Ch 12 ECO

What are barriers to entry?

1. Barriers to entry are social, political, or economic impediments that prevent other firms from entering the market. 2. Barriers sometimes take the form of patents granted to produce a certain good

**Which of the following is not a characteristic of a perfectly competitive market structure? A) There are a very large number of firms that are small compared to the market. B) All firms sell identical products. C) There are no restrictions to entry by new firms. D) There are restrictions on exit of firms.

D) There are restrictions on exit of firms.

What is allocative efficiency? A) It refers to a situation in which resources are allocated to their highest profit use. B) It refers to a situation in which resources are allocated such that goods can be produced at their lowest possible average cost. C) It refers to a situation in which resources are allocated such that the last unit of output produced provides a marginal benefit to consumers equal to the marginal cost of producing it. D) It refers to a situation in which resources are allocated fairly to all consumers in a society.

C) It refers to a situation in which resources are allocated such that the last unit of output produced provides a marginal benefit to consumers equal to the marginal cost of producing it.

Perfectly competitive firms produce up to the point where the price of the good equals the marginal cost of producing the last unit. This condition is referred to as A) productive efficiency. B) constant returns to scale. C) allocative efficiency. D) perfectly competitive efficiency.

C) allocative efficiency.

Both individual buyers and sellers in perfect competition A) can influence the market price by their own individual actions. B) can influence the market price by joining with a few of their competitors. C) have to take the market price as a given. D) have the market price dictated to them by government.

C) have to take the market price as a given.

A perfectly competitive firm's marginal revenue A) is greater than its price. B) is less than price because a firm must lower its price to sell more. C) is equal to its price. D) may be either greater or less than its price, depending on the quantity sold.

C) is equal to its price.

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.

C) is incurring a loss.

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.

C) market demand and market supply.

What are price takers?

A buyer or seller that is unable to affect market price. Why? 1. The market is made up of a large number of small firms. 2. One firm cannot influence the action of other firms. 3. One firm's production is negligible as compared to the total market production.

A perfectly competitive industry achieves allocative efficiency in the long run. What does allocative efficiency mean? A) Each firm produces up to the point where the price of the good equals the marginal cost of producing the last unit. B) Each firm produces up to the point where all scale economies are exhausted. C) Production occurs at the lowest average total cost. D) Firms use an input combination that minimizes cost and maximizes output.

A) Each firm produces up to the point where the price of the good equals the marginal cost of producing the last unit.

Which of the following offers the best reason why restaurants are not considered to be perfectly competitive firms? A) Restaurants do not sell identical products. B) Restaurants compete in small market areas - neighborhoods and cities - rather than in regional or national markets. Therefore, restaurants are not small relative to their market size. C) Restaurants usually have entry barriers in the form of zoning restrictions and health regulations. D) Restaurants have significant liability costs that perfectly competitive firms do not have; for example, customers may sue if they suffer from food poisoning.

A) Restaurants do not sell identical products.

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) the price is set by the government. C) all the sellers get together and set the price. D) all the demanders get together and set the price.

A) each seller is too small to affect market price.

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 the market price. B) the price is set by the government. C) all the sellers get together and set the price. D) all the demanders get together and set the price.

A) each seller is too small to affect the market price.

Which of the following describes a situation in which a good or service is produced at the lowest possible cost? A) productive efficiency B) allocative efficiency C) marginal efficiency D) profit maximization

A) productive efficiency

Which of the following is the best example of a perfectly competitive industry? A) the wheat market B) the steel market C) the electricity market D) the airplane market

A) the wheat market

Letters are used to represent the terms used to answer this question: price (P), quantity of output (Q), total cost (TC) and average total cost (ATC). Which of the following equations is equal to a firm's profit? A) P - ATC B) (P × Q) - TC C) (P × Q) - (P × ATC) D) P - TC

B) (P × Q) - TC

Which of the following is not an assumption of perfectly competitive markets? A) There are many sellers and many buyers, all of which are small relative to the market. B) Each firm produces a similar but not identical product. C) There are no barriers to new firms entering the market. D) The products sold by all firms in the market are identical.

B) Each firm produces a similar but not identical product.

If a perfectly competitive firm achieves productive efficiency then A) it will raise its price in order to earn an economic profit. B) the price of the good it sells is equal to the benefit consumers receive from consuming the last unit of the good sold. C) it is producing at minimum efficient scale. D) it is producing the good it sells at the lowest possible cost.

D) it is producing the good it sells at the lowest possible cost.

Marginal revenue is A) total revenue divided by the total quantity of output. B) the change in profit divided by the change in the quantity of output. C) the change in total revenue divided by the change in total cost. D) the change in total revenue divided by the change in the quantity of output.

D) the change in total revenue divided by the change in the quantity of output.

In perfect competition A) the market demand curve and the individual's demand curve 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.

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

Producing where marginal revenue equals marginal cost is equivalent to producing where A) average total cost equals average revenue. B) average fixed cost is minimized. C) total revenue is equal to total cost. D) total profit is maximized.

D) total profit is maximized.

What does a perfectly elastic (firm) demand curve look like?

Horizontal line on graph.

Why zero economic profit?

If economic profit < zero ▶ Firms leave ⇒ Supply shifts to left ▶ Price rises ▶ Profit returns to zero

Why zero economic profit?

If economic profit > zero ▶ Firms enter ⇒ Supply shifts to right ▶ Price falls ▶ Profit falls to zero

What characteristics do perfectly competitive markets have?

Large number of buyers and sellers. Identical types of products. No barriers to entry or exit. Examples: Wheat/apple industry

If market demand shifts to the right, how will a competitive firm's level of output change? a. The firm will increase its output, and its profits will increase. b. The firm will need to decrease its output and suffer losses. c. The firm will keep its output constant, but its profits will increase. d. The firm will decrease its output, which will increase its profit.

a. The firm will increase its output, and its profits will increase.

What is the relationship between price, average revenue, and marginal revenue for a firm in a perfectly competitive market? a. Price is equal to average revenue and greater than marginal revenue. b. Price is greater than average revenue and equal to marginal revenue. c. Price is equal to both average revenue and marginal revenue. d. Price, average revenue, and marginal revenue usually all have different values.

c. Price is equal to both average revenue and marginal revenue.

Which of the following are characteristics of a perfectly competitive industry? a. Firms are unable to control the prices of the products they sell b. Firms are unable to earn an economic profit in the long run. c. Firms sell identical products. d. All of the above.

d. All of the above.

Which of the following is not a characteristic of a perfectly competitive market structure? a. There are a very large number of firms that are small compared to the market. b. All firms sell identical products. c. There are no restrictions to entry by new firms. d. There are restrictions on exit of firms.

d. There are restrictions on exit of firms.

When the market system allocates inputs efficiently to produce goods and services that best satisfy consumer wants, which of the following is true? a. The price of a good represents the marginal benefit consumers receive from consuming the last unit of the good sold. b. Perfectly competitive firms produce up to the point where the price of the good equals the marginal cost of producing the last unit. c. Firms produce up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it. d. all of the above

d. all of the above

If an individual firm in a perfectly competitive market increases its price, the firm will experience a. higher revenue. b. lower average total cost. c. increased sales. d. none of the above.

d. none of the above.

In perfect competition a. the market demand curve and the individual's demand curve 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.

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

What is allocative efficiency?

production of a good or service up to the point where a marginal benefit from the last unit equals to a marginal cost of producing it.

What is productive efficiency?

refers to the situation in which a good or service is produced at the lowest possible cost

What is profit?

total revenue - total cost

What are characteristics of a market demand curve?

▶ A firm's demand curve is different from the market demand curve. ▶ Market demand in a perfectly competitive market is always downward sloping. ▶ The market price is determined by the market supply and demand curves.

When do firms experience profits or loss?

▶ TR > TC Economic profits ▶ TR < TC Economic loss ▶ TR = TC Normal profits