Perfect Competition


1. At present output levels, a firm in a perfectly competitive industry is in the following position: output = 1000 units, market price = $3, total cost = $6000, fixed cost = $2000, marginal cost = $3. To achieve optimum output, the firm should:
A. reduce output but keep producing.
B. increase its selling price.
C. leave output unchanged.
D. reduce output to zero.
E. increase output but keep its price constant.
2. Which of the following is not usually a characteristic of a perfectly competitive industry?
A. no individual firm has any significant amount of market power.
B. the market demand curve is perfectly elastic.
C. any individual firm can increase its production and sales without affecting the price of the good.
D. existing firms cannot bar the entry of new firms.
E. all of the above are characteristics of perfectly competitive industries.
3. A competitive firm's demand curve is determined by:
A. firm demand and firm supply.
B. the price set by the individual firm.
C. market demand and market supply.
D. the level of the firm's short-run average total cost.
E. the MC curve above average variable cost.
4. At present output levels, a perfectly competitive firm is in the following position: output = 4000 units, market price = $1, fixed costs = $2000, total variable costs = $1000, marginal cost = $1.10. This firm is:
A. making a positive economic profit.
B. making a zero economic profit.
C. losing money, although it could make a profit by decreasing its output.
D. producing the output where AVC = MC.
E. not maximizing its profit but could do so by increasing its output.
5. In the long-run for a competitive industry:
A. all factors of production are variable so that firms are free to enter or leave the market.
B. technology may change in response to profit opportunities.
C. all inputs are fixed for the industry as a whole.
D. firms can earn more than normal accounting profits if demand is high.
E. profits serve as a signal for entry which does not happen for other market structures (such as monopolies, oligopolies, or monopolistically competitive firms).
6. When typical firms in a perfectly competitive industry are making economic profits, then all of the following will take place except:
A. new firms will enter the industry.
B. the industry supply curve will shift to the right.
C. the firm demand curves will shift down.
D. the typical firm in the industry will begin to experience a reduction in profits.
E. all of the above will occur.
7. If an industry is characterized by perfect competition as well as increasing costs then:
A. the long-run industry supply curve is perfectly elastic.
B. each firm must experience decreasing returns to scale at low levels of production.
C. some of the resources used in production have supply curves that are upward sloping.
D. some firms are likely to become natural monopolies.
E. economies of scale are significant for all firms.
8. In the long-run, competition in competitive markets:
A. yields economic inefficiency with the absence of government intervention.
B. results in output being produced at maximum opportunity cost.
C. forces all surviving firms to adopt the most efficient technology.
D. guarantees each firm economic profits.
E. may result in economic losses.
9. As a budding young economist you are called in to consult with a friend of yours who has just started his own business producing and selling pie cherries in Utah Valley. He tells you that in the past year, he has attempted to maximize his profits by decreasing his price below the market price. He currently sells his pie cherries for $1 a pound which is just equal to his ATC and his MC (the market price is $1.50 a pound). You do a study of the cherry industry and find that there are a very large number of pie cherry producers who are all quite small relative to the market. Further, you find that the cost of starting a cherry orchard is relatively small. What would you suggest that your friend do to maximize profits?
A. increase price to the market price but decrease his output.
B. increase price to the market price and increase his output.
C. increase price to the market price but leave his output unchanged.
D. decrease price further in an attempt to gain more market share.
E. shut down since he is just barely covering his cost at the present output level.
10. Consider the market for hard red winter wheat. You know that there are numerous firms in the market, all of which are relatively small. Assume further that there are no entry costs that cannot be recovered on exiting the industry. Suppose that a health fad emerges in the U.S. that encourages the consumption of natural grains and cereals. What will be the effect on profits of wheat farmers, the price of wheat and output in both the short-run and the long-run? (Assume that input prices are constant over the relevant range.)
A. price, quantity and profits will rise in the short-run but remain constant in the long-run.
B. price, quantity and profits will rise in both the short-run and the long-run.
C. quantity will rise in both the short and the long-run, price will rise in the short-run but remain constant in the long-run, profits will rise in the short-run but fall to zero in the long-run.
D. price and quantity will increase in both the short and the long-run while profits, although initially rising, will fall to zero in the long-run.
E. while price, quantity, and profits will rise in the short-run it is impossible to predict what will happen in the long-run.
11. At present output levels, a perfectly competitive firm is in the following position: output = 4000 units, market price = $1.10, fixed costs = $2000, total variable costs = $1000, marginal cost = $1.00. This firm is:
A. not maximizing its profit but could do so by decreasing its output.
B. making a zero economic profit.
C. losing money, although it could make a profit by increasing its output.
D. Producing the output where ATC = MC.
E. not maximizing its profit but could do so by increasing its output.
12. In the long-run, competition in competitive markets:
A. yields economic inefficiency in the absence of external costs.
B. results in output being produced at maximum opportunity cost.
C. forces all surviving firms to adopt the most efficient technology.
D. guarantees each firm long-run economic profits.
E. may result in economic losses.
13. That portion of a perfectly competitive firm's marginal cost curve lying above its AVC curve has all of the following characteristics except:
A. it is upward sloping.
B. it intersects the firm's ATC curve at minimum ATC.
C. its intersection with the firm's MR curve determines the firm's profit maximizing output level.
D. it is the firm's supply curve.
E. all of the above are true.
14. When in long-run equilibrium, perfectly competitive firms:
A. must employ the most efficient (least costly) production technology or be driven out of the business by competition.
B. are paid a price that equals the maximum value of the long-run average cost curve.
C. collectively produce more output than society desires.
D. reap economic profits if the firm is exceptionally efficient.
E. cover all variable costs and make a profit just sufficient to cover previous losses.
15. The short-run shutdown point for the perfectly competitive firm occurs:
A. where total revenue is just sufficient to cover total cost.
B. when the demand curve facing the firm is tangent to its average variable cost curve.
C. where total revenue is just sufficient to cover all explicit cost but not any implicit or imputed costs.
D. when the firm is able to cover all of its fixed costs and part of its variable costs.
E. at the same quantity level as the long-run shutdown point.
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