Chapter 7: Perfect Competition

MULTIPLE CHOICE
1.
a.
b.
c.
d.
e.
ANS: C
MSC: Factual
2.
a.
b.
c.
d.
e.
ANS: D
MSC: Factual
3.
a.
b.
c.
d.
e.
ANS: E
MSC: Factual
4.
a.
b.
c.
d.
e.

In the model of perfect competition, firms produce a:

standardized product with considerable
control over price.
differentiated product with considerable
control over price.
standardized product with no control over
price.
differentiated product with no control over
price.
standardized or differentiated product with
some control over price.
DIF: Easy

REF: 226

TOP: Market Structure

In the model of perfect competition, there:

are many firms producing differentiated
products.
are a few firms producing undifferentiated
products.
are a few firms producing differentiated
products.
are many firms producing undifferentiated
products.
is one firm producing a highly differentiated
product.
DIF: Easy

REF: 226

TOP: Market Structure

In the model of perfect competition, there are:

high barriers to entry and no nonprice
competition.
low barriers to entry and some advertising
and product differentiation.
very high barriers to entry and some
advertising and product differentiation.
high barriers to entry and some advertising
and product differentiation.
low barriers to entry and no nonprice
competition.
DIF: Easy

REF: 226

TOP: Market Structure

In a competitive market the equilibrium price is determined:

at the intersection of the firms demand and
the market supply curves.
at the intersection of the market demand and
supply curves.
at the intersection of the firms demand and
marginal cost curves.
so as to cover the costs of the potential
firms.
so as to cover the costs of the firms
currently in the industry.

a.
b.
c.
d.
e.

at the intersection of the firms demand and

the market supply curves.
at the intersection of the market demand and
supply curves.
at the intersection of the firms demand and
marginal cost curves.
so as to cover the costs of the potential
firms.
so as to cover the costs of the firms
currently in the industry.

ANS: B
DIF: Easy
REF: 228
TOP: Market Price in Perfect Competition

MSC: Factual

5.
If the perfectly competitive market demand for cholesterol-free cookies shifts
from QD,93 = 1,150 5P to QD,94 = 1,640 5P, and the market supply is given by QS =
100 + 2P, then the change in equilibrium price will be:
a.
$70.
b.
$80.
c.
$90.
d.
$100.
e.
$110.
ANS: A
DIF: Easy
REF: 228
TOP: Market Price in Perfect Competition

MSC: Applied

6.
If the perfectly competitive market supply of pork bellies shifts from QS,93 =
250 + 50P to QS,94 = 400 + 40P, and the market demand is given by QD = +10,000 200P,
then the change in equilibrium price will be:
a.
$2.
b.
$1.
c.
$0.
d.
$1.
e.
$2.
ANS: B
DIF: Easy
REF: 228
TOP: Market Price in Perfect Competition

MSC: Applied

7.
If the perfectly competitive market demand for gym shoes is given by QD =
100 P and the market supply is given by QS = 10 + 2P, then the equilibrium price and
quantity will be:
a.
P = 50 and Q = 50.
b.
P = 40 and Q = 90.
c.
P = 40 and Q = 60.
d.
P = 30 and Q = 70.
e.
P = 25 and Q = 75.
ANS: D
DIF: Easy
REF: 228
TOP: Market Price in Perfect Competition

MSC: Applied

8.
If the perfectly competitive market demand for tanning beds shifts from QD,
91 = 1,230 5P to QD,92 = 740 5P and the market supply is given by QS = 100 + 2P,
then the change in equilibrium quantity will be:
a.
140 units.
b.
280 units.
c.
98 units.
d.
140 units.
e.
150 units.

a.
b.
c.
d.
e.

140 units.
280 units.
98 units.
140 units.
150 units.

ANS: D
DIF: Easy
REF: 228
TOP: Market Price in Perfect Competition

MSC: Applied

9.
If the perfectly competitive market supply of pork bellies shifts from QS,93 =
250 + 50P to QS,94 = 400 + 40P, and the market demand is given by QD = +10,000 200P,
then the change in equilibrium quantity will be:
a.
200 units.
b.
100 units.
c.
0 units.
d.
100 units.
e.
200 units.
ANS: E
DIF: Easy
REF: 228
TOP: Market Price in Perfect Competition

MSC: Applied

10.
If a representative firm with total cost given by TC = 20 + 20q + 5q2 operates
in a competitive industry where the short-run market demand and supply curves are given by
QD = 1,400 40P and QS = 400 + 20P, the number of firms operating in the short run will
be:
a.
100.
b.
140.
c.
200.
d.
280.
e.
240.
ANS: C
DIF: Difficult
REF: 230
TOP: The Output Decision of a Perfectly Competitive Firm
11.
where:
a.
b.
c.
d.
e.

MSC: Applied

In the model of perfect competition, firms maximize profits by producing

the difference between marginal revenue
and marginal cost is maximized.
marginal revenue equals price.
the difference between price and marginal
cost is maximized.
price equals marginal cost.
the difference between price and marginal
revenue is maximized.

ANS: D
DIF: Easy
REF: 232
TOP: The Output Decision of a Perfectly Competitive Firm

MSC: Factual

12.
A representative firm with short-run total cost given by TC = 50 + 2q + 2q2
operates in a competitive industry where the short-run market demand and supply curves are
given by QD = 1,410 40P and QS = 390 + 20P. Its short-run profit-maximizing level of
output is:
a.
0 units.
b.
1 unit.
c.
2 units.
d.
5 units.
e.
7 units.

ANS: E
DIF: Easy
REF: 232
TOP: The Output Decision of a Perfectly Competitive Firm

MSC: Applied

13.
If a representative firm with total cost given by TC = 20 + 20q + 5q2 operates
in a competitive industry where the short-run market demand and supply curves are given by
QD = 1,400 40P and QS = 400 + 20P, its short-run profit-maximizing level of output is:
a.
0 units.
b.
1 unit.
c.
2 units.
d.
4 units.
e.
6 units.
ANS: B
DIF: Moderate
REF: 232
TOP: The Output Decision of a Perfectly Competitive Firm

MSC: Applied

14.
If price is above the average variable cost but below the average total cost of
a representative firm in a competitive industry:
a.
there will be entry to the industry over time.
b.
there will be exit from the industry over
time.
c.
the firms in the industry are just earning a
normal rate of return.
d.
the firms in the industry are earning a
supranormal rate of return.
e.
the industry is in long-run equilibrium.
ANS: B
DIF: Easy
REF: 235
TOP: Setting the Marginal Cost Equal to the Price MSC:

Conceptual

15.
Meteor Tie Company produces ties from fabric according to Q = 10 + 4F
3
(1/3)F . If fabric is free and ties sell for $20, what is Meteors optimal usage of fabric?
a.
0.
b.
2.
c.
4.
d.
6.
e.
8.
ANS: B
DIF: Difficult
REF: 240
TOP: Another Way of Viewing the Price Equals Marginal Cost Profit-Maximizing Rule
MSC: Applied
16.
If labor produces output according to Q = 8L1/2, labor costs $10, and output
sells for $100, then the optimal level of L is:
a.
8.
b.
16.
c.
1,600.
d.
2.
e.
10.
ANS: C
DIF: Difficult
REF: 240
TOP: Another Way of Viewing the Price Equals Marginal Cost Profit-Maximizing Rule
MSC: Applied

17.
Pauls Pizza Parlor bakes pizza pies according to Q = 3L 0.3L2. If labor
costs $6 and pizza sells for $10, the optimal amount of labor is:
a.
6.
b.
5.
c.
4.
d.
3.
e.
2.
ANS: C
DIF: Difficult
REF: 240
TOP: Another Way of Viewing the Price Equals Marginal Cost Profit-Maximizing Rule
MSC: Applied
18.
Camel Records produces records according to Q = 4L 0.15L2. If labor costs
$5 and records sell for $2, the optimal quantity of labor is:
a.
0.
b.
2.
c.
10.
d.
5.
e.
17.
ANS: D
DIF: Difficult
REF: 240
TOP: Another Way of Viewing the Price Equals Marginal Cost Profit-Maximizing Rule
MSC: Applied
19.
Toy Productions makes toy trucks from steel according to Q = 50 + 100S
2
0.5S . If steel costs $49 and toy trucks sell for $7, the optimal level of steel usage is:
a.
b.
c.
d.
e.

50.
43.
100.
93.
133.

ANS: D
DIF: Difficult
REF: 240
TOP: Another Way of Viewing the Price Equals Marginal Cost Profit-Maximizing Rule
MSC: Applied
20.
The following diagram represents the market for paperback books. Which
area represents producer surplus?

a.
b.
c.
d.
e.

A.
B.
C.
D.
None of the above.

ANS: B
DIF: Easy
TOP: Producer Surplus in the Short Run
21.

REF: 242
MSC: Factual

Producer surplus is defined as:

a.

the difference between the price the

consumer actually pays for a product and
the consumers reservation price.
the profit that the firm earns on each unit of
a product sold.
the profit that the firm earns after taxes.
the difference between the price received by
the producer and the producers reservation
price.
the difference between the price paid by the
consumer and the price received by the
consumer.

b.
c.
d.
e.

ANS: D
DIF: Easy
TOP: Producer Surplus in the Short Run

REF: 242
MSC: Factual

22.
The following diagram represents the market for paperback books. In the
market for paperback books, producer surplus is:
a.
b.
c.
d.
e.

$15.00.
$30.00.
$112.50.
$225.00.
None of the above.

ANS: C
DIF: Easy
TOP: Producer Surplus in the Short Run
23.
a.
b.
c.
d.
e.

REF: 242
MSC: Applied

Total surplus in a market is a measure of:

social welfare created by the market.
profits that accrue to the owners of firms in
a particular market.
the rebates that consumers receive when
they purchase certain goods or services.
excess inventory that remains at the end of a
season.
planned inventory that a firm carries from
one year to the next.

ANS: A
DIF: Easy
TOP: Producer Surplus in the Short Run

REF: 244
MSC: Factual

24.
The following diagram represents the market for paperback books. In the
market for paperback books, total surplus is:
a.
b.
c.
d.
e.
ANS: D
DIF: Easy
TOP: Producer Surplus in the Short Run

$15.00.
$30.00.
$112.50.
$225.00.
None of the above.
REF: 244
MSC: Applied

25.
A representative firm with long-run total cost given by TC = 2,000 + 20q +
2
5q operates in a competitive industry where the market demand is given by QD = 10,000
40P. The long-run equilibrium output of the industry will be:
a.
1,200 units.
b.
1,800 units.
c.
2,200 units.
d.
2,600 units.
e.
3,200 units.
ANS: A
DIF: Moderate
REF: 246
TOP: Long-Run Equilibrium of the Firm MSC: Applied
26.
A representative firm with long-run total cost given by TC = 20 + 20q + 5q2
operates in a competitive industry where the short-run market demand and supply curves are
given by QD = 1,400 40P and QS = 400 + 20P. If it continues to operate in the long run,
its profit-maximizing level of output is:
a.
1 unit.
b.
2 units.
c.
4 units.
d.
5 units.
e.
6 units.
ANS: B
DIF: Moderate
REF: 246
TOP: Long-Run Equilibrium of the Firm MSC: Applied
27.
If a representative firm with long-run total cost given by TC = 50 + 2q + 2q2
operates in a competitive industry where the market demand is given by QD = 1,410 40P,
the long-run equilibrium output of the industry will be:
a.
490 units.
b.
530 units.
c.
570 units.
d.
610 units.
e.
650 units.
ANS: B
DIF: Moderate
REF: 246
TOP: Long-Run Equilibrium of the Firm MSC: Applied
28.
If a representative firm with long-run total cost given by TC = 2,000 + 20q +
2
5q operates in a competitive industry where the market demand is given by QD = 10,000
40P, the long-run equilibrium output of the individual firms will be:
a.
10 units.
b.
20 units.
c.
30 units.
d.
35 units.
e.
40 units.
ANS: B
DIF: Moderate
REF: 246
TOP: Long-Run Equilibrium of the Firm MSC: Applied
29.
If a representative firm with long-run total cost given by TC = 50 + 2q + 2q2
operates in a competitive industry where the short-run market demand and supply curves are

given by QD = 1,410 40P and QS = 390 + 20P, its long-run profit-maximizing level of
output is:
a.
0 units.
b.
1 unit.
c.
2 units.
d.
5 units.
e.
7 units.
ANS: D
DIF: Moderate
REF: 246
TOP: Long-Run Equilibrium of the Firm MSC: Applied
30.
If a representative firm with long-run total cost given by TC = 2,000 + 20q +
2
5q operates in a competitive industry where the market demand is given by QD = 10,000
40P, in the long-run equilibrium there will be:
a.
60 firms.
b.
98 firms.
c.
106 firms.
d.
110 firms.
e.
120 firms.
ANS: A
DIF: Difficult
REF: 246
TOP: Long-Run Equilibrium of the Firm MSC: Applied
31.
If a representative firm with long-run total cost given by TC = 50 + 2q + 2q2
operates in a competitive industry where the market demand is given by QD = 1,410 40P, in
the long-run equilibrium there will be:
a.
60 firms.
b.
98 firms.
c.
106 firms.
d.
110 firms.
e.
120 firms.
ANS: C
DIF: Difficult
REF: 246
TOP: Long-Run Equilibrium of the Firm MSC: Applied
32.
a.
b.
c.
d.
e.

A decreasing-cost industry is one in which:

input prices fall over time.
technology deteriorates over time.
input prices and technology do not change
over time.
firms are in the growth phase of the
industrys life cycle.
input prices fall or technology improves as
firms enter the industry.

ANS: E
DIF: Easy
REF: 247
TOP: The Long-Run Adjustment Process: A Constant-Cost Industry
MSC: Factual
33.
a.
b.
c.
d.
e.

A constant-cost industry is one in which:

input prices do not change over time.
technology does not change over time.
input prices and technology do not change
as firms enter or exit the industry.
input prices and technology do not change
over time.
firms have reached the maturity phase of the
industrys life cycle.

a.
b.
c.

input prices do not change over time.

technology does not change over time.
input prices and technology do not change
as firms enter or exit the industry.
input prices and technology do not change
over time.
firms have reached the maturity phase of the
industrys life cycle.

d.
e.

ANS: C
DIF: Moderate
REF: 247
TOP: The Long-Run Adjustment Process: A Constant-Cost Industry
MSC: Factual
34.
a.
b.
c.
d.
e.

If the demand increases for the product of a constant-cost industry:

long-run output goes up, but long-run price
may go up or down.
short-run output goes up, but long-run
output may go up or down.
short-run price goes up, but long-run price
remains constant.
long-run output goes up, but short-run price
remains constant.
long-run price goes up, but short-run price
may go up or down.

ANS: C
DIF: Moderate
REF: 247
TOP: The Long-Run Adjustment Process: A Constant-Cost Industry
MSC: Factual
35.
a.
b.
c.
d.
e.

If the demand increases for the product of a decreasing-cost industry:

short-run price goes up, but long-run price
falls.
long-run output goes up, but long-run price
may go up or down.
short-run output goes up, but long-run
output may go up or down.
long-run output goes up, but short-run price
remains constant.
long-run price goes up, but short-run price
may go up or down.

ANS: A
DIF: Moderate
REF: 247
TOP: The Long-Run Adjustment Process: A Constant-Cost Industry
MSC: Conceptual
36.
a.
b.
c.
d.
e.
ANS: E

If the demand increases for the product of an increasing-cost industry:

short-run price goes up, but long-run price
falls.
long-run output goes up, but long-run price
may go up or down.
short-run output goes up, but long-run
output may go up or down.
long-run output goes up, but short-run price
remains constant.
short-run price goes up, and long-run price
goes up.
DIF: Moderate

REF: 247

TOP: The Long-Run Adjustment Process: A Constant-Cost Industry

MSC: Conceptual
37.
The long-run supply curve for a product is horizontal with ATC = 200.
Market demand is defined as P = 1,000 5Q. The market is competitive and is in long-run
equilibrium with 40 firms in the industry. If a $50 tax is imposed on sellers, how many firms
will be in the industry at the new long-run equilibrium?
a.
44.
b.
37.
c.
32.
d.
29.
e.
28.
ANS: B
DIF: Difficult
REF: 247
TOP: The Long-Run Adjustment Process: A Constant-Cost Industry
MSC: Applied
38.
The long-run supply curve for a product is horizontal with ATC = 200.
Market demand is defined as P = 1,000 4Q. The market is competitive and is in long-run
equilibrium with 50 firms in the industry. If demand increases to P = 1,240 4Q, how many
firms will be in the industry at the new long-run equilibrium?
a.
45.
b.
55.
c.
65.
d.
75.
e.
85.
ANS: C
DIF: Difficult
REF: 247
TOP: The Long-Run Adjustment Process: A Constant-Cost Industry
MSC: Applied
39.
The long-run supply curve for a product is horizontal with ATC = 400.
Market demand is defined as P = 1,000 4Q. The market is competitive and is in long-run
equilibrium with 50 firms in the industry. If demand increases to P = 1,240 4Q, how many
firms will be in the industry at the new long-run equilibrium?
a.
30.
b.
40.
c.
50.
d.
60.
e.
70.
ANS: E
DIF: Difficult
REF: 247
TOP: The Long-Run Adjustment Process: A Constant-Cost Industry
MSC: Applied