Question 1

Suppose a perfectly competitive firm is producing a level of output for which price equals average total cost, and average total cost is less than marginal cost. In order to maximize its profits, the firm should

Accepted Answer

A)   reduce its output.
B)   expand its output.
C)   produce zero output.
D)   increase the market price.
E)   not change its output.F) A) and B)
G) B) and E)

Question 2

Suppose a typical firm in a competitive industry has the following data in the short run: price = $6; output =
100 units; ATC = $8; AVC = $7. What will likely happen in the long run?

Accepted Answer

A)   In the long run the industry will expand because firms are earning economic profits.
B)   In the long run the industry will contract because firms are suffering losses.
C)   The size of the industry will remain the same in the long run.
D)   The typical firm would shut down, until the remaining firms have a higher price.
E)   There is not enough information to formulate an answer.F) None of the above
G) D) and E)

Question 3

The term ʺperfect competitionʺ refers to

Accepted Answer

A)   rivalrous behaviour.
B)   ideal economic behaviour.
C)   a type of market structure.
D)   the most prevalent market structure in a capitalist economy.
E)   the most realistic market structure.F) B) and D)
G) C) and D)

Question 4

Firms have several different concepts of revenue: total revenue, average revenue, marginal revenue, and price. For a profit-maximizing perfectly competitive firm, which statement below is true?

Accepted Answer

A)   Total revenue, average revenue, marginal revenue, and price are all equal.
B)   Average revenue, marginal revenue, and price are equal.
C)   Only marginal revenue and price are equal.
D)   Only average revenue and price are equal.
E)   None of these revenues are equal.F) B) and D)
G) A) and E)

Question 5

If a firm in a perfectly competitive market were to raise its price, its

Accepted Answer

A)   revenue would decrease only if market demand were elastic.
B)   revenue would increase only if market demand were inelastic.
C)   total costs would increase.
D)   revenue would fall dramatically.
E)   profits would increase as long as costs remained constant.F) None of the above
G) B) and D)

Question 6

Consider a perfectly competitive firm when its industry is in long-run equilibrium. In this case,

Accepted Answer

A)   price is greater than marginal cost.
B)   marginal revenue is greater than marginal cost.
C)   price equals minimum short-run and long-run average total cost.
D)   economic profits are greater than zero.
E)   average fixed costs are at the maximum.F) C) and E)
G) A) and B)

Question 7

FIGURE 9-1
-Refer to Figure 9-1. The diagram shows cost curves for a perfectly competitive firm. The firmʹs short-run supply curve starts at output and rises along the marginal cost MC)  curve.

Accepted Answer

A)   D
B)   E
C)   F
D)   G
E)   HF) A) and E)
G) C) and D)

Question 8

Average revenue AR)  for an individual firm in a perfectly competitive market equals

Accepted Answer

A)   p × q.
B)   p.
C)   △p × △q.
D)   △q/△p.
E)   p × q) /△q.F) A) and B)
G) A) and C)

Question 9

In the long run it is not possible for a perfectly competitive firm to

Accepted Answer

A)   alter its plant size.
B)   adopt new technology.
C)   replace its antiquated equipment.
D)   adjust its output.
E)   set the product price.F) B) and D)
G) C) and E)

Question 10

Consider the price and quantity data below for a perfectly competitive firm producing mousetraps.  TABLE 9-1
-Refer to Table 9-1. Suppose this firm is producing 1250 mousetraps and its average total cost is $4 per unit. The firm will be

Accepted Answer

A)   suffering losses of $5000.
B)   earning profits of $5000.
C)   breaking even.
D)   earning profits of $1250.
E)   suffering losses of $1250.F) B) and C)
G) A) and D)

Question 11

A firm in a perfectly competitive industry will maximize profits by adjusting

Accepted Answer

A)   price until marginal revenue equals marginal cost.
B)   output until marginal cost equals marginal revenue.
C)   price until average revenue equals average total cost.
D)   output until average revenue equals short-run average total cost.
E)   average total cost until it equals price.F) D) and E)
G) C) and D)

Question 12

FIGURE 9-1
-Refer to Figure 9-1. The diagram shows cost curves for a perfectly competitive firm. If the market price is P 4 and the firm is producing output level F, this firm should

Accepted Answer

A)   expand output to quantity G.
B)   expand output to quantity I.
C)   maintain output at quantity F.
D)   reduce output to quantity C.
E)   reduce output to quantity D.F) A) and D)
G) B) and C)

Question 13

Assume the following total cost schedule for a perfectly competitive firm.  TABLE 9-2
-Refer to Table 9-2. If the market price were $75, this perfectly competitive firm wishing to maximize its profits would

Accepted Answer

A)   produce 2 units of output.
B)   produce 6 units of output.
C)   produce 5 units of output.
D)   not produce because P 
E)   not produce because P < TFC.F) None of the above
G) D) and E)

Question 14

A perfectly competitive firm is currently producing an output level where price is $10.00, average variable cost is $6.00, average total cost is $10.00, and marginal cost is $8.00. In order to maximize profits, this firm should

Accepted Answer

A)   produce zero output.
B)   decrease its output.
C)   increase its output.
D)   increase the market price.
E)   not change its output this firm is at its profit-maximizing position.F) A) and E)
G) A) and D)

Question 15

The diagram below shows the short-run cost curves for 3 perfectly competitive firms in the same industry.
  FIGURE 9-6
-Refer to Figure 9-6. Which firm or firms is likely to exit this industry?

Accepted Answer

A)   Firm A
B)   Firm B
C)   Firm C
D)   all of Firms A, B, and C
E)   none of Firms A, B, and CF) B) and C)
G) C) and E)

Question 16

Consider the following cost curves for Firm X, a perfectly competitive firm.
  FIGURE 9-5
-Refer to Figure 9-5. In this industry, which one of the following is FALSE?

Accepted Answer

A)   If the price were to fall below P2, firms would leave the industry.
B)   If the price were to rise above P2, new firms would enter the industry.
C)   If the scale of Firm X at output Q2 and price P2 is large enough that Firm X has an appreciable share of the market, Firm X will no longer be a price taker.
D)   At output Q2 and price P2, Firm X is maximizing its long-run profits.
E)   Only one firm can reach the size of output Q2.F) C) and D)
G) B) and E)

Question 17

Why will a perfectly competitive firm not sell its product below the prevailing market price?

Accepted Answer

A)   It faces inelastic demand.
B)   It can sell all it wishes at the market price.
C)   The sellers in the market have agreed to not sell below a specified price.
D)   Its costs would increase dramatically.
E)   This would lead to a price war among sellers.F) None of the above
G) C) and D)

Question 18

A perfectly competitive firmʹs total revenue is equal to which of the following?

Accepted Answer

A)   average revenue multiplied by price.
B)   price times quantity of the product sold, divided by quantity of the product sold.
C)   the revenue received on the last unit sold.
D)   marginal revenue times quantity of the product sold.
E)   price multiplied by marginal revenue.F) A) and D)
G) B) and D)

Question 19

Suppose that in a perfectly competitive industry, the market price of the product is $6. A firm is producing the output level at which average total cost equals marginal cost, both of which are $8. Average variable cost is $4. To maximize its profits in the short run, the firm should

Accepted Answer

A)   reduce its output.
B)   expand its output.
C)   leave its output unchanged.
D)   shut down.
E)   There is insufficient information to know.F) B) and D)
G) A) and B)

Question 20

Long-run equilibrium in a perfectly competitive industry is characterized by

Accepted Answer

A)   internal economies of scale.
B)   an output level at which firmsʹ SRATC curves are tangent to the downward sloping portion of their LRAC curves.
C)   falling costs.
D)   rising costs.
E)   each firm producing at the minimum point on its LRAC curve.F) A) and E)
G) A) and D)

Exam 9: Competitive Markets

Suppose a perfectly competitive firm is producing a level of output for which price equals average total cost, and average total cost is less than marginal cost. In order to maximize its profits, the firm should

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Consider the price and quantity data below for a perfectly competitive firm producing mousetraps. TABLE 9-1 -Refer to Table 9-1. Suppose this firm is producing 1250 mousetraps and its average total cost is $4 per unit. The firm will be

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The term ʺperfect competitionʺ refers to

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A firm in a perfectly competitive industry will maximize profits by adjusting

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Firms have several different concepts of revenue: total revenue, average revenue, marginal revenue, and price. For a profit-maximizing perfectly competitive firm, which statement below is true?

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The diagram below shows the short-run cost curves for 3 perfectly competitive firms in the same industry. FIGURE 9-6 -Refer to Figure 9-6. Which firm or firms is likely to exit this industry?

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If a firm in a perfectly competitive market were to raise its price, its

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A perfectly competitive firm is currently producing an output level where price is $10.00, average variable cost is $6.00, average total cost is $10.00, and marginal cost is $8.00. In order to maximize profits, this firm should

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In the long run it is not possible for a perfectly competitive firm to

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Average revenue AR) for an individual firm in a perfectly competitive market equals

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FIGURE 9-1 -Refer to Figure 9-1. The diagram shows cost curves for a perfectly competitive firm. The firmʹs short-run supply curve starts at output and rises along the marginal cost MC) curve.

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Consider the following cost curves for Firm X, a perfectly competitive firm. FIGURE 9-5 -Refer to Figure 9-5. In this industry, which one of the following is FALSE?

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Assume the following total cost schedule for a perfectly competitive firm. TABLE 9-2 -Refer to Table 9-2. If the market price were $75, this perfectly competitive firm wishing to maximize its profits would

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Consider a perfectly competitive firm when its industry is in long-run equilibrium. In this case,

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A perfectly competitive firmʹs total revenue is equal to which of the following?

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FIGURE 9-1 -Refer to Figure 9-1. The diagram shows cost curves for a perfectly competitive firm. If the market price is P 4 and the firm is producing output level F, this firm should

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Suppose that in a perfectly competitive industry, the market price of the product is $6. A firm is producing the output level at which average total cost equals marginal cost, both of which are $8. Average variable cost is $4. To maximize its profits in the short run, the firm should

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Why will a perfectly competitive firm not sell its product below the prevailing market price?

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Long-run equilibrium in a perfectly competitive industry is characterized by

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Suppose a typical firm in a competitive industry has the following data in the short run: price = $6; output = 100 units; ATC = $8; AVC = $7. What will likely happen in the long run?

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