Question 1

Consider the following short- run cost curves for a perfectly competitive firm.  FIGURE 9- 1
-Refer to Figure 9- 1. The diagram shows cost curves for a perfectly competitive firm. The firm's short- run supply curve starts at output and rises along the marginal cost (MC) curve.
A) D
B) E
C) F
D) G
E) H

Accepted Answer

The answer of Consider the following short- run cost curves...

Question 2

Consider the price and quantity data below for a perfectly competitive firm producing mousetraps. $$\begin{array}{l}
\begin{array} { | l | l | } 
\hline \text { Price } ( \$ ) & \text { Quantity } \
\hline 5 & 1000 \
\hline 5 & 1250 \
\hline 5 & 1500 \
\hline 5 & 1750 \
\hline 5 & 2000 \
\hline
\end{array}\
\text { TABLE 9- } 1
\end{array}$$
-Refer to Table 9- 1. If this firm is producing 1250 mousetraps, its total revenue is , its average revenue is and its marginal revenue is .
A) $5; $5; $5
B) $6250; $250; $5
C) $6250; $5; $5
D) $5000; $5; $250
E) $1750; $250; $5

Accepted Answer

Total revenue is calculated as price multiplied by quantity, which is $5 * 1250 = $6250. Average revenue is total revenue divided by quantity, which is $6250 / 1250 = $5. Marginal revenue in perfect competition is equal to the price, which is $5.

Question 3

Given the usual assumptions about perfect competition, a perfectly competitive firm
A) can affect the market conditions in a significant way.
B) can set the price it charges.
C) competes actively with other sellers in the industry.
D) can sell as much of its product as it wishes at the market price.
E) is aware of its competitors' costs.

Accepted Answer

In perfect competition, a firm is a price taker, meaning it cannot set the price it charges but instead must accept the market price. The firm also faces many competitors in the industry and cannot significantly affect market conditions. However, it can sell as much of its product as it wishes at the market price, as there are no barriers to entry or exit in perfect competition. The firm does not necessarily have knowledge of its competitors' costs, as this is not a requirement in the assumptions about perfect competition.

Question 4

The market demand curve for a perfectly competitive industry is typically
A) upward sloping.
B) identical to the competitive firm's demand curve.
C) infinitely elastic.
D) a rectangular hyperbola.
E) downward sloping.

Accepted Answer

In a perfectly competitive industry, the market demand curve is downward sloping because it reflects the law of demand, where quantity demanded decreases as price increases.

Question 5

Consider the following short- run cost curves for a perfectly competitive firm.  FIGURE 9- 1
-Refer to Figure 9- 1. The diagram shows cost curves for a perfectly competitive firm. If the market price is P3, the profit- maximizing firm in the short run should
A) produce output A.
B) produce output F or shut down, as it doesn't matter which.
C) produce output D.
D) shut down because more profits could be earned in another industry.
E) produce output F.

Accepted Answer

The answer of Consider the following short- run cost curves...

Question 6

For a perfectly competitive firm in long- run profit- maximizing equilibrium,
A) marginal revenue is greater than marginal cost.
B) price is greater than marginal cost.
C) economic profits are greater than zero.
D) average fixed costs are at the maximum.
E) price equals minimum short- run and long- run average total cost.

Accepted Answer

In long-run profit-maximizing equilibrium, a perfectly competitive firm will produce at the point where price equals minimum short-run and long-run average total cost (LRATC). This ensures that the firm is producing at the lowest possible cost while still earning normal profits. If the firm were to produce at a higher level of output, it would incur higher costs and earn lower profits. If it were to produce at a lower level of output, it would not be maximizing profits. Therefore, option E is the correct answer.

Question 7

The diagram below shows the short- run cost curves for 3 perfectly competitive firms in the same industry.  FIGURE 9- 6
-Refer to Figure 9- 6. If Firms A, B and C are in the same industry, is this industry in long- run equilibrium?
A) Yes, because P = MC = MR for each of the 3 firms.
B) Yes, because each of the 3 firms is operating at its minimum efficient scale.
C) No, because if the industry were in equilibrium, all 3 firms would be earning zero economic profits.
D) No, because Firm A is not producing at a profit- maximizing level of output.
E) Yes, because all 3 firms are producing at their minimum average total cost.

Accepted Answer

In long-run equilibrium, firms in a perfectly competitive market earn zero economic profits. However, in this diagram, all three firms are earning positive economic profits as their average total cost is above the price level. Therefore, the industry is not in equilibrium.

Question 8

The short- run supply curve for a perfectly competitive firm is
A) its entire marginal- cost curve.
B) its marginal- cost curve above the average- variable- cost curve.
C) the industry supply curve.
D) its average- revenue curve.
E) its rising portion of the average- variable- cost curve.

Accepted Answer

In the short run, a perfectly competitive firm will produce as long as its price is greater than or equal to its average variable cost. Therefore, the short-run supply curve for a perfectly competitive firm is its marginal cost curve above the average variable cost curve. If the price is below the average variable cost, the firm will shut down and produce zero output. The choice A is incorrect because the firm only needs to produce where price equals or exceeds marginal cost, not its entire marginal cost curve. Choice C is incorrect because the industry supply curve is the horizontal summation of individual firm supply curves. Choice D is incorrect because the firm does not consider its average revenue curve when determining how much to produce. Choice E is incorrect because the rising portion of the average variable cost curve is the point where the firm decides to shut down temporarily in the short run.

Question 9

If firms in a competitive industry are earning positive economic profits, in the long run we expect
A) the individual firms will lower their price to discourage new firms from entering the industry.
B) the government would intervene and force the firms to lower prices.
C) the demand curve for the product will shift to the left, so that the price of the product will fall.
D) the supply curve for the product will shift to the right as new firms enter the industry, causing industry output to increase and price to fall.
E) there would be no change in the industry as long as P = MC for the individual firms.

Accepted Answer

In the long run, positive economic profits will attract new firms to enter the industry. As new firms enter, the supply curve for the product will shift to the right, causing industry output to increase and price to fall. Eventually, the price will fall to the point where each firm in the industry is earning only a normal profit or zero economic profit, and no further new firms will enter.

Question 10

When a firm is referred to as a "price taker",
A) the firm can alter its rate of production and sales without affecting the market price of the product.
B) the firm initially takes price as given and tries to influence it through advertising.
C) the demand curve that the firm faces is perfectly inelastic.
D) the firm can alter the market price as it changes its rate of production.
E) the firm will be willing to sell an infinite quantity at the market price.

Accepted Answer

A price taker is a firm that cannot influence the market price and must accept the prevailing market price, meaning it can change its production without affecting the market price.

Question 11

Consider the following short- run cost curves for a perfectly competitive firm.  FIGURE 9- 1
-Refer to Figure 9- 1. The diagram shows cost curves for a perfectly competitive firm. The short- run shut down price for the firm is
A) P2.
B) P5.
C) P1.
D) P4.
E) P3.

Accepted Answer

The short-run shut down price for a perfectly competitive firm is the price at which the firm's price falls below its minimum average variable cost (AVC). In this diagram, the minimum AVC is at point A, and the corresponding price is P1. Therefore, the firm would shut down in the short run if the price falls below P1.

Question 12

A perfectly competitive firm is currently producing an output level where price is $10.00, average variable cost is $6.00, average total cost is $10.00, and marginal cost is $8.00. In order to maximize profits, this firm should
A) decrease its output.
B) increase the market price.
C) shut down.
D) increase its output.
E) not change its output -- this firm is at its profit- maximizing position.

Accepted Answer

The answer of A perfectly competitive firm is currently producing...

Question 13

In the short run, a profit- maximizing firm will expand output
A) until total revenue equals total cost.
B) as long as marginal revenue is greater than marginal cost.
C) until marginal revenue equals average variable cost.
D) as long as marginal cost is greater than marginal revenue.
E) until marginal cost begins to rise.

Accepted Answer

A profit-maximizing firm will expand output as long as marginal revenue is greater than marginal cost. This is because producing one more unit will add more revenue than cost, resulting in an increase in profit. Therefore, it makes sense for the firm to keep expanding output as long as it remains profitable to do so.

Question 14

Suppose a perfectly competitive firm is producing a level of output for which price equals average total cost, and average total cost is less than marginal cost. In order to maximize its profits, the firm should
A) shut down.
B) not change its output.
C) reduce its output.
D) increase the market price.
E) expand its output.

Accepted Answer

When average total cost is less than marginal cost, the firm is producing beyond the profit-maximizing output level. To maximize profits, the firm should reduce its output until marginal cost equals price.

Question 15

The supply curve for a perfectly competitive industry is the horizontal summation of the individual firms'
A) MC curves above AVC.
B) MC curves above ATC.
C) short- run average cost curves.
D) MC curves above AFC.
E) AVC curves above MC.

Accepted Answer

In a perfectly competitive industry, the supply curve is the horizontal summation of the individual firms' marginal cost (MC) curves above the average variable cost (AVC), as firms will only produce where price covers AVC in the short run.

Question 16

Comparing the short- run and long- run profit- maximizing positions of a perfectly competitive firm, which statement is true?
A) The firm may have unexploited economies of scale in both the short run and the long run.
B) Price will equal marginal cost in the short run, but not necessarily in the long run.
C) Price should equal average cost in the long run, but not necessarily in the short run.
D) The firm will produce at minimum average cost in both the short and long run.
E) Economic profit may exist in the short run and in the long run.

Accepted Answer

In the short run, a perfectly competitive firm will produce at the point where marginal revenue equals marginal cost, but may not be producing at minimum average cost. However, in the long run, firms have the opportunity to adjust all inputs, including plant size, and can enter or exit the industry. In the long run, firms will produce at the minimum of their long-run average cost curve, which means price should equal average cost.

Question 17

Assume the following total cost schedule for a perfectly competitive firm. $$\begin{array}{l}
\begin{array} { | l | l | l | } 
\hline \text { Output } & \text { TVC } & \text { TFC } \
\hline 0 & 0 & 100 \
\hline 1 & 40 & 100 \
\hline 2 & 70 & 100 \
\hline 3 & 120 & 100 \
\hline 4 & 180 & 100 \
\hline 5 & 250 & 100 \
\hline 6 & 330 & 100 \
\hline
\end{array}\
\text { TABLE 9- } 2
\end{array}$$
-Refer to Table 9- 2. At what price would a profit- maximizing firm earn zero economic profits?
A) $40.
B) $70.
C) $145.
D) $220.
E) $430.

Accepted Answer

The answer of Assume the following total cost schedule for...

Question 18

In the long run it is not possible for a perfectly competitive firm to
A) alter its plant size.
B) set the product price.
C) adjust its output.
D) replace its antiquated equipment.
E) adopt new technology.

Accepted Answer

In a perfectly competitive market, the price of the product is determined by the market forces of supply and demand. The individual firm has no control over the price and must accept the market price. Therefore, it is not possible for a perfectly competitive firm to set the product price.

Question 19

Which of the following producers operate in a market structure closely approximated by perfect competition?
A) A Safeway grocery store
B) A Saskatchewan wheat farmer
C) The Bank of Montreal
D) A restaurant in your neighbourhood
E) Air Canada

Accepted Answer

The Saskatchewan wheat farmer operates in a market structure closely approximated by perfect competition as there are numerous small producers, easy entry and exit, and identical products. The other options do not meet the characteristics of perfect competition.

Question 20

The price elasticity of demand faced by an individual wheat farmer would come closest to which following value?
A) 0.00007.
B) 0.7.
C) 1.0.
D) 71.0.
E) 71 000.

Accepted Answer

The answer of The price elasticity of demand faced by...

Quiz 9: Competitive Markets

Consider the following short- run cost curves for a perfectly competitive firm. FIGURE 9- 1 -Refer to Figure 9- 1. The diagram shows cost curves for a perfectly competitive firm. The firm's short- run supply curve starts at output and rises along the marginal cost (MC) curve.

Given the usual assumptions about perfect competition, a perfectly competitive firm

The market demand curve for a perfectly competitive industry is typically

Consider the following short- run cost curves for a perfectly competitive firm. FIGURE 9- 1 -Refer to Figure 9- 1. The diagram shows cost curves for a perfectly competitive firm. If the market price is P3, the profit- maximizing firm in the short run should

For a perfectly competitive firm in long- run profit- maximizing equilibrium,

The diagram below shows the short- run cost curves for 3 perfectly competitive firms in the same industry. FIGURE 9- 6 -Refer to Figure 9- 6. If Firms A, B and C are in the same industry, is this industry in long- run equilibrium?

The short- run supply curve for a perfectly competitive firm is

If firms in a competitive industry are earning positive economic profits, in the long run we expect

When a firm is referred to as a "price taker",

Consider the following short- run cost curves for a perfectly competitive firm. FIGURE 9- 1 -Refer to Figure 9- 1. The diagram shows cost curves for a perfectly competitive firm. The short- run shut down price for the firm is

A perfectly competitive firm is currently producing an output level where price is $10.00, average variable cost is $6.00, average total cost is $10.00, and marginal cost is $8.00. In order to maximize profits, this firm should

In the short run, a profit- maximizing firm will expand output

Suppose a perfectly competitive firm is producing a level of output for which price equals average total cost, and average total cost is less than marginal cost. In order to maximize its profits, the firm should

The supply curve for a perfectly competitive industry is the horizontal summation of the individual firms'

Comparing the short- run and long- run profit- maximizing positions of a perfectly competitive firm, which statement is true?

In the long run it is not possible for a perfectly competitive firm to

Which of the following producers operate in a market structure closely approximated by perfect competition?

The price elasticity of demand faced by an individual wheat farmer would come closest to which following value?