question
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.
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.
answer
b
question
In the theory of perfect competition,
a. sellers of the product are not influenced by other sellers and therefore have virtually complete control over the production and pricing of their product.
b. buyers of the product may have a preference as to whom they purchase from based on brand loyalty.
c. buyers and sellers of the product know everything that there is to know about the product.
d. it can be quite expensive for a firm to enter this type of market, but once the firm is established, it will be a profitable venture.
a. sellers of the product are not influenced by other sellers and therefore have virtually complete control over the production and pricing of their product.
b. buyers of the product may have a preference as to whom they purchase from based on brand loyalty.
c. buyers and sellers of the product know everything that there is to know about the product.
d. it can be quite expensive for a firm to enter this type of market, but once the firm is established, it will be a profitable venture.
answer
c
question
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 it sells and still sell some units of its product.
d. sells a differentiated product.
e. none of the above
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 it sells and still sell some units of its product.
d. sells a differentiated product.
e. none of the above
answer
A
question
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.
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.
answer
A
question
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.
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.
answer
D
question
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.
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.
answer
D
question
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.
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.
answer
B
question
Consider the following data: equilibrium price = $9, quantity of output produced = 1,000 units, average total cost = $8, and average variable cost $6. Given this, total revenue is ____, total cost is ____, and fixed cost is ____.
a. $6,000; $8,000; $1,000
b. $9,000; $7,000; $8,000
c. $9,000; $8,000; $2,000
d. $9,000; $8,000; $6,000
e. none of the above
a. $6,000; $8,000; $1,000
b. $9,000; $7,000; $8,000
c. $9,000; $8,000; $2,000
d. $9,000; $8,000; $6,000
e. none of the above
answer
C
question
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.
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.
answer
C
question
In order for a firm to continue producing, price must exceed ____ and total revenue must exceed ____.
a. marginal cost, total cost
b. ATC; total cost
c. AFC; total fixed cost
d. AVC; total variable costs
e. price; total cost
a. marginal cost, total cost
b. ATC; total cost
c. AFC; total fixed cost
d. AVC; total variable costs
e. price; total cost
answer
D
question
The short-run industry supply curve is the
a. horizontal summation of the short-run supply curves for all firms in the industry.
b. vertical summation of the short-run supply curves for all firms in the industry.
c. average of the short-run supply curves for all firms in the industry.
d. same as that of the typical firm in the industry.
a. horizontal summation of the short-run supply curves for all firms in the industry.
b. vertical summation of the short-run supply curves for all firms in the industry.
c. average of the short-run supply curves for all firms in the industry.
d. same as that of the typical firm in the industry.
answer
A
question
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
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
answer
B
question
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.
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.
answer
A
question
A constant-cost industry has a long-run (industry) supply curve that is
a. upward sloping.
b. downward sloping.
c. horizontal.
d. U-shaped.
a. upward sloping.
b. downward sloping.
c. horizontal.
d. U-shaped.
answer
C
question
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
a. leftward; rises; zero
b. leftward; falls; positive
c. leftward; rises; positive
d. rightward; falls; negative
e. rightward; rises; positive
answer
A
question
Resource allocative efficiency occurs when a firm
a. minimizes costs of production yet charges the highest possible price.
b. produces the quantity of output at which price exceeds average total cost by the greatest amount.
c. produces the quantity of output at which price equals marginal cost.
d. produces the quantity of output at which price equals average total cost.
e. produces the quantity of output at which price equals average variable cost.
a. minimizes costs of production yet charges the highest possible price.
b. produces the quantity of output at which price exceeds average total cost by the greatest amount.
c. produces the quantity of output at which price equals marginal cost.
d. produces the quantity of output at which price equals average total cost.
e. produces the quantity of output at which price equals average variable cost.
answer
C
question
Suppose one firm in a perfectly competitive industry experiences an increase in its costs of production. Which of the following best describes the most likely long run adjustment to this situation?
a. Eventually, all firms in the industry will also experience this same increase in costs.
b. Eventually, the price of the product will increase, and consumers will pay for the increase in costs.
c. The firm in question may suffer losses and exit the industry.
d. none of the above
a. Eventually, all firms in the industry will also experience this same increase in costs.
b. Eventually, the price of the product will increase, and consumers will pay for the increase in costs.
c. The firm in question may suffer losses and exit the industry.
d. none of the above
answer
C
question
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
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
answer
D
question
Which of the following is the best example of a homogeneous good?
a. new cars
b. ice cream
c. soda
d. wheat
a. new cars
b. ice cream
c. soda
d. wheat
answer
D
question
A perfectly competitive firm faces a ____ demand curve.
a. nonlinear
b. downward-sloping
c. perfectly elastic
d. perfectly inelastic
e. unit-elastic
a. nonlinear
b. downward-sloping
c. perfectly elastic
d. perfectly inelastic
e. unit-elastic
answer
C
question
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.
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.
answer
C
question
In the long run a firm earns a zero economic profit, given the condition that
a. P = MR.
b. P = AVC.
c. P = ATC.
d. (P - MC) = 0.
e. none of the above
a. P = MR.
b. P = AVC.
c. P = ATC.
d. (P - MC) = 0.
e. none of the above
answer
C
question
The perfectly competitive firm maximizes profit at the output where
a. price equals marginal cost.
b. marginal revenue equals marginal cost.
c. average variable cost equals average fixed cost.
d. a and b
e. all of the above
a. price equals marginal cost.
b. marginal revenue equals marginal cost.
c. average variable cost equals average fixed cost.
d. a and b
e. all of the above
answer
D
question
A decreasing-cost industry is characterized by
a. an upward-sloping long-run supply curve.
b. a downward-sloping long-run supply curve.
c. a perfectly elastic long-run supply curve.
d. perfectly elastic short-run and long-run supply curves.
e. a perfectly elastic short-run supply curve and an upward-sloping long-run supply curve.
a. an upward-sloping long-run supply curve.
b. a downward-sloping long-run supply curve.
c. a perfectly elastic long-run supply curve.
d. perfectly elastic short-run and long-run supply curves.
e. a perfectly elastic short-run supply curve and an upward-sloping long-run supply curve.
answer
B
question
A perfectly competitive firm that maximizes profit exhibits resource allocative efficiency because it produces where price
a. equals minimum average total cost.
b. equals marginal revenue.
c. equals marginal cost.
d. is greater than minimum average variable cost.
a. equals minimum average total cost.
b. equals marginal revenue.
c. equals marginal cost.
d. is greater than minimum average variable cost.
answer
C
question
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
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
answer
B
question
For a price taker, market equilibrium price is $100. At 50 units, MR = MC, ATC = $90, and AVC = $60. This price taker will
a. earn $10 profits if it produces 50 units of the good.
b. earn $500 profits if it produces 50 units.
c. shut down its operation and by doing this minimize its losses.
d. maximize its profits if it produces fewer than 50 units.
e. maximize its profits if it produces more than 50 units.
a. earn $10 profits if it produces 50 units of the good.
b. earn $500 profits if it produces 50 units.
c. shut down its operation and by doing this minimize its losses.
d. maximize its profits if it produces fewer than 50 units.
e. maximize its profits if it produces more than 50 units.
answer
B
question
Equilibrium price is $10 in a perfectly competitive market. For a perfectly competitive firm, MR = MC at 233 units of output. At 233 units, ATC is $11, and AVC is $9. The best policy for this firm is to ____ in the short run. Also, total fixed cost equals ____ for this firm.
a. continue to produce; $2
b. shut down; $450
c. continue to produce; $466
d. shut down; $2,097
e. continue to produce; $2,097
a. continue to produce; $2
b. shut down; $450
c. continue to produce; $466
d. shut down; $2,097
e. continue to produce; $2,097
answer
C
question
Equilibrium price is $9 in a perfectly competitive market. For a perfectly competitive firm, MR = MC at 125 units of output. At 125 units, ATC is $11, and AVC is $10. The best policy for this firm is to ____ in the short run. Also, total fixed cost equals ____ and total variable cost equals ____ for this firm.
a. continue to produce; $125; $1,375
b. shut down; $125; $1,250
c. shut down; $1,375; $1,250
d. continue to produce; $125; $1,250
e. There is not enough information to answer all parts of the question.
a. continue to produce; $125; $1,375
b. shut down; $125; $1,250
c. shut down; $1,375; $1,250
d. continue to produce; $125; $1,250
e. There is not enough information to answer all parts of the question.
answer
B
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