Chapter 13: Perfect Competition

22. Refer to the graph shown, which depicts a perfectly competitive firm. When it is maximizingprofit, the total profit earned by this firm is roughly: $605. $200. $250. $300.

250 Explanation Since per unit profit is roughly $2.30 (more than $2.00 and less than $2.50) at the profit maximizing quantity of 110 units the best answer is $2.30 x 110 = $253 ~ $250.

9.A perfectly competitive firm will be profitable if price at the profit-maximizing quantity is above: AFC. AVC. ATC. MC.

ATC. Explanation If price exceeds average total cost or cost per unit, a firm is making positive economic profits.

three conditions for perfect competition.

There are no barriers to entry Firms' products are identical Explanation A perfectly competitive market is a market in which economic forces operate unimpeded. For a market to be called perfectly competitive, it must meet some stringent conditions. Some of these conditions include: Both buyers and sellers are price takers. The number of firms is large. There are no barriers to entry. Firms' products are identical, etc.

23. Refer to the graph shown. Assuming that the industry operates under conditions of perfect competition and that the firms seek to maximize profits, this firm will: incur economic losses in the short run. produce 1,200 square feet of construction in the short run. produce 800 square feet of construction per month in the short run. produce 1,000 square feet of construction per month in the short run.

produce 1,000 square feet of construction per month in the short run. Explanation Profit is at its maximum at that output level, because P = MR = MC. Price equals marginal cost at this output level in the short run.

3. Refer to the graph shown. If the firm is producing 450 units of output, profit is equal to: $30. -$30. $38. $0.

30 Explanation Profit is total revenue minus total cost ($180 - $150).

13 . Which graph depicts a perfectly competitive firm in long-run equilibrium? graph II graph IV graph III graph I

II Explanation In graph II, the market price is at the minimum point of the average total cost curve, and so economic profit is zero for this firm.

12. Refer to the graph shown. What price represents the shutdown price? 3 P2 P1 P4

P1 Explanation At this price, the firm maximizes profits by producing Q2 units since only at Q2 is marginal cost equal to price. At Q2, price equals average variable cost, and so the firm not only suffers a loss but also fails to generate any revenue to cover even a portion of its fixed costs, giving it no incentive to operate.

20. The existence of positive economic profits induces firms to: a. enter an industry, which shifts the market supply curve to the right and decreases market price. b. enter an industry, which shifts the market supply curve to the right and increases market price. c. enter an industry, which shifts the market supply curve to the left and decreases market price. d. exit an industry, which shifts the market supply curve to the right and decreases market price

enter an industry, which shifts the market supply curve to the right and decreases market price. Explanation When economic profits are positive, firms have an incentive to enter an industry. As they do, supply increases at every price level, causing prices to fall.

Long-run competitive equilibrium in an industry implies that no firm: a. is producing at the output level where price equals long-run average total cost. c. is earning a normal profit. d. has an incentive to enter or exit the industry. b. is earning accounting profits.

is producing at the output level where price equals long-run average total cost Explanation In a long-run equilibrium, firms earn a normal economic profit, and so there is no incentive to exit or enter the industry.

4. eBay.com is a vast auction site that is similar to a competitive market in some ways but differs from it in others. Which of the following describes how eBay resembles a competitive market? A. It is easy to enter and easy to leave eBay. B. Sellers sometimes do not describe the products accurately on eBay. C. There is a great variety of different products sold on eBay. D. On eBay the large sellers dominate the market. it is easy to enter and easy to leave eBay

it is easy to enter and easy to leave eBay Explanation Competitive markets assume no barriers to entry, and there are few or none with eBay.

19. Refer to the graph shown. Assuming that the industry operates under conditions of perfect competition: firms in the industry are earning zero economic profit. it is currently in equilibrium. new firms will soon enter the industry. existing firms will leave the industry.

new firms will soon enter the industry. Explanation At a price of $60, price exceeds average total cost, and so firms are making positive economic profits. This will induce entry in the long run.

17. Barriers to entry: exist only in perfectly competitive markets. restrict the number of firms in an industry. do not affect the number of firms in an industry. limit output in an industry.

restrict the number of firms in an industry. Explanation Since firms are not free to enter an industry with barriers, the number of firms is restricted. The level of output is not restricted.

18. Refer to the graph shown, which depicts a perfectly competitive firm. When the industry is in long-run competitive equilibrium: the firm will produce 100 units of output. the marginal cost of production will be $3. the firm will earn economic profits of $300 per day. the price of the product will be $6.

the firm will produce 100 units of output. Explanation In a long-run competitive equilibrium, the zero-profit condition must hold, and so price must be equal to both marginal cost and long-run average total cost. This is true only at a price of $4, and so output must equal 100 units.

1. The following graph shows marginal cost, average total cost, and average variable cost curves for a typical perfectly competitive firm.\ In long-run equilibrium, this firm is earning economic profit equal to......

0 Explanation In the long run, firms enter and exit the market and neither economic profits nor economic losses are possible. In the long run, firms make zero economic profit.

8.Refer to the graph shown, which depicts a perfectly competitive firm. To maximize profit, the firm represented will produce: 90 units of output. 40 units of output. 130 units of output. 110 units of output.

110 units of output. Explanation Only at this output level is MR = P = MC.

6. Refer to the graph shown. The supply curve for the perfectly competitive firm is best represented by the segment: AB. CE. DE. BD.

CE Explanation A perfectly competitive firm's supply curve is the portion of the marginal cost curve that lies above the average variable cost curve.

11. Refer to the graph shown. If the market price is P2, the firm will produce: Q3 and earn a profit. Q3 and break even. Q4 and incur a loss. Q2 and incur a loss.

Q3 and break even. Explanation At P2, the firm maximizes profits by producing Q3 units since only at Q3 is price equal to marginal cost. At Q3, price equals average total cost, and so profits are zero.

5. Refer to the graph shown. Assuming that the industry operates under conditions of perfect competition and that the cost curves do not shift, the price of construction in a long-run competitive equilibrium will be: a. $50 per square foot. b. In the long run no construction will be supplied at any price. c. $55 per square foot. d. $60 per square foot.

50 Explanation In the long run, the industry will earn zero profits only if the price is $50.

7. Refer to the graph shown. Assuming that the industry continues to operate under conditions of perfect competition and that the cost curves do not shift, in the long run this firm will produce: 1,000 units of output. 1,400 units of output. 1,200 units of output. 800 units of output.

800 Explanation In the long run, the firm will earn zero profits only if output is 800 units.

3. A perfectly competitive firm sells its good for $20. If marginal cost is four times the quantity produced, how much does the firm produce? Why? Assuming perfect competition, the firm is producing where MC is twice MR. If the price is $20, then MC is $40. This means that the firm is producing 10 units. Assuming perfect competition, the firm is producing where MR = MC = P. Since price is $20, MR is $20. If MC is 4 times the quantity, it is producing 5 units. Assuming perfect competition, the firm is producing where MR = MC. If the price is $20 and MC is four times the quantity, it is producing 80 units. Assuming perfect competition, there is not enough information to determine how much the firm is producing.

Assuming perfect competition, the firm should produce where MR = MC. If the price is $20, then MR is also $20. If MC is four times the quantity, then the firm is producing 5 units (MR = P = MC = 4 × 5).

10. Refer to the graph shown. What area represents total economic profits? MFWT CBWT DABC DAFM

DACB Explanation This area equals output times profit per unit of output, which is total profit.

16. Which graph depicts a perfectly competitive firm that will minimize short-run losses by producing zero output? graph I graph IV graph II graph III

IV Explanation In graph IV, the market price is below average variable cost, indicating that total revenue is less than total variable cost. In this case, the firm incurs a smaller loss by shutting down and paying total fixed cost.

2. Use the accompanying graph, which shows the marginal cost and average total cost curves for the shoe store Zapateria, a perfectly competitive firm. a. If the market price of shoes is $70 a pair, Zapateria will produce....pair b.If the market price of shoes is $70 a pair, Zapateria will earn total profit equal to $....... c. Since Zapateria is making an economic profit, ......... d.The long-run equilibrium price is $40 a pair because at $40 a pair, ......... profit is made.

a.50 pair (Zapateria will produce 500 pairs of shoes if the market price is $70. At 500 pairs, the market price equals the marginal cost of $70.) b. $10,000 (The total profit that Zapateria will earn is $20 times 500 pairs of shoes, or $10,000.) c. it should expect other shoe stores to enter the market. d. 0

15. Refer to the graph shown. Suppose that the market price is $5. At this price, a perfectly competitive firm should: continue to produce in both the short run and the long run. continue to produce in the short run but shut down in the long run. shut down immediately. shut down in the short run but continue production in the long run.

continue to produce in both the short run and the long run. Explanation Since price exceeds average total cost at the profit-maximizing output level, the firm earns positive profits in both the short run and the long run and should continue to produce.

1. Each firm in perfect competition: sets quantity based on market price. follows the pricing decisions of other firms. follows the reactions of competitors. follows the output of other firms.

produces a good that is identical to that of the other firms Explanation In a perfectly competitive market, a firm can sell whatever quantity of output it wants at the market determined price regardless of the behavior of other firms.

14. Refer to the graph shown. Suppose the market price is $3. At this price, a perfectly competitive firm should: Shut down immediately. shut down in the short run but continue production in the long run. continue to produce in both the short run and the long run. continue to produce in the short run but shut down in the long run.

shut down immediately. Explanation Since price is less than average variable cost at the profit-maximizing output level, a firm will not even be able to cover its variable costs and hence has no incentive to operate in the short run or the long run.

21. Spam (junk e-mail) is a major annoyance for many people who use the Internet. However, spammers sometimes have to send thousands of messages to get just one response that pays money. Given this information: a. spamming cannot be profitable because of the low numbers of buyers; it is fraudulently profitable. b. spamming can be profitable even with a very low number of buyers because the marginal cost of sending spam is virtually zero. c. as with many other activities on the Internet, spammers are profitable only because they rely on the fees from advertising. d. spamming cannot be profitable because of the low numbers of buyers; its sole purpose is to annoy others.

spamming can be profitable even with a very low number of buyers because the marginal cost of sending spam is virtually zero. Explanation The revenue per message is very low, but if the costs are even lower, there can be a profit. The amount of spam suggests that it is profitable and virtually costless for a spammer to send messages. A spammer does seem to be quite similar to a firm in perfect competition—there is a demand curve that is virtually flat over a tremendous range. The marginal cost curve is also flat over a tremendous range, and as a result the profit-maximizing quantity is large.