Question 1

Firms in a perfectly competitive industry maximize profits by:

Accepted Answer

Firms in a perfectly competitive industry are price takers, meaning they cannot set prices above or below the market price. To maximize profits, they must set their price equal to the market price and produce at the point where MR=MC. Setting a price higher than the competition (B) or eliminating the competition (A) would require market power, which is not present in a perfectly competitive industry. Setting a price lower than the market price (D) may lead to increased sales but would result in lower profits.

Question 2

Figure: World Market for Maple Syrup  Refer to the figure. If you are one of literally thousands of maple syrup producers and you wanted to increase your maple syrup production from 100 gallons to 110 gallons, what price would you charge?

Accepted Answer

According to the figure, the world market price for maple syrup is $8 per gallon when the production level is at 100 gallons. However, when the production level increases to 110 gallons, the market price drops to $7 per gallon. To sell an extra 10 gallons of maple syrup at the new market price of $7, the producer should charge a price that would allow them to earn the same revenue per gallon as before. The original revenue per gallon at a price of $8 was $8/gallon. To maintain this revenue per gallon with the new market price of $7, the producer should charge $96 per gallon ($7 market price + $89 lost revenue from the original price of $8 = $96). Therefore, the best choice would be C) $96.

Question 3

If a single supplier produces a good with many good substitutes, then:

Accepted Answer

When there are many good substitutes available, consumers have the option to switch to other substitutes if the price of one good increases. This means that the single supplier will not have much control over the market price as they cannot increase the price too much without driving consumers to switch to other substitutes.

Question 4

A perfectly competitive industry exists under which of the following conditions?
I. The product sold is similar across firms.
II. There are many sellers, each small relative to the total market.
III. There are many sellers, each with total assets less than $2 million.
IV. The threat of competition exists from potential sellers that have not yet entered the market.

Accepted Answer

A perfectly competitive industry exists when the product sold is similar across firms, there are many sellers each small relative to the total market, and the threat of competition exists from potential sellers that have not yet entered the market. The third statement about total assets is not a determining factor for a perfectly competitive industry.

Question 5

In Texas, what does the term nodding donkey mean?

Accepted Answer

In Texas, the term "nodding donkey" usually refers to an oil pump due to its up and down movement resembling the nodding motion of a donkey's head.

Question 6

In a highly competitive industry, demand for a firm's product is:

Accepted Answer

In a highly competitive industry, there are many substitutes for the product, which means that consumers can easily switch to competitors if one firm raises their prices even slightly. Therefore, demand for the firm's product is highly responsive to changes in price, resulting in a perfectly elastic demand curve.

Question 7

When there are many buyers and sellers of a good and the product sold is identical across firms,:

Accepted Answer

In a perfectly competitive market, there are many buyers and sellers of a standardized product, so each firm has no market power and must accept the market price. As a result, the demand curve for each firm's output is perfectly elastic, meaning that the firm can sell as much as it wants at the market price, but cannot charge a higher price without losing all its customers. The industry demand curve is not perfectly elastic, but rather downward-sloping, reflecting the fact that as the total quantity demanded increases, the market price decreases.

Question 8

When there are many buyers and sellers of a good and the product sold is identical across firms,:

Accepted Answer

When there are many buyers and sellers of a good and the product sold is identical across firms, the industry demand curve is relatively elastic, meaning that a change in the market price will have a significant impact on the quantity demanded by consumers. Each firm in the industry must take the market price as a given and cannot affect it, meaning that the demand curve for each firm's output is perfectly elastic.

Question 9

The short run is defined as:

Accepted Answer

The short run is defined as the period in which at least one factor of production is fixed, and firms cannot enter or exit the market.

Question 10

When competitive firms do not have influence over the price of their product, all of the following are true EXCEPT which condition?

Accepted Answer

When firms do not have influence over the price of their product, it means that the market is perfectly competitive. Under such conditions, all firms produce a homogenous product and there are many potential sellers and buyers. Option B states that the product appeals more strongly to some consumers than others, which is not true in a perfectly competitive market where all consumers have the same preferences for the product. Hence, option B is the exception.

Question 11

Firms in competitive industries:
I. can only charge a price equal to the market price.
II. cannot charge any more than the market price.
III. will earn less profit if they charge less than the market price.

Accepted Answer

In competitive industries, firms are price takers, meaning they must charge the market price (I and II). Charging less than the market price would reduce profits (III).

Question 12

A market is considered perfectly competitive if:
I. there is a lot of product differentiation among sellers.
II. there are many sellers, each small relative to the total market.
III. the product sold is similar across sellers.
IV. there are only a few buyers.

Accepted Answer

Perfectly competitive markets have many small sellers, each selling a similar product. There is no product differentiation and multiple buyers. Therefore, options I and IV are incorrect, and option III is correct. Option II states that there are many small sellers, which is correct and necessary for a perfectly competitive market. Therefore, the correct answer is C, II and III only.

Question 13

In the small town of Wellsville, there is only one grocery store. Given that everyone needs food, we would expect that this grocery store:

Accepted Answer

Since everyone in the town needs food, the demand for groceries is relatively inelastic. However, the presence of only one grocery store does not necessarily mean it has a monopoly. The store may still face competition from nearby towns or online retailers. Therefore, the grocery store is likely to price competitively to attract customers and retain their loyalty.

Question 14

An industry is said to be perfectly competitive when:

Accepted Answer

Perfectly competitive industries are characterized by a large number of small firms, homogeneous products, ease of entry/exit, perfect information, and no market power. In such a market structure, each firm is a price taker, meaning that it has no influence over the price of its product and must accept the prevailing market price. Therefore, option B is the correct answer. Options A, C, and D may be present in a perfectly competitive industry, but they are not defining characteristics.

Question 15

To maximize profits, a firm in a highly competitive industry should set its price:

Accepted Answer

In a highly competitive industry, setting the price higher than the market price will result in lower demand and loss of market share. On the other hand, setting the price lower than the market price may result in a higher demand but lower profit margin. Therefore, setting the price at the market price will maximize profits by achieving a balance between demand and profit margin.

Question 16

If a single supplier produces such a small portion of the total market output that changes in its production have no impact on the overall market price,:

Accepted Answer

If changes in the production of a single supplier have no impact on the overall market price, it indicates that the demand for that firm's output is perfectly elastic. This means that consumers are extremely sensitive to changes in price and would likely switch to another supplier if the firm increased its prices even slightly. As a result, the firm has very little market power and cannot affect the market price.

Question 17

Which of the following best illustrates a product sold in a perfectly competitive market?

Accepted Answer

Eggs are a product sold in a perfectly competitive market because there are numerous small sellers who don't have any market power to influence the price. The product itself is homogeneous, meaning one carton of eggs from one seller is the same as another carton of eggs from a different seller. In addition, it's easy for new sellers to enter the market, making it difficult for any one seller to control the market price.

Question 18

Which of the following is NOT a key decision that a firm must make?

Accepted Answer

Deciding where to produce is typically a logistical or operational decision, not a key strategic decision like pricing, production quantity, or market entry/exit.

Question 19

At a ski resort located over one hour from the nearest large town, there is only one grocery store and it charges prices more than 200% percent above the typical retail prices. In the long run, we would expect that:

Accepted Answer

In the long run, high prices and profits attract new entrants to the market. Another store may open to offer lower prices, increasing competition and driving prices down.

Question 20

Economists call the time after all exit or entry has occurred:

Accepted Answer

The long run is the time period after all exit or entry has occurred. This is the period when firms can adjust all their inputs, including capital and labor, in response to changes in market conditions. In contrast, the short run is a period when at least one input (usually capital) is fixed, while the medium run refers to a period when all inputs can be adjusted, but not as freely as in the long run. The marginal run is not a commonly used term in economics.

Quiz 11: Costs and Profit Maximization Under Competition

Firms in a perfectly competitive industry maximize profits by:

Figure: World Market for Maple Syrup Refer to the figure. If you are one of literally thousands of maple syrup producers and you wanted to increase your maple syrup production from 100 gallons to 110 gallons, what price would you charge?

If a single supplier produces a good with many good substitutes, then:

In Texas, what does the term nodding donkey mean?

In a highly competitive industry, demand for a firm's product is:

When there are many buyers and sellers of a good and the product sold is identical across firms,:

When there are many buyers and sellers of a good and the product sold is identical across firms,:

The short run is defined as:

When competitive firms do not have influence over the price of their product, all of the following are true EXCEPT which condition?

Firms in competitive industries: I. can only charge a price equal to the market price. II. cannot charge any more than the market price. III. will earn less profit if they charge less than the market price.

A market is considered perfectly competitive if: I. there is a lot of product differentiation among sellers. II. there are many sellers, each small relative to the total market. III. the product sold is similar across sellers. IV. there are only a few buyers.

In the small town of Wellsville, there is only one grocery store. Given that everyone needs food, we would expect that this grocery store:

An industry is said to be perfectly competitive when:

To maximize profits, a firm in a highly competitive industry should set its price:

If a single supplier produces such a small portion of the total market output that changes in its production have no impact on the overall market price,:

Which of the following best illustrates a product sold in a perfectly competitive market?

Which of the following is NOT a key decision that a firm must make?

At a ski resort located over one hour from the nearest large town, there is only one grocery store and it charges prices more than 200% percent above the typical retail prices. In the long run, we would expect that:

Economists call the time after all exit or entry has occurred: