ECON 1001: Chapter 10 (Pure Competition in the Short Run)

What are two ways that a purely competitive firm can determine the level of output at which it will realize maximum profit or minimum losses? *By comparing marginal costs to total costs *By comparing total revenue to total costs *By comparing marginal revenue to marginal costs *By comparing unit costs to total costs

*By comparing total revenue to total costs *By comparing marginal revenue to marginal costs

Which of the following features occur in a purely competitive market? *Major restrictions on where products can be sold *Sales in both national and international markets. *One seller dominating the market *Many independently acting sellers

*Sales in both national and international markets. *Many independently acting sellers

Confronted with the market price of its product, a purely competitive producer will ask which three questions? *If we produce this product, in what amount? *What economic profit or loss will we realize if we produce this product? *If we produce this product, what price should we charge? *Should we produce this product? *If we sell above market price what will our profits be?

*Should we produce this product? *If we produce this product, in what amount? *What economic profit or loss will we realize if we produce this product?

Which of the following factors will alter costs and shift the marginal cost or short-run supply curve to a new location? *Consumer preferences *Technology *Prices of variable inputs *Availability of product substitutes

*Technology *Prices of variable inputs

Which factors illustrate that the demand curve for a purely competitive firm is perfectly elastic? *The firm has no legal or financial barriers for entering or exiting the industry. *The firm does not need to lower its price to increase its sales volume. *The firm produces only a small fraction of the total industry output. *The firm cannot obtain a higher price by restricting its output.

*The firm does not need to lower its price to increase its sales volume. *The firm cannot obtain a higher price by restricting its output. *why?* because the price is already set in price competition.

A purely competitive firm's demand schedule is equal to which of the following? *average revenue *total revenue *quantity supplied *marginal revenue

*average revenue *marginal revenue

A purely competitive firm's demand schedule is equal to which of the following? *marginal revenue *average revenue *quantity supplied *total revenue

*marginal revenue *average revenue *why?* they're both the same thing as price, and the demand schedule is perfectly elastic to price! also D = MR = AR lolz

In a purely competitive industry, at the profit-maximizing or loss-minimizing level of output, marginal ______ is equal to ______. *output; marginal cost *revenue; price *cost; price *revenue; marginal cost

*revenue; price *cost; price *revenue; marginal cost

Which of the following are conditions necessary to have pure competition? *very large number of firms or sellers *free entry and exit *standardized product *price searchers *barriers to entry

*very large number of firms or sellers *free entry and exit *standardized product

True or false: Quantity supplied increases as price decreases, and economic profit is usually higher at lower product prices and output.

False. *why?* According to the supply schedule of the competitive firm, *quantity supplied and economic profit both increase as prices rise*.

True or false: A pure monopoly involves a very large number of firms producing a single unique product.

False.

Between P2 and P4, the firm will minimize its losses by producing and supplying the quantity at which: ****

MR = P = MC *why?* Recall that the profit-maximizing and loss-minimizing rule of MR=MC applies when price exceeds average variable cost.

_____ revenue is the additional revenue that an additional unit of _____ would add to total revenue.

Marginal, output

_____ competition is considered to be rare in the real world.

Pure

At which point will a firm be indifferent whether to shut down or continue to produce?

Recall that a firm will be indifferent to shutting down or producing when price = minimum average variable cost.

When MR intersects with MC:

The firm incurs a loss but covers part of its fixed cost.

True or false: Firms within pure competition will produce standardized products.

True.

When does a firm shut down?

When P < AVC.

Which of the following market structures produces only a standardized product? a) A purely competitive market b) An oligopoly c) A pure monopoly d) A monopolistically competitive market

a) A purely competitive market

Which of the following best describes oligopoly? a) Involves only a few sellers of a standardized or differentiated product, so each firm is affected by the decisions of its rivals. b) Involves many sellers of a standardized or differentiated product, so each firm is affected by the decisions of its rivals. c) Involves only a few sellers of an identical product, so each firm is affected by the decisions of its rivals. d) Involves only a few sellers of a standardized or differentiated product, so each firm is unaffected by the decisions of its rivals.

a) Involves only a few sellers of a standardized or differentiated product, so each firm is affected by the decisions of its rivals.

When the marginal cost of an additional unit of output exceeds the marginal revenue, what should the firm do? a) Not produce that additional unit of output b) Shut down c) Reduce its fixed plant size d) Continue producing more units output

a) Not produce that additional unit of output

Which of the following explains why a firm would not produce a unit of output where MC exceeds MR? a) Producing it would add more to costs than to revenue, and profit would decline or loss would increase b) Producing it would add more to revenue than to costs, and profit would decline or loss would increase c) Producing it would add more to revenue than to costs, and profit would increase or loss would decrease d) Producing it would add more to costs than to revenue, and profit would increase or loss would decrease

a) Producing it would add more to costs than to revenue, and profit would decline or loss would increase

Which of the following are considered to be the four basic market structures? a) Pure monopoly b) Monopolistic competition c) Pure competition d) Representative democracy e) Oligopoly

a) Pure monopoly b) Monopolistic competition c) Pure competition e) Oligopoly

The quantity of a product supplied by a firm in pure competition should _____ as long as price rises. a) increase b) remain constant c) decrease

a) increase *why?* According to the supply schedule of the competitive firm, there is a direct relationship between price and quantity supplied.

The MR = MC rule is known as the: a) profit-maximizing rule b) loss-maximizing rule c) profit-minimizing rule

a) profit-maximizing rule

Which of the following best describes pure competition? a) An industry involving a few firms producing identical products and in which new firms cannot enter or exit the industry very easily. b) An industry involving a very large number of firms producing identical products and in which new firms can enter or exit the industry very easily. c) An industry involving two firms producing identical products and in which new firms can enter or exit the industry very easily. d) An industry involving one large firm producing many products and in which new firms cannot enter or exit the industry very easily.

b) An industry involving a very large number of firms producing identical products and in which new firms can enter or exit the industry very easily.

What is the firm's most likely response if price is exactly equal to minimum average variable cost? a) Shutting down production entirely b) Indifference to producing or shutting down c) Decreasing production to reduce variable costs d) Allocating more resources to production

b) Indifference to producing or shutting down

Which of the following is a method of calculating economic profit in pure competition? a) Total revenue minus marginal cost divided by quantity b) Price minus average total cost multiplied by quantity c) Price minus average variable cost multiplied by quantity d) Price minus average total cost plus quantity

b) Price minus average total cost multiplied by quantity Profit = Q (P-A)

______ is relatively rare in the real world, although this market model is highly ______ to several industries. a) Pure monopoly; irrelevant b) Pure competition; relevant c) Monopolistic competition; relevant d) Oligopoly; relevant

b) Pure competition; relevant

After a company has determined that it should produce a product and the amount of the product to produce, what basic question should it ask? a) How will our level of output affect market price? b) What economic profit (or loss) will we realize? c) Which sales promotions should we offer? d) What level of output is provided by our closest competitor?

b) What economic profit (or loss) will we realize?

In pure competition, if the first unit of output sold increases total revenue from $0 to $131, marginal revenue for that unit is $131. If the second unit sold increases total revenue from $131 to $262, marginal revenue is again $131. The third unit sold increases total revenue to $______ and marginal revenue is now $______. a) 131; 393 b) 131; 131 c) 393; 131 d) 393; 262

c) 393; 131

Which of the following explains why a purely competitive firm is a price taker? a) A purely competitive firm offers only a negligible fraction of total market supply and therefore must set the price for the market b) A purely competitive firm offers a large fraction of total market supply and therefore determines market price c) A purely competitive firm offers only a negligible fraction of total market supply and therefore must accept the price determined by the market d) A purely competitive firm produces all of total market supply and therefore must accept the price determined by the market

c) A purely competitive firm offers only a negligible fraction of total market supply and therefore must accept the price determined by the market

Which of the following is a characteristic of a monopolistically competitive market? a) High barriers to entry and exit b) A perfectly elastic demand curve c) A relatively large number of sellers producing differentiated products d) Firms not having any control over the selling price of goods

c) A relatively large number of sellers producing differentiated products

Which of the following best describes a pure monopoly? a) One firm selling a single unique product, with ease of entry into the industry and little control over price b) Many firms selling a single unique product, where entry of additional firms is blocked and there is considerable control over price c) One firm selling a single unique product, where entry of additional firms is blocked and there is considerable control over price d) One firm selling differentiated products or services and in which entry of additional firms is blocked

c) One firm selling a single unique product, where entry of additional firms is blocked and there is considerable control over price

Which of the following improves as production increases?*** a) Price-marginal revenue relationship b) Fixed costs c) Price-marginal cost relationship d) Opportunity cost

c) Price-marginal cost relationship *why?* Remember that in the very early stages of production, marginal product is low, making marginal cost unusually high. With increased production, the price-marginal cost relationship improves.

Which of the following best describes the economic break-even point? a) The point where total revenue covers fixed costs but not variable costs. b) The point where total revenues exceed those of the strongest competitor in the industry. c) The point where total revenue covers all costs, but there is no economic profit. d) The point where total revenue exceeds total costs and economic profits are realized.

c) The point where total revenue covers all costs, but there is no economic profit.

Which of the following best describes marginal revenue? a) The level of output needed to produce revenue that covers all of the firm's costs. b) The sum of revenue received by producing at a certain level of output. c) The revenue that an additional unit of output contributes to total revenue. d) The cost that an additional unit of output contributes to total cost.

c) The revenue that an additional unit of output contributes to total revenue.

Multiplying product price by output reveals which of the following? a) Marginal revenue b) Quantity demanded c) Total revenue d) Average total cost

c) Total revenue

A basic feature of the purely competitive market is the presence of ______. a) high barriers to entry b) differentiated prices c) a large number of sellers d) differentiated products

c) a large number of sellers

In a purely competitive market, price per unit to a buyer equals: a) total revenue to a seller b) total profits to a seller c) average revenue to a seller d) average profits to a seller

c) average revenue to a seller

A firm operating in a purely competitive market is a price taker because it ______. a) cannot change the market price in the long run b) can change the market price in the short run c) cannot change the market price, it can only adjust to it d) can change the market price in the long run

c) cannot change the market price, it can only adjust to it

An oligopoly has ___ sellers and must consider the decisions of its rivals in determining its own ___ and output. a) few; costs b) many; price c) few; price d) many; costs

c) few; price

A purely competitive firm can maximize its economic profit (or minimize its loss) by adjusting only its output because it ______. a) has access to unlimited resources b) is a price maker c) is a price taker d) has market power

c) is a price taker

A firm would not produce a unit of output where ______. a) marginal cost exceeds average revenue b) marginal cost equals marginal revenue c) marginal cost exceeds marginal revenue d) marginal revenue exceeds marginal cost

c) marginal cost exceeds marginal revenue

From an economic standpoint, the break-even point is the level of output at which a firm makes a(n) ______ profit. a) accounting b) economic c) normal d) negative

c) normal but not economic, until later on in the curve where it makes both :O break even means it covers all costs + makes a normal profit too

In a purely competitive market, marginal revenue is a constant that is equal to which of the following? a) average total cost b) quantity c) price d) consumer surplus

c) price

This graph illustrates that a firm can minimize its losses by producing where ______. a) price exceeds minimum average total cost but is less than average fixed cost b) price equals minimum average variable cost but is less than minimum average total cost c) price exceeds minimum average variable cost but is less than average total cost c) price exceeds minimum average variable cost but is less than marginal cost

c) price exceeds minimum average variable cost but is less than average total cost

Total revenue equals ______ times ______. a) demand; quantity b) average revenue; price c) price; quantity d) average revenue; demand

c) price; quantity

The two ways to determine the level of output at which a firm will realize maximum profit or minimum loss are to compare total revenue to ______ and to compare marginal revenue to ______. a) maximum willingness to pay; equilibrium price b) marginal cost; total cost c) total cost; marginal cost d) average revenue; cost per unit

c) total cost; marginal cost

Pure ______ involves a very large number of firms.

competition

In a purely competitive market, price per unit to the purchaser is synonymous with ______ per unit or _____ revenue to a seller.

cost or revenue, marginal or average *why?* price = average/marginal revenue in a PC

Which of the following best explains why the price-marginal cost relationship improves as production increases? a) At the very late stages of production, marginal product is low, making marginal cost unusually high. b) At the very early stages of production, marginal revenue is low, making marginal cost unusually high. c) At the very early stages of production, marginal product is high, making marginal cost unusually high. d) At the very early stages of production, marginal product is low, making marginal cost unusually high.

d) At the very early stages of production, marginal product is low, making marginal cost unusually high.

Which of the following best describes the situation of a price-taking firm? A price-taking firm is one of a ______ number of firms producing a product that is identical to that of every other firm in the industry and providing ______ of total market supply. a) large; a large share b) small; a large share c) small; only a fraction d) large; only a fraction

d) large; only a fraction

In which market model do firms rely on product differentiation to distinguish themselves from the competition? a) pure competition b) oligopoly c) pure monopoly d) monopolistic competition

d) monopolistic competition

The price, multiplied by the firm's output or goods produced, equals ______. a) marginal revenue b) average revenue c) total profits d) total revenue

d) total revenue

A firm will break even where ______ will just cover ______ because the revenue per unit and the average total cost per unit are equal. a) marginal revenue; total cost b) total revenue; marginal cost c) marginal cost; marginal revenue d) total revenue; total cost

d) total revenue; total cost *why?* Marginal cost does not cover marginal revenue; marginal revenue covers marginal costs.

A firm should always stop producing if its average ______ cost is ______ price. a) total; greater than b) variable; less than c) total; less than d) variable; greater than

d) variable; greater than

In a perfectly competitive market, the demand curve for an individual firm is perfectly ____ at the market price.

elastic, flat, horizontal

Economists group industries into ___ distinct market structures.

four

A firm should not produce a unit of output when the marginal cost is ____ (greater/lesser) than its marginal revenue.

greater

The change in total revenue that results from selling one more unit of output is called _____ revenue.

marginal

In the short run, a purely competitive firm can maximize its economic profit (or minimize its loss) by adjusting its _____.

output which in turn, minimizes costs.

A firm's total revenue is calculated as ___ times quantity produced.

price

In pure competition, marginal revenue and ____ are equal.

price

In pure competition, to calculate economic profit, we first calculate the difference between _____ and average total cost and then multiply it by output. (Type only one word in blank.)

price

A(n) _____ competitive firm's average-revenue schedule is also known as its demand schedule.

pure

A(n) ____ competitive firm's average-revenue schedule is also known as its demand schedule.

pure or perfectly

A purely competitive firm is a price ____.

taker

Firms within pure competition are considered to be price ___.

takers

Changes in ____ and changes in prices of variable inputs alter costs and shift the marginal cost or short run supply curve.

technology

If price is below a firm's minimum average ____ cost, the firm will not operate.

variable