Perfect Competition (CH12)

A perfectly competitive farm produces 1,000 broccoli heads per week in the short run. At this quantity, ATC = $6 and AFC = $2. The market price is $3 per head and is equal to MC. To maximize profits or minimize losses, the farm should A) shut down in the short run. B) reduce output but continue to produce in the short run. C) increase output in the short run. D) do nothing because it is already maximizing profits.

A

If a perfectly competitive firm is producing a quantity where MC > MR, then profit: A) can be increased by decreasing production. B) is maximized. C) can be increased by increasing production. D) can be increased by decreasing the price.

A

In a perfectly competitive market, tastes and preferences lead to an increase in the demand for the good. Holding everything else constant, this will lead to an increase in price that will result in _____ in the short run, which will in turn _____, which will _____. A) positive economic profits; attract new firms; reduce the price B) economic losses; lead some firms to leave the industry; further increase the price C) economic losses; attract new firms; reduce the price D) positive economic profits; lead some firms to leave the industry; further increase the price

A

In the short run, a firm will continue to sell its product as long as: A) the price is greater than average variable costs. B) its marginal cost is increasing. C) it is making a positive profit. D) the price is greater than average total costs.

A

In the short run, fixed cost: A) is constant. B) does not impact a firm's profit level. C) falls as output increases. D) is directly proportional to average variable cost.

A

Many furniture stores run "going out of business" sales but never actually go out of business. Assume that furniture is sold in a perfectly competitive market. For a furniture firm to actually shut down in the short run, the price of furniture must be _____ than the _____ average variable cost. A) lower; minimum B) lower; maximum C) higher; minimum D) higher; maximum

A

Perfectly competitive industries are characterized by: A) standardized goods. B) few sellers and many buyers. C) a few producers that account for most of the market share. D) consumers who can differentiate between products.

A

A competitive firm operating in the short run is maximizing profits and just breaking even. Its costs include a monthly state license fee of $100 that must be paid for as long as the firm operates. If the license fee is raised to $150, what should the firm do to maximize profits in the short run? A) increase price B) not change output C) increase output D) reduce output

B

Antonio sells cell phone cases in a perfectly competitive market. If Antonio sells 40 cell phone cases at a price of $40 per unit, his marginal revenue is: A) $10. B) $40. C) more than $40. D) $1,600.

B

Consider a perfectly competitive firm in the short run. Assume that it is sustaining economic losses but continues to produce at the profit-maximizing (loss-minimizing) output. Which statement is false? A) Marginal cost is equal to marginal revenue. B) Marginal cost is less than average total cost. C) Marginal cost is less than average variable cost. D) Price is equal to marginal cost.

C

For a firm producing at a quantity of output below the profit-maximizing quantity of output, an increase in output adds: A) more to total cost than to total revenue. B) the same amount to total revenue and total cost. C) more to total revenue than to total cost. D) to total revenue but not total cost.

C

In perfect competition, a change in fixed cost will A) cause a change in output in the short run. B) cause a change in variable cost. C) encourage entry or exit in the long run, with price changing so as to leave firms earning zero profits. D) cause a change in price in the short run.

C

In the short run, a perfectly competitive firm produces output and earns zero economic profit if: A) P < ATC. B) P < MC. C) P = ATC. D) P > ATC.

C

Jack operates a perfectly competitive firm in the long run. For several periods, the market price has been $20, and his break-even price is $22. Given the chance to change his fixed costs, Janet should: A) stay in the industry since he is a perfect competitor and must take the price as given. B) stay in the industry since he can cover his fixed costs. C) seriously consider exiting the industry since he is consistently making economic losses. D) wait for the short-run period.

C

Which scenario is most likely to cause firms to exit a perfectly competitive industry? A) Consumer tastes and preferences for this product get stronger, making them more interested in the good. B) The price of a key variable input falls. C) Consumer income falls. D) A technological advance allows all firms to produce more efficiently.

C

Generally, when preferences for a good rise, demand for the good rises. If a perfectly competitive market starts in long-run equilibrium, holding all else constant, this will result in a higher market price, which will lead to _____ in the industry and _____ the market. This causes price to _____. A) economic losses; attracts new firms into; fall B) economic losses; causes some firms to leave; rise further C) positive economic profits; causes some firms to leave; rise further D) positive economic profits; attracts new firms into; fall

D

In the long run, all of the firms in a perfectly competitive industry will: A) earn an economic profit greater than zero. B) produce an output level at which price is greater than average total cost. C) exit the industry if price is greater than average total cost. D) produce at an output level at which average total cost equals marginal cost.

D

Jennifer's Sunglass Hut operates in a perfectly competitive industry and has standard cost curves. The variable costs at Jennifer's Sunglass Hut decrease, so all the cost curves (except fixed cost) shift downward. The demand for Jennifer's sunglasses does not change, nor does the firm shut down. To maximize profits after the variable cost decrease, Jennifer's Sunglass Hut will _____ its price and _____ its level of production. A) not change; decrease B) raise; decrease C) raise; increase D) not change; increase

D

The equilibrium price of a travel guide book is $35 in the perfectly competitive travel guide book industry. Our firm produces 10,000 travel guide books at an average total cost of $38, marginal cost of $30, and average variable cost of $30. In the short run, our firm should A) raise the price of travel guide books because the firm is losing money. B) keep output the same because the firm is producing at the minimum average variable cost. C) shut down because the firm is losing money. D) produce more travel guide books because the next travel guide book produced will increase profit by $5.

D