Deck 10: Competitive Markets

Question 1

Market structure is not typically characterized on the basis of:

A) the number and size distribution of active buyers and sellers.
B) potential entrants.
C) exit barriers.
D) government regulation.

Answer 1

D

Question 2

Graphically, competitive market supply is measured by the:

A) vertical difference of competitor demand curves.
B) vertical sum of competitor demand curves.
C) horizontal difference of competitor MC curves.
D) horizontal sum of competitor MC curves.

Answer 2

D

Question 3

In the short run, a perfectly competitive firm will shut down and produce nothing if:

A) excess profits equal zero.
B) total cost exceeds total revenue.
C) total variable cost exceeds total revenue.
D) the market price falls below the minimum average total cost.

Answer 3

C

Question 4

If P = $8 and MC = $5 + 0. 2Q, the competitive firm's profit-maximizing level of output is:

A) 5
B) 0.2
C) 8
D) 15

Question 5

Competition tends to be light when:

A) potential entrants are few.
B) capital requirements are nominal.
C) standards for skilled labor and other inputs are modest.
D) regulatory barriers are modest.

Question 6

Effects of market structure are not typically measured in terms of:

A) the prices paid by consumers.
B) declining consumer popularity.
C) employment opportunities.
D) the pace of product innovation.

Question 7

Economic profit:

A) cannot be negative.
B) can exceed the risk-adjusted normal rate of return.
C) is less than the risk-adjusted normal rate of return.
D) does not reflect the cost of owner-supplied inputs.

Question 8

By itself, a reduction in import tariffs (taxes) will:

A) reduce quantity demanded.
B) enhance domestic competition.
C) enhance the profits of domestic competitors.
D) reduce import competition.

Question 9

In a perfectly competitive market:

A) sellers and buyers have perfect information.
B) entry and exit are difficult.
C) sellers produce similar, but not identical products.
D) each seller can affect the market price by changing output.

Question 10

Price and product quality competition tends to be vigorous when:

A) entry barriers are low.
B) potential entrants are few.
C) product quality information is scarce.
D) the number of active sellers is few.

Question 11

For a firm in perfectly competitive market equilibrium:

A) MR < AR
B) P > AC
C) P > MR
D) P = MC

Question 12

In the long run, firms will offer supply at the point where P = MR = MC if:

A) MC is rising.
B) MC is falling.
C) MC is constant.
D) P > AC

Question 13

The rate of return necessary to attract and retain capital investment is called:

A) ROE.
B) economic losses.
C) normal profit.
D) economic profit.

Question 14

A firm will earn normal profits when price:

A) equals average total cost.
B) equals average variable cost.
C) equals marginal cost.
D) exceeds minimum average total cost.

Question 15

Above-normal profits in a perfectly competitive market are caused by:

A) increases in demand that are successfully anticipated.
B) decreases in cost that are successfully anticipated.
C) increases in productivity that are successfully anticipated.
D) luck.

Question 16

Industry cartels never:

A) give rise to price supports.
B) spur entry when barriers to entry are low.
C) spur exit when exit barriers are low.
D) prompt inefficiency and waste.

Question 17

In the long run, firms will exit a perfectly competitive industry if:

A) excess profits exceed zero.
B) excess profits are less than zero.
C) total profit equals zero.
D) excess profits equal zero.

Question 18

In perfectly competitive markets, profits are maximized when:

A) MC = AC
B) P > AC
C) MR = MC
D) MR = P

Question 19

The firm demand curve in a competitive market is:

A) upward sloping.
B) downward sloping.
C) horizontal.
D) vertical.

Question 20

Perfect competition always prevails in markets with:

A) few buyers and sellers.
B) many buyers and sellers.
C) an even balance of power between sellers and buyers.
D) a single buyer.

Question 21

Entry and Exit Conditions. Signify whether each of the following statements is true or false and document why.
A. A barrier to mobility is any factor or industry characteristic that creates an advantage for incumbents over new arrivals.
B. A barrier to entry is any factor or industry characteristic that creates an advantage for large leading firms over smaller nonleading rivals.
C. Barriers to entry and mobility sometimes result in compensating advantages for consumers.
D. A barrier to exit is any restriction on the ability of incumbents to redeploy assets from one industry or line of business to another.
E. Government actions that create barriers to exit can have the unintended effect of retarding industrial development.

Question 22

Long-run Competitive Firm Supply. Calvin's Barbershop is a popularly-priced hair cutter on the south side of Chicago. Given the large number of competitors, the fact that barbers routinely tailor services to meet customer needs, and the lack of entry barriers, it is reasonable to assume that the market is perfectly competitive and that the average $15 price equals marginal revenue, P = MR = $15. Furthermore, assume that the barbershop's monthly operating expenses are typical of the 50 barbershops in the local market and can be expressed by the following total and marginal cost functions:

where TC is total cost per month including capital costs, MC is marginal cost, and Q is the number of hair cuts provided. Total costs include a normal profit.

Question 23

Long-run Firm Supply. The Los Angeles retail market for unleaded gasoline is fiercely price competitive. Consider the situation faced by a typical gasoline retailer when the local market price for unleaded gasoline is $2.50 per gallon and total cost (TC) and marginal cost (MC) relations are:

Question 24

Market Structure. Specify whether each of the following statements is true or false and demonstrate why.
A. A market is confined to all firms and individuals willing and able to buy or sell a particular product at a given time and place.
B. The more even the balance of power between sellers and buyers, the more likely it is that the competitive process will yield maximum benefits.
C. A close link between the numbers of market participants and the vigor of price competition is always evident.
D. Market structure describes the competitive environment in the market for any good or service.
E. Competitors often benefit from the effects of potential entrants in industries with only a handful of viable firms.

Question 25

Firm Supply. The Copy Center specializes in high-volume printing and color copying for small businesses. This is a fiercely competitive market. The following relation exists between output and total production costs:

Question 26

Competitive Markets. Indicate whether each of the following statements is true or false and why.
A. In long-run equilibrium, every firm in a perfectly competitive industry earns an economic profit.
B. Pure competition exists in a market when firms are price makers as opposed to price takers.
C. A natural monopoly results when the profit-maximizing output level occurs at a point where long-run average costs are decreasing.
D. Downward-sloping industry demand curves characterize monopoly markets; horizontal demand curves characterize perfectly competitive markets.
E. A decrease in the price elasticity of demand would follow an increase in monopoly power.

Question 27

Short-run Firm Supply. Whole Fruit, Inc., distributes oranges to wholesalers located throughout the country. Like several grain and commodity markets, the market for oranges is perfectly competitive. The marginal cost per crate of oranges is:

Question 28

Firm Supply. Retirement Planning Services.com is a wholesale producer of standardized retirement plans for high net worth individuals. These plans are produced and e-mailed to financial planners who incorporate them in their client presentations. The following relation exists between the firm's output and total production costs in this highly price-competitive market:

Question 29

Long-run Firm Supply. The Boston retail market for unleaded gasoline is fiercely price competitive. Consider the situation faced by a typical gasoline retailer when the local market price for unleaded gasoline is $1.80 per gallon and total cost (TC) and marginal cost (MC) relations are:

and Q is gallons of gasoline. Total costs include a normal profit.

Question 30

Short-run Firm Supply. Nature's Best, Inc., supplies asparagus to canners located throughout the Mississippi River valley. Like several grain and commodity markets, the market for asparagus is perfectly competitive. Marginal cost per ton of asparagus is:

Question 31

So long as P > AVC, the competitive firm's short-run supply curve is equal to:

A) AVC
B) P
C) MC
D) none of these.

Question 32

At the point of minimum AVC:

A) MC is falling.
B) MC is constant.
C) MC is rising.
D) MC = AVC.

Question 33

The following market cannot be described as perfectly competitive:

A) unskilled labor market.
B) milk market.
C) discount retailing.
D) agricultural grain markets.

Question 34

When profits are maximized in a competitive market, average cost is always:

A) rising.
B) falling.
C) constant.
D) none of these.

Question 35

Short-run Firm Supply. Give Me a Pane, Inc., distributes window glass to hardware and building supply chains located throughout the Northeast. Like several grain and commodity markets, the market for common single-pane glass is perfectly competitive. The company's technology defines a marginal cost per pound of single-pane glass given by the relation:
where Q is pounds of single-pane glass.

Question 36

Product Differentiation. Suggest whether each of the following statements is true or false and illustrate why.
A. Sources of product differentiation include only physical differences, not merely perceived differences.
B. Price competition tends to be most vigorous for products with many actual or perceived differences.
C. The availability of good substitutes decreases the degree of competition.
D. Competition tends to be less vigorous when buyers and sellers have easy access to detailed price/product performance information.
E. The availability of good complements increases the degree of competition.

Question 37

In competitive market equilibrium, the firm's:

A) MR = MC and P > AR
B) MR = MC and P > AC
C) AR = AC and MR > MC
D) P = MR = AR = AC = MC

Question 38

Firm Supply. Credit Check, Inc., offers credit checking services to credit card companies and retailers. The following relation exists between the number of credit checks performed and total costs in this viciously competitive market:

Question 39

Short-run Firm Supply. Produce Pride, Inc., supplies sweet corn to canneries located throughout the Missouri River Valley. Like many grain and commodity markets, the market for sweet corn is perfectly competitive. With $500,000 in fixed costs, the company's total and marginal costs per ton (Q) are:

Question 40

Price/Output Determination. Cold Case, Inc., produces beverage containers used by fast food franchises. This is a perfectly competitive market. The following relation exists between the firm's beverage container output per hour and total production costs:

Question 41

Short-run Market Supply. Motor City Music is a local distributor of musical CDs featuring compilations of classic rock recordings by various artists. Motor City's marginal cost of output is described by the relation:
where Q is CDs sold per year.

Question 42

Competitive Market Equilibrium. Syracuse Paper supplies printer paper in upstate New York. Like the output of other wholesale distributors, Syracuse Paper must meet strict guidelines and the printer paper supply industry can be regarded as perfectly competitive. Total and marginal cost relations are:

where Q is cases of printer paper per day.

Question 43

Short-run Market Supply. The Magazine Delivery Company is a typical firm in the perfectly competitive magazine delivery business. The company delivers magazines and stocks magazine racks at convenience stores located throughout the state of Kentucky. Marginal costs of service are described by the relation:
where Q is racks of magazines delivered and serviced per week.

Question 44

Perfectly Competitive Equilibrium. Fuel costs have risen quickly during recent years as consumption, refining and production costs have risen sharply. Supply and demand conditions in the perfectly competitive domestic crude oil market are:
where Q is quantity in millions of barrels per day, and P is price per barrel.

Question 45

Short-run Market Supply. Carolina Textiles, Inc., is a small manufacturer of cotton linen that it sells in a perfectly competitive market. Given $100,000 in fixed costs per day, the daily total cost function for this product is described by:

where Q is units of cotton linen produced per day. Assume that MC > AVC at every point along the firm's marginal cost curve, and that total costs include a normal profit.

Question 46

Perfectly Competitive Equilibrium. Lawn mowing services are supplied by a host of individuals in the suburb of Westbrook. Demand and supply conditions in the perfectly competitive domestic for lawn mowing services are:
where P is price per lawn mowed and Q is quantity of lawns mowed per day.

Question 47

Competitive Market Equilibrium. Happy Valley Supply, Inc., provides recycled toner cartridges for printers. Like its competitors, Happy Valley must meet strict specifications. As a result, the replacement toner cartridge market can be regarded as perfectly competitive. Total and marginal cost relations per week are:

where Q is the number of recycled toner cartridges.

Question 48

Perfectly Competitive Equilibrium. Fuel costs have risen sharply during recent years as consumption, refining and production costs have increased. Demand and supply conditions in the perfectly competitive domestic crude oil market are:
where P is price per barrel and Q is quantity in millions of barrels per day .

Question 49

Perfectly Competitive Equilibrium. Office building maintenance plans call for the stripping, waxing, and buffing of ceramic floor tiles. This work is often contracted out to office maintenance firms, and both technology and labor requirements are very basic. Supply and demand conditions in this perfectly competitive service market in St. Paul, Minnesota, are:
where Q is thousands of hours of floor reconditioning per month, and P is the price per hour.

Question 50

Short-run Market Supply. The Fertilizer Supply Co. is a typical distributor in the perfectly competitive fertilizer supply industry. Its marginal cost of output is:
where Q is tons of fertilizer produced per year.