Multiple Choice Tutorial

Chapter 8
Perfect Competition

1. Economic theory assumes that the goal of

firms is to maximize
a. sales
b. total revenue
c. profit
d. price

C. Microeconomics is the study of the

economic behavior in particular markets,
such as the market for computers or for
unskilled labor. A part of microeconomics is
price theory, what is the best price to charge
and quantity to produce for a firm to
maximize its profits?
2

2. Market structure
a. has no influence on a firms decision
making
b. applies only to industries regulated by the
government
c. is determined entirely by demand
conditions in the industry
d. influences the forms of competition among
firms

D. Economists recognize four distinct types of

markets, they are: perfect competition,
monopolistic competition, oligopoly, and
monopoly.
3

3. A market is perfectly competitive when

a. there are two virtually identical firms which
are equally matched and selling in the same
market
b. government authorities set price at an
acceptable level which forces firms to
compete on everything except price
c. all sellers must charge approximately the
same price for comparable products
C. Firms charge approximately the same
price because they have no incentive to
charge a price other than that which is
determined by the market, market demand
and market supply.
4

4. Which of the following describes the market

structure of perfect competition?
a. many firms, low barriers to entry, some
control over price, and product
differentiation
b. many firms, low barriers to entry, no
control over price, and identical products
with no differentiation
c. a few firms producing similar products,
significant barriers to entry, and some
control over price
B. For example, there are many potato farmers,
anyone can plant potatoes, and the potatoes of
one farmer cannot be distinguished from the
potatoes of another farmer.
5

5. Homogeneous products are

a. rare and expensive
b. patented and licensed
c. highly differentiated
d. uniform or standardized

D. The term homo means the same. For

example, all potatoes are the same, one
potato cannot be distinguished from another.

6. The economic model of perfect competition is

a. not useful
b. useful because most firms and industries in
the real world are perfectly competitive
c. only useful in markets created and
controlled by the government
d. useful because it demonstrates how market
structure can affect resource allocation,
prices, and output

D. Sometimes the best we can do is

approximate reality, but even so, this gives us
an idea of how the real-world works.
7

7. Which real-world market closely

approximates perfect competition?
a. most agricultural markets
b. automobile manufacturers
c. state universities
d. cable television services

A. Most agricultural markets are perfectly

competitive because each involves a
homogeneous product, there is easy entry
and exit, and farmers can sell all units they
bring to market providing they are willing to
sell at the market price.
8

8. The demand curve facing a perfectly

competitive firm is
a. perfectly elastic
b. perfectly inelastic
c. unit elastic
d. downward-sloping
A. A perfectly elastic demand curve means that
a change in price has an infinite effect on
quantity demanded, the curve is perfectly
horizontal at the market price. At the market
price a farmer can sell all units brought to
market, but if he charges a higher price, he
will sell no units; why would consumers pay a
higher price if they can buy exactly the same
9
thing at a lower price from many competitors.

9. Perfectly competitive firms have no

individual control over the
a. quantity of output produced
b. quantities of inputs used
c. price of the product
d. type of goods produced

C. For example, any farmer can charge

whatever price he wants for his product, but
he had no incentive to charge other than the
market price. If he charges more, he will sell
zero units, he will not charge less because he
can sell all units brought to market at the
market price.
10

10. Which of the following is not true with

regard to economic profit?
a. economic profit equals total revenue minus
total cost
b. economic profit excludes implicit cost
c. economic profit is any profit greater than a
normal profit
d. firms attempt to maximize economic profit
B. Normal profit is an example of implicit costs.
Normal profit is the minimum amount of
money that will keep a business owner
operating the business. Because this is a
necessary expense of operating a business, we
include normal profit as part of our cost data.
11

11. Perfectly competitive firms respond to

changing short-run market conditions by
varying
a. both c and d
b. advertising campaigns
c. output
d. price

C. A firm that is part of a perfectly competitive

market will charge the market price, that is,
they are price takers; but they do have a
choice of how many units to produce.
12

12. If a firm shuts down in the short run and

produces no output, its total cost is
a. zero
b. equal to variable cost
c. equal to fixed cost
d. explicit costs only

C. To shut down does not mean that the firm

goes out of business; it means that the firm
simply ceases production. Why will a firm
continue to operate even though it is making
a loss? Because its losses are less than its
fixed costs, costs that have to be paid whether
13
the firm continues to operate or not.

13. The total revenue curve for a perfectly

competitive firm
a. is a vertical line intersecting the horizontal
axis
b. is a horizontal line at the market price
c. starts part way up the vertical axis,
sloping upward in a backwards-S curve
d. is a straight line starting from the origin
and sloping upward
D. The total revenue curve is a straight line
sloping upward from the origin because a
perfectly competitive firm can sell all units
brought to market at the same price, the
market price.
14

14. The total revenue curve for a perfectly

competitive firm is
a. directly and proportionately related to
output
b. directly or inversely related to output,
depending on the price elasticity of demand
c. inversely related to output
d. inversely related to price

A. In other types of markets, a firm can sell

more units if it lowers the price, and except for
a discriminating monopolist, the price cut has
to apply to all identical units at one point in
time. Not so in a perfectly competitive market.
15

15. Marginal revenue is

a. total revenue minus total cost
b. total revenue divided by quantity of output
c. the change in total revenue divided by the
change in output
d. the change in total revenue divided by the
change in the quantity of an input used

C. The word margin means the last unit.

Marginal revenue is the measure of how
much revenue is added to total revenue by
producing the last unit of output.
16

16. The slope of the total revenue curve equals

a. marginal revenue, which equals price for a
perfectly competitive firm
b. marginal revenue, which is greater than
price for a perfectly competitive firm
c. marginal revenue, which is less than price
for a perfectly competitive firm
d. average revenue, which is greater than
price for a perfectly competitive firm
A. The slope of a line is the measure of a
change vertically and the change
horizontally; sometimes it is referred to as
the rise divided by the run. In perfect
competition, the rise per unit is always the
17
market price.

17. For perfectly competitive firms, what is the

relationship between market price (P), average
revenue (AR), and marginal revenue (MR)?
a. P = AR = MR
b. P > AR = MR
c. P = AR > MR
d. P = AR < MR

A. Price equals average revenue because all

units are sold for the same price, therefore,
total revenue divided by quantity will always
equal the price. Average revenue always
equals marginal revenue because no matter
the number of units sold, the same price is 18
added to total revenue.

18. The golden rule of profit maximization states

that any firm maximizes profit by producing
where
a. demand is unit elastic, and total revenue is
greatest
b. price equals average revenue
c. price equals marginal cost
d. marginal revenue equals marginal cost
D. If marginal revenue is greater than marginal
cost, a firm will produce that unit of output
because it can make a profit on that last unit of
output. A firm will not produce that last unit of
output where marginal revenue is less than
marginal cost because a loss would be made on
19
that last unit of output.

19. Average revenue is

a. total revenue minus total cost
b. total revenue divided by quantity of output
c. total revenue divided by quantity of input
d. the change in total revenue divided by the
change in output

B. Average always means the total divided by

number of units. Revenue means money in,
that is, price times quantity. So average
revenue means total revenue divided by units
of output.
20

20. If average revenue equals average total cost,

a. total revenue is maximized
b. average revenue is maximized
c. economic profit is maximized
d. economic profit is zero

D. When average revenue equals average cost,

total revenue equals total cost. Because we
include normal profit (the minimum amount
of money that will keep a business owner
operating the business) as a part of our cost
data, when TR equals TC we say that the
firm is making zero economic profits, or it is
exactly breaking even.
21

21. Total revenue minus total cost equals

a. total economic profit
b. total accounting profit
c. a normal profit
d. economic profit per unit of output

D. Revenue minus cost is either profit or loss,

depending on whether revenues are greater
or less than costs. When revenue is greater
than cost, an economic profit (profit) is being
made. If revenues equal costs, a normal
profit is being made. If revenues are less than
costs, the firm experiences a loss.
22

22. On a graph showing a perfectly competitive

firms demand curve, average total cost curve,
and marginal cost curve, total economic profit
is represented by the
a. length of a vertical line
b. length of a horizontal line
c. area of a rectangle
d. area of a triangle
C. Profits are maximized at the number of units
where marginal revenue equals marginal cost.
On this vertical line, the difference between AR
and AC is the width of the rectangle and from
zero to the number of units (where MR = MC)
is the length of the rectangle.
23

23. To maximize profit, a perfectly competitive

firm which decides not to shut down will
choose the rate of output at which
a. price is highest
b. price minus average total cost is maximized
c. price equals marginal cost
d. total revenue is maximized
C. In a perfectly competitive market, price
always equals marginal revenue because no
matter how many units are sold the market
price is always added to the total revenue.
Therefore, when we say that price equals
marginal revenue, we are also saying the
marginal revenue equals marginal cost. 24

24. A perfectly competitive firm will produce at

an economic loss (negative profit) in the short
run rather than discontinue production if
there is a rate of output at which price
a. exceeds average variable cost
b. exceeds average fixed cost
c. exceeds average total cost
d. equals marginal cost
A. When price exceeds average fixed cost (at
the level of output where MR = MC) the
firms loss is less than its fixed cost.
Therefore, it will lose less money if it
continues to operate than it would incur if it
were to close down.
25

25. A perfectly competitive firm will produce at

an economic loss (negative profit) in the short
run rather than discontinue production if
there is a rate of output at which
a. marginal revenue equals marginal cost
b. total revenue equals total cost
c. total revenue exceeds total cost
d. total revenue exceeds total variable cost

D. This is the same as the previous question

because when average revenue exceeds
average cost, total revenue exceeds total cost.
26

26. A perfectly competitive firm producing 100

units of output faces the following facts:
Average total cost is $20
Average variable cost is $12
Marginal cost is $18
Price of the product is $18
The firm should
a. stay open
b. raise the price of its product
c. shut down (reduce output to zero)
A. Average loss equals AR ($18) minus AC
($20) or $-2; average fixed cost equals AC
($20) minus AVC ($12) or -$8). So if this firm
stays open it will lose on the average $2, but
if it closes down it will lose an average $8. So
27
this firm should stay open.

27. A perfectly competitive firm faces the

following facts:
Price of the product is $22
Marginal cost is $20 and increasing
The firm should
a. produce more output
b. reduce the production without shutting
down
shut
downincrease
(reduceproduction
output to zero)
A.c. It
should
because MR >
MC. The fact that the MC curve is increasing
is pertinent because its possible that MR can
intersect the MC curve at a point where it is
decreasing, more units produced in this case
will result in MR being greater then MC. 28

Last slide viewed

MC
ATC

99
90
77
50
45

AVC

D = MR =AR

Exhibit 21-1

10 12

20

Q
29

28. The purely competitive firm in Exhibit 21-1

should
a. close down
b. produce 5 units of output
c. product 10 units of output
d. produce 12 units of output

D. MR = MC at 12 units of output. For each

unit it produces beyond 12 units it will
lose money on each unit of output.

30

29. The maximum economic profit (or minimum

economic loss) for the firm in Exhibit 21-1
would be a
a. loss of $540
b. loss of $480
c. loss of $60
d. loss of $490
B. MR = MC at 12 units of output. At 12 units
average revenue (AR) is $50 and average
total cost (ATC) is $90. $90 minus $50 equals
$40, which is average loss at 12 units (we
know it is a loss because ATC is > then AR at
12 units). Total loss is 12 x $40 which is $480.
31

30. The firm in Exhibit 21-1

a. will close immediately
b. is earning a short-run economic profit
c. is earning a short-run economic loss
d. is operating in the long run

C. If this firm were to produce any other but

12 units of output it would lose more money.

32

31. The profit maximizing firm in Exhibit 21-1

a. has a profit per unit of $5
b. is incurring a loss per unit of $40
c. is incurring a loss per unit of $49
d. is incurring a loss per unit of $108

B. At 12 units AR is $50 and AC is $90 so

average loss is equal to $40.

33

32. The firm in Exhibit 21-1

a. has both c and d
b. has fixed costs equal to $490
c. should close down immediately to minimize
losses
d. has fixed costs equal to $540

D. Average fixed cost (AFC) at 12 units is $45

(ATC minus AVC or $90 -$45) and therefore
total loss is $540 ($45 x 12).

34

Last slide viewed

M
P

MC
ATC

D = MR =AR

J
Exhibit 21-2

AVC
X
B

Q
35

33. The profit maximizing firm in Exhibit 21-2

a. finds both b and d to be the case
b. is incurring economic losses
c. breaks even
d. should close immediately
C. MR = MC at C units of output. At C units
of output AR = ATC, so total revenue equals
total cost. Where total revenue equals total
cost we say that the firm is breaking even,
which means that is it making a normal
profit. Remember, because normal profit (the
minimum amount of profit that will keep a
business owner operating the business) is a
necessary expense, it is included as a cost. 36

34. In order to maximize profit or minimize

losses, the firm in Exhibit 21-2 should produce
a. A units
b. B units
c. C units
d. more than C units

C. C units is the where MR = MC.

37

35. The profit maximizing firm in Exhibit 21-2

a. has economic profit per unit equal to the
distance UX
b. has economic profit per unit equal to the
distance SX
c. has economic loss per unit equal to the
distance SX
d. none of these

D. At the level of output where MR = MC this

firm is making neither a profit or a loss but is
making a normal profit (AR = AC).
38

36. The profit maximizing firm in Exhibit 21-2 is

a. earning an economic profit
b. incurring an economic loss
c. breaking even

C. Breaking even means that it is

making a normal profit.

39

Last slide viewed

MC

M
$366
$293
$180
$150

D =MR =AR

25
Exhibit 21-3

ATC
AVC

40 45

Q
40

37. The profit maximizing firm in Exhibit 21-3

a. should produce 45 units of output
b. should produce 40 units of output
c. should produce 25 units of output
d. would minimize losses by closing

A. 45 units of output is the level of output

where MR = MC.

41

38. The profit maximizing firm in Exhibit 21-3

a. breaks even
b. should produce slightly less than 40 units of
output
c. has fixed costs of $5400
d. should close immediately to minimize losses

C. At the level of output where MR = MC

average total cost (ATC) is $300 and average
variable cost (AVC) is $180 so average fixed
cost (AFC) is $300 minus $180 or $120; total
fixed cost, therefore, is $120 x 45 or $5,400.
42

39. The profit maximizing firm in

Exhibit 21-3 is
a. earning a profit per unit of $66
b. earning a profit per unit of $73
c. earning a profit per unit of $186
d. earning a profit per unit of $216

A. Profit per unit is equal to AR minus ATC at

the level of output where MR = MC. In this
case AR is $366 and ATC is $300, so profit
per unit (on the average) is $366 minus $300
or $66.
43

40. The maximum total profit the firm could

earn in Exhibit 21-3
a. would be negative since the firm has an
economic loss
b. is $2970
c. is $5400
d. is $8370

B. Because this firm is making an average

profit of $66 at the level of output where MR
= MC and the number of units at the level of
output where MR = MC is 45 units, total
profit is 45 x $66 or $2970.
44

41. At the profit maximizing output, the firm in

Exhibit 21-3 has
a. average total cost of $150
b. a total cost of $13,500
c. a total variable cost of $3750
d. a total cost of $9150

B. Average total cost (ATC) at 45 units is

$300, so total cost (TC) at 45 units is 45 x
$300 or $13,500.

45

42. The firm illustrated in Exhibit 21-3

a. is both d and e
b. has all of the following characteristics
c. earns an economic profit
d. is perfectly competitive
e. is a price taker
B. It is earning an economic profit because AR
is greater than AC at the level of output
where MR = MC. This has to be a perfectly
competitive firm because D = AR = MR. Any
firm that is a part of a perfectly competitive
industry is a price taker because it has no
incentive to charge a price other than the
46
market price.

43. The perfectly competitive firm in

Exhibit 21-3 would find it in its best
interest to stop producing immediately if
the markets equilibrium price falls below
a. $293
b. $180
c. $150
d. $366

C. If the market price were to fall below $150

(where MC intersect AVC) its losses would
exceed its fixed cost and therefore should
close down.
47

44. How will a decrease in the equilibrium price

in the market of a perfectly competitive
industry affect the total revenue and the
economic profit of a typical firm?
a. both total revenue and economic profit will
decrease at all rates of output
b. total revenue and economic profit may
increase or decrease, although they will be
directly related to each other
c. it is impossible to predict
A. Because total revenue (TR) equals price (P)
times quantity (Q), when price declines, TR
declines. Economic profit (profit) is average
revenue (AR) minus average total cost
(ATC), so when AR declines, so does profit. 48

45. A decrease in market price in a perfectly

competitive industry
a. does not affect the total revenue curve of the
typical firm
b. shifts the total revenue curve of the typical
firm to the left, without changing its slope
c. shifts the total revenue curve of the typical
firm to the right, without changing its slope
d. reduces the slope of the total revenue curve
of the typical firm
D. Reducing the slope means that the curve
becomes more horizontal (elastic). As the
market price decreases less revenue (measured
on the vertical axis) is added to TR.
49

46. Which is true with regard to the shutdown

point and the break-even point for a perfectly
competitive firm?
a. they are two names for the same point
b. the shutdown point is minimum average
variable cost and the break-even point is
minimum average total cost
c. the shutdown point is minimum average
total cost and the break-even point is
minimum average variable cost
d. the shutdown point is minimum average
variable cost and the break-even point is
minimum average fixed cost
B.
50

47.The perfectly competitive firms short-run

supply curve is the same as the
a. supply curve of all other firms in the
industry
b. upward-sloping portion of its MR curve
c. upward-sloping portion of its marginal cost
curve at or above the minimum AVC curve
C. A supply curve shows how many units will
be supplied at various prices. Because a firm
will produce where MR = MC, the
intersection of MR and MC shows us how
many units will be supplied at various prices.
Below the AVC curve a firm will shut down,
therefore, the supply curve is irrelevant
51
below this point.

48. In a Dutch auction,

a. bidding starts a a high price and decreases
until a buyer stops the clock
b. bidding starts at a low price and increases
until only one buyer remains
c. bidding is done in sealed envelopes, with the
high bid winning
d. any buyer or seller may announce a bid or
an offer to the entire market at any time

A. Interesting!
52

49. Positive short-run economic profit

a. may occur even if accounting profit is
negative
b. attracts resources into an industry
c. creates incentives for resources to leave an
industry
d. can never occur in perfect competition

B. The lower are the barriers to entry, the

more likely that firms will enter into the
industry to partake in the economic profits
being made.
53

50. Which characteristic of perfect competition

ensures that economic profit will be zero in the
long run?
a. each firms output is small in relation to
total market supply
b. the product is homogeneous
c. there is freedom of entry and exit in the
market

C. In a perfectly competitive industry there

are almost no barriers to entry or exit.
Therefore, when a profit is made, firms will
easily enter the industry. Likewise, when
losses are made, some firms will easily leave
the industry.
54

51. Which of the following is not a condition of

long-run equilibrium for perfectly competitive
firms?
a. price is equal to marginal cost
b. price is equal to minimum short-run
average total cost
c. price is equal to minimum long-run average
cost
d. economic profit is positive

D. In long-run equilibrium, a firm in a

perfectly competitive industry will make a
normal profit (zero economic profit).
55

52. Consider a perfectly-competitive, constantcost industry in long-run equilibrium which

experiences a decrease in demand. What
happens after long-run adjustments?
a. price and output both remain unchanged,
although profit has decreased
b. price has fallen and profit is lower, but
output remains unchanged
c. price and profit ultimately remain
unchanged, but market output has been
reduced by some firms leaving the industry
C. A constant cost industry is one that can
expand or contract without effecting the
long-run per-unit cost of production; the
56
long-run industry supply curve is horizontal.

53. Consider a perfectly-competitive, decreasingcost industry in long-run equilibrium which

experiences a decrease in demand. What
happens after long-run adjustments?
a. profits has decrease
b. price has risen and output has been reduced
by some firms leaving the industry, but profit
ultimately remains unchanged
c. in the long run, there would be no changes in
price, output, or profit
B. A decreasing cost industry is the rare case in
which an industry faces lower per-unit
production costs as industry output expands
in the long run; the long-run industry supply
57
curve slopes downward.

54. Consider a perfectly competitive market in

long-run equilibrium. What adjustments take
place during the short-run when there is a
decrease in market demand?
a. price and output remain unchanged, although
profit decreases
b. price and profit fall, but output remains
unchanged
c. price and profit fall, and firms reduce output
by using existing capacity less intensively
C. The short-run is a period of time that a
firms can change output but cannot change
their capacity to produce. The long-run is a
period of time which firms can change their
plant capacity.
58

55. The long-run industry supply curve in a

perfectly competitive market
a. is the horizontal sum of each firms shortrun supply curves
b. illustrates what happens to average costs as
industry output increases
c. illustrates what happens to average costs as
a firm increases its output

A. Theoretically, if we can determine the

supply curve for each firm in the industry,
and then add the curves horizontally, the
result would be the industrys supply curve.
59

56. A constant-cost industry is distinguished by

the fact that
a. firms long-run average cost curve are
horizontal
b. firms short-run marginal cost curves are
horizontal
c. firms short-run average total cost curves
are horizontal
d. the long-run industry supply curve is
perfectly elastic
D. Perfectly elastic means perfectly horizontal.
In this case, the firm can change output
without effecting costs.
60

57. If an increase in industry output pushes

resource prices higher, then
a. it is an increasing-cost industry
b. firms long-run average cost curves are
upward-sloping
c. firms short-run marginal cost curves are
upward-sloping
d. firms short-run average total cost curves
are upward-sloping
A. The supply curve in an increasing-cost
industry is less elastic (more horizontal) then
is the case in a constant-cost industry. In this
case, as industry output increases, per unit
costs will increase.
61

58. Decreasing-cost industries

a. are the most common industry type in the
real world
b. occur only when costs are independent of
the number of firms in the market
c. occur when average costs increase as the
number of firms increases
d. occur when average costs decrease as the
number of firms increases
D. This is a rare case. Supply curves are
almost always upward sloping (they have a
positive slope). But in this case, the long-run
industry supply curve is downward sloping
(it has a negative slope).
62

59. The choice of which goods to produce, and

how to distribute these goods, falls under the
concept of
a. technological efficiency
b. productive efficiency
c. allocative efficiency
d. economic efficiency

C. A basic question for any economic system

is how do we allocate societys scarce
resources?
63

60. Productive efficiency involves

a. producing and selling the most output
possible
b. maximizing the price of the product
c. producing and selling output for the
greatest possible total revenue
d. producing at the lowest possible cost per
unit of output

D. Once society decides what to produce, it has

to determine how to produce goods and
services the most efficient way possible.
64

61. When market exchange occurs voluntarily in

a perfectly competitive market,
a. the choice incurs no opportunity cost
b. the combination of consumer surplus and
producer surplus is maximized
c. both consumer surplus and producer
surplus are eliminated
d. buyers benefit at the expense of producers
B. Consumer surplus is the difference between the
maximum amount that a consumer is willing to
pay for a given quantity of a good and what the
consumer actually pays. Producer surplus is the
amount by which total revenue from production
exceeds total variable cost.
65

62. Short-run producer surplus in competitive

markets is
a. total revenue minus total cost
b. total revenue minus total variable cost
c. total revenue minus total fixed cost
d. price minus average total cost

B. When total revenue minus total variable

cost results in producer surplus, a firm is
meeting at least all of its fixed costs and some
(if not all) of its variable costs. Therefore,
even if the firm were making a loss, its loss
would be less than its fixed cost and it would
66
continue to operate.

63. The definition of producer surplus ignores

a. the price of the product
b. the quantity of the product sold
c. price elasticity of surplus
d. sunk costs

D. A sunk cost (fixed cost) is a cost that has to

be paid no matter what; hence a cost that is
irrelevant when an economic choice is being
made.

67

64. In long-run equilibrium in perfect

competition, producer surplus is
a. often negative
b. always positive
c. always greater than consumer surplus
d. smaller than in the short run
D. If producer surplus is defined narrowly as
total revenue minus total variable cost,
producer surplus in the long run for perfectly
competitive industries is zero. In long run
equilibrium, all costs are variable and total
cost equals total revenue, so there is no (zero)
producer surplus.
68

65. Posted-offer pricing

a. is rarely, if ever, seen in U.S. retail markets
b. adjusts to changing market conditions
more quickly and efficiently than does a
double continuous auction
c. is another name for a double continuous
auction
d. involves low transaction costs in large,
stable markets
D. In most U.S. retail markets, such as
supermarkets and department stores, use
posted-offer pricing - that is, the price is
marked, not negotiated.
69

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