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Chapter 23
Perfect Competition
23.1 Characteristics of a Perfectly Competitive Market Structure
1) Which of the following is NOT a characteristic of a perfectly competitive market?
A) The products sold by the firms in the market are homogeneous.
B) There are many buyers and sellers in the market.
C) It is difficult for a firm to enter or leave the market.
D) Each firm is a price taker.
2) Which of the following is a characteristic of perfect competition?
A) Easy entry and exit B) Few firms
C) Differentiated products D) None of the above
3) All of the following are characteristics of perfect competition EXCEPT
A) homogenous products. B) each firm is a price taker.
C) product differentiation. D) a lack of barriers.
4) Perfect competition is characterized by
A) many buyers and sellers.
B) a small number of firms.
C) differentiated products of firms in the industry.
D) high barriers to entry.
5) The perfectly competitive firm cannot influence the market price because
A) it has market power.
B) its production is too small to affect the market.
C) it is a price maker.
D) its costs are too high.
6) Which of the following is NOT a characteristic of a perfectly competitive industry?
A) There is free entry and exit in the long run.
B) The industry demand curve is downward sloping.
C) Each firm produces the same homogeneous product.
D) Economic profits must be positive in the short run.
7) Being a price taker essentially means
A) a firm can influence the market price.
B) a firm cannot influence the market price.
C) the firm cannot legally set its price above the market price.
D) the firm cannot legally set its price below the market price.
8) In a perfectly competitive industry
A) each firm is a price maker.
B) no buyer or seller can influence the market price.
C) there is apt to be a shortage of sellers of output.
D) firms can never make an economic profit.
9) Each firm in a perfectly competitive industry is
A) producing a unique product. B) relatively large.
C) a price taker. D) a price setter.
10) All firms in a perfect competition industry
A) are price makers. B) produce differentiated products.
C) produce identical products. D) lose money.
11) Which of the following is NOT a characteristic of a perfectly competitive industry?
A) There are large numbers of buyers and sellers.
B) The firms in the industry produce a homogeneous product.
C) Sellers have better information about the product than consumers.
D) Any firm can enter or leave the industry without serious impediments.
12) A market structure in which the decisions of individual buyers and sellers have no effect on
market price is
A) perfect competition. B) a short run industry.
C) a long run industry. D) a market supply industry.
13) A market structure in which the decisions of individual buyers and sellers have no effect on
market price is
A) monopoly. B) monopolistic competition.
C) perfect competition. D) oligopoly.
14) A firm in a perfectly competitive industry is a
A) price taker. B) quantity taker. C) quality maker. D) price maker.
15) Under perfect competition, a firm that sets its price slightly above the market price would
A) make lower profits than the other firms, but the amount would depend on the elasticity of
demand.
B) make a normal rate of return, but on reduced revenues.
C) lose all of its customers.
D) earn higher profits as long as the other firms continued to charge the market price.
16) A price taker is a firm that
A) seeks to maximize revenue rather than profit.
B) cannot influence the market price.
C) searches for the best price and then takes the highest profits possible.
D)
b
uys inputs for firms.
17) Which of the following is NOT a characteristic of perfect competition?
A) There are large numbers of buyers and sellers.
B) The firms in an industry produce goods that are different from each other.
C) Any firm can easily enter or leave the industry.
D) Both buyers and sellers have equally good information.
18) When considering perfect competition the absence of entry barriers implies that
A) no firm can enter the industry.
B) firms can enter but cannot get out of the industry easily.
C) all firms will earn economic profit.
D) firms can enter and leave the industry without serious impediments.
19) In a perfectly competitive market, which of the following is the main factor that affects
consumers decisions on which firm to purchase a good from?
A) Quality B) Customer service
C) Reputation D) Price
20) All of the following are characteristics of a perfectly competitive industry EXCEPT
A) the product sold is homogeneous.
B) firms in the industry are price takers.
C)
b
uyers and sellers have equal access to information.
D) there are a large number of buyers and sellers with only a few being able to influence the
market price.
21) When there are large numbers of buyers and sellers, then
A) the products sold must look identical.
B) firms will move labor and capital in pursuit of profit making opportunities to whatever
business venture gives them the highest return on their investment.
C) no one buyer or seller has any influence on price.
D) consumers are able to find out about lower prices charged by other firms.
22) What does it mean when the products sold by the firms in an industry are homogeneous?
A) The product sold by one firm is a perfect substitute of the product sold by another firm in
the same industry.
B) Firms in the industry can produce the same product with different inputs.
C) All firms in the industry are identical in size.
D) The product sold by one firm is a perfect complement of the product sold by another firm
in the same industry.
23) In a perfectly competitive market structure both buyers and sellers have equal access to
information. This implies
A) the products sold will be alike.
B) firms will move labor and capital in pursuit of profit making opportunities to whatever
business venture gives them the highest return on their investment.
C) no one buyer or seller has any influence on price.
D) consumers are able to find out about lower prices charged by other firms.
24) In a perfectly competitive market structure any firm can enter or leave the industry without
serious impediments. This implies
A) the products sold will be alike.
B) firms will move labor and capital in pursuit of profit making opportunities to whatever
business venture gives them the highest return on their investment.
C) no one buyer or seller has any influence on price.
D) consumers are able to find out about lower prices charged by other firms.
25) Malfeasance at Enron
,
a Houston
b
ased energy firm, led to overstatement of revenues by
almost $92 billion. As Enron closed its operations, U.S. energy prices remained stable. This may
have been evidence that
A) Enron could charge whatever price it wanted to for energy.
B) there was lack of any competition, so Enron was the winner.
C) there is a competitive market in energy distribution in the United States.
D) the accounting profession needs to review its policies quickly.
26) Clothing retailers have faced greater competition in recent years as more firms have entered the
clothing market. Some of the competition has come from foreign competitors, but much of it is
domestic competition. As a result there is much competition in markets for many types of
clothing and
A) individual buyers and sellers cannot affect the market price because it is determined by
the market forces of demand and supply.
B) there are no other implications.
C) firms have a great degree of flexibility in pricing their products because these products can
be sold at a high profit level.
D) there are relatively few buyers and sellers in the market, and one individual firm can
determine the market price.
27) Your local farmer has many competitors and exists in a market structure known as perfect
competition. This means that price is determined outside of the individual farmer s ability to
charge a price higher than the going market for a bushel of wheat, hence the farmer is
A) a price maker and can therefore charge different customers different prices.
B) always able to price produce above the competition and earn a larger profit.
C) never able to determine any prices he charges for anything, such as soybeans.
D) a price taker and cannot affect the market price of wheat.
28) Perfect competition is a market structure
A) in which any firm would have serious impediments to entry or exit.
B) in which individual buyers and sellers have no effect on the market price.
C) resulting from individual firms selling highly differentiated products.
D) where there is significant regulation and markets are always efficient.
29) The firm in a perfectly competitive industry is a
A) price taker. B) price maker. C) price seeker. D) price dealer.
30) Which of the following statements about the perfect competitor is INCORRECT?
A) The perfectly competitive firm is always a price taker.
B) The perfect competitor sells a homogeneous commodity.
C) If an individual firm raises price, it will lose business.
D) The products made by a perfectly competitive firm have no close substitutes.
31) Which of the following is NOT a characteristic of perfect competition?
A) There are many buyers and sellers.
B) Each firm determines the market price of its product.
C) Products are homogeneous.
D) Buyers and sellers have equal access to information.
32) Which of the following is NOT a characteristic of perfect competition?
A) differentiated products B) large number of buyers and sellers
C) price taking by each firm D) easy entry and exit into the market
33) Which of the following is NOT a characteristic of perfect competition?
A) Firms are price takers.
B) All firms sell identical products.
C) There are substantial barriers to entry into the industry.
D) There are many buyers and sellers.
34) All of the following are characteristics of a perfectly competitive market EXCEPT
A) homogeneous products.
B) large number of buyers and sellers.
C)
b
uyers and seller have equal access to information.
D) high barriers to entry and exit.
35) Which of the following is closest to a perfectly competitive market?
A) the computer software market B) the market for handmade guitars
C) the market for broccoli D) the market for athletic shoes
36) Which of the following is closest to a perfectly competitive market?
A) the pizza market B) the market for breakfast cereal
C) the market for corn D) the market for automobiles
37) Which of the following is closest to a perfectly competitive market?
A) the soda pop market B) the market for bread
C) the market for sugar D) the market for fast food
38) A perfectly competitive market has
A) high barriers to entry or exit.
B) homogeneous products.
C) to do a lot of advertising to attract buyers.
D) few firms.
39) What is a price taker? Discuss the assumptions used to obtain the perfectly competitive model.
40) What are the main characteristics of a perfectly competitive market?
41) A market is said to be perfectly competitive when consumers can tell that some products are of
better quality than others. Do you agree or disagree? Why?
23.2 The Demand Curve of the Perfect Competitor
1) Under the perfectly competitive market structure, the demand curve of an individual firm is
A) perfectly inelastic. B) downward sloping.
C) relatively inelastic. D) perfectly elastic.
2) If a firm is a perfect competitor, then
A) the demand curve for its product is perfectly elastic.
B) it can independently set the price of the product it sells without regard to what other firms
in the market are doing.
C) it is impossible for the firm to earn short run economic profits.
D) its marginal cost will exceed marginal revenue at the optimal level of output.
3) For a firm in a perfectly competitive industry, the demand curve for its own product is
A) horizontal. B) vertical.
C) upward sloping. D) downward sloping.
4) For a firm in a perfectly competitive industry, the demand curve for its own product is
A) downward sloping.
B) vertical.
C) always above the marginal revenue curve.
D) the same as the marginal revenue curve.
5) In a perfectly competitive industry, the industry demand curve
A) must be horizontal. B) must be vertical.
C) is upward sloping. D) is downward sloping.
6) The perfectly competitive firm faces
A) a downward sloping demand curve. B) a horizontal supply function.
C) perfectly elastic demand. D) constant marginal costs.
7) A perfectly elastic demand function
A) shows that a consumer is willing to pay any amount for the product.
B) is characteristic of an individual firm operating in a perfectly competitive market.
C) shows that the individual firm can increase sales by lowering the price of output.
D) has a marginal revenue that is always decreasing.
8) The demand curve for a perfectly competitive firm is horizontal because
A) consumers are willing to pay any price to obtain its product.
B) its production decisions cannot influence the market price.
C) the firm profits from setting its price higher than the market price.
D) its product is easy for consumers to differentiate from those of other firms.
9) The demand curve for a perfectly competitive industry is
A) downward sloping.
B) horizontal.
C) vertical.
D) indeterminate without more information.
10) The demand curve for a perfectly competitive firm is
A) elastic at relatively high prices and inelastic at relatively low prices.
B) perfectly elastic.
C) perfectly inelastic.
D) unitary elastic.
11) In the model of perfect competition, the market demand curve is found by
A) a marketing analysis.
B) taking the demand curve of a representative consumer and expanding it by the number
of consumers of the good.
C) horizontally summing the demand curves of individual consumers.
D) horizontally summing the supply curves of individual firms.
12) The demand curve for the product of a perfectly competitive firm s demand curve indicates that
if the firm
A) lowers its price, it can sell more.
B) accepts the market set price, the number of units the firm can sell is limited.
C) raises its price, sales will fall to zero.
D) changes its price, the quantity demanded will change in the opposite direction.
13) Which of the following statements is not true for a perfectly competitive firm?
A) A firm s demand curve is horizontal.
B) The firm can influence its demand curve by advertising its product.
C) The firm s demand curve is perfectly elastic.
D) The market demand and supply curves determine the market price.
14) A perfectly competitive producer faces a demand curve for its own product that is
A) downward sloping. B) upward sloping.
C) horizontal. D) vertical.
15) Which of the following statements is correct about the demand curve of the perfectly
competitive industry?
A) The demand curve of the perfectly competitive industry is horizontal as are the demand
curves facing the individual firms.
B) The market demand curve of perfect competition is vertical because the individual
consumers are buying a homogeneous product.
C) The market demand curve of the perfectly competitive industry is downward sloping
while the demand curve facing an individual firm is horizontal.
D) The market demand curve of the perfectly competitive industry is downward sloping, so
the demand curves of the individual firms are also downward sloping.
16) Which of the following statements is correct?
A) The demand curve of the perfectly competitive industry is elastic as are the demand
curves facing the individual firms.
B) The market demand curve of perfect competition is inelastic because the individual
consumers are buying a homogeneous product.
C) The market demand curve of the perfectly competitive industry is downward sloping
while the demand curve of an individual firm is horizontal with a height equal to the
product price.
D) The market demand curve of the perfectly competitive industry is downward sloping, so
the demand curves of the individual firms are also downward sloping.
17) The demand curve for the product of a perfectly competitive firm is
A) perfectly elastic.
B) perfectly inelastic.
C) elastic at high prices and inelastic at low prices.
D) identical to the elasticity of demand on the market demand curve.
18) Refer to the above figure. The market supply and demand curves in a perfectly competitive
market intersect at $4. Which of the graphs represent the situation for an individual firm?
A) Panel A B) Panel B C) Panel C D) Panel D
19) Refer to the above figure. Which of the graphs represent the situation for a perfectly competitive
industry?
A) Panel A B) Panel B C) Panel C D) Panel D
20) Refer to the above figure. The figure represents the market demand and supply curves for
widgets. What statement can be made about the demand curve for an individual firm in this
market?
A) An individual firm s demand curve will be a smaller version of the market demand curve.
B) An individual firm s demand curve will be horizontal at $5.
C) An individual firm s demand curve will be horizontal at a price below $5.
D) An individual firm s demand curve cannot be determined from the graph above.
21) Referring to the diagram, which of the following statements is INCORRECT?
A) The equilibrium market price is $5, at which the industry demand and supply curves
intersect.
B) If the individual firm raises its price, it will capture all sales in the market.
C) The individual firm takes as given the market price along the perfectly elastic demand
curve d.
D) The individual firm faces the going market price as determined by the industry.
22) The demand curve faced by a perfectly competitive industry
A) slopes upward. B) slopes downward.
C) has no slope. D) is perfectly inelastic.
23) The demand curve for a perfectly competitive industry is
A) perfectly elastic. B) downward sloping.
C) perfectly inelastic. D) unit elastic.
24) The demand curve for the product of a perfectly competitive firm is
A) downward sloping. B) upward sloping.
C) perfectly inelastic. D) perfectly elastic.
25) If a firm in a perfectly competitive market raises its price,
A) it will sell more products. B) it will sell fewer products.
C) its sales will remain unchanged. D) it will sell nothing.
26) A perfectly competitive firm faces a horizontal demand curve because it is
A) a price taker. B) a price maker.
C) a large firm in a small industry. D) one of few firms in the market.
27) The perfectly competitive firm s demand curve has
A) a negative slope. B) a positive slope.
C) an undefined slope. D) a slope of 0.
28) Demand curves slope down, so the demand curve faced by a perfectly competitive firm must
also be downward sloping. Do you agree or disagree? Why?
29) Describe and explain how a perfectly competitive firm s demand curve is found.
30) Why is the demand curve horizontal for a perfectly competitive firm?
23.3 How Much Should the Perfect Competitor Produce?
1) For a firm in a perfectly competitive market, average revenue equals
A) average cost. B) the change in total revenue.
C) the market price. D) price divided by quantity.
2) The total revenue of a perfectly competitive firm is calculated by
A) multiplying average revenue by price.
B) dividing price by quantity.
C) multiplying price by quantity.
D) multiplying quantity by average total cost.
3) Economists generally assume that firms attempt to maximize
A) total revenue. B) sales.
C) marginal revenue. D) total economic profits.
4) In the above figure, the market price charged by this profit maximizing, perfectly competitive
firm is
A) $5 per unit of output. B) $10 per unit of output.
C) $8 per unit of output. D) $14 per unit of output.
5) In the above figure, the profit maximizing rate of production for the perfectly competitive firm
is
A) 5. B) 10.
C) 13. D) none of the above.
6) In the above figure, at the profit maximizing rate of production for the perfectly competitive
firm total revenue is
A) $100. B) $70. C) $30. D) $130.
7) In the above figure, at the profit maximizing rate of production for the perfectly competitive
firm total cost is
A) $100. B) $70. C) $30. D) $130.
8) In the above figure, at the profit maximizing rate of production for the perfectly competitive
firm average total cost is
A) $10. B) $3. C) $7. D) $70.
9) In the above figure, at the profit maximizing rate of production for the perfectly competitive
firm profit is
A) $100. B) $70. C) $30. D) $130.
10) In the above figure, at output levels between 5 units and 13 units,
A) the firm s accounting profits are negative.
B) total revenue equals total costs.
C) the firm s economic profits are positive.
D) the firm is breaking even.
11) In the above figure, at which output level is this firm earning negative economic profits?
A) 2 B) 5 C) 10 D) 12
