Chapter 12 – Practice Problems

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Perfect competition is characterized by
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The inability of any one firm to influence price
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An industry that contains a firm that is the only producer of a good or service for which there are no close substitutes and for which entry by potential rivals is prohibitively difficult is
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A monopoly
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Which of the following is true in a perfectly competitive market?
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One unit of a good or service cannot be differentiated from any other on any basis
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The assumptions of perfect competition imply that
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Individuals in the market accept the market price as given
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The perfectly competitive model assumes all of the following EXCEPT
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That firms attempt to maximize their total revenue
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If a perfectly competitive firm decreases production from 11 units to 10 units and the market price is $20 per unit, total revenue for 10 units is
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$200
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If a perfectly competitive firm sells 10 units of output at $30 per unit, its marginal revenue is
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$30
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If a perfectly competitive firm is producing a quantity where P > MC, then the firm can increase profit by
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Increasing production
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A perfectly competitive firm will earn a profit and will continue producing the profit-maximizing quantity of output in the short run if the price is
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Greater than average total cost
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If the price is consistently below average total cost, then in the short run a perfectly competitive firm should
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There is not enough information given to answer this question
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If the price is greater than the average variable cost and less than the average total cost at the profit-maximizing quantity of output in the short run, a perfectly competitive firm will
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produce at an economic loss
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In the short run, if P < AVC at the quantity where MR = MC, a perfectly competitive firm produces _____ and takes an economic _____.
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no output; loss
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(Figure: Total Cost for Tomato Producers) Look at the figure Total Cost for Tomato Producers. The market for tomatoes is perfectly competitive. The market price of a bushel of tomatoes is $14. The farmer’s total cost at the profit-maximizing number of bushels is:
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$56.00
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(Figure: The Profit-Maximizing Firm in the Short Run) Look at the figure The Profit-Maximizing Firm. O is the _____ curve.
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AVC
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(Figure: A Perfectly Competitive Firm in the Short Run) Look at the figure A Perfectly Competitive Firm in the Short Run. The minimum price that the firm must receive to produce in the short run is:
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P
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If firms are taking economic losses in the short run, firms will leave the industry, industry output will _____, and economic losses will _____ in the long run
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Fall;Fall
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Which of the following is MOST likely to cause firms to exit a perfectly competitive industry?
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Consumer income falls
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Suppose that some firms in a perfectly competitive industry are earning positive economic profits. In the long run, the
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Number of firms in the industry will increase
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A perfectly competitive industry is said to be efficient because the
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Average total cost of production of the industry’s output is minimized
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Table: Cherry Farm) Look at the table Cherry Farm. If all farms are the same size, how much economic profit will each farm earn when the industry is in long-run equilibrium?
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When perfect competition prevails, which of the following characteristics of firms are we likely to observe?
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They are all price takers
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In a perfectly competitive industry:
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all firms are price-taking producers
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Suppose Sarah’s pottery studio is charging the market price, which is just higher than her minimum average total cost. This means that Sarah
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Is earning a small economic profit
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A perfectly competitive industry is in a state of long-run equilibrium. Which of the following must be true?
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P = MR = MC = ATC
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If a firm produces a quantity at which total revenue exceeds total cost, then
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economic profit is positive
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One characteristic of a perfectly competitive market is that there are ________ sellers of the good or service
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Many
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If the price is greater than average total cost at the profit-maximizing quantity of output in the short run, a perfectly competitive firm will
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Produce at a profit
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The short-run supply curve for a perfectly competitive firm is
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the marginal cost curve above the shut-down price
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In perfect competition
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Price and marginal revenue are the same
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The price received by a firm in a perfectly competitive market
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Is equal to the market price
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Perfect competition is a model of the market that assumes all of the following except:
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firms face downward-sloping demand curves
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In the short run, a perfectly competitive firm produces output and earns zero economic profit if:
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P=ATC
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For a perfectly competitive firm, marginal revenue:
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is equal to price
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A perfectly competitive firm’s marginal cost curve above the average variable cost curve is its
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Short run supply curve
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Lilly is the price-taking owner of an apple orchard. The price of apples is high enough that Lilly is earning positive economic profits. In the long run, Lilly should expect
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Lower apple prices due to the entry of new firms
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Assume that in the short run a perfectly competitive firm does not produce output and has economic losses. This would occur if
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P0
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Bob runs a pedicure business in a perfectly competitive industry. He knows that he will break even if the price of pedicures is $15 but that he will have to shut down if the price is $11. If the market demand in the industry is P = 30 – (0.2) Q and the market supply is P = (0.2) Q, then in the short run, Bob will
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Produce, since he is at his break even level
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A perfectly competitive firm will produce
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with a loss in the short run if its price is greater than AVC but less than ATC.
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Perfectly competitive firms will
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increase output up to the point that the marginal benefit of an additional unit of output is equal to the marginal cost
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A decrease in production costs for firms in a perfectly competitive market will cause a(n)
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economic profit for firms in the short run
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If a perfectly competitive firm can sell a bushel of soybeans for $25 and it has an average variable cost of $26 per bushel and the marginal cost is $26 per bushel, the firm should
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cut output to zero
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In perfect competition
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A firm’s total revenue is found by multiplying the market price by the firm’s quantity of output
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In a perfectly competitive market
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Both producers and consumers are price takers
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A firm’s shut-down point is the minimum value of
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Average variable cost
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If some firms in a perfectly competitive industry are earning positive economic profits, then in the long run, the
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Industry supply curve will shift to the right
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When a perfectly competitive industry is in long-run equilibrium, its firms
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Allocate all of their resources efficiently
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The slope of the total revenue curve is
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Constant under perfect competition
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The slope of the total revenue curve is
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Constant under perfect competition
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The slope of the total revenue curve is
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Constant under perfect competition

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