1. One of the
defining characteristics of a perfectly competitive market is
a. a small number of sellers.
b. a large number of buyers and a small number of sellers.
c. a standardized product.
d. significant advertising by firms to promote their
products.
2. Which of the
following firms is the closest to being a perfectly competitive firm?
a. a hot dog vendor in New York
b. Microsoft Corporation
c. Ford Motor Company
d. the campus bookstore
3. Java Joe sells 200
cups of coffee each day in a perfectly competitive market at the market price
of $1.00 per cup. If Java Joe independently decreased its price per cup to
$0.75,
a. its sales would rise to 250 cups.
b. its revenues would decrease.
c. its revenues would remain constant at $200.
d. the market price would fall to $0.75 as other sellers
match Java Joe’s price.
4. If the market
elasticity of demand for potatoes is –.3, then the individual farmer’s
elasticity of demand
a. is also –.3.
b. depends on how large a crop she produces.
c. will range between –.3 and –1.0.
d. will be infinite.
5. Perfect
competition may be defined as competition
a. among price-taking sellers.
b. among buyers with perfect information about the market.
c. among sellers of high-quality products.
d. in a market where prices adjust quickly to the long-run
equilibrium.
6. Free entry means
that
a. there are no costs of entering into an industry.
b. no legal barriers prevent a firm from entering an
industry.
c. a firm’s marginal cost is zero.
d. a firm has no fixed costs in the short run.
7. This table
describes the relationship between output, marginal revenue, and marginal cost.
If the firm is currently producing 14 units, what would you advise them to do?
a. decrease quantity to 13
b. increase quantity to 15
c. remain at 14 units
d. increase quantity to 16 units
8. This table
describes the relationship between output, marginal revenue, and marginal cost.
If the firm is maximizing profit, how much profit is it earning?
a. 0
b. $1.00
c. $16.00
d. There is not sufficient data to determine firm
profitability.
9. Cold Duck Airlines
flies between Tacoma and Portland. The company leases planes on a year-long
contract at a cost that averages $600 per flight. Other costs (fuel, flight
attendants, etc.) amount to $550 per flight. Currently, Cold Duck’s revenues
are $1,000 per flight. All prices and costs are expected to continue at their
present levels. If it wants to maximize profit, Cold Duck Airlines should
a. drop the flight immediately.
b. continue the flight.
c. continue flying until the lease expires and then drop the
run.
d. drop the flight now but renew the lease if conditions
improve.
10. Raiman’s Shoe
Repair also produces custom-made shoes. When Mr. Raiman produces 12 pairs a
week, the MC of the twelfth pair is $84, and the MR of that unit is $70. What
would you advise Mr. Raiman to do?
a. shut down
b. produce more custom-made shoes
c. decrease the price
d. produce fewer custom-made shoes
11. Carla’s Candy
Store is maximizing profits by producing 1,000 pounds of candy per day. If
Carla’s fixed costs unexpectedly increase and the market price remains
constant, then the profit-maximizing level of output
a. is less than 1,000 pounds.
b. is still 1,000 pounds.
c. is more than 1,000 pounds.
d. becomes zero.
12. The firm will
make the most profits if it produces that quantity of output for which
a. marginal cost equals average cost.
b. profit per unit is greatest.
c. marginal revenue equals total revenue.
d. marginal revenue equals marginal cost.
13. This table shows
the total revenue and total cost data for a perfectly competitive firm. The
profit earned at the profit-maximizing output level is
a. $80.
b. $10.
c. $0.
d. $15.
14. Joe’s Garage
operates in a perfectly competitive market. At the point where marginal cost
equals marginal revenue, ATC = $20, AVC = $15, and the price per unit is $10.
In this situation,
a. Joe’s Garage will break even.
b. Joe’s Garage will shut down immediately.
c. Joe’s will lose money in the short run, but stay in
business.
d. the market price will fall in the short run.
15. If there is an
increase in market demand in a perfectly competitive market, then in the short
run
a. there will be no change in the demand curves faced by
individual firms in the market.
b. the demand curves for firms will shift downward.
c. the demand curves for firms will become more elastic.
d. profits will rise.
16. A sunk cost is
one that
a. changes as the level of output changes in the short run.
b. was paid in the past and will not change regardless of
the present decision.
c. should determine the rational course of action in the
future.
d. has the most impact on profit-making decisions.
17. A corporation has
been steadily losing money on one of its product lines. The factory used to
produce that brand cost $20 million to build 10 years ago. The firm now is
considering an offer to buy that factory for $15 million. Which of the
following statements about the decision to sell or not to sell is correct?
a. The firm should turn down the purchase offer because the
factory cost more than $15 million to build.
b. The $20 million spent on the factory is a sunk cost that
should not affect the decision.
c. The $20 million spent on the factory is an implicit cost,
which should be included in the decision.
d. The firm should sell the factory only if it can reduce
its costs elsewhere by $5 million.
18. The short-run
market supply curve in a perfectly competitive industry
a. shows the total quantity supplied by all firms at each
possible price.
b. is perfectly inelastic at the market price.
c. is perfectly elastic at the market price.
d. is usually downward-sloping.
19. Tommy’s Tires
operates in a perfectly competitive market. If tires sell for $50 each and ATC
= $40 per tire at the profit-maximizing output level, then in the long run
a. more firms will enter the market.
b. some firms will exit from the market.
c. the equilibrium price per tire will rise.
d. average total costs will fall.
20. If all firms have
the same costs of production, then in long-run equilibrium,
a. price exceeds all firms’ average cost.
b. price exceeds all firms’ marginal cost.
c. some firms have positive profits.
d. all firms have zero profits and just cover their
opportunity costs.
21. When market
conditions in a competitive industry are such that firms cannot cover their
production costs, then
a. the firms will suffer long-run economic losses.
b. the firms will suffer short-run economic losses that will
be exactly offset by long-run economic profits.
c. some firms will go out of business, causing prices to
rise until the remaining firms can cover their production costs.
d. all firms will go out of business, since consumers will
not pay prices that enable firms to cover their production costs.
22. The market price
in a perfectly competitive industry in short-run equilibrium is $3 and the
minimum average cost for all firms is $2.50. In the long run, we would expect
an increase in
a. each firm’s output.
b. the number of firms.
c. each firm’s profit.
d. each firm’s average costs.
23. If occupational
safety laws were changed so that firms no longer had to take expensive steps to
meet regulatory requirements, we should expect that
a. the demand for the products of this industry would
increase.
b. the market price of the products of this industry would
decrease in the short run but not in the long run.
c. the firms in the industry would make a long-run economic
profit.
d. competition would force producers to pass the lower
production costs on to consumers in the long run.
24. The textile
industry is composed of a large number of small firms. In recent years, these
firms have suffered economic losses and many sellers have left the industry.
Economic theory suggests that these conditions will
a. shift the demand curve outward so that price will rise to
the level of production cost.
b. cause the remaining firms to collude so that they can
produce more efficiently.
c. cause the market supply to decline and the price of
textiles to rise.
d. cause firms in the textile industry to suffer long-run
economic losses.
25. In a perfectly
competitive market, the horizontal sum of all the individual firms’ supply
curves is
a. zero.
b. equal to the industry profits.
c. the market supply curve.
d. a horizontal line.
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