Ch. 8 Perfect Competition

5. Which of the following is a characteristic of a competitive price-taker market?

There are many firms in the market, each producing a small share of total market output.

15. Which of the following correctly explains why sellers in a perfectly competitive market are price takers?

There are many sellers, and so the market process generates an equilibrium price that cannot be influenced by any one seller. Thus they have no choice but to take the price generated by the market process.

78. In Exhibit 8-8, product price in this market is fixed at $35. This firm is currently operating where MR = MC. What do you advise this firm to do?

This firm should continue to operate at its current output.

80. In Exhibit 8-9, product price in this market is fixed at $7. This firm is currently operating where MR = MC. What do you advise this firm to do?

This firm should shut down.

88. In Exhibit 8-16, if the market price of its product is $50 per unit, then the firm will:

break even.

6. When a product is defined as homogeneous,

buyers are indifferent as to which seller's product they buy.

119. If the expansion of output in an industry leads to unchanged resource prices, the industry is most likely to be a(n):

constant cost industry.

86. In Exhibit 8-15, suppose the market price of mowing lawns falls to $10 per lawn. In this situation, E-Z-Care will:

continue to mow lawns in the short run despite its economic losses.

67. Suppose that price is below the minimum average total cost but above the minimum average variable cost. In the short run, a firm that is a price taker would:

continue to produce a quantity such that marginal revenue equals marginal cost.

122. If a perfectly competitive industry's long-run supply curve is downward sloping, we can conclude that input prices will:

decrease as industry output increases.

110. The long run is a planning period:

during which the firm can vary its plant size.

2. The large-number-of-sellers condition of perfect competition is met when

each firm is so small relative to the total market that no single firm can influence the market price.

59. In Exhibit 8-6, if this firm is currently producing 20 units of output, this firm is

earning a profit of $10.

44. The neighborhood ice cream shop finds that when it charges $3 per ice cream cone, its total revenues are $90,000. It has total variable costs of $30,000 and total fixed costs of $40,000. From this we can infer the:

economic profits are $20,000.

114. Suppose that in a perfectly competitive market, firms are making economic profits. In the long run, we can expect to see:

economic profits become zero.

77. As shown in Exhibit 8-3, the firm will produce in the short run if the price is at least equal to:

$1.50 per unit (point B).

45. If a fishing boat owner brings 10,000 fish to market and the market price is $7 per fish, she will have $70,000 in total revenue. If the average variable cost of 10,000 fish is $4 and the fixed cost of the boat is $20,000, what is her profit?

$10,000.

51. If a perfectly competitive firm sells 50 units of output at a market price of $10 per unit, its marginal revenue is:

$10.

63. In Exhibit 8-15, what market price would cause E-Z-Care to just break even?

$12 per lawn.

61. In Exhibit 8-10, the maximum possible total profit is:

$12.

75. If a firm is operating at a loss in the short run and finds that its price is greater than average variable cost, then

it should produce where MR = MC.

70. In the short run, a firm should shut down its operation if:

its losses are greater than TFC at the MR = MC point.

3. Suppose a single egg farmer alters the number of eggs she produces but the change in egg output does not have any effect on the market price. This example describes which of the following characteristics of perfect competition?

large number of small firms

24. Exhibit 8-1 indicates that this firm is operating in which type of market structure?

perfect competition

116. Consider a firm operating with the following: price = 10; MR = 10; MC = 10; ATC = 10. This firm is:

perfectly competitive in long-run equilibrium.

19. The demand for the product of a competitive price-taker firm is:

perfectly elastic.

85. In Exhibit 8-13, the firm will not produce when the price is between:

zero and P2.

98. Above the shutdown point, a competitive firm's supply curve coincides with its:

​marginal cost curve.

81. In the short run, when the prevailing market price falls below the average variable cost curve, a firm in perfect competition will shut down because: ​

​marginal revenue is insufficient to pay average variable cost.

43. Consider a firm with the following cost information: ATC = $15, AVC = $12, and MC = $14. If we know that this firm has decided to produce Q = 20 by following the rule to maximize profits or minimize losses, then the price of the output is:

$14.

53. A portrait photographer produces output in packages of 100 photos each. If the output sold increases from 600 to 700 photos, total revenue increases from $1,200 to $1,400. The marginal revenue per photo is:

$2.

56. As shown in Exhibit 8-3, the price at which the firm earns zero economic profit in the short-run is:

$2.00 per unit.

87. In Exhibit 8-16, the firm should shut down in the short run if the market price of its product falls below:

$30 per unit.

89. In Exhibit 8-11, the profit-maximizing output level at the price of $8 is:

10.

55. In Exhibit 8-3, if the price of the firm's product is $2.00 per unit, the firm will produce:

15 units per day.

57. In Exhibit 8-4, what is this firm's profit-maximizing rate of output?

16

99. Suppose that 1000 identical sellers each set their profit-maximizing output level at 18 units when price equals $10. Then what is market quantity supplied at a price of $10?

18,000.

117. As shown in Exhibit 8-18, the perfectly competitive firm is in long-run equilibrium at a price of:

200

54. In Exhibit 8-2, economic profit for the firm is at a maximum when output per week equals:

250 units.

60. In Exhibit 8-10, following the rule regarding MR and MC, the most profitable output level is:

3.

124. As shown in Exhibit 8-19, assume that a perfectly competitive industry is in long-run equilibrium at point A and the demand curve shifts from D1 to D2. The result is a long-run supply curve drawn from point:

A to point C.

104. What is a firm's short run supply curve?

A firm's short run supply curve is that portion of its marginal cost curve above minimum average variable cost.

123. As shown in Exhibit 8-19, assume that a perfectly competitive industry is in long-run equilibrium at point A. If the demand curve shifts from D1 to D2, the adjustment sequence between points will be:

A to B, then to C.

69. In the short run, a firm should shut down its business if price is less than:

AVC.

64. Which of the following best describes why a perfectly competitive firm will sometimes continue producing in the short run even if it incurs a loss?

As long as price exceeds average variable cost, the loss from producing will be smaller than the loss from shutting down, which is equal to the amount of total fixed costs.

103. As shown in Exhibit 8-17, the short-run supply curve for the firm corresponds to which segment of its marginal cost curve?

B and all points above.

96. In Exhibit 8-13, the firm's short-run supply curve is the marginal cost curve above point

B.

65. In the short run, why would a firm in a perfectly competitive market shut down production if the prevailing market price falls below the lowest possible average variable cost?

Below that point marginal revenue becomes insufficient to pay for avoidable average variable cost.

32. A firm is currently operating where the MC of the last unit produced = $84, and the MR of this unit = $70. What would you advise this firm to do?

Decrease output.

125. Assume a competitive market has firms earning large economic profits. What is expected to happen over time in this competitive market and to firm's profits?

Economic profits will attract new firms into the market. This increases market supply and decreases market price. The demand curve facing firms will decline (shift downward). Profits will decline until a zero economic profit (a normal profit) is earned. In the long run, competitive firms can earn only a normal profit.

1. Which of the following is not a characteristic of the structure of perfectly competitive markets?

Few sellers.

11. Which of the following is not a characteristic of a perfectly competitive market?

Firms are price makers, not price takers.

108. Which of the following is a key characteristic of the long-run competitive equilibrium that distinguishes it from the short-run competitive equilibrium?

Free entry to reduce short-run profits, or free exit to reduce short-run losses.

18. Which of the following best explains why a firm in a perfectly competitive market must take the price determined in the market?

If a price taker increased its price, consumers would buy from other suppliers.

26. Which of the following offers the best explanation of why "marginal revenue equals marginal cost" is the rule that indicates the profit-maximizing output level?

If output were increased from the profit-maximizing level, then the firm would be gaining marginal revenue that is less than the marginal cost incurred in producing this additional unit, and thus reducing the level of profit.

112. Which of the following statements is true?

In long-run equilibrium, a competitive firm produces at the point of minimum average total cost.

33. A firm is currently operating where the MC of the last unit produced = $64, and the MR of this unit = $70. What would you advise this firm to do?

Increase output.

58. In Exhibit 8-5, a firm is currently producing 40 units of output. What would you advise this firm to do?

Increase output.

49. If a firm in a competitive industry is making zero economic profit but still producing, it must be the case that:

MC = MR = ATC.

34. The point of maximum profit for a business firm is where:

MR = MC.

102. As shown in Exhibit 8-12, the firm will shut down in the short-run at a price below:

OA

84. As shown in Exhibit 8-12, the firm will not produce in the short-run if the price is below:

OA

93. As shown in Exhibit 8-12, the price that will yield zero economic profit is:

OB.

94. As shown in Exhibit 8-12, if the price is OD, the firm's total revenue at its most profitable level of output is:

OZID

62. In Exhibit 8-10, MR is the same as which column?

P

115. The long-run equilibrium condition for perfect competition is:

P = ATC = MR = MC.

79. In Exhibit 8-8, product price in this market is fixed at $35. This firm is currently operating where MR = MC. Which of the following is true?

Price > AVC and the firm should continue producing its current output.

97. In Exhibit 8-13, if the price is P3, total economic profit is maximized or economic loss minimized at the output:

Q3.

37. Suppose product price is fixed at $24; MR = MC at Q = 200; AFC = $6; AVC = $16. What do you advise this firm to do?

Stay at the current output; the firm is earning a profit of $400.

36. Maximizing profit means finding the maximum difference between:

TR and TC.

13. Which of the following is true of a perfectly competitive firm?

The firm will not earn an economic profit in the long run.

25. What are the characteristics of the perfectly competitive market?

The perfectly competitive market is characterized by a very large number of sellers, firms sell a standardized product, firms are price-takers, there are no barriers to entry and firms do not undertake any non-price competition.

126. What are the pros and cons of a competitive market in the long run?

The pros include price equals minimum average total costs and marginal cost. Also, only a normal profit is earned in the long run. The major drawback of a competitive market is that it usually does not promote technological advances (because competitive firms do not earn the profits necessary to enable long-term investments in research and development).

48. Suppose a company increases production from a point where marginal cost equals average total cost to a point where marginal revenue and marginal cost are equal. Is it a good idea for the company to do this? Why?

Yes, even though the previous level of output had minimized the average total cost, there was still profit to be earned by producing additional units.

92. As shown in Exhibit 8-12, if the firm's price is OD, the firm will supply

Z units and make an economic profit.

107. The short-run supply curve for a perfectly competitive firm is the marginal cost curve

above the minimum point of the average variable cost (AVC) curve because the firm maximizes profit by choosing the quantity at which marginal revenue equals marginal cost and below the minimum point of AVC the firm will shut down to minimize its losses.

31. A profit-maximizing firm will continue to expand output:

as long as the revenues from the production and sale of an additional unit exceeds the marginal cost of the unit.

47. The market price for wallets is $20. Your technology is such that at your most efficient production point, the average total cost of producing a wallet is $2.50. Your manager runs into your office and shouts, "Boss!!! Average costs are rising!! Average costs are rising!!" To make a profit-maximizing decision, you should:

ask the manager about the marginal cost.

72. If the price of a product is $12, its average total cost is $2 and its average total cost is $15 at the profit-maximizing output level, in the short run the firm:

experiences a loss.

20. In a perfectly competitive market buyers want to buy 20,000 units and sellers want to sell 20,000 units of a product when the price is $50 per unit. ABC Corporation, one seller in this market,

faces a perfectly elastic demand curve at a price of $50.

74. Suppose the price of a product is less than its average variable cost. When the firm's fixed obligations are completely ended, it will now most likely:

go out of business.

14. If a firm has no ability to influence the market price of its product, it:

has a horizontal individual demand curve.

121. Assume the short-run average total cost for a perfectly competitive industry decreases as the output of the industry expands. In the long run, the industry supply curve will:

have a negative slope.

113. In a perfectly competitive industry, assume the short-run average total cost increases as the output of the industry expands. In the long run, the industry supply curve will:

have a positive slope.

40. If a potato farmer expands output, he finds that the increase in total revenue is less than the increase in total costs. This means that:

he should not have expanded output.

7. Pedro goes to the local farmer's market and is just as happy buying corn from the first vendor as he is from the second vendor. This example describes which of the following characteristics of perfect competition?

homogeneous product

4. In the perfectly competitive market, all firms in the market are assumed to be producing:

identical products.

73. If a firm shuts down in the short run, it will:

incur losses equal to its fixed costs.

91. In Exhibit 8-11, when the price rises from $5 to $8, the profit-maximizing (or loss-minimizing) firm goes from making a:

loss to making a profit.

42. Jerome, the florist, sold 500 bridesmaid's bouquets in June. He estimates his costs that month were ATC = $10, AVC = $6, and MC = $9. If he sold each bouquet at the constant market price of $9, Jerome:

made a loss of $500.

27. A perfectly competitive firm sells its output for $100 per unit and marginal cost is $100 per unit. To maximize short-run profit, the firm should:

maintain its current output.

100. As market price increases in the short run, a profit-maximizing firm in a perfectly competitive market will expand output along its:

marginal cost curve.

29. A competitive firm maximizes its profits (or minimizes is losses) by producing the quantity where the market price equals the firm's:

marginal cost.

30. The profit maximizing or loss minimizing quantity of output for any firm to produce exists at that output level in which:

marginal revenue equals marginal cost.

17. A firm that is a price taker can:

market

16. A firm in a perfectly competitive market:

must take the price that is determined in the market.

28. In the short run, if a perfectly competitive firm is producing at a price below average total cost, its economic profit is:

negative.

95. If price is equal to OD for the firm shown in Exhibit 8-12, total profit is maximized when:

output is Z.

23. Under perfect competition, which of the following are equal at all levels of output?

price and marginal revenue

66. In the short run, a firm will stay in business as long as:

price exceeds average variable cost.

105. In Exhibit 8-13, if the price is P3, the firm will

produce Q3 and incur a loss in the short run.

46. If the market price is $5 and you are currently producing at a level where average total cost is $3 and falling, you should:

produce where MR = MC.

35. If a firm increases output when MR > MC, then:

profit will increase.

38. If a firm equates MR and MC, then:

profits are at a maximum or losses are at a minimum.

101. As shown in Exhibit 8-12, the firm's short-run supply curve is the:

rising part of marginal cost beginning at E.

22. Under perfect competition, a firm is a price taker because:

setting a price higher than the going price results in zero sales.

21. A firm operating in a perfectly competitive market is a price taker because:

setting a price higher than the market price results in zero sales.

41. A sandwich shop owner has the following information: P = MR = $4, ATC = $2, AVC = $1, MC = 4, and Q = 500. From this, she can determine:

she has earned economic profits of $1,000.

111. In long-run equilibrium, which of the following is not equal to price for a perfectly competitive firm?

short-run average variable cost

118. In Exhibit 8-18, assume the perfectly competitive firm is in long-run equilibrium and there is an increase in demand. As a result, the firm in the short run will increase output along its:

short-run marginal cost curve B.

90. In Exhibit 8-11, when the price is $5, the firm:

should produce output equal to 7.

83. In Exhibit 8-11, when the price is $2, the profit-maximizing (or loss-minimizing) firm:

should shut down and produce zero.

71. Consider a firm with the following cost and revenue information: ATC = $8, AVC = $7, and MR = MC = $6. If the firm produces Q = 60 in the short run, it:

should shut down.

82. If a competitive firm is losing money then it should:

shut down if its losses are greater than total fixed costs.

120. If resource prices rise and the per-unit cost of producing a product increases as the firms in an industry expand output in response to an increase in demand, the long-run market supply curve for the product will:

slope upward to the right.

10. Which of the following best illustrates a perfectly competitive market?

soybeans

76. If the price of the firm's product in Exhibit 8-3 is $1.50 per unit, which intersects AVC at point B, the firm should:

stay in operation for the time being even though it is making an economic loss.

8. Which of the following could be a perfectly competitive market?

the market for tradable stocks

68. The price-taker firm should discontinue production immediately if:

the market price is less than the firm's average variable costs.

106. Suppose the marginal revenue curve for a perfectly competitive firm intersects the average total cost curve at its minimum point. As the marginal revenue curve moves upward from that point along the marginal cost curve,

the profit-maximizing quantity increases.

50. In the perfectly competitive market, individual firms exert no effect on the market price. Therefore, the firm's marginal revenue is:

the same as the firm's demand curve.

52. Marginal revenue is the change in:

total revenue brought about by selling one more unit of output.

12. Bethany decides to get some build a chicken coop, get some chickens, and start selling fresh eggs in her neighborhood. This example describes which of the following characteristics of perfect competition?

very easy entry and exit

9. Which of the following best illustrates perfect competition?

wheat farming

39. If a firm is currently equating MR and MC and product price = $24, AVC = $22, and ATC = $26, then in the long run this firm:

will go out of business.

109. What is the largest possible loss that is consistent with a firm producing in a perfectly competitive market in long-run competitive equilibrium?

zero