8a - Chapter_08a_Perfect_Competition 1 ,aswellasupon True False 2 True False 3

8a - Chapter_08a_Perfect_Competition 1 ,aswellasupon True...

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Unformatted text preview: Chapter_08a_Perfect_Competition 1 Profit maximization depends upon demand conditions, as well as upon productivity and costs. True False 2 An industry consists of all firms that supply output to a particular market. True False 3 Which of the following would not help identify market structure? number of firms in the industry type of product produced in the industry ease of entry into the industry forms of competition among firms in the industry price of the good 4 Perfectly competitive firms are sometimes called price makers because they have significant control over product price. True False 5 In perfect competition, each firm's output is a large fraction of total market supply. True False 6 Which of the following is not necessarily a characteristic of perfect competition? low prices a large number of buyers and sellers a homogeneous product perfect information easy entry and exit in the long run 7 Which of the following firms is most likely to be a perfectly competitive firm? one of the three largest U.S. automakers one of the "Seven Sisters" oil producers a public school operated by the government a soybean farmer a manufacturer of refrigerators 8 Commodity products are pasteurized bland perceived by consumers to be identical made by one manufacturer made by hand 9 Which of the following is not true of a perfectly competitive market? Firms experience constant returns to scale. Firms face significant barriers to entry. Economic profit is zero. Each firm chooses the quantity it wants to sell. Each firm knows the prices of outputs and inputs. 10 Which of the following is not characteristic of perfect competition? many buyers and sellers brand name advertising standardized products fully informed buyers and sellers free entry and exit of firms 11 Perfectly competitive firms respond to changing market conditions by varying their price output market share information advertising campaigns 12 Which of the following markets best approximates the perfectly competitive market structure? automobile manufacturing insurance world commodity markets airlines manufacture of stereo equipment 13 Which of the following is likely to be present in a perfectly competitive market? patents government licenses nonprice competition such as advertising high capital costs firms producing identical products 14 Which of the following characterizes a perfectly competitive market? a few firms fiercely competing by slashing prices product differentiation through aggressive advertising perfect information limited resource mobility barriers to entry such as licenses 15 Firms in perfect competition have no control over all of the following where to operate on their average total cost curves what price to charge how many inputs to use how much to produce 16 In a perfectly competitive industry we are likely to find firms producing a wide variety of products barriers to entry no profit possible in the short run firms that do not advertise firms that can choose the price of their products 17 A firm in a perfectly competitive market can raise the price of its product and sell more output can lower the price of its product and sell more output can increase its supply to lower the price can decrease its supply to raise the price accepts the market price for its product 18 Suppose Thelma and Louise both sell fried green tomatoes in a perfectly competitive market. If Louise increases her output, Thelma must reduce output the price Thelma can charge falls the price Thelma can charge rises the price Thelma can charge is unaffected Thelma's profits must fall 19 Perfectly competitive firms are price takers because all small firms must take the price set by the largest firm in the market firms take the price that government determines is a "fair" price each firm is small and goods are perfect substitutes for one another free entry and exit in the short run creates a constant market price in the long run high barriers to entry force firms to compete by charging lower prices than other firms in the industry 20 Market structure has no influence on a firm's decision making applies only to industries regulated by the government is determined entirely by demand conditions in the industry influences the forms of competition among firms does not affect product price or quantity of output 21 Which real­world market most closely approximates perfect competition? the stock market automobiles higher education cable television services retail clothing stores 22 Because it is small relative to the market, a perfectly competitive firm faces an inelastic demand curve for its output. True False 23 If a perfectly competitive firm raises its price, its sales decrease to zero. True False 24 The price charged by a perfectly competitive firm is determined by each individual firm a group of firms acting together as a cartel market demand and market supply the firm's total costs alone the firm's average variable cost 25 Perfectly competitive firms are price takers because each firm is too small compared to the market to be able to affect price one firm determines price and all other firms accept this price firms take the price that government determines firms must accept any price consumers offer them firms earn high profits by "taking" consumers 26 If every firm is a price taker, then which of the following characteristics does their industry have? large number of sellers many versions of the product limited resource mobility few consumers market power 27 The demand curve for the output of a perfectly competitive firm is perfectly inelastic perfectly elastic unit elastic downward sloping nonlinear 28 Suppose the market for hot pretzels in New York City is perfectly competitive. What is true of demand in this market? The demand curve facing each seller is perfectly elastic. The demand curve facing each seller is perfectly inelastic. The market demand curve is perfectly elastic. The market demand curve is perfectly inelastic. The market demand curve is elastic. 29 The demand curve facing a perfectly competitive firm is almost vertical at the market quantity perfectly inelastic perfectly elastic horizontal at the price the firm wishes to charge downward sloping 30 Adam's Apples, a small firm supplying apples in a perfectly competitive market, decides to cut its production in half this year. As a result, the market price will rise market price will fall market quantity will rise market price will not be affected total expenditures on apples will rise 31 In perfect competition, if one firm raises its price, others will follow that firm will increase its revenues that firm will lose revenues because other firms will not follow all consumers will be adversely affected the market demand curve will shift 32 Because market price remains constant as a perfectly competitive firm expands output, each firm faces a downward­sloping demand curve a horizontal demand curve constant returns to scale constant costs diminishing marginal revenue 33 Individual firms in a perfectly competitive market can purchase all they want at the market price sell all they produce at the market price earn more profit if they charge a price above the market price earn more profit if they charge a price below the market price earn no profit in the short run 34 A perfectly competitive firm is a price taker. Therefore, it faces a perfectly elastic supply curve for its output perfectly elastic demand curve for its output perfectly inelastic supply curve for its output perfectly inelastic demand curve for its output unit­elastic demand curve for its output 35 A Midwestern wheat farmer faces a horizontal demand curve because it is so large relative to the market as a whole that it has no impact on market price it is so small relative to the market as a whole that it has no impact on market price it produces a good for which there are no substitutes it produces a good for which there are no complements it produces a good that no other firm in the industry produces 36 Suppose the equilibrium price in a perfectly competitive industry is $100 and a firm in the industry charges $112. Which of the following will happen? 37 The firm will not sell any of its output. The firm will sell more output than its competitors. The firm's profits will increase. The firm's revenue will increase. The firm will gradually take over the entire industry. Suppose the equilibrium price in a perfectly competitive industry is $10 and a firm in the industry charges $9. Which of the following will happen? The firm will not sell any output. The firm will sell less output than its competitors. The firm will make more profit than it could at the $10 price. The firm will make less profit than it could at the $10 price. The firm's revenue will increase and its costs may decrease. 38 In Connecticut, the apple market is perfectly competitive. Suppose that consumer tastes change so that the market demand for apples increases. In that case, the demand curves faced by individual firms will not change become less elastic shift upward shift leftward shift downward 39 The demand curve faced by a perfectly competitive firm is the market demand curve slopes downward is perfectly elastic is vertical rises when market supply rises 40 Exhibit 8­1 Demand Cost Price Q Q Marginal cost $60 5 1 $50 80 4 2 60 100 3 3 100 120 2 4 140 The perfectly competitive firewood market is composed of 1,000 identical consumers and 1,000 identical firms. Exhibit 8­1 shows cost data for one firm and demand data for one consumer. What is the equilibrium price? $60 $80 $100 $120 It is impossible to determine the equilibrium price because there is no information on market demand or supply. 41 Exhibit 8­1 Demand Cost Price Q Q Marginal cost $60 5 1 $50 80 4 2 60 100 3 3 100 120 2 4 140 The perfectly competitive firewood market is composed of 1,000 identical consumers and 1,000 identical firms. Exhibit 8­1 shows cost data for one firm and demand data for one consumer. What is the profit­maximizing quantity for each firm? zero cords of wood one cord of wood two cords of wood three cords of wood four cords of wood 42 Exhibit 8­1 Demand Cost Price Q Q Marginal cost $60 5 1 $50 80 4 2 60 100 3 3 100 120 2 4 140 The perfectly competitive firewood market is composed of 1,000 identical consumers and 1,000 identical firms. Exhibit 8­1 shows cost data for one firm and demand data for one consumer. What does the demand curve facing a single firm look like? horizontal at a price of $120 horizontal at a price of $100 horizontal at a price of $80 horizontal at a price of $60 same as the demand for a single consumer 43 Exhibit 8­1 Demand Cost Price Q Q Marginal cost $60 5 1 $50 80 4 2 60 100 3 3 100 120 2 4 140 The perfectly competitive firewood market is composed of 1,000 identical consumers and 1,000 identical firms. Exhibit 8­1 shows cost data for one firm and demand data for one consumer. How many cords of firewood wil be bought and sold in equilibrium? 5,000 4,000 3,000 2,000 1,000 44 Commodity products are rare and expensive patented and licensed highly differentiated uniform or standardized ones without impurities 45 The demand curve facing a perfectly competitive firm is perfectly elastic perfectly inelastic unit elastic downward­sloping identical to the industry demand curve 46 A perfectly competitive firm has no control over the quantity of output produced quantities of inputs used price of the product type of good produced types of inputs used 47 Economists assume that firms seek to maximize accounting profit maximize economic profit maximize total revenue maximize normal profit minimize cost 48 Economic theory assumes that the goal of firms is to maximize sales total revenue profit price utility 49 Which of the following is not true with regard to economic profit? economic profit equals total revenue minus total cost economic profit excludes implicit cost economic profit is any profit greater than a normal profit firms attempt to maximize economic profit long­run economic profit is always zero in perfect competition 50 The total revenue curve of a perfectly competitive firm is horizontal is vertical has a diminishing slope as output increases has an increasing slope as output increases has a constant slope as output increases 51 If, as a firm increases its rate of output, total cost increases as well, profit cannot be maximized revenue cannot be maximized cost cannot be minimized marginal cost is increasing marginal cost is positive 52 Exhibit 8­2 Total cost and total revenue for a firm in a perfectly competitive wool blanket market Cost Demand Q TC Q TR 0 $30 0 $0 1 33 1 10 2 37 2 20 3 42 3 30 4 51 4 40 5 60 5 50 6 90 6 60 Given the information in Exhibit 8­2, the price of a wool blanket is $10 is $20 is $30 is $40 depends on the quantity sold 53 Exhibit 8­2 Total cost and total revenue for a firm in a perfectly competitive wool blanket market Cost Demand Q TC Q TR 0 $30 0 $0 1 33 1 10 2 37 2 20 3 42 3 30 4 51 4 40 5 60 5 50 6 90 6 60 Given the information in Exhibit 8­2, what is the profit­maximizing (or loss­ minimizing) quantity? zero blankets one blanket two blankets three blankets five blankets 54 Exhibit 8­2 Total cost and total revenue for a firm in a perfectly competitive wool blanket market Cost Demand Q TC Q TR 0 $30 0 $0 1 33 1 10 2 37 2 20 3 42 3 30 4 51 4 40 5 60 5 50 6 90 6 60 How much profit is the firm in Exhibit 8­2 earning (or how much of a loss is it suffering)? ­$17 $10 zero profit or loss ­$10 $30 55 Exhibit 8­3 Which point in Exhibit 8­3 indicates the quantity at which this firm will maximize profit? point a point b point c point d either point b or point d 56 Exhibit 8­3 Which point in Exhibit 8­3 indicates the quantity at which marginal revenue and marginal cost are equal? point a point b point c point d either point b or point d 57 Exhibit 8­3 The shape of the total cost curve between outputs a and b in Exhibit 8­3 reflects fixed cost increasing profits diminishing marginal returns increasing marginal returns economies of scale 58 Exhibit 8­3 The shape of the total revenue curve in Exhibit 8­3 reflects profitability falling marginal revenue increasing marginal revenue the fact that perfectly competitive firms are price takers the fact that consumers will purchase more from this firm at higher prices 59 Exhibit 8­4 Quantity of output Total cost 0 $ 50 10 85 20 150 30 220 40 305 50 455 Consider Exhibit 8­4. If the market price is $8.50, what are the profit­ maximizing output and profit? output = 40; profit = $35 output = 40; profit = $0 output = 0; profit = ­$50 output and profit cannot be determined because marginal revenue cannot be calculated output and profit cannot be determined because average variable cost cannot be calculated 60 Exhibit 8­4 Quantity of output Total cost 0 $ 50 10 85 20 150 30 220 40 305 50 455 Does Exhibit 8­4 represent a long­run or a short­run situation? long run because there is no fixed cost short run because there is no equilibrium long run because there is an equilibrium level of output short run because there is fixed cost long run because there is a normal profit 61 Exhibit 8­5 Q TFC TVC TC MC 0 $10.00 $ 0.00 $ 10.00 1 10.00 20.00 30.00 $20.00 2 10.00 38.00 48.00 18.00 3 10.00 54.00 64.00 16.00 4 10.00 72.00 82.00 18.00 5 10.00 92.00 102.00 20.00 6 10.00 114.00 124.00 22.00 7 10.00 138.00 148.00 24.00 Consider Exhibit 8­5. If the market price is $21, this perfectly competitive firm will earn a profit of $3.00 earn a profit of $2 earn a profit of $1 suffer a loss of $10 break even 62 Exhibit 8­5 Q TFC TVC TC MC 0 $10.00 $ 0.00 $ 10.00 1 10.00 20.00 30.00 $20.00 2 10.00 38.00 48.00 18.00 3 10.00 54.00 64.00 16.00 4 10.00 72.00 82.00 18.00 5 10.00 92.00 102.00 20.00 6 10.00 114.00 124.00 22.00 7 10.00 138.00 148.00 24.00 Consider Exhibit 8­5. If the market price is $15, the minimum loss this perfectly competitive firm can incur is $10 $15 $18 $19 $22 63 Exhibit 8­5 Q TFC TVC TC MC 0 $10.00 $ 0.00 $ 10.00 1 10.00 20.00 30.00 $20.00 2 10.00 38.00 48.00 18.00 3 10.00 54.00 64.00 16.00 4 10.00 72.00 82.00 18.00 5 10.00 92.00 102.00 20.00 6 10.00 114.00 124.00 22.00 7 10.00 138.00 148.00 24.00 Consider Exhibit 8­5. Assume the firm is perfectly competitive and the market price is $21. To maximize profit or minimize loss, the firm will shut down produce 7 units produce 3 units produce 4 units produce 5 units 64 Exhibit 8­5 Q TFC TVC TC MC 0 $10.00 $ 0.00 $ 10.00 1 10.00 20.00 30.00 $20.00 2 10.00 38.00 48.00 18.00 3 10.00 54.00 64.00 16.00 4 10.00 72.00 82.00 18.00 5 10.00 92.00 102.00 20.00 6 10.00 114.00 124.00 22.00 7 10.00 138.00 148.00 24.00 Consider Exhibit 8­5. Assume the firm is perfectly competitive and the market price is $15. To maximize profit or minimize loss, the firm will shut down produce 7 units produce 3 units produce 4 units produce 5 units 65 The total revenue curve for a perfectly competitive firm is a vertical line intersecting the horizontal axis is a horizontal line intersecting the vertical axis starts part way up the vertical axis, then slopes upward in a backwards­S curve is a straight line starting from the origin and sloping upward starts at the origin, sloping upward at first and then sloping downward 66 Average revenue is total revenue minus total cost total revenue divided by quantity of output total revenue divided by quantity of input the change in total revenue divided by the change in output the change in total revenue divided by the change in the quantity of an input used 67 For a perfectly competitive firm, price is identical to marginal revenue at every quantity. True False 68 For a perfectly competitive firm, marginal revenue is identical to marginal cost at every quantity. True False 69 Marginal revenue is the change in total revenue from using one more unit of an input in the short run. True False 70 Marginal revenue is the change in total revenue from selling one more unit of output. True False 71 The golden rule of profit maximization states that firms maximize profit by producing at the rate of output at which price equals average total cost. True False 72 Marginal revenue is defined as total revenue divided by quantity total revenue minus total cost the change in total revenue divided by the change in quantity the change in total revenue divided by quantity the change in total revenue 73 The slope of the total revenue curve for a perfectly competitive firm equals marginal revenue, which is less than price marginal revenue, which is greater than price marginal revenue, which is equal to price average revenue, which is less than price average revenue, which is greater than price 74 If a perfectly competitive firm charges the market price of $14 per unit, its marginal revenue is $14, and its average revenue is less than $14 per unit it will sell no output its average revenue is $14, and its marginal revenue is less than $14 per unit its average revenue is $14, and its marginal revenue is $14 its average and marginal revenue are $14 only for the first unit sold 75 Perfectly competitive firms that earn an economic profit in the short run choose the output that maximizes total revenue minimizes total cost maximizes the difference between total revenue and total cost maximizes the difference between total revenue and explicit cost maximizes the difference between total revenue and implicit cost 76 Farmer Fanny sells her crops in a perfectly competitive market. If she produces 500 bushels for total revenue of $3,000 and if harvesting the 501st bushel would raise her total cost from $2,500 to $2,510, her revenue will increase by $4 if she harvests the 501st bushel revenue will fall by $4 if she harvests the 501st bushel average fixed cost will rise if she harvests the 501st bushel profit will fall by $10 if she harvests the 501st bushel profit will fall by $4 if she harvests the 501st bushel 77 Farmer Fanny sells her crops in a perfectly competitive market. If she produces 500 bushels for total revenue of $2,500 and ...
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  • Fall '06
  • MichaelVardanyan
  • Microeconomics, shut down, perfectly competitive firm

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