Perfect Competition
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the
question.
1) Which of the following correctly ranks the market structures from least
1) _______
competitive to most competitive?
A) Monopoly, monopolistic competition, perfect competition,
oligopoly
B) Monopolistic competition, monopoly, oligopoly, perfect
competition
C) Perfect competition, monopolistic competition, oligopoly,
monopoly
D) Monopoly, oligopoly, monopolistic competition, perfect
competition
E) Oligopoly, monopolistic competition, monopoly, perfect
competition
2) Market definition is
A) very simple if the products are highly differentiated.
B) the process of identifying a product, and the buyers and the sellers
of that product.
C) easier if the features consumers are looking for differ greatly from
one person to the next.
D) easier if the product varies from seller to seller.
E) very complicated if the product is homogeneous.
2) _______
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the
question.
3) What are the four basic assumptions of the perfect competition
3) _____________
model?
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the
question.
4) The products sold in a perfectly competitive market are
4) _______
A) not homogeneous.
B) perfect substitutes.
C) differentiated.
D) unique to each firm.
E) similar but not exactly the same.
5) In a perfectly competitive market, products are not
A) differentiated.
B) homogeneous.
C) exactly the same.
D) perfect substitutes.
E) undifferentiated.
5) _______
6) The reason that there are a large number of sellers in a perfectly
competitive market is that
A) the firms are not trying to maximize profit.
B) there are not extensive economies of scale for any firms relative to
6) _______
the size of the
C)
D)
E)
market.
there are significant economies of scale in the production prices.
there are a large number of buyers.
the market is not very competitive.
7) If firms in a perfectly competitive market are earning large economic
profits,
A) no changes in the number of firms are likely to occur.
B) other firms are likely to enter the market.
C) resources are likely to leave this market.
D) some firms are likely to leave the market.
E) the firms in the market will erect barriers to keep rivals from
entering.
7) _______
8) If a large number of firms sell the same product in a market,
A) there must be perfect information.
B) products cannot be substitutes for each other.
C) profits will be zero, even in the short run.
D) the actions of one cannot affect the market.
E) there must be free entry and exit.
8) _______
9) In a perfectly competitive market, firms have
A) no control over quantity, so focus on price.
B) no control over price, so focus on other attributes such as quality
or marketing.
C) no control over price, so focus on quantity.
D) no control over quantity, so focus on other attributes such as
quality or marketing.
E) complete control over price, quantity, and other aspects of the
good they produce.
9) _______
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the
question.
10) When economists say firms in perfect competition are price
10) _____________
takers, what do they mean and why do they think this?
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the
question.
11) Firms in a perfectly competitive market try to maximize profits by
11) ______
A) producing all quantities that add additional revenue.
B) charging the highest possible price.
C) pricing their product below rivals to increase sales.
D) producing only those units that add more to revenue than they
add to costs.
E) selling the most units possible.
12) When a firm earns zero economic profit,
A) it earns accounting losses.
B) the firm will leave the market.
C) it earns a normal profit.
D) it covers only its explicit costs.
E) other firms will want to enter the market.
12) ______
13) To maximize profits, firms in perfect competition should
A) produce the number of units where the gap between total revenue
and total cost is as large as possible.
B) raise price.
C) try to keep total cost as small as possible.
D) lower price.
E) produce every unit that increases total revenue.
13) ______
Use the table for the question(s) below.
Quantity of
Peaches
TFC
TVC
TC
MC
(dozens)
--0
5
0
5
1
12
17
2
17
3
20
4
22
5
23
6
25
7
28
8
32
9
38
10
46
14) Refer to the information in the table above for Margie's Peaches Stand,
one of many perfectly competitive peach venders in a downtown
farmer's market area in Japan. What is the marginal cost of the third
dozen peaches?
A) $25
B) $3
C) $1
D) $8.33
E) $20
14) ______
15) Refer to the information in the table above for Margie's Peaches Stand,
one of many perfectly competitive peach venders in a downtown
farmer's market area in Japan. If peaches sell for $5.99 per dozen, what
is the profit maximizing output level for Margie?
A) Six dozen
B) Five dozen
C) Seven dozen
D) Nine dozen
E) Eight dozen
15) ______
16) Refer to the information in the table above for Margie's Peaches Stand,
one of many perfectly competitive peach venders in a downtown
farmer's market area in Japan. If peaches sell for $5.99 per dozen, and
Margie is maximizing her profits, which of the following best describes
Margie's current situation?
A) She is operating in the short run with a small economic loss.
B) She is shut down (producing zero peaches).
C) She is earning a normal profit but not an economic profit.
D) She is earning economic profits but accounting losses.
E) She is earning an economic profit.
16) ______
17) Refer to the information in the table above for Margie's Peaches Stand,
one of many perfectly competitive peach venders in a downtown
farmer's market area in Japan. If peaches sell for $4.50 per dozen, what
is the profit maximizing output level for Margie?
A) Seven dozen
B) Five dozen
C) Nine dozen
D) Six dozen
E) Eight dozen
17) ______
18) Refer to the information in the table above for Margie's Peaches Stand,
one of many perfectly competitive peach venders in a downtown
farmer's market area in Japan. If peaches sell for $4.50 per dozen, and
Margie is maximizing her profits, which of the following best describes
Margie's current situation?
A) She is operating in the short run with a small economic loss.
B) She is earning a normal profit but not an economic profit.
C) She is earning economic profits but accounting losses.
D) She is shut down (producing zero peaches).
E) She is earning an economic profit.
18) ______
19) Refer to the information in the table above for Margie's Peaches Stand,
one of many perfectly competitive peach venders in a downtown
farmer's market area. Which unit of peaches has a marginal cost of $8?
A) The seventh
B) The eighth
C) The ninth
D) The first
E) The tenth
19) ______
20) What is the rule that governs production for a perfectly competitive
firm?
A) Unless p < minimum MC, choose q so that p = ATC.
B) Unless p < minimum ATC, choose q so that p = MC.
C) Unless p < minimum AVC, choose q so that p = MC.
D) Unless p < minimum MC, choose q so that p = AVC.
E) Unless p < minimum AVC, choose q so that p = ATC.
20) ______
21) Which of the following is false?
A) A firm in perfect competition has an upward sloping marginal cost
curve.
B) A firm decides how many units to produce by comparing marginal
revenue with marginal cost.
C) As long as variable costs are covered, the firm will produce the
number of units where MR equals MC.
D) If price is below AVC, the firm will not produce any units.
E) A firm in perfect competition has a horizontal supply curve.
21) ______
22) If existing firms in a perfectly competitive market are currently earning
economic losses, which of the following is likely to occur as time passes?
A) The size of the losses will increase.
B) More firms will enter the market.
22) ______
C) The market demand curve shifts to the left.
D) Market price for the product increases.
E) The market supply curve shifts to the right.
23) Which of the following is not a characteristic of long-run equilibrium in
a perfectly competitive market?
A) The firms have economic losses but accounting profits.
B) Quantity supplied equals quantity demanded at the market level.
C) Price = ATC for firms.
D) The firms earn only a normal profit.
E) Only the most efficient producers survive.
23) ______
24) In the long run, perfectly competitive firms have an incentive to
A) raise prices.
B) increase output.
C) lower prices.
D) lower costs.
E) increase profits.
24) ______
25) Perfect competition is unique compared to the outcome of other market
structures in that
A) in the long run, price cannot be less than average total cost.
B) in the long run, price equals average total cost.
C) in the short run, marginal revenue equals marginal cost.
D) in the long run, marginal revenue equals marginal cost.
E) in the long run, marginal cost equals average total cost.
25) ______
26) A perfectly competitive firm that produces output at a level where
marginal cost is greater than average total cost will
A) need to raise prices.
B) not survive in the short run.
C) not survive in the long run.
D) try to increase firm demand.
E) thrive in the long run.
26) ______
27) Which of the following is true for a perfectly competitive firm?
A) The firm attempts to maximize total revenue.
B) The firm can keep rival firms from entering its market.
C) The firm will advertise.
D) The firm must produce at the lowest possible cost per unit to
survive in the long run.
E) The firm must break even in the short run.
27) ______
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the
question.
28) In the long run, why do firms stay in a perfectly competitive
28) _____________
market when they are earning zero economic profits?
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
29) In the long run, what happens if firms in a perfectly competitive industry adopt
cost-saving capital equipment?
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the
question.
30) If the long-run supply curve is upward sloping,
30) ______
A) the product's price is likely to be lower in the long run.
B) firms face higher production costs as output and the number of
firms expand in the long run.
C) the industry experiences falling input prices as output expands.
D) the short-run supply curve is horizontal.
E) production costs are constant as the industry expands.
31) Which of the following is false for a firm in a perfectly competitive
market?
A) The firm can raise price, but only a little.
B) If the firm raises price, it will lose all its customers to rivals.
C) The firm is a price taker.
D) The overall market supply and demand set the price, not the firm.
E) The firm has no market power.
31) ______
1) D
2) B
3) The product produced is homogeneous or has perfect substitutes, there are a large number
of firms and buyers, all participants have perfect information, and there are no barriers to
entry or to exit.
4) B
5) A
6) B
7) B
8) D
9) C
10) Because each firm is so small relative to the overall market, and is producing a product for
which there is a large number of perfect substitutes, a firm in perfect competition has to
charge the prevailing market price and has no ability to set or change the price as an
individual firm.
11) D
12) C
13) A
14) B
15) E
16) E
17) E
18) A
19) E
20) C
21) E
22) D
23) A
24) D
25) E
26) C
27) D
28) Because they have accounting profits sufficient to cover their implicit costs. Zero economic
profit is the same as a normal profit, which is just enough to keep them in business but not
enough to attract new entrants.
29) If long-run production costs decrease due to changes in technology, training, or other
capital changes, only the firms that adopt the cost-saving equipment and pass those
savings on to their customers in the form of lower prices will survive. The intense
competitive pressure is such that if firms don't make the change, they will have higher
costs and fail. If firms do make the change, any profits are short-lived as other firms enter
and drive prices back to the break-even level.
30) B
31) A