Chapter 8
Which of the following statements applies to a purely competitive producer? A. It will not advertise its product. B. In long-run equilibrium it will earn an economic profit. C. Its product will have a brand name. D. Its product is slightly different from those of its competitors.
A. It will not advertise its product.
Which of the following is characteristic of a purely competitive seller's demand curve? A. Price and marginal revenue are equal at all levels of output. B. Average revenue is less than price. C. Its elasticity coefficient is 1 at all levels of output. D. It is the same as the market demand curve.
A. Price and marginal revenue are equal at all levels of output.
Which of the following is not a valid generalization concerning the relationship between price and costs for a purely competitive seller in the short run? A. Price must be at least equal to average total cost. B. Price times quantity produced must be equal to or greater than total variable cost for some level of output or the firm will close down in the short run. C. Price may be equal to, greater than, or less than average total cost. D. Price must be equal to or greater than minimum average variable cost for the firm to continue producing.
A. Price must be at least equal to average total cost.
Which of the following statements is correct? A. The demand curve for a purely competitive firm is perfectly elastic, but the demand curve for a purely competitive industry is downsloping. B. The demand curve for a purely competitive firm is downsloping, but the demand curve for a purely competitive industry is perfectly elastic. C. The demand curves are downsloping for both a purely competitive firm and a purely competitive industry. D. The demand curves are perfectly elastic for both a purely competitive firm and a purely competitive industry.
A. The demand curve for a purely competitive firm is perfectly elastic, but the demand curve for a purely competitive industry is downsloping.
Which of the following industries most closely approximates pure competition? A. agriculture B. farm implements C. clothing D. steel
A. agriculture
Which of the following is not a basic characteristic of pure competition? A. considerable nonprice competition B. no barriers to the entry or exit of firms C. a standardized or homogeneous product D. a large number of buyers and sellers
A. considerable nonprice competition
The MR = MC rule can be restated for a purely competitive seller as P = MC because: A. each additional unit of output adds exactly its price to total revenue. B. the firm's average revenue curve is downsloping. C. the market demand curve is downsloping. D. the firm's marginal revenue and total revenue curves will coincide.
A. each additional unit of output adds exactly its price to total revenue.
An industry comprised of 40 firms, none of which has more than 3 percent of the total market for a differentiated product is an example of: A. monopolistic competition. B. oligopoly. C. pure monopoly. D. pure competition.
A. monopolistic competition.
Which of the following is not a characteristic of pure competition? A. price strategies by firms B. a standardized product C. no barriers to entry D. a larger number of sellers
A. price strategies by firms
In which of the following industry structures is the entry of new firms the most difficult? A. pure monopoly B. oligopoly C. monopolistic competition D. pure competition
A. pure monopoly
In answering the question, assume a graph in which dollars are measured on the vertical axis and output on the horizontal axis. Refer to the above information. For a purely competitive firm, total revenue graphs as a: A. straight, upsloping line. B. straight line, parallel to the vertical axis. C. straight line, parallel to the horizontal axis. D. straight, downsloping line.
A. straight, upsloping line.
The MR = MC rule applies: A. to firms in all types of industries. B. only when the firm is a "price taker." C. only to monopolies. D. only to purely competitive firms.
A. to firms in all types of industries.
A competitive firm will maximize profits at that output at which: A. total revenue exceeds total cost by the greatest amount. B. total revenue and total cost are equal. C. price exceeds average total cost by the largest amount. D. the difference between marginal revenue and price is at a maximum.
A. total revenue exceeds total cost by the greatest amount.
A purely competitive firm should produce in the short run if its total revenue is sufficient to cover its: A. total variable costs. B. total costs. C. total fixed costs. D. marginal costs.
A. total variable costs.
Economists would describe the U.S. automobile industry as: A. purely competitive. B. an oligopoly. C. monopolistically competitive. D. a pure monopoly.
B. an oligopoly.
A perfectly elastic demand curve implies that the firm: A. must lower price to sell more output. B. can sell as much output as it chooses at the existing price. C. realizes an increase in total revenue which is less than product price when it sells an extra unit. D. is selling a differentiated (heterogeneous) product.
B. can sell as much output as it chooses at the existing price.
The demand curve in a purely competitive industry is _____, while the demand curve to a single firm in that industry is _____. A. perfectly inelastic, perfectly elastic B. downsloping, perfectly elastic C. downsloping, perfectly inelastic D. perfectly elastic, downsloping
B. downsloping, perfectly elastic
Assume a purely competitive firm is selling 200 units of output at $3 each. At this output its total fixed cost is $100 and its total variable cost is $350. This firm: A. is maximizing its profit. B. is making a profit, but not necessarily the maximum profit. C. is incurring losses. D. should shut down in the short run.
B. is making a profit, but not necessarily the maximum profit.
If a purely competitive firm is maximizing economic profit: A. it is necessarily maximizing per-unit profit. B. it may or may not be maximizing per unit profit. C. then per-unit profit will be minimized. D. it is necessarily overallocating resources to its product.
B. it may or may not be maximizing per unit profit.
In the short run the individual competitive firm's supply curve is that segment of the: A. average variable cost curve lying below the marginal cost curve. B. marginal cost curve lying above the average variable cost curve. C. marginal revenue curve lying below the demand curve. D. marginal cost curve lying between the average total cost and average variable cost curves.
B. marginal cost curve lying above the average variable cost curve.
If a purely competitive firm is producing at the P = MC output and realizing an economic profit, at that output: A. marginal revenue is less than price. B. marginal revenue exceeds ATC. C. ATC is being minimized. D. total revenue equals total cost.
B. marginal revenue exceeds ATC.
When a firm is maximizing profit it will necessarily be: A. maximizing profit per unit of output. B. maximizing the difference between total revenue and total cost. C. minimizing total cost. D. maximizing total revenue.
B. maximizing the difference between total revenue and total cost.
If a profit-seeking competitive firm is producing its profit-maximizing output and its total fixed costs fall by 25 percent, the firm should: A. use more labor and less capital to produce a larger output. B. not change its output. C. reduce its output. D. increase its output.
B. not change its output.
In which of the following market structures is there clear-cut mutual interdependence with respect to price-output policies? A. pure monopoly B. oligopoly C. monopolistic competition D. pure competition
B. oligopoly
An industry comprised of a small number of firms, each of which considers the potential reactions of its rivals in making price-output decisions is called: A. monopolistic competition. B. oligopoly. C. pure monopoly. D. pure competition.
B. oligopoly.
An industry comprised of four firms, each with about 25 percent of the total market for a product is an example of: A. monopolistic competition. B. oligopoly. C. pure monopoly. D. pure competition
B. oligopoly.
The demand schedule or curve confronted by the individual purely competitive firm is: A. relatively elastic, that is, the elasticity coefficient is greater than unity. B. perfectly elastic. C. relatively inelastic, that is, the elasticity coefficient is less than unity. D. perfectly inelastic.
B. perfectly elastic.
If a firm is confronted with economic losses in the short run, it will decide whether or not to produce by comparing: A. marginal revenue and marginal cost. B. price and minimum average variable cost. C. total revenue and total cost. D. total revenue and total fixed cost.
B. price and minimum average variable cost.
In the short run a purely competitive seller will shut down if: A. it cannot produce at an economic profit. B. price is less than average variable cost at all outputs. C. price is less than average fixed cost at all outputs. D. there is no point at which marginal revenue and marginal cost are equal.
B. price is less than average variable cost at all outputs.
A firm finds that at its MR = MC output, its TC = $1,000, TVC = $800, TFC = $200, and total revenue is $900. This firm should: A. shut down in the short run. B. produce because the resulting loss is less than its TFC. C. produce because it will realize an economic profit. D. liquidate its assets and go out of business.
B. produce because the resulting loss is less than its TFC.
On a per unit basis economic profit can be determined as the difference between: A. marginal revenue and product price. B. product price and average total cost. C. marginal revenue and marginal cost. D. average fixed cost and product price.
B. product price and average total cost.
The principle that a firm should produce up to the point where the marginal revenue from the sale of an extra unit of output is equal to the marginal cost of producing it is known as the: A. output-maximizing rule. B. profit-maximizing rule. C. shut-down rule. D. break-even rule.
B. profit-maximizing rule.
The lowest point on a purely competitive firm's short-run supply curve corresponds to: A. the minimum point on its ATC curve. B. the minimum point on its AVC curve. C. the minimum point on its AFC curve. D. the minimum point on its MC curve.
B. the minimum point on its AVC curve.
A purely competitive firm's short-run supply curve is: A. perfectly elastic at the minimum average total cost. B. upsloping and equal to the portion of the marginal cost curve that lies above the average variable cost curve. C. upsloping and equal to the portion of the marginal cost curve that lies above the average total cost curve. D. upsloping only when the industry has constant costs.
B. upsloping and equal to the portion of the marginal cost curve that lies above the average variable cost curve.
In the short run a purely competitive firm that seeks to maximize profit will produce: A. where the demand and the ATC curves intersect. B. where total revenue exceeds total cost by the maximum amount. C. that output where economic profits are zero. D. at any point where the total revenue and total cost curves intersect.
B. where total revenue exceeds total cost by the maximum amount.
If a firm in a purely competitive industry is confronted with an equilibrium price of $5, its marginal revenue: A. may be either greater or less than $5. B. will also be $5. C. will be less than $5. D. will be greater than $5.
B. will also be $5.
If at the MC = MR output, AVC exceeds price: A. New firms will enter this industry. B. The firm should produce the MC = MR output and realize an economic profit. C. Some firms should shut down in the short run. D. The firm should expand its plant.
C. Some firms should shut down in the short run.
A purely competitive seller is: A. both a "price maker" and a "price taker." B. neither a "price maker" nor a "price taker." C. a "price taker." D. a "price maker."
C. a "price taker."
DASH Airlines is considering the addition of a flight from Red Cloud to David City. The total cost of the flight would be $1,100, of which $800 are fixed costs already incurred. Expected revenues from the flight are $600. DASH should: A. not add this flight because only flights which cover their full costs are profitable. B. not add this flight because it is not profitable at the margin. C. add this flight because marginal revenue exceeds marginal costs and total revenue exceeds total variable cost. D. not add this flight because total costs exceed total revenue.
C. add this flight because marginal revenue exceeds marginal costs and total revenue exceeds total variable cost.
Suppose that at 500 units of output marginal revenue is equal to marginal cost. The firm is selling its output at $5 per unit and average total cost at 500 units of output is $6. On the basis of this information we: A. can say that the firm should close down in the short run. B. can say that the firm can produce and realize an economic profit in the short run. C. cannot determine whether the firm should produce or shut down in the short run. D. can assume the firm is not using the most efficient technology.
C. cannot determine whether the firm should produce or shut down in the short run.
Suppose you find that the price of your product is less than minimum AVC. You should: A. minimize your losses by producing where P = MC. B. maximize your profits by producing where P = MC. C. close down because, by producing, your losses will exceed your total fixed costs. D. close down because total revenue exceeds total variable cost.
C. close down because, by producing, your losses will exceed your total fixed costs.
Price is constant or given to the individual firm selling in a purely competitive market because: A. the firm's demand curve is downsloping. B. of product differentiation reinforced by extensive advertising. C. each seller supplies a negligible fraction of total supply. D. there are no good substitutes for its product.
C. each seller supplies a negligible fraction of total supply.
A purely competitive seller should produce (rather than shut down) in the short run: A. only if total revenue exceeds total cost. B. only if total cost exceeds total revenue. C. if total revenue exceeds total cost or if total cost exceeds total revenue by some amount less than total fixed cost. D. if total cost exceeds total revenue by some amount greater than total fixed cost.
C. if total revenue exceeds total cost or if total cost exceeds total revenue by some amount less than total fixed cost.
The marginal revenue curve of a purely competitive firm: A. lies below the firm's demand curve. B. is downsloping because price must be reduced to sell more output. C. is horizontal at the market price. D. has all of these characteristics.
C. is horizontal at the market price.
In the short run, a purely competitive seller will shut down if product price: A. equals average revenue. B. is greater than MC. C. is less than AVC. D. is less than ATC.
C. is less than AVC.
If a purely competitive firm shuts down in the short run: A. its loss will be zero. B. it will realize a loss equal to its total variable costs. C. it will realize a loss equal to its total fixed costs. D. it will realize a loss equal to its explicit costs.
C. it will realize a loss equal to its total fixed costs.
A competitive firm in the short run can determine the profit-maximizing (or loss-minimizing) output by equating: A. price and average total cost. B. price and average fixed cost. C. marginal revenue and marginal cost. D. price and marginal revenue.
C. marginal revenue and marginal cost.
Assume for a competitive firm that MC = AVC at $12, MC = ATC at $20, and MC = MR at $16. This firm will: A. realize a profit of $4 per unit of output. B. maximize its profit by producing in the short run. C. minimize its losses by producing in the short run. D. shut down in the short run.
C. minimize its losses by producing in the short run.
The fact that a purely competitive firm's total revenue curve is linear and upsloping to the right implies that: A. product price increases as output increases. B. product price decreases as output increases. C. product price is constant at all levels of output. D. marginal revenue declines as more output is produced.
C. product price is constant at all levels of output.
In answering the question, assume a graph in which dollars are measured on the vertical axis and output on the horizontal axis. Refer to the above information. For a purely competitive firm, marginal revenue graphs as a: A. straight, upsloping line. B. straight line, parallel to the vertical axis. C. straight line, parallel to the horizontal axis. D. straight, downsloping line.
C. straight line, parallel to the horizontal axis.
The short-run supply curve for a purely competitive industry can be found by: A. multiplying the AVC curve of the representative firm by the number of firms in the industry. B. adding horizontally the AVC curves of all firms. C. summing horizontally the segments of the MC curves lying above the AVC curve for all firms. D. adding horizontally the immediate market period supply curves of each firm.
C. summing horizontally the segments of the MC curves lying above the AVC curve for all firms.
. Firms seek to maximize: A. per unit profit. B. total revenue. C. total profit. D. market share.
C. total profit.
The short-run supply curve of a purely competitive producer is based primarily on its: A. AVC curve. B. ATC curve. C. AFC curve. D. MC curve.
D. MC curve.
In the short run, a purely competitive firm will earn a normal profit when: A. P = AVC. B. P > MC. C. that firm's MR = market equilibrium price. D. P = ATC.
D. P = ATC.
In the short run a purely competitive firm will always make an economic profit if: A. P = ATC. B. P > AVC. C. P = MC. D. P > ATC.
D. P > ATC.
For a purely competitive seller, price equals: A. average revenue. B. marginal revenue. C. total revenue divided by output. D. all of these.
D. all of these.
Marginal revenue is the: A. change in product price associated with the sale of one more unit of output. B. change in average revenue associated with the sale of one more unit of output. C. difference between product price and average total cost. D. change in total revenue associated with the sale of one more unit of output.
D. change in total revenue associated with the sale of one more unit of output.
In contrast to American firms, Japanese firms frequently make lifetime employment commitments to their workers and agree not to lay them off when product demand is weak. Other things being equal, we would expect Japanese firms to: A. face more elastic product demand curves than American firms. B. have relatively greater variable costs than American firms. C. discontinue production at higher product prices than would American firms. D. continue to produce in the short run at lower prices than would American firms.
D. continue to produce in the short run at lower prices than would American firms.
For a purely competitive firm total revenue: A. is price times quantity sold. B. increases by a constant absolute amount as output expands. C. graphs as a straight upsloping line from the origin. D. has all of these characteristics.
D. has all of these characteristics.
Assume the XYZ Corporation is producing 20 units of output. It is selling this output in a purely competitive market at $10 per unit. Its total fixed costs are $100 and its average variable cost is $3 at 20 units of output. This corporation: A. should close down in the short run. B. is maximizing its profits. C. is realizing a loss of $60. D. is realizing an economic profit of $40.
D. is realizing an economic profit of $40.
If a purely competitive firm is producing at some level less than the profit-maximizing output, then: A. price is necessarily greater than average total cost. B. fixed costs are large relative to variable costs. C. price exceeds marginal revenue. D. marginal revenue exceeds marginal cost.
D. marginal revenue exceeds marginal cost.
The Ajax Manufacturing Company is selling in a purely competitive market. Its output is 100 units which sell at $4 each. At this level of output total cost is $600, total fixed cost is $100, and marginal cost is $4. The firm should: A. reduce output to about 80 units. B. expand its production. C. continue to produce 100 units. D. produce zero units of output.
D. produce zero units of output.
An industry comprised of a very large number of sellers producing a standardized product is known as: A. monopolistic competition. B. oligopoly. C. pure monopoly. D. pure competition.
D. pure competition.
In answering the question, assume a graph in which dollars are measured on the vertical axis and output on the horizontal axis. Refer to the above information. For a purely competitive firm: A. marginal revenue will graph as an upsloping line. B. the demand curve will lie above the marginal revenue curve. C. the marginal revenue curve will lie above the demand curve. D. the demand and marginal revenue curves will coincide.
D. the demand and marginal revenue curves will coincide.
Economists use the term imperfect competition to describe: A. all industries which produce standardized products. B. any industry in which there is no nonprice competition. C. a pure monopoly only. D. those markets which are not purely competitive.
D. those markets which are not purely competitive.
A firm reaches a break-even point (normal profit position) where: A. marginal revenue cuts the horizontal axis. B. marginal cost intersects the average variable cost curve. C. total revenue equals total variable cost. D. total revenue and total cost are equal.
D. total revenue and total cost are equal.
