Question 1

Which of the following is characteristic of a perfectly competitive market?

Accepted Answer

A) There is free entry into and exit from the market. 
B) Individual firms can exert a perceptible influence on the market price. 
C) Firms in the market produce a differentiated product. 
D) All of the above are true. 
A) There is free entry into and exit from the market. 
B) Individual firms can exert a perceptible influence on the market price. 
C) Firms in the market produce a differentiated product. 
D) All of the above are true.

Question 2

Figure 7-H  
-Refer to Figure 7-H.When the market price for lawn care services decreases from P1 to P0, the firm will most likely:

Accepted Answer

A) continue providing q1 units of services. 
B) decrease its production of services. 
C) leave the industry. 
D) increase its production of services. 
A) continue providing q1 units of services. 
B) decrease its production of services. 
C) leave the industry. 
D) increase its production of services.

Question 3

Which of the following statements is not characteristic of a perfectly competitive industry in long-run equilibrium?

Accepted Answer

A) A profit-maximizing firm may produce any output level at which P < LRATC. 
B) Every firm produces at an output level at which MC = LRATC. 
C) Ceteris paribus, there is no tendency for firms to either enter or exit the industry. 
D) No firm earns an economic profit. 
E) All of the above statements are characteristic of a perfectly competitive industry in long-run equilibrium. 
A) A profit-maximizing firm may produce any output level at which P < LRATC. 
B) Every firm produces at an output level at which MC = LRATC. 
C) Ceteris paribus, there is no tendency for firms to either enter or exit the industry. 
D) No firm earns an economic profit. 
E) All of the above statements are characteristic of a perfectly competitive industry in long-run equilibrium.

Question 4

Figure 7-A  
-Refer to Figure 7-A.In Graph A, the market demand has increased from d0 to d1, and as a result:

Accepted Answer

A) both the market price and the price of the price-taking firm have risen to $6. 
B) both the market price and the price of the price-taking firm have fallen to $5. 
C) the quantity of goods transacted in the market has fallen from Q1 to Q0. 
D) at the new equilibrium price, the firm will be unable to sell any of its output. 
E) the market price has increased to $6, but the price of the price-taking firm remains equal to $5. 
A) both the market price and the price of the price-taking firm have risen to $6. 
B) both the market price and the price of the price-taking firm have fallen to $5. 
C) the quantity of goods transacted in the market has fallen from Q1 to Q0. 
D) at the new equilibrium price, the firm will be unable to sell any of its output. 
E) the market price has increased to $6, but the price of the price-taking firm remains equal to $5.

Question 5

If price is less than average fixed costs,

Accepted Answer

A) the firm should operate, since it is making economic profits. 
B) the firm should operate in the short run, but it is making economic losses. 
C) the firm should shut down in the short run. 
D) We do not know whether a firm should continue operating or not. 
A) the firm should operate, since it is making economic profits. 
B) the firm should operate in the short run, but it is making economic losses. 
C) the firm should shut down in the short run. 
D) We do not know whether a firm should continue operating or not.

Question 6

Figure 7-D  
-Refer to Figure 7-D.If the market price equals $45, the maximum profit that the firm can earn is:

Accepted Answer

A) approximately $29,250. 
B) approximately $9,750. 
C) approximately $19,500. 
D) zero dollars. 
A) approximately $29,250. 
B) approximately $9,750. 
C) approximately $19,500. 
D) zero dollars.

Question 7

In short-run equilibrium in a perfectly competitive market, firms always make zero economic profit.

Accepted Answer

A) True 
 B)False

Question 8

"I'm losing money, but since my fixed costs are so high, I simply cannot afford to shut down." If the firm were attempting to maximize profit, this decision may be:

Accepted Answer

A) correct if price is less than average variable cost. 
B) incorrect because a firm experiencing economic losses should never continue to operate. 
C) correct if the firm is covering all of its variable costs and expects the price of its product to rise in the near future. 
D) incorrect since a firm should shut down whenever price falls below average total cost in the short run. 
A) correct if price is less than average variable cost. 
B) incorrect because a firm experiencing economic losses should never continue to operate. 
C) correct if the firm is covering all of its variable costs and expects the price of its product to rise in the near future. 
D) incorrect since a firm should shut down whenever price falls below average total cost in the short run.

Question 9

Figure 7-H  
-Refer to Figure 7-I.The graph represents a price-taking firm producing q1 units of output.Is the firm making a profit, experiencing a loss, or earning a normal profit? Should the firm increase output, decrease output, or shut down? Explain.

Accepted Answer

This price-taking firm is operating at a

Question 10

In the short run, a perfectly competitive firm can earn:

Accepted Answer

A) positive economic profits. 
B) zero economic profits. 
C) negative economic profits. 
D) any of the above. 
A) positive economic profits. 
B) zero economic profits. 
C) negative economic profits. 
D) any of the above.

Question 11

If a competitive firm is operating in short run equilibrium and then its fixed costs fall by 40 percent, it should:

Accepted Answer

A) use more labor and less capital in current production. 
B) not change its output. 
C) increase its output. 
D) decrease its output. 
E) stop producing. 
A) use more labor and less capital in current production. 
B) not change its output. 
C) increase its output. 
D) decrease its output. 
E) stop producing.

Question 12

Table 7-A
Revenue and Cost Data for a Perfectly Competitive Firm
 $$\begin{array} { c c c c c c c } 
\text { Daily } & \text { Price } & \text { Total } & \text { TFC } & \text { TVC } & \text { TC } & \text { Profit } \
\text { Output } && \text { Revenue } & & & & \
0 & \$ 20 & \$0 & V&\$0& \$ 50 & - \$ 50 \
1 & \$ 20 & \$ 20 & \$ 50 & \$ 12 & \$ W & - \$ 42 \
2 & \mathbf { X } & \$ 40 & \$ 50 & Y & \$ 78 & - \$ 38 \
3 & \$ 20 & \$ 60 & \$ 50 & \$ 45 & \$ 95 & Z
\end{array}$$
-Refer to Table 7-A.What is the value of the variable X shown in the table?

Accepted Answer

A) $0 
B) $50 
C) $20 
D) $40 
E) The value of X cannot be determined from the information provided. 
A) $0 
B) $50 
C) $20 
D) $40 
E) The value of X cannot be determined from the information provided.

Question 13

Assume you know the following short run information for a perfectly competitive firm: $\begin{array}{c}
\begin{array}{lll}
\text {Quantity}\
\
6 \
7 \
8 \
9 \
10 \
11 \
12
\end{array}
\begin{array}{lll}
\text {Price}\
\
10\
\
\
\
\
\ 
\
\end{array}
\begin{array}{cc}
\text { Total } & \text { Marginal } \
\text { Revenue } & \text { Revenue }\
\
\
\
\
\
\
\
\end{array}
\begin{array}{lll}
\text {Total}\
\text {Cost}\
30\
35\
42\
51\
62 \
75\
90 
\end{array}
\begin{array}{cc}
\text { Marginal } & \text { Total } \
\text { Cost } & \text { Profil } \
& \
& \
& \
&\
\
\ 
\
\end{array}
\end{array}$
  Based on the information above, which of the following is false?

Accepted Answer

A) The firm's average total cost of production increases for outputs in excess of 8 units. 
B) The firm's average total cost of producing 7 units is the same as for producing 6 units. 
C) The profit maximizing level of output for the firm would be 10 units. 
D) In the long run, the firm's price would be less than $10. 
A) The firm's average total cost of production increases for outputs in excess of 8 units. 
B) The firm's average total cost of producing 7 units is the same as for producing 6 units. 
C) The profit maximizing level of output for the firm would be 10 units. 
D) In the long run, the firm's price would be less than $10.

Question 14

Figure 7-A  
-Refer to Figure 7-A.Graphs A and B together demonstrate the effect that a change in market demand has on the demand curve faced by a firm that is:

Accepted Answer

A) producing a homogeneous product. 
B) very small relative to the market output as a whole. 
C) a price taker. 
D) all of the above. 
A) producing a homogeneous product. 
B) very small relative to the market output as a whole. 
C) a price taker. 
D) all of the above.

Question 15

In the perfectly competitive model, all firms are assumed to be producing:

Accepted Answer

A) products that are heavily advertised. 
B) differentiated products. 
C) identical products. 
D) complementary products. 
A) products that are heavily advertised. 
B) differentiated products. 
C) identical products. 
D) complementary products.

Question 16

The demand curve faced by a perfectly competitive firm is vertical.

Accepted Answer

A) True 
 B)False

Question 17

Which one of the following is not a characteristic of a perfectly competitive market?

Accepted Answer

A) Firms advertise in order to distinguish their products and increase market share. 
B) Firms earn zero economic profit in the long run. 
C) Competing products are virtually identical. 
D) Firms are price takers. 
E) There are a large number of buyers and sellers interacting in the market. 
A) Firms advertise in order to distinguish their products and increase market share. 
B) Firms earn zero economic profit in the long run. 
C) Competing products are virtually identical. 
D) Firms are price takers. 
E) There are a large number of buyers and sellers interacting in the market.

Question 18

Which of the following is true of perfectly competitive firms?

Accepted Answer

A) It is difficult for entrepreneurs to become suppliers of a product in a perfectly competitive market structure. 
B) A perfectly competitive firm has a perfectly elastic supply curve. 
C) In a perfectly competitive market, an individual seller can change his price and it will not alter the output he sells. 
D) All of the above are true. 
E) None of the above are true. 
A) It is difficult for entrepreneurs to become suppliers of a product in a perfectly competitive market structure. 
B) A perfectly competitive firm has a perfectly elastic supply curve. 
C) In a perfectly competitive market, an individual seller can change his price and it will not alter the output he sells. 
D) All of the above are true. 
E) None of the above are true.

Question 19

When would you expect economic profits in an industry to be zero?

Accepted Answer

A) When firms are entering the industry. 
B) When firms are leaving the industry. 
C) When existing firms are growing. 
D) When existing firms are shrinking. 
E) When firms have no incentives to enter or exit. 
A) When firms are entering the industry. 
B) When firms are leaving the industry. 
C) When existing firms are growing. 
D) When existing firms are shrinking. 
E) When firms have no incentives to enter or exit.

Question 20

Table 7-A
Revenue and Cost Data for a Perfectly Competitive Firm
 $$\begin{array} { c c c c c c c } 
\text { Daily } & \text { Price } & \text { Total } & \text { TFC } & \text { TVC } & \text { TC } & \text { Profit } \
\text { Output } && \text { Revenue } & & & & \
0 & \$ 20 & \$0 & V&\$0& \$ 50 & - \$ 50 \
1 & \$ 20 & \$ 20 & \$ 50 & \$ 12 & \$ W & - \$ 42 \
2 & \mathbf { X } & \$ 40 & \$ 50 & Y & \$ 78 & - \$ 38 \
3 & \$ 20 & \$ 60 & \$ 50 & \$ 45 & \$ 95 & Z
\end{array}$$
-Refer to Table 7-A.What is the value of the variable Z shown in the table?

Accepted Answer

A) $0 
B) -$38 
C) -$35 
D) -$40 
E) $60 
A) $0 
B) -$38 
C) -$35 
D) -$40 
E) $60

Which of the following is characteristic of a perfectly competitive market?

Figure 7-H -Refer to Figure 7-H.When the market price for lawn care services decreases from P₁ to P₀, the firm will most likely:

Which of the following statements is not characteristic of a perfectly competitive industry in long-run equilibrium?

Figure 7-A -Refer to Figure 7-A.In Graph A, the market demand has increased from d₀ to d₁, and as a result:

If price is less than average fixed costs,

Figure 7-D -Refer to Figure 7-D.If the market price equals $45, the maximum profit that the firm can earn is:

In short-run equilibrium in a perfectly competitive market, firms always make zero economic profit.

"I'm losing money, but since my fixed costs are so high, I simply cannot afford to shut down." If the firm were attempting to maximize profit, this decision may be:

Figure 7-H -Refer to Figure 7-I.The graph represents a price-taking firm producing q₁ units of output.Is the firm making a profit, experiencing a loss, or earning a normal profit? Should the firm increase output, decrease output, or shut down? Explain.

In the short run, a perfectly competitive firm can earn:

If a competitive firm is operating in short run equilibrium and then its fixed costs fall by 40 percent, it should:

Assume you know the following short run information for a perfectly competitive firm: Quantity 6 7 8 9 10 11 12 Price 10 Total Marginal Revenue Revenue Total Cost 30 35 42 51 62 75 90 Marginal Total Cost Profil Based on the information above, which of the following is false?

Figure 7-A -Refer to Figure 7-A.Graphs A and B together demonstrate the effect that a change in market demand has on the demand curve faced by a firm that is:

In the perfectly competitive model, all firms are assumed to be producing:

The demand curve faced by a perfectly competitive firm is vertical.

Which one of the following is not a characteristic of a perfectly competitive market?

Which of the following is true of perfectly competitive firms?

When would you expect economic profits in an industry to be zero?

The Role and Method of Economics

The Economic Way of Thinking

Supply and Demand

Using Supply and Demand

Market Failure and Public Choice

Production and Costs

Monopoly

Monopolistic Competition and Oligopoly

Labor Markets, Income Distribution, and Poverty

Introduction to Macroeconomics: Unemployment, Inflation, and Economic Fluctuations

Economic Growth

Aggregate Demand and Aggregate Supply

Fiscal Policy

Monetary Institutions

The Federal Reserve System and Monetary Policy

Issues in Macroeconomic Theory and Policy

International Economics

Filters

Exam 7: Firms in Competitive Markets

Which of the following is characteristic of a perfectly competitive market?

Figure 7-H -Refer to Figure 7-H.When the market price for lawn care services decreases from P1 to P0, the firm will most likely:

Which of the following statements is not characteristic of a perfectly competitive industry in long-run equilibrium?

Figure 7-A -Refer to Figure 7-A.In Graph A, the market demand has increased from d0 to d1, and as a result:

If price is less than average fixed costs,

Figure 7-D -Refer to Figure 7-D.If the market price equals $45, the maximum profit that the firm can earn is:

In short-run equilibrium in a perfectly competitive market, firms always make zero economic profit.

"I'm losing money, but since my fixed costs are so high, I simply cannot afford to shut down." If the firm were attempting to maximize profit, this decision may be:

Figure 7-H -Refer to Figure 7-I.The graph represents a price-taking firm producing q1 units of output.Is the firm making a profit, experiencing a loss, or earning a normal profit? Should the firm increase output, decrease output, or shut down? Explain.

In the short run, a perfectly competitive firm can earn:

If a competitive firm is operating in short run equilibrium and then its fixed costs fall by 40 percent, it should:

Assume you know the following short run information for a perfectly competitive firm: Quantity 6 7 8 9 10 11 12 Price 10 Total Marginal Revenue Revenue Total Cost 30 35 42 51 62 75 90 Marginal Total Cost Profil Based on the information above, which of the following is false?

Figure 7-A -Refer to Figure 7-A.Graphs A and B together demonstrate the effect that a change in market demand has on the demand curve faced by a firm that is:

In the perfectly competitive model, all firms are assumed to be producing:

The demand curve faced by a perfectly competitive firm is vertical.

Which one of the following is not a characteristic of a perfectly competitive market?

Which of the following is true of perfectly competitive firms?

When would you expect economic profits in an industry to be zero?

The Role and Method of Economics

The Economic Way of Thinking

Supply and Demand

Using Supply and Demand

Market Failure and Public Choice

Production and Costs

Monopoly

Monopolistic Competition and Oligopoly

Labor Markets, Income Distribution, and Poverty

Introduction to Macroeconomics: Unemployment, Inflation, and Economic Fluctuations

Economic Growth

Aggregate Demand and Aggregate Supply

Fiscal Policy

Monetary Institutions

The Federal Reserve System and Monetary Policy

Issues in Macroeconomic Theory and Policy

International Economics

Filters

Figure 7-H -Refer to Figure 7-H.When the market price for lawn care services decreases from P₁ to P₀, the firm will most likely:

Figure 7-A -Refer to Figure 7-A.In Graph A, the market demand has increased from d₀ to d₁, and as a result:

Figure 7-H -Refer to Figure 7-I.The graph represents a price-taking firm producing q₁ units of output.Is the firm making a profit, experiencing a loss, or earning a normal profit? Should the firm increase output, decrease output, or shut down? Explain.