Deck 8: Competitive Firms and Markets

Question 1

If a firm happened to be the only seller of a particular product, it might behave as a price taker as long as

A)buyers have full information about the firm's price.
B)the transaction costs of doing business with this firm are low.
C)there are many buyers.
D)there is free entry and exit.

Answer 1

there is free entry and exit.

Question 2

If all conditions for a perfectly competitive market are met,

A)firms face sunk cost when entering the market.
B)firms' demand curves are horizontal.
C)the market demand curve is horizontal.
D)the firms' demand curves are downward-sloping.

Answer 2

firms' demand curves are horizontal.

Question 3

The "Got Milk?" advertising campaign is a good example of

A)advertising in a competitive market.
B)how advertising in a competitive market does not pay off for a single firm.
C)interest groups financed by the industry advertise for the whole industry.
D)All of the above.

Answer 3

All of the above.

Question 4

Economists define a market to be competitive when the firms

A)spend large amounts of money on advertising to lure customers away from the competition.
B)watch each other's behavior closely.
C)are price takers.
D)All of the above.

Question 5

Many used car owners and used car dealers describe their different cars for sale in the local newspapers and list their asking price. Many people shopping for a used car consider the different choices listed in the paper. The market for used cars could be described as

A)relatively competitive.
B)perfectly competitive.
C)non-competitive.
D)having high transaction costs.

Question 6

Firms that exhibit price-taking behavior

A)wait for other firms to set price, take it as given, and charge a higher price.
B)have outputs that are too small to influence market price and thus take it as given.
C)take pricing behavior in their own hands.
D)are independently capable of setting price.

Question 7

A special license is required to operate a taxi in many cities. The number of licenses is restricted. More drivers want licenses than are issued. This describes a non-perfectly competitive market because

A)taxi services are very different.
B)firms cannot freely enter and exit the market.
C)transaction costs are high.
D)the government generates revenue from the licenses.

Question 8

The perfectly competitive model makes a lot of fairly unrealistic assumptions. Why do economics textbooks still talk a lot about this model?

A)Many markets are close to being perfectly competitive.
B)It is an important model to use as a benchmark to compare other markets structures to.
C)Perfectly competitive markets maximize societal welfare.
D)All of the above.

Question 9

If a firm operates in a perfectly competitive market, then

A)all firms will advertise.
B)no firms will advertise.
C)the market leader will advertise.
D)new firms will advertise.

Question 10

In a competitive market, if buyers did not know all the prices charged by the many firms,

A)all firms still face horizontal demand curves.
B)firms sell a differentiated product.
C)demand curves can be downward sloping for some or all firms.
D)the number of firms will most likely decrease.

Question 11

A market's structure is described by

A)the number of firms in the market.
B)the ease with which firms can enter and exit the market.
C)the ability of firms to differentiate their product.
D)All of the above.

Question 12

Many car owners and car dealers describe their different cars for sale in the local newspapers and list their asking price. Many people shopping for a used car consider the different choices listed in the paper. The absence of which condition prohibits this market from being described as perfectly competitive?

A)Buyers and sellers know the prices.
B)Firms freely enter and exit.
C)Transaction costs are low.
D)Consumers believe all firms sell identical products.

Question 13

In the absence of any government regulation on price, if a firm has no power to set price on its own, one can safely conclude

A)the demand curve for the firm's product is horizontal.
B)there aren't many firms in the industry.
C)the market is in long-run equilibrium.
D)the firms in this industry are not profitable.

Question 14

Which of the following are NOT characteristics of a competitive market?

A)There is freedom of entry and exit.
B)There are zero transaction costs.
C)There are only one or two sellers.
D)Buyers and sellers have complete information.

Question 15

If consumers view the output of any firm in a market to be identical to the output of any other firm in the market, the demand curve for the output of any given firm

A)will be identical to the market demand curve.
B)will be horizontal.
C)will be vertical.
D)cannot be determined from the information given.

Question 16

The demand curve that an individual competitive firm faces is known as its

A)excess demand curve.
B)market demand curve.
C)residual demand curve.
D)leftover demand curve.

Question 17

A horizontal demand curve for a firm implies that

A)the firm is a monopoly.
B)the market the firm is operating in is not competitive.
C)the firm is selling in a competitive market.
D)the products of that firm are very different from other firms' products.

Question 18

Even if two products have different characteristics, such as color, the products are only considered heterogeneous if consumers

A)consider the two products as perfect complements.
B)consider the two products as perfect substitutes.
C)consider the two products as imperfect substitutes.
D)consider the two products as imperfect complements.

Question 19

In a perfectly competitive market,

A)firms can freely enter and exit.
B)firms sell a differentiated product.
C)transaction costs are high.
D)All of the above.

Question 20

If a firm operates in a perfectly competitive market, then it will most likely

A)advertise its product on television.
B)take the price of its product as determined by the market.
C)have a difficult time obtaining information about the market price.
D)have an easy time keeping other firms out of the market.

Question 21

In a competitive market where the elasticity of the market demand curve is -2, the elasticity of the supply curve is 1, and an individual firm faces a residual demand curve with an elasticity of -98. What happens to the individual firm's residual demand curve when the number of firms serving this market declines?

A)It becomes less elastic.
B)It becomes more elastic.
C)It does not change.
D)It cannot be determined.

Question 22

A small business owner earns $50,000 in revenue annually. The explicit annual costs equal $30,000. The owner could work for someone else and earn $25,000 annually. The owner's business profit is ________ and the economic profit is ________.

A)$20,000; $5,000
B)$20,000; -$5,000
C)$25,000; -$5,000
D)$45,000; -$5,000

Question 23

Many auction sites, such as eBay, provide a reputation score by which previous customers can rate a seller. Which of the following characteristics of a competitive market is this policy trying to emulate?

A)There is freedom of entry and exit.
B)There are very low transaction costs.
C)There are only one or two sellers.
D)Buyers have more complete information.

Question 24

If transaction costs are high, then it is more likely a firm's demand curve is downward sloping.

Question 25

How can the market demand for a product be inelastic but the demand for a particular firm is elastic?

A)There is no advertising.
B)There is a sufficiently large number of sellers.
C)There is only one or two sellers.
D)Buyers do not have complete information.

Question 26

In a competitive market where the elasticity of the market demand curve is -0.5, there are 100 identical firms, and the elasticity of the supply curve to the other 99 firms is 4. What is the elasticity of the demand curve of the 100^th firm?

A)-446
B)-489
C)-50
D)-0.5

Question 27

In a competitive market where the elasticity of the market demand curve is -2, the elasticity of the supply curve is 1, and an individual firm faces a residual demand curve with an elasticity of -98. What is the number of firms in this market?

A)10
B)20
C)33
D)Cannot be determined.

Question 28

All else equal, a smaller elasticity of the supply curve to the other firms leads to a ________ individual firm's residual elasticity of demand.

A)less elastic
B)unit elastic
C)more elastic
D)zero

Question 29

Which of the following characteristics of a competitive market make auction sites such as eBay so popular?

A)There is freedom of entry and exit.
B)There are very low transaction costs.
C)There are only one or two sellers.
D)Buyers and sellers have complete information.

Question 30

If marginal revenue equals marginal cost, the firm is maximizing profits as long as

A)the resulting profits are positive.
B)marginal cost exceeds marginal revenue for greater levels of output.
C)the average cost curve lies above the demand curve.
D)All of the above are required.

Question 31

The model of perfect competition is valuable for

A)prediction.
B)comparison to other markets.
C)Either A or B
D)None of the above.

Question 32

In a competitive market where the elasticity of the market demand curve is -1.5, the number of firms is 20, and an individual firm faces a residual demand curve with an elasticity of -68. What is the elasticity of the supply curve?

A)0.5
B)1.2
C)2
D)Cannot be determined.

Question 33

In a competitive market, one would expect to see

A)no advertising.
B)false advertising.
C)advertising only in the Sunday papers.
D)minimal advertising.

Question 34

If a firm makes zero economic profit, then the firm

A)has total revenues greater than its economic costs.
B)must shut down.
C)can be earning positive business profit.
D)must have no fixed costs.

Question 35

Explain why individual firms in competitive markets face more elastic demand curves than the market as a whole.

Question 36

A small business owner earns $60,000 in revenue annually. The explicit annual costs equal $10,000. The owner could work for someone else and earn $25,000 annually. The owner's accounting profit is ________ and owner's economic profit is ________.

A)$20,000; $5,000
B)$50,000; $25,000
C)$25,000; -$5,000
D)$45,000; -$5,000

Question 37

If a firm makes zero economic profit, then the firm

A)has no incentive to stay in the industry.
B)is better off exiting the industry.
C)is indifferent between staying and exiting the industry.
D)will shut down.

Question 38

If a competitive firm's marginal profit is positive at an output of 1000 units,

A)at 1000 units, MR = MC.
B)it should produce more than 1000 units.
C)it should produce less than 1000 units.
D)at 1000 units, MR < MC.

Question 39

A market is perfectly competitive even if firms have the ability to set their own price as long as the price difference reflects differences in the product.

Question 40

If a firm is operating at an output level where losses are minimized, the firm

A)has no incentive to stay in the industry.
B)is better off exiting the industry.
C)is maximizing profits.
D)will shut down.

Question 41

If a profit-maximizing firm finds that, at its current level of production, MR > MC, it will

A)earn greater profits than if MR = MC.
B)increase output.
C)decrease output.
D)shut down.

Question 42

If a profit-maximizing firm finds that, at its current level of production, MR < MC, it will

A)decrease output.
B)increase output.
C)shut down.
D)operate at a loss.

Question 43

If a firm doesn't make an economic profit, it will shut down.

Question 44

Suppose a competitive firm's total revenue is $1,000,000 where MR = MC, its explicit variable costs are $900,000, its fixed costs are $90,000 of which $60,000 are sunk in the short run. If its implicit opportunity costs are $50,000, the firm should

A)produce because its economic profit is positive.
B)produce because its economic profit is zero.
C)produce even though its economic profit is negative.
D)shut down.

Question 45

Suppose a firm has the following total cost function: TC = 50 + 2q². What is the minimum price necessary for the firm to earn profit?

A)p = $20
B)p = $30
C)p = $35
D)p = $40

Question 46

The above figure shows the cost curves for a competitive firm. The firm will incur economic losses if the price is less than

A)$0.
B)$5.
C)$10.
D)$11.

Question 47

Suppose there are 20 competitive firms in a market. The supply curve of each firm is q = 2p. The market demand is Q = 200 - 2p. What is the residual demand curve facing a typical firm?

Question 48

The above figure shows the cost curves for a competitive firm. If the market price is $15 per unit, the firm will earn profits of

A)$0.
B)$4.
C)$40.
D)$160.

Question 49

If a firm goes out of business because of negative economic profits, its books

A)might indicate a positive accounting profit.
B)might indicate that opportunity costs were zero.
C)might indicate that taxes are too high.
D)might suggest a mistaken value of explicit costs.

Question 50

The above figure shows the cost curves for a competitive firm. If the firm is to earn economic profit, price must exceed

A)$0.
B)$5.
C)$10.
D)$11.

Question 51

If a firm traded on the New York Stock Exchange posts an accounting profit of $10 million, then the firm is making a positive economic profit

A)only if the Securities and Exchange Commission (SEC)approves the accounting report.
B)only if the firm's opportunity cost is less than $10 million.
C)only if the firm's opportunity benefit is more than $10 million.
D)only if the firm's management receives stock compensation.

Question 52

If a competitive firm finds that it maximizes short-run profits by shutting down, which of the following must be TRUE?

A)p < AVC for all levels of output.
B)p < AVC only for the level of output at which p = MC.
C)p < AVC only if the firm has no fixed costs.
D)The firm will earn zero profit.

Question 53

Explain why shutting down and going out-of-business are different concepts.

Question 54

Even though fixed costs do not affect the output decision, an increase in fixed costs results in a wider range of prices for which the firm operates at a loss.

Question 55

Suppose a firm has the following total cost function: TC = 100 + 4q². What is the minimum price necessary for the firm to earn profit? Below what price will the firm shut down in the short run?

Question 56

If a firm sets marginal revenue equal to marginal cost, it will make an economic profit.

Question 57

If a competitive firm maximizes short-run profits by producing some quantity of output, which of the following must be TRUE at that level of output?

A)p = MC
B)MR = MC
C)p ≥ AVC
D)All of the above.

Question 58

If a competitive firm maximizes short-run profits by producing some quantity of output, which of the following must be TRUE at that level of output?

A)p > MC
B)MR > MC
C)p ≥ AVC
D)All of the above.

Question 59

A firm should always shut down if its revenue is

A)declining.
B)less than its average fixed costs.
C)less than its total costs.
D)less than its avoidable costs.

Question 60

The above figure shows the cost curves for a typical firm in a competitive market. Note that if p = 10, then MC = p at both q = 5 and q = 60. Can they both yield maximum profit? Explain.

Question 61

An increase in the cost of an input will result in

A)a leftward shift in the firm's supply curve.
B)an upward shift of the firm's marginal cost curve.
C)a leftward shift of the market supply curve.
D)All of the above.

Question 62

A firm will shut down in the short run if

A)total fixed costs are too high.
B)total revenue from operating would not cover all costs.
C)total revenue from operating would not cover variable costs.
D)total revenue from operating would not cover fixed costs.

Question 63

If a firm is a price taker, then its marginal revenue will always equal

A)price.
B)total cost.
C)zero.
D)one.

Question 64

The above figure shows the cost curves for a typical firm in a market and three possible market supply curves. If there are 100 identical firms, the market supply curve is best represented by

A)curve A.
B)curve B.
C)curve C.
D)either curve A or B, but definitely not C.

Question 65

Suppose TC = 10 + (0.1 ∗ q²). If p = 10, the firm's profit-maximizing level of output is

A)40.
B)50.
C)60.
D)0, since the firm will shut down.

Question 66

When the production of a good involves several inputs, an increase in the cost of one input will usually cause total costs to

A)rise more than in proportion.
B)rise less than in proportion.
C)remain unchanged.
D)rise by the exact amount of the input price increase.

Question 67

The above figure shows the cost curves for a competitive firm. If the firm is to operate in the short run, price must exceed

A)$0.
B)$5.
C)$10.
D)$11.

Question 68

The above figure shows the cost curves for a competitive firm. If the profit-maximizing level of output is 40, price is equal to

A)$0.
B)$15.
C)$10.
D)$11.

Question 69

Suppose TC = 10 + (0.1 ∗ q²). If there are 100 identical firms in the market, the market supply curve is

A)Q = 1000 ∗ p.
B)Q = 500 ∗ p.
C)Q = 100 ∗ p.
D)Q = 10.

Question 70

Suppose a firm's costs are F + v ∗ q² where F and v are positive real numbers and the firm sells its product at the market determined price p. Profits are calculated using

A)p ∗ q - F - v ∗ q².
B)[p -(F/q + v ∗ q)] ∗ q.
C)[(p ∗ q)/q -(F + v ∗ q)/q] ∗ q.
D)Both A and B.

Question 71

Suppose that once a well is dug, water flows out of it continuously without any additional effort. Customers collect their water and pay a per gallon fee when they leave the site of the well. In the short run, the competitive firm in this market

A)has no variable costs.
B)has no fixed costs.
C)will shut down.
D)can produce water at no cost.

Question 72

Suppose TC = 10 + (0.1 ∗ q²). If p = 10, the firm's profits will be

A)240.
B)250.
C)260.
D)-10 because the firm will shut down.

Question 73

Suppose that once a well is dug, water flows out of it continuously without any additional effort. Customers collect their water and pay a per gallon fee when they leave the site of the well. In the short run, the competitive firm in this market

A)will not shut down because variable costs are zero.
B)has no fixed costs.
C)faces diminishing marginal returns.
D)can act as a price setter.

Question 74

If a firm is currently in short-run equilibrium earning a profit, what impact will a lump-sum tax have on its production decision?

A)The firm will decrease output to earn a higher profit.
B)The firm will increase output but earn a lower profit.
C)The firm will not change output but earn a lower profit.
D)The firm will not change output and earn a higher profit.

Question 75

If a competitive firm is in short-run equilibrium, then

A)economic profits equal zero.
B)economic profits will be positive.
C)economic profits will be negative.
D)All of the above are possible in the short run.

Question 76

When the production of a good involves several inputs and inputs are used in fixed proportions, an increase in the cost of one input will usually cause total costs to

A)rise more than in proportion.
B)rise less than in proportion.
C)remain unchanged.
D)rise by the exact amount of the input price increase.

Question 77

The competitive firm's supply curve is equal to

A)its marginal cost curve.
B)the portion of its marginal cost curve that lies above AC.
C)the portion of its marginal cost curve that lies above AVC.
D)the portion of its marginal cost curve that lies above AFC.

Question 78

The reasons why a competitive firm's short-run supply curve is upward sloping are

A)the law of diminishing marginal returns and profit maximization.
B)constant returns to scale and profit maximization.
C)decreasing returns to scale and profit maximization.
D)Both B and C.

Question 79

If a competitive firm is in short-run equilibrium, then

A)profits equal zero.
B)it will not operate at a loss.
C)an increase in its fixed cost will have no effect on profit.
D)an increase in its fixed cost will have no effect on output.

Question 80

In a graph of a firm's short-run total costs and total revenue, the total cost and the total revenue curves, respectively, will intersect the vertical axis

A)above the origin, above the origin.
B)above the origin, at the origin.
C)at the origin, at the origin.
D)below the origin, below the origin.