Question 1

One characteristic of perfect competition is:

Accepted Answer

One characteristic of perfect competition is that there are many firms in the market, each producing an identical product. This means that no single firm has a significant influence on the market price or supply, and there is no restriction on entry or exit of firms. Perfect competition is characterized by a large number of firms, meaning that no single firm can have a significant impact on the market price. This also implies ease of entry and exit for firms, which is necessary to maintain the lack of market power. The other options - differentiated product, restricted entry, and preferred access to resources - are more characteristic of monopolistic or oligopolistic markets.

Question 2

A decreasing-cost industry is characterized by:

Accepted Answer

A decreasing-cost industry is characterized by economies of scale, which means the cost per unit of output decreases as the scale of production increases. Therefore, more firms may be able to enter the market and enjoy lower costs, leading to more competition. There are no diseconomies of scale in a decreasing-cost industry. The accounting profit net of the minimum return on invested capital demanded by the firm's investors is not specific to a decreasing-cost industry. A decreasing-cost industry typically experiences economies of scale, which means that as output increases, the average cost per unit of production decreases. This can lead to lower costs for firms and a more competitive market, which may result in more firms entering the industry. Therefore, there may be more firms in a decreasing-cost industry than in an increasing-cost industry. However, the presence of diseconomies of scale would result in higher costs per unit of production as output increases, which is not characteristic of a decreasing-cost industry. The profitability of a firm in a decreasing-cost industry would depend on its ability to take advantage of economies of scale to lower costs and increase efficiency.

Question 3

Suppose that for last year, Sarah's small business earned an accounting profit of $70,000 and an economic profit of $20,000. What can we correctly infer about Sarah's business?

Accepted Answer

The difference between accounting profit ($70,000) and economic profit ($20,000) is $50,000, which represents the total opportunity costs (including implicit costs) not accounted for in the accounting profit. This means Sarah had additional costs or foregone income of $50,000 that were considered in the economic profit calculation but not in the accounting profit.

Question 4

Characteristics of a short-run perfectly competitive equilibrium always include:

Accepted Answer

In a short-run perfectly competitive equilibrium, firms produce at a level where marginal cost equals marginal revenue, and since firms are price takers, they produce the same level of output if they have identical cost structures.

Question 5

Which of the following will not be true of a perfectly competitive market?

Accepted Answer

In a perfectly competitive market, all consumers pay the same price for a product from any seller. This is because sellers must charge the market price, which is determined by the forces of supply and demand, and there is no room for price discrimination. Therefore, different consumers cannot pay different prices for the same product. In a perfectly competitive market, all consumers pay the same price for the same product. This is because firms in a perfectly competitive market are price takers, meaning they have no control over the market price and must sell their goods at the prevailing market price. Therefore, if different consumers pay different prices, it violates the assumption of a perfectly competitive market.

Question 6

Suppose that, at the current level of output, a firm in a perfectly competitive market is producing at a level such that price exceeds marginal cost, P > MC. Marginal cost is normally shaped (U-shaped). The firm:

Accepted Answer

In a perfectly competitive market, firms maximize profit where price equals marginal cost (P = MC). If the price is greater than marginal cost (P > MC), the firm can increase its output to raise its profit, moving closer to the point where P = MC.

Question 7

Suppose a $1 tax is levied on each unit of output in a perfectly competitive industry, we know that:

Accepted Answer

A $1 tax increases costs, reducing profits. In the long run, firms exit the industry if they can't cover costs, decreasing the number of firms.

Question 8

$$S T C = 200 + 2 q + 4 q ^ { 2 } \text { and } S M C = 2 + 8 q$$ , where q is output. Sunk fixed costs are 56 and nonsunk fixed costs are 144. What is the minimum level of average nonsunk cost?

Accepted Answer

The formula for average cost is: 
Average Cost = (Total Variable Cost + Total Nonsunk Fixed Cost) / Quantity

To find the minimum level of average nonsunk cost, we need to differentiate the total cost function with respect to q and set it equal to 0.

d(Total Cost) / d(q) = 2 + 8q + 4q^2 = 0

Solving for q, we get q = -1 or q = -0.5. Since output cannot be negative, we discard the solution q = -1.

Thus, the minimum level of average nonsunk cost occurs at q = -0.5, which is the minimum point of the total cost curve.

Substituting q = -0.5 into the total cost function, we get:

Total Cost = 200 + 2(-0.5) + 4(-0.5)^2 + 144

Total Cost = 212

Therefore, Average Nonsunk Cost = (212 - 56) / (-0.5) = 312

Thus, the minimum level of average nonsunk cost is 50. To find the minimum level of average nonsunk cost, we need to find the point where the marginal cost intersects with the average cost curve. We can use the following formula to calculate the average cost:
$$A V C = \frac { S T C - S F C } { q } + \frac { N F C } { q }$$
Where:
- STC is the total cost of production (sunk and nonsunk costs)
- SFC is the sunk fixed cost
- NFC is the nonsunk fixed cost
- q is the level of output

To find the minimum level of AVC, we need to find the derivative of AVC with respect to q and set it equal to zero:
$$\frac { d A V C } { d q } = \frac { 2 q + 4 q ^ { 2 } - 56 - 144 } { q ^ { 2 } } + \frac { 144 } { q ^ { 2 } } = \frac { 4 q - 200 } { q ^ { 2 } }$$
$$\frac { d A V C } { d q } = 0 \Rightarrow 4q = 200 \Rightarrow q = 50$$

Therefore, the minimum level of AVC occurs at q = 50. Plugging this into the AVC formula, we get:
$$\text{AVC} = \frac { 200 + 2 \times 50 + 4 \times 50 ^ { 2 } - 56 - 144 } { 50 } + \frac { 144 } { 50 } = 6$$

Thus, the best choice is B, with a minimum level of average nonsunk cost of 6.

Question 9

Which of the following statements about marginal revenue for a perfectly competitive firm is incorrect, where TR stands for total revenue, P stands for price, and q stands for output?

Accepted Answer

The formula in statement A is incorrect. The correct formula for marginal revenue for a perfectly competitive firm is MR = ∆TR/∆q, which is statement C. Statement B is also correct, as a perfectly competitive firm faces a horizontal demand curve and therefore the price remains constant. Statement D is also correct as it explains the concept of marginal revenue. Option A is incorrect because it calculates the marginal revenue as the change in total revenue divided by the quantity sold, which is not the correct formula for marginal revenue in a perfectly competitive market. The correct formula is MR=P, indicating that the marginal revenue is equal to the market price. Option B is the correct statement. Option C is another correct way of writing the formula for marginal revenue: the change in total revenue divided by the change in quantity. Option D is a correct statement about marginal revenue.

Question 10

A perfectly competitive firm will always maximize its profit or minimize its loss by:

Accepted Answer

In perfect competition, a firm will be a price taker and faces a horizontal demand curve. Therefore, its marginal revenue (MR) is equal to the market price. To maximize profit, the firm should produce the quantity where its marginal cost (MC) equals MR. This ensures that the last unit produced adds the same amount to revenue as it does to cost, maximizing the difference between revenue and cost (i.e. profit). If MC is below MR, the firm can increase profit by producing more. If MC is above MR, the firm can decrease loss by producing less. Therefore, setting MC equal to MR is the optimal strategy for a perfectly competitive firm. A perfectly competitive firm will always aim to maximize its profit or minimize its loss by setting the marginal cost equal to marginal revenue. This is because in a perfectly competitive market, the firm has no control over the market price and must therefore produce at the level where its marginal revenue equals its marginal cost. This will ensure that the firm is producing the optimal quantity of output that maximizes its profit or minimizes its loss. Setting marginal cost above average cost would result in the firm incurring losses, while setting total cost minus total revenue at its maximum level is not a relevant concept for maximizing profit or minimizing loss in a perfectly competitive market. Creating a unique product is also not relevant in a perfectly competitive market, where firms produce homogeneous products.

Question 11

An industry in which any potential entrant has access to the same technology and inputs as existing firms is said to be characterized by:

Accepted Answer

Free entry means that there are no barriers to entry, such as patent protection or government regulations, that prevent new firms from entering the industry. Therefore, any potential entrant has access to the same technology and inputs as existing firms, leading to a level playing field and competition based on efficiency and innovation. Free entry means that there are no barriers to entry, such as exclusive access to technology or inputs, that would prevent potential entrants from joining the industry. This creates a level playing field for all firms, ensuring that they have equal opportunities to compete and innovate.

Question 12

When the average variable cost curve is "u-shaped" and not everywhere upward or downward sloping, marginal cost will:

Accepted Answer

When the average variable cost curve is "u-shaped", the marginal cost curve intersects or "bisects" the average variable cost curve at its minimum point. This is because at the minimum point, the average variable cost curve is at its lowest point, which means that each additional unit produced has a lower average variable cost. As marginal cost reflects the cost of producing one additional unit, it will also be at its minimum point where it intersects the average variable cost curve. Therefore, choice C is the correct answer. When the average variable cost curve is "U-shaped," it reaches a minimum point. At that minimum point, the marginal cost curve intersects or "bisects" the average variable cost curve. Therefore, choice C is correct. Choices A, B, and D are incorrect. Since marginal cost must always intersect the average variable cost curve at its minimum in this case, it is not true that it will never intersect the average variable cost curve. Similarly, since marginal revenue can intersect the marginal cost curve at any point, it is not true that it will never equal marginal revenue. Finally, although the marginal cost curve could be increasing or decreasing, it is not necessarily always increasing.

Question 13

Suppose Joe starts his own business. In the first year the business earns $100,000 in revenue and incurs $85,000 in explicit costs. In addition, Joe has a standing offer to come work for his brother for $40,000 per year. Joe's accounting profit is _________ and Joe's economic profit is __________.

Accepted Answer

Joe's accounting profit is calculated by subtracting explicit costs from revenue, which is $100,000 - $85,000 = $15,000. Joe's economic profit takes into account both explicit and implicit costs, including the forgone salary of $40,000. Therefore, the economic profit is $15,000 (accounting profit) - $40,000 (forgone salary) = -$25,000.

Question 14

In a perfectly competitive industry, individual firms act as:

Accepted Answer

In a perfectly competitive industry, there are many small firms producing homogenous products, and no single firm has the ability to influence the market price. As a result, individual firms have to accept the prevailing market price and cannot set their own prices. Therefore, they are price takers, not price makers. They also try to maximize profits as profit maximization is a primary goal of firms in a market economy, but they cannot disregard market prices. In a perfectly competitive industry, individual firms have no control over the price and must accept the market price. Therefore, they act as price takers rather than price makers. They also aim to maximize their profits, but in doing so, they must take the market price into account and adjust their output accordingly.

Question 15

Which of the following is not an assumption of a perfectly competitive market?

Accepted Answer

A perfectly competitive market assumes that all firms sell identical products, so there is no differentiation among products. Differentiated product is not an assumption of a perfectly competitive market. In a perfectly competitive market, all firms produce identical products, so there is no differentiation between them. The other options are assumptions of a perfectly competitive market. A fragmented industry means there are many small firms, perfect information means that all market participants have access to the same information, and equal access to resources means that all firms have the same access to inputs like labor and raw materials.

Question 16

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

Accepted Answer

Perfect competition assumes that consumers have perfect or complete information about the products and prices offered by firms in the market. Imperfect information could lead to market inefficiencies and distortions. The other characteristics listed (fragmented industry, undifferentiated products, and equal access to resources) are all typical of perfect competition. Perfect competition assumes that consumers have perfect knowledge and access to information about the products and prices in the market. Therefore, answer choice C, which suggests that consumers have imperfect information, is not a characteristic of perfect competition. The other answer choices are all characteristics of perfect competition.

Question 17

For the data in the following table, which level of q will maximize profit? $$\begin{array} { l l l } 
\hline \mathrm { q } & \mathrm { MR } & \mathrm { MC } \
\hline 0 & 0 & 0 \
10 & 40 & 10 \
20 & 30 & 20 \
30 & 20 & 30 \
40 & 10 & 40 \
50 & 5 & 50 \
\hline
\end{array}$$

Accepted Answer

Profit is maximized where marginal revenue (MR) equals marginal cost (MC), which occurs at q=20.

Question 18

Sunk costs:

Accepted Answer

Sunk costs are costs that have already been incurred and cannot be recovered. They do not affect decision-making in the short run because they are irrelevant to future costs and revenues.

Question 19

Economic value added is defined as:

Accepted Answer

Economic value added (EVA) is the profit earned by a company after accounting for the cost of all capital, including equity and debt. It is calculated as the difference between the net operating profit after tax (NOPAT) and the cost of capital. Unlike accounting profit, EVA deducts the minimum rate of return demanded by investors for the use of their capital. Therefore, option C is the correct answer. Option A is incorrect because accounting profit does not consider the cost of capital. Option B is incorrect because it only considers explicit costs, not the cost of capital. Option D is also incorrect because economic profit is calculated by deducting both explicit and implicit costs from total revenue. Economic value added (EVA) is the measure of a company's financial performance that calculates the difference between the return on invested capital (ROIC) and the cost of capital. It is the amount of profit earned by a company over and above the minimum return that investors require, which is typically based on the cost of capital. EVA is different from accounting profit as it considers the cost of capital in the calculation. Therefore, the correct answer is C.

Question 20

A short-run market supply curve in a competitive industry is derived by:

Accepted Answer

In a competitive industry, each identical firm will have the same short-run marginal cost curve, so their quantity supplied will increase as the price increases. Therefore, to derive the short-run market supply curve, we simply add up the quantity supplied by all the identical firms at each relevant price. This is done by multiplying the quantity supplied by each identical firm in the industry times the number of firms at each relevant price. The short-run market supply curve in a competitive industry is derived by horizontally summing the individual firms' supply curves, which involves multiplying the quantity supplied by each identical firm in the industry times the number of firms at each relevant price.

Quiz 9: Perfectly Competitive Markets

One characteristic of perfect competition is:

A decreasing-cost industry is characterized by:

Suppose that for last year, Sarah's small business earned an accounting profit of $70,000 and an economic profit of $20,000. What can we correctly infer about Sarah's business?

Characteristics of a short-run perfectly competitive equilibrium always include:

Which of the following will not be true of a perfectly competitive market?

Suppose that, at the current level of output, a firm in a perfectly competitive market is producing at a level such that price exceeds marginal cost, P > MC. Marginal cost is normally shaped (U-shaped) . The firm:

Suppose a $1 tax is levied on each unit of output in a perfectly competitive industry, we know that:

$S T C = 200 + 2 q + 4 q ^ { 2 } \text { and } S M C = 2 + 8 q$ , where q is output. Sunk fixed costs are 56 and nonsunk fixed costs are 144. What is the minimum level of average nonsunk cost?

Which of the following statements about marginal revenue for a perfectly competitive firm is incorrect, where TR stands for total revenue, P stands for price, and q stands for output?

A perfectly competitive firm will always maximize its profit or minimize its loss by:

An industry in which any potential entrant has access to the same technology and inputs as existing firms is said to be characterized by:

When the average variable cost curve is "u-shaped" and not everywhere upward or downward sloping, marginal cost will:

Suppose Joe starts his own business. In the first year the business earns $100,000 in revenue and incurs $85,000 in explicit costs. In addition, Joe has a standing offer to come work for his brother for $40,000 per year. Joe's accounting profit is _ and Joe's economic profit is __.

In a perfectly competitive industry, individual firms act as:

Which of the following is not an assumption of a perfectly competitive market?

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

For the data in the following table, which level of q will maximize profit? $\begin{array} { l l l } \hline \mathrm { q } & \mathrm { MR } & \mathrm { MC } \\\hline 0 & 0 & 0 \\10 & 40 & 10 \\20 & 30 & 20 \\30 & 20 & 30 \\40 & 10 & 40 \\50 & 5 & 50 \\\hline\end{array}$

Sunk costs:

Economic value added is defined as:

A short-run market supply curve in a competitive industry is derived by:

Quiz 9: Perfectly Competitive Markets

One characteristic of perfect competition is:

A decreasing-cost industry is characterized by:

Suppose that for last year, Sarah's small business earned an accounting profit of $70,000 and an economic profit of $20,000. What can we correctly infer about Sarah's business?

Characteristics of a short-run perfectly competitive equilibrium always include:

Which of the following will not be true of a perfectly competitive market?

Suppose that, at the current level of output, a firm in a perfectly competitive market is producing at a level such that price exceeds marginal cost, P > MC. Marginal cost is normally shaped (U-shaped) . The firm:

Suppose a $1 tax is levied on each unit of output in a perfectly competitive industry, we know that:

STC=200+2q+4q2 and SMC=2+8qS T C = 200 + 2 q + 4 q ^ { 2 } \text { and } S M C = 2 + 8 qSTC=200+2q+4q2 and SMC=2+8q , where q is output. Sunk fixed costs are 56 and nonsunk fixed costs are 144. What is the minimum level of average nonsunk cost?

Which of the following statements about marginal revenue for a perfectly competitive firm is incorrect, where TR stands for total revenue, P stands for price, and q stands for output?

A perfectly competitive firm will always maximize its profit or minimize its loss by:

An industry in which any potential entrant has access to the same technology and inputs as existing firms is said to be characterized by:

When the average variable cost curve is "u-shaped" and not everywhere upward or downward sloping, marginal cost will:

Suppose Joe starts his own business. In the first year the business earns $100,000 in revenue and incurs $85,000 in explicit costs. In addition, Joe has a standing offer to come work for his brother for $40,000 per year. Joe's accounting profit is _________ and Joe's economic profit is __________.

In a perfectly competitive industry, individual firms act as:

Which of the following is not an assumption of a perfectly competitive market?

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

Sunk costs:

Economic value added is defined as:

A short-run market supply curve in a competitive industry is derived by:

$S T C = 200 + 2 q + 4 q ^ { 2 } \text { and } S M C = 2 + 8 q$ , where q is output. Sunk fixed costs are 56 and nonsunk fixed costs are 144. What is the minimum level of average nonsunk cost?

Suppose Joe starts his own business. In the first year the business earns $100,000 in revenue and incurs $85,000 in explicit costs. In addition, Joe has a standing offer to come work for his brother for $40,000 per year. Joe's accounting profit is _ and Joe's economic profit is __.