Deck 6: The Two Extremes: Perfect Competition and Pure Monopoly  

Question 1

Enron, a Houston-based energy firm, was forced to cease its business in the wake of an accounting scandal. As Enron closed its operations, U.S. energy prices remained stable. This may have been evidence that

A) Enron could charge whatever price it wanted to for energy.
B) there was lack of any competition so Enron was the winner.
C) there is a competitive market in energy distribution in the U.S.
D) the accounting profession needs to review its policies quickly.

Answer 1

there is a competitive market in energy distribution in the U.S.

Question 2

Clothing retailers have faced greater competition in recent years as more firms have entered the clothing market. Some has come from foreign competitors, but much of it is domestic competition. As a result there is much competition and

A) individual buyers and sellers cannot affect the market price; it is determined by the market forces of demand and supply.
B) most individuals cannot afford clothing.
C) firms have a great degree of flexibility in pricing their products; these products can be sold at a high profit level.
D) there are relatively few buyers and sellers in the market, and one individual firm can determine the market price.

Answer 2

individual buyers and sellers cannot affect the market price; it is determined by the market forces of demand and supply.

Question 3

Your local farmer has many competitors, and he operates in a market structure known as perfect competition. This means that price is determined outside of the individual farmer's ability to determine his selling price. Therefore, the farmer is

A) a price maker and can therefore charge different customers different prices.
B) always able to price produce above the competition and earn a larger profit.
C) never able to determine any prices he charges for anything, such as soybeans.
D) a price taker and cannot affect the price of the produce sold to a great degree.

Answer 3

a price taker and cannot affect the price of the produce sold to a great degree.

Question 4

What is true of market structures considered to be imperfect competition?

A) The industry provides services requiring specialized labor.
B) The industry consists of more than one firm.
C) The industry provides products that are necessities.
D) The industry provides products that are luxuries.

Question 5

What is a homogeneous product?

A) One which has only one use.
B) One which is produced by only one firm.
C) One which has the same characteristics even when produced by different firms.
D) One for which there is only one substitute.

Question 6

A market is considered to act as a perfectly competitive one if

A) all firms advertise aggressively.
B) all firms use the same production process.
C) all firms are price takers.
D) all firms use the least-cost combination of inputs.

Question 7

Which of the following is closest to a perfectly competitive market?

A) Computer software
B) Handmade guitars
C) Athletic shoes
D) Wheat

Question 8

Market structure refers to

A) the number, size, and interaction of firms in a market.
B) the system of government regulations preserving free trade.
C) the legal requirements firms must meet before beginning their operations.
D) the legal regulation of financial markets.

Question 9

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

A) Firms can easily enter or exit the industry.
B) The product is considered a necessity for consumers.
C) There are a large number of buyers and sellers.
D) Buyers and sellers have good information about price and product qualities.

Question 10

Referring to the diagram, which of the following statements is INCORRECT?
Figure 6.1

A) The equilibrium market price is $5, where the industry D and S curve intersect.
B) If the individual firm raises its price, it will make no sales at all.
C) The individual firm faces a perfectly inelastic demand curve d.
D) The individual firm faces the going market price as determined by the industry.

Question 11

By saying that the perfectly competitive firm is a price taker, economists mean that

A) the firm faces a perfectly inelastic demand curve.
B) the firm can sell all it wants at the market price.
C) the firm charges a price equal to its production costs plus 10 percent.
D) the firm charges a price equal to its labor costs plus 10 percent.

Question 12

The demand curve facing the perfectly competitive firm is

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

Question 13

The demand curve facing the perfectly competitive firm is

A) horizontal at the price most customers prefer.
B) horizontal at the price most producers prefer.
C) horizontal at the price established by the interaction of market supply and market demand.
D) vertical at the equilibrium market quantity.

Question 14

For the perfectly competitive firm the selling price of its product is determined by

A) the interaction of market supply and demand.
B) the number of competing firms.
C) the amount it chooses to spend on marketing.
D) the length of time it has been in business.

Question 15

Which of the following is within control of the perfectly competitive firm?

A) Its level of profit
B) The number of its competitors
C) Its selling price
D) Its quantity produced

Question 16

The profit maximizing level of production

A) is the quantity at which marginal revenue equals marginal cost.
B) is where the difference between marginal revenue and marginal cost is maximized.
C) is not measurable for a perfectly competitive firm.
D) ignores the relation of total revenues and total costs.

Question 17

The profit maximizing level of output for a firm is where

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

Question 18

When are profits maximized?

A) At the rate of output at which marginal revenue equals marginal cost
B) At the output rate where marginal cost is greater than marginal revenue
C) When the difference between total revenues and total costs is negative
D) When the difference between price and quantity demanded is greatest

Question 19

The perfect competitor

A) produces what he thinks can be sold, regardless of cost.
B) chooses the profit-maximizing price.
C) chooses the profit-maximizing quantity.
D) chooses a quantity that will make the most efficient use of his labor and capital resources.

Question 20

In the short-run, the perfectly competitive firm will always earn an economic profit when

A) P = ATC.
B) P $\gt$ AVC.
C) P = MC.
D) P $\gt$ ATC.

Question 21

A company finds that at the MR = MC output level, its total cost is $500, total variable cost is $400, and total revenue is $450. Your advice to the firm is to

A) shut down immediately.
B) reduce output to reduce the cost of production.
C) increase output to reduce the per unit cost of production.
D) continue to produce, as total revenue covers total variable cost.

Question 22

A perfectly competitive firm finds that its total revenue is $74,000 and its total costs are $80,000. If its total variable costs are $75,000, what should the firm do?

A) Increase its selling price.
B) Decrease its selling price.
C) Continue to produce at the current price and quantity combination.
D) Shut down immediately.

Question 23

A perfectly competitive firm finds that its selling price is $17, its ATC is $18, and its AVC is $16. What should the firm do?

A) Minimize losses by continuing to produce.
B) Minimize losses by shutting down immediately.
C) Increase its selling price.
D) Decrease its selling price.

Question 24

In the long run, the level of economic profit in a perfectly competitive industry

A) will be equal to the level of accounting profit.
B) will depend on the portion of costs that are fixed costs.
C) will depend on the portion of costs that are variable costs.
D) will be zero.

Question 25

In the short run in perfect competition, a firm will shut down when

A) price is below average variable cost.
B) price is below average total cost.
C) marginal revenue equals marginal cost.
D) economic profit is zero.

Question 26

A perfectly competitive firm earning zero economic profit

A) is earning an accounting profit of zero.
B) is not covering the opportunity cost of the resources it is using.
C) is earning an accounting profit equal to the normal rate of return.
D) is not covering its variable costs.

Question 27

Figure 6.3

-In Figure 6.3, if the market price was $10 the firm would

A) produce 10 units.
B) produce 11 units.
C) produce 12 units.
D) shut down operations.

Question 28

Figure 6.3

-In Figure 6.3, if the market price was $9 the firm would

A) shut down operations.
B) earn a positive economic profit.
C) earn a positive accounting profit, but zero economic profit.
D) not be able to cover all the opportunity costs of the resources it uses.

Question 29

The breakeven point for a firm in perfect competition is at the level of output where

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

Question 30

If a firm's total explicit costs are $1,000 and total implicit costs are $500 and it has a total revenue of $900, it makes a(n)

A) accounting profit only.
B) economic profit only.
C) both an economic and accounting profit.
D) neither an economic nor an accounting profit.

Question 31

The perfectly competitive firm produces at the point where price equals marginal cost because this is the quantity that

A) minimizes total cost.
B) maximizes profit.
C) allows the firm to make best use of its capital and labor resources.
D) allows the firm to break even.

Question 32

Figure 6.4

-Using Figure 6.4, the perfectly competitive firm in the diagram will earn an economic profit if the market price is

A) P₁.
B) P₂.
C) P₃.
D) P₄.

Question 33

Figure 6.4

-Using Figure 6.4, the perfectly competitive firm should continue to produce in the short-run if the market price is above

A) P₁.
B) P₂.
C) P₃.
D) P₄.

Question 34

Figure 6.4

-Using Figure 6.4, the perfectly competitive firm should shut down now if the market price is below

A) P₁.
B) P₂.
C) P₃.
D) P₄.

Question 35

Figure 6.4

-Using Figure 6.4, the breakeven price for the perfectly competitive firm will be

A) P₁.
B) P₂.
C) P₃.
D) P₄.

Question 36

Figure 6.4

-Using Figure 6.4, the price facing the perfectly competitive firm in the long-run will be

A) P₁.
B) P₂.
C) P₃.
D) P₄.

Question 37

When there are economic profits in a perfectly competitive industry

A) the high barriers to entry prevent further competition.
B) firms exit the industry.
C) firms enter the industry.
D) firms have no incentive to exit or enter the industry.

Question 38

When there are zero economic profits in a perfectly competitive firm

A) the high barriers to entry prevent further competition.
B) firms exit the industry.
C) firms enter the industry.
D) firms have no incentive to exit or enter the industry.

Question 39

If a perfectly competitive firm is maximizing profits and is currently producing at the point where price is $24, marginal cost is $24, and average total cost is $20, then the firm can expect that

A) it will have to shut down soon.
B) its average total cost will increase until it is just breaking even.
C) more firms will enter the industry, and the price will decline.
D) its level of accounting profit will be below the normal rate of return.

Question 40

A cartel seeks to

A) create the conditions of perfect competition.
B) restrict industry output to the monopoly level.
C) create a price and quantity combination that consumers will think is fair.
D) produce the quantity for which price will equal average total cost.

Question 41

For a monopolist, selling more units requires

A) forming a cartel.
B) lowering the selling price.
C) allowing more firms to enter the industry.
D) hiring a more productive labor force.

Question 42

The demand curve faced by the monopolist is

A) perfectly elastic.
B) perfectly inelastic.
C) upward sloping.
D) downward sloping.

Question 43

It was reported that a drug for treating cancer was providing positive preliminary results. If the drug is cleared by the Food and Drug Administration and the company is successful in obtaining a patent for their product

A) the patent holder will have to operate as a perfect competitor.
B) the patent holder will have to charge a price equal to marginal cost.
C) the patent holder has a monopoly.
D) the drug would have many close substitutes.

Question 44

A barrier to entry

A) makes it difficult for other firms to enter the industry.
B) can be thought of as unrelated to monopoly.
C) can only be created with government authority.
D) usually takes the form of a cartel.

Question 45

Table 6.1


-Given the data in Table 6.1, what is the marginal revenue when the quantity is 5?

A) 160
B) 120
C) 80
D) 0

Question 46

Table 6.1


-Given the data in Table 6.1, what would the monopolist do if the marginal cost of producing his good were constant at 100 per unit?

A) Produce 4 units and sell them for 100 each.
B) Produce 5 units and sell them for 100 each.
C) Produce 5 units and sell them for 160 each.
D) Produce 6 units and sell them for 150 each.

Question 47

Marginal revenue is equal to price for

A) the perfect competitor only.
B) the monopolist only.
C) the perfect competitor and the monopolist.
D) neither the perfect competitor nor the monopolist.

Question 48

Monopoly implies

A) no competition.
B) low prices.
C) low profits.
D) high costs.

Question 49

The point of profit maximization for a monopolist is

A) the point at which total revenue equals total cost.
B) the point at which marginal revenue equals marginal cost.
C) the point at which average total cost is minimized.
D) the point at which marginal revenue equals average total cost.

Question 50

To maximize profit the monopolist will

A) produce where marginal cost is minimized and charge a price equal to ATC at that quantity.
B) produce where ATC is minimized and charge a price equal to marginal cost at that quantity.
C) produce where MR = MC and charge a price equal to marginal revenue.
D) produce where MR = MC and charge the price that corresponds to that quantity on the demand curve.

Question 51

For a monopolist

A) P $\gt$ MR.
B) P = MC.
C) P = MR.
D) P = ATC.

Question 52

A monopolist will not make a profit if

A) P < ATC.
B) P > ATC.
C) MR= MC.
D) P $\gt$ MR.

Question 53

Which of the following is true of a perfectly competitive firm and a monopoly in the long run?

A) P = MC
B) P = ATC
C) MR = MC
D) P = MR

Question 54

For a monopoly at the profit maximizing output level all of the following are true, EXCEPT

A) P $\gt$ ATC.
B) P $\gt$ MR.
C) P $\gt$ MC.
D) P =MR.

Question 55

A monopoly sells 10 units of output at $10. The MR of the 11th unit is $4.50, then

A) the price of the 11th unit is also $10.
B) the price of the 11th unit is $9.50.
C) the price of the 11th unit must be greater than $10.
D) the price of the 11th unit is $7.25.

Question 56

Figure 6.5

-Using Figure 6.5, the profit maximizing quantity and price will be

A) Q₁ and P₁.
B) Q₂ and P₂.
C) Q₃ and P₃.
D) Q₃ and P₄.

Question 57

The perfect competitor seeks to produce a quantity that will maximize his _________.

Question 58

The perfectly competitive firm produces where price is equal to _________ _________ because this is the quantity that will maximize profit.

Question 59

The firm's profit is the difference between its total revenue and its _________ _________.

Question 60

Profits disappear eventually in perfect competition because of _________ from other firms.

Question 61

When a perfect competitor is at the break even price, economic profits are _________.

Question 62

When a perfect competitor is at the break even price, the firm's level of accounting profit is equal to the _________ rate of return.

Question 63

The firm should shut down immediately when price is below average _________ cost.

Question 64

The firm is making an economic profit as long as price is above average _________ cost.

Question 65

Market _________ relates to the number, size, and interaction of firms in a particular market.

Question 66

A product is _________ if items produced by one firm in the industry are identical to those produced by another.

Question 67

Perfect competitors are _________ _________ because they take the market price as given.

Question 68

The demand curve facing the perfectly competitive firm is perfectly _________ at the market price.

Question 69

Perfect competition, monopoly, and imperfect competition are all examples of _________ _________.

Question 70

Duopoly, oligopoly, and monopolistic competition are all examples of _________ _________.

Question 71

The behavior of the perfect competitor can be described by his desire to maximize _________.

Question 72

If a firm shuts down immediately, it will lose its _________ _________.

Question 73

New firms will enter a perfectly competitive industry as long as firms in the industry are making positive _________ _________.

Question 74

In the long run, all firms in a perfectly competitive industry will make _________ economic profit.

Question 75

A perfectly competitive firm takes _________ as given, and selects a _________ in response.

Question 76

If price is less than average _________ cost, the firm will minimize losses by shutting down.

Question 77

Economies of scale give rise to _________ monopolies.

Question 78

For monopoly power to persist, there must be some form of _________ to entry into the industry.

Question 79

Alcoa became a monopoly producer of aluminum because it controlled the sources of _________.

Question 80

A cartel seeks to restrict industry output to the _________ level.