Chapter 8
Practice Quiz
Perfect Competition
1
1. A perfectly competitive market is not
characterized by
a. many small firms.
b. a great variety of different products.
c. free entry into and exit from the market.
d. any of the above.
B. Perfect competition is characterized by
goods that cannot be distinguished from
one another.
2
2. Which of the following is a characteristic
of perfect competition?
a. Entry barriers.
b. Homogeneous products.
c. Expenditures on advertising.
d. Quality of service.
B. A homogeneous product is one that
cannot be distinguished from the others,
for example, one potato looks just like
another potato.
3
3. Which of the following are the same at all
levels of output under perfect competition?
a. Marginal cost and marginal revenue.
b. Price and marginal revenue.
c. Price and marginal cost.
d. All of the above.
B. Price equals marginal revenue because
each unit is sold at the same price;
therefore, every additional unit sold adds
the price to total revenue.
4
4. If a perfectly competitive firm sells 100
units of output at a market price of $100 per
unit, its marginal revenue per unit is
a. $1.
b. $100.
c. more than $1, but less than $100.
d. less than $100.
B. Marginal revenue is defined as the addition
to total revenue when selling one unit.
5
5. Short-run profit maximization for a
perfectly competitive firm occurs when
the firm’s marginal cost equals
a. average total cost.
b. average variable cost.
c. marginal revenue.
d. all of the above.
C. Profits are maximized or losses are
minimized at the unit of output where MR =
MC. If MR were > than MC, an additional
unit would be produced. If MR were < MC,
that last unit would not be produced.
6
6. A perfectly competitive firm sells its output for $100
per unit, and the minimum average variable cost is
$150 per unit. The firm should
a. increase output.
b. decrease output, but not shut down.
c. maintain its current rate of output.
d. shut down.
D. As shown in the next slide, at this output a
firm’s losses exceed its fixed costs; it would
therefore lose more money by staying open
than by closing down.
7
7. A perfectly competitive firm’s supply curve
follows the upward sloping segment of its
marginal cost curve above the
a. average total cost curve (ATC).
b. average variable cost curve (AVC).
c. average fixed cost curve (AFC).
d. average price curve (APC).
B. The supply curve, which is the MC curve,
does not extend below the AVC curve
because below this price the firm would
close down and supply nothing. See Exhibit
15.
8
Exhibit 15 Marginal Revenue and Cost per Unit Curves
Price & Cost per unit (dollars)
20
MC
D
•
15
ATC
C
•
10
AVC
B
•
5
A
•
500
1,000 1,500
2,000
Quantity of output (units per week)
9
8. Assume the price of the firm’s product
in Exhibit 15 is $15 per unit. The firm
will produce
a. 500 units per week.
b. 1,000 units per week.
c. 1,500 units per week.
d. 2,000 units per week.
e. 2,500 units per week.
D. This is the number of units in which
MR = MC.
10
9. The lowest price in Exhibit 15 at which the
firm earns zero economic profit in the
short-run is
a. $5 per unit.
b. $10 per unit.
c. $20 per unit.
d. $30 per unit.
B. This is the minimum point of the ATC
curve at which P = ATC. Exactly a
normal profit is being made, that is,
zero economic profit.
11
10. Assume the price of the firm’s product in
Exhibit 15 is $6 per unit. The firm should
a. continue to operate because it is earning an
economic profit.
b. stay in operation for the time being even
though it is incurring an economic loss.
c. shut down temporarily.
d. shut down permanently.
B. At this price, the firm’s losses are less than
its fixed costs; it will therefore lose less
money by staying open than closing.
12
11. Assume the price of the firm’s product in
Exhibit 15 is $10 per unit. The maximum
profit the firm earns is
a. zero.
b. $5,000 per week.
c. $1,500 per week.
d. $10,500 per week.
A. In perfect competition, Price = AR = MR = the
firm’s short-run demand curve. When P = ATC,
the firm’s revenues equal its costs, so zero
economic profits are made. Normal profit is
included as a part of the firm’s cost data because
it is a necessary expense of operating the business.
13
12. In Exhibit 15, the firm’s total revenue at
a price of $10 per unit pays for
a. a portion of total variable costs.
b. a portion of total fixed costs.
c. none of the total fixed costs.
d. all of the total fixed costs and total
variable cost.
D. At a price of $10, the firm is making an
economic profit - more than enough money
is being made to meet its fixed costs.
14
13. As shown in Exhibit 15, the short-run supply
curve for this firm corresponds to which segment
of its marginal cost curve?
a. A to D and all points above.
b. B to D and all points above.
c. C to D and all points above.
d. B to C only.
B. A supply curve shows how many units
will be produced at various prices. The
firm’s supply curve is its MC curve which
lies above its AVC curve because it will
always produce where MR (AR, P) = MC.
15
14. In long-run equilibrium, the perfectly
competitive firm’s price equals which of
the following?
a. Short-run marginal cost.
b. Minimum short-run average total cost.
c. Marginal revenue.
d. All of the above.
D. Long-run equilibrium is at the price in
which a normal profit is being made.
Normal profit is when P(AR) = ATC in
long-run equilibrium.
16
15. In a constant-cost industry, input prices
remain constant as
a. the supply of inputs fluctuates.
b. firms encounter diseconomies of scale.
c. workers become more experienced.
d. firms enter and exit the industry.
D. A constant-cost industry is when the
entry or exit of firms has little impact on a
firm’s cost curves.
17
16. Suppose that, in the long run, the price
of feature films rises as the movie
production industry expands. We can
conclude that movie production is a (an)
a. increasing-cost industry.
b. constant-cost industry.
c. decreasing-cost industry.
d. marginal-cost industry.
A. An industry in which the expansion of
industry output by the entry of new firms
increases the firm’s cost curves.
18
17. Which of the following is true of a perfectly
competitive market?
a. If economic profits are earned, then
the price will fall over time.
b. In long-run equilibrium, P = MR =
SRMC = SRATC = LRAC.
c. A constant-cost industry exists when
the entry of new firms has no effect on
their cost curves.
d. All of the above.
D. All of the above statements are true.
19
18. Suppose that in a perfectly competitive
market, firms are making economic
profits. In the long run, we can expect
to see
a. some firms leave.
b. the market price rise.
c. market supply shift to the left.
d. economic profits become zero.
e. production levels remaining the same
as in the short run.
D. In the long run, economic profits attract firms
to enter the industry until zero economic profits
are earned and firms are no longer attracted to the
industry.
20
19. Assume the short-run average total cost of a
perfectly competitive industry decreases as the
output of the industry expands. In the long
run, the industry supply curve will
a. have a positive slope.
b. have a negative slope.
c. be perfectly horizontal.
d. be perfectly vertical.
B. In a decreasing-cost industry, the short-run
average total cost curve (SRATC) shifts lower
and the equilibrium price decreases as output
increases. The result is a negative slope for the
long run supply curve.
21
20. The long-run supply curve for a competitive constantcost industry is:
a. horizontal.
b. vertical.
c. upward sloping.
d. downward sloping.
A. In a constant-cost industry, both the short-run
average total cost curve (SRATC) and the
equilibrium price remain constant as output
increases. The result is a zero slope for the longrun supply curve.
22