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Wesleyan college – ECON 220 CHAPTER 12 1) Perfect competition is characterized by all of the following except A) heavy advertising by individual sellers

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Wesleyan college – ECON 220

CHAPTER 12

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

A) heavy advertising by individual sellers.

B) homogeneous products.

C) sellers are price takers.

D) a horizontal demand curve for individual sellers.

 

 

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

A) a multitude of vastly different selling prices.

B) a downward sloping demand for each seller's product.

C) the inability of one seller to influence price.

D) chaos in the market.

 

 

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

A) the individual seller.

B) a few of the sellers.

C) market demand and market supply.

D) the individual demander.

 

 

4) 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 not sell any output.

D) The firm will sell more output than its competitors.

 

 

5) In perfect competition

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

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

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

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

 

 

12.2   How a Firm Maximizes Profit in a Perfectly Competitive Market

 

1) If the market price is $25, the average revenue of selling five units is

A) $5.

B) $12.50.

C) $25.

D) $125.

 

 

2) 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.

 

 

Table 12-1

Quantity	Total Cost (dollars)	Variable Cost (dollars)
0	$1,000	$0
100	1,360	360
200	1,560	560
300	1,960	960
400	2,760	1,760
500	4,000	3,000
600	5,800	4,800

 

Table 12-1 shows the short-run cost data of a perfectly competitive firm that produces plastic camera cases. Assume that output can only be increased in batches of 100 units.

 

3) Refer to Table 12-1. What is the fixed cost of production?

A) $0

B) $500

C) $1,000

D) It cannot be determined.

 

 

4) Refer to Table 12-1. If the market price of each camera case is $8 and the firm maximizes profit, what is the amount of the firm's profit or loss?

A) $0 (it breaks even)

B) loss of $1,000

C) profit of $440

D) loss of $440

 

 

5) Refer to Table 12-1. Suppose the fixed cost of production rises by $500 and the price per unit is still $8. What happens to the firm's profit-maximizing output level?

A) It must fall.

B) It must rise to offset the increased cost.

C) It will remain the same.

D) The firm will shut down.

 

 

6) Refer to Table 12-1. The firm will not produce in the short run if the output price falls below

A) $8.

B) $4.

C) $3.20.

D) $2.80.

 

 

Figure 12-1

 

 

 

7) Refer to Figure 12-1. If the firm is producing 700 units

A) it is making a profit.

B)  it is making a loss.

C) it should cut back its output to maximize profit.

D) it should increase its output to maximize profit.

 

 

8) Refer to Figure 12-1. If the firm is producing 700 units, what is the amount of its profit or loss?

A) loss of $280

B) loss equivalent to the area A

C) profit equivalent to the area A

D) There is insufficient information to answer the question.

 

 

9) Refer to Figure 12-1. If the firm is producing 200 units

A) it breaks even.

B)  it is making a loss.

C) it should cut back its output to maximize profit.

D) it should increase its output to maximize profit.

 

 

10) Refer to Figure 12-3. If the firm is producing 500 units, what is the amount of its profit or loss?

A) profit of $280

B) loss equivalent to the area A

C) profit equivalent to the area A

D) There is insufficient information to answer the question.

 

 

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

A) increase its output.

B) reduce its output.

C) keep output constant and enjoy the above normal profit.

D) lower the price.

 

 

Figure 12-2

 

 

 

12) Refer to Figure 12-2. What is the amount of profit if the firm produces Q2 units?

A) It is equal to the vertical distance c to g.

B)  It is equal to the vertical distance c to Q2.

C)  It is equal to the vertical distance g to Q2.

D) It is equal to the vertical distance c to g multiplied by Q2 units.

 

 

13) Refer to Figure 12-2. Suppose the firm is currently producing Q2 units. What happens if it expands output to Q3 units?

A) Its profit increases by the size of the vertical distance df.

B)  It makes less profit.

C) It incurs a loss.

D) It will be moving toward its profit maximizing output.

 

 

12.3   Illustrating Profit or Loss on the Cost Curve Graph

 

1) A firm's total profit can be calculated as all of the following except

A) total revenue minus total cost.

B) average profit per unit times quantity sold.

C) (price minus average total cost) times quantity sold.

D) marginal profit times quantity sold.

 

 

2) 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 earning a profit.

B) should shut down.

C) is incurring a loss.

D) is breaking even.

 

 

Figure 12-4

 

 

 

Figure 12-4 shows the cost and demand curves for a profit-maximizing firm in a perfectly competitive market.

 

3) Refer to Figure 12-4. If the market price is $30 and if the firm is producing output, what is the amount of its total variable cost?

A) $7,200

B) $6,480

C) $5,400

D) $3,960

 

 

4) Refer to Figure 12-4. What is the amount of its total fixed cost?

A) $1,080

B) $1,440

C) $2,520

D) It cannot be determined.

 

 

5) Refer to Figure 12-4. If the market price is $30 and the firm is producing output, what is the amount of the firm's profit or loss?

A) loss of $1,080

B) profit of $1,440

C) loss of $2,520

D) profit of $1,300

 

 

6) Refer to Figure 12-4. 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 is making a loss.

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

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

D) Yes, because it is making a profit.

 

 

 

Table 12-3

Quantity	Total Cost	Average Total Cost	Marginal Cost
0	$10.00	-----	-----
1	15.00	$15.00	$5.00
2	17.50	8.75	2.50
3	22.50	7.50	5.00
4	30.00	7.50	7.50
5	40.00	8.00	10.00
6	52.50	8.75	12.50
7	67.50	9.64	15.00
8	85.00	10.63	17.50
9	105.00	11.67	20.00

 

Arnie sells basketballs in a perfectly competitive market. Table 12-3 summarizes Arnie's output per day (Q), total cost (TC), average total cost (ATC) and marginal cost (MC).

 

7) Refer to Table 12-3. What price (P) will Arnie charge and how much profit will he earn if the market price of basketballs is $12.50?

A) Price and profit cannot be determined from the information given.

B) P = $12.50; profit = $52.50

C) P = $12.50; profit = $22.50

D) P = $20; profit = $75.00.

 

 

8) Refer to Table 12-3. What will Arnie's output be and how much profit will he earn if the market price of basketballs is $5.00?

A) Q = 1; profit = -$10.

B) Q = 3; profit = -$7.50

C) Q = 0; profit = -$10.00

D) Price and profit cannot be determined from the information given.

 

 

12.4   Deciding Whether to Produce or to Shut Down in the Short Run

 

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

A) is earning a profit.

B) should shut down.

C) should increase output.

D) should increase price.

 

 

2) A perfectly competitive firm's supply curve is its

A) marginal cost curve.

B) marginal cost curve above its minimum average total cost.

C) marginal cost curve above its minimum average variable cost.

D) marginal cost curve above its minimum average fixed cost.

 

 

Figure 12-9

 

 

 

Figure 12-9 shows cost and demand curves facing a profit-maximizing, perfectly competitive firm.

 

3) Refer to Figure 12-9. At price P1, the firm would produce

A) Q1 units

B) Q3 units.

C) Q5 units.

D) zero units.

 

 

4) Refer to Figure 12-9. At price P1, the firm would

A) lose an amount equal to its fixed cost.

B) lose an amount more than fixed cost.

C) lose an amount less than fixed cost.

D) break even.

 

 

5) Refer to Figure 12-9. At price P2, the firm would

A) lose an amount equal to its fixed cost.

B) lose an amount more than fixed cost.

C) lose an amount less than fixed cost.

D) break even.

 

 

6) Refer to Figure 12-9. At price P3, the firm would

A) lose an amount equal to its fixed cost.

B) lose an amount more than fixed cost.

C) lose an amount less than fixed cost.

D) break even.

 

 

7) Refer to Figure 12-9. Identify the short-run shut down point for the firm.

A) a

B) b

C) c

D) d

 

 

 

Figure 12-10

 

 

 

8) Refer to Figure 12-10. The firm's short-run supply curve is its

A) marginal cost curve.

B) marginal cost curve from b and above.

C) marginal cost curve from c and above.

D) marginal cost curve from d and above.

 

 

9) Refer to Figure 12-10. Total revenue at the profit-maximizing level of output is

A) $1,200.

B) $2,500.

C) $4,800.

D) $6,000.

 

 

10) Refer to Figure 12-10. The total cost at the profit-maximizing output level equals

A) $4,800.

B) $3,300.

C) $2,500.

D) $1,800.

 

 

12.5   "If Everyone Can Do It, You Can't Make Money at It": The Entry and Exit of Firms in the Long Run

 

Figure 12-11

 

 

 

1) Refer to Figure 12-11. 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 continue to produce the same quantity.

B) will reduce its output to 1,100 units.

C) will reduce its output to 750 units.

D) will cease to exist.

 

 

2) Refer to Figure 12-11. If this is a constant-cost industry, what is the market price in the long-run equilibrium?

A) $5

B) $14

C) $15

D) $20

 

 

Figure 12-13

 

 

 

3) Refer to Figure 12-13. 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 and total industry output decreases.

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

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 remains constant.

 

 

4) Refer to Figure 12-13. 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 reduce its output to Q0 and face a price of P0.

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

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

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

 

 

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

A) all firms will continue to lose money.

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

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

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

 

 

6) In the long run, a perfectly competitive market will

A) produce only the quantity of output that yields a long-run profit for the typical firm.

B) supply whatever amount consumers will buy at a price which earns the market an economic profit.

C) supply whatever amount consumers demand at a price determined by the minimum point on the typical firm's average total cost curve.

D) generate a long-run equilibrium where the typical firm operates at a loss.

 

 

7) In the long run, a firm in a perfectly competitive industry will supply output only if its total revenue covers its

A) explicit plus its implicit costs.

B) fixed costs.

C) implicit costs.

D) explicit costs.

 

 

Figure 12-17

 

 

 

The graphs in Figure 12-17 represent the perfectly competitive market demand and supply curves for the apple industry and demand and cost curves for a typical firm in the industry.

 

8) Refer to Figure 12-17. Which of the following statements is true?

A) The current market price is $3 but the firm will be able to increase the price in the future.

B) The current market price is $3 but the price will fall in the long-run as a result of a decrease in demand.

C) The current market price is $3 but the price will fall in the long-run as new firms enter the market.

D) The current market price is $3 but the price will increase in the future as the market demand increases.

 

 

9) Refer to Figure 12-17. Which of the following statements is true?

A) The firm will produce 30 thousand pounds of apples in the short run and earn an economic profit. New firms will enter the market and shift the market supply curve to the left.

B) The firm will produce 30 thousand pounds of apples in the short run and earn an economic profit, but it would earn a greater profit if it produced at the lowest point on the ATC curve.

C) The firm will produce 30 thousand pounds of apples in the short run and earn an economic profit. New firms will enter the industry; as a result, the firm will be forced to exit the industry in the long run.

D) The firm will produce 30 thousands pounds of apples in the short run and earn an economic profit. In the long run the firm will break even.

 

 

10) A firm could continue to operate for years without ever earning a profit as long as it is producing an output where

A) MR < ATC.

B) ATC > AVC.

C) MR > AVC.

D) AFC < AVC.

 

 

11) A firm would decide to shut down if its production resulted in

A) MR < ATC.

B) ATC > AVC.

C) AFC > AVC.

D) MR < AVC.

 

 

12.6   Perfect Competition and Efficiency

 

1) The perfectly competitive market structure benefits consumers because

A) firms do not produce goods at the lowest possible price in the long run.

B) firms are forced by competitive pressure to be as efficient as possible.

C) firms add a much smaller markup over average cost than firms in any other type of market structure.

D) firms produce high quality goods at low prices.

 

 

 

Figure 12-20

 

 

2) Refer to Figure 12-20. If the market price is P1, what is the allocatively efficient output level?

A) Q0

B) Q1

C) Q2

D) There is no allocatively efficient output level because the firm is making a loss.

 

 

3) Which of the following describes a difference between allocative efficiency and productive efficiency in a perfectly competitive market?

A) Allocative efficiency is achieved only in the long run. Productive efficiency is achieved only in the short run.

B) Allocative efficiency is achieved only in the long run. Productive efficiency is achieved in the short run and the long run.

C) Allocative efficiency is achieved only in the short run. Productive efficiency is achieved only in the long run.

D) Allocative efficiency is achieved in the short run and the long run. Productive efficiency is achieved only in the long run.