FNP10022 ECONOMICS 2

EXERCISE TOPIC 1A

NAME :

STUDENT NO. :

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) 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.

3) 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.

4) 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.

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5) 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.

6) 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

7) 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.

8) 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

9) 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.

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10) 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.

11) 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.

Total Total
Output Revenue Cost
1 $ 20 $ 40
2 40 60
3 60 70
4 80 80
5 100 85
6 120 110

12) 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.

13) 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.

14) 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.

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15) 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.

16) 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.

17) 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.

18) 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.

19) 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.

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20) 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.

21) Perfect competition arises if the ________ efficient scale of a single producer is
________ relative to the demand for the good or service.
a. minimum; small
b. minimum; large
c. maximum; small
d. maximum; large

22) In perfect competition, ________.

a. there are restrictions on entry into the market
b. firms in the market have advantages over firms that plan to enter the market
c. only firms know their competitors' prices
d. there are many firms that sell identical products

23) Perfect competition exists in a market if

a. there are many firms producing an identical product.
b. there are many firms producing a similar product, each of which may have
unique features.
c. the firm is protected by a barrier to entry.
d. the firm is always at the break-even point where it is earning only a normal profit.

24) Which of the following is TRUE regarding perfect competition?

I. The firms are price takers.
II. Marginal revenue equals the price of the product.
III. Established firms have no advantage over new firms.
a. I and II
b. II and III
c. I, II and III
d. I only

25) In perfect competition

a. each firm can influence the price of the good.
b. there are few buyers.
c. there are significant restrictions on entry.
d. all firms in the market sell their product at the same price.

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26) Firms in perfectly competitive industries have a ________ individual demand curve
when the price is on the vertical axis and the quantity is on the horizontal axis. The
shape of the curve is result of the firm being a ________.
a. horizontal; price taker
b. downward sloping; price maker
c. vertical; price taker
d. downward sloping; price taker

27) In perfect competition, an individual firm

a. faces unitary elasticity of demand.
b. has a price elasticity of supply equal to one.
c. faces a perfectly elastic demand.
d. has perfectly elastic supply.

28) In perfect competition, the price of the product is determined where the market
a. elasticity of supply equals the market elasticity of demand.
b. supply curve and market demand curve intersect.
c. average variable cost equals the market average total cost.
d. fixed cost is zero.

29) In perfect competition, a firm that maximizes its economic profit will sell its good at a
price that is
a. below the market price.
b. at the market price.
c. above the market price.
d. below the market price if its supply curve is inelastic and above the market price
if its supply curve is elastic.

Quantity sold Price

5 $15
6 $15
7 $15

30) In the above table, if the quantity sold by the firm rises from 5 to 6, its marginal
revenue is
a. $15.
b. $30.
c. $75.
d. $90.

31) Marginal revenue is equal to

a. total revenue divided by price.
b. the change in total revenue divided by total output.
c. the change in total revenue divided by the change in quantity sold.
d. price divided by quantity sold.

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32) A perfectly competitive firm that is producing a positive quantity of a good
maximizes its economic profit if it produces so that
a. total revenue = total cost.
b. marginal revenue = marginal cost.
c. average revenue = average total cost.
d. average total cost = average variable cost.

33) Charlie's Chimps is a perfectly competitive firm that produces cuddly chimps for
children. The market price of a chimp is $10, and Charlie's produces 100 chimps. The
marginal cost of the 100th chimp is $9. Charlie's ________.
a. is maximizing its profit
b. will maximize its profit if it produces more than 100 chimps
c. will maximize its profit if it lowers the price to $9 a chimp
d. will maximize its profit if it produces fewer than 100 chimps

Total
Output Revenue Total Cost
0 $0 $25
1 $30 $49
2 $60 $69
3 $90 $91
4 $120 $117
5 $150 $147
6 $180 $180

34) In the above table, the price of the product is

a. $30.
b. $147.
c. $150.
d. $180.

Price Quantity demanded

(dollars per CD) (CDs per week)
8.00 30,000
8.50 25,000
9.00 20,000
9.50 15,000
10.00 10,000

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 Quantity Marginal cost
(CDs per week) (dollars per CD)
50 8.50
100 9.00
150 9.50
200 10.00
250 10.20

35) The first table shows the market demand schedule for CDs, and the second table
shows the cost structure of each firm. The CD market is perfectly competitive and there
are 100 identical firms. The market price of a CD is ________, and ________ CDs are
produced and sold.
a. $9.00; 20,000
b. $9.50; 15,000
c. $10.00; 10,000
d. $8.50; 24,000

36) A firm will expand the amount of output it produces as long as its
a. average total revenue exceeds its average total cost.
b. average total revenue exceeds its average variable cost.
c. marginal cost exceeds its marginal revenue.
d. marginal revenue exceeds its marginal cost.

37) In the above figure, the line represented by the "2" is the
a. average fixed cost.
b. average variable cost.
c. total cost.
d. average total cost.

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38) In the above figure, the line represented by the "1" is the
a. average fixed cost.
b. marginal revenue.
c. total cost.
d. average total cost.

39) In the above figure, the firm will produce

a. 0 units.
b. 5 units.
c. 15 units.
d. 20 units.

40) In the above figure, the firm's total economic profit is equal to
a. $60.
b. $200.
c. $150.
d. MR - MC.

41) The owners will shut down a perfectly competitive firm if the price of its good falls
below its minimum
a. average total cost.
b. average marginal cost.
c. average variable cost.
d. wage rate.

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42) A firm that shuts down and produces no output incurs a loss equal to its
total fixed costs.
a. total variable costs.
b. marginal costs.
c. marginal revenue.

43) In the short run, a firm will

a. not produce if its total revenue does not cover its total cost.
b. produce and incur an economic loss if its total revenue covers its total variable
cost but not its total cost.
c. produce and break even if its total revenue covers its total fixed cost but not its
total variable cost.
d. produce and earn an economic profit if its total revenue is equal to its total cost.

44) Consider the perfectly competitive firm in the above figure. The profit maximizing
level of output for the firm is equal to
a. 0 units.
b. 14 units.
c. 17 units.
d. 19 units.

45) Consider the perfectly competitive firm in the above figure. At the profit maximizing
level of output, the firm is
a. incurring an economic loss equal to $119.00.
b. incurring an economic loss equal to $123.50.
c. incurring an economic loss equal to $187.00.
d. making zero economic profit.

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46) Consider the perfectly competitive firm in the above figure. The shutdown point
occurs at a price of
a. $11.00.
b. $12.00.
c. $16.00.
d. $22.00.

47) The short-run supply curve for a perfectly competitive firm is its
a. marginal cost curve above the horizontal axis.
b. marginal cost curve above its shutdown point.
c. average cost curve above the horizontal axis.
d. average cost curve above its shutdown point.

48) In a perfectly competitive market in the short run, as the market demand increases,
the firms ________ their output and their economic profit ________.
a. increase; increases
b. increase; decreases
c. decrease; decreases
d. decrease; increases

49) If firms in a perfectly competitive industry are making zero economic profit, then
a. some of those firms will leave the industry, because firms cannot persistently go
without making economic profit.
b. new firms will enter the industry, because the new entrants would be ensured of
doing as well as in their best foregone alternative.
c. there is no incentive for either entry or exit.
d. some of the firms will temporarily shut down.

50) The firms in a perfectly competitive are making an economic profit when new firms
enter. The entry shifts the short-run market supply curve ________, the market price
________, and each firm's economic profit ________.
a. leftward; rises; decreases
b. rightward; rises; increases
c. rightward; falls; decreases
d. leftward; falls; decreases

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51) The above figure shows the cost curves for a perfectly competitive firm. If all firms in
the market have the same cost curves and the price equals $16 per unit
a. the market is in its long-run equilibrium.
b. over time, firms will leave this market.
c. the firm is making zero economic profit.
d. over time, the price will fall as new firms enter the market.

52) If firms in a competitive market are ________ then there is ________ for firms to
________ the industry.
a. incurring economic losses; an incentive; exit
b. incurring economic losses; no incentive; exit
c. making economic profits; no incentive; enter
d. making zero economic profit; an incentive; exit

53) In the long-run, if firms in a perfectly competitive market are incurring persistent
economic losses, some firms will
a. exit and the price will fall.
b. exit and the price will rise.
c. enter and the price might either rise or fall.
d. exit and the price might either rise or fall.

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