Question 1

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

If the industry were in long-run equilibrium, all firms would be earning zero economic profits. However, in this diagram, all three firms are earning positive economic profits at the intersection of their respective MC and ATC curves. Therefore, the industry is not in long-run equilibrium.

Question 2

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, firms are price takers and cannot set the price they charge. Instead, they sell at the market price and can sell as much of their product as they wish at that price. They also compete actively with other sellers in the industry. However, they cannot affect the market conditions in a significant way and may not be aware of their competitors' costs.

Question 3

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, the firm produces the quantity of output where price equals minimum long-run average total cost (LRATC). This is because in the long run, firms can enter or exit the market and adjust their plant sizes, resulting in LRATC being the lowest possible average cost of production. Therefore, the firm's price equals LRATC, which also equals minimum short-run average total cost (SRATC) since the firm adjusts its plant size to minimize its costs in the long run. Thus, E is the correct choice.

Question 4

A firm in a perfectly competitive industry
A) will maximize its profit by producing where P = ATC.
B) will not produce at all if P < the minimum of AVC.
C) can improve its competitive position and sell more output by advertising its product.
D) will not produce at all if P < ATC.
E) will maximize its profit by producing where P = AVC.

Accepted Answer

The answer of A firm in a perfectly competitive industry
A)...

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 for...

Question 6

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...

Question 7

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

The answer of The supply curve for a perfectly competitive...

Question 8

In a perfectly competitive market, smaller-than-efficient sized firms can exist in
A) both the short run and the long run, but they must reduce plant size to remain competitive.
B) both the short and long run.
C) the long run, and they will make positive economic profits.
D) the short run.
E) the long run.

Accepted Answer

In a perfectly competitive market, firms must produce at the lowest average total cost to remain competitive. If a smaller firm tries to produce at the same level as larger firms, they will have higher average total costs and will not be able to compete in the long run. However, in the short run, a smaller firm may be able to make profits due to market fluctuations or temporary price increases. Therefore, smaller-than-efficient sized firms can exist in the short run, but not in the long run unless they reduce their plant size to become more efficient.

Question 9

Consider the following short-run cost curves for a perfectly competitive firm.  FIGURE 9-1
-Refer to Figure 9-1. curve.
A) D
B) E
C) F
D) G
E) H

Accepted Answer

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

Question 10

In the short run, the profit-maximizing behaviour for a price-taking firm requires it to operate where
A) P = MC, given that P is greater than or equal to AVC.
B) P = TR = TC.
C) P > MR > MC.
D) P = MC, given that P is greater than or equal to ATC.
E) AVC = AR.

Accepted Answer

In the short run, a price-taking firm will maximize profits by producing where marginal cost (MC) equals marginal revenue (MR) and the price (P) is greater than or equal to average variable cost (AVC). This is because if the firm produces at a quantity where P is less than AVC, it will not even cover its variable costs and will have to shut down. Therefore, option A which states P = MC, given that P is greater than or equal to AVC, is the correct choice.

Question 11

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

A Saskatchewan wheat farmer operates in a market structure closely approximated by perfect competition as there are numerous small producers in the market, the products are homogeneous, and there are no barriers to entry or exit.

Question 12

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 continue to produce as long as its marginal revenue is greater than or equal to its marginal cost. Therefore, the firm's short-run supply curve is equal to its marginal-cost curve above the average-variable-cost curve, because the firm will only produce as long as it can cover its variable costs.

Question 13

Which of the following statements is one of the assumptions of the theory of perfect competition?
A) Firms produce a wide variety of versions of the product.
B) Firms are price setters.
C) Consumers know the prices charged by each firm.
D) A firm's entry to the market is regulated by the federal Competition Bureau.
E) Firms compete with each other by varying their price.

Accepted Answer

The answer of Which of the following statements is one...

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

The answer of Suppose a perfectly competitive firm is producing...

Question 15

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 P2, the profit-maximizing firm in the short run should
A) produce output B.
B) produce output C.
C) produce output D.
D) produce output E.
E) shut down, as it is incurring losses.

Accepted Answer

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

Question 16

Suppose a paper mill in Quebec is shut down by its owner, even though the plant and equipment are in excellent shape and the paper is of top quality. What could explain this?
A) The price the firm is receiving for the paper is less than its average variable cost.
B) The owner is minimizing its production costs.
C) The price the firm is receiving is less than the average total cost.
D) The price the firm is receiving for the paper is greater than its marginal cost.
E) The paper mill must not have been operating at its profit-maximizing level of output.

Accepted Answer

The answer of Suppose a paper mill in Quebec is...

Question 17

Any firm's average revenue is defined as
A) the total amount received by the seller from the sale of a product.
B) the change in total revenue resulting from the sale of an additional unit of the product.
C) price times quantity of the product sold.
D) the change in price resulting from the sale of an additional unit of the product.
E) total revenue divided by the number of units sold.

Accepted Answer

The answer of Any firm's average revenue is defined as
A)...

Question 18

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

The market demand curve for a perfectly competitive industry is downward sloping. This is because as the price of the product decreases, consumers demand more of it, and as the price increases, they demand less.

Question 19

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

In order to maximize profits, a perfectly competitive firm should produce where marginal cost (MC) equals market price (P), which in this case is $8.00. At the current output level, the firm's MC is less than the market price, indicating that the firm should increase its output in order to earn higher profits. Therefore, the best choice is to increase its output.

Question 20

Consider the following short-run cost curves for a perfectly competitive firm.  FIGURE 9-2
-Refer to Figure 9-2.
A) 100 units.
B) 200 units.
C) 300 units.
D) 400 units.
E) 500 units.

Accepted Answer

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

Quiz 9: Competitive Markets

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?

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

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

A firm in a perfectly competitive industry

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

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

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

In a perfectly competitive market, smaller-than-efficient sized firms can exist in

Consider the following short-run cost curves for a perfectly competitive firm. FIGURE 9-1 -Refer to Figure 9-1. curve.

In the short run, the profit-maximizing behaviour for a price-taking firm requires it to operate where

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

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

Which of the following statements is one of the assumptions of the theory of perfect competition?

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

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 P2, the profit-maximizing firm in the short run should

Suppose a paper mill in Quebec is shut down by its owner, even though the plant and equipment are in excellent shape and the paper is of top quality. What could explain this?

Any firm's average revenue is defined as

The market demand curve for a perfectly competitive industry is typically

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

Consider the following short-run cost curves for a perfectly competitive firm. FIGURE 9-2 -Refer to Figure 9-2.