Question 1

A perfectly competitive firm is a price maker and a monopolist is a price taker.

Accepted Answer

In a perfectly competitive market, firms are price takers because they have no control over the market price, while a monopolist is a price maker because it has significant control over the price of its product due to lack of competition.

Question 2

A perfectly competitive market is characterized by insignificant barriers to entry or exit, many sellers and buyers, a standardized product produced by firms in the market, and perfect information among sellers and buyers.

Accepted Answer

In a perfectly competitive market, there are indeed low barriers to entry and exit, a large number of sellers and buyers, a homogeneous product, and perfect information, allowing for efficient allocation of resources.

Question 3

Agricultural and fishing industries provide approximations of perfect competition.

Accepted Answer

Agricultural and fishing industries are often cited as examples of perfect competition due to the large number of small producers, homogeneous products, and relatively free entry and exit from the market.

Question 4

Marginal revenue represents the increase in total revenue resulting from the sale of another unit of output.

Accepted Answer

Marginal revenue is defined as the additional revenue that a firm receives from selling one more unit of a good or service. It is calculated by dividing the change in total revenue by the change in quantity sold.

Question 5

The graph of the total revenue schedule of a perfectly competitive firm is a downward-sloping curve because the firm sells additional units of output at a falling price.

Accepted Answer

In a perfectly competitive market, the firm is a price taker, meaning it sells each unit of output at the market price, which does not change with the quantity of output the firm sells. Therefore, the total revenue schedule of a perfectly competitive firm is a straight line originating from the origin, indicating a constant price per unit sold.

Question 6

A perfectly competitive firm maximizes profit per unit by producing and selling that output where marginal revenue equals marginal cost.

Accepted Answer

A perfectly competitive firm maximizes total profit, not profit per unit, by producing where marginal revenue equals marginal cost.

Question 7

If price falls below average total cost, a firm will always temporarily shut down until the price rises.

Accepted Answer

A firm will continue to operate if the price covers the average variable cost, even if it's below the average total cost, to cover some of its fixed costs. Shutting down is considered if the price falls below the average variable cost.

Question 8

If total revenue exceeds total variable cost, a firm should continue to produce in the short run because all of its variable costs and some or all of its fixed costs can be paid out of revenue.

Accepted Answer

When total revenue exceeds total variable costs, it means the firm is covering all its variable costs and has some revenue left over to contribute towards its fixed costs, making it financially sensible to continue production in the short run.

Question 9

The short-run supply curve of a perfectly competitive firm is the segment of its marginal cost curve that lies above the average total cost curve.

Accepted Answer

The short-run supply curve of a perfectly competitive firm is the segment of its marginal cost curve that lies above the average variable cost curve, not the average total cost curve.

Question 10

Because of easy entry into and exit from a market, perfectly competitive firms operate at the lowest possible cost, charge the lowest price that they can without going out of business, and earn no economic profit in the long run.

Accepted Answer

In perfectly competitive markets, the presence of many firms, identical products, and ease of entry and exit ensures that firms operate efficiently at the lowest cost. They charge a price equal to marginal costs, leading to zero economic profit in the long run as any potential profit attracts new entrants, increasing supply and driving prices down to the level of costs.

Question 11

If economic profits are being earned in a perfectly competitive market, new firms will enter the market in the long run. Therefore, the market supply curve will shift leftward and the market price will increase.

Accepted Answer

In a perfectly competitive market, if economic profits are being earned, new firms will enter the market, increasing the market supply, which shifts the supply curve rightward, leading to a decrease in market price.

Question 12

If economic losses are being earned in a perfectly competitive industry, some firms will exit the market in the long run. Therefore, the market demand curve will shift rightward and the market price will increase.

Accepted Answer

In a perfectly competitive market, if firms exit due to economic losses, the market supply decreases, leading to an increase in price. The market demand curve does not shift; instead, the change in equilibrium is due to a shift in the supply curve.

Question 13

A monopoly is a market structure characterized by a single supplier of a good or service for which there are many substitutes.

Accepted Answer

A monopoly is characterized by a single supplier of a good or service for which there are no close substitutes, not many.

Question 14

The development of e-mail and fax machines has reinforced the U.S. Postal Service's monopoly of first-class letter mail.

Accepted Answer

The development of e-mail and fax machines has actually decreased the volume of first-class letter mail, challenging the U.S. Postal Service's traditional role and revenue from this service.

Question 15

Barriers to entry include patents, copyrights, control over essential inputs, and economies of scale.

Accepted Answer

Barriers to entry are factors that make it difficult for new firms to enter a market. Patents and copyrights protect intellectual property, preventing others from using it without permission. Control over essential inputs means a company has exclusive access to materials necessary for production, limiting competition. Economies of scale refer to the cost advantages that enterprises obtain due to their scale of operation, with cost per unit of output decreasing with increasing scale, making it harder for smaller competitors to compete.

Question 16

If government regulators broke up a natural monopoly into several competing firms, average costs of production would decrease.

Accepted Answer

Breaking up a natural monopoly, which typically enjoys economies of scale, into several smaller firms would likely increase the average costs of production because these smaller firms would not be able to achieve the same efficiencies and economies of scale as the original monopoly.

Question 17

DeBeers, a producer of diamonds, is an example of a perfectly competitive firm.

Accepted Answer

DeBeers is more accurately described as a monopolistic or oligopolistic firm because it has historically controlled a significant portion of the diamond market, allowing it to influence prices and production levels, which is contrary to the characteristics of a perfectly competitive market.

Question 18

A monopoly will always charge the highest price that consumers will bear and thus realize an economic profit.

Accepted Answer

While a monopoly has the power to set prices higher than in competitive markets, it does not always charge the highest possible price. The optimal price is determined by the demand curve, aiming to maximize profits, which involves balancing higher prices against the quantity of sales. Charging the highest price consumers will bear could reduce the quantity sold too much, lowering profits.

Question 19

Similar to a perfectly competitive firm, if a monopolist can charge a price that exceeds average variable cost, it will minimize short-run losses by producing where marginal revenue equals marginal cost rather than shutting down.

Accepted Answer

Both a monopolist and a perfectly competitive firm will continue to produce in the short run as long as the price (or marginal revenue for the monopolist) is above the average variable cost, aiming to produce where marginal revenue equals marginal cost to minimize losses or maximize profits.

Question 20

Low barriers to entry provide a monopoly with the opportunity to realize continuing economic profits in the long run.

Accepted Answer

Low barriers to entry allow new competitors to enter the market easily, increasing competition and making it difficult for a monopoly to maintain its status and realize continuing economic profits in the long run.

Quiz 5: Competition and Monopoly: Virtues and Vices