Question 1

Which of the following describes the difference between the market demand curve for a perfectly competitive industry and the demand curve for a firm in this industry?

Accepted Answer

A) The market demand curve is a horizontal line; the firm's demand curve is downward sloping. 
B) The market demand curve is downward sloping; the firm's demand curve is a vertical line. 
C) The market demand curve cannot have a constant slope; the firm's demand curve has a slope equal to zero. 
D) The market demand curve is downward sloping; the firm's demand curve is a horizontal line.

Question 2

Mark Frost grows apples in a perfectly competitive market.If we drew a line in a graph that illustrates Mark's total revenue from selling apples, it would be

Accepted Answer

A) a straight, upward-sloping line. 
B) a horizontal line. 
C) a straight, downward-sloping line. 
D) a curve that is negatively sloped at low levels of output and positively sloped at higher levels of output.

Question 3

If in a perfectly competitive market, firms are facing a price below their average total cost but above average variable cost at the profit-maximizing output, then

Accepted Answer

A) the industry supply will not change. 
B) new firms are attracted to the industry. 
C) some existing firms will exit the industry. 
D) firms are breaking even.

Question 4

Assume that the medical screening industry is perfectly competitive.Consider a typical firm that is making short-run losses.Suppose the medical screening industry runs an effective advertising campaign which convinces a large number of people that yearly CT scans are critical for good health.How will this affect a typical firm that remains in the industry?

Accepted Answer

A) The firm's supply curve shifts right and its marginal revenue curve shifts upwards as the market price rises and ultimately the firm starts making profits. 
B) The firm's marginal revenue curve and average cost curve shift upwards in response to the increase in market price and advertising expenditure. The firm increases output until it starts breaking even. 
C) The marginal revenue curve shifts upwards, the firm's output increases along its marginal cost curve, it expands production and eventually starts making profits. 
D) The marginal revenue curve shifts upwards, the firm's output increases along its marginal cost curve, it expands production until it breaks even.

Question 5

In an increasing-cost industry the long-run supply curve is upward sloping.

Accepted Answer

A) True 
 B)False

Question 6

In the long run, a perfectly competitive market will

Accepted Answer

A) produce only the quantity of output that yields a long-run profit for the typical firm. 
B) supply whatever amount consumers will buy at a price which earns the market an economic profit. 
C) supply whatever amount consumers demand at a price determined by the minimum point on the typical firm's average total cost curve. 
D) generate a long-run equilibrium where the typical firm operates at a loss.

Question 7

When plasma television sets were first introduced prices were high and few firms were in the market.Later, economic profits attracted new firms and the price of plasma televisions fell.This example illustrates

Accepted Answer

A) a decreasing-cost industry. 
B) that consumers receive this new technology "free of charge" in the sense that they only have to pay a price for plasma televisions equal to the lowest production cost. 
C) an industry with a low minimum efficient scale. 
D) how fickle consumer demands are.

Question 8

Figure 12-10
 
-Refer to Figure 12-10.Total revenue at the profit-maximizing level of output is

Accepted Answer

A) $1,200. 
B) $2,500. 
C) $4,800. 
D) $6,000.

Question 9

Figure 12-1
 
-Refer to Figure 12-1.If the firm is producing 500 units,

Accepted Answer

A) it is making a profit. 
B) it is incurring a loss. 
C) it should maintain its output to maximize profit. 
D) it should increase its output to maximize profit.

Question 10

Figure 12-5
  
Figure 12-5 shows cost and demand curves facing a typical firm in a constant-cost, perfectly competitive industry.
-Refer to Figure 12-5.If the market price is $20, what is the firm's profit-maximizing output?

Accepted Answer

A) 750 units 
B) 1,100 units 
C) 1,350 units 
D) 1,800 units

Question 11

The market demand curve for a perfectly competitive industry is the horizontal summation of each individual firm's demand curve.

Accepted Answer

A) True 
 B)False

Question 12

Figure 12-7
  
Figure 12-7 illustrates the cost curves of a perfectly competitive firm.
-Refer to Figure 12-7.If the market price is P₁,

Accepted Answer

A) the firm will experience a loss and raise its price to P₂. The firm will then break even. 
B) the firm will break even by producing a quantity of Q₂. 
C) the firm will experience a loss since price is less than ATC. 
D) the firm may make a profit if it can increase the demand for its product.

Question 13

A perfectly competitive firm has to charge the same price as every other firm in the market.Therefore, the firm

Accepted Answer

A) faces a perfectly inelastic demand curve. 
B) is not able to make a profit in the short run. 
C) is a price taker. 
D) faces a perfectly elastic supply curve.

Question 14

In a perfectly competitive market the term "price taker" applies to

Accepted Answer

A) sellers and buyers. 
B) sellers but not buyers. 
C) buyers but not sellers. 
D) only the smallest sellers and buyers.

Question 15

What assumptions are necessary for a market to be perfectly competitive? Explain why each of these assumptions is important.

Accepted Answer

The answer of What assumptions are necessary for a market...

Question 16

Which of the following describes a situation in which every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it?

Accepted Answer

A) productive efficiency 
B) allocative efficiency 
C) marginal efficiency 
D) profit maximization

Question 17

Ted's Pancake Kitchen suffers a short-run loss.When should Ted decide to shut down rather than continue to produce?

Accepted Answer

A) if his Pancake Kitchen's revenue is less than its variable costs 
B) if his Pancake Kitchen's revenue is less than its fixed costs 
C) if his Pancake Kitchen's revenue is less than its explicit costs 
D) if his Pancake Kitchen's revenue is less than its total costs

Question 18

Jason, a high-school student, mows lawns for families in his neighborhood.The going rate is $12 for each lawn-mowing service.Jason would like to charge $20 because he believes he has more experience mowing lawns than the many other teenagers who also offer the same service.If the market for lawn mowing services is perfectly competitive, what would happen if Jason raised his price?

Accepted Answer

A) He would lose some but not all his customers. 
B) Initially, his customers might complain, but over time they will come to accept the new rate. 
C) If Jason raises his price, he would lose all his customers. 
D) If Jason raises his price, then all others supplying the same service will also raise their prices.

Question 19

Article Summary
According to the Department of Agriculture, net farm income in 2017 will rise from $61.5 billion in 2016 to $63.4 billion in 2017, a modest 3.1 percent increase but also the first increase since 2013. Much of the increase came from the sales of grain inventory, along with increased revenue from milk and livestock. The net income for 2017 is still only about half of its peak level, and according to agricultural economist David Widmar, income closer to $72 billion would be a sign of an improving farm economy.
Source: Alan Bjerga and Jeff Wilson, "First U.S. Farm-Income Gain in Four Years Signals Hope of Bottom," bloomberg.com, August 30, 2017.
-Refer to the Article Summary.Assume that the increase in net farm income in 2017 was a result of average total cost falling from being equal to the market price to slightly below the market price at the output level where marginal cost equals marginal revenue.This indicates that the market went from

Accepted Answer

A) breaking even to earning a profit. 
B) suffering a loss to breaking even. 
C) suffering a loss to earning a profit. 
D) earning a profit to suffering a loss.

Question 20

What is the difference between "shutting down temporarily" and "exiting the industry"?

Accepted Answer

The answer of What is the difference between "shutting down...

Exam 12: Firms in Perfectly Competitive Markets