Chapter 11
Perfect Competition
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2. The profit maximizing output level for a perfectly competitive firm is always where
A. P = MC
B. P = AVC
C. MC = ATC
D. MC = AVC
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Chapter 11 - Perfect Competition
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Chapter 11 - Perfect Competition
3. In the graph above at a price of P*, in the above graph, the profit maximizing level of
output is
A. Q*
B. Above Q*
C. Below Q* but above zero
D. Zero
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4. In the graph above at P*, the firm is making __________ economic profits.
A. Positive
B. Negative
C. Zero
D. An indeterminate level of
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6. In the graph above if the price persists at P*, the profit maximizing firm will
A. Shut down immediately
B. Shut down in the long run
C. Operate indefinitely
D. Has a strategy that can not be predicted without an ATC curve
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Chapter 11 - Perfect Competition
7. If a firm's demand curve falls below its AVC curve, then the firm should
A. Shut down now
B. Operate in the short run but not the long run
C. Set price = marginal cost
D. Shutdown in the long-run
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9. If the demand curve falls below the ATC curve but lies above AVC, then the firm should
A. Should shut down
B. Operate in the short run but not the long run
C. Set price = marginal cost
D. Operate in the short run and the long run
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Chapter 11 - Perfect Competition
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12. Suppose that the store owner gave Joe the store. Now what should he do?
A. Quit his job
B. Keep the job
C. Work part-time
D. It is impossible to say with the information given in the problem
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13. Suppose that Joe had a long term lease which requires him to pay the rent even if he
doesn't operate the store. What should Joe do?
A. Quit immediately
B. Keep the job permanently
C. Keep the job until the lease expires
D. It is impossible to say with the information given in the problem
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Chapter 11 - Perfect Competition
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Chapter 11 - Perfect Competition
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Chapter 11 - Perfect Competition
21. At point D
A. The firm is maximizing its profit
B. The firm is losing money
C. The firm is breaking even
D. The firm is making money
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22. At point A
A. MC = MR
B. The firm is making positive economic profit
C. The firm would do worst by shutting down
D. MC > MR
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23. In the graph shown, if the market demand were to shift right, which of the following
would occur for the firm?
A. The total cost curve would shift downward
B. The total revenue function would rotate upward
C. The total revenue function would rotate downward
D. The firm would produce less output
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Chapter 11 - Perfect Competition
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26. The relationship between producer surplus and consumer surplus is.
A. Producer surplus is always greater
B. Consumer surplus is always greater
C. Producer and consumer surplus are always equal
D. Producer surplus may be greater, equal or less than consumer surplus
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Chapter 11 - Perfect Competition
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A.
B.
C.
D. All of the above
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31. Suppose that the supply curve is given by P = Q. What is the elasticity of supply?
A. 10
B. 1/10
C. 1
D. Cannot be determined from the above information
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32. Given to following two points on a supply curve (P = 10, Q = 5; and P = 12, Q = 8), what
is the approximate arc elasticity?
A. .4
B. 2.5
C. 1
D. 0
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Chapter 11 - Perfect Competition
33. Other things remaining the same, in the long-run as compared to the short-run
A. Supply elasticity will increase
B. Supply elasticity will decrease
C. Supply elasticity will remain the same
D. One cannot tell
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34. Ceteris paribus, In the long run, a tax placed on a perfectly competitive industry will
A. Increase the price of the good by an amount equal to the tax
B. Increase the price of the good by an amount less than the tax
C. Be borne entirely by the firm
D. Be entirely borne by the consumer
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35. In the long run, a tax placed on a perfectly competitive industry should
A. Increase the number of firms
B. Decrease the number of firms
C. Not affect the number of firms
D. One cannot tell
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36. In the short run, a tax placed on a perfectly competitive industry should
A. Increase the total amount of the good sold
B. Decrease the total amount of the good sold
C. Not affect the total amount of the good sold
D. Always increase the price
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Chapter 11 - Perfect Competition
37. In the long run, a tax placed on a perfectly competitive industry should have what effect
on the entire market?
A. Increase the total amount of the good sold
B. Decrease the total amount of the good sold
C. Not affect the total amount of the good sold
D. One cannot tell
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38. A firm's total revenue curve is given by 3Q2- 7Q. The firm
A. Is perfectly competitive
B. May be perfectly competitive
C. Is not perfectly competitive
D. One cannot tell
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39. You have a small business that makes $50,000 accounting and economic profit for you. As
a disabled person, you must work at home and you did not have other opportunities until your
neighbor offers you a job you like equally well for $50,000 and you can do it at home. This
means
A. Your accounting profit has gone down and your economic profit has gone up
B. Your economic profit has gone down and your accounting profit has gone up
C. Both your accounting and economic profit have gone down
D. Both your accounting and economic profit have gone up
E. Your economic profit has gone down and your accounting profit has stayed the same
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Chapter 11 - Perfect Competition
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42. If a firm is producing where its LMC = price and the LMC is equal to LAC, then it would
do better in the long run by
A. Increasing output with its existing plant until LMC equals price
B. Increasing plant size until LMC and SAC are identical and equal to price
C. Decreasing plant size until LAC, SAC and price are equal
D. Changing nothing because it is already at the long run profit maximizing point
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Chapter 11 - Perfect Competition
43. Some people advocate price ceilings in certain markets because they seek to
A. Expand the total of consumer and producer surplus which the market generates
B. Redistribute welfare from the producer to the consumer even if overall welfare is sacrificed
C. Redistribute welfare from the consumer to the producer even if welfare is sacrificed
D. Enhance both efficiency and distribution goals with the price ceiling
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44. At market equilibrium, the total (not net) benefit that results from all the transactions is
A. The consumer surplus minus the producer surplus
B. The producer surplus minus the consumer surplus
C. The sum of the producer surplus and the consumer surplus
D. The entire area under the demand curve up to the quantity exchanged
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45. I get $200 revenue from the sale of my product each day. I rent the factory that I use for
$90 a day. The raw materials of the operation cost $115 a day. I do all the work myself. Both
jobs are equally attractive as far as the work is concerned. Recently, a competitor offered me
$30 a day to work for him. My accounting profit is _____, and my economic profit is
______.
A. -5, -35
B. -35, -35
C. 25, -5
D. 110, -30
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46. In the long-run, any perfectly competitive firm that produces will choose a quantity such
that
A. Short-run average cost is minimized
B. Long-run total cost is minimized
C. Long-run marginal cost equals long-run marginal cost
D. Price is greater marginal cost
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Chapter 11 - Perfect Competition
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48. A firm is currently selling its product at $20 each. It estimates that its average total cost of
production is $100 and its average fixed cost is $40. In the short run the firm should
A. Shutdown
B. Continue production at a point where P = MC
C. Hire more employees
D. Buy more capital
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50. How many units of output will be produced by a firm operating in this market with a MC
= 130Q?
A. 2
B. 5
C. 0.70
D. It is impossible to answer with the information given
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51. The expansion of the car manufacturing industry causes an improvement in the assembly
line, so reducing charges to each firm in that industry. This is an example of
A. Constant returns to scale
B. A decreasing-cost industry
C. A decreasing returns to scale
D. An increasing-cost industry
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Essay Questions
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Chapter 11 - Perfect Competition
53. What is the equilibrium price and quantity produced by the industry as a whole?
Price is 350 and industry quantity is 500. The MC curves must be summed into a market
supply curve which is MC = 200 - .3Q. This is equated to the demand curve to get the answer.
54. What is the price charged by each firm and what quantity will each firm produce?
55. How much profit is each firm making if fixed costs are $375 per firm?
This question requires one to go from the MC to the total cost curve which will be TC = 200Q
+ 15Q2+ 375. Total costs are $1,750 per firm and revenue is $350 x $5 which is $1,750. Thus
no economic profit exists.
56. What is the producer and consumer surplus in the entire market?
Producer surplus will be 37,500 [(150 500)/2] and consumer surplus will be 12,500. [(50
500)/2].
(150 5)/2 = 375. The point here is that producer surplus can be made even if no economic
profit is made. It is no coincidence that the producer surplus is equal to the fixed cost.
58. How can a firm stay in business if it makes no economic profit in the long run?
Economic profit is money above the full opportunity cost of the resources employed. That
means that the owners are fairly compensated for their opportunity costs of time and capital as
part of the total cost function.
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Chapter 11 - Perfect Competition
59. Sketch a perfectly competitive firm operating in short-run equilibrium but making
economic losses. Put in all the functions necessary to show that the firm should stay in
business in the short-run despite the losses. Shade in the area of loss shown by the drawing.
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