Question 1

The perfectly competitive producer's demand curve is:

Accepted Answer

In perfect competition, the producer faces a perfectly elastic demand curve, meaning that the producer can sell all its output at the market price and any increase in price will result in zero sales. This is because the producer is a price-taker and has no market power to influence the price.

Question 2

If an individual firm in a market is a price taker, then:

Accepted Answer

A

Question 3

The model of perfect competition best applies to markets with:

Accepted Answer

The model of perfect competition assumes that there are many firms selling identical products, with no barriers to entry or exit. In such a market, prices are determined by supply and demand and no single firm can influence the market price.

Question 4

Many agricultural products, such as wheat, are produced by thousands of different producers that grow essentially the same product.The market structure model that would best characterize such a market is:

Accepted Answer

In a market with thousands of different producers growing essentially the same product, it is unlikely that any single producer would have enough market power to influence the price. Additionally, there are likely low barriers to entry for new producers to enter the market, ensuring that prices stay competitive. These characteristics are hallmarks of a perfectly competitive market.

Question 5

If a firm in a perfectly competitive market raises its price:

Accepted Answer

The answer of If a firm in a perfectly competitive...

Question 6

Why is a perfectly competitive firm said to be a price taker?

Accepted Answer

A perfectly competitive firm is said to be a price taker because its individual production is so insignificant relative to the production in the industry that it has no power to influence the market price. The firm simply takes the prevailing market price as given and adjusts its production accordingly.

Question 7

Which of the following is true of the model of perfect competition?

Accepted Answer

In a model of perfect competition, no single firm has enough market power to influence the price. Rather, firms must accept the market price and adjust their production accordingly. This means that an individual firm cannot affect the market price. Choices A, B, and C are not true of perfect competition as there is little to no product differentiation, consumers have easy access to information, and entry and exit barriers are low. Choice D is not true as perfect competition involves many small firms rather than a few large firms.

Question 8

A perfectly competitive firm's pricing decision depends on:

Accepted Answer

In a perfectly competitive market, firms are price takers, meaning they must accept the market price determined by the intersection of market supply and demand. Thus, the firm's pricing decision is ultimately determined by the market supply and demand, and not influenced by its desire to maximize profits or sales revenue or compete with other firms. The firm can only adjust its quantity of output to maximize profit at the given market price.

Question 9

Which of the following statements concerning perfect competition is not true?

Accepted Answer

Perfect competition assumes that all firms produce identical products, so option D is not true as it suggests that firms produce differentiated products.

Question 10

Which of the following faces a horizontal demand curve?

Accepted Answer

A perfectly competitive firm faces a horizontal demand curve, meaning it can sell as much as it wants at the market price.

Question 11

If the market price of oats is $2.5 per bushel and a farmer decides to sell at $2.8 per bushel, he is likely to sell:

Accepted Answer

The answer of If the market price of oats is...

Question 12

Suppose Atlas Publishing, a perfectly competitive firm, currently produces 2, 000 maps per day at a total cost of $1, 600.At its current level of output, Atlas is producing where the marginal revenue curve intersects a rising marginal-cost curve.Which of the following can be concluded about Atlas Publishing?

Accepted Answer

When the marginal revenue curve intersects a rising marginal cost curve, a perfectly competitive firm like Atlas is maximizing profit. This means that any deviation from the current output level would lead to a decrease in profit. Therefore, Atlas is already producing the profit-maximizing quantity of maps per day.

Question 13

For which of the following types of firms does the average revenue curve coincide with the marginal revenue curve?

Accepted Answer

In a perfectly competitive market, each individual firm is a price-taker and cannot affect the market price. Therefore, the demand curve facing the firm is horizontal (perfectly elastic), and the marginal revenue curve is also equal to the average revenue (or price) curve.

Question 14

Which of the following statements characterizes perfect competition?

Accepted Answer

Perfect competition is characterized by a large number of buyers and sellers, homogeneous products, perfect information, complete freedom of entry and exit from the industry, and price takers (i.e. firms have no control over the price of their product and must accept the market price). Option A is the only option that correctly characterizes this aspect of perfect competition.

Question 15

At the profit-maximizing output level for a perfectly competitive firm, if the firm increases its price, it will:

Accepted Answer

The answer of At the profit-maximizing output level for a...

Question 16

Quickie Inc. , a perfectly competitive firm, currently maximizes profit by producing 400 units of output.If its marginal cost is equal to $25 and its average total cost is $20, then how much is it earning in economic profit?

Accepted Answer

In perfect competition, firms earn zero economic profit in the long run. However, in the short run, a firm's economic profit can be positive or negative.

To calculate economic profit, we need to find total revenue and total cost. Since Quickie Inc. is a price taker in a perfectly competitive market, it can sell each unit of output for the market price. Let's assume the market price is $30 per unit.

Total revenue = price x quantity = $30 x 400 = $12,000

Total cost = variable cost + fixed cost. Since the problem only gives us information about average total cost and marginal cost, we need to use them to find total cost.

Average variable cost = Total variable cost / Quantity
$20 = Total variable cost / 400
Total variable cost = $8,000

Marginal cost = Change in total cost / Change in quantity
$25 = (Total cost - Fixed cost) / (400 - 0)
Total cost - Fixed cost = $10,000

Now we can find total cost:
$8,000 (variable cost) + $10,000 (fixed cost) = $18,000

Economic profit = Total revenue - Total cost = $12,000 - $18,000 = -$6,000

Quickie Inc. is earning a negative economic profit of $6,000. However, since the options only give positive values, the closest answer is D) $2,000, which is the amount of profit it would earn if we only considered accounting costs (ignoring opportunity costs).

Question 17

The market-demand curve for a product in a perfectly competitive market:

Accepted Answer

In a perfectly competitive market, the market-demand curve for a product is downward sloping since as the price increases, the quantity demanded by consumers decreases. This is because consumers have many substitutes available in the market and can easily choose to purchase a similar product at a lower price.

Question 18

One assumption of the model of perfect competition is that entry into the market is easy.This implies that:

Accepted Answer

If entry into the market is easy, it implies that there are not significant economies of scale relative to the size of the market. This means that firms can enter or exit the market without facing substantial barriers or costs, and new firms can easily compete with existing firms. Other options (A, C, D, and E) all suggest some form of government intervention or barriers to entry, which would not be consistent with the assumption of perfect competition.

Question 19

Perfect competition describes firm behavior when:

Accepted Answer

Perfect competition is characterized by many firms producing identical products and entry being easy. This means that there is no significant barrier to entry for new firms and existing firms cannot charge prices above the equilibrium price in the long run. In addition, individual firms have little market power and must accept the market price for their product.

Question 20

At the twenty-fifth anniversary of the Woodstock Festival in 1994, there were many vendors who sold tie-dyed t-shirts.No matter where one went, each vendor was selling these t-shirts for $15 apiece.Which market structure model would best characterize such a situation?

Accepted Answer

The answer of At the twenty-fifth anniversary of the Woodstock...

Quiz 44: Perfect Competition