Question 1

If there is a decrease in industry supply while the industry demand curve remains the same, then an individual firm in a perfectly competitive industry currently earning profits will see its profits
A) increase.
B) not change.
C) decrease.
D) impossible to determine.

Accepted Answer

When there is a decrease in industry supply while demand remains constant, the market price will increase. In a perfectly competitive market, individual firms are price takers, so an increase in market price leads to higher revenues for the same quantity sold, thereby increasing profits for firms already earning profits.

Question 2

A firm facing a ________ demand curve, ceteris paribus, will have zero quantity demanded if it raises its price above the market price.
A) perfectly inelastic
B) relatively elastic
C) relatively inelastic
D) perfectly elastic

Accepted Answer

A firm facing a perfectly elastic demand curve will have zero quantity demanded if it raises its price above the market price because consumers are perfectly price sensitive and will switch to substitutes at any price increase.

Question 3

A perfectly competitive firm ________ at the level of output where P = ATC.
A) earns an economic profit
B) suffers an economic loss
C) breaks even
D) shuts down

Accepted Answer

In a perfectly competitive market, when a firm's price (P) equals its average total cost (ATC), the firm is breaking even, meaning it is covering all its costs but not earning an economic profit.

Question 4

If the corn industry is perfectly competitive, ________ for corn is downward sloping and ________ is horizontal.
A) the market demand curve; an individual corn producer's demand curve
B) an individual corn producer's demand curve; the marginal revenue curve
C) the marginal cost curve; the marginal revenue curve
D) marginal revenue curve; average total cost curve

Accepted Answer

In a perfectly competitive market, the market demand curve for a product like corn is downward sloping due to the law of demand, which states that as the price of a good decreases, the quantity demanded increases, and vice versa. An individual corn producer's demand curve is horizontal, reflecting the fact that the producer is a price taker and can sell any quantity of corn at the market price.

Question 5

Dominic sells pizza slices for $5 on the Santa Monica Pier. He currently sells 500 slices of pizza per day.This is a perfectly competitive business, and Dominic faces a perfectly price elastic demand curve. If he wants to try to increase daily revenues to $3,000, he should
A) raise the price of his pizza to $6 per slice and continue to sell 500 slices per day.
B) lower the price of his pizza to $4 per slice and try to sell 750 slices per day.
C) keep the price at $5 per slice and produce 600 slices per day.
D) do nothing since he can do nothing to increase revenue.

Accepted Answer

In a perfectly competitive market with perfectly price elastic demand, increasing output is the only way to increase revenue since price cannot be changed. Selling 600 slices at $5 each would yield $3,000 in revenue.

Question 6

If a perfectly competitive firm's average total cost curve is below its demand schedule at any level of output, then the firm will earn ________ profits.
A) positive
B) break-even
C) negative
D) zero

Accepted Answer

If a firm's average total cost curve is below its demand schedule at any level of output, it means the price at which it can sell its product is higher than the cost of producing it, leading to positive profits.

Question 7

It is ________ for a corn producer in a perfectly competitive corn industry to make excess profits because entry into the corn industry is free.
A) expected
B) very easy
C) likely
D) difficult

Accepted Answer

In a perfectly competitive market, free entry and exit of firms ensure that excess profits are eroded in the long run as new firms enter the market, increasing supply and reducing prices until only normal profits are made.

Question 8

If a firm in a perfectly competitive industry lowers its price below the market price, its
A) total revenue will increase.
B) profit will decrease.
C) sales will drop to zero.
D) demand curve will become downward sloping.

Accepted Answer

In a perfectly competitive market, firms are price takers, meaning they have no control over the market price. If a firm lowers its price below the market price, it will sell its product at a loss compared to the market price, thereby decreasing its profit. Other choices do not accurately reflect the outcomes in a perfectly competitive market.

Question 9

Demand for the product of an industry in perfect competition is assumed to be inelastic.

Accepted Answer

In perfect competition, the demand curve for the product of an individual firm is perfectly elastic, indicating that the firm can sell any quantity of its product at the prevailing market price.

Question 10

If a perfectly competitive firm is currently producing where ________, then the firm will earn zero profits. A) P > MC and MC = ATC B) P = MC and MC = ATC C) P = MC and MC < ATC D) P < MC and MC > ATC

Accepted Answer

In a perfectly competitive market, if a firm is producing at a point where the price (P) equals the marginal cost (MC) and the marginal cost equals the average total cost (ATC), the firm is operating at the point where economic profits are zero. This is because the price covers all variable and fixed costs, leaving no surplus.

Question 11

Economists do not consider the smartphone industry perfectly competitive because
A) the government strictly regulates entry and exit.
B) smartphones are heterogeneous.
C) smartphone manufacturers each have a small market share.
D) there are a large number of smartphone manufacturers.

Accepted Answer

Smartphones are heterogeneous, meaning they vary widely in features, design, brand, and functionality, which contradicts the perfect competition assumption of homogeneous products.

Question 12

If P = MC and MC <ATC, then a perfectly competitive firm will earn ________ profits.
A) positive
B) zero
C) negative
D) break-even

Accepted Answer

If P = MC and MC < ATC, it means the price at which the firm is selling its product is less than the average total cost of producing that product. Therefore, the firm will incur losses, leading to negative profits.

Question 13

The ________ part of a perfectly competitive firm's marginal cost curve is the firm's short-run supply curve.
A) rising
B) falling
C) horizontal
D) backward-bending

Accepted Answer

The rising part of a perfectly competitive firm's marginal cost curve is its short-run supply curve because the firm will increase production as long as the price (or marginal revenue) is above the marginal cost, which aligns with the upward slope of the marginal cost curve beyond the minimum point.

Question 14

Which of the following is the closest example of a perfectly competitive industry?
A) casual dining restaurants
B) cigarettes
C) convenience stores
D) alfalfa

Accepted Answer

Alfalfa is the closest example of a perfectly competitive industry because it is a homogeneous product, there are many buyers and sellers, and there are no barriers to entry or exit in the market.

Question 15

An individual firm's demand curve in a perfectly competitive market is
A) downward sloping.
B) upward sloping.
C) perfectly elastic.
D) perfectly inelastic.

Accepted Answer

In a perfectly competitive market, an individual firm's demand curve is perfectly elastic because the firm is a price taker and can sell any quantity of its product at the market price.

Question 16

If there is an increase in industry supply while the industry demand remains the same, then an individual firm in a perfectly competitive industry currently earning negative profits will see its profits
A) increase.
B) not change.
C) decrease further.
D) impossible to determine

Accepted Answer

When there is an increase in industry supply while demand remains constant, prices tend to fall. For a firm already experiencing negative profits, lower prices will likely exacerbate its losses, leading to further decreased profits.

Question 17

Perfectly competitive industries are characterized by a homogeneous product.

Accepted Answer

In perfectly competitive markets, all firms sell products that are essentially identical, meaning the products are homogeneous. This characteristic ensures that no single firm can influence the market price based on product differentiation.

Question 18

Free exit implies that
A) a perfectly competitive firm can never earn a profit.
B) if an industry's existing firms make excessively high losses, firms are likely to exit the industry.
C) the government regulates the number of firms it allows in an industry.
D) firms will always earn below normal profit, as firms can exit the industry at any time they like.

Accepted Answer

Free exit refers to the ability of firms to leave an industry without facing significant barriers or costs. When existing firms in an industry incur excessively high losses, it becomes unsustainable for them to continue operating, leading to their exit from the industry. This mechanism helps to balance the market by reducing supply, potentially leading to a restoration of market equilibrium. Choices A, C, and D misinterpret the concept of free exit and its implications on profitability, regulation, and earnings.

Question 19

A firm in a perfectly competitive market has ________ control over price because each firm's product perfectly substitutes for every other firm's product.
A) total
B) moderate
C) limited
D) no

Accepted Answer

In a perfectly competitive market, firms have no control over price because products are perfect substitutes, leading to price-taking behavior.

Question 20

Perfectly competitive firms
A) sell identical products.
B) are price makers.
C) are large relative to the size of the market.
D) All of the above are correct.

Accepted Answer

Perfectly competitive firms sell identical (or homogeneous) products, which is a key characteristic of perfect competition. This means that the products offered by different firms are considered perfect substitutes for each other.

Quiz 8: Short-Run Costs and Output Decisions

If there is a decrease in industry supply while the industry demand curve remains the same, then an individual firm in a perfectly competitive industry currently earning profits will see its profits

A firm facing a ________ demand curve, ceteris paribus, will have zero quantity demanded if it raises its price above the market price.

A perfectly competitive firm ________ at the level of output where P = ATC.

If the corn industry is perfectly competitive, for corn is downward sloping and is horizontal.

Dominic sells pizza slices for $5 on the Santa Monica Pier. He currently sells 500 slices of pizza per day.This is a perfectly competitive business, and Dominic faces a perfectly price elastic demand curve. If he wants to try to increase daily revenues to $3,000, he should

If a perfectly competitive firm's average total cost curve is below its demand schedule at any level of output, then the firm will earn ________ profits.

It is ________ for a corn producer in a perfectly competitive corn industry to make excess profits because entry into the corn industry is free.

If a firm in a perfectly competitive industry lowers its price below the market price, its

Demand for the product of an industry in perfect competition is assumed to be inelastic.

If a perfectly competitive firm is currently producing where ________, then the firm will earn zero profits.

Economists do not consider the smartphone industry perfectly competitive because

If P = MC and MC <ATC, then a perfectly competitive firm will earn ________ profits.

The ________ part of a perfectly competitive firm's marginal cost curve is the firm's short-run supply curve.

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

An individual firm's demand curve in a perfectly competitive market is

If there is an increase in industry supply while the industry demand remains the same, then an individual firm in a perfectly competitive industry currently earning negative profits will see its profits

Perfectly competitive industries are characterized by a homogeneous product.

Free exit implies that

A firm in a perfectly competitive market has ________ control over price because each firm's product perfectly substitutes for every other firm's product.

Perfectly competitive firms