Chapter 12 Perfect Competition

1) Perfect competition arises if the ______efficient scale of a single producer is ______relative to the demand for the good or service. A) minimum; small B) minimum; large C) maximum; small D) maximum; large

2) In perfect competition, ______. A) there are restrictions on entry into the industry B) firms in the industry have advantages over firms that plan to enter the industry C) only firms know their competitors' prices D) there are many firms that sell identical products

3) Perfect competition implies that A) there are many firms in the industry. B) all firms are price takers. C) all firms are producing the same identical product. D) All of the above answers are correct.

4) Which of the following is NOT a characteristic of a perfectly competitive industry? A) There are many firms. B) There are no restrictions on entry into the industry. C) Each firm produces a slightly differentiated product. D) Each firm takes price as given, determined by the equilibrium of industry supply and industry demand.

5) In perfect competition, the market demand for the good ______perfectly elastic and the demand for the output of one firm ______perfectly elastic. A) is; is B) is; is not C) is not; is D) is not; is not

6) In perfect competition, the elasticity of demand for the product of a single firm is A) 0. B) between 0 and 1. C) 1. D) infinite.

7) Economic profit is ______. A) included in the firm's total opportunity cost B) equal to normal profit minus total opportunity cost C) equal to total revenue minus marginal cost D) equal to total revenue minus total opportunity cost

8) In perfect competition, a firm that maximizes its economic profit will sell its good at a price that is A) below the market price. B) at the market price. C) above the market price. D) below the market price if its supply curve is inelastic and above the market price if its supply curve is elastic.

9) The firm's goal is to A) maximize its normal profit. B) maximize its economic profit. C) maximize its total revenue. D) maximize its industry's revenue.

10) In perfect competition, the marginal revenue of an individual firm A) is zero. B) is positive but less than the price of the product. C) equals the price of the product. D) exceeds the price of the product. 11) The above figure shows a firm's total revenue line. The firm must be in a market with A) perfect competition. B) monopolistic competition. C) monopoly. D) oligopoly.

12) The figure above portrays a total revenue curve for a perfectly competitive firm. The firm's marginal revenue from selling a unit of output A) equals $0.50. B) equals $1.00. C) equals $2.00. D) cannot be determined.

13) The figure above portrays a total revenue curve for a perfectly competitive firm. The price of the product in this industry A) equals $0.50. B) equals $1.00. C) equals $2.00. D) cannot be determined.

14) In the above figure showing a perfectly competitive firm's total revenue line, the firm's marginal revenue A) falls as output increases. B) does not change as output increases. C) rises as output increases. D) cannot be determined.

Price Total Quantity (dollars per revenue (units) unit) (dollars) 9 10 90 10 10 100 11 10 110

15) Based on the table above, what is the marginal revenue of the tenth unit of output? A) $190 B) $100 C) $10 D) $9

16) A perfectly competitive firm maximizes its economic profit if it produces so that A) total revenue = total cost. B) marginal revenue = marginal cost. C) average revenue = average total cost. D) average total cost = average variable cost.

17) The profit maximizing condition for a perfectly competitive firm is A) MR = P. B) P = MC. C) P = ATC. D) TR = TC.

18) If marginal revenue exceeds marginal cost, to increase its profit the firm will A) decrease its output. B) increase its output. C) keep its output the same. D) shut down.

19) In the above figure, by increasing its output from Q to 1 Q , the firm 2 A) reduces its marginal revenue. B) increases its marginal revenue. C) decreases its profit. D) increases its profit.

20) The above figure illustrates a firm's total revenue and total cost curves. Which one of the following statements is FALSE? A) Economic profit is the vertical distance between the total revenue curve and the total cost curve. B) At output Q the firm makes zero economic profit. 1 C) At an output above Q the firm incurs an economic loss. 3 D) At output Q the firm incurs an economic loss. 2 21) A perfectly competitive firm will shut down in the short run when the price is less than A) marginal cost. B) average total cost. C) average fixed cost. D) average variable cost.

22) In the above figure, the line represented by the "2" is the A) average fixed cost. B) average variable cost. C) total cost. D) average total cost.

23) In the above figure, the line represented by the "1" is the A) average fixed cost. B) marginal revenue. C) total cost. D) average total cost.

24) A firm's shutdown point is the output and price at which the firm just covers its A) total fixed cost. B) total variable cost. C) total cost. D) marginal cost. 25) The owners will shut down a perfectly competitive firm if the price of its good falls below its minimum A) average total cost. B) average marginal cost. C) average variable cost. D) wage rate.

26) A perfectly competitive firm's shutdown point occurs when the firm's A) average total cost equals average variable cost. B) revenue just equals its average variable cost. C) revenue just equals its average total cost. D) revenue just equals its total variable cost.

Average total Output cost (sandwiches per ($ per hour) sandwich) 1 17.00 2 10.00 3 8.00 4 8.00 5 8.80 6 10.00

27) The table above shows output and costs of Evan's Subs, a typical perfectly competitive firm in a local market for sandwiches. Evan's fixed cost is $9 per hour. The current market price of a sandwich is $6. What is Evan's marginal revenue from the 2nd sandwich sold? A) $10.00 B) $13.50 C) $3.00 D) $6.00

28) The table above shows output and costs of Evan's Subs, a typical perfectly competitive firm in a local market for sandwiches. Evan's fixed cost is $9 per hour. The current market price of a sandwich is $6. If Evan's sells the 5th sandwich, the marginal cost is ______the marginal revenue, so the firm's profit ______. A) greater than; decreases B) greater than; increases C) less than; increases D) less than; decreases

29) The figure above shows a perfectly competitive firm. In the short run, the firm will shut down A) only if the AVC of producing 10 units is less than $20. B) only if the AVC of producing 10 units is more than $20. C) only if the AVC curve reaches its minimum before 10 units are produced. D) always. Consider the perfectly competitive firm in the above (30 figure. The profit maximizing level of output for the firm is equal to A) 0 units. B) 14 units. C) 17 units. D) 19 units.

31) Consider the perfectly competitive firm in the above figure. At the profit maximizing level of output, the firm is earning A) an economic loss equal to $119.00. B) an economic loss equal to $123.50. C) an economic loss equal to $187.00. D) a normal profit.

32) Consider the perfectly competitive firm in the above figure. The shutdown point occurs at a price of A) $11.00. B) $12.00. C) $16.00. D) $22.00. 33) Consider the perfectly competitive firm in the above figure. What will the firm choose to do in the short-run and why? A) shut down because the firm incurs an economic loss B) stay in business because the firm is making an economic profit C) stay in business because the firm's economic loss is less than fixed costs D) stay in business because it is earning a normal profit

34) A perfectly competitive firm's short-run supply curve is the same as its A) ATC curve. B) MR curve. C) AVC curve. D) MC curve above the minimum of the AVC curve.

35) In the above figure, the vertical distance between the ATC and AVC curves is A) the marginal cost. B) the total cost. C) the average fixed costs. D) None of the above answers are correct.

36) Consider the perfectly competitive firm in the above figure. At the profit maximizing level of output, the total costs is A) $187. B) $485. C) $391. D) $204.

37) Consider the perfectly competitive firm in the above figure. At the profit maximizing level of output, the total average costs is A) $285. B) $485. C) $391. D) $204.

38) Consider the perfectly competitive firm in the above figure. At the profit maximizing level of output, the total fixed costs is A) $187. B) $204. C) $285. D) $200.

Numeric and Essay Questions

1) What are the requirements for perfect competition? Answer: The requirements are: many firms selling an identical product; many buyers; no restrictions on entry into the industry; established firms have no advantages over new entrants; and sellers and buyers have good information about prices of each firm's product.

2) What is a normal profit? Answer: A normal profit is the return a firm's owner could obtain in the best alternative business. As a result, it is an opportunity cost to the firm

Total Profit or Quantity Total cost revenue loss (wreaths) (dollars) (dollars) (dollars) 0 1 1 10 2 18 3 24 4 28 5 33 6 40 7 49 8 60 9 73

3) The above table gives Amy's total cost schedule for producing holiday wreaths. Amy is a perfect competitor and can sell each wreath for $9. a) Complete the table by calculating Amy's total revenue and her profit or loss schedule. b) When Amy is producing 4 wreaths, what is her total cost? What is her total revenue? What is her economic profit or economic loss? c) What number of wreaths maximizes Amy's profit?

Answer:

Total Profit or Quantity Total cost revenue loss (wreaths) (dollars) (dollars) (dollars) 0 1 0 -1 1 10 9 -1 2 18 18 0 3 24 27 3 4 28 36 8 5 33 45 12 6 40 54 14 7 49 63 14 8 60 72 12 9 73 81 8 a) The completed table is above. b) When Amy is producing 4 wreaths, her total cost is $28, her total revenue is $36, and her economic profit is $8. c) Amy can produce 6 or 7 wreaths, with a maximum economic profit of $14.

4) The above figure shows the cost curves of a profit- maximizing perfectly competitive firm. If the price equals $7, a) how much will the firm produce? b) how much is the firm's average total, average variable, and marginal costs? c) how much is the firm's total, total variable, and total fixed costs? d) how much is the firm's total revenue and economic profit?

Answer:

a) The firm will produce 40 units of output because that is where the marginal revenue equals the marginal cost. b) The firm's average total cost equals $4, its average variable cost equals $3, and its marginal cost equals $7. c) The firm's total cost is $160 (= $4 × 40), its total variable cost is $120 (= $3 × 40), and its total fixed cost is $40 (= $160 - $120). d) The firm's total revenue is $280 (= $7 × 40) and its economic profit is $120 (= $280 - $160).