Chapter 11 Perfect Competition

Chapter 11 - Perfect Competition

11-11

Chapter 11

Perfect Competition

Multiple Choice Questions

1.Which of the following is not a condition for perfect competition?A.Firms take prices as givenB.Firms sell a standardized productC.Firms are protected by barriers to entryD.Firms have perfect information

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2.The profit maximizing output level for a perfectly competitive firm is always whereA.P = MCB.P = AVCC.MC = ATCD.MC = AVC

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Use the following to answer questions 3-6:

3.In the graph above at a price of P*, in the above graph, the profit maximizing level of output isA.Q*B.Above Q*C.Below Q* but above zeroD.Zero

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4.In the graph above at P*, the firm is making __________ economic profits.A.PositiveB.NegativeC.ZeroD.An indeterminate level of

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5.Which statement is true of the graph shown?A.The marginal cost curve should not cross the AFC while it is fallingB.If an ATC curve was drawn in the graph it would intersect the MC curve but not any other curveC.The shut down point of the firm would be at an output more than Q*D.The marginal cost curve crosses the AFC curve at the lowest point of the AFC curve

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6.In the graph above if the price persists at P*, the profit maximizing firm willA.Shut down immediatelyB.Shut down in the long runC.Operate indefinitelyD.Has a strategy that can not be predicted without an ATC curve

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7.If a firm's demand curve falls below its AVC curve, then the firm shouldA.Shut down nowB.Operate in the short run but not the long runC.Set price = marginal costD.Shutdown in the long-run

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8.The demand curve facing a perfectly competitive firm isA.Infinitely elasticB.Perfectly inelasticC.Downward slopingD.Perfectly elastic

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9.If the demand curve falls below the ATC curve but lies above AVC, then the firm shouldA.Should shut downB.Operate in the short run but not the long runC.Set price = marginal costD.Operate in the short run and the long run

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10.In general, economists assume that firmsA.Maximize accounting profitB.Maximize economic profitC.Maximize salesD.Maximize revenue

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Use the following to answer questions 11-13:Joe is self-employed in a store that has a rental value of $500 a month which he pays, but he can vacate the building without giving notice. His other expenses are $100 a month for maintenance. He makes $25,000 a year on net sales (total revenue minus the wholesale cost of the product). If he quit his job and worked the same number of hours elsewhere at a job he liked equally well, he estimates that he could make $20,000 a year. No one else can be hired to work in the store.

11.Joe shouldA.Quit his jobB.Keep the jobC.Work part-timeD.It is impossible to say with the information given in the problem

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12.Suppose that the store owner gave Joe the store. Now what should he do?A.Quit his jobB.Keep the jobC.Work part-timeD.It is impossible to say with the information given in the problem

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13.Suppose that Joe had a long term lease which requires him to pay the rent even if he doesn't operate the store. What should Joe do?A.Quit immediatelyB.Keep the job permanentlyC.Keep the job until the lease expiresD.It is impossible to say with the information given in the problem

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14.In a decreasing cost industry, as output grows over time,A.Prices will fallB.Prices will riseC.Prices will stay the sameD.Prices are zero

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15.The output where MC = AVC is called theA.Shutdown pointB.Break-even pointC.Profit maximizing pointD.Revenue maximizing point

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16.At the output where MC = ATC = P, the firmA.Should shutdownB.Has no economic profitC.Is profit maximizingD.Should raise output

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17.A standardized product is a productA.That has many perfect substitutesB.That is unique to one producerC.Which is produced according to government regulationsD.Where the demand function is downward sloping for both the firm and the industry

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18.If firms are price takers this impliesA.That in the short-run economic profits will be zeroB.That the demand curve facing the firm is perfectly elasticC.That the total revenue curve is horizontalD.That the marginal revenue curve is upward sloping

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Use the following to answer questions 19-23:

19.In the above diagram profit is maximized at pointA.AB.BC.CD.D

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20.In the long runA.The firm will operate at point BB.The firm will operate at point CC.The firm will operate at point DD.The total revenue curve will change its slope

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21.At point DA.The firm is maximizing its profitB.The firm is losing moneyC.The firm is breaking evenD.The firm is making money

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22.At point AA.MC = MRB.The firm is making positive economic profitC.The firm would do worst by shutting downD.MC > MR

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23.In the graph shown, if the market demand were to shift right, which of the following would occur for the firm?A.The total cost curve would shift downwardB.The total revenue function would rotate upwardC.The total revenue function would rotate downwardD.The firm would produce less output

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24.In a competitive industry the industry's short-run supply curve isA.The horizontal sum of the marginal cost curvesB.The vertical sum of the marginal cost curvesC.Determined by the average total cost curveD.Determined by the average variable cost curve

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25.Producer surplus is given byA.The area above the supply curve but below the priceB.The area below the supply curveC.The area below the demand curve but above the priceD.The area below the demand curve

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26.The relationship between producer surplus and consumer surplus is.A.Producer surplus is always greaterB.Consumer surplus is always greaterC.Producer and consumer surplus are always equalD.Producer surplus may be greater, equal or less than consumer surplus

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27.In the long run for a competitive firm,A.The firm is at the bottom of its short run average cost curveB.The firm is at the top of its long run average cost curveC.Marginal cost is greater priceD.The firm is making economic profits

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28.If free entry and exit were not possible,A.In the long run firms would lose moneyB.In the long run firms would make moneyC.In the long run firms would break evenD.It is impossible to tell what would happen without more cost and revenue information

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29.A pecuniary diseconomy occurs whenA.Supply exceeds demandB.An expansion of industry output increases the price of an inputC.Higher output levels result in lower unit costsD.Higher output levels results in the same unit costs

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30.The elasticity of supply is given byA.B.C.D.All of the above

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31.Suppose that the supply curve is given by P = Q. What is the elasticity of supply?A.10B.1/10C.1D.Cannot be determined from the above information

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32.Given to following two points on a supply curve (P = 10, Q = 5; and P = 12, Q = 8), what is the approximate arc elasticity?A..4B.2.5C.1D.0

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33.Other things remaining the same, in the long-run as compared to the short-runA.Supply elasticity will increaseB.Supply elasticity will decreaseC.Supply elasticity will remain the sameD.One cannot tell

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34.Ceteris paribus, In the long run, a tax placed on a perfectly competitive industry willA.Increase the price of the good by an amount equal to the taxB.Increase the price of the good by an amount less than the taxC.Be borne entirely by the firmD.Be entirely borne by the consumer

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35.In the long run, a tax placed on a perfectly competitive industry shouldA.Increase the number of firmsB.Decrease the number of firmsC.Not affect the number of firmsD.One cannot tell

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36.In the short run, a tax placed on a perfectly competitive industry shouldA.Increase the total amount of the good soldB.Decrease the total amount of the good soldC.Not affect the total amount of the good soldD.Always increase the price

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37.In the long run, a tax placed on a perfectly competitive industry should have what effect on the entire market?A.Increase the total amount of the good soldB.Decrease the total amount of the good soldC.Not affect the total amount of the good soldD.One cannot tell

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38.A firm's total revenue curve is given by 3Q2- 7Q. The firmA.Is perfectly competitiveB.May be perfectly competitiveC.Is not perfectly competitiveD.One cannot tell

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39.You have a small business that makes $50,000 accounting and economic profit for you. As a disabled person, you must work at home and you did not have other opportunities until your neighbor offers you a job you like equally well for $50,000 and you can do it at home. This meansA.Your accounting profit has gone down and your economic profit has gone upB.Your economic profit has gone down and your accounting profit has gone upC.Both your accounting and economic profit have gone downD.Both your accounting and economic profit have gone upE.Your economic profit has gone down and your accounting profit has stayed the same

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40.In a competitive industry in the long-run, it is likely thatA.Firms with the advantage of location or an especially skilled work crew will be the lone survivors in equilibriumB.All firms giving their best effort will have the same LAC regardless of location or the unique skills of some workersC.The firms with the poorest location will be the lone survivors in equilibrium because their location cost will be lowestD.Only one large efficient firm can survive

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41.Producer surplus isA.The amount of revenue received by the producer below the amount that would have been required for her to supply the product in the short-runB.The amount of economic profit that would be present if there were no fixed costs in the production processC.The difference between the marginal revenue and the marginal variable cost of the production processD.Always equal to producer revenue

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42.If a firm is producing where its LMC = price and the LMC is equal to LAC, then it would do better in the long run byA.Increasing output with its existing plant until LMC equals priceB.Increasing plant size until LMC and SAC are identical and equal to priceC.Decreasing plant size until LAC, SAC and price are equalD.Changing nothing because it is already at the long run profit maximizing point

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43.Some people advocate price ceilings in certain markets because they seek toA.Expand the total of consumer and producer surplus which the market generatesB.Redistribute welfare from the producer to the consumer even if overall welfare is sacrificedC.Redistribute welfare from the consumer to the producer even if welfare is sacrificedD.Enhance both efficiency and distribution goals with the price ceiling

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44.At market equilibrium, the total (not net) benefit that results from all the transactions isA.The consumer surplus minus the producer surplusB.The producer surplus minus the consumer surplusC.The sum of the producer surplus and the consumer surplusD.The entire area under the demand curve up to the quantity exchanged

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45.I get $200 revenue from the sale of my product each day. I rent the factory that I use for $90 a day. The raw materials of the operation cost $115 a day. I do all the work myself. Both jobs are equally attractive as far as the work is concerned. Recently, a competitor offered me $30 a day to work for him. My accounting profit is _____, and my economic profit is ______.A.-5, -35B.-35, -35C.25, -5D.110, -30

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46.In the long-run, any perfectly competitive firm that produces will choose a quantity such thatA.Short-run average cost is minimizedB.Long-run total cost is minimizedC.Long-run marginal cost equals long-run marginal costD.Price is greater marginal cost

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47.Which is not true of a perfectly competitive market?A.The typical industry demand curve is downward slopingB.There is no incentive to innovate since economic profit is zero in the long-runC.If the long-run average total cost curve is horizontal in the relevant range of production, perfectly competitive firms can be various sizes in long-run equilibriumD.At long-run equilibrium, economic profit is less than accounting profit

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48.A firm is currently selling its product at $20 each. It estimates that its average total cost of production is $100 and its average fixed cost is $40. In the short run the firm shouldA.ShutdownB.Continue production at a point where P = MCC.Hire more employeesD.Buy more capital

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Use the following information to answer the next two questions.Suppose an industry has 100 firms, each with supply curve P = 50 + 10Q. Furthermore, suppose the market demand curve is given by P = 200 - 0.9Q.

49.What is the industry supply curve?A.P = 500 + QB.P = 50 + 0.1QC.P = -500 + 10PD.P = 50 + 10 Q

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50.How many units of output will be produced by a firm operating in this market with a MC = 130Q?A.2B.5C.0.70D.It is impossible to answer with the information given

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51.The expansion of the car manufacturing industry causes an improvement in the assembly line, so reducing charges to each firm in that industry. This is an example ofA.Constant returns to scaleB.A decreasing-cost industryC.A decreasing returns to scaleD.An increasing-cost industry

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52.Competitive markets result allocative efficiency because they:A.Maximize the total benefits from exchangeB.Make sure goods are produce at the lowest costsC.Generate the most benefits for consumersD.Distribute resources in the most equitable way

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Essay Questions

Use the following to answer questions 53-57:The following 5 questions relate to the information provided here. A competitive industry consists of 100 firms. The short-run marginal cost curve for each firm is given by MC = 200 + .3Q. The demand curve faced by the industry is given as P = 400 - .1Q.

53.What is the equilibrium price and quantity produced by the industry as a whole?

Price is 350 and industry quantity is 500. The MC curves must be summed into a market supply curve which is MC = 200 - .3Q. This is equated to the demand curve to get the answer.

54.What is the price charged by each firm and what quantity will each firm produce?

Obviously the firm must charge 350 and will sell 5.

55.How much profit is each firm making if fixed costs are $375 per firm?

This question requires one to go from the MC to the total cost curve which will be TC = 200Q + 15Q2+ 375. Total costs are $1,750 per firm and revenue is $350 x $5 which is $1,750. Thus no economic profit exists.

56.What is the producer and consumer surplus in the entire market?

Producer surplus will be 37,500 [(150 500)/2] and consumer surplus will be 12,500. [(50 500)/2].

57.What is the producer surplus for each firm?

(150 5)/2 = 375. The point here is that producer surplus can be made even if no economic profit is made. It is no coincidence that the producer surplus is equal to the fixed cost.

58.How can a firm stay in business if it makes no economic profit in the long run?

Economic profit is money above the full opportunity cost of the resources employed. That means that the owners are fairly compensated for their opportunity costs of time and capital as part of the total cost function.

59.Sketch a perfectly competitive firm operating in short-run equilibrium but making economic losses. Put in all the functions necessary to show that the firm should stay in business in the short-run despite the losses. Shade in the area of loss shown by the drawing.