Chapter 22—Perfect Competition
For a perfectly competitive firm, profit maximization or loss minimization occurs at the output at which
a. MR = MC.
A "price taker" is a firm that
a. does not have the ability to control the price of the product it sells.
Refer to Exhibit 22-1. The marginal revenue curve represented by the information in this table is
c. horizontal.
Perfectly competitive firms are price takers for all of the following reasons except that
d. barriers to exit force firms to sell at the market price.
The perfectly competitive firm will produce in the
The perfectly competitive firm will produce in the
Refer to Exhibit 22-8. 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.
Why must profits be zero in long-run competitive equilibrium?
a. If profits are not zero, firms will enter or exit the industry.
Does a real-world market have to meet all the assumptions of the theory of perfect competition before it is considered a perfectly competitive market?
a. No, probably no real-world market meets all the assumptions of the theory of perfect competition. All that is necessary is that a real-world market behave as if it satisfies all the assumptions.
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.
The market demand curve in a perfectly competitive market is
a. downward sloping.
For a perfectly competitive firm,
a. the marginal revenue curve and the demand curve are the same.
Refer to Exhibit 22-1. The dollar amounts that go in blanks (A) and (B) are, respectively,
b. $12 and $12.
Refer to Exhibit 22-3. What is the maximum profit?
b. $59
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?
b. Continue to produce in the short run, because price is greater than average variable cost.
Which of the following is not an assumption of the theory of perfect competition?
b. Each firm produces and sells a differentiated product.
Which of the following is not a condition of long-run competitive equilibrium?
b. Marginal revenue is greater than marginal cost.
Refer to Exhibit 22-2. If the firm produces the quantity of output at which marginal revenue (MR) equals marginal cost (MC), is it guaranteed maximum profit or minimized loss?
b. No, at the quantity of output at which MR = MC, it could be the case that average variable cost is greater than price and the firm would do better to shut down.
Which of the following conditions does not characterize long-run competitive equilibrium?
b. Price is greater than marginal cost.
Refer to Exhibit 22-2. What quantity does the profit-maximizing or loss-minimizing firm produce?
b. Q2, where the difference between "what is coming in" on the last unit and "what is going out" is zero.
Which of the following statements is false?
b. The theory of perfect competition is completely and accurately descriptive of most real-world firms.
If, for the last unit of a good produced by a perfectly competitive firm, MR > MC, then in producing that unit the firm
b. added more to total revenue than it added to total costs.
The price at which a perfectly competitive firm sells its product is determined by
b. all sellers and buyers of the product.
Refer to Exhibit 22-4. Where can you find the lowest price that will motivate the firm to produce Q1 in the short run?
b. at the horizontal line running to "AVC"
A seller is a price taker. This means that the seller sells his product at the price
b. determined in the market.
If firms are earning zero economic profits, they must be producing at an output level at which
b. price equals average total cost.
Refer to Exhibit 22-4. Equilibrium price is P1, and the firm produces Q1. At this level of output, average variable cost and average total cost are indicated by the dots. Given this situation, the firm is
b. taking a loss equal to areas 2 + 3.
Refer to Exhibit 22-7. At the profit-maximizing output level, average total cost is
c. $5.00.
Refer to Exhibit 22-3. What quantity of output should the profit-maximizing firm produce?
c. 44 units
In the long run, a firm earns zero economic profit, given the condition that
c. P = ATC.
Demand increases in an increasing-cost industry that is initially in long-run competitive equilibrium. After full adjustment, price will be
c. above its original level.
The theory of perfect competition generally assumes that
c. buyers and sellers act independently of other buyers and sellers.
Refer to Exhibit 22-1. The firm's demand curve represented by the information in this table is
c. horizontal.
The demand curve for a perfectly competitive firm
c. is perfectly horizontal.
Refer to Exhibit 22-1. The data in this table are relevant to a perfectly competitive firm because
c. it doesn't have to lower price to sell additional units of the product.
A perfectly competitive firm should increase its level of production as long as
c. marginal revenue is greater than marginal cost.
Resource allocative efficiency occurs when a firm
c. produces the quantity of output at which price equals marginal cost.
If MR > MC, then
c. the firm can increase its profits or minimize its losses by increasing output.
Refer to Exhibit 22-4. The firm sells its product at P1 and produces Q1. Given this situation,
c. total cost is equal to areas 1 + 2 + 3.
Refer to Exhibit 22-7. At the profit-maximizing output level, the firm's total revenue is
d. $360.00.
Refer to Exhibit 22-7. At the profit-maximizing level of output, marginal cost is
d. $6.00.
22-07. Refer to Exhibit 22-7. What is the profit at 60 units of output?
d. $60
Consider the following data: equilibrium price = $9, quantity of output produced = 1,000 units, average total cost = $7, and average variable cost $5. Given this, total revenue is __________, total cost is __________, and total fixed cost is __________.
d. $9,000; $7,000; $2,000
Refer to Exhibit 22-7. The perfectly competitive, profit-maximizing firm will produce __________ units of output.
d. 60
If the perfectly competitive firm is producing an output level at which price equals marginal cost, it is
d. There is not enough information to answer the question.
Refer to Exhibit 22-4. The firm sells its product at P1 and produces Q1. Given this situation,
d. a and b
Real-world markets that approximate the four assumptions of the theory of perfect competition include
d. a and c
Assume a constant-cost 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.
d. increase; enter; rightward; the same as
The perfectly competitive firm will seek to produce the output level for which
d. marginal cost equals marginal revenue.
Marginal revenue is
d. the change in total revenue brought about by selling an additional unit of the good.
Which of the following is the best example of a homogeneous good?
d. wheat
Refer to Exhibit 22-3. What is the increase in profit that would result from producing 43 units of the product rather than producing 40 units?
e. $13
In the short-run, if P < ATC, a perfectly competitive firm should
e. There is not enough information to answer the question.
Refer to Exhibit 22-7. At the profit-maximizing output level, average fixed cost is
e. This cannot be determined based on the information provided.
Refer to Exhibit 22-2. For the firm that faces the demand curve in the exhibit,
e. a, b, and c
In the theory of perfect competition,
e. b and d
The perfectly competitive firm's short-run supply curve is the
e. portion of its marginal cost curve that lies above its average variable cost curve.
