Chapter 8: Competitive Markets

Chapter 8: Competitive Markets

Multiple Choice Questions

THE MARKET SUPPLY CURVE

1. The equilibrium price in a competitive market:

A) Ensures that anyone who can afford the good can get it.
B) Equates the demand for goods with the supply of goods.
C) Remains unchanged as long as supply and demand do not change.
D) All of the above.

Answer: D Type: Definition Page: 174

2. The market supply curve of a particular product indicates the total quantities, ceteris paribus, at alternative
prices during a given time period that sellers:
A) Actually sell.
B) Are willing to offer for sale, even if they are unable to sell.
C) Are willing and able to offer for sale, even if they fail to sell anything.
D) Are willing and able to offer for sale, and actually do sell.

Answer: C Type: Definition Page: 174

3. The market-supply curve in a perfectly competitive market is usually:

A) Downward-sloping. B) Horizontal. C) Vertical. D) Upward-sloping.

Answer: D Type: Basic Understanding Page: 174

4. Which of the following is a determinant of market supply but not the supply curve of an individual firm?
A) The price of factor inputs.
B) Expectations.
C) The number of firms in the market.
D) All of the above are determinants of both supply curves.

Answer: C Type: Definition Page: 174

5. Which of the following is true about the market supply curve?

A) It is the sum of the marginal cost curves of all the firms in the market.
B) It is upward sloping to the right.
C) It is determined by the number of firms in the market.
D) All of the above.

Answer: D Type: Basic Understanding Page: 174

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6. Which of the following is true about a competitive market supply curve?

A) It is horizontal.
B) It is downward sloping to the right.
C) It is the sum of the marginal cost curves of all firms.
D) It is vertical.

Answer: C Type: Basic Understanding Page: 174

7. Which of the following is an investment decision in a competitive market?

A) The shutdown decision. C) The rate of output to produce.
B) Entry or exit. D) The price to charge.

Answer: B Type: Basic Understanding Page: 175

8. Investment decisions are made on the basis of the relationship of price to:
A) Short-run average total cost. C) Short-run marginal cost.
B) Long-run fixed cost. D) Long-run average total cost.

Answer: D Type: Basic Understanding Page: 175

9. In making an investment decision, an entrepreneur:

A) Makes a decision to exit if price is above marginal cost.
B) Makes a short-run decision.
C) Must only consider variable costs.
D) Must take account of diminishing returns.

Answer: C Type: Basic Understanding Page: 175

10. Which of the following is characteristic of a perfectly competitive market?

A) A small number of firms.
B) Exit of small firms when profits are high for large firms.
C) Zero economic profit in the long run.
D) Marginal revenue lower than price for each firm.

Answer: C Type: Basic Understanding Page: 175

11. For a competitive market in the long run:

A) Economic profits induce firms to enter until profits are normal.
B) Economic losses induce firms to exit until profits are normal.
C) Economic profit is zero at equilibrium.
D) All of the above.

Answer: D Type: Basic Understanding Page: 176

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12. For a competitive market in the long run:

A) Economic losses induce firms to shut down.
B) Economic profits induce firms to enter until profits are normal.
C) Accounting profit is zero.
D) All of the above.

Answer: B Type: Basic Understanding Page: 176

13. If economic profits are earned in a competitive market, then over time:
A) Additional firms will enter the market. C) Equilibrium price will fall as more firms enter.
B) The market supply curve will shift to the right. D) All of the above.

Answer: D Type: Basic Understanding Page: 176

14. If long-run economic losses are being experienced in a competitive market:

A) More firms will enter the market. C) Equilibrium price will rise as firms exit.
B) The market supply curve will shift to the right. D) All of the above.

Answer: C Type: Basic Understanding Page: 176

15. In a competitive market, economic profits will:

A) Attract profit-maximizing entrepreneurs. C) Continue to be earned for a long time.
B) Cause new firms to leave the market. D) All of the above.

Answer: A Type: Basic Understanding Page: 176

16. If economic profits are earned in a competitive market:

A) The market supply curve will shift to the left. C) Equilibrium price will rise.
B) More firms will enter the market. D) All of the above.

Answer: B Type: Basic Understanding Page: 176

17. In a competitive market, economic profits will:

A) Cause existing firms to expand production. C) Potentially last a long time.
B) Cause new firms to leave the market. D) Not be possible, even in the short run.

Answer: A Type: Basic Understanding Page: 176

18. In a competitive market where firms are earning economic profits, which of the following should be expected
as the industry moves to long-run equilibrium, ceteris paribus?
A) A higher price and fewer firms. C) A higher price and more firms.
B) A lower price and fewer firms. D) A lower price and more firms.

Answer: D Type: Analytical Page: 176

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19. As new firms enter a competitive market:

A) The equilibrium market price falls. C) The market supply curve shifts to the left.
B) The equilibrium market quantity falls. D) Profits for existing firms will increase.

Answer: A Type: Basic Understanding Page: 176

20. The entry of firms into a market:

A) Reduces the equilibrium price.
B) Reduces the profits of existing firms in the market.
C) Shifts the market supply curve to the right.
D) All of the above.

Answer: D Type: Basic Understanding Page: 176

21. The entry of firms into a market:

A) Increases the equilibrium price.
B) Reduces the profits of existing firms in the market.
C) Shifts the market supply curve to the left.
D) All of the above.

Answer: B Type: Basic Understanding Page: 176

22. Other things being equal, as more firms enter a market, the market supply curve:
A) Becomes more inelastic. C) Shifts to the right.
B) Shifts to the left. D) Intersects the demand curve at a higher price.

Answer: C Type: Basic Understanding Page: 176

23. As new firms enter the market and market supply increases:
A) Equilibrium market price decreases. C) Price will remain constant, but profits will rise.
B) Equilibrium market price increases. D) Price will remain constant, but profits will fall.

Answer: A Type: Basic Understanding Page: 176

24. The exit of firms from a market, ceteris paribus:

A) Shifts the market supply curve to the right.
B) Reduces the economic losses of remaining firms in a market.
C) Increases the equilibrium output in the market.
D) All of the above.

Answer: B Type: Complex Understanding Page: 176

25. The exit of firms from a market:

A) Shifts the market supply curve to the right.
B) Reduces the profits of existing firms in the market.
C) Reduces the equilibrium output in the market.
D) All of the above.

Answer: C Type: Complex Understanding Page: 176

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26. A competitive firm:

A) Is able to keep other producers out of the market.
B) Would like to keep other producers out of the market but cannot do so.
C) Is powerless to alter its own rate of production.
D) Will not care if more producers enter the market.

Answer: B Type: Basic Understanding Page: 176

27. Examples of barriers to entry include:

A) Price taking. B) Patents. C) Standardized products. D) All of the above.

Answer: B Type: Definition Page: 176

28. Examples of barriers to entry include:

A) Government regulation. C) Diseconomies of scale.
B) Lack of control over resource prices. D) Rising marginal cost.

Answer: A Type: Definition Page: 176

29. A competitive market structure includes:

A) Many firms. C) Products to which customers have loyalty.
B) High barriers to entry. D) All of the above.

Answer: A Type: Basic Understanding Page: 176

30. Perfectly competitive firms cannot individually affect market price because:
A) There is an infinite demand for their goods.
B) Demand is perfectly inelastic for their goods.
C) There are many firms, none of which has a significant share of total output.
D) The government exercises control over the market power of competitive firms.

Answer: C Type: Basic Understanding Page: 176

31. Which of the following is characteristic of a perfectly competitive market?

A) Differentiated products. C) Price below marginal revenue.
B) A large number of firms. D) Significant barriers to entry.

Answer: B Type: Basic Understanding Page: 176

32. Which of the following is characteristic of a perfectly competitive market?

A) Long-run economic profit. C) High barriers to entry.
B) Identical products. D) A small number of firms.

Answer: B Type: Basic Understanding Page: 176

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33. Which of the following is characteristic of a perfectly competitive market?

A) Zero economic profit in the long run. C) One firm in the market.
B) Imperfect information. D) All of the above.

Answer: A Type: Basic Understanding Page: 176

34. Which of the following is characteristic of a perfectly competitive market?

A) Zero economic profit in the long run. C) Perfect information.
B) Homogeneous products. D) All of the above.

Answer: D Type: Basic Understanding Page: 176

35. The behavior expected in a competitive market includes:

A) Very little entry and exit.
B) Marginal cost pricing.
C) Aggressive behavior among competitors to control prices.
D) Little technological growth.

Answer: B Type: Basic Understanding Page: 176

36. Suppose a perfectly competitive firm is experiencing zero economic profits. In an effort to increase profits,
the firm decides to initiate an advertising campaign for its product. The most likely short-run result of this
campaign, ceteris paribus, would be:
A) Economic losses for the firm.
B) The ability to sell more at the existing market price.
C) The ability to sell more at a lower price.
D) The ability to sell more at a higher price.

Answer: A Type: Complex Understanding Page: 176

COMPETITION AT WORK: MICROCOMPUTERS

37. The competitive market model is important because:

A) It characterizes most markets in the U.S. economy.
B) It shows how laissez faire can overcome market failures.
C) Many industries function much like the competitive model.
D) All of the above.

Answer: C Type: Basic Understanding Page: 176

38. In making a production decision, an entrepreneur:

A) Decides whether to enter or exit the market. C) Determines plant and equipment.
B) Makes a long-run decision about production. D) Decides the short-run rate of output.

Answer: D Type: Basic Understanding Page: 178

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39. Which of the following is a production decision?

A) Whether to enter or exit an industry. C) Whether to increase or decrease output.
B) Whether to increase or decrease plant capacity. D) All of the above.

Answer: C Type: Basic Understanding Page: 178

40. To maximize profits, a competitive firm will seek to expand output until:
A) Total revenue equals total cost. C) The elasticity of demand equals 1.
B) Price equals marginal cost. D) All of the above.

Answer: B Type: Basic Understanding Page: 179

41. To maximize profits, a competitive firm will seek to expand output until:
A) Price equals demand. C) The elasticity of demand equals zero.
B) Total revenue equals total cost. D) Marginal cost equals price.

Answer: D Type: Basic Understanding Page: 179

42. Profit per unit is equal to:

A) Price divided by average total cost.
B) Price minus average total cost.
C) Total revenue minus total cost.
D) Total revenue minus variable cost divided by quantity.

Answer: B Type: Definition Page: 179

43. Profit per unit is maximized when the firm produces the output where:
A) The ATC is minimized. B) The MC is minimized. C) MC equals MR. D) Demand equals MC.

Answer: A Type: Basic Understanding Page: 179

44. A profit-maximizing producer seeks to:

A) Maximize profit per unit. C) Minimize marginal cost.
B) Minimize average total costs. D) Maximize total profit.

Answer: D Type: Analytical Page: 179

45. The entry of additional firms into a market, ceteris paribus:

A) Shifts the market supply curve to the right. C) Forces the typical producer to reduce output.
B) Reduces the equilibrium price. D) All of the above.

Answer: D Type: Complex Understanding Page: 181

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46. Which of the following characterizes a firm that is in long-run perfectly competitive equilibrium where
profits are maximized?
A) P = minimum ATC. C) Zero economic profit.
B) Price equals marginal cost. D) All of the above.

Answer: D Type: Basic Understanding Page: 182

47. For a perfectly competitive market, long-run equilibrium is characterized by:

A) P = MR. B) P = MC. C) P = minimum ATC. D) All of the above.

Answer: D Type: Basic Understanding Page: 182

48. Which of the following is consistent with long-run equilibrium for a perfectly competitive market?
A) Average total costs of production are minimized.
B) Economic profits are zero.
C) Maximum technical efficiency is achieved.
D) All of the above.

Answer: D Type: Basic Understanding Page: 182

49. For a perfectly competitive market, long-run competitive equilibrium is characterized by:
A) P = minimum ATC. B) MC = ATC. C) P = MC. D) All of the above.

Answer: D Type: Basic Understanding Page: 183

50. In long-run perfectly competitive equilibrium, prices tend to fall to the minimum of the firm's long-run:
A) Marginal cost curve. C) Average variable cost curve.
B) Average total cost curve. D) Average fixed cost curve.

Answer: B Type: Basic Understanding Page: 183

51. In a perfectly competitive market, prices will tend to fall to the minimum of the firm's long-run:
A) Marginal cost curve. B) Fixed cost curve. C) Average total cost curve. D) Total cost curve.

Answer: C Type: Basic Understanding Page: 183

52. In long-run perfectly competitive equilibrium, price equals:

A) The minimum of the long-run average total cost curve.
B) Marginal revenue.
C) Marginal cost.
D) All of the above.

Answer: D Type: Basic Understanding Page: 183

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53. In a perfectly competitive market, when price is equal to the:

A) Minimum short-run average total cost, it has reached the shutdown point.
B) Minimum average variable cost, economic profit is zero.
C) Marginal cost, accounting profit is maximized.
D) Minimum average total cost, economic profit is zero.

Answer: D Type: Basic Understanding Page: 183

54. In long-run perfectly competitive equilibrium, marginal cost:

A) Is greater than ATC. C) Is less than ATC.
B) Equals the minimum of the ATC. D) Equals the minimum of the AVC.

Answer: B Type: Complex Understanding Page: 183

55. Economic profit equals zero where:

A) P = minimum ATC. B) P = AVC. C) P = AFC. D) P = minimum ATC × Q.

Answer: A Type: Basic Understanding Page: 183

56. In a perfectly competitive market in the long run, which of the following is not correct?
A) Firms are attempting to maximize profit. C) There are no better uses for the firm's resources.
B) Economic profits are zero. D) Firms are maximizing total revenue.

Answer: D Type: Complex Understanding Page: 183

57. In which of the following cases would a firm enter a market?

A) P > short-run ATC. B) P > long-run ATC. C) P < short-run ATC. D) P < long-run ATC.

Answer: B Type: Basic Understanding Page: 183

58. If price is above the long-run competitive equilibrium level:

A) Firms will enter the market. C) Firms will shut down.
B) Firms will incur losses. D) Market supply will shift to the left.

Answer: A Type: Basic Understanding Page: 183

59. In which of the following cases would entry and exit cease?
A) P > short-run ATC. B) P > long-run ATC. C) P = long-run ATC. D) P < long-run ATC.

Answer: C Type: Basic Understanding Page: 183

60. If price is below the long-run competitive equilibrium level, there will be:
A) Greater demand. C) Positive economic profits.
B) Greater output. D) Exit of firms from the market.

Answer: D Type: Basic Understanding Page: 183

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61. In which of the following cases would a firm exit from a market?
A) P > short-run ATC. B) P > long-run ATC. C) P < short-run ATC. D) P < long-run ATC.

Answer: D Type: Basic Understanding Page: 183

62. In a competitive market if the market price is equal to the minimum point of the firm's ATC curve, the firm
may seek to earn economic profits by:
A) Producing at the rate of output where price equals demand.
B) Decreasing production costs through technological improvements.
C) Decreasing price.
D) Increasing price.

Answer: B Type: Basic Understanding Page: 183

63. A competitive market creates strong pressure for technological innovation which:
A) Allows the firm to raise the price of its product. C) Shifts the firm's demand curve to the right.
B) Provides the firm with more market power. D) Shifts the supply curve to the right.

Answer: D Type: Basic Understanding Page: 183

64. Technological improvements cause:

A) ATC to shift down. C) The supply curve to shift to the left.
B) MC to shift up. D) All of the above.

Answer: A Type: Basic Understanding Page: 184

65. Technological improvements cause:

A) ATC to shift down. B) MC to shift down. C) Output to increase. D) All of the above.

Answer: D Type: Basic Understanding Page: 184

66. A firm should shut down production when:

A) P < minimum AVC. B) P > minimum AVC. C) P = minimum ATC. D) P = MC.

Answer: A Type: Basic Understanding Page: 185

67. The shutdown point is the rate of output at which:

A) P = MC. B) P = minimum ATC. C) P = minimum AVC. D) Economic profit equals zero.

Answer: C Type: Basic Understanding Page: 185

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THE COMPETITIVE PROCESS

68. Which of the following is a consequence of competition?

A) An unrelenting squeeze on prices and profit. C) Elimination of the least efficient firms.
B) Zero economic profit in the long run. D) All of the above.

Answer: D Type: Basic Understanding Page: 188

69. Which of the following is least likely to occur during the long run in a perfectly competitive market
experiencing economic profits?
A) A rightward shift in the market supply curve. C) An increase in the marginal revenue.
B) An increase in the market quantity demanded. D) A decline in the ATC and MC curves.

Answer: C Type: Complex Understanding Page: 188

70. The constant quest for profits in competitive markets results in:
A) Zero economic profit in the long run.
B) The production of goods and services that consumers demand.
C) Product and technological innovation.
D) All of the above are correct.

Answer: D Type: Complex Understanding Page: 189

71. When firms in a competitive market are experiencing zero economic profits, this is an indication that:
A) They should be producing a different product.
B) There is currently no better way to use society's scarce resources.
C) They will eventually go bankrupt.
D) Accounting losses are being experienced by these firms.

Answer: B Type: Basic Understanding Page: 189

72. When a firm is earning positive economic profits, this is an indication that the firm:
A) Should leave this market in the long run.
B) Is using its resources in the best possible way.
C) Is using its resources in one of a number of ways that would yield positive economic profits.
D) Is producing at the minimum ATC.

Answer: B Type: Basic Understanding Page: 189

73. Economic losses are a signal to producers that:

A) Consumer demands are being satisfied.
B) Competitive efficiency is being achieved.
C) The market mechanism has failed.
D) They are not using society's scarce resources in the best way.

Answer: D Type: Basic Understanding Page: 189

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74. Economic losses are a signal to producers:

A) That they are using resources in the most efficient way.
B) That they are not using resources in the best way.
C) That consumer demand is being satisfied.
D) That consumers are content with the allocation of resources.

Answer: B Type: Basic Understanding Page: 189

75. Marginal cost pricing means that a firm:

A) Produces up to the output where P = MC for a given market price.
B) Lowers market price to marginal cost for a given output.
C) Lets marginal cost rise to the market price for a given output.
D) All of the above.

Answer: A Type: Basic Understanding Page: 189

76. A perfectly competitive market promotes efficiency by pushing prices to the minimum of:
A) Short-run AVC. B) Short-run MC. C) Long-run ATC. D) Long-run TC.

Answer: C Type: Basic Understanding Page: 189

77. A perfectly competitive market results in efficiency because:

A) Price is driven down to minimum ATC. C) Zero economic profit is achieved.
B) Price rises high enough to equal marginal cost. D) MC < P.

Answer: A Type: Basic Understanding Page: 189

78. The price signal the consumer gets in a competitive market:

A) In no way reflects opportunity cost.
B) Is an accurate reflection of opportunity cost.
C) Is not reliable for making choices about the allocation of resources.
D) Is the result of the selfishness of individuals.

Answer: B Type: Basic Understanding Page: 189

79. Marginal cost pricing results in the most desirable mix of goods and services from the consumer's standpoint
because:
A) Firms are forced to produce at the most technically efficient output level.
B) Economic profits are zero.
C) Prices are forced down to the lowest possible level.
D) The prices consumers pay are a reflection of the value of the goods and services given up.

Answer: D Type: Complex Understanding Page: 189

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80. Marginal cost pricing in competitive markets results in:

A) An efficient mix of goods and services being produced.
B) Output being produced where price equals the opportunity cost of the last unit being produced.
C) The information necessary for consumers to make rational choices between alternative goods and
services.
D) All of the above are correct.

Answer: D Type: Complex Understanding Page: 189

81. In a perfectly competitive market economy, business failures can benefit society by causing:
A) A reallocation of resources to better uses.
B) An increase in market power for the remaining firms.
C) A decline in market prices as remaining firms attempt to increase sales and stay in business.
D) An increase in the number of jobs for bankruptcy lawyers and accountants.

Answer: A Type: Complex Understanding Page: 189

82. Suppose economic profits are being experienced in the doughnut market. What does this imply about
economic profits (or losses) in the cookie market, assuming the same types of resources are used to produce
both products?
A) Economic losses are being experienced. C) Economic profits are zero.
B) Economic profits are being experienced. D) Impossible to tell from the information given.

Answer: A Type: Complex Understanding Page: 189

83. The BBB Bagel Co. produces 800 bagels per week. If the firm used marginal cost pricing to determine bagel
output, they would produce 600 bagels. Consumers do not receive the most desirable quantity of bagels from
BBB Bagel Co. because:
A) The cost of producing the additional 200 bagels is less than the amount that consumers are willing to pay
for the additional bagels.
B) The cost of producing the additional 200 bagels is greater than the amount that consumers are willing to
pay for the additional bagels.
C) Economic losses are occurring.
D) The firm must be earning higher than normal economic profits.

Answer: B Type: Complex Understanding Page: 189

84. When economic losses exist in the cereal market, for example, this is an indication that:
A) The goods and services that society is giving up (i.e. the opportunity cost) are more valuable than the
cereal being produced.
B) Society's scarce resources are not being used in the best way.
C) Too many firms are producing cereal (assuming that the market is perfectly competitive).
D) All of the above.

Answer: D Type: Complex Understanding Page: 189

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85. When economic profits exist in the market for a particular product, this is a signal to producers that:
A) Consumers would like more scarce resources devoted to the production of this product.
B) The market is oversupplied with this product.
C) The best mix of goods and services are being produced with society's scarce resources.
D) Price is at the minimum of the ATC curve.

Answer: A Type: Complex Understanding Page: 189

86. In a competitive market, efficiency in production is required because of:

A) The profit motive.
B) Competition from many other firms selling identical products.
C) Low barriers to entry.
D) All of the above.

Answer: D Type: Complex Understanding Page: 189

87. The equilibrium price of a good or service in a competitive market is:

A) Higher than it should be because profits are included in the price.
B) A reflection of the opportunity cost of producing the product.
C) Lower than it should be because bankruptcies are common in competitive markets.
D) Higher than the opportunity cost of producing the product.

Answer: B Type: Complex Understanding Page: 189

88. When an athletic shoe company is producing a level of output where price is greater than MC, from society's
standpoint the company is producing too:
A) Much because society is giving up more to produce additional shoes than the shoes are worth.
B) Much because society would be willing to give up more alternative goods in order to get additional
shoes.
C) Little because society is giving up more to produce additional shoes than the shoes are worth.
D) Little because society would be willing to give up more alternative goods in order to get additional shoes.

Answer: D Type: Complex Understanding Page: 189

89. When a computer firm is producing a level of output where MC is greater than price, from society's
standpoint the firm is producing too:
A) Much because society is giving up more to produce additional computers than the computers are worth.
B) Much because society would be willing to give up more alternative goods in order to get additional
computers.
C) Little because society is giving up more to produce additional computers than the computers are worth.
D) Little because society would be willing to give up more alternative goods in order to get additional
computers.

Answer: A Type: Complex Understanding Page: 189

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Use the following to answer questions 90-95:

In Figure 8.1, diagram "a" presents the cost curves that are relevant to a firm's production decision, and diagram "b"
shows the market demand and supply curves for the market. Use both diagrams to answer the indicated questions.

Figure 8.1

MC S
p4 p4
D4
ATC
(per unit)

p3 p3
Price

D3
p2 p2
p1 p1
D2
D1

q1 q2 q3 q4
Quantity
(units per week)
(b)
(a)

90. In Figure 8.1, at a price of p3 in the long run:

A) Firms will enter the market. C) Economic profits equal zero.
B) Firms will exit the market. D) P = ATC.

Answer: A Type: Analytical Page: 175

91. In Figure 8.1, at a price of p2 in the long run:

A) Firms will enter the market. C) Economic profits equal zero.
B) Firms will exit the market. D) P = AVC.

Answer: C Type: Analytical Page: 175

92. In Figure 8.1, if market demand is at D1, the firm should:

A) Leave the market.
B) Produce q1.
C) Shutdown.
D) Do any of the above depending on the position of the AVC and the length of the time period.

Answer: D Type: Basic Understanding Page: 175

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93. In the long run, at prices below p2 in Figure 8.1:

A) There is economic profit.
B) The firm will produce the quantity where MC = MR.
C) Firms will enter the market.
D) Firms will exit the market.

Answer: D Type: Analytical Page: 175

94. In Figure 8.1, the price at which a firm makes zero economic profits is:
A) p1. B) p2. C) p3. D) p4.

Answer: B Type: Analytical Page: 175

95. If the market demand curve is D2 in Figure 8.1, then in the long run:
A) Economic profit is less than zero and firms will exit.
B) Economic profit is greater than zero and firms will expand production.
C) There are zero economic profits, so there will be no entry or exit.
D) There are zero economic profits so firms will exit.

Answer: C Type: Analytical Page: 175

Use the following to answer questions 96-98:

Figure 8.2

MC

ATC
AVC
20 MR 4
PRICE OR COST
(dollars per unit)

15 MR 3

10 MR 2

5 MR 1

0
QUANTITY

96. Refer to Figure 8.2 for a perfectly competitive firm. This firm should shutdown in the short run if the market
price is below:
A) $5. B) $10. C) $15. D) $20.

Answer: A Type: Complex Understanding Page: 179

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97. Refer to Figure 8.2 for a perfectly competitive firm. In the long run, this firm would stay in this market only if
the market price was equal to or higher than:
A) $5. B) $10. C) $15. D) $20.

Answer: C Type: Complex Understanding Page: 175

98. Refer to Figure 8.2. If the market price equaled $10, in the short run this firm should:
A) Raise the price. C) Produce with an economic loss.
B) Shutdown. D) Produce where the ATC is at a minimum.

Answer: C Type: Complex Understanding Page: 175

Use the following to answer questions 99-102:

Figure 8.3

MC
ATC
AVC

•
D
A

B
E
• MR

C
• F

0 G
QUANTITY

99. Refer to Figure 8.3 for a perfectly competitive firm. If the market price is B and output is G, which area in the
diagram represents the amount the firm can save by producing in the short run rather than shutting down?
A) ABED. B) BCFE. C) ACFD. D) BOGE.

Answer: B Type: Complex Understanding Page: 179

100. Refer to Figure 8.3. At an output of G and a price of B, which of the following is true?
A) Economic losses equal ABED. C) Variable costs equal COGF.
B) Fixed costs equal ACFD. D) All of the above.

Answer: D Type: Analytical Page: 179

101. Refer to Figure 8.3. At an output of G and a price of B, which of the following is equal to fixed costs?
A) ABED. B) ACFD. C) COGF. D) AOGD.

Answer: B Type: Analytical Page: 179

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102. Refer to Figure 8.3. At an output of G and a price of B, which of the following is equal to variable costs?
A) ABED. B) ACFD. C) COGF. D) AOGD.

Answer: C Type: Analytical Page: 179

Use the following to answer questions 103-106:

Figure 8.4

MC

S
ATC

PRICE OR COST
(dollars per unit)

(dollars per unit)

PRICE

AVC
4 4 MR

0 Q 0 Q
QUANTITY QUANTITY

103. Refer to Figure 8.4 for a perfectly competitive market and firm. Which of the following is likely to occur in
the market in the long run, ceteris paribus?
A) An increase in demand. C) A decrease in demand.
B) An increase in supply. D) A decrease in supply.

Answer: D Type: Complex Understanding Page: 179

104. Refer to Figure 8.4 for a perfectly competitive market and firm. Which of the following is most likely to
occur, ceteris paribus?
A) The firm will exit in the long run. C) The firm will increase output.
B) The firm will shutdown in the short run. D) The firm will raise its price.

Answer: A Type: Complex Understanding Page: 179

105. If the firm in Figure 8.4 raised the price of its product above $4, the firm would:
A) Increase its profits.
B) Reduce its total revenue to zero.
C) Increase its total revenue but not its profits because costs would increase.
D) Not effect revenues but increase profits because costs would decrease.

Answer: B Type: Complex Understanding Page: 179

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106. Refer to Figure 8.4. In the long run, which of the following would not be expected?
A) A decrease in market supply.
B) An increase in total revenue for the remaining firms.
C) An increase in output for the remaining firms.
D) A decrease in MR for the remaining firms.

Answer: D Type: Basic Understanding Page: 179

Use the following to answer questions 107-108:

Figure 8.5

MC
PRICE OR COST
(dollars per unit)

ATC

P MR

0 Q
QUANTITY

107. Refer to Figure 8.5 for a perfectly competitive firm. Which of the following is not true for this firm?
A) The firm is using the fewest resources possible to produce each unit of output.
B) The firm is practicing marginal cost pricing.
C) The price is a reflection of the highest-valued good that could have been produced with the resources the
firm used on the last unit it produced.
D) The firm should leave this market in an effort to earn economic profits.

Answer: D Type: Complex Understanding Page: 179

108. Refer to Figure 8.5 for a perfectly competitive firm. If more efficient production techniques were developed
in this market, which of the following changes would we expect to occur, ceteris paribus?
A) The ATC, MC and market price would all decrease.
B) The ATC alone would decrease.
C) The ATC, MC and market price would all increase.
D) The ATC alone would increase.

Answer: A Type: Complex Understanding Page: 179

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The following multiple-choice questions require critical thinking about In the News and World View articles that
appeared in the text.

109. One In the News article reported "Because of Vietnamese fish imports, the US catfish production has plunged
in the past year." Which of the following market supply determinants is responsible for the shift in the supply
of catfish?
A) The number of firms in the market. C) Expectations.
B) Technology. D) The price and availability of factors.

Answer: A Type: Complex Understanding Page: 174

110. One In the News article titled "Whiskered Catfish Stir a New Trade Controversy" describes the increased
competition in the catfish market. In a perfectly competitive industry in the long run:
A) The number of firms will steadily increase.
B) Economic profits will equal zero.
C) Individual firms will possess significant market power.
D) All of the above.

Answer: B Type: Complex Understanding Page: 174

111. One In the News article states “A new price war has broken out among companies that sell Internet access.”
New firms continue to enter the industry even though prices are falling because:
A) Normal profits are being earned. C) Total costs equal total revenues.
B) Total costs are greater than total revenues. D) Economic profits are being earned.

Answer: D Type: Complex Understanding Page: 177

112. One In the News article is titled "Price War Squeezes PC Makers." Competitive forces typically force
companies to:
A) Cut prices. B) Improve product quality. C) Improve service. D) All of the above.

Answer: D Type: Complex Understanding Page: 189

113. An In the News article titled "Death Valley" discusses the exit of many companies in the Bay Area from the
dot.com industry. Companies typically exit an industry because:
A) Economic profits are zero. C) Economic profits are less than zero.
B) Economic profits are greater than zero. D) Total revenue is greater than total costs.

Answer: C Type: Complex Understanding Page: 190

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True/False Questions

THE MARKET SUPPLY CURVE

T F 114. Since a perfectly competitive firm has no market power, its marginal cost curve is flat (i.e.
horizontal).

Answer: False Type: Basic Understanding Page: 174

T F 115. Market supply is the horizontal sum of the individual MC curves above the AVC in a perfectly
competitive market.

Answer: True Type: Basic Understanding Page: 174

T F 116. The decision by firms to enter a market shifts the market supply curve to the right.

Answer: True Type: Basic Understanding Page: 175

T F 117. Entry and exit are long-run investment decisions.

Answer: True Type: Basic Understanding Page: 175

T F 118. When entrepreneurs decide to build a plant, they are making a production decision.

Answer: False Type: Basic Understanding Page: 175

T F 119. A necessary condition for the operation of a perfectly competitive market is free entry and exit from
the market.

Answer: True Type: Basic Understanding Page: 175

T F 120. In perfectly competitive markets, economic losses are the signal for firms to exit from the industry.

Answer: True Type: Basic Understanding Page: 175

T F 121. In a perfectly competitive market, firms will earn zero economic profits in the long run.

Answer: True Type: Basic Understanding Page: 175

T F 122. In a perfectly competitive market, firms will earn economic profits in the long run.

Answer: False Type: Basic Understanding Page: 175

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T F 123. Perfectly competitive firms always earn economic profits in the short run.

Answer: False Type: Basic Understanding Page: 175

T F 124. As long as an economic profit is available, a perfectly competitive market will continue to attract
new entrants.

Answer: True Type: Basic Understanding Page: 176

T F 125. Economic losses mean firms exit from a market in the short run.

Answer: False Type: Basic Understanding Page: 176

T F 126. In the long-run equilibrium, a perfectly competitive market experiences zero economic profit.

Answer: True Type: Basic Understanding Page: 176

T F 127. Patents are a barrier to entry.

Answer: True Type: Basic Understanding Page: 176

T F 128. Perfectly competitive firms are heavy advertisers because they produce differentiated products.

Answer: False Type: Basic Understanding Page: 176

T F 129. Perfect information is a necessary condition of perfect competition.

Answer: True Type: Basic Understanding Page: 176

COMPETITION AT WORK: MICROCOMPUTERS

T F 130. In the short run, a perfectly competitive firm's production decision aims to maximize profits at the
production rate where P = MR = MC.

Answer: True Type: Basic Understanding Page: 178

T F 131. Minimizing average total cost always leads to the maximization of total profit.

Answer: False Type: Basic Understanding Page: 179

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T F 132. Maximizing profits per unit always leads to the maximization of total profit.

Answer: False Type: Basic Understanding Page: 179

T F 133. Maximizing profit means that average total costs are minimized.

Answer: False Type: Basic Understanding Page: 179

T F 134. When P < ATC in the long run, a perfectly competitive firm experiences economic profit and new
firms will enter the market.

Answer: False Type: Basic Understanding Page: 179

T F 135. Technological improvements shift the average total cost curve and the marginal cost curve
downward.

Answer: True Type: Basic Understanding Page: 184

T F 136. Profits that are less than normal profits result in the long run decision to shut down.

Answer: False Type: Basic Understanding Page: 185

T F 137. Exit and shutdown mean the same thing.

Answer: False Type: Basic Understanding Page: 186

THE COMPETITIVE PROCESS

T F 138. Perfectly competitive markets are responsive to the demand of consumers.

Answer: True Type: Basic Understanding Page: 188

T F 139. When resources are earning zero economic profits for a firm the resources could earn more in their
next best alternative use.

Answer: False Type: Basic Understanding Page: 188

T F 140. High profits in a particular industry indicate that consumers want a different mix of output.

Answer: True Type: Basic Understanding Page: 188

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T F 141. The price consumers pay for a product in a perfectly competitive market is an inaccurate reflection
of opportunity cost.

Answer: False Type: Basic Understanding Page: 188

T F 142. In a perfectly competitive market, economic profits are expected to be positive in the long run.

Answer: False Type: Basic Understanding Page: 188

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