Deck 12: Perfect Competition : Theory and Practice

Question 1

Which of the following statements about Canadian farming is false?

A) In Saskatchewan, farm income represented 20% of total income in 1998 as compared to 50% in 1959.
B) Net farm income in Canada has decreased by 50% between 1975 and 2000.
C) The number of Canadians who work on farms has decreased by about 74% since the
Second World War.
D) Wheat is not used to manufacture wallboard, toothpaste, plastics, and disposable diapers.

Answer 1

The number of Canadians who work on farms has decreased by about 74% since the
Second World War.

Question 2

Which of the following statements about Canadian farming is false?

A) The number of Canadians who work on farms has decreased by about 50% since the Second World War.
B) Wheat is not used to manufacture wallboard, toothpaste, plastics, and disposable diapers.
C) Net farm income in Canada has decreased by 77% between 1975 and 2000.
D) In Saskatchewan, farm income represented 20% of total income in 1998 as compared to 50% in 1959.

Answer 2

Net farm income in Canada has decreased by 77% between 1975 and 2000.

Question 3

Which of the following statements about Canadian farming is false?

A) The number of Canadians who work on farms has decreased by about 50% since the Second World War.
B) Wheat is not used to manufacture wallboard, toothpaste, plastics, and disposable diapers.
C) Net farm income in Canada has decreased by 50% between 1975 and 2000.
D) In Saskatchewan, farm income represented 2% of total income in 1998 as compared to 50% in 1959.

Answer 3

In Saskatchewan, farm income represented 2% of total income in 1998 as compared to 50% in 1959.

Question 4

A firm in perfect competition faces a demand curve that is:

A) downward sloping to the right.
B) vertical.
C) horizontal.
D) upward sloping to the right.

Question 5

The industry demand curve in perfect competition is:

A) vertical.
B) horizontal.
C) downward sloping to the right.
D) upward sloping to the right.

Question 6

In order to maximize profits, a firm in perfect competition will produce a level of output:

A) consistent with the lowest point on the average total cost curve.
B) where the difference between price and average cost is the greatest.
C) where the marginal cost and average total cost curves intersect.
D) where the price equals the extra cost of producing one more unit.

Question 7

A firm in perfect competition is referred to as a price-taker because:

A) it could not alter the market price by adjusting its output.
B) competition is carried on primarily through non-price competition.
C) it is uncertain what the price for its product should be.
D) being a small firm, it has to accept the price dictated by the larger firms.

Question 8

Firms in perfect competition are unlikely to earn economic profits in the long run because:

A) all resources are variable in the long run, creating uncertainty for the firm.
B) the existence of economic profits will attract new firms into the industry and reduce the price.
C) in the long run, diseconomies of scale result in increased costs.
D) in the long run, the demand curve for the firm will not remain horizontal.

Question 9

Which of the following is true for firm in perfect competition?

A) it can increase the market price
B) it chooses output only
C) it chooses output and price
D) it can decrease the market price

Question 10

If a firm in perfect competition were interested in increasing its profit, it would:

A) lower its price in order to increase sales.
B) cut back production until the marginal cost of extra output is equal to the price of the product.
C) spend more money on advertising.
D) increase production until economies of scale have been reached and average total cost is at its lowest level.

Question 11

The market price for a perfectly competitive product is $10. If, at its current level of production, marginal cost is equal to $10.50, the firm should:

A) increase production until marginal cost declines to $10.
B) go out of business, as it is impossible to earn a profit when marginal cost exceeds price.
C) cut back on production until marginal cost declines to $10.
D) increase production until average total cost declines to $10.

Question 12

A firm is currently producing at an output level at which marginal revenue is $5 and marginal cost is $4, the firm should:

A) increase its production until marginal cost is $5
B) increase its price to $5
C) decrease its price to $4
D) decrease its production until marginal revenue is $4

Question 13

A firm is currently maximizing profits by producing at an output level at which marginal revenue is $5 and average variable cost is $5.25, the firm should:

A) shut-down at the current output level
B) increase its price to $5.25
C) increase its production until average variable cost is $5
D) decrease its production until marginal cost is $5

Question 14

A firm is currently maximizing profits by producing at an output level at which marginal revenue is $5 and average total cost is $5.25, the firm should:

A) increase its price to $5.25
B) continue to operate as long as the average variable cost is less than $5
C) decrease its production until average total cost is equal to $5
D) shut-down at the current output level

Question 15

If a firm in perfect competition finds that total revenue is less than the total costs of production, it should:

A) raise the price in order to increase total revenue.
B) shut down.
C) remain in business as long as the price exceeds average variable cost.
D) decrease the price in order to increase sales and increase total revenue.

Question 16

The demand curve for a firm in perfect competition is:

A) somewhat elastic.
B) somewhat inelastic.
C) perfectly inelastic.
D) perfectly elastic.

Question 17

The supply curve for a firm in perfect competition is:

A) perfectly horizontal.
B) perfectly vertical.
C) the MC curve above the ATC curve.
D) the MC curve above the AVC curve.

Question 18

If, for a firm in perfect competition, the price, the marginal cost, and the average total cost are all equal to $9, then:

A) the firm should increase production in order to reduce average total cost.
B) the firm should shut down.
C) the firm should reduce production in order to raise the price of the product.
D) the firm is just breaking even.

Question 19

A firm that is maximizing profits by producing at an output level at which marginal revenue, marginal cost and average variable cost are equal to $20, then that firm:

A) is just breaking even.
B) should increase production in order to reduce average total cost.
C) should shut down.
D) should reduce production in order to raise the price of the product.

Question 20

If, for a perfectly competitive firm, the price exceeds average total cost:

A) the firm will increase production until average costs are equal to the price.
B) new firms will be attracted into the industry.
C) the firm will undertake non-price competition in order to maintain its advantageous position.
D) the firm will increase production in order to increase profits.

Question 21

If, for a perfectly competitive firm, the price exceeds average total cost:

A) the market price will decrease as firms enter.
B) the market price will increase as firms enter.
C) the market price will decrease as firms exit.
D) the market price will increase as firms exit.

Question 22

Society treats the situation of perfect competition as ideal because:

A) it operates without any involvement from government.
B) there are many small firms creating a great many jobs.
C) it is primarily found in agriculture, which is an essential product.
D) it allocates resources efficiently by producing a quantity of output where the price is equal to the marginal cost.

Question 23

A firm in perfect competition may produce a higher level of output than is socially optimum Because:

A) it's price does not represent the value that consumers place on a product.
B) it produces a level of output that does not please the society.
C) it always produces where price is equal to marginal cost.
D) it does not take into account third party-effects.

Question 24

A perfectly competitive firm finds itself in the following situation: TR = $10 000; TC = $8000; TFC = $2000; P = $8; and MC = $7. The firm should:

A) do nothing, as it is already maximizing profits.
B) increase production.
C) shut down.
D) decrease production, but not shut down.

Question 25

A perfectly competitive firm finds itself in the following situation: TR = $10 000; TC = $8000; TFC = $2000; P = $7; and MC = $8. The firm should:

A) increase production.
B) do nothing, as it is already maximizing profits.
C) decrease production
D) shut down.

Question 26

A perfectly competitive firm finds itself in the following situation: TR = $6000; TC = $8000; FC = $3888; P = $8; and MC = $8. The firm should:

A) continue to produce as it is now.
B) decrease production, but not shut down.
C) increase production.
D) shut down.

Question 27

A perfectly competitive firm finds itself in the following situation: TR = $5000; TC = $8000; FC = $3000; P = $5; MC = $5; and Q = 100 The firm should:

A) shut down.
B) continue to produce as it is now.
C) decrease production, but not shut down.
D) increase production.

Question 28

Agriculture is generally associated with which type of competition?

A) monopoly
B) many differentiated sellers
C) oligopoly
D) perfect competition

Question 29

Farm families compose approximately what percentage of total families in Canada?

A) 4 percent
B) 8 percent
C) 10 percent
D) 12 percent

Question 30

Between 1951 and 2001 the number of farms in Canada declined by approximately:

A) 4 percent
B) 6 percent
C) 40 percent
D) 60 percent

Question 31

Farms have increased in size for all the following reasons except that:

A) farming has become more labour intensive.
B) farming has become more mechanized.
C) farming has become more capitalized.
D) farming has become more specialized.

Question 32

Agricultural prices have not increased as much as other prices in the twentieth century because:

A) consumers are spending more of their disposable income on other products.
B) increases in agricultural output have outstripped the increased demand.
C) government price controls have kept agricultural prices lower than prices of other products.
D) the demand for food has been declining, resulting in lower prices.

Question 33

The demand for most agricultural products is:

A) inelastic.
B) perfectly inelastic.
C) perfectly elastic.
D) elastic.

Question 34

Farm incomes tend to be unstable because of:

A) the inelastic demand for food.
B) changes in government farm-support programs.
C) the elastic demand for farm products.
D) the fluctuating demand for food.

Question 35

The supply of agricultural output is inelastic because:

A) farmers are easily able to swap crops from one type to another.
B) of changes in government farm-support programs.
C) of fluctuations in weather conditions.
D) the presence of large fixed costs do not increase savings from output adjustments.

Question 36

The cobweb theorem:

A) tells farmers how much of their crop to plant this year.
B) assumes that the supply of farm products is fixed.
C) assumes that farmers determine this year's production on the basis of last year's production.
D) assumes that farmers determine this year's production on the basis of last year's prices.

Question 37

Fluctuations in agricultural prices, according to the cobweb theorem, occur because of:

A) the inelastic nature of the demand curve for food.
B) changes in government price supports.
C) changes in the consumer demand for food in other nations.
D) fluctuations in the supply of the product.

Question 38

The cobweb theorem explains why farms prices:

A) may never reach an equilibrium level if the demand and supply elasticities are not identical.
B) may never reach an equilibrium level if the demand and supply elasticities are identical.
C) always reach an equilibrium level when price elasticity of demand exceeds that of supply.
D) always reach an equilibrium level when price elasticity of supply exceeds that of demand.

Question 39

The cobweb theorem explains why the price gets further and further from the equilibrium price when:

A) the price elasticity of supply exceeds that of demand.
B) the demand and supply elasticities are not identical.
C) the demand and supply elasticities are identical.
D) the price elasticity of demand exceeds that of supply.

Question 40

The cobweb theorem explains why the price gets closer and closer to the equilibrium price when:

A) the price elasticity of supply exceeds that of demand.
B) the demand and supply elasticities are identical.
C) the demand and supply elasticities are not identical.
D) the price elasticity of demand exceeds that of supply.

Question 41

Under the deficiency-payment system of agricultural price supports, the cost to government and the taxpayer will be greater:

A) if production quotas are in place.
B) if the demand for the product is inelastic.
C) if the demand for the product is elastic.
D) if foreign governments cease to subsidize agricultural production.

Question 42

Under the deficiency-payment system of agricultural price supports, the cost to the government may be higher than under the offer-to-purchase program if:

A) if foreign governments cease to subsidize agricultural production.
B) if production quotas are in place.
C) if the demand for the product is elastic.
D) if the demand for the product is inelastic.

Question 43

One major advantage of the deficiency-payment system of agricultural price supports compared to the Offer-to- Purchase Program Is:

A) the offer-to-purchase program solves storage problems.
B) the deficiency-payment system is always less costly.
C) the offer-to-purchase program is always more costly.
D) the deficiency-payment system solves storage problems.

Question 44

A system of quotas will result in higher incomes for farmers if:

A) the government purchases any excess supply.
B) production costs can also be reduced.
C) the demand for farm products is inelastic.
D) government price supports remain in effect.

Question 45

In years of high agricultural production, farm incomes tend to go down because:

A) the demand for most farm products is inelastic.
B) prices are lower.
C) costs increase in order to provide high levels of output.
D) government price supports are removed.

Question 46

Under the offer-to-purchase price support:

A) the government purchases all agricultural output and sells it in the marketplace.
B) the government guarantees farmers a certain price for their crop, regardless of the market price.
C) surpluses are created.
D) the government will correct shortages by offering incentives to farmers.

Question 47

All of the following are primary purposes of marketing boards in Canada except:

A) to maintain or increase incomes of the producers of a particular product.
B) to stabilize income from the sale of the product.
C) to determine size of subsidies to farmers.
D) to standardize the terms of the sale of the product.

Question 48

All of the following are powers and procedure use by marketing boards in Canada except:

A) subsidy allocation.
B) seizure and disposal.
C) price setting.
D) trade regulation.