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Homework answers / question archive /   University of Tennessee, Chattanooga - ECON 1020 Ch 8 Perfect Competition Practice Module       1)Which of the following is not a characteristic of a perfectly competitive market structure? A)     There are no restrictions to entry by new firms

  University of Tennessee, Chattanooga - ECON 1020 Ch 8 Perfect Competition Practice Module       1)Which of the following is not a characteristic of a perfectly competitive market structure? A)     There are no restrictions to entry by new firms

Business

 

University of Tennessee, Chattanooga - ECON 1020

Ch 8 Perfect Competition Practice Module

 

 

 

1)Which of the following is not a characteristic of a perfectly competitive market structure?


A)
 

 

There are no restrictions to entry by new firms.

 

B)
 

 

There are restrictions on exit of firms.

 

C)
 

 

All firms sell identical products.

 

D)
 

 

There are a very large number of firms that are small compared to the market.

 

 

 

2)Perfect competition is characterized by all of the following except


A)
 

 

heavy advertising by individual sellers.

 

B)
 

 

a horizontal demand curve for individual sellers.

 

C)
 

 

homogeneous products.

 

D)
 

 

sellers are price takers.

 

 

 

3)A very large number of small sellers who sell identical products imply


A)
 

 

a downward sloping demand for each seller's product.

 

B)
 

 

a multitude of vastly different selling prices.

 

C)
 

 

chaos in the market.

 

D)
 

 

the inability of one seller to influence price.

 

 

 

4)Which of the following is the best example of a perfectly competitive industry?


A)
 

 

airplane production
 

 

B)
 

 

steel production

 

C)
 

 

wheat production
 

 

D)
 

 

electricity production

 

 

 

5)The price of a seller's product in perfect competition is determined by


A)
 

 

market demand and market supply.
 

 

B)
 

 

a few of the sellers.

 

C)
 

 

the individual seller.
 

 

D)
 

 

the individual demander.

 

 

 

6)Both individual buyers and sellers in perfect competition


A)
 

 

can influence the market price by joining with a few of their competitors.

 

B)
 

 

have the market price dictated to them by government.

 

C)
 

 

have to take the market price as a given.

 

D)
 

 

can influence the market price by their own individual actions.

 

 

 

7)Suppose the equilibrium price in a perfectly competitive industry is $15 and a firm in the industry charges $21. Which of the following will happen?


A)
 

 

The firm's profits will increase.

 

B)
 

 

The firm's revenue will increase.

 

C)
 

 

The firm will sell more output than its competitors.

 

D)
 

 

The firm will not sell any output.

 

 

 

8)The demand curve for each seller's product in perfect competition is horizontal at the market price because


A)
 

 

each seller is too small to affect market price.

 

B)
 

 

all the demanders get together and set the price.

 

C)
 

 

the price is set by the government.

 

D)
 

 

all the sellers get together and set the price.

 

 

 

 

 

 

 

9)An individual seller in perfect competition will not sell at a price lower than the market price because


A)
 

 

demand for the product will exceed supply.

 

B)
 

 

demand is perfectly inelastic.

 

C)
 

 

the seller would start a price war.

 

D)
 

 

the seller can sell any quantity she wants at the prevailing market price.

 

 

 

10)Jason, a high-school student, mows lawns for families in his neighborhood. The going rate is $12 for each lawn-mowing service. Jason would like to charge $20 because he believes he has more experience mowing lawns than the many other teenagers who also offer the same service. If the market for lawn mowing services is perfectly competitive, what would happen if Jason raised his price?


A)
 

 

He would lose some but not all his customers.

 

B)
 

 

If Jason raises his price, then all others supplying the same service will also raise their prices.

 

C)
 

 

If Jason raises his price he would lose all his customers.

 

D)
 

 

Initially, his customers might complain but over time they will come to accept the new rate.

 

 

 

11)The demand curve for an individual seller's product in perfect competition is


A)
 

 

vertical.
 

 

B)
 

 

the same as market demand.

 

C)
 

 

downward sloping. 
 

 

D)
 

 

horizontal.

 

 

 

12)In perfect competition


A)
 

 

the market demand curve is perfectly elastic while demand for an individual seller's product is perfectly inelastic.

 

B)
 

 

the market demand curve is downward sloping while demand for an individual seller's product is perfectly elastic.

 

C)
 

 

 the market demand curve and the individual's demand are identical.

 

D)
 

 

the market demand curve is perfectly inelastic while demand for an individual seller's product is perfectly elastic.

 

 

 

13)If the market price is $25 in a perfectly competitive market, the marginal revenue from selling the fifth unit is


A)
 

 

$5.
 

 

B)
 

 

$12.50.
 

 

C)
 

 

$25.
 

 

D)
 

 

$125.

 

 

 

Figure 11-1

 

 

 

 

 

14)
 

 

Refer to Figure 11-1. If the firm is producing 700 units,

 

A)
 

 

 it is making a loss.
 

 

B)
 

 

it should cut back its output to maximize profit.

 

C)
 

 

it is making a profit.
 

 

D)
 

 

it should increase its output to maximize profit.

 

 

 

15)
 

 

Refer to Figure 11-1. If the firm is producing 200 units,

 

A)
 

 

it should increase its output to maximize profit.
 

 

B)
 

 

it should cut back its output to maximize profit.

 

C)
 

 

it breaks even.
 

 

D)
 

 

 it is making a loss.

 

 

 

16)
 

 

If, for a perfectly competitive firm, price exceeds the marginal cost of production, the firm should

 

A)
 

 

lower the price.

 

B)
 

 

keep output constant and enjoy the above normal profit.

 

C)
 

 

increase its output.

 

D)
 

 

reduce its output.

 

 

 

17)
 

 

Assume that price is greater than average variable cost. If a perfectly competitive seller is producing at an output where price is $11 and the marginal cost is $14.54, then to maximize profits the firm should

 

A)
 

 

produce a larger level of output.

 

B)
 

 

produce a smaller level of output.

 

C)
 

 

continue producing at the current output.

 

D)
 

 

There is not enough information given to answer the question.

 

 

 

18)
 

 

If a perfectly competitive firm's price is less than its average total cost but greater than its average variable cost, the firm

 

A)
 

 

is incurring a loss.
 

 

B)
 

 

is earning a profit.
 

 

C)
 

 

is breaking even.
 

 

D)
 

 

should shut down.

 

 

 

Figure 11-4

 

 

 

Figure 11-4 shows the cost and demand curves for a profit-maximizing firm in a perfectly competitive market.

 

 

19)
 

 

Refer to Figure 11-4. If the market price is $30, the firm's profit-maximizing output level is

 

A)
 

 

0.
 

 

B)
 

 

130.
 

 

C)
 

 

180.
 

 

D)
 

 

240.

 

 

 

20)
 

 

Refer to Figure 11-4. If the market price is $30, should the firm represented in the diagram continue to stay in business?

 

A)
 

 

No, it should shut down because it cannot cover its variable cost.

 

B)
 

 

Yes, because it is covering part of its fixed cost.

 

C)
 

 

No, it should shut down because it is making a loss.

 

D)
 

 

Yes, because it is making a profit.

 

 

 

 

 

Figure 11-5

 

 

 

 

Figure 11-5 shows cost and demand curves facing a typical firm in a constant-cost, perfectly competitive industry.

 

 

21)
 

 

Refer to Figure 11-5. If the market price is $20, what is the firm's profit-maximizing output?

 

A)
 

 

750 units
 

 

B)
 

 

1,100 units
 

 

C)
 

 

1,350 units
 

 

D)
 

 

1,800 units

 

 

 

22)
 

 

If, for a given output level, a perfectly competitive firm's price is less than its average variable cost, the firm

 

A)
 

 

should increase output.
 

 

B)
 

 

should increase price.

 

C)
 

 

should shut down.
 

 

D)
 

 

is earning a profit.

 

 

 

23)When a perfectly competitive firm finds that its market price is below its minimum average variable cost, it will sell


A)
 

 

nothing at all; the firm shuts down.

 

B)
 

 

the output where average total cost equals price.

 

C)
 

 

the output where marginal revenue equals marginal cost.

 

D)
 

 

any positive output the entrepreneur decides upon because all of it can be sold.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Figure 11-6

 

 

 

 

Figure 11-6 shows cost and demand curves facing a profit-maximizing, perfectly competitive firm.

 

 

 

24)
 

 

Refer to Figure 11-6. At price P1, the firm would produce

 

A)
 

 

Q1 units 
 

 

B)
 

 

Q3 units.
 

 

C)
 

 

Q5 units.
 

 

D)
 

 

zero units.

 

 

 

25)
 

 

Refer to Figure 11-6. At price P2, the firm would produce

 

A)
 

 

Q2 units.
 

 

B)
 

 

Q3 units.
 

 

C)
 

 

Q4 units.
 

 

D)
 

 

zero units.

 

 

 

26)
 

 

Refer to Figure 11-6. At price P2, the firm would

 

A)
 

 

lose an amount more than fixed cost.
 

 

B)
 

 

lose an amount less than fixed cost.

 

C)
 

 

break even.
 

 

D)
 

 

lose an amount equal to its fixed cost.

 

 

 

27)
 

 

Refer to Figure 11-6. At price P3, the firm would produce

 

A)
 

 

Q2 units 
 

 

B)
 

 

Q3 units.
 

 

C)
 

 

Q4 units.
 

 

D)
 

 

Q5 units.

 

 

 

28)
 

 

Refer to Figure 11-6. At price P3, the firm would

 

A)
 

 

lose an amount equal to its fixed cost.
 

 

B)
 

 

break even.

 

C)
 

 

lose an amount less than fixed cost.
 

 

D)
 

 

lose an amount more than fixed cost.

 

 

 

29)
 

 

Refer to Figure 11-6. At price P4, the firm would produce

 

A)
 

 

Q3 units.
 

 

B)
 

 

Q4 units.
 

 

C)
 

 

Q5 units.
 

 

D)
 

 

Q6 units.

 

 

 

30)
 

 

Refer to Figure 11-6. At price P4, the firm would

 

A)
 

 

make a profit.
 

 

B)
 

 

lose an amount less than fixed cost.

 

C)
 

 

lose an amount equal to its fixed cost.
 

 

D)
 

 

make a normal profit.

 

 

 

31)
 

 

If a firm shuts down in the short run,

 

A)
 

 

is makes zero economic profit.

 

B)
 

 

its total revenue is not large enough to cover its fixed cost.

 

C)
 

 

its loss equals its fixed cost.

 

D)
 

 

its loss equals zero.

 

 

 

 

 

 

Figure 11-7

 

 

 

 

 

32)
 

 

Refer to Figure 11-7. Suppose the prevailing price is $20 and the firm is currently producing 1,350 units. In the long-run equilibrium, the firm represented in the diagram

 

A)
 

 

will reduce its output to 1,100 units.
 

 

B)
 

 

will reduce its output to 750 units.

 

C)
 

 

will cease to exist.
 

 

D)
 

 

will continue to produce the same quantity.

 

 

 

33)
 

 

Refer to Figure 11-7. Suppose the prevailing price is $20 and the firm is currently producing 1,350 units. In the long-run equilibrium,

 

A)
 

 

there will be fewer firms in the industry and total industry output decreases.

 

B)
 

 

there will be more firms in the industry and total industry output remains constant.

 

C)
 

 

there will be fewer firms in the industry but total industry output increases.

 

D)
 

 

there will be more firms in the industry and total industry output increases.

 

 

 

34)
 

 

If a typical firm in a perfectly competitive industry is earning profits, then

 

A)
 

 

all firms will continue to earn profits.

 

B)
 

 

new firms will enter in the long run causing market supply to decrease, market price to rise and profits to increase.

 

C)
 

 

the number of firms in the industry will remain constant in the long run.

 

D)
 

 

new firms will enter in the long run causing market supply to increase, market price to fall and profits to decrease.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Figure 11-8

 

 

 

 

 

35)
 

 

Refer to Figure 11-8. Consider a typical firm in a perfectly competitive industry that makes short-run profits.  Which of the diagrams in the figure shows the effect on the industry as it transitions to a long-run equilibrium?

 

A)
 

 

Panel A
 

 

B)
 

 

Panel B
 

 

C)
 

 

Panel C
 

 

D)
 

 

Panel D

 

 

 

 

 

 

36)
 

 

If, in a perfectly competitive industry, the market price facing a firm is above its average total cost at the output where marginal revenue equals marginal cost, then

 

A)
 

 

market supply will remain constant.
 

 

B)
 

 

new firms are attracted to the industry.

 

C)
 

 

existing firms will exit the industry.
 

 

D)
 

 

firms are breaking even.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Figure 11-9

 

 

 

 

 

37)
 

 

Refer to Figure 11-9. Suppose the prevailing price is P1 and the firm is currently producing its loss-minimizing quantity. In the long-run equilibrium,

 

A)
 

 

there will be fewer firms in the industry but total industry output increases.

 

B)
 

 

there will be more firms in the industry and total industry output increases.

 

C)
 

 

there will be fewer firms in the industry and total industry output decreases.

 

D)
 

 

there will be more firms in the industry and total industry output remains constant.

 

 

 

38)
 

 

Refer to Figure 11-9. Suppose the prevailing price is P1 and the firm is currently producing its loss-minimizing quantity. If the firm represented in the diagram continues to stay in business, in the long-run equilibrium,

 

A)
 

 

it will expand its output to Q3 and face a price of P1.

 

B)
 

 

it will expand its output to Q2 and face a price of P2.

 

C)
 

 

it will reduce its output to Q0 and face a price of P0.

 

D)
 

 

it will continue to produce Q1 but faces the higher price of P2.

 

 

 

39)
 

 

If a typical firm in a perfectly competitive industry is incurring losses, then

 

A)
 

 

some firms will exit in the long run, causing market supply to decrease and market price to fall increasing losses for the remaining firms.

 

B)
 

 

all firms will continue to lose money.

 

C)
 

 

some firms will enter in the long run, causing market supply to increase and market price to rise increasing profit for all firms.

 

D)
 

 

some firms will exit in the long run, causing market supply to decrease and market price to rise increasing profits for the remaining firms.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Figure 11-10

 

 

*

 

 

40)
 

 

Refer to Figure 11-10.  Consider a typical firm in a perfectly competitive industry which is incurring short-run losses.  Which of the diagrams in the figure shows the effect on the industry as it transitions to a long-run equilibrium?

 

A)
 

 

Panel A
 

 

B)
 

 

Panel B
 

 

C)
 

 

Panel C
 

 

D)
 

 

Panel D

 

 

 

41)
 

 

If in a perfectly competitive industry, the market price facing a firm is below its average total cost but above average variable cost at the output where marginal cost equals marginal revenue

 

A)
 

 

new firms are attracted to the industry.
 

 

B)
 

 

some existing firms will exit the industry.

 

C)
 

 

the industry supply will not change.
 

 

D)
 

 

firms are breaking even.

 

 

 

42.       Which of the following is not an assumption of the theory of perfect competition?

a.

There are many sellers and many buyers, none of which is large in relation to total sales or purchases.

b.

Each firm produces and sells a differentiated product.

c.

Buyers and sellers have all relevant information with respect to prices, product quality, and sources of supply.

d.

There is easy entry and exit.

 

 

43.       The theory of perfect competition generally assumes that

a.

sellers act independently of other sellers, but buyers do not act independently of other buyers.

b.

buyers act independently of other buyers, but sellers do not act independently of other sellers.

c.

buyers and sellers act independently of other buyers and sellers.

d.

neither buyers nor sellers act independently of other buyers and sellers.

 

44.       Perfectly competitive industries are

a.

difficult to enter because there are already so many producers in the industry.

b.

not particularly appealing or attractive to enter because there tend to be so many buyers that it is difficult to deal with them.

c.

relatively easy to enter but not so easy to exit from.

d.

a and b

e.

none of the above

 

 

45.       A "price taker" is a firm that

a.

does not have the ability to control the price of the product it sells.

b.

does have the ability, although limited, to control the price of the product it sells.

c.

can raise the price of the product (above the market price) and still sell some units of its product.

d.

sells a differentiated product.

e.

none of the above

 

46.       Perfectly competitive firms are price takers for all of the following reasons except that

a.

each firm is quite small relative to the total market supply.

b.

buyers and sellers have all the necessary information about prices, etc.

c.

the product is homogeneous.

d.

barriers to exit force firms to sell at the market price.

 

 

47.       The demand curve for a perfectly competitive firm

a.

is downward sloping.

b.

is upward sloping.

c.

is perfectly horizontal.

d.

is perfectly vertical.

e.

may be downward or upward sloping, depending upon the type of product offered for sale.

 

 

48.       The market demand curve in a perfectly competitive market is

a.

downward sloping.

b.

upward sloping.

c.

perfectly horizontal.

d.

perfectly vertical.

e.

downward or upward sloping depending upon the type of product offered for sale.

 

 

49.       In the theory of perfect competition,

a.

the market demand curve is horizontal.

b.

the single firm's demand curve is horizontal.

c.

the single firm's demand curve is downward sloping.

d.

the market demand curve is downward sloping.

e.

b and d

 

 

50.       The price at which a perfectly competitive firm sells its product is determined by

a.

the individual seller based on his costs of production and his profit margin.

b.

all sellers and buyers of the product.

c.

the buyers of the product, because there are so many sellers that they cannot agree on a price.

d.

the government, because there are so many buyers and sellers of the product that together they cannot agree on the price.

 

 

51.       The perfectly competitive firm will seek to produce the output level for which

a.

average variable cost is at a minimum.

b.

average total cost is at a minimum.

c.

average fixed cost is at a minimum.

d.

marginal cost equals marginal revenue.

 

 

52.       Marginal revenue is

a.

total revenue divided by the quantity of output.

b.

total profit minus total costs.

c.

the change in total output brought about by using an additional unit of a variable input.

d.

the change in total revenue brought about by selling an additional unit of the good.

e.

the change in total revenue minus the change in total costs.

 

 

53.       For a perfectly competitive firm,

a.

the marginal revenue curve and the demand curve are the same.

b.

the marginal revenue curve and the marginal cost curve are the same.

c.

the supply curve and the marginal revenue curve are the same.

d.

the demand curve and the marginal cost curve are the same.

e.

none of the above

 

 

Exhibit 23-1

 

(1)

(2)

(3)

 

Price

Quantity Sold

Marginal Revenue

$12

100

 

$12

101

(A)

$12

102

(B)

$12

103

(C)

$12

104

(D)

 

 

54.       Refer to Exhibit 23-1. The dollar amounts that go in blanks (A) and (B) are, respectively,

a.

$1 and $12.

b.

$12 and $12.

c.

$8.42 and $8.50.

d.

$12 and $6.

 

 

55.       Refer to Exhibit 23-1. The dollar amounts that go in blanks (C) and (D) are, respectively,

a.

$1 and $12.

b.

$12 and $12.

c.

$8.58 and $8.67.

d.

$4 and $3.

 

 

56.       Refer to Exhibit 23-1. The data in this table are relevant to a perfectly competitive firm because

a.

its total revenue is different at different levels of quantities sold.

b.

its total revenue is the same at all levels of quantities sold.

c.

it doesn't have to lower price to sell additional units of the product.

d.

marginal revenue is greater than price.

 

 

57.       Refer to Exhibit 23-1. The firm’s demand curve represented by the information in this table is

a.

downward-sloping.

b.

upward-sloping.

c.

horizontal.

d.

vertical.

 

 

58.       Refer to Exhibit 23-1. The marginal revenue curve represented by the information in this table is

a.

downward-sloping.

b.

upward-sloping.

c.

horizontal.

d.

vertical.

 

 

 

 

 

59.       A perfectly competitive firm should increase its level of production as long as

a.

total revenue is less than total cost.

b.

the total revenue curve is rising.

c.

marginal revenue is greater than marginal cost.

d.

the marginal revenue curve is rising.

 

 

60.       For a perfectly competitive firm, profit maximization or loss minimization occurs at the output at which

a.

MR = MC.

b.

MR = AVC.

c.

P = ATC.

d.

MR = ATC.

 

 

 

61.       If MR > MC, then

a.

profits will be at their maximum.

b.

the firm is producing too much of the good to be maximizing profits.

c.

the firm can increase its profits or minimize its losses by increasing output.

d.

the firm is necessarily incurring losses.

 

 

 

62.       If, for the last unit of a good produced by a perfectly competitive firm, MR > MC, then in producing that unit the firm

a.

added more to total costs than it added to total revenue.

b.

added more to total revenue than it added to total costs.

c.

added an equal amount to both total revenue and total costs.

d.

maximized profits or minimized losses.

 

 

Exhibit 23-2

 

 

 

 

63.       Refer to Exhibit 23-2. What quantity does the profit-maximizing or loss-minimizing firm produce?

a.

Q1, where "what is coming in" on the last unit is greater than "what is going out."

b.

Q2, where the difference between "what is coming in" on the last unit and "what is going out" is zero.

c.

Q3, where marginal cost is greater than marginal revenue.

d.

Q4, which maximizes the excess of marginal cost over marginal revenue.

 

 

64.       Refer to Exhibit 23-2. For the firm that faces the demand curve in the exhibit,

a.

marginal revenue is constant.

b.

price equals marginal revenue.

c.

if the firm maximizes profits, it produces the quantity of output at which price equals marginal cost.

d.

a and c

e.

a, b, and c

 

 

Exhibit 23-3

 

(1)

(2)

(3)

Price

Quantity Sold

Total Cost

$8

40

$274

$8

41

$276

$8

42

$280

$8

43

$285

$8

44

$293

$8

45

$302

$8

46

$312

$8

47

$325

 

 

65.       Refer to Exhibit 23-3. What quantity of output should the profit-maximizing firm produce?

a.

41 units

b.

42 units

c.

44 units

d.

45 units

e.

46 units

 

 

66.       Refer to Exhibit 23-3. What is the increase in profit that would result from producing 43 units of the product rather than producing 40 units?

a.

$60

b.

$48

c.

$28

d.

$16

e.

$13

 

 

67.       Refer to Exhibit 23-3. What is the maximum profit?

a.

$65

b.

$59

c.

$20

d.

$376

 

 

68.       Refer to Exhibit 23-3. Is it possible for this firm to produce "too much" in the short-run?

a.

Any quantity above 42 units is too much.

b.

Any quantity above 44 units is too much.

c.

Any quantity above 40 units is too much.

d.

none of the above

 

69.       Consider the following data: equilibrium price = $10, quantity of output produced = 100 units, average total cost = $13, and average variable cost = $7. What will the firm do and why?

a.

Shut down in the short run, because it is taking a loss of $200.

b.

Continue to produce in the short run, because price is greater than average variable cost.

c.

Shut down in the short run, because average variable cost is less than average total cost.

d.

Continue to produce in the short run, because firms are always stuck with having to produce in the short run.

 

 

70.       The perfectly competitive firm will produce in the

a.

short run if price is below average variable cost.

b.

long run if price is below average variable cost.

c.

short run if price is below average total cost but above average variable cost.

d.

long run if price is below average total cost but above average variable cost.

 

 

 

 

71.       Consider the following data: equilibrium price = $8.50, quantity of output produced = 100 units, average total cost = $10, and average variable cost = $9. What will the firm do and why?

a.

Shut down in the short run, because price is below average variable cost.

b.

Shut down in the short run, because it will be taking a loss of $100.

c.

Continue to produce in the short run, because price is greater than average variable cost.

d.

Continue to produce in the short run, because firms are always stuck with having to produce in the short run.

e.

none of the above

 

 

72.       Firm X is producing the quantity of output at which marginal revenue equals marginal cost. It is

a.

receiving a positive economic profit.

b.

taking a loss.

c.

earning a normal profit.

d.

There is not enough information to answer the question.

 

 

 

73.       Which of the following conditions does not characterize long-run competitive equilibrium?

a.

Economic profit is zero.

b.

Price is greater than marginal cost.

c.

No firm has an incentive to change its plant size.

d.

No firm has an incentive to produce more or less output.

 

 

74.       If firms are earning zero economic profits, they must be producing at an output level at which

a.

price equals marginal cost.

b.

price equals average total cost.

c.

price equals average variable cost.

d.

marginal revenue equals marginal cost.

e.

none of the above

 

 

 

75.       When the perfectly competitive firm produces the quantity of output at which marginal revenue equals marginal cost, it naturally

a.

produces the quantity of output at which marginal cost equals price, since for the perfectly competitive firm price equals marginal revenue.

b.

produces the quantity of output at which short-run average total cost equals price, since for the perfectly competitive firm short-run average total cost equals marginal revenue.

c.

earns a profit, since equating marginal revenue and marginal cost guarantees profit.

d.

takes a loss.

 

 

76.       Why must profits be zero in long-run competitive equilibrium?

a.

If profits are not zero, firms will enter or exit the industry.

b.

If profits are not zero, firms will produce higher-quality goods.

c.

If profits are not zero, marginal revenue will rise.

d.

If profits are not zero, marginal cost will rise.

 

 

77.       Assume an industry that is initially in long-run competitive equilibrium. An increase in demand will cause a(n) __________ in prices and profits, and as a result, firms will __________ the industry, causing the market supply curve to shift __________, which, in turn, will eventually cause the equilibrium price to be __________ before.

a.

decrease; exit; leftward; lower than

b.

increase; enter; rightward; higher than

c.

decrease; exit; rightward; higher than

d.

increase; enter; rightward; the same as

e.

increase; exit; leftward; lower than

 

 

 

 

78.       If an industry is in long-run competitive equilibrium and experiences a decrease in demand, then as a result the equilibrium price will __________, which will cause the representative firm's __________ curve to shift downward and some firms will __________ the industry.

a.

rise; marginal cost; enter

b.

fall; marginal cost; enter

c.

rise; marginal revenue; enter

d.

fall; demand; exit

e.

fall; marginal cost; exit

 

 

79.       As firms exit an industry, the industry supply curve shifts __________ and the equilibrium price __________ until long-run competitive equilibrium is established and the surviving firms are earning __________ economic profits.

a.

leftward; rises; zero

b.

leftward; falls; positive

c.

leftward; rises; positive

d.

rightward; falls; negative

e.

rightward; rises; positive

 

 

80.       Which of the following is a characteristic of perfect competition?

a.

many sellers and few buyers

b.

many buyers and few sellers

c.

a heterogeneous product

d.

buyers and sellers having all relevant information

e.

high barriers to entry and exit

 

 

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

a.

buyers and sellers having no influence on price

b.

no barriers to entry and exit

c.

a heterogeneous product

d.

buyers and sellers having all relevant information

e.

none of the above

 

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

a.

new cars

b.

ice cream

c.

soft drinks

d.

wheat

 

 

83.       A perfectly competitive firm faces a __________ demand curve.

a.

nonlinear

b.

downward-sloping

c.

perfectly elastic

d.

perfectly inelastic

e.

unit-elastic

 

 

84.       Which of the assumptions in the theory of perfect competition assures us that economic profit will be zero in the long run?

a.

buyers and sellers having all relevant information

b.

firms producing homogeneous goods

c.

too few buyers

d.

easy entry and exit

e.

smallness of firms with respect to the market

 

85.       The price charged by a perfectly competitive firm is determined by

a.

the firm's demand curve alone.

b.

the firm's cost curves alone.

c.

market demand and market supply, together.

d.

market demand alone.

e.

market supply alone.

 

 

86.       Marginal revenue is defined as

a.

the difference between costs and revenues.

b.

the change in total revenue caused by selling one additional unit of output.

c.

price times quantity.

d.

total revenue divided by the level of output.

e.

total revenue minus the level of output.

 

 

87.       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

a.

sets the price it wishes.

b.

has a demand curve that is downward sloping.

c.

has a demand curve that is perfectly elastic.

d.

a and b

e.

a and c

 

 

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

a.

downward sloping.

b.

upward sloping.

c.

perfectly inelastic.

d.

perfectly elastic.

 

 

89.       In the theory of perfect competition, the market demand curve is __________ and the firm's demand curve is __________.

a.

perfectly elastic; perfectly elastic

b.

downward sloping; downward sloping

c.

perfectly elastic; downward sloping

d.

downward sloping; perfectly elastic

e.

perfectly inelastic; downward sloping

 

 

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

a.

positive economic profits in the long run.

b.

losses in the long-run equilibrium.

c.

zero economic profits in the long run.

d.

zero economic profits in both the short run and the long run.

e.

positive economic profits in both the short run and the long run.

 

 

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

a.

perfectly elastic.

b.

the same as the firm's demand curve.

c.

the same as the firm's total revenue curve.

d.

a and b

e.

a and c

 

 

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

a.

less than average variable cost.

b.

greater than average variable cost but less than average total cost.

c.

greater than average total cost.

d.

equal to average total cost.

e.

a and b

 

 

93.       In short-run equilibrium, the perfectly competitive firm may be making __________ economic profits.

a.

positive

b.

zero

c.

negative

d.

a or b

e.

any of the above

 

 

 

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

a.

positive

b.

zero

c.

negative

d.

any of the above

 

 

95.       Which of the following is not a condition of long-run competitive equilibrium?

a.

Economic profits are zero.

b.

Marginal revenue is greater than marginal cost.

c.

Price is equal to marginal cost.

d.

Firms do not have an incentive to change plant size.

e.

none of the above

 

 

96.       A firm operating in a perfectly competitive market finds itself producing at an output level for which marginal revenue is lower than marginal cost. In order to maximize profits (or minimize losses), the firm should

a.

increase the level of output.

b.

decrease the level of output.

c.

shut down operations.

d.

lower its prices.

e.

raise its prices.

 

 

 

Exhibit 23-7

 

 

 

 

97.       Refer to Exhibit 23-7. The perfectly competitive, profit-maximizing firm will produce __________ units of output.

a.

10

b.

30

c.

50

d.

60

e.

70

 

 

98.       Refer to Exhibit 23-7. At the profit-maximizing level of output, marginal cost is

a.

$60.00.

b.

$4.50.

c.

$5.00.

d.

$6.00.

e.

This cannot be determined based on the information provided.

 

 

 

 

 

 

99.       Refer to Exhibit 23-7. At the profit-maximizing output level, average fixed cost is

a.

$2.00.

b.

$4.00.

c.

$5.00.

d.

$6.00.

e.

This cannot be determined based on the information provided.

 

 

100.     Refer to Exhibit 23-7. At the profit-maximizing output level, average total cost is

a.

$2.00.

b.

$4.50.

c.

$5.00.

d.

$6.00.

e.

This cannot be determined based on the information provided.

 

 

Exhibit 23-8

 

 

 

 

101.     Refer to Exhibit 23-8. Which of the following is true in the short run of A and B, two perfectly competitive firms?

a.

Both A and B will continue to produce in the short run.

b.

Firm A will continue to produce and Firm B will shut down.

c.

Firm A will shut down and Firm B will continue to produce.

d.

Firm A will continue to produce in the short run and shut down in the long run.

e.

a and d

 

102.     Refer to Exhibit 23-8. What is the profit (loss) of Firm A at the profit-maximizing (or loss-minimizing) level of production?

a.

$300

b.

$270

c.

$600

d.

$400

e.

-$300

 

 

 

 

 

 

 

 

 

Exhibit 23-9

 

 

 

 

103.     Refer to Exhibit 23-9. Suppose that the market starts at its long-run competitive equilibrium (P1, Q1), and that demand increases from D1 to D2. As a consequence, the typical profit-maximizing firm will

a.

increase quantity produced by (q2 - q1).

b.

decrease quantity produced by (q2 - q1).

c.

decrease quantity produced by (q1 - q3).

d.

not change its output level because the demand curve it is facing did not change.

 

 

 

104.     Refer to Exhibit 23-9. Following an increase in market demand from D1 to D2, the firm's profits in the short run will

a.

remain the same at P1 times q1.

b.

remain the same at zero.

c.

increase by less than (P2 - P1) times q2.

d.

increase by (P2 - P1) times q3.

 

 

105.     A seller is a price taker. This means that the seller sells his product at the price

a.

he chooses.

b.

determined in the market.

c.

determined by the biggest firm in the market.

d.

determined by the largest consumer in the market.

e.

none of the above

 

 

106.     A price-taker firm can sell

a.

any quantity of product it wants at any price.

b.

less of its product at a higher price than at a lower price.

c.

any quantity of product it wants at the market equilibrium price.

d.

more of its product at a higher price than at a lower price.

e.

none of the above

 

 

107.     A price-taker firm will not sell any of its product for less than the equilibrium price because

a.

it is against the law to do this.

b.

it can sell all it wants at the equilibrium price.

c.

this would invite competition from outside the market and end up reducing the profits of the firm.

d.

this would be breaking the cartel agreement that price-taker firms often enter into.

e.

none of the above

 

 

 

 

 

108.     Which of the following is false?

a.

The market demand curve in a perfectly competitive market is downward sloping.

b.

The firm's demand curve in a perfectly competitive market is horizontal.

c.

The firm's demand curve in a perfectly competitive market is perfectly elastic.

d.

Marginal revenue is equal to the change in total revenue divided by the change in quantity of output.

e.

none of the above

 

 

109.     For a perfectly competitive firm,

a.

marginal revenue is equal to price.

b.

price is equal to marginal cost at the output level that maximizes profit.

c.

selling an additional unit of the good it produces increases total revenue by the price of the good.

d.

a and b

e.

a, b, and c

 

 

110.     For a perfectly competitive firm,

a.

price equals marginal revenue only for the first unit of the good produced and sold.

b.

only at a lower price can more units of a good be sold.

c.

demand is perfectly inelastic.

d.

a and b

e.

none of the above

 

 

111.     The profit-maximization rule is as follows:

a.

Produce the quantity of output at which price equals average total cost (unit cost).

b.

Produce as much output as can be sold.

c.

Produce the quantity of output at which marginal revenue equals marginal cost.

d.

Produce the quantity of output at which marginal revenue equals unit cost.

e.

Produce the quantity of output at which total cost is minimized.

 

 

112.     If, for a perfectly competitive firm, marginal cost is greater than marginal revenue for the 100th unit, then it follows that

a.

producing the 100th unit adds more to total revenue than it does to total cost.

b.

producing the 100th unit adds more to total cost than it does to total revenue.

c.

marginal cost equals marginal revenue for the 99th unit.

d.

the firm is not maximizing profit, or minimizing losses, if it produces the 100th unit.

e.

b and d

 

 

113.     In the short run, the best policy for a perfectly competitive firm is to

a.

shut down its operation if price ever falls below average total cost.

b.

produce and sell its product as long as price is greater than average variable cost.

c.

shut down its operation if price falls between average total cost and average variable cost.

d.

a and c

e.

none of the above

 

 

114.     When a perfectly competitive firm incurs losses, it follows that price is

a.

necessarily below average total cost.

b.

necessarily below average variable cost.

c.

below marginal cost.

d.

below marginal revenue.

 

 

115.     A perfectly competitive firm that wants to maximize profits or minimize losses will produce in the short run as long as

a.

customers are buying its product.

b.

price is above average variable cost.

c.

price is above marginal revenue.

d.

average variable cost is above price.

e.

average total cost is above price.

 

 

 

 

116.     In long-run competitive equilibrium P = SRATC, because if P > SRATC

a.

losses in the industry would cause some existing firms to exit the industry.

b.

positive economic profit would attract firms to the industry in order to obtain the profits.

c.

firms would not be producing the quantity of output at which MR = MC.

d.

firms would not be covering total fixed costs.

e.

none of the above

 

 

117.     In long-run competitive equilibrium SRATC = LRATC, because if SRATC > LRATC (at the quantity of output at which MR = MC) firms would

a.

have an incentive to change their plant size to produce their current output.

b.

not be covering their total fixed costs.

c.

not be covering their total variable costs.

d.

a and b

e.

b and c

 

 

118.     In long-run competitive equilibrium, firms

a.

earn positive economic profits.

b.

have no incentive to make any changes.

c.

earn losses on some units of the good they produce and sell.

d.

do not produce the quantity of output at which MR = MC.

e.

b and c

 

 

119.     In long-run competitive equilibrium, the market equilibrium price equals

a.

marginal cost.

b.

short-run average total cost.

c.

long-run average total cost.

d.

a and c

e.

a, b, and c

 

 

120.     A perfectly competitive market is initially in long-run competitive equilibrium. Then, market demand increases. As a result,

a.

the marginal revenue curve for each firm shifts upward.

b.

the demand curve for each firm shifts upward.

c.

marginal cost for each firm falls.

d.

average total cost for each firm rises.

e.

a and b

 

 

121.     A perfectly competitive market is initially in long-run competitive equilibrium. Then, market demand increases. This causes existing firms in the market to __________ and __________. As a result of the latter, the market supply curve shifts __________.

a.

produce more output; some existing firms to exit the market; leftward

b.

produce less output; new firms to enter the market; rightward

c.

produce more output; new firms to enter the market; rightward

d.

expand their plant size; some existing firms to exit the market; leftward

e.

none of the above

 

122.     A perfectly competitive market is initially in long-run competitive equilibrium. Then, market demand falls. This causes the marginal revenue curves for existing firms to shift __________ and for these firms to produce __________ output. Some of the existing firms will end up __________.

a.

upward, more, increasing their plant size

b.

downward, less, exiting the market

c.

downward, more, purchasing more capital equipment

d.

upward, less, cutting fixed costs

e.

none of the above

 

 

 

123.     A perfectly competitive market is initially in long-run competitive equilibrium. Then, market demand increases. As a result, existing firms in the market begin to __________. By the time all adjustments have been made, profits will __________.

a.

earn positive economic profit, rise even higher

b.

earn positive economic profit; be back at zero

c.

produce more output; be less than zero

d.

produce less output; rise

e.

earn positive economic profit; turn into loss

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