Quiz 08: Perfect Competition
A perfectly competitive firm sells 200 units at a market price of $40 per unit. Its marginal cost is $50, and it incurs a variable cost of $10,000. To improve its profit or loss situation, this firm should _____.
shut down
Irrespective of whether a firm produces or shuts down in the short run, fixed cost is equal to its _____.
sunk cost
Which of the following firms is most likely to be a perfectly competitive firm?
A farm that grows soybeans
Which of the following is true of a perfectly competitive market?
Each seller supplies only a small fraction of the total amount in a market.
Which of the following is not necessarily a characteristic of a perfectly competitive market structure?
Low prices
Which of the following is true for a perfectly competitive firm in long-run equilibrium?
Marginal revenue (MR) = Marginal cost (MC) = Average total cost (ATC)
Which of the following characterizes a perfectly competitive market?
Perfect information
For perfectly competitive firms, which of the following correctly shows the relationship among market price (P), average revenue (AR), and marginal revenue (MR)?
Price = Average revenue (AR) = Marginal revenue (MR)
Assume a perfectly competitive firm incurs a total cost of $10,000, marginal cost of $38, and fixed cost of $2,000. It sells 200 units of its product at a market price of $38 per unit. Which of the following is true in this case?
The average variable cost of production exceeds the market price.
Suppose each firm's long-run average cost of production does not vary with the entry of new firms in a perfectly competitive industry and a long-run adjustment results in a smaller industry output but leaves price unchanged. Which of the following is likely to be true in this case?
The industry is a constant-cost industry.
Suppose a perfectly competitive firm and industry is in long-run equilibrium and the firm earns an economic profit in the short run. Which of the following is likely to occur in the long run?
The market supply curve will shift to the right, and the market price will decrease.
Which of the following would not help identify market structure?
The price of a good sold in a market
Which of the following is true of the total revenue curve of a perfectly competitive firm?
The slope of the curve remains constant slope as output increases.
If every firm in a market is a price taker, then which of the following is true?
There are a large number of sellers in the market.
In a perfectly competitive industry, we are likely to find that _____.
firms do not advertise
The short-run equilibrium in a perfectly competitive market is determined by the:
intersection of the market demand and market supply curves.
The total revenue curve for a perfectly competitive firm_____.
is a straight line that starts from the origin and slopes upward
Economists assume that firms seek to:
maximize economic profit.
A perfectly competitive firm that earns an economic profit in the short run choose the output that:
maximizes the difference between total revenue and total cost.
The golden rule of profit maximization states that firms maximize profit by producing at the level of output at which price equals average total cost.
false
A perfectly competitive firm is currently producing at a point where price is $10 and both marginal cost and average variable cost are $7. To maximize profit or minimize loss in the short run, this firm should:
increase its output.
Claude's Copper Clappers sells clappers for $40 each in a perfectly competitive market. At its present level of output, Claude's marginal cost is $39, average variable cost is $25, and average total cost is $45. To improve his profit or loss situation, Claude should:
increase output.
In an increasing-cost industry, the entry of new firms _____.
increases the average cost at each level of output
If price is less than minimum average variable cost, a perfectly competitive firm that continues to produce in the short run _____.
incurs a loss greater than its fixed cost
The significance of the minimum point on the average variable cost curve is that:
it is the point of indifference between producing at a loss and shutting down.
A firm said to be is productively efficient if, _____.
it produces its output at the lowest possible cost
If a perfectly competitive firm sells its product at the market price of $14 per unit, _____.
its average revenue is $14 and its marginal revenue is also $14
In the short run, if a firm shuts down, its loss is equal to:
its fixed cost.
The price that represents the shutdown point for a perfectly competitive firm corresponds to the _____.
lowest point on the average variable cost curve
For a perfectly competitive firm operating at the profit-maximizing output level in the short run, _____.
marginal cost equals price
The combination of producer and consumer surplus shows the:
gains from voluntary exchange.
A firm in a perfectly competitive market:
has to accept the market price for its product.
The slope of the total revenue curve for a perfectly competitive firm equals:
marginal revenue.
The Hound Dog Bus Company contemplates expanding its Virginia operations by offering services from Fairfax to Arlington. The total cost of the trip would be $120, of which $50 is the fixed cost, which it has already paid. The firm expects to earn $60 in revenue from the trip. The Hound Dog Bus Company should:
not offer this service because the marginal revenue is less than the marginal cost.
In the short run, a firm will produce a positive amount of output as long as:
price exceeds average variable cost.
Resources are efficiently allocated when production occurs at that point at which:
price is equal to marginal cost.
A perfectly competitive firm's profit per unit of output equals:
price minus average total cost.
To achieve allocative efficiency, firms:
produce the output consumers value most.
Firms achieve productive efficiency by:
producing at their minimum long-run average cost.
Suppose a firm finds it is better off operating than shutting down in the short run. At the quantity at which marginal cost equals marginal revenue, _____.
profit is maximized
When an industry supply curve shifts rightward so that economic profit is erased, _____.
the entry of new firms and the expansion of existing firms stop
Economic theory assumes that:
the goal of firms is to maximize their profit.
If MC's Hammers, a perfectly competitive firm, finds that its total revenue is $45,000, its fixed cost is $20,000, and its total cost is $50,000, its producer surplus is _____.
$15,000
The demand curve for the output of a perfectly competitive firm is _____.
perfectly elastic
The long-run supply curve for a constant-cost perfectly competitive industry is _____.
perfectly elastic.
A perfectly competitive firm is allocatively efficient because price is identical to marginal cost at every quantity.
true
Suppose a perfectly competitive constant-cost industry is in long-run equilibrium when market demand increases. What will probably happen to a firm in this industry in the long run?
There will be no change in the equilibrium price and quantity supplied by the firm.
In the short run, producer surplus equals _____.
Total revenue (TR) − Variable cost (VC)
The demand curve facing a perfectly competitive firm is:
a horizontal straight line at the market price.
If a perfectly competitive firm is in long-run equilibrium and market demand suddenly decreases, the firm will experience:
an economic loss.
A decline in market demand in a competitive industry will result in a(n):
decrease in the equilibrium quantity.
Claude's Copper Clappers sells clappers for $60 each in a perfectly competitive market. At its present level of output, Claude's marginal cost is $65, average variable cost is $25, and average total cost is $62. To improve his profit or loss situation, Claude should _____.
reduce output but not to zero
Individual firms in a perfectly competitive market can:
sell all they produce at the market price.
Suppose a perfectly competitive firm and industry is in long-run equilibrium. A rightward shift of the market demand curve is likely to:
shift the demand curve facing the firm upward and increase quantity supplied in the market.
In Connecticut, the market for apples is perfectly competitive. Suppose consumers' tastes change so that the market demand for apples increases. In this case, the demand curves faced by individual firms will:
shift upward.
The long-run market supply curve for an increasing-cost, perfectly competitive industry _____.
slopes upward
Marginal revenue is defined as:
the change in total revenue divided by the change in quantity.
A perfectly competitive firm's short-run supply curve is the same as:
the portion of its marginal cost curve above the minimum average variable cost.
Suppose Thelma and Louise both sell tomatoes in a perfectly competitive market. If Louise increases the amount of tomatoes that she sells in the market, _____.
the price at which Thelma sells her output is unaffected
In the short run, producers derive surplus from market exchange because:
the price they receive is greater than the minimum amount they require to sell a good.
If an industry is a constant-cost industry, _____.
the prices of its inputs remain the same as the number of firms increases
Average revenue is:
total revenue divided by the quantity of output.
After an increase in demand in a constant-cost industry, the long-run average cost curves of firms shift upward.
False
In perfect competition, no firm can earn a normal profit In the long run.
False
Perfectly competitive firms are sometimes called price makers because they have significant control over product price.
False
When marginal revenue equals marginal cost, the firm just breaks even.
False
_____ is the change in total cost from producing one more unit of the output.
Marginal cost.
A horizontal long-run industry supply curve occurs under conditions of _____.
constant costs
A firm that minimizes average cost will not survive in the long run.
false
A perfectly competitive firm has a horizontal supply curve in the short run.
false
Consumers benefit from market exchange when the maximum price they are willing to pay for a unit of a good is less than what they usually pay.
false
Firms in a perfectly competitive market achieve both allocative and productive efficiency in the short run.
false
In short-run equilibrium, a perfectly competitive firm can never earn an economic profit.
false
Marginal revenue is the change in total revenue from using one more unit of an input in the short run.
false
An increasing-cost industry is one in which per-unit cost increases as output expands in the long run.
true
An industry consists of all firms that supply output to a particular market.
true
For a perfectly competitive firm, price is identical to marginal revenue at every quantity.
true
If a perfectly competitive firm raises its price, its sales decrease to zero.
true
In a perfectly competitive market, profit attracts entry of new firms in the market in the long run.
true
In a perfectly competitive, increasing-cost industry, if price and quantity increase, demand must have increased
true
It is possible for a firm to enjoy a short-run producer surplus while suffering a short-run economic loss.
true
Mobility of resources ensures productive efficiency in a perfectly competitive market.
true
The Hound Dog Bus Company contemplates expanding its New Mexico operations by offering services from Raton to Santa Fe. It has estimated that the total cost of the trip will be $400, of which $150 is the fixed cost, which it has already paid. The company expects an increase in revenue by $275 from the trip. The Hound Dog Bus Co. should:
offer this service because the additional revenue exceeds the additional cost of this service.
If Harry's Blueberries, a perfectly competitive firm, shuts down in the short run, Harry must pay:
only the fixed cost of production.
For a perfectly competitive firm, ____.
price equals marginal revenue at all output levels
Claude's Copper Clappers sells clappers for $40 each in a perfectly competitive market. At its present level of output, Claude's marginal cost is $39, average variable cost is $45, and average total cost is $60. To improve his profit or loss situation, Claude should:
shut down.
Perfectly competitive firms respond to changing market conditions by varying their:
output.
The short-run industry supply curve in a perfectly competitive market is the horizontal sum of each firm's short-run supply curve.
true
If a firm shuts down in the short run, its total revenue is _____.
zero
If you were to put the following effects of a decrease in demand into the sequence in which they occur, which would be the last one?
A short-run loss forces some firms out of business in the long run.
Suppose an increase in population increases the demand for automobile repairs in New Haven County's market for auto repair, which is a perfectly competitive market. Which of the following is true in the short run?
Auto repair centers may be able to earn an economic profit.
Which of the following is true at the quantity at which average total cost equals average revenue?
Economic profit is zero.
Which of the following is likely to be present in a perfectly competitive market?
Firms producing identical products
Which of the following best approximates a perfectly competitive market structure?
Foreign exchange markets
Which of the following is true of economic profit?
It equals total revenue minus total cost.
Which of the following is true of social welfare?
It refers to the overall well-being of people in an economy.
If a firm is producing at an output level where the total revenue curve intersects the total cost curve, which of the following is true of the firm?
Its profit is zero.
Long-run equilibrium for a perfectly competitive firm occurs when:
Price (P) = Marginal cost (MC) = Short-run average total cost (SRATC) = Long-run average cost (LRAC).
Suppose a perfectly competitive increasing-cost industry is in long-run equilibrium when market demand increases. Which of the following statements is true in this case?
Some resource suppliers to the industry will earn higher income.
Suppose the market for hot pretzels in New York City is perfectly competitive. Which of the following is true of the demand in this market?
The demand curve facing each seller is perfectly elastic.
Suppose a perfectly competitive, increasing-cost industry is in long-run equilibrium when market demand increases. What is likely to happen to a typical firm in the long run?
The equilibrium price will be higher in the long run.
Suppose the equilibrium price in a perfectly competitive industry is $100 and a firm in the industry charges $112. Which of the following is likely to happen?
The firm will not be able to sell any of its output.
Adam's Apples, a small firm supplying apples in a perfectly competitive market, decides to cut its production to half this year. Which of the following is likely to occur in this case?
The market price of apples will not be affected.
If new firms enter a perfectly competitive industry seeking economic profit and begin supplying goods in the market, which of the following will occur?
The market supply curve will shift rightward.
Which of the following factors ensures that economic profit will be zero in the long run in a competitive industry?
There is easy entry and exit in the market.
Mary Ann and Donna provide lawn mowing services in a perfectly competitive market. When they began their operations, the market rate for mowing lawns was $50 per lawn. After the price increased to $60, they were willing to work on Saturdays as well. Their response to the price change will be shown by:
an upward movement along their firm's marginal cost curve.
Claude's Copper Clappers sells clappers for $65 each in a perfectly competitive market. At its present level of output, Claude's marginal cost is $65, average variable cost is $45, and average total cost is $67. To maximize his profit or minimize his loss, Claude should:
continue producing the present level of output.
At its present rate of output, Barrel O' Biscuits, a perfectly competitive firm, finds that its marginal cost exceeds its marginal revenue and its price exceeds its average variable cost. To maximize profit, the firm should _____.
decrease output
Perfectly competitive firms are price takers because:
each firm is too small compared to the market to be able to affect price.
In the long run, the entry of new firms in a competitive industry:
eliminates economic profits.
Peggy's Kegs sells kegs in a perfectly competitive market. If the firm decides to shut down due to economic losses in the short run, its current loss is _____.
equal to fixed cost
Suppose a perfectly competitive, increasing-cost industry is in long-run equilibrium when market demand increases. In the long run, a typical firm _____.
experiences a higher average total cost and equilibrium price
Allocative efficiency occurs in markets when:
the marginal benefit that consumers attach to the last unit purchased equals the opportunity cost of the resources employed to produce that unit.
If, at the equilibrium quantity in a market, the benefit of the last unit produced just equals its marginal cost, _____.
the market is said to have achieved allocative efficiency
Suppose a price-taking firm produces 400 units at its optimal output level. At that output rate, marginal cost is $200, average total cost is $240, and average variable cost is $170. The firm will be forced to go out of business in the short run if:
the market price falls below $170 per unit.
A farmer in the Midwest who produces wheat faces a horizontal demand curve because:
the quantity supplied by him is so small relative to the market that it has no impact on the market price for wheat.
We say that equilibrium in a perfectly competitive market is allocatively efficient because:
the sum of consumer and producer surplus is maximized.
When market exchange occurs voluntarily in a competitive market, _____.
the sum of consumer surplus and producer surplus is maximized
If a market is allocatively efficient, _____.
total utility cannot be increased through a reallocation of resources
If a manufacturer shuts down in the short run, it must be true that before the shutdown, at all positive output levels, _____.
variable cost was greater than total revenue
A constant-cost industry is one:
whose cost curves do not change as new firms enter the market.
If a perfectly competitive firm is incurring losses in the short run, it:
will continue to operate in the short run if its variable cost is covered.