Chapter 8—Perfect Competition
MULTIPLE CHOICE
1. Which of the following is not a characteristic of the structure of perfectly competitive markets?
a.
Each individual firm is small in size relative to the overall market.
b.
Few sellers.
c.
Homogeneous product.
d.
Easy, low cost entry and exit.
2. Market structure is defined as the:
a.
number of firms in each industry.
b.
similarity of the product sold.
c.
ease of entry into and exit from the market.
d.
all of these.
3. Market structure describes which of the following characteristics?
a.
The ease of entry into and exit from the market.
b.
The similarity of the product sold.
c.
The number of firms in each industry.
d.
All of these are true.
4. In the perfectly competitive market, all firms in the market are assumed to be producing:
a.
identical products.
c.
products that are heavily advertised.
b.
differentiated products.
d.
complementary products.
5. Which of the following is a characteristic of a competitive price-taker market?
a.
Profit maximizing firms in the market will expand output until price equals average
variable cost.
b.
The market demand curve for the product is a horizontal line.
c.
There are many firms in the market, each producing a small share of total market output.
d.
The product produced by each of the firms is differentiated.
6. Which of the following is characteristic of a perfectly competitive market?
a.
There is free entry into and exit from the market.
b.
Individual firms can exert a perceptible influence on the market price.
c.
The firms in the market produce differentiated products.
d.
All of these are true.
7. Perfect competition is defined as market structure in which:
a.
there are many small sellers.
b.
the product is homogeneous.
c.
it is very easy for firms to enter or exit the market.
d.
all of these.
8. Perfect competition is a market structure in which there is:
a.
a contest among firms to provide good service after the sale.
b.
competition in product quality.
c.
rivalry in product design.
d.
none of these.
9. Which of the following best illustrates perfect competition?
a.
Wheat farming.
b.
Orange growers setting quotas under the Sunkist cooperative.
c.
General Motors advertising campaign for its cars.
d.
All of these.
10. Which of the following best illustrates a perfectly competitive market?
a.
Soft drinks.
c.
Electric power.
b.
Automobiles.
d.
Soybean farmers.
11. Which of the following is not a characteristic of a perfectly competitive market?
a.
There is a large number of small firms.
b.
Firms sell a homogeneous product.
c.
Firms can easily enter or exit the market.
d.
Firms are price makers, not price takers.
12. Perfectly competitive markets are characterized by:
a.
a small number of very large producers.
b.
very strong barriers to entry and exit.
c.
firms selling a homogeneous product.
d.
all of these.
13. Which of the following is true of a perfectly competitive firm?
a.
The firm is a price maker.
b.
If the firm wishes to maximize profits it will produce an output level in which total
revenue equals total cost.
c.
The firm will not earn an economic profit in the long run.
d.
The firm’s short-run supply curve is its MC curve below its AVC curve.
14. If a firm has no ability to select the price of its product, it:
a.
will go out of business due to losses.
b.
is a price-maker.
c.
cannot maximize profit.
d.
has a horizontal individual demand curve.
15. Which of the following correctly explains why sellers in a perfectly competitive market are price
takers?
a.
There are few sellers, and so they have the power to take whatever price they want.
b.
There are many sellers, and so the market process generates an equilibrium price that
cannot be influenced by any one seller. Thus they have no choice but to take the price
generated by the market process.
c.
Sellers in a competitive market have the power to influence price by colluding with one
another and using quotas to limit overall market output and thus raise price.
d.
Individual buyers in a competitive market have the power to influence price, and thus can
impose prices and other conditions on powerless sellers.
16. A firm in a price-taker market:
a.
must take the price that is determined in the market.
b.
must reduce its price if it wants to sell a larger quantity.
c.
must be large relative to the total market.
d.
can exert a major influence on the market price.
17. A firm that is a price taker can:
a.
substantially change the market price of its product by changing its level of production.
b.
sell all of its output at the market price.
c.
sell some of its output at a price higher than the market price.
d.
decide what price to charge for its product.
18. Which of the following best explains why a firm in a perfectly competitive market must take the price
determined in the market?
a.
The short-run average total costs of firms that are price takers will be constant.
b.
If a price taker increased its price, consumers would buy from other suppliers.
c.
Firms in a price-taker market will have to advertise in order to increase sales.
d.
There are no good substitutes for the product supplied by a firm that is a price taker.
19. The demand for the product of a competitive price-taker firm is:
a.
perfectly inelastic.
b.
perfectly elastic.
c.
greater than zero but less than one.
d.
dependent on the availability of substitutes for the firm’s product.
20. Because a competitive firm is a price taker, it faces a demand curve that is:
a.
perfectly inelastic.
c.
relatively elastic.
b.
relatively inelastic.
d.
perfectly elastic.
21. A firm operating in a perfectly competitive market is a price taker because:
a.
no firm has a significant market share.
b.
no firm’s product is perceived as different.
c.
setting a price higher than the going price results in zero sales.
d.
all of these.
22. Under perfect competition, a firm is a price taker because:
a.
setting a price higher than the going price results in profits.
b.
each firm’s product is perceived as different.
c.
each firm has a significant market share.
d.
setting a price higher than the going price results in zero sales.
23. Under perfect competition, which of the following are the same (equal) at all levels of output?
a.
Price and marginal cost.
c.
Marginal cost and marginal revenue.
b.
Price and marginal revenue.
d.
All of these.
24. Profit is maximized when which of the following conditions occurs?
a.
Total revenue equals total cost.
b.
Average revenue equals average cost.
c.
Marginal revenue equals marginal cost.
d.
Both b. and c. above are correct.
25. Which of the following offers the fullest explanation of why “price equals marginal cost” is the rule
from marginal analysis that indicates the profit-maximizing output level?
a.
If output were reduced from the profit-maximizing level, then the firm would be giving up
marginal revenue that exceeds marginal cost, and thus reducing the level of profit.
b.
If output were increased from the profit-maximizing level, then the firm would be gaining
marginal revenue that is less than the marginal cost incurred in producing this additional
unit, and thus reducing the level of profit.
c.
Because the firm colludes with other similar firms to set price equal to marginal cost.
d.
Both a. and b. above are correct.
26. In short-run perfectly competitive equilibrium, which of the following is always true?
a.
Profit equals zero.
b.
Profit can be negative, zero, or positive.
c.
Profit can be zero or positive, but not negative.
d.
Profit is positive, otherwise firms would not produce.
27. In the short run, why would a firm in a perfectly competitive market shut down production if the
prevailing market price falls below the lowest possible average variable cost?
a.
At that point (economic) profit is zero.
b.
Below that point average revenue becomes less than marginal revenue.
c.
Below that point marginal revenue becomes insufficient to pay for avoidable average
variable cost.
d.
Below that point other firms with similar cost will find it profitable to enter the market and
take away demand from the existing firms.
28. A perfectly competitive firm in the short-run maximizes its profit by producing the output where:
a.
marginal cost equals price.
b.
marginal cost equals marginal revenue.
c.
total revenue minus total cost is at a maximum.
d.
all of these.
29. In the short run, a perfectly competitive firm’s most profitable level of output is where:
a.
total revenue minus total cost is at a maximum.
b.
marginal cost equals marginal revenue.
c.
Both of the above.
d.
Neither of the above.
30. A perfectly competitive firm in the short-run can earn:
a.
positive economic profits.
c.
zero economic profits.
b.
negative economic profits.
d.
all of these are possible
31. A perfectly competitive firm maximizes profits or minimizes losses in the short-run by producing at
the output level at which:
a.
marginal revenue equals marginal cost.
b.
total revenue equals total cost.
c.
total revenue is at a maximum.
d.
none of these.
32. A perfectly competitive firm sells its output for $100 per unit and marginal cost is $100 per unit. To
maximize short-run profit, the firm should:
a.
increase output.
c.
maintain its current output.
b.
decrease output.
d.
shut down.
33. In the short run, if a perfectly competitive firm is producing at a price below average total cost, its
economic profit is:
a.
positive.
c.
negative.
b.
zero.
d.
normal.
34. In the short run, if a perfectly competitive firm is producing at a price above average total cost, its
economic profit must be:
a.
positive.
c.
negative.
b.
zero.
d.
normal.
35. A competitive firm maximizes its profits (or minimizes is losses) by producing the quantity where the
market price equals the firm’s:
a.
marginal cost.
c.
average variable cost.
b.
average total cost.
d.
average fixed cost.
36. Assume that a firm’s marginal revenue just barely exceeds marginal cost. Under these conditions the
firm should:
a.
expand output.
b.
contract output.
c.
maintain output.
d.
There is insufficient information to answer the question.
37. In the short run, a perfectly competitive firm’s most profitable level of output is where:
a.
marginal cost exceeds marginal revenue.
b.
total revenue is at a maximum.
c.
marginal cost equals marginal revenue.
d.
All of these.
38. The profit maximizing or loss minimizing quantity of output for any firm to produce exists at that
output level in which:
a.
total revenue is maximized.
c.
marginal cost is minimized.
b.
total cost is minimized.
d.
marginal revenue equals marginal cost.
39. When the marginal cost of a price-taker firm is more than the market price of its product, the firm
should:
a.
expand output.
c.
maintain output.
b.
reduce output.
d.
charge more than the market price.
40. A profit-maximizing firm will continue to expand output:
a.
as long as the revenues from the production and sale of an additional unit exceeds the
average cost of the unit.
b.
until the average cost of producing the good or service is at a minimum.
c.
as long as the revenues from the production and sale of an additional unit exceeds the
marginal cost of the unit.
d.
until the marginal cost of producing a good or service is at a minimum.
41. In the short run, a firm will stay in business as long as:
a.
price equals average revenue.
b.
marginal revenue is greater than or equal to marginal cost.
c.
price exceeds average variable cost.
d.
price is less than average variable cost.
42. Suppose that price is below the minimum average total cost (ATC) but above the minimum average
variable cost (AVC), and the market price is expected to rise at least to ATC in the near future. In the
short run, a firm that is a price taker would:
a.
immediately shut down and get out of the industry.
b.
continue to produce a quantity such that marginal revenue equals marginal cost.
c.
shut down temporarily, in hopes of restarting in the near future.
d.
cut price and expand output in hopes of achieving economies of scale
43. The price-taker firm should discontinue production immediately if:
a.
the market price exceeds the firm’s average total costs.
b.
the market price is less than the firm’s average variable costs.
c.
the market price is less than the firm’s average total costs, but greater than its average
variable cost.
d.
its accounting statement indicates that it is suffering losses.
44. A firm is currently operating where the MC of the last unit produced = $84, and the MR of this unit =
$70. What would you advise this firm to do?
a.
Shut down.
b.
Increase output.
c.
Stay at its current output.
d.
Decrease output.
e.
Decrease price.
45. A firm is currently operating where the MC of the last unit produced = $64, and the MR of this unit =
$70. What would you advise this firm to do?
a.
Shut down.
b.
Increase output.
c.
Stay at current output.
d.
Decrease output.
e.
Decrease price.
46. The point of maximum profit for a business firm is where:
a.
P = AC.
b.
TR = TC.
c.
MR = AR.
d.
MR = MC.
e.
TR = MR.
47. If a firm increases output when MR > MC, then:
a.
profit will equal zero.
b.
profit will increase.
c.
profit will decrease.
d.
profit will remain the same.
e.
the firm is minimizing losses.
48. If a firm decreases output when MR > MC, then:
a.
profit will equal zero.
b.
profit will increase.
c.
profit will decrease.
d.
profit will remain the same.
e.
the firm is minimizing losses.
49. If a firm increases output when MR < MC, then:
a.
profit will equal zero.
b.
profit will increase.
c.
profit will decrease.
d.
profit will remain the same.
e.
the firm is minimizing losses.
50. If a firm decreases output when MR < MC, then:
a.
profit will equal zero.
b.
profit will increase.
c.
profit will decrease.
d.
profit will remain the same.
e.
the firm is minimizing losses.
51. By producing at the point where MR = MC, the firm:
a.
is guaranteed a profit.
b.
will earn a profit of zero.
c.
will lose money.
d.
profit is maximized.
e.
output.
52. Maximizing profit means finding the maximum difference between:
a.
TR and TC.
b.
MR and MC.
c.
price and ATC.
d.
price and AR.
e.
ATC and MC.
53. If a business firm is not operating at the point where MR = MC, then:
a.
it should shut down.
b.
it will incur losses.
c.
it cannot be earning a profit.
d.
its profit is zero.
e.
it is not earning the maximum potential profit.
54. If, at the point where MR = MC, the firm incurs losses, in the short run the firm should:
a.
shut down.
b.
increase output.
c.
decrease output.
d.
continue at its current output if P > AVC.
e.
continue at its current output if P > ATC.
55. In the short run, a firm should shut down its business if price is less than:
a.
ATC.
b.
AR.
c.
MC.
d.
AVC.
e.
AFC.
56. In the short run, a firm should shut down its operation if:
a.
its losses are less than TFC at the MR = MC point.
b.
its losses equal TFC at the MR = MC point.
c.
its losses are greater than TFC at the MR = MC point.
d.
TR is less than TC.
e.
TR exceeds TVC.
57. Suppose product price is fixed at $24; MR = MC at Q = 200; AFC = $6; AVC = $16. What do you
advise this firm to do?
a.
Increase output.
b.
Decrease output.
c.
Shut down operations.
d.
Stay at the current output; the firm is earning a profit of $400.
e.
Stay at the current output; the firm is losing $200.
58. Suppose product price is fixed at $24; MR = MC at Q = 200; AFC = $6; AVC = $25. What do you
advise this firm to do?
a.
Increase output.
b.
Decrease output.
c.
Shut down operations.
d.
Stay at the current output; the firm is earning a profit of $1,400.
e.
Stay at the current output; the firm is losing $1,400.
59. Under perfect competition, a business firm can accept losses:
a.
only in the short run.
b.
only for 1 year.
c.
only in the long run.
d.
no longer than 10 years.
e.
never.
60. If a firm equates MR and MC, then:
a.
TR is at a maximum, and TC is at a minimum.
b.
output is at a maximum.
c.
losses are at a maximum.
d.
profits are at a maximum or losses are at a minimum.
e.
both TR and TC are at a maximum.
61. If a firm is currently equating MR and MC and product price = $24, AVC = $22, and ATC = $26, then
in the long run this firm:
a.
will continue to operate at a loss.
b.
will earn a positive profit.
c.
will go out of business.
d.
should increase output.
e.
should decrease price.
62. If a potato farmer expands output, he finds that the increase in total revenue is less than the increase in
total costs. This means that:
a.
profit is being maximized.
b.
he should not have expanded output.
c.
he should produce even more output.
d.
the firm is wasting resources.
e.
the farmer should go out of business.
63. The most profitable output level can be found by looking at which two curves?
a.
P and MR.
b.
MR and MC.
c.
MC and TC.
d.
P and AVC.
e.
AVC and ATC.
64. If a firm’s marginal revenue from its 100th unit of output is $50 and the marginal cost from its 100th
unit of output is $45, then in the short run this firm should:
a.
increase its plant size.
b.
change its technology.
c.
produce more than 99 units of output.
d.
produce less than 100 units of output.
e.
shut down.
65. If ABC Printing is producing an output level of 100, where MR is $5 and MC is $3, then the firm is:
a.
maximizing total profit.
b.
making too much profit.
c.
making $200 total profit.
d.
making $200 total loss.
e.
making an unknown amount of profit or loss.
66. The fundamental rule of profit maximization for firms is to produce where:
a.
MR = MC.
b.
ATC is minimized.
c.
quantity of output is maximized.
d.
price is maximized.
e.
total revenue is maximized.
67. The marginal approach to profit maximization means that a firm should produce until:
a.
marginal revenue equals zero.
b.
marginal revenue equals marginal cost.
c.
marginal cost becomes negatively sloped.
d.
marginal revenue equals price.
e.
price equals average total cost.
68. A sandwich shop owner has the following information: P = MR = $4, ATC = $2, AVC = $1, MC = 4,
and Q = 500. From this, she can determine:
a.
her profits are not being maximized.
b.
she has earned zero economic profits.
c.
she has earned economic profits of $1,000.
d.
she has earned economic profits of $1,500.
e.
she should sell fewer sandwiches.
69. Jerome, the florist, sold 500 bridesmaid’s bouquets in June. He estimates his costs that month were
ATC = $10, AVC = $6, and MC = $9. If he sold each bouquet at the constant market price of $9,
Jerome:
a.
made an economic profit of $500.
b.
made a loss of $500.
c.
made an economic profit of $1,500.
d.
made a loss of $1,500.
e.
should have shut down in June.
70. Consider a firm with the following cost information: ATC = $15, AVC = $12, and MC = $14. If we
know that this firm has decided to produce Q = 20 by following the rule to maximize profits or
minimize losses, then the price of the output is:
a.
$12.
c.
$15.
b.
$14.
d.
$20.
71. Consider a firm with the following cost and revenue information: ATC = $8, AVC = $7, and MR =
MC = $6. If the firm produces Q = 60 in the short run, it:
a.
is minimizing losses.
b.
makes a total loss of $60.
c.
should produce more output.
d.
is making a mistake and should shut down.
e.
is maximizing total profit.
72. If the price of a product falls below average total cost in the short run, the firm:
a.
has an economic profit.
b.
cannot cover total fixed costs.
c.
experiences a loss.
d.
must always shut down.
e.
should expand output until MC = MR.
73. If a firm shuts down in the short run, it will:
a.
incur losses equal to its fixed costs.
b.
produce at the output level where MC = MR.
c.
reduce its losses to zero.
d.
do this because P > AVC.
e.
have total revenue greater than total fixed costs.
74. Suppose the price of a product is less than its average variable cost. When the firm’s fixed obligations
are completely ended, it will now most likely:
a.
make an economic profit.
b.
go out of business.
c.
expand to a bigger operation.
d.
continue to be shut down.
e.
break even.
75. The neighborhood ice cream shop finds that when it charges $3 per ice cream cone, its total revenues
are $90,000. It has total variable costs of $30,000 and total fixed costs of $40,000. From this we can
infer the:
a.
shop should be moved because the rent is too high.
b.
price is less than average total cost.
c.
economic profits are $20,000.
d.
shop will be closed in the long run.
e.
shop sells 10,000 ice cream cones.
76. If a firm is operating at a loss in the short run and finds that its price is greater than average variable
cost, then in the short run:
a.
it should produce where MR = MC.
b.
it should produce zero output.
c.
it should go out of business.
d.
total revenue is less than total variable costs.
e.
total revenue is greater than total costs.
77. Total profit can be calculated by:
a.
c and e.
b.
subtracting total revenue from total costs.
c.
subtracting total costs from total revenue.
d.
finding the product of the difference between average profit and average total cost and the
quantity produced.
e.
quantity produced times the difference between average revenue and average total cost.
78. If a fishing boat owner brings 10,000 fish to market and the market price is $7 per fish, she will have
$70,000 in total revenue. If the average variable cost of 10,000 fish is $4 and the fixed cost of the boat
is $20,000, what is her profit?
a.
$1.
b.
$3.
c.
$1,000.
d.
$3,000.
e.
$10,000.
79. A fishing boat owner brings 50,000 fish to market and the market price is $4 per fish. Her average
variable cost of 50,000 fish is $1 and the fixed cost of the boat is $100,000. What is her profit per fish?
a.
$1.
b.
$500.
c.
$5,000.
d.
$25,000.
e.
$500,000.
80. Suppose that you have returned from your fishing expedition with 20,000 fish. The market price is $3
per fish. Your average fixed cost was $1 and your total variable cost was $5,000. If the price jumps to
$3.50 before you sell your first fish, how much extra profit, if any, do you earn?
a.
c and d.
b.
Extra profit is zero.
c.
Extra profit is enough to cover half of the fixed cost of your next trip.
d.
Extra profit is enough to cover all of the variable costs of your next two trips.
e.
Extra profit is $45,000.
81. Suppose that you have returned from your fishing expedition with 20,000 fish. The market price is $3
per fish. Your average fixed cost was $1 and your total variable cost was $5,000. If the price jumps to
$3.50 before you sell your first fish, how much extra profit, if any, do you earn?
a.
$10,000.
b.
$25,000.
c.
$30,000.
d.
$45,000.
e.
$70,000.
82. If the market price is $5 and you are currently producing at a level where average total cost is $3 and
falling, you should:
a.
b or c, it doesn’t matter.
b.
shut down.
c.
produce only enough to cover variable costs.
d.
produce where MR = MC.
e.
produce until the average total cost and average revenue are equal.
83. The market price for wallets is $20. Your technology is such that at your most efficient production
point, the average total cost of producing a wallet is $2.50. Your manager runs into your office and
shouts, “Boss!!! Average costs are rising!! Average costs are rising!!” To make a profit-maximizing
decision, you should:
a.
d or e.
b.
immediately stop production.
c.
completely ignore your manager.
d.
ask the manager about the marginal cost.
e.
ask the manager about the average total cost.
84. When choosing the production level for tomorrow you find that at an output of 100 units, the total
variable costs are $20,000 and the average fixed cost is only $50. If the market price is $200, you
should:
a.
b or e.
b.
shut down.
c.
produce more than 100 units.
d.
produce fewer than 100 units.
e.
produce where MC = MR.
85. Suppose a company increases production from a point where marginal cost equals average total cost to
a point where marginal revenue and marginal cost are equal. Is it a good idea for the company to do
this? Why?
a.
No, average total costs have increased which means the company is not minimizing losses.
b.
Yes, because average variable costs are always less than average total costs.
c.
No, because the marginal cost of producing the last unit is the same as the marginal
revenue.
d.
Yes, even though the previous level of output had minimized the average total cost, there
was still profit to be earned by producing additional units.
e.
No, the previous level of output was the most efficient because it had the lowest average
total cost.
86. If a firm in a competitive industry is making zero economic profit but still producing, it must be the
case that:
a.
MC = MR > ATC.
b.
MC = MR < ATC.
c.
MC = ATC > MR.
d.
MC = MR = ATC.
e.
this situation is not possible.
87. Which of the following statements are false?
a.
b and d.
b.
Marginal cost is always rising.
c.
Marginal and average total costs are equal at the most efficient production level.
d.
The AFC and AVC curves do not cross.
e.
The AFC and ATC curves do not cross.
88. If marginal revenue exceeds marginal cost, profit maximizers should:
a.
reduce output until they are equal.
b.
increase output until they are equal.
c.
increase output until profits are zero.
d.
decrease output unless profits are zero.
e.
maintain current output.
89. Imagine you own a machine that produces perfectly authentic and legal $100 bills. You would use this
machine until:
a.
the bills became worthless.
b.
the total cost began to fall.
c.
the marginal cost was $100.
d.
the variable cost began to rise.
e.
the marginal revenue began to fall.
90. Assume that a firm’s marginal revenue just barely exceeds marginal cost. Under these conditions the
firm should:
a.
expand output.
b.
contract output.
c.
maintain output.
d.
There is insufficient information to answer the question.
Exhibit 8-1 Quantity and total revenue data for a firm
Quantity
Total Revenue
0
$ 0
1
62
2
124
3
186
91. Exhibit 8-1 indicates that this firm is operating in which type of market structure?
a.
Price-maker.
c.
Perfect competition.
b.
Unprofitable.
d.
Nonhomogeneous.
92. In the perfectly competitive market, individual firms exert no effect on the market price. Therefore, the
firm’s marginal revenue curve is:
a.
indeterminate.
c.
a downward-sloping curve.
b.
an upward-sloping curve.
d.
the same as the firm’s demand curve.
93. The marginal revenue of a price taker is:
a.
equal to price.
c.
more than price.
b.
less than price.
d.
unrelated to price.
94. If a perfectly competitive firm sells 50 units of output at a market price of $10 per unit, its marginal
revenue is:
a.
more than $10.
c.
$10.
b.
less than $10.
d.
$5300.