Chapter 8 Practice Quiz Perfect Competition

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Chapter 8Practice Quiz Perfect Competition
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• 1. A perfectly competitive market is not
  characterized by
• a. many small firms.
• b. a great variety of different products.
• c. free entry into and exit from the market.
• d. any of the above.

B. Perfect competition is characterized by goods
that cannot be distinguished from one another.
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• 2. Which of the following is a characteristic of
  perfect competition?
• a. Entry barriers.
• b. Homogeneous products.
• c. Expenditures on advertising.
• d. Quality of service.

B. A homogeneous product is one that cannot be
distinguished from the others, for example, one
potato looks just like another potato.
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• 3. Which of the following are the same at all
  levels of output under perfect competition?
• a. Marginal cost and marginal revenue.
• b. Price and marginal revenue.
• c. Price and marginal cost.
• d. All of the above.

B. Price equals marginal revenue because each
unit is sold at the same price therefore, every
additional unit sold adds the price to total
revenue.
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• 4. If a perfectly competitive firm sells 100
  units of output at a market price of 100 per
  unit, its marginal revenue per unit is
• a. 1.
• b. 100.
• c. more than 1, but less than 100.
• d. less than 100.

B. Marginal revenue is defined as the addition to
total revenue when selling one unit.
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• 5. Short-run profit maximization for a perfectly
  competitive firm occurs when the firms marginal
  cost equals
• a. average total cost.
• b. average variable cost.
• c. marginal revenue.
• d. all of the above.

C. Profits are maximized or losses are minimized
at the unit of output where MR MC. If MR were gt
than MC, an additional unit would be produced. If
MR were lt MC, that last unit would not be
produced.
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• 6. A perfectly competitive firm sells its output
  for 100 per unit, and the minimum
  average variable cost is 150 per unit. The firm
  should
• a. increase output.
• b. decrease output, but not shut down.
• c. maintain its current rate of output.
• d. shut down.

D. As shown in the next slide, at this output a
firms losses exceed its fixed costs it would
therefore lose more money by staying open than by
closing down.
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• 7. A perfectly competitive firms supply curve
  follows the upward sloping segment of its
  marginal cost curve above the
• a. average total cost curve (ATC).
• b. average variable cost curve (AVC).
• c. average fixed cost curve (AFC).
• d. average price curve (APC).

B. The supply curve, which is the MC curve, does
not extend below the AVC curve because below this
price the firm would close down and supply
nothing. See Exhibit 15.
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Exhibit 15 Marginal Revenue and Cost per Unit
Curves
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MC
D
15

ATC
C
10
Price Cost per unit (dollars)

AVC
B
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A

1,000
1,500
2,000
500
(units per week)
Quantity of output
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• 8. Assume the price of the firms product in
  Exhibit 15 is 15 per unit. The firm will
  produce
• a. 500 units per week.
• b. 1,000 units per week.
• c. 1,500 units per week.
• d. 2,000 units per week.
• e. 2,500 units per week.

D. This is the number of units in which MR
MC.
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• 9. The lowest price in Exhibit 15 at which the
  firm earns zero economic profit in the short-run
  is
• a. 5 per unit.
• b. 10 per unit.
• c. 20 per unit.
• d. 30 per unit.

B. This is the minimum point of the ATC curve at
which P ATC. Exactly a normal profit is being
made, that is, zero economic profit.
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• 10. Assume the price of the firms product in
• Exhibit 15 is 6 per unit. The firm should
  
• a. continue to operate because it is earning an
• economic profit.
• b. stay in operation for the time being even
• though it is incurring an economic loss.
• c. shut down temporarily.
• d. shut down permanently.

B. At this price, the firms losses are less
than its fixed costs it will therefore lose
less money by staying open than closing.
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• 11. Assume the price of the firms product in
• Exhibit 15 is 10 per unit. The maximum
• profit the firm earns is
• a. zero.
• b. 5,000 per week.
• c. 1,500 per week.
• d. 10,500 per week.

A. In perfect competition, Price AR MR the
firms short-run demand curve. When P ATC, the
firms revenues equal its costs, so zero economic
profits are made. Normal profit is included as a
part of the firms cost data because it is a
necessary expense of operating the business.
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• 12. In Exhibit 15, the firms total revenue at
• a price of 10 per unit pays for
• a. a portion of total variable costs.
• b. a portion of total fixed costs.
• c. none of the total fixed costs.
• d. all of the total fixed costs and total
• variable cost.

D. At a price of 10, the firm is making an
economic profit - more than enough money is
being made to meet its fixed costs.
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• 13. As shown in Exhibit 15, the short-run supply
  curve for this firm corresponds to which segment
  of its marginal cost curve?
• a. A to D and all points above.
• b. B to D and all points above.
• c. C to D and all points above.
• d. B to C only.

B. A supply curve shows how many units will be
produced at various prices. The firms supply
curve is its MC curve which lies above its AVC
curve because it will always produce where MR
(AR, P) MC.
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• 14. In long-run equilibrium, the perfectly
  competitive firms price equals which of the
  following?
• a. Short-run marginal cost.
• b. Minimum short-run average total cost.
• c. Marginal revenue.
• d. All of the above.

D. Long-run equilibrium is at the price in which
a normal profit is being made. Normal profit is
when P(AR) ATC in long-run equilibrium.
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• 15. In a constant-cost industry, input prices
  remain constant as
• a. the supply of inputs fluctuates.
• b. firms encounter diseconomies of scale.
• c. workers become more experienced.
• d. firms enter and exit the industry.

D. A constant-cost industry is when the entry or
exit of firms has little impact on a firms cost
curves.
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• 16. Suppose that, in the long run, the price of
  feature films rises as the movie production
  industry expands. We can conclude that movie
  production is a (an)
• a. increasing-cost industry.
• b. constant-cost industry.
• c. decreasing-cost industry.
• d. marginal-cost industry.

A. An industry in which the expansion of industry
output by the entry of new firms increases the
firms cost curves.
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• 17. Which of the following is true of a perfectly
  
• competitive market?
• a. If economic profits are earned, then
• the price will fall over time.
• b. In long-run equilibrium, P MR
• SRMC SRATC LRAC.
• c. A constant-cost industry exists when
• the entry of new firms has no effect on
• their cost curves.
• d. All of the above.

D. All of the above statements are true.
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18. Suppose that in a perfectly competitive
market, firms are making economic profits.
In the long run, we can expect to see
a. some firms leave. b. the market price
rise. c. market supply shift to the left.
d. economic profits become zero. e.
production levels remaining the same as
in the short run.
D. In the long run, economic profits attract
firms to enter the industry until zero economic
profits are earned and firms are no longer
attracted to the industry.
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19. Assume the short-run average total cost of a
perfectly competitive industry decreases as
the output of the industry expands. In the
long run, the industry supply curve will
a. have a positive slope. b. have a
negative slope. c. be perfectly horizontal.
d. be perfectly vertical.
B. In a decreasing-cost industry, the short-run
average total cost curve (SRATC) shifts lower
and the equilibrium price decreases as
output increases. The result is a negative
slope for the long run supply curve.
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20. The long-run supply curve for a competitive
constant-cost industry is a. horizontal.
b. vertical. c. upward sloping.
d. downward sloping.
A. In a constant-cost industry, both the
short-run average total cost curve (SRATC) and
the equilibrium price remain constant as output
increases. The result is a zero slope for the
long-run supply curve.