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Chapter 8
2.
3.
4.
5.
6.
7.
Under the theory of perfect competition, firms and buyers know the availability and prices
associated with all products in the market.
ANSWER T, M, R
8.
Under perfect competition, firms are relatively ignorant of the actions of their competitors.
ANSWER F, E, R
9.
In perfect competition there are differences in the products sold by various firms.
ANSWER F, M, R
10.
In the long run, a perfectly competitive industry tends to develop differentiated products.
ANSWER F, D, R
11.
12.
Perfectly competitive markets are not the best at producing the goods that are desired by
consumers.
ANSWER F, E, R
14.
A perfectly competitive firm is a price taker because it cannot sell its product for more
than the market price.
ANSWER T, E, R
16.
17.
A perfectly competitive firm may, under some circumstances, be able to affect the market
price.
ANSWER F, E, R
18.
A perfectly competitive firm has a horizontal demand curve because it can sell as much as
it wants at the market price.
ANSWER T, E, R
19.
20.
In perfect competition, a firms marginal revenue equals the price of the product.
ANSWER T, D, A
21.
22.
23.
A perfectly competitive firm can maximize profits by producing the quantity at which MR
exceeds MC by the greatest amount.
ANSWER F, M, A
24.
In the short run, a perfectly competitive firm can make a profit, a loss, or shut down.
ANSWER T, M, R
25.
In the short run, a perfectly competitive firm can make a profit, a loss, or go out of
business.
ANSWER F, M, R
26.
Once a firms marginal revenue curve is known, the output level can be determined.
ANSWER F, M, A
The short-run equilibrium output of a competitive firm is found by equating marginal cost
with price.
ANSWER T, M, R
28.
Total profit of a competitive firm can be found by multiplying profit per unit times units
sold.
ANSWER T, E, A
29.
If a firm sells its output at a price greater than AC, it will earn economic profit.
ANSWER T, E, A
30.
If a firm sells its output at a price greater than AVC, it will earn economic profit.
ANSWER F, M, A
31.
In the short run, a firm may have accounting losses and remain in operation.
ANSWER T, M, A
32.
33.
As long as TVC < TR, a firm will have a positive level of output in the short run.
ANSWER T, E, A
34.
Using only marginal revenue and marginal cost, we can determine whether a firm is
incurring a profit or a loss.
ANSWER F, M, A
35.
The lowest price that a competitive firm will accept without closing its doors is found by
examining the average variable cost curve.
ANSWER T, M, A
36.
It pays the firm to produce only if total variable costs exceed total revenue.
ANSWER F, D, A
37.
In the short run, if price is below AC, maximizing profits really means minimizing total
losses.
ANSWER T, D, A
38.
The short-run supply curve for a perfectly competitive firm is that portion of the MC curve
above the AVC curve.
ANSWER T, E, R
39.
The short-run supply curve for the perfectly competitive firm is that part of the marginal
cost curve that lies above the average fixed cost curve.
ANSWER F, M, A
40.
In the short-run, only a limited number of new firms may enter a perfectly competitive
market.
ANSWER F, M, R
42.
43.
44.
The entry of new firms into a perfectly competitive market shifts the demand curve
outward.
ANSWER F, M, A
45.
Zero economic profit means that the firms owners receive no compensation for their
investment.
ANSWER F, M, R
46.
The opportunity cost of a given investment is the potential earnings forfeited by tying up
money in the investment.
ANSWER T, E, A
47.
Economic profit equals gross earnings minus the firms direct costs.
ANSWER F, M, R
48.
Zero profit in the economic sense means that firms are earning a normal rate of return.
ANSWER T, M, R
49.
50.
In a long-run equilibrium in a perfectly competitive market, the average firm earns positive
economic profits.
ANSWER F, E, R
51.
52.
53.
54.
56.
An industry supply curve is the horizontal summation of the supply curves of all of the
individual firms.
ANSWER T, E, A
57.
In the long run, any firm may enter or leave a perfectly competitive market.
ANSWER T, E, R
58.
The number of firms in a perfectly competitive industry is not fixed in the long run.
ANSWER T, M, A
59.
For a perfectly competitive firm, the long-run supply curve is the long-run average cost
curve.
ANSWER T, M, A
61.
Firms in a perfectly competitive market produce at minimum average cost in the short run
and the long run.
ANSWER F, M, A
62.
Subsidizing firms that pollute will reduce pollution in the long run.
ANSWER F, E, R
MULTIPLE-CHOICE QUESTIONS
PERFECT COMPETITION DEFINED
63.
A market
a. may be an organized exchange.
b. refers to a set of sellers and buyers whose actions affect a commoditys price.
c. is that area in which buyers and sellers compete to effect a product price.
M,R d. All of the above are correct.
64.
The strength of the competition faced by a company can profoundly affect its
a. pricing.
b. output decisions.
c. input decisions.
M,A d. All of the above are correct.
66.
73.
E,I
75.
The result that perfectly competitive firms produce at the lowest per-unit cost is derived
from the assumptions of
a. homogeneous products.
b. few sellers.
c. firms facing horizontal demand curves.
D,I d. free entry and exit.
In a market with perfectly competitive firms, the market demand curve is usually ______
and the demand curve facing each individual firm ______.
a. upward sloping; horizontal
M,R b. downward sloping; horizontal
c. horizontal; downward sloping
d. downward sloping; downward sloping
77.
E,I
78.
For a perfectly competitive firm, marginal revenue equals average revenue because the
a. firms supply curve is horizontal.
b. industrys demand curve is horizontal
D,A c. firms demand curve is horizontal.
d. industrys supply curve is horizontal.
FIGURE 8-1
84.
If the profit-maximizing firm depicted in Figure 8-1 is perfectly competitive, how much
output should it produce?
a. A
b. B
E,A c. C
d. D
85.
A firm earns a profit of exactly zero at its optimal output level only if
a. P = MR.
b. P = MC.
M,A c. P = AC.
d. P = SR AVC.
TABLE 8-1
MC (in dollars)
C
10
14
42
94
170
In Table 8-1 are the short-run cost schedules of a perfectly competitive firm. If the market
price of output is $50, the firm will produce ______ units and earn a profit of ______.
D,I a. 6; $187.02
b. 6; $48
c. 8; $154.96
d. 8; $245.04
FIGURE 8-2
87.
Figure 8-2 shows demand and short-run cost curves for a perfectly competitive firm. At its
profit-maximizing level of output, the firms short-run TC is represented by area
M,I a. ADFO.
b. BGHC.
c. BGIO.
d. ADGIO.
88.
Figure 8-2 shows demand and short-run cost curves for a perfectly competitive firm. At its
profit-maximizing output, the firms total ______ is represented by area ______.
a. loss; GBHC
b. profit; ADGHC
D,I c. loss; ADEC
d. profit; EGH
Figure 8-2 shows demand and short-run cost curves for a perfectly competitive firm. In the
short run, this firm would
a. earn positive economic profits.
M,I b. earn economic losses.
c. go out of business.
d. Cannot be determined with the information given.
TABLE 8-2
A perfectly competitive producer has the following short-run average cost curve and marginal
cost curve:
SR AC = 2Q + 3
MC = 4Q + 3
where costs are measured in dollars and Q represents the firms output in units.
90.
If the market price of wangdoodles is $15 each, the profit-maximizing producer whose
short-run cost curves are given in Table 9-2 should produce ______ wangdoodles.
a. 0
D,I b. 3
c. 6
d. 15
91. The firm whose short-run cost curves are given in Table 8-2 has a long-run fixed cost of
M,A a. $0.
b. $2.
c. $3.
d. $4.
92.
FIGURE 8-3
93.
In Figure 8-3, the firms minimum cost per unit occurs at an output of
a. OJ.
E,A b. OG.
c. OI.
d. OH.
96.
FIGURE 8-4
99.
Figure 8-4 shows the industrys supply and demand curves in panel (1) and the cost curves
of a firm in the industry in panel (2). At S1, the firm is
a. shut down.
b. incurring losses.
c. earning zero economic profits.
M,A d. earning economic profit greater than zero.
100. Figure 8-4 shows the industrys supply and demand curves in panel (1) and the cost curves
of a firm in the industry in panel (2). At S2, the firm is
a. shut down.
b. incurring losses.
M,A c. earning zero economic profits.
d. earning economic profit greater than zero.
FIGURE 8-5
115. In Figure 8-5, points which lie on the firms short-run supply curve are
a. A, B, C.
M,A b. C, D, H.
c. F, E, G.
d. A, C, H.
FIGURE 8-6
FIGURE 8-7
FIGURE 8-8
152. In Figure 8-8, through which point must a horizontal demand curve pass to yield a longrun equilibrium?
M,A a. A
b. B
c. C
d. All of the above is correct.
FIGURE 8-9
154. Figure 8-9 displays the cost curves of a perfectly competitive firm. Profits at a price of $10
would be approximately
M,I a. $1 per unit.
b. $3 per unit.
c. $5 per unit.
d. $10 per unit.
155. For the perfectly competitive firm in Figure 8-9, what is the long-run price and quantity?
a. P = 4, Q = 150
M,A b. P = 9, Q = 200
c. P = 10, Q = 200
d. P = 5, Q = 150
156. In the long run, the perfectly competitive firm in Figure 8-9 will leave the industry if the
price falls below
a. $10.
M,A b. $9.
c. $5.
d. $2.
ESSAY QUESTIONS
167. Give a complete but concise definition of the following terms.
a. perfect competition
b. perfectly competitive firms demand curve
c. shutdown point
d. long-run equilibrium in perfect competition
ANSWER E, R
b.
c.
d.
Perfect competition is a market structure in which there are many small firms each
selling a homogeneous product, with freedom of entry and exit and complete
information.
The perfectly competitive firms demand curve is horizontal, which means it can sell as
much as it wishes at the prevailing market price.
The shut-down point for the firm in the short run is the output point where average
revenue is less than average variable cost.
Long-run equilibrium for the perfectly competitive firm is an output level such that P = MC
= AC and economic profit is zero.
168. Define the following terms and explain their importance to the study of economics.
a. marginal cost
b. marginal revenue
c. short-run equilibrium
d. supply curve of the firm
e. economic profit
ANSWER E, R
a. Marginal cost is the cost to the firm of producing and selling an additional unit of the
good.
b. Marginal revenue is the amount of extra revenue the firm receives for producing and
selling one more unit of a good.
c. Short-run equilibrium occurs in the time period in which some commitments cannot
be changed. The number of firms in the industry cannot be changed. The competitive
firm will equate P to MC > AVC to choose profit-maximizing (or loss-minimizing)
price and output. If price is below the minimum of AVC, the firm will minimize losses
by shutting down.
d. The supply curve for the competitive firm is MC > AVC. If price is below the minimum
of AVC, the firm will minimize losses by shutting down.
e. Economic profit equals net earnings, in the accountants sense, minus the opportunity
cost of capital and of any other inputs supplied by the firms owners. It is assumed
that firms seek to maximize economic profits. In a competitive industry in the long
run, economic profits are zero.
169. What are the assumptions of the model of perfect competition? Explain why each is
important for short-run and long-run equilibrium.
ANSWER M, R
There are four assumptions:
1.
Numerous small firms and customers. Each buyer and each seller is so small that each has
only a negligible portion of the whole market. Therefore, none is able to control price or
output of the industry.
3.
Freedom of entry and exit. New firms can enter the market with no impediments, and firms
are able to leave the industry with no problems. If there are economic profits in the
industry, we expect firms to enter, increasing industry supply and driving price lower.
4.
Perfect information. Each firm and each customer is well informed about the available
products and prices. They are able to compare prices and seek the lowest price.
The result is that the firm has no control over price and is a price taker. Market demand
and market supply determine the price. The firm will maximize short-run profits by
equating MR = P = MC > AVC and by producing at the quantity at which this equilibrium
occurs. If P < minimum AVC, the firm will minimize losses by shutting down. In the long
run, firms will enter or leave the industry based on profit opportunities, and there will be
no economic profits or losses. If the price should rise or fall enough to cause economic
profits or losses, there will be entry or exit of firms until economic profits of all firms in the
industry are zero.
170. Of the following industries, which are perfectly competitive? Of those which are not, why
do they not fit the model?
a. local banking
b. gasoline stations
c. college-level educational institutions
d. local radio and television
e. local farmers market
ANSWER M, I
a. Local banking is not (generally) perfectly competitive. In small towns, there are at most
only a few banks. In larger cities, there are more banks from which to choose. Further,
banks compete on image, size, service, etc., and not always on price. Location and
hours of service may vary.
b. Gasoline stations are close to perfectly competitive, but many customers will shop on
the basis of brand names. If so, the industry is monopolistically competitive.
c. Colleges are differentiated. They are generally distinguished by size, quality of
instruction, etc. This is an example of monopolistic competition.
d. Local radio and television can be oligopolistic in many smaller markets and close to
monopolistic competition in large markets. Differentiation is common, with different
formats (talk, classical, rock, etc.).
e. Local farmers markets are probably the closest to perfect competition on the list. Each
buyer and seller is small relative to the market; produce is not usually differentiated;
and all are able to shop quickly and easily to compare price and output quality.
171. Why study perfect competition, if it rarely exists?
ANSWER E, R
FIGURE 8-10
FIGURE 8-11
FIGURE 8-12
FIGURE 8-13
188. There are currently 1,000 firms in a competitive industry. Minimum long-run average cost
is $80 and price $100. Explain what will happen to price, profit, and the number of firms in
this industry over time.
ANSWER E, I
Price exceeds minimum long-run average cost, so that firms are earning an economic
profit. This will induce additional entry over time. As supply increases (rightward shift),
price will fall to minimum long-run average cost of $80. Economic profit will drop to zero.
189. How does a firm that is losing money in the short run decide whether to shut down or
continue to produce to minimize its losses?
ANSWER M, A
The firm should continue to produce in the short run if TR exceeds TVC; if TR falls below
TVC, the firm should shut down.