Chapter008 1

Chapter 8
Analysis of Perfectly Competitive Markets
Multiple Choice Questions
1. Profit maximization requires a firm to do which of the following:

A) manage internal operations efficiently.
B) prevent waste.
C) encourage worker morale.
D) choose efficient production processes.
E) all of the above.
Answer: E
Difficulty: Medium
Topic: Definition
Bloom’s: Knowledge
AACSB: Reflective Thinking
2. In a market economy, the short-run reaction to a shortage of a commodity after an increase in

demand will be that:
A) price will fall, but profits will increase.
B) price will rise, but profits decrease.
C) price will rise, but profits remain unchanged.
D) price and profits will both rise.
E) output will fall, but price rises.
Answer: D
Difficulty: Medium
Topic: Simple Application
Bloom’s: Comprehension
3. Which of the following is an important function of prices in a competitive market economy?

A) Ensuring an equal distribution of goods and services.
B) Ensuring that resources are used in the most efficient manner.
C) Ensuring that all industries will be perfectly competitive in the long run.
D) Equating the marginal utilities of all goods consumed.
E) Equating level of purchases with level of needs.
Answer: B
Difficulty: Easy
4. The long-run supply curve of an individual firm in perfect competition is the same thing as:
A) the rising segment of its marginal cost curve, above average cost.
B) the rising segment of its average cost curve.
C) its entire average cost curve.
D) that entire part of its total cost curve in which total cost rises or remains constant as output
increases.
E) none of the above.
Answer: A
Difficulty: Hard
5. A supplier in a perfectly competitive market is characterized by all but which of the following?
A) It can influence the price of its product.
B) It produces such that marginal cost equals price.
C) It can sell all it wants to at the prevailing market price.
D) It produces a positive amount in the short run if it can recover variable costs.
E) None of the above are incorrect.
Answer: A
Difficulty: Medium
Topic: Definition
6. If you are a wheat farmer and you want to earn as much profit as you can, you should do which of
the following:
A) try to produce and sell that quantity of output at which marginal cost has risen to equality
with price.
B) try to produce and sell that quantity of output at which marginal cost is equal to average
variable cost.
C) try to produce and sell that quantity of output at which marginal cost has reached its
minimum possible level.
D) never let marginal cost reach equality with price, since this is the point at which profits
become zero.
E) keep marginal cost above price.
Answer: A
Difficulty: Easy
7. Which panel in the figure below most accurately indicates by q* the level of output which a
single supplier in a perfectly competitive industry will produce, given it produces a positive
amount?
P P P
M C
M C M C
p p p
q* Q q* Q q* Q
(a ) (b ) (c )
P P
M C M C
D
D
p p
D
D
q* Q q* Q
(d ) (e )
A) a
B) b
C) c
D) d
E) e
Answer: B
Difficulty: Medium
8. What is the underlying reason that maximum profit comes at the level of output where marginal
cost equals price?
A) there is additional profit as long as the price is greater than the marginal cost of the last unit.
B) there is additional profit when the marginal cost of a unit is higher than the price.
C) there is no more profit when the price is greater than the marginal cost of the last unit.
D) price is not important in determining profit.
Answer: A
Difficulty: Medium
9. If a firm in circumstances of perfect competition finds that, at its best possible operating position,
total revenue is not sufficient to cover total variable costs, it should:
A) plan to shut down, even in the short run.
B) plan to continue operating permanently.
C) continue to operate if, at this same level of output, price per unit is sufficient to cover average
cost.
D) increase the price it is charging.
E) decrease the price it is charging.
Answer: A
Difficulty: Easy
Topic: Definition
10. If four firms constituting a competitive industry have the supply schedules given below, then their
combined market supply may be stated as:
Ql s= 16 + 4P Q3 s= 32 + 8P
Q2 s= 5 + 5P Q4 s= 60 + 10P
A) Q = 113 - 27P.
B) Q = 113 + 27P.
C) Q = 51 + 4P.
D) Q = 92 + 18P.
Answer: B
Difficulty: Hard
Topic: Advanced Concept
Bloom’s: Application
AACSB: Analytic
11. Which of the following statements is correct in reference to the figure below?
P M C
d C d
AC
B
AVC
A
A) B is the shutdown point.

B) B is the profit-maximizing point.
C) C is the zero-profit point.
D) A is the shutdown point.
E) C is the shutdown point.
Answer: D
Difficulty: Medium
12. If all the firms in a perfectly competitive industry that is characterized by constant costs are
charging a price equal to marginal cost, then an upward shift in demand will in the long run (if
there are marginal firms which have not yet entered the industry):
A) cause each firm's marginal cost curve to move to the right.
B) cause the industry price to rise.
C) cause the industry price to fall.
D) have no effect on the industry price.
E) cause excess capacity.
Answer: D
Difficulty: Medium
13. The shutdown point is that point at which

A) price equals marginal cost.
B) average fixed cost equals marginal cost.
C) average variable cost equals marginal cost.
D) average total cost equals marginal cost.
Answer: C
Difficulty: Easy
Topic: Definition
14. The zero-profit point for a perfectly competitive firm occurs where the price equals the minimum
point of the:
A) AVC curve.
B) AC curve.
C) MC curve.
D) AFC curve.
Answer: B
Difficulty: Easy
Topic: Definition
15. If you are losing money on your wheat farm, you should consider changing to another crop
when which of the following is true:
A) when the price falls below average variable costs.
B) when the price equals costs.
C) when the price is above costs.
D) when the price equals zero profits.
Answer: A
Difficulty: Medium
16. If prices rise in a perfectly competitive industry, then in the short run the firms in that industry
will:
A) bid for more resources.
B) reduce marginal costs.
C) decrease production.
D) increase plant capacity.
Answer: A
Difficulty: Medium
17. Which of the following is true at the quantity of output where average cost (AC) has reached its
minimum level?
A) AVC = FC
B) MC = AVC
C) MC = AC
D) AC = AFC
E) P = AVC
Answer: C
Difficulty: Medium
18. "I'm losing money, but with my investment in equipment I can't afford to shut down at this time."
If this entrepreneur is attempting to maximize profits, his behavior is:
A) rational if the firm is covering its variable costs.
B) rational if the firm is covering its fixed costs.
C) irrational since plant closing is necessary to eliminate losses.
D) irrational since fixed costs are eliminated if a firm shuts down.
Answer: A
Difficulty: Easy
19. In long-run equilibrium, a firm in a perfectly competitive industry will produce at the point
where:
A) marginal cost equals average total cost.
B) total revenue is maximized.
C) marginal cost equals average variable cost.
D) its opportunity cost is lowest.
E) price equals average fixed cost.
Answer: A
Difficulty: Easy
20. Suppose that all the firms in a given market can be characterized by the cost structure illustrated
in the figure on the left. If market demand is as indicated in the figure on the right, the number of
firms required to support long run equilibrium is:
M C P r ic e ( $ ) M a rk e t D e m a n d
$
AC 15
15
AVC
10
10
5
5
5 10 15 Q u a n tity 500 1000 1500 Q u a n tity
A) 90.
B) 100.
C) 110.
D) 120.
E) some number greater than 50 that cannot be determined with the information provided.
Answer: B
Difficulty: Hard
Topic: Numerical Analysis
AACSB: Analytic
21. If, in long run equilibrium, the competitive price of some good is $16.67, then, for each and every
firm in the industry,
A) marginal cost > average cost = $16.67.
B) marginal cost < average cost = $16.67.
C) $16.67 = marginal cost = average cost.
D) $16.67 = marginal cost > average cost.
E) $16.67 = marginal cost < average cost.
Answer: C
Difficulty: Medium
AACSB: Analytic
22. In a competitive market with a downward-sloping demand curve, a tax that increases the fixed
cost of every firm will:
A) reduce the number of firms supporting long-run equilibrium.
B) increase the long-run equilibrium price.
C) not cause the number of firms supporting long-run equilibrium to change.
D) answers a and b.
E) answers b and c.
Answer: D
Difficulty: Hard
23. In a market economy, the short-run reaction to an excess supply of a commodity after a decrease
in demand is that the price will:
A) rise, but profits fall.
B) fall and profits will fall.
C) fall, but profits will be unchanged.
D) fall, but profits will increase.
E) rise and profits will both increase.
Answer: B
Difficulty: Medium
24. In a market economy, if you double the inputs for a new branch of your textile company and
produce double the output which term best describes your situation.
A) constant cost.
B) increasing cost diminishing returns.
C) decreasing cost diminishing returns.
D) both B and C.
Answer: A
Difficulty: Medium
25. Since you cannot add another corner in Times Square regardless of the rent you can charge, we
call the payment for the corners in Times Square what?
A) pure economic rent.
B) pure economic wage.
C) fixed rent.
D) high demand rent.
Answer: A
Difficulty: Medium
26. The short-run supply curve of a firm in perfect competition is the rising segment of its short-run:
A) marginal cost curve.
B) average fixed cost curve.
C) average variable cost curve.
D) marginal cost curve above its average variable cost curve.
E) average total cost curve.
Answer: D
Difficulty: Easy
Topic: Definition
27. If prices fall in a perfectly competitive industry, then the firms in that industry will in the short
run:
A) not decrease in number unless price falls below ATC for some firms.
B) try to reduce production or shut down.
C) keep output at the same level but make losses.
D) advertise.
E) both A and B.
Answer: B
Difficulty: Medium
28. Which of the following characterizes a supplier of a good in a perfectly competitive market?
A) It can influence the price of its product.
B) In the short run, it produces a positive amount only if price is greater than average total cost.
C) It chooses output such that marginal cost equals price.
D) In the long run, it will shut down if price exceeds average variable cost.
E) None of the above.
Answer: C
Difficulty: Easy
Topic: Definition
29. Which of the panels in the figure below best indicates with q* the level of output that a supplier
in a perfectly competitive industry will produce?
P M C P M C
p p
q* Q q* Q
(a ) (b )
P d M C P
M C
d
p p
d d
q* Q q* Q
(c ) (d )
A) a
B) b
C) c
D) d
E) None of the above.
Answer: E
Difficulty: Medium
30. If a competitive firm must sell its output at the going price and wants to maximize profits, it
should:
A) produce at its zero-profit point.
B) produce where average cost equals price.
C) produce where marginal cost equals price.
D) sell as much as it can produce.
Answer: C
Difficulty: Easy
Topic: Definition
31. Which of the following statements is correct with reference to the figure below?
A) A is the shutdown point.

B) B is the zero-profit point.
C) C is the zero-profit point.
D) B is the shutdown point.
E) B is the profit-maximizing point.
Answer: B
Difficulty: Medium
32. If all firms in an industry which is characterized by decreasing costs are charging a price equal to
marginal cost, then an upward shift in demand in the long run will:
A) increase industry output and lower price.
B) decrease industry output and raise price.
C) alter neither industry output nor price.
D) result in much more competitive industry structure.
E) do none of the above.
Answer: A
Difficulty: Hard
33. Pareto efficiency occurs:

A) when no possible reorganization of production or distribution can make anyone better off
without making someone else worse off.
B) when everyone gets a fair share of the goods produced.
C) when reorganizing the production makes everyone better off.
D) when I am better off and everyone else stays the same.
Answer: A
Difficulty: Medium
Topic: Definition
34. The zero-profit price for a firm in perfect competition:

A) is a price just sufficient to cover fixed cost.
B) is at the point where total revenue from sales is at its minimum level.
C) occurs at the point where marginal and average cost are equal.
D) occurs at the point where marginal cost is at its minimum level.
E) is not correctly described by any of the above.
Answer: C
Difficulty: Easy
Topic: Definition
35. When dealing with the economics of the business firm, the short run is defined as a period long
enough to:
A) gather cost data but not production data.
B) gather cost data and production data.
C) vary output but not plant capacity.
D) vary output and plant capacity.
E) vary plant capacity but not output.
Answer: C
Difficulty: Easy
Topic: Definition
36. When there are only perfectly competitive producers in a market economy, there will be an
efficient allocation of resources (ignoring externalities)because:
A) even though excess profits are earned in some industries, capital is prevented from moving
into those industries.
B) even though excess profits are earned in some industries, there will be excess losses earned in
other industries.
C) some firms will produce too little output and other firms will produce too much output.
D) the prices of goods will tend to reflect their marginal costs of production.
Answer: D
Difficulty: Medium
37. In the long run, all firms in a perfectly competitive industry will operate at the point where:
A) marginal cost is minimized.
B) social welfare is compromised by overextended resources.
C) marginal cost equals average fixed costs.
D) marginal cost equals average total cost.
Answer: D
Difficulty: Easy
38. When an economy is in the position where no person can be made better off without making
another person worse off, it:
A) income will be distributed equally.
B) exhibits allocative efficiency.
C) has maximized its social utility irrespective of any pollution.
D) has eliminated all opportunity costs.
E) has distributed all opportunity cost as equitably as possible.
Answer: B
Difficulty: Easy
39. In the long run, falling average cost curves over the relevant range of output lead to:
A) perfect competition.
B) zero total profit.
C) imperfect competition.
D) allocative efficiency.
E) any of the above.
Answer: C
Difficulty: Easy
40. Allocative efficiency occurs when:
A) marginal social utility equals marginal social cost.
B) all industries are monopolized.
C) all externalities are eliminated.
D) marginal social cost equals the minimum of average social cost.
E) marginal social cost equals average social cost, though not necessarily at the minimum of
average social cost.
Answer: A
Difficulty: Easy
41. All of the following qualify as market failure except:

A) imperfect competition.
B) externalities.
C) imperfect information.
D) pollution.
E) allocative efficiency.
Answer: E
Difficulty: Easy
Topic: Definition
42. Allocative efficiency does not necessarily mean:

A) a socially desirable distribution of resources.
B) zero economic profits for firms.
C) price is equal to marginal cost.
D) price is equal to average costs.
E) there are many firms in the industry.
Answer: A
Difficulty: Medium
Use the following to answer questions 43-45:
Figure 8-1
$ M C
AC
15
AVC
10
5 10 15 Q u a n tity
43. In Figure 8-1, the long run equilibrium competitive price is:
A) $5.
B) $7.
C) $10.
D) greater than $10.
E) some positive number that cannot be determined without seeing the market demand curve.
Answer: C
Difficulty: Medium
AACSB: Analytic
Difficulty: 2 Topic: Numerical Analysis

44. In Figure 8-1, in the long-run the firm's economic profits will equal:
A) 0.
B) $40.
C) $100.
D) $150.
Answer: A
Difficulty: Medium
AACSB: Analytic
45. If the market price increases to $15, the firm depicted in Figure 8-1 will:
A) shutdown.
B) earn economic profits.
C) produce more than 10 units of output.
D) produce less than 10 units of output.
E) both B and C are correct.
Answer: E
Difficulty: Hard
AACSB: Analytic
46. Suppose that Michael Jordan, star basketball player, earns a pure economic rent. This means that:
A) the demand curve for his talent is perfectly elastic.
B) the supply curve for his talent is perfectly inelastic.
C) the demand curve for his talent is downward-sloping.
D) the supply curve for his talent is perfectly elastic.
E) market equilibrium will be undefined.
Answer: B
Difficulty: Easy
Topic: Definition
47. The "demand rule" states that an increase in the demand for a commodity will raise the price of
the commodity. This may not be the case when the supply curve is:
A) backward-bending.
B) perfectly inelastic.
C) upward-sloping.
D) all of the above.
Answer: A
Difficulty: Easy
Topic: Definition
48. It will sometimes pay a firm to operate at a loss under perfect competition, so long as price
covers:
A) average variable cost.
B) average cost.
C) marginal cost.
D) average fixed cost.
Answer: A
Difficulty: Easy
Topic: Definition
49. Which of the following would occur if a single farm in perfect competition lowered its price
below the long-run equilibrium market price?
A) All other farms would lower their prices, too.
B) It would not be maximizing profit.
C) It would get a larger share of the market, and this would be profitable for it.
D) Other farms would be driven out of the industry.
E) Other farms would enter the industry.
Answer: B
Difficulty: Medium
50. In a market economy, if you are only one of many wheat farmers you are considered a which of
the following:
A) price-maker.
B) price-taker.
C) price manipulator.
D) price-neogiator.
Answer: B
Difficulty: 2
Topic: Definition
.
True/False Questions
51. In a purely competitive market, the maximum profit comes at that output where marginal cost
equals price.
Answer: True
Difficulty: Easy
Topic: Definition
52. If a firm is maximizing profit their marginal cost curve will also be their supply curve.
Answer: True
Difficulty: Easy
53. Marginal cost equals marginal utility in a well-running society, so they are essentially the same
thing.
Answer: False
Difficulty: Easy
54. Economic efficiency simply requires that all commodities be produced at minimum marginal
cost.
Answer: False
Difficulty: Easy
55. The shutdown point comes where revenues just cover variable costs.
Answer: True
Difficulty: Easy
Topic: Definition
56. The total quantity brought to market at a given price will be the sum of the individual quantities
that all firms supply at that price.
Answer: True
Difficulty: Easy
Topic: Definition
57. An efficient allocation of resources calls for flexible prices.

Answer: False
Difficulty: Medium
58. A perfect competitor is defined as one who can sell all she wants at the prevailing market price.
Answer: True
Difficulty: Easy
Topic: Definition
59. When its variable costs are less than total revenue, a firm should shut down.
Answer: False
Difficulty: Medium
60. If all factors of production could be bought at existing prices and output were to show constant
returns to scale, then long-run MC could be horizontal forever.
Answer: True
Difficulty: Hard
61. A profit maximizing competitive firm should produce at the point where marginal cost is lowest.
Answer: False
Difficulty: Easy
62. In the long run, the industry's supply curve may reflect constant, increasing, or decreasing costs.
Answer: True
Difficulty: Easy
Topic: Definition
63. If externalities are involved, there may be a divergence between social costs and private
production costs.
Answer: True
Difficulty: Easy
Topic: Definition
Use the following to answer questions 64-65:
Figure 8-2
64. For the market whose typical firm is characterized in Figure 8-2, the long-run competitive
equilibrium price is $1000.
Answer: False
Difficulty: Medium
AACSB: Analytic
65. For the market whose typical firm is characterized in Figure 8-2, the long-run competitive level
of output is 5.
Answer: False
Difficulty: Medium
AACSB: Analytic
66. Given the market demand drawn in Panel B of the figure below and the cost structure for the
typical firms shown in Panel A of the figure below, the long-run total output of the industry is 900
units.
$ M C
P r ic e ( $ )
AC M a rk e t D e m a n d
15 15
AVC
10 10
5 5
5 10 15 Q u a n tity 500 1000 1500 Q u a n tity

Panel A Panel B
Answer: False
Difficulty: Medium
AACSB: Analytic
67. A firm will shut down if its MU exceeds its MC.

Answer: False
Difficulty: Easy
Topic: Definition
68. We can add horizontally the supply curves of firms to get a market supply curve even for low
prices, although in the short run some firms will close down if they cannot cover their variable
costs.
Answer: True
Difficulty: Medium
Topic: Definition
69. A perfect competitor is defined as one who can earn economic profits, even in the long run.
Answer: False
Difficulty: Easy
Topic: Definition
70. A competitive firm always wants to produce at the point where average cost is lowest.
Answer: False
Difficulty: Medium
71. A competitive firm in the long run must realize a price that covers its average cost.
Answer: True
Difficulty: Medium
72. The fact that some large firms are earning positive profits while smaller firms in the same
industry are losing money is not in itself an indication of monopoly power.
Answer: True
Difficulty: Hard
Topic: Definition
73. Free (unrestricted) entry and exit of firms is not an essential feature for adjustments in industry
output in response to price changes in a competitive market.
Answer: False
Difficulty: Medium
Topic: Definition
74. A tax on the emission of a pollutant from the firms of a competitive industry can be expected to
cause the equilibrium quantity demanded and supplied to decline.
Answer: True
Difficulty: Medium
75. Economic rents are earned by factors of production that are fixed in total supply so that the
supply curve is perfectly elastic.
Answer: False
Difficulty: Easy
Topic: Definition
76. If demand decreases in a constant cost industry, in the long-run firms will exit, industry output
will fall, and the price of the product will fall.
Answer: False
Difficulty: Easy
Topic: Definition
77. Pure economic rent is the price paid to a factor of production that is fixed in total supply
Answer: True
Difficulty: Medium
Topic: Definition
78. There can be an efficient allocation of resources even if P does not equal MC for all commodities.
Answer: False
Difficulty: Medium
79. A competitive price system equitably and even-handedly distributes income to compensate for the
minor inefficiencies it must entail.
Answer: False
Difficulty: Medium
Topic: Definition
80. The market demand curve is a reflection of society's marginal benefit schedule including the
social costs of any production externalities.
Answer: False
Difficulty: Hard
Topic: Definition

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Chapter 8

Analysis of Perfectly Competitive Markets

Multiple Choice Questions

1. Profit maximization requires a firm to do which of the following:

2. In a market economy, the short-run reaction to a shortage of a commodity after an increase in

3. Which of the following is an important function of prices in a competitive market economy?

A) B is the shutdown point.

13. The shutdown point is that point at which

5 10 15 Q u a n tity 500 1000 1500 Q u a n tity

A) A is the shutdown point.

33. Pareto efficiency occurs:

34. The zero-profit price for a firm in perfect competition:

41. All of the following qualify as market failure except:

42. Allocative efficiency does not necessarily mean:

Use the following to answer questions 43-45:

Difficulty: 2 Topic: Numerical Analysis

57. An efficient allocation of resources calls for flexible prices.

Use the following to answer questions 64-65:

5 10 15 Q u a n tity 500 1000 1500 Q u a n tity

67. A firm will shut down if its MU exceeds its MC.

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