Question 1

Which of the following is a characteristic of perfect competition?

Accepted Answer

Perfect competition is characterized by many buyers and sellers, a homogeneous product, and perfect information. High barriers to entry and exit would indicate a more monopolistic market structure. The option A and B are contradictory to the characteristic of perfect competition. The option C refers to a differentiated market structure. Therefore, the only option that is consistent with perfect competition is D.

Question 2

A decreasing-cost industry is characterized by

Accepted Answer

In a decreasing-cost industry, as industry output increases, the cost of producing each unit decreases. This is because expanding production may lead to economies of scale, which in turn lead to lower costs. As a result, there is a downward-sloping long-run supply curve, which indicates that firms are willing to produce and sell more output at lower prices.

Question 3

If an industry advertises, then it

Accepted Answer

Advertising may be used by firms in both perfectly competitive and imperfectly competitive industries. In a perfectly competitive industry, advertising can be used to differentiate products or inform consumers about prices or availability. In an imperfectly competitive industry, advertising can be used to increase market power and create brand recognition. Therefore, advertising alone cannot determine whether an industry is perfectly competitive or not.

Question 4

In perfect competition, the firm's marginal revenue curve is

Accepted Answer

In perfect competition, the firm is a price taker and faces a horizontal demand curve, meaning that its marginal revenue curve is also horizontal and the same as its demand curve. This is because the firm can sell as much output as it wants at the market price, so the additional revenue gained from selling one more unit is equal to the market price.

Question 5

The price charged by a perfectly competitive firm is determined by

Accepted Answer

In a perfectly competitive market, the price charged by a firm is determined by market demand and market supply together. Each firm is a price-taker, meaning they have no control over the price and must accept the market price as it is. Therefore, the interaction between market demand and market supply determines the equilibrium price, which all firms in the market must accept.

Question 6

In the theory of perfect competition, the market demand curve is __________ and the firm faces a demand curve that is __________.

Accepted Answer

In a perfectly competitive market, the market demand curve is downward sloping, reflecting the overall market's decreasing willingness to pay as quantity increases. However, an individual firm faces a perfectly elastic demand curve at the market price, meaning it can sell any quantity at the prevailing market price but cannot influence the price itself.

Question 7

Which of the following is the best example of a homogeneous good?

Accepted Answer

Wheat is a commodity that is identical in quality regardless of where it is grown or sold, making it a prime example of a homogeneous good. New cars, ice cream, and soft drinks are not homogeneous goods as the quality and features can vary based on the brand and specific product.

Question 8

At the quantity of output for which total revenue equals total cost,

Accepted Answer

When total revenue equals total cost, the economic profit is zero. This is because all costs of production are covered by the revenue generated and there is no additional profit beyond that.

Question 9

In short-run equilibrium, the perfectly competitive firm _________________ economic profits.

Accepted Answer

In the short-run, a perfectly competitive firm can experience positive, negative, or zero economic profits depending on the market price relative to its average total cost.

Question 10

The perfectly competitive firm will shut down in the short run if price is

Accepted Answer

In the short run, a perfectly competitive firm will shut down if the price is less than the average variable cost. This is because the firm is not able to cover its variable costs, and continuing to operate would only result in further losses. If the price is greater than the average variable cost but less than the average total cost, the firm will continue to operate in the short run but will not be able to make a profit. Only if the price is equal to or greater than the average total cost will the firm be able to make a profit in the short run. However, in the long run, firms that cannot make a profit will exit the market, resulting in a higher market price that may enable remaining firms to make a profit.

Question 11

Which of the assumptions below assures us that economic profit will be zero in long-run equilibrium for perfectly competitive firms?

Accepted Answer

Easy entry and exit in the market ensures that there are no barriers preventing new firms from entering the market or existing firms from leaving the market. This competition keeps prices in check and ensures that economic profits are competed away to zero in long-run equilibrium.

Question 12

In the theory of perfect competition, the assumption of easy entry into and exit from the market implies

Accepted Answer

In perfect competition, new firms can enter the market easily, and existing firms can exit the market without difficulty. This implies that, in the long run, firms cannot earn economic profits above their opportunity cost. If firms were earning positive economic profits in the short run, new firms would enter the market, increasing supply and driving down the market price until economic profits for all firms are zero. Similarly, if firms were making losses in the short run, some firms would exit the market, reducing supply and driving up the market price until economic profits for all firms are zero. Therefore, in the long run equilibrium, firms in perfect competition earn zero economic profits.

Question 13

A perfectly competitive firm faces a __________ demand curve.

Accepted Answer

A perfectly competitive firm is a price taker, meaning it has no control over the price of the product it sells. Therefore, the demand curve it faces is perfectly elastic, as it can sell as much as it wants at the market price.

Question 14

If a firm is a price taker, its demand curve is

Accepted Answer

If a firm is a price taker, it has no control over the price of its product and must accept the market price. Therefore, the firm's demand curve is perfectly elastic, which means that any increase in price would result in zero sales, and any decrease in price would result in an infinite amount of sales. This is because the firm is not able to influence the market price, and must accept the price as given.

Question 15

In long-run equilibrium, the perfectly competitive firm earns __________ economic profits.

Accepted Answer

In the long-run equilibrium of a perfectly competitive market, firms earn zero economic profits because of the process of entry and exit. If firms are earning positive economic profits, then new firms will enter the market, increasing the supply and lowering prices until profits reach zero. If firms are earning negative economic profits, then existing firms will exit the market, reducing supply and raising prices until profits reach zero. Thus, in the long-run equilibrium, firms earn zero economic profits.

Question 16

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

Accepted Answer

Perfect competition requires sellers to produce and sell a homogeneous product, not a heterogeneous one.

Question 17

In the theory of perfect competition, the assumptions of many buyers and sellers, the production of a homogeneous product, and the possession of all relevant information by buyers and sellers imply that the perfectly competitive firm

Accepted Answer

In perfect competition, there are many buyers and sellers, and the product produced is homogeneous. The possession of all relevant information by buyers and sellers implies that buyers are fully aware of the prices charged by all sellers. Hence, the perfectly competitive firm cannot set the price it wishes, as it has no control over the market price, which is determined by the interaction of demand and supply. Furthermore, the presence of many buyers and sellers implies that no single buyer or seller can affect the market price. Therefore, the demand curve facing the perfectly competitive firm is perfectly elastic, as any increase in the price charged by the firm will cause it to lose all its customers to other sellers in the market, which charge a lower price.

Question 18

In a perfectly competitive industry, there is a motive for __________ to advertise in order to induce a rightward shift of the demand curve.

Accepted Answer

The answer of In a perfectly competitive industry, there is...

Question 19

In the long run, a firm earns zero economic profit, given the condition that

Accepted Answer

If the firm is earning zero economic profit, it means that its revenue (P) is equal to its total costs (ATC). This is because if P was greater than ATC, the firm would be earning a positive economic profit, and if P was less than ATC, the firm would be incurring a loss. Therefore, the best choice is C, where P = ATC.

Question 20

Marginal revenue is defined as

Accepted Answer

Marginal revenue is the additional revenue generated by selling one more unit of output. It is calculated by subtracting the total revenue of the previous level from the total revenue of the current level. Therefore, it is the change in total revenue caused by selling one additional unit of output.

Quiz 9: Perfect Competition