixed cost.

Question 49

A perfectly competitive firm's marginal revenue curve is downward sloping.

Question 50

Figure 9-2
Refer to Figure 9-2.What happens if the firm produces more than Q₄ units?

A)Its profit increases.
B)It makes a loss.
C)Its total revenue is increasing faster than its total cost.
D)It could make a profit or a loss depending on what happens to demand.

Question 51

For a perfectly competitive firm,which of the following is not true at profit maximization?

A)Market price is greater than marginal cost.
B)Marginal revenue equals marginal cost.
C)Total revenue minus total cost is maximized.
D)Price equals marginal cost.

Question 52

An increase in a firm's fixed cost will not change the firm's profit-maximizing output in the short run.

Question 53

Figure 9-4 Figure 9-4 shows the cost and demand curves for a profit-maximizing firm in a perfectly competitive market.
Refer to Figure 9-4.What is the amount of its total fixed cost?

A)$1,080
B)$1,440
C)$2,520
D)It cannot be determined.

Question 54

Figure 9-4 Figure 9-4 shows the cost and demand curves for a profit-maximizing firm in a perfectly competitive market.
Refer to Figure 9-4.If the market price is $30,the firm's profit-maximizing output level is

A)0.
B)130.
C)180.
D)240.

Question 55

Figure 9-4 Figure 9-4 shows the cost and demand curves for a profit-maximizing firm in a perfectly competitive market.
Refer to Figure 9-4.If the market price is $30 and if the firm is producing output,what is the amount of its total variable cost?

A)$7,200
B)$6,480
C)$5,400
D)$3,960

Question 56

A firm's total profit can be calculated as all of the following except

A)total revenue minus total cost.
B)average profit per unit times quantity sold.
C)(price minus average total cost)times quantity sold.
D)marginal profit times quantity sold.

Question 57

How are market price,average revenue,and marginal revenue related for a perfectly competitive firm and why?

Question 58

Assuming a market price of $4,fill in the columns in the following table.What is the profit-maximizing level of production? What are the two ways to determine the profit-maximizing level of production?

Question 59

If a perfectly competitive firm's price is less than its average total cost but greater than its average variable cost,the firm

A)is earning a profit.
B)should shut down.
C)is incurring a loss.
D)is breaking even.

Question 60

Assume that price is greater than average variable cost.If a perfectly competitive seller is producing at an output where price is $11 and the marginal cost is $14.54,then to maximize profits the firm should

A)continue producing at the current output.
B)produce a larger level of output.
C)produce a smaller level of output.
D)There is not enough information given to answer the question.

Question 61

When a perfectly competitive firm finds that its market price is below its minimum average variable cost,it will sell

A)the output where marginal revenue equals marginal cost.
B)any positive output the entrepreneur decides upon because all of it can be sold.
C)nothing at all;the firm shuts down.
D)the output where average total cost equals price.

Question 62

Figure 9-5 Figure 9-5 shows cost and demand curves facing a typical firm in a constant-cost,perfectly competitive industry.
Refer to Figure 9-5.The firm's manager suggests that the firm's goal should be to maximize average profit.If the firm does this,what is the amount of profit that it will earn?

A)$6,600
B)$6,750
C)$12,150
D)$36,000

Question 63

Maximizing average profit is equivalent to maximizing total profit.

Question 64

Suppose Veronica sells teapots in the perfectly competitive teapot market.Her output per day and her costs are as follows:
Suppose the current equilibrium price in the teapot market is $15.To maximize profit,how many teapots will Veronica produce,what price will she charge,and how much profit (or loss)will she make? Draw a graph to illustrate your answer.Your graph should include Veronica's demand,ATC,AVC,MC,and MR curves,the price she is charging,the quantity she is producing,and the area representing her profit (or loss).

Question 65

Figure 9-5 Figure 9-5 shows cost and demand curves facing a typical firm in a constant-cost,perfectly competitive industry.
Refer to Figure 9-5.What is the minimum price the firm requires to produce output?

A)$20
B)$14
C)$5
D)It cannot be determined

Question 66

Figure 9-5 Figure 9-5 shows cost and demand curves facing a typical firm in a constant-cost,perfectly competitive industry.
Refer to Figure 9-5.The firm's manager suggests that the firm's goal should be to maximize average profit.In that case,what is the output level and what is the average profit that will achieve the manager's goal?

A)Q = 1,350 units,average profit =$5
B)Q = 1,100 units,average profit =$6
C)Q = 1,350 units,average profit =$9
D)Q = 1,800 units,average profit =$20

Question 67

If,for a given output level,a perfectly competitive firm's price is less than its average variable cost,the firm

A)is earning a profit.
B)should shut down.
C)should increase output.
D)should increase price.

Question 68

A perfectly competitive firm's supply curve is its

A)marginal cost curve.
B)marginal cost curve above its minimum average total cost.
C)marginal cost curve above its minimum average variable cost.
D)marginal cost curve above its minimum average fixed cost.

Question 69

Figure 9-5 Figure 9-5 shows cost and demand curves facing a typical firm in a constant-cost,perfectly competitive industry.
Refer to Figure 9-5.If the market price is $20,what is the average profit at the profit-maximizing quantity?

A)$5
B)$6
C)$9
D)$20

Question 70

Figure 9-5 Figure 9-5 shows cost and demand curves facing a typical firm in a constant-cost,perfectly competitive industry.
Refer to Figure 9-5.The figure shows the cost structure of a firm in a perfectly competitive market.If the firm's fixed cost increases by $1,000 due to a new environmental regulation,what happens to its profit-maximizing output level?

A)It increases.
B)It decreases.
C)It remains the same.
D)It could increase,decrease or remain constant,depending on whether the firm is able to cut costs somewhere else.

Question 71

All of the following can be used to compute average profit except

A)marginal profit minus marginal cost.
B)total profit divided by quantity.
C)average revenue minus average total cost.
D)price minus average total cost.

Question 72

Suppose Veronica sells teapots in the perfectly competitive teapot market.Her output per day and her costs are as follows:
Suppose the current equilibrium price in the teapot market is $20.To maximize profit,how many teapots will Veronica produce,what price will she charge,and how much profit (or loss)will she make? Draw a graph to illustrate your answer.Your graph should include Veronica's demand,ATC,AVC,MC,and MR curves,the price she is charging,the quantity she is producing,and the area representing her profit (or loss).

Question 73

In the short run,if price falls below a firm's minimum average total cost,the firm should shut down.

Question 74

Figure 9-5 Figure 9-5 shows cost and demand curves facing a typical firm in a constant-cost,perfectly competitive industry.
Refer to Figure 9-5.If the market price is $20,what is the firm's profit-maximizing output?

A)750 units
B)1,100 units
C)1,350 units
D)1,800 units

Question 75

A perfectly competitive firm breaks even at a price equal to its minimum average total cost.

Question 76

An increase in demand for U.S.farm exports will ________ the market prices for these exports and ________ economic profit in these markets.

A)increase;decrease
B)decrease;increase
C)increase;increase
D)decrease;decrease

Question 77

Assume that after a banner year in U.S.farm exports in 2011,farmers are expected to break even in 2012.This means that at the quantity being produced in 2012,

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

Question 78

Figure 9-5 Figure 9-5 shows cost and demand curves facing a typical firm in a constant-cost,perfectly competitive industry.
Refer to Figure 9-5.If the market price is $20,what is the amount of the firm's profit?

A)$5,400
B)$6,750
C)$8,100
D)$16,200

Question 79

Figure 9-5 Figure 9-5 shows cost and demand curves facing a typical firm in a constant-cost,perfectly competitive industry.
Refer to Figure 9-5.If the firm's fixed cost increases by $1,000 due to a new environmental regulation,what happens in the diagram above?

A)All the cost curves shift upward.
B)Only the average variable cost and average total cost curves shift upward;marginal cost is not affected.
C)Only the average total cost curve shifts upward;the marginal cost and average variable cost curves are not affected.
D)None of the curves shifts;only the fixed cost curve,which is not shown here,is affected.

Question 80

Figure 9-5 Figure 9-5 shows cost and demand curves facing a typical firm in a constant-cost,perfectly competitive industry.
Refer to Figure 9-5.What is the amount of the firm's fixed cost of production?

A)$5,400
B)$6,750
C)$8,100
D)It cannot be determined.