MULTIPLE CHOICE. Choose the one alternative that best completes the statement or

Question

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the questioin 4) Perfect competition is characterized by all of the following EXCEPT A) a large number of buyers and sellers B) well-informed buyers and sellers with 1) A price-taking firm A) asks the government to set the price of its B) sets the product's price to whatever level C) cannot influence the price of the product D) talks to rival firms to determine the best E) takes whichever of the many market respect to prices product. the owner decides upon it sells price for all of them to charge prices it prefers C) firms produce an identical product. D) considerable advertising by individual firms E) no restrictions on entry into or exit from the industry 5) Under which of the following conditions will a profit-maximizing perfectly competitive firm shut down in the short run? A) whenever its total cost is greater than its 2) A perfectly competitive firm's demand curve is total revenue horizontal because i. the firm is so small, relative to the market, that it cannot affect the market price ii. there are many perfect substitutes for its product iii. the firm cannot sell any output at a price higher than the market price B) when the price is less than its minimum average total cost ) when it is earning a normal profit D) whenever its marginal cost is less than its marginal revenue E) when the price is less than its minimum average variable cost A) iii only B) ii only 6) Henry, a perfectly competitive lime grower in and 11 Southern California, notices that the market D) i and iii E) 1, 11, and 111 price of limes is greater than his marginal cost. What should Henry do?

Explanation / Answer

1. Option C

Explanation: A price-taking firm accepts the market price determined by the market force. It cannot affect the price of the products sold. A perfectly competitive firm is a price-taking firm.

2. Option E

Explanation: In a perfectly competitive market, there are a large number of small firms selling an identical product. Each firm has a very small market share; therefore, each firm is a price-taker. So, a firm can sell its products only at the market price. If a firm charges even a slightly higher price than the market price, its total sales will be zero. Since, each firm sells an identical good, the products of each firm is perfectly substitutable. Therefore, all the options i,ii, and iii are correct.

4. Option D.

Explanation: In perfect competition, each firm sells an identical product. Therefore, there is no scope of product differentiation. So, advertising is not heavily used in perfect competition.

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