Deck 10: Perfect Competition

Question 1

Joe is self-employed in a store that has a rental value of $500 a month which he pays, but he can vacate the building without giving notice. His other expenses are $100 a month for maintenance. He makes $25,000 a year on net sales (total revenue minus the wholesale cost of the product). If he quit his job and worked the same number of hours elsewhere at a job he liked equally well, he estimates that he could make $20,000 a year. No one else can be hired to work in the store. Suppose that Joe had a long term lease which requires him to pay the rent even if he doesn't operate the store. What should Joe do?

A)Quit immediately.
B)Keep the job permanently.
C)Keep the job until the lease expires.
D)It is impossible to say with the information given in the problem.

Answer 1

C

Question 2

In the graph below at a price of P*, the profit maximizing level of output is

A)Q*.
B)above Q*.
C)below Q* but above zero.
D)zero.

Answer 2

Q*.

Question 3

Which statement is true of the graph shown?

A)The marginal cost curve should not cross the AFC while it is falling.
B)If an ATC curve was drawn in the graph it would intersect the MC curve but not any other curve.
C)The shut down point of the firm would be at an output more than Q*.
D)The marginal cost curve crosses the AFC curve at the lowest point of the AFC curve.

Answer 3

If an ATC curve was drawn in the graph it would intersect the MC curve but not any other curve.

Question 4

In a decreasing cost industry, as output grows over time,

A)prices will fall.
B)prices will rise.
C)prices will stay the same.
D)prices are zero.

Question 5

Say a competitive firm is producing at point where ATC = $10, AVC = $2. If the firm charges $5 for its output, then in the short-run this firm should

A)shutdown production.
B)exit the industry.
C)continue to operate.
D)try to reduce its fixed costs.

Question 6

Joe is self-employed in a store that has a rental value of $500 a month which he pays, but he can vacate the building without giving notice. His other expenses are $100 a month for maintenance. He makes $25,000 a year on net sales (total revenue minus the wholesale cost of the product). If he quit his job and worked the same number of hours elsewhere at a job he liked equally well, he estimates that he could make $20,000 a year. No one else can be hired to work in the store. Joe should

A)quit his job.
B)keep the job.
C)work part-time.
D)It is impossible to say with the information given in the problem.

Question 7

At the output where MC = ATC = P, the firm

A)should shutdown.
B)has no economic profit.
C)is profit maximizing.
D)should raise output.

Question 8

The demand curve facing a perfectly competitive firm is

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

Question 9

The profit maximizing output level for a perfectly competitive firm is always where

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

Question 10

A standardized product is a product

A)that has many perfect substitutes.
B)that is unique to one producer.
C)which is produced according to government regulations.
D)where the demand function is downward sloping for both the firm and the industry.

Question 11

The output where MC = AVC is called the

A)shutdown point.
B)break-even point.
C)profit maximizing point.
D)revenue maximizing point.

Question 12

In general, economists assume that firms

A)maximize accounting profit.
B)maximize economic profit.
C)maximize sales.
D)maximize revenue.

Question 13

In the graph below at P*, the firm is making __________ economic profits.

A)positive
B)negative
C)zero
D)an indeterminate level of

Question 14

If the demand curve falls below the ATC curve but lies above AVC, then the firm should

A)should shut down.
B)operate in the short run but not the long run.
C)set price = marginal cost.
D)operate in the short run and the long run.

Question 15

In the graph below if the price persists at P*, the profit maximizing firm will

A)shut down immediately.
B)shut down in the long run.
C)operate indefinitely.
D)have a strategy that cannot be predicted without an ATC curve.

Question 16

If firms are price takers this implies that

A)in the short-run economic profits will be zero.
B)the demand curve facing the firm is perfectly elastic.
C)the total revenue curve is horizontal.
D)the marginal revenue curve is upward sloping.

Question 17

Which of the following is not a condition for perfect competition?

A)Firms take prices as given.
B)Firms sell a standardized product.
C)Firms are protected by barriers to entry.
D)Firms have perfect information.

Question 18

If a firm's demand curve falls below its AVC curve, then the firm should

A)shut down now.
B)operate in the short run but not the long run.
C)set price = marginal cost.
D)shutdown in the long-run.

Question 19

Joe is self-employed in a store that has a rental value of $500 a month which he pays, but he can vacate the building without giving notice. His other expenses are $100 a month for maintenance. He makes $25,000 a year on net sales (total revenue minus the wholesale cost of the product). If he quit his job and worked the same number of hours elsewhere at a job he liked equally well, he estimates that he could make $20,000 a year. No one else can be hired to work in the store. Suppose that the store owner gave Joe the store. Now what should he do?

A)Quit his job.
B)Keep the job.
C)Work part-time.
D)It is impossible to say with the information given in the problem.

Question 20

When the perfectly competitive firm maximizes profits the price of its product always equals

A)average revenue.
B)marginal revenue.
C)marginal costs.
D)All of the choices are correct

Question 21

In a competitive industry, the industry's short-run supply curve is

A)the horizontal sum of the marginal cost curves.
B)the vertical sum of the marginal cost curves.
C)determined by the average total cost curve.
D)determined by the average variable cost curve.

Question 22

In the long run for a competitive firm,

A)the firm is at the bottom of its short run average cost curve.
B)the firm is at the top of its long run average cost curve.
C)the marginal cost is greater price.
D)the firm is making economic profits.

Question 23

At point A,

A)MC = MR.
B)The firm is making positive economic profit.
C)The firm would do worst by shutting down.
D)MC > MR.

Question 24

Other things remaining the same, in the long-run as compared to the short-run

A)supply elasticity will increase.
B)supply elasticity will decrease.
C)supply elasticity will remain the same.
D)one cannot tell.

Question 25

Ceteris paribus, in the long run, a tax placed on a perfectly competitive industry will

A)increase the price of the good by an amount equal to the tax.
B)increase the price of the good by an amount less than the tax.
C)be borne entirely by the firm.
D)be entirely borne by the consumer.

Question 26

In the long run, a tax placed on a perfectly competitive industry should have what effect on the entire market?

A)Increase the total amount of the good sold.
B)Decrease the total amount of the good sold.
C)Not affect the total amount of the good sold.
D)One cannot tell.

Question 27

In the long run,

A) the firm will operate at point B.
B) the firm will operate at point C.
C) the firm will operate at point D.
D) the total revenue curve will change its slope.

Question 28

Producer surplus is given by the area

A)above the supply curve but below the price.
B)below the supply curve.
C)below the demand curve but above the price.
D)below the demand curve.

Question 29

If free entry and exit were not possible,

A)in the long run firms would lose money.
B)in the long run firms would make money.
C)in the long run firms would break even.
D)It is impossible to tell what would happen without more cost and revenue information.

Question 30

In the short run, a tax placed on a perfectly competitive industry should

A)increase the total amount of the good sold.
B)decrease the total amount of the good sold.
C)not affect the total amount of the good sold.
D)always increase the price.

Question 31

In the long run, a tax placed on a perfectly competitive industry should

A)increase the number of firms.
B)decrease the number of firms.
C)not affect the number of firms.
D)One cannot tell

Question 32

In the long run, the price in this market will be

A)P₁.
B)higher than P₁.
C)lower than P₁.
D)We need more information in order to answer

Question 33

Suppose that the supply curve is given by P = Q. What is the elasticity of supply?

A)10
B)1/10
C)1
D)Cannot be determined from these information

Question 34

At point D, the firm is

A)maximizing its profit.
B)losing money.
C)breaking even.
D)making money.

Question 35

In the graph shown below, if the market demand were to shift right, which of the following would occur for the firm?

A)The total cost curve would shift downward.
B)The total revenue function would rotate upward.
C)The total revenue function would rotate downward.
D)The firm would produce less output.

Question 36

A pecuniary diseconomy occurs when

A)supply exceeds demand.
B)an expansion of industry output increases the price of an input.
C)higher output levels results in lower unit costs.
D)higher output levels results in the same unit costs.

Question 37

In the long run, the typical firm in this market will produce a quantity equal to

A)q₁.
B)q₂.
C)q₃.
D)Q₁.

Question 38

In the diagram below, profit is maximized at point

A) A.
B) B.
C) C.
D) D.

Question 39

The elasticity of supply is given by

A) $\frac { \Delta Q } { \Delta P } \times \frac { P } { Q }$
B) $\frac { P } { Q } \times \frac { 1 } { \text { slope } }$
C) $\frac { \frac { \Delta Q } { Q } } { \frac { \Delta P } { P } }$
D)All of these are correct.

Question 40

When the price is P1, in order to maximize profits this firm must produce a quantity equal to

A)q₁.
B)q₂.
C)q₃.
D)Q₁.

Question 41

In the long run, any perfectly competitive firm that produces will choose a quantity such that

A)short run average cost is minimized.
B)long run total cost is minimized.
C)long run marginal cost is less than short run marginal cost.
D)price is greater marginal cost.

Question 42

Suppose an industry has 100 firms, each with supply curve P = 50 + 10Q. Furthermore, suppose the market demand curve is given by P = 200 - 0.9Q. How many units of output will be produced by a firm operating in this market with a MC = 130Q?

A)2
B)5
C)0.70
D)It is impossible to answer with the information given

Question 43

If a firm is producing where its LMC = price and the LMC is equal to LAC, then it would do better in the long run by

A)increasing output with its existing plant until LMC equals price.
B)increasing plant size until LMC and SAC are identical and equal to price.
C)decreasing plant size until LAC, SAC and price are equal.
D)changing nothing because it is already at the long run profit maximizing point.

Question 44

At market equilibrium, the total benefit that results from all the transactions is

A)the consumer surplus minus the producer surplus.
B)the producer surplus minus the consumer surplus.
C)the sum of the producer surplus and the consumer surplus.
D)the entire area under the demand curve up to the quantity exchanged.

Question 45

Assume a perfectly competitive economy would use an assortment of nails that weighs a total of 100 tons. However, the economy is controlled by the government and it sets a ton limit of 100 tons. When production is complete there is only one nail that weighs 100 tons. Which of the following describes what was wrong when government did the planning?

A)Producers did not follow their personal interest in planning production.
B)The wishes of consumers were not represented in the producer's actions.
C)The government miscalculated the correct tonnage that the economy needed.
D)All of these are true.

Question 46

The expansion of the car manufacturing industry causes an improvement in the assembly line system, thus reducing costs to each firm in that industry. This is an example of

A)constant returns to scale.
B)a decreasing-cost industry.
C)a decreasing returns to scale.
D)an increasing-cost industry.

Question 47

Suppose an industry has 100 firms, each with supply curve P = 50 + 10Q. Furthermore, suppose the market demand curve is given by P = 200 - 0.9Q. What is the industry supply curve?

A)P = 500 + Q
B)P = 50 + 0.1Q
C)P = -500 + 10P
D)P = 50 + 10 Q

Question 48

Some people advocate price ceilings in certain markets because they seek to

A)expand the total of consumer and producer surplus which the market generates.
B)redistribute welfare from the producer to the consumer even if overall welfare is sacrificed.
C)redistribute welfare from the consumer to the producer even if welfare is sacrificed.
D)enhance both efficiency and distribution goals with the price ceiling.

Question 49

In a competitive industry in the long-run, it is likely that

A)firms with the advantage of location or an especially skilled work crew will be the lone survivors in equilibrium.
B)all firms giving their best effort will have the same LAC regardless of location or the unique skills of some workers.
C)the firms with the poorest location will be the lone survivors in equilibrium because their location cost will be lowest.
D)only one large efficient firm can survive.

Question 50

A competitive industry consists of 100 firms. The short-run marginal cost curve for each firm is given by MC = 200 + .3Q. The demand curve faced by the industry is given as P = 400 - .1Q. How much profit is each firm making if fixed costs are $375 per firm?

Question 51

A firm is currently selling its product at $20 each. It estimates that its average total cost of production is $100 and its average fixed cost is $40. In the short run the firm should

A)shutdown.
B)continue production at a point where P = MC.
C)hire more employees.
D)buy more capital.

Question 52

You have a small business that makes $50,000 accounting and economic profit for you. As a disabled person, you must work at home and you did not have other opportunities until your neighbor offers you a job you like equally well for $50,000 and you can do it at home. This means

A)your economic profit has gone down and your accounting profit has gone up.
B)both your accounting and economic profit have gone down.
C)both your accounting and economic profit have gone up.
D)your economic profit has gone down and your accounting profit has stayed the same.

Question 53

Competitive markets result in allocative efficiency because they

A)exhaust all possibilities for mutually beneficial trade.
B)exhaust all possible benefits for the consumer.
C)generate all possible benefits for the consumers.
D)distribute resources in the most equitable way.

Question 54

A competitive industry consists of 100 firms. The short-run marginal cost curve for each firm is given by MC = 200 + .3Q. The demand curve faced by the industry is given as P = 400 - .1Q. What is the equilibrium price and quantity produced by the industry as a whole?

Question 55

A competitive industry consists of 100 firms. The short-run marginal cost curve for each firm is given by MC = 200 + .3Q. The demand curve faced by the industry is given as P = 400 - .1Q. What is the price charged by each firm and what quantity will each firm produce?

Question 56

Which statement is true of the market supply curve?

A)It is the vertical summation of all the individual supply curves.
B)It is the horizontal summation of the upward sloping portion of the AVC function of all firms in the industry.
C)One must know the marginal cost information of firms in order to construct a supply function.
D)In perfect competition the slope of the curve is horizontal.

Question 57

The Agriculture industry is often used as an example of a competitive market model. However, of the four conditions required for perfect competition, one is clearly not present in farming. Which one is the least applicable and why does it not fit the model?

Question 58

I get $200 revenue from the sale of my product each day. I rent the factory that I use for $90 a day. The raw materials of the operation cost $115 a day. I do all the work myself. Both jobs are equally attractive as far as the work is concerned. Recently, a competitor offered me $30 a day to work for him. My accounting profit is ____, and my economic profit is _____.

A)-5; -35
B)-35; -35
C)25; -5
D)110; -30

Question 59

A competitive industry consists of 100 firms. The short-run marginal cost curve for each firm is given by MC = 200 + .3Q. The demand curve faced by the industry is given as P = 400 - .1Q. What is the producer and consumer surplus in the entire market?

Question 60

Which is not true of a perfectly competitive market?

A)The typical industry demand curve is downward sloping.
B)There is no incentive to innovate since economic profit is zero in the long-run.
C)If the long-run average total cost curve is horizontal in the relevant range of production, perfectly competitive firms can be various sizes in long-run equilibrium.
D)At long-run equilibrium, economic profit is less than accounting profit.

Question 61

Sketch a perfectly competitive firm operating in short-run equilibrium but making economic losses. Put in all the functions necessary to show that the firm should stay in business in the short-run despite the losses. Shade in the area of loss shown by the drawing.

Question 62

How can a firm stay in business if it makes no economic profit in the long run?

Question 63

A competitive industry consists of 100 firms. The short-run marginal cost curve for each firm is given by MC = 200 + .3Q. The demand curve faced by the industry is given as P = 400 - .1Q. What is the producer surplus for each firm?

Question 64

Put yourself in the place of a blacksmith during the early years of the 20^th century. Assume you and all the other blacksmiths in the town were doing as well as any alternative options that were available. Then cars began to arrive and fewer horses needed horseshoes. Describe, using terms from this chapter, the sequence of events that ultimately led to you closing your shop and hunting another job.

Question 65

Over the last two decades the combination of the internet, high definition TV, and the surround sound has revolutionized watching a movie at home. At the same time, advances in technology in the movie theater have raised the standard that the home entertainment alternative must achieve. Think about the effects of these technological changes on movie watching and identify another market for related goods or service where one will expand and the other will contract. Describe in detail the sequence of events as the two related items you've identified respond to the new technologies.

Question 66

The price of the typical cell phone has been going down in the past 10 years. What could explain this consistent drop in the price of these phones? Use the model for the long-run competitive firm to illustrate your answer (hint: you need two diagrams here: one showing the LAC for the typical firm, and another showing the long-run supply curve for the industry).