Perfect Competiton Question 1 Perfectly competitive firms are said to be \"small
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Question
Perfect Competiton
Question 1
Perfectly competitive firms are said to be "small." Which of the following best describes this smallness?
Answer
The individual firm is unable to affect market price through its output decisions.
The individual firm must have fewer than 10 employees.
The individual firm faces a downward-sloping demand curve.
The individual firm has assets of less than $2 million.
Question 2
The market structure that is most similar to the model of perfect competition is:
Answer
monopolistic competition.
oligopoly.
monopsony
monopoly.
Question 3
The fact that the outputs of the firms in a perfectly competitive market are undifferentiated means that:
Answer
consumers don't care which supplier they buy from.
purchase decisions are based only on price.
the quality of each producer's output is the same.
all of the above.
Question 4
The manager of a perfectly competitive firm has to decide:
Answer
the price the firm should charge for its output.
the quantity of output the firm should produce and the price it should charge.
the quantity of output the firm should produce.
neither the quantity of output the firm should produce nor the price it should charge because the market makes both of these decisions.
Question 5
The demand curve faced by the individual perfectly competitive firm is:
Answer
vertical.
upward sloping.
horizontal.
downward sloping.
Question 6
In order to maximize its profits, a price-taking firm should produce the level of output at which:
Answer
marginal revenue = marginal cost.
average revenue = average cost.
total revenue = total cost.
variable revenue = variable cost.
Question 7
Assume a perfectly competitive firm is producing a level of output at which MR > MC. What should the firm do to maximize its profits?
Answer
The firm should increase price.
The firm should hire less labor.
The firm should increase output.
The firm should do nothing it wants to maximize the difference between MR and MC in order to maximize its profits.
Question 8
A firm will earn zero economic profit when, at the firm's profit-maximizing level of output:
Answer
MR = MC > ATC.
P = AFC.
P = AVC.
P = ATC.
Question 9
When a firm is earning positive economic profit:
Answer
price is greater than average total cost.
price equals average total cost.
price is less than average total cost.
price is greater than or less than average total cost depending on the level of output.
Question 10
When price is less than average variable cost at the profit-maximizing level of output, a firm should:
Answer
continue to produce the level of output at which marginal revenue equals marginal cost if it is operating in the long run.
shutdown, because it cannot even cover all of its variable costs let alone its fixed costs if it stays in business.
shutdown, because it will lose nothing in that case.
continue to produce the level of output at which marginal revenue equals marginal cost if it is operating in the short run.
Question 11
Assume that at the current market price, a perfectly competitive firm's profit-maximizing level of output yields total revenues that are just equal to total costs. Which of the following statements applies to this firm?
The firm should increase its explicit costs to reduce its tax burden.
The firm should continue to operate in the short run to minimize losses, but shut down if things don't improve over the long run.
The firm is earning zero economic profit and should continue to operate.
The firm should shut down right now.
Question 12
Assume a perfectly competitive firm is producing the profit-maximizing level of output and price is less than average total cost, but greater than average variable cost. Which of the following statements is correct?
Answer
The firm should raise its price enough to cover its losses.
The firm should continue to produce in the short run in order to minimize its losses.
The firm should shutdown in order to minimize its losses.
The firm should move its resources to another industry.
Question 13
By continuing to operate when price is greater than average variable cost but less than average total cost, a firm limits its losses to:
Answer
$0.
the difference between its total fixed cost and the amount by which total revenue exceeds total variable costs.
its total fixed costs.
its total variable costs.
Question 14
The perfectly competitive firm's supply curve:
Answer
is the firm's average total cost curve above the shutdown point.
is the firm's marginal cost curve above the minimum point on the AVC curve.
coincides with its perfectly elastic demand curve.
is perfectly inelastic at the market price.
Question 15
Assume that as the firms in a perfectly competitive industry expand output, the prices of productive inputs increase. All else constant, this would cause the individual firms' marginal cost curves to ________ and the market supply curve to become ________.
Answer
shift down; flatter
shift up; steeper
shift up; flatter
shift down; steeper
Question 16
Assume there is a decrease in the market demand for a good sold by price-taking firms that are initially producing the profit-maximizing level of output. How will the market adjust over time?
Answer
Firms will exit the market, causing price to rise until losses are eliminated.
Firms will exit the market, causing price to fall until positive profits are eliminated.
Firms will enter the market, causing price to fall until positive profits are eliminated.
Firms will enter the market, causing price to rise until losses are eliminated.
Question 17
Assume there is an increase in the number of consumers in the market for a good sold by perfectly competitive firms that are initially producing the profit-maximizing level of output. For the individual firm, this would result in:
Answer
a decrease in price and increase in the profit-maximizing quantity of output.
an increase in both price and the profit-maximizing quantity of output.
an increase in price and decrease in profit-maximizing quantity of output.
a decrease in both price and the profit-maximizing quantity of output.
Question 18
If farmers operating in the competitive wheat industry are incurring losses, and are not kept in business with government subsidies, which of the following will result?
Answer
Resources will be reallocated out of the wheat industry into more productive uses.
Farmers will run economic losses indefinitely, if they are rational.
Price and quantity produced will both increase in the long run.
The supply of wheat will fall to near zero and the U.S. will become dependent on foreign suppliers of food.
Question 19
Assume the firms in a perfectly competitive industry are initially in long-run equilibrium and the cost of labor increases. In the short run, this will cause firms in the industry to:
Answer
increase output and earn a positive economic profit.
reduce output and incur a loss.
increase output and incur a loss.
reduce output and earn a positive economic profit.
Question 20
Assume perfectly competitive firm Z is in long-run equilibrium and consumers' tastes and preferences for the type of good produced by Z increase. Which of the following will not happen in the long run?
Answer
The market will return to long-run equilibrium when profits return to their normal level.
The firms that were already in the industry will return to a situation in which they earn zero economic profit.
Price will be lower at the new long-run equilibrium as a result of entry into the market.
New firms will enter, causing market price to fall.
Question 21
Industry X, which is perfectly competitive, is in long-run equilibrium. Assume a new law is passed that requires employers in industry X to provide health insurance to previously uninsured employees. As a result of this new requirement we would expect to observe:
Answer
an increase in price and a decrease in total output in industry X.
an increase in price and total output in industry X.
a decrease in price and total output in industry X.
a decrease in price and an increase in total output in industry X.
Question 22
Assume that there is an improvement in the technology used by firms in a perfectly competitive industry. After all adjustments have taken place, we would expect to see:
Answer
an increase in equilibrium price and a decrease in quantity.
a decrease in equilibrium price and quantity.
a decrease in equilibrium price and an increase in quantity.
an increase in equilibrium price and quantity.
Question 23
Assume that goods X and Y are complements and are produced in perfectly competitive markets. All else constant, a decrease in demand for good X would cause:
Answer
an increase in the number of firms that produce good X.
an increase in the number of firms that produce good Y.
no effect on the number of firms that produce either good.
a decrease in the number of firms that produce good Y.
Question 24
What is the "most efficient capacity" for the perfectly competitive firm?
Answer
The plant size for which Price = AR.
The plant size at which LRAC is at its minimum.
The plant size at which MR = MC.
The plant size at which any of the SRATC curves are tangent to the LRAC curve.
Question 25
The term "industry concentration:"
Answer
is a measure of how many firms produce the total output of an industry.
is a measure of how many customers purchase the total output of an industry.
refers to how capital or labor intensive a particular industry is.
refers to the degree of product differentiation in an industry.
Explanation / Answer
Perfect Competiton Question 1 Perfectly competitive firms are said to be "small." Which of the following best describes this smallness? Answer The individual firm is unable to affect market price through its output decisions. Question 2 The market structure that is most similar to the model of perfect competition is: Answer monopolistic competition. Question 3 The fact that the outputs of the firms in a perfectly competitive market are undifferentiated means that: Answer all of the above. Question 4 The manager of a perfectly competitive firm has to decide: Answer the quantity of output the firm should produce. Question 5 The demand curve faced by the individual perfectly competitive firm is: Answer horizontal. Question 6 In order to maximize its profits, a price-taking firm should produce the level of output at which: Answer marginal revenue = marginal cost. Question 7 Assume a perfectly competitive firm is producing a level of output at which MR > MC. What should the firm do to maximize its profits? Answer The firm should increase output. Question 8 A firm will earn zero economic profit when, at the firm's profit-maximizing level of output: Answer P = ATC. Question 9 When a firm is earning positive economic profit: Answer price is greater than average total cost. Question 10 When price is less than average variable cost at the profit-maximizing level of output, a firm should: Answer continue to produce the level of output at which marginal revenue equals marginal cost if it is operating in the short run. Question 11 Assume that at the current market price, a perfectly competitive firm's profit-maximizing level of output yields total revenues that are just equal to total costs. Which of the following statements applies to this firm? The firm is earning zero economic profit and should continue to operate. Question 12 Assume a perfectly competitive firm is producing the profit-maximizing level of output and price is less than average total cost, but greater than average variable cost. Which of the following statements is correct? Answer The firm should continue to produce in the short run in order to minimize its losses. Question 13 By continuing to operate when price is greater than average variable cost but less than average total cost, a firm limits its losses to: Answer the difference between its total fixed cost and the amount by which total revenue exceeds total variable costs. Question 14 The perfectly competitive firm's supply curve: Answer coincides with its perfectly elastic demand curve. Question 15 Assume that as the firms in a perfectly competitive industry expand output, the prices of productive inputs increase. All else constant, this would cause the individual firms' marginal cost curves to ________ and the market supply curve to become ________. Answer shift up; flatter Question 16 Assume there is a decrease in the market demand for a good sold by price-taking firms that are initially producing the profit-maximizing level of output. How will the market adjust over time? Answer Firms will exit the market, causing price to rise until losses are eliminated. Question 17 Assume there is an increase in the number of consumers in the market for a good sold by perfectly competitive firms that are initially producing the profit-maximizing level of output. For the individual firm, this would result in: Answer an increase in both price and the profit-maximizing quantity of output. Question 18 If farmers operating in the competitive wheat industry are incurring losses, and are not kept in business with government subsidies, which of the following will result? Answer Resources will be reallocated out of the wheat industry into more productive uses. Question 19 Assume the firms in a perfectly competitive industry are initially in long-run equilibrium and the cost of labor increases. In the short run, this will cause firms in the industry to: Answer reduce output and incur a loss. Question 20 Assume perfectly competitive firm Z is in long-run equilibrium and consumers' tastes and preferences for the type of good produced by Z increase. Which of the following will not happen in the long run? Answer The market will return to long-run equilibrium when profits return to their normal level. Question 21 Industry X, which is perfectly competitive, is in long-run equilibrium. Assume a new law is passed that requires employers in industry X to provide health insurance to previously uninsured employees. As a result of this new requirement we would expect to observe: Answer an increase in price and a decrease in total output in industry X. Question 22 Assume that there is an improvement in the technology used by firms in a perfectly competitive industry. After all adjustments have taken place, we would expect to see: Answer a decrease in equilibrium price and an increase in quantity. Question 23 Assume that goods X and Y are complements and are produced in perfectly competitive markets. All else constant, a decrease in demand for good X would cause: Answer a decrease in the number of firms that produce good Y. Question 24 What is the "most efficient capacity" for the perfectly competitive firm? Answer The plant size at which MR = MC. Question 25 The term "industry concentration:" Answer is a measure of how many firms produce the total output of an industry.
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