CHAPTER 7
PERFECT COMPETITION
The following table shows the four topic sections of this chapter and the associated study
guide problems that pertain to each topic section.
Section Topic
1 The Basics of Supply and Demand
Problems M1-M6, S1-S2, L1-L2.
2 Competitive Equilibrium
Problems M7-M13, S3-S8, L3-L4.
3 Market Efficiency
Problems M14-M18, S9, L5-L7.
4 International Trade
Problems M19-M20, L8-L9.
Multiple Choice
M1 Demand is given by P = 1,000 – 10Q and supply by P = 400 + 20Q. Equilibrium price
and output under perfect competition are
a. P = $600 and Q = 10 units.
b. P = $700 and Q = 30 units.
c. P = $800 and Q = 20 units.
d. P = $1,000 and Q = 30 units.
e. P = $800 and Q = 10 units.
M2 If for some reason the price of a good is below the equilibrium price, then
a. Finding inventories building up, suppliers will cut output, and raise prices.
b. Finding inventories depleted, suppliers will increase output and raise prices.
c. The demand curve shifts left until equilibrium is established at the existing price.
d. The supply curve shifts right until equilibrium is established at the existing price.
e. Consumers will bid up the good’s price, but there will be no increase in output.
M3 A favorable shift in the demand curve occurs when
a. Suppliers place more goods on the market.
b. The price of a good rises.
c. Time passes. Next year’s demand will be very different than this year’s.
d. The price of the good falls.
e. Consumers want to buy more than before at a given price.
Managerial Economics Study Guide
M4 A shift in the demand for sailboats due to an increase in income will typically cause
a. Higher prices of sailboats.
b. Lower prices of sailboats.
c. A shift in the supply curve for sailboats.
d. Lower output of sailboats.
e. No change in the price of sailboats.
M5 A shift in the supply curve of bicycles resulting from higher steel prices will lead to
a. Larger output of bicycles.
b. Lower prices of bicycles.
c. A shift in the demand curve for bicycles.
d. Lower output of bicycles.
e. No change in the price of bicycles.
M6 We observe that the price of food rises and the quantity purchased also rises. Thus the
a. Supply curve has shifted to the left.
b. Demand curve has shifted to the right.
c. Demand curve has shifted to the left.
d. Supply curve has shifted to the right.
e. Demand curve happens to be upward sloping.
M7 As a result of standardized products, under perfect competition
a. Firms are confronted by diminishing returns.
b. Firms will seek to attain quality advantages.
c. Firms face perfectly elastic individual demand curves.
d. Firms face perfectly inelastic demand curves.
e. Firms are forced to advertise.
M8 A firm under perfect competition sells 100 units of output at $7 per unit. If it expands
production to 120 units, its marginal revenue is
a. $3.50 per extra unit sold.
b. More than $7 per extra unit sold.
c. $700 in total.
d. Exactly $7 per extra unit sold.
e. Impossible to determine without further information.
M9 An accurate description of a perfectly competitive industry is
a. A limited number of firms producing standardized products.
b. A large number of small firms producing standardized products.
c. A large number of small firms producing differentiated products.
d. A small number of large firms producing either standardized or differentiated
products.
e. Large-scale firms producing at minimum average cost per unit.
Perfect Competition Chapter 7
M10 In order to maximize profit, a firm under perfect competition should continue production
until the extra cost of producing the last unit of output
a. Is stabilized.
b. Begins to rise.
c. Begins to decline.
d. Is equal to average variable cost.
e. Is equal to the market price.
M11 A perfectly competitive industry may be able to expand along a horizontal long-run
supply curve. Such an industry is known as a
a. Constant-cost industry.
b. Increasing-cost industry.
c. Decreasing-cost industry.
d. Dynamic industry.
e. An industry with increasing returns to scale.
M12 The demand curve faced by a firm in a perfectly competitive industry is
a. The same as the market demand.
b. The same as the market supply.
c. The same as the market price.
d. Always above the marginal revenue curve.
e. Downward sloping.
M13 In the long run, perfectly competitive firms are at equilibrium when
a. P = LMC > LAC.
b. P = MR.
c. P = LAC > LMC.
d. P = LMC = LAC.
e. R = VC.
M14 In a constant cost industry, a permanent fall in demand will cause
a. A drop in price in the long run.
b. A reduction in the number of firms in the long run.
c. No change in equilibrium price in the long run.
d. No change in the output per firm in the long run.
e. Answers b, c, and d are all correct.
M15 The idea behind the concept of the “invisible hand” is that
a. Competitive markets maximize shareholder welfare.
b. Government intervention is necessary to correct market outcomes.
c. Competitive markets are efficient, i.e. maximize social welfare.
d. Government regulations necessarily distort social welfare.
e. Competitive markets are fair, but not necessarily efficient.
Managerial Economics Study Guide
M16 The net “gain” a buyer of a good obtains is called
a. Consumer surplus.
b. Producer surplus.
c. Profit.
d. Social welfare.
e. The terms of trade
M17 The efficient industry outcome under perfect competition occurs at an output where
a. MR = MC.
b. MB = P = MC.
c. P > MC.
d. Consumer Surplus = Industry Profit.
e. Consumers attain a partial price subsidy from the government.
M18 Consumers who are priced out of the market because their MB < PC
a. represent a source of inefficiency.
b. are consistent with an efficient market outcome.
c. should be subsidized by the government.
d. should strive to increase their MB and purchase the good.
e. Answers a and c are both correct.