Deck 8: A--Perfect Competition

Question 1

An industry consists of all firms that supply output to a particular market.

Answer 1

True

Question 2

Which of the following is not true of a perfectly competitive market?

A)Firms experience constant returns to scale.
B)Firms face significant barriers to entry.
C)Economic profit is zero.
D)Each firm chooses the quantity it wants to sell.
E)Each firm knows the prices of outputs and inputs.

Answer 2

Firms face significant barriers to entry.

Question 3

Which of the following is not characteristic of perfect competition?

A)many buyers and sellers
B)brand name advertising
C)standardized products
D)fully informed buyers and sellers
E)free entry and exit of firms

Answer 3

brand name advertising

Question 4

Perfectly competitive firms are sometimes called price makers because they have significant control over product price.

Question 5

Profit maximization depends upon demand conditions, as well as upon productivity and costs.

Question 6

Which of the following markets best approximates the perfectly competitive market structure?

A)automobile manufacturing
B)insurance
C)world commodity markets
D)airlines
E)manufacture of stereo equipment

Question 7

Which of the following would not help identify market structure?

A)number of firms in the industry
B)type of product produced in the industry
C)ease of entry into the industry
D)forms of competition among firms in the industry
E)price of the good

Question 8

Which of the following is likely to be present in a perfectly competitive market?

A)patents
B)government licenses
C)nonprice competition such as advertising
D)high capital costs
E)firms producing identical products

Question 9

Perfectly competitive firms respond to changing market conditions by varying their

A)price
B)output
C)market share
D)information
E)advertising campaigns

Question 10

Perfectly competitive firms are price takers because

A)all small firms must take the price set by the largest firm in the market
B)firms take the price that government determines is a "fair" price
C)each firm is small and goods are perfect substitutes for one another
D)free entry and exit in the short run creates a constant market price in the long run
E)high barriers to entry force firms to compete by charging lower prices than other firms in the industry

Question 11

Which of the following is not necessarily a characteristic of perfect competition?

A)low prices
B)a large number of buyers and sellers
C)a homogeneous product
D)perfect information
E)easy entry and exit in the long run

Question 12

In a perfectly competitive industry we are likely to find

A)firms producing a wide variety of products
B)barriers to entry
C)no profit possible in the short run
D)firms that do not advertise
E)firms that can choose the price of their products

Question 13

In perfect competition, each firm's output is a large fraction of total market supply.

Question 14

Suppose Thelma and Louise both sell fried green tomatoes in a perfectly competitive market.If Louise increases her output,

A)Thelma must reduce output
B)the price Thelma can charge falls
C)the price Thelma can charge rises
D)the price Thelma can charge is unaffected
E)Thelma's profits must fall

Question 15

Firms in perfect competition have no control over

A)all of the following
B)where to operate on their average total cost curves
C)what price to charge
D)how many inputs to use
E)how much to produce

Question 16

Which of the following firms is most likely to be a perfectly competitive firm?

A)one of the three largest U.S.automakers
B)one of the "Seven Sisters" oil producers
C)a public school operated by the government
D)a soybean farmer
E)a manufacturer of refrigerators

Question 17

A firm in a perfectly competitive market

A)can raise the price of its product and sell more output
B)can lower the price of its product and sell more output
C)can increase its supply to lower the price
D)can decrease its supply to raise the price
E)accepts the market price for its product

Question 18

Commodity products are

A)pasteurized
B)bland
C)perceived by consumers to be identical
D)made by one manufacturer
E)made by hand

Question 19

Which of the following characterizes a perfectly competitive market?

A)a few firms fiercely competing by slashing prices
B)product differentiation through aggressive advertising
C)perfect information
D)limited resource mobility
E)barriers to entry such as licenses

Question 20

Market structure

A)has no influence on a firm's decision making
B)applies only to industries regulated by the government
C)is determined entirely by demand conditions in the industry
D)influences the forms of competition among firms
E)does not affect product price or quantity of output

Question 21

A Midwestern wheat farmer faces a horizontal demand curve because

A)it is so large relative to the market as a whole that it has no impact on market price
B)it is so small relative to the market as a whole that it has no impact on market price
C)it produces a good for which there are no substitutes
D)it produces a good for which there are no complements
E)it produces a good that no other firm in the industry produces

Question 22

Suppose the market for hot pretzels in New York City is perfectly competitive.What is true of demand in this market?

A)The demand curve facing each seller is perfectly elastic.
B)The demand curve facing each seller is perfectly inelastic.
C)The market demand curve is perfectly elastic.
D)The market demand curve is perfectly inelastic.
E)The market demand curve is elastic.

Question 23

Suppose the equilibrium price in a perfectly competitive industry is $10 and a firm in the industry charges $9.Which of the following will happen?

A)The firm will not sell any output.
B)The firm will sell less output than its competitors.
C)The firm will make more profit than it could at the $10 price.
D)The firm will make less profit than it could at the $10 price.
E)The firm's revenue will increase and its costs may decrease.

Question 24

Exhibit 8-1 The perfectly competitive firewood market is composed of 1, 000 identical consumers and 1, 000 identical firms.Exhibit 8-1 shows cost data for one firm and demand data for one consumer.What is the equilibrium price?

A)$60
B)$80
C)$100
D)$120
E)It is impossible to determine the equilibrium price because there is no information on market demand or supply.

Question 25

Because it is small relative to the market, a perfectly competitive firm faces an inelastic demand curve for its output.

Question 26

Perfectly competitive firms are price takers because

A)each firm is too small compared to the market to be able to affect price
B)one firm determines price and all other firms accept this price
C)firms take the price that government determines
D)firms must accept any price consumers offer them
E)firms earn high profits by "taking" consumers

Question 27

]The demand curve faced by a perfectly competitive firm

A)is the market demand curve
B)slopes downward
C)is perfectly elastic
D)is vertical
E)rises when market supply rises

Question 28

If every firm is a price taker, then which of the following characteristics does their industry have?

A)large number of sellers
B)many versions of the product
C)limited resource mobility
D)few consumers
E)market power

Question 29

Suppose the equilibrium price in a perfectly competitive industry is $100 and a firm in the industry charges $112.Which of the following will happen?

A)The firm will not sell any of its output.
B)The firm will sell more output than its competitors.
C)The firm's profits will increase.
D)The firm's revenue will increase.
E)The firm will gradually take over the entire industry.

Question 30

The demand curve facing a perfectly competitive firm is

A)almost vertical at the market quantity
B)perfectly inelastic
C)perfectly elastic
D)horizontal at the price the firm wishes to charge
E)downward sloping

Question 31

A perfectly competitive firm is a price taker.Therefore, it faces a

A)perfectly elastic supply curve for its output
B)perfectly elastic demand curve for its output
C)perfectly inelastic supply curve for its output
D)perfectly inelastic demand curve for its output
E)unit-elastic demand curve for its output

Question 32

If a perfectly competitive firm raises its price, its sales decrease to zero.

Question 33

Which real-world market most closely approximates perfect competition?

A)the stock market
B)automobiles
C)higher education
D)cable television services
E)retail clothing stores

Question 34

Adam's Apples, a small firm supplying apples in a perfectly competitive market, decides to cut its production in half this year.As a result, the

A)market price will rise
B)market price will fall
C)market quantity will rise
D)market price will not be affected
E)total expenditures on apples will rise

Question 35

Because market price remains constant as a perfectly competitive firm expands output, each firm faces

A)a downward-sloping demand curve
B)a horizontal demand curve
C)constant returns to scale
D)constant costs
E)diminishing marginal revenue

Question 36

The demand curve for the output of a perfectly competitive firm is

A)perfectly inelastic
B)perfectly elastic
C)unit elastic
D)downward sloping
E)nonlinear

Question 37

In Connecticut, the apple market is perfectly competitive.Suppose that consumer tastes change so that the market demand for apples increases.In that case, the demand curves faced by individual firms will

A)not change
B)become less elastic
C)shift upward
D)shift leftward
E)shift downward

Question 38

The price charged by a perfectly competitive firm is determined by

A)each individual firm
B)a group of firms acting together as a cartel
C)market demand and market supply
D)the firm's total costs alone
E)the firm's average variable cost

Question 39

In perfect competition, if one firm raises its price,

A)others will follow
B)that firm will increase its revenues
C)that firm will lose revenues because other firms will not follow
D)all consumers will be adversely affected
E)the market demand curve will shift

Question 40

Individual firms in a perfectly competitive market can

A)purchase all they want at the market price
B)sell all they produce at the market price
C)earn more profit if they charge a price above the market price
D)earn more profit if they charge a price below the market price
E)earn no profit in the short run

Question 41

Exhibit 8-3 Which point in Exhibit 8-3 indicates the quantity at which marginal revenue and marginal cost are equal?

A)point a
B)point b
C)point c
D)point d
E)either point b or point d

Question 42

The demand curve facing a perfectly competitive firm is

A)perfectly elastic
B)perfectly inelastic
C)unit elastic
D)downward-sloping
E)identical to the industry demand curve

Question 43

Exhibit 8-1 The perfectly competitive firewood market is composed of 1, 000 identical consumers and 1, 000 identical firms.Exhibit 8-1 shows cost data for one firm and demand data for one consumer.What does the demand curve facing a single firm look like?

A)horizontal at a price of $120
B)horizontal at a price of $100
C)horizontal at a price of $80
D)horizontal at a price of $60
E)same as the demand for a single consumer

Question 44

Exhibit 8-2 Given the information in Exhibit 8-2, what is the profit-maximizing (or loss-minimizing)quantity?

A)zero blankets
B)one blanket
C)two blankets
D)three blankets
E)five blankets

Question 45

Exhibit 8-1 The perfectly competitive firewood market is composed of 1, 000 identical consumers and 1, 000 identical firms.Exhibit 8-1 shows cost data for one firm and demand data for one consumer.What is the profit-maximizing quantity for each firm?

A)zero cords of wood
B)one cord of wood
C)two cords of wood
D)three cords of wood
E)four cords of wood

Question 46

Exhibit 8-3 The shape of the total cost curve between outputs a and b in Exhibit 8-3 reflects

A)fixed cost
B)increasing profits
C)diminishing marginal returns
D)increasing marginal returns
E)economies of scale

Question 47

Commodity products are

A)rare and expensive
B)patented and licensed
C)highly differentiated
D)uniform or standardized
E)ones without impurities

Question 48

Economic theory assumes that the goal of firms is to maximize

A)sales
B)total revenue
C)profit
D)price
E)utility

Question 49

The total revenue curve of a perfectly competitive firm

A)is horizontal
B)is vertical
C)has a diminishing slope as output increases
D)has an increasing slope as output increases
E)has a constant slope as output increases

Question 50

Exhibit 8-3 The shape of the total revenue curve in Exhibit 8-3 reflects

A)profitability
B)falling marginal revenue
C)increasing marginal revenue
D)the fact that perfectly competitive firms are price takers
E)the fact that consumers will purchase more from this firm at higher prices

Question 51

A perfectly competitive firm has no control over the

A)quantity of output produced
B)quantities of inputs used
C)price of the product
D)type of good produced
E)types of inputs used

Question 52

Which of the following is not true with regard to economic profit?

A)economic profit equals total revenue minus total cost
B)economic profit excludes implicit cost
C)economic profit is any profit greater than a normal profit
D)firms attempt to maximize economic profit
E)long-run economic profit is always zero in perfect competition

Question 53

Exhibit 8-1 The perfectly competitive firewood market is composed of 1, 000 identical consumers and 1, 000 identical firms.Exhibit 8-1 shows cost data for one firm and demand data for one consumer.How many cords of firewood wil be bought and sold in equilibrium?

A)5, 000
B)4, 000
C)3, 000
D)2, 000
E)1, 000

Question 54

Economists assume that firms seek to

A)maximize accounting profit
B)maximize economic profit
C)maximize total revenue
D)maximize normal profit
E)minimize cost

Question 55

Exhibit 8-2 How much profit is the firm in Exhibit 8-2 earning (or how much of a loss is it suffering)?

A)-$17
B)$10
C)zero profit or loss
D)-$10
E)$30

Question 56

Exhibit 8-3 Which point in Exhibit 8-3 indicates the quantity at which this firm will maximize profit?

A)point a
B)point b
C)point c
D)point d
E)either point b or point d

Question 57

Exhibit 8-4 Does Exhibit 8-4 represent a long-run or a short-run situation?

A)long run because there is no fixed cost
B)short run because there is no equilibrium
C)long run because there is an equilibrium level of output
D)short run because there is fixed cost
E)long run because there is a normal profit

Question 58

Exhibit 8-4 Consider Exhibit 8-4.If the market price is $8.50, what are the profit-maximizing output and profit?

A)output = 40; profit = $35
B)output = 40; profit = $0
C)output = 0; profit = -$50
D)output and profit cannot be determined because marginal revenue cannot be calculated
E)output and profit cannot be determined because average variable cost cannot be calculated

Question 59

Exhibit 8-2 Given the information in Exhibit 8-2, the price of a wool blanket

A)is $10
B)is $20
C)is $30
D)is $40
E)depends on the quantity sold

Question 60

If, as a firm increases its rate of output, total cost increases as well,

A)profit cannot be maximized
B)revenue cannot be maximized
C)cost cannot be minimized
D)marginal cost is increasing
E)marginal cost is positive

Question 61

Marginal revenue is defined as

A)total revenue divided by quantity
B)total revenue minus total cost
C)the change in total revenue divided by the change in quantity
D)the change in total revenue divided by quantity
E)the change in total revenue

Question 62

Farmer Fanny sells her crops in a perfectly competitive market.If she produces 500 bushels for total revenue of $2, 500 and if harvesting the 501st bushel would raise her total cost from $2, 500 to $2, 505, her

A)revenue will increase by $10 if she harvests the 501st bushel
B)revenue will fall by $5 if she harvests the 501st bushel
C)average fixed cost will rise if she harvests the 501st bushel
D)profit will fall by $10 if she harvests the 501st bushel
E)profit will remain unchanged if she harvests the 501st bushel

Question 63

Perfectly competitive firms that earn an economic profit in the short run choose the output that

A)maximizes total revenue
B)minimizes total cost
C)maximizes the difference between total revenue and total cost
D)maximizes the difference between total revenue and explicit cost
E)maximizes the difference between total revenue and implicit cost

Question 64

Exhibit 8-5 Consider Exhibit 8-5.Assume the firm is perfectly competitive and the market price is $21.To maximize profit or minimize loss, the firm will

A)shut down
B)produce 7 units
C)produce 3 units
D)produce 4 units
E)produce 5 units

Question 65

Marginal revenue is

A)total revenue minus total cost
B)total revenue divided by quantity of output
C)the change in total revenue divided by the change in output
D)the change in total revenue divided by the change in the quantity of an input used
E)economic profit

Question 66

Farmer Fanny sells her crops in a perfectly competitive market.If she produces 500 bushels for total revenue of $3, 000 and if harvesting the 501st bushel would raise her total cost from $2, 500 to $2, 510, her

A)revenue will increase by $4 if she harvests the 501st bushel
B)revenue will fall by $4 if she harvests the 501st bushel
C)average fixed cost will rise if she harvests the 501st bushel
D)profit will fall by $10 if she harvests the 501st bushel
E)profit will fall by $4 if she harvests the 501st bushel

Question 67

For a perfectly competitive firm, price is identical to marginal revenue at every quantity.

Question 68

The slope of the total revenue curve for a perfectly competitive firm equals

A)marginal revenue, which is less than price
B)marginal revenue, which is greater than price
C)marginal revenue, which is equal to price
D)average revenue, which is less than price
E)average revenue, which is greater than price

Question 69

The Hound Dog Bus Company contemplates expanding its New Mexico operations by offering service from Raton to Milk-of-Magnesia.The total cost of the trip would be $400, of which $150 is fixed cost, which it has already paid.The firm expects to earn $275 in revenue from the trip.The Hound Dog Bus Co.should

A)offer this service because it will earn a positive economic profit
B)not offer this service because the marginal revenue is less than the marginal cost
C)offer this service because the revenue exceeds fixed cost
D)not offer this service because the total cost exceeds the total revenue
E)offer this service because the added revenue exceeds the added cost of this service

Question 70

Average revenue is

A)total revenue minus total cost
B)total revenue divided by quantity of output
C)total revenue divided by quantity of input
D)the change in total revenue divided by the change in output
E)the change in total revenue divided by the change in the quantity of an input used

Question 71

The Hound Dog Bus Company contemplates expanding its Virginia operations by offering service from Fairfax to Arlington.The total cost of the trip would be $120, of which $50 is fixed cost, which it has already paid.The firm expects to earn $60 in revenue from the trip.The Hound Dog Bus Company should

A)offer this service because it will earn a positive economic profit
B)not offer this service because the marginal revenue is less than the marginal cost
C)offer this service because the revenue exceeds fixed cost
D)not offer this service because the total cost exceeds the total revenue
E)offer this service because the added revenue exceeds the added cost of this service

Question 72

Marginal revenue is the change in total revenue from using one more unit of an input in the short run.

Question 73

Exhibit 8-5 Consider Exhibit 8-5.If the market price is $21, this perfectly competitive firm will

A)earn a profit of $3.00
B)earn a profit of $2
C)earn a profit of $1
D)suffer a loss of $10
E)break even

Question 74

Exhibit 8-5 Consider Exhibit 8-5.Assume the firm is perfectly competitive and the market price is $15.To maximize profit or minimize loss, the firm will

A)shut down
B)produce 7 units
C)produce 3 units
D)produce 4 units
E)produce 5 units

Question 75

For a perfectly competitive firm, marginal revenue is identical to marginal cost at every quantity.

Question 76

Exhibit 8-5 Consider Exhibit 8-5.If the market price is $15, the minimum loss this perfectly competitive firm can incur is

A)$10
B)$15
C)$18
D)$19
E)$22

Question 77

The golden rule of profit maximization states that firms maximize profit by producing at the rate of output at which price equals average total cost.

Question 78

If a perfectly competitive firm charges the market price of $14 per unit,

A)its marginal revenue is $14, and its average revenue is less than $14 per unit
B)it will sell no output
C)its average revenue is $14, and its marginal revenue is less than $14 per unit
D)its average revenue is $14, and its marginal revenue is $14
E)its average and marginal revenue are $14 only for the first unit sold

Question 79

Marginal revenue is the change in total revenue from selling one more unit of output.

Question 80

The total revenue curve for a perfectly competitive firm

A)is a vertical line intersecting the horizontal axis
B)is a horizontal line intersecting the vertical axis
C)starts part way up the vertical axis, then slopes upward in a backwards-S curve
D)is a straight line starting from the origin and sloping upward
E)starts at the origin, sloping upward at first and then sloping downward