Chapter 13 Perfect Competition

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1 Chapter 13 Perfect Competition 13.1 A Firm's Profit-Maximizing Choices 1) What is the difference between perfect competition and monopolistic competition? A) Perfect competition has a large number of small firms while monopolistic competition does not. B) Perfect competition has barriers to entry while monopolistic competition does not. C) Perfect competition has no barriers to entry, while monopolistic competition does. D) In perfect competition, firms produce identical goods, while in monopolistic competition, firms produce slightly different goods. E) In monopolistic competition, firms produce identical goods, while in perfect competition, firms produce slightly different goods. Topic: Market types Skill: Level 1: Definition 2) Perfect competition is A) almost free from competition and firms earn large profits. B) dominated by fierce advertising campaigns. C) highly competitive and firms find it impossible to earn an economic profit in the long run. D) marked by firms continuously trying to change their products so that consumers prefer their product to their competitors' products. E) a market that has many sellers but is controlled by only a few sellers. Topic: Perfect competition, definition Skill: Level 1: Definition

2 548 Bade/Parkin œ Foundations of Economics, Third Edition 3) Under perfect competition, A) buyers and sellers have a lot of information about prices. B) buyers but not sellers have a lot of information about prices. C) sellers but not buyers have a lot of information about prices. D) neither sellers nor buyers have a lot of information about prices. E) each firm has a lot of information about its price but not much information about the price in the market as a whole. Topic: Perfect competition, definition Skill: Level 1: Definition Author: CD 4) In part, perfect competition arises if i) each firm's minimum efficient scale is large relative to demand. ii) each firm produces a good or service identical to those produced by its many competitors. iii) there are significant barriers to entry. A) i only. B) ii only. C) i and ii. D) iii only. E) ii and iii. Topic: Perfect competition, definition Skill: Level 1: Definition Author: CD 5) In which of the following market types do all firms sell products so identical that buyers do not care from which firm they buy? A) perfect competition B) monopolistic competition C) oligopoly D) monopoly E) perfect competition and monopolistic competition Topic: Perfect competition, definition Skill: Level 1: Definition

3 Chapter 13 Perfect Competition 549 6) A market in which firms sell identical products is A) a monopoly. B) an oligopoly. C) perfectly competition. D) monopolistic competition. E) perfect competition and monopolistic competition Topic: Perfect competition, definition Skill: Level 1: Definition Author: MR 7) Perfect competition is characterized by all of the following EXCEPT A) a large number of buyers and sellers. B) no restrictions on entry into or exit from the industry. C) considerable advertising by individual firms. D) well-informed buyers and sellers with respect to prices. E) firms produce an identical product. Topic: Perfect competition, definition Skill: Level 1: Definition 8) Which of the following is the best example of a perfectly competitive market? A) farming B) diamonds C) athletic shoes D) soft drinks E) electricity distribution Topic: Perfect competition, definition

4 550 Bade/Parkin œ Foundations of Economics, Third Edition 9) Which of the following market types has the fewest number of firms? A) perfect competition B) monopolistic competition C) oligopoly D) monopoly E) perfect competition and monopolistic competition Topic: Monopoly, definition Skill: Level 1: Definition 10) Which of the following market types has a large number of firms that sell similar but slightly different products? A) perfect competition B) monopolistic competition C) oligopoly D) monopoly E) perfect competition and monopolistic competition Topic: Monopolistic competition, definition Skill: Level 1: Definition 11) Which of the following market types has only a few competing firms? A) perfect competition B) monopolistic competition C) oligopoly D) monopoly E) perfect competition and monopolistic competition Topic: Oligopoly, definition Skill: Level 1: Definition

5 Chapter 13 Perfect Competition ) In a perfectly competitive market, the type of decision a firm has to make is different in the short run than in the long run. Which of the following is an example of a perfectly competitive firm's short-run decision? A) the profit-maximizing level of output B) how much to spend on advertising and sales promotion C) what price to charge buyers for the product D) whether or not to enter or exit an industry E) whether or not to change its plant size Topic: Short-run decisions 13) In perfect competition, a firm maximizes profit in the short run by deciding A) whether or not to enter a market. B) how much output to produce. C) what price to charge. D) how much capital to use. E) how much advertising to buy. Topic: Short-run decisions 14) To maximize its profit, in the short run a perfectly competitive firm decides A) what price to charge for its product. B) what quantity of output to produce. C) whether to stay in the industry or leave it. D) whether to increase the size of its plant. E) how much advertising it should undertake. Topic: Short-run decisions Author: CD

6 552 Bade/Parkin œ Foundations of Economics, Third Edition 15) A price-taking firm A) sets the product's price to whatever level the owner decides upon. B) talks to rival firms to determine the best price for all of them to charge. C) cannot influence the price of the product it sells. D) asks the government to set the price of its product. E) takes whichever of the many market prices it prefers. Topic: Price takers Skill: Level 1: Definition 16) A firm that is a price taker faces A) an elastic supply curve. B) an inelastic supply curve. C) a perfectly elastic demand curve. D) a perfectly inelastic demand curve. E) an elastic but not perfectly elastic demand curve. Topic: Price takers Author: CD 17) A large number of sellers all selling an identical product implies which of the following? A) market chaos B) the inability of any seller to change the price of the product C) large losses by all sellers D) horizontal market supply curves E) vertical market supply curves. Topic: Price takers

7 Chapter 13 Perfect Competition ) A firm in perfect competition is a price taker because A) there are no good substitutes for its good. B) many other firms produce identical products. C) it is very large. D) its demand curves are downward sloping. E) it's demand curve is vertical at the profit-maximizing quantity. Topic: Price takers 19) Suppose Pat's Paints is a perfectly competitive firm. If Pat's Paints' marginal revenue equals $5 per can, and Pat decides to sell 100 cans of paint, Pat's total revenue equals A) $5. B) $100. C) $500. D) $20. E) Information on the price of a can of paint is needed to answer the question. Topic: Price takers Author: CD 20) If demand for a seller's product is perfectly elastic, which of the following is true? i. The firm will sell no output if it sets the price its product above the market price. ii. There are many perfect substitutes for the seller's product. iii. The firm will sell no output if it sets the price its product below the market price. A) i only. B) ii only. C) iii only. D) i and ii. E) ii and iii. Topic: Demand

8 554 Bade/Parkin œ Foundations of Economics, Third Edition 21) A perfectly competitive firm's demand curve is horizontal because i. the firm is so small, relative to the market, that it cannot affect the market price. ii. there are many perfect substitutes for its product. iii. the firm cannot sell any output at a price higher than the market price. A) ii only. B) i and ii. C) iii only. D) i and iii. E) i, ii, and iii. Answer: E Topic: Demand 22) If a perfectly competitive firm raised the price of its product, A) its profits would increase. B) the output it sells will decrease to zero. C) rival firms will follow suit and raise their prices also. D) the firm will be forced to advertise more. E) its total revenue would rise but its total cost would rise by more. Topic: Demand 23) If the wheat industry is perfectly competitive with a market price of $4 per bushel and Farmer Brown charged $5 per bushel, how many bushels would Farmer Brown sell? A) some, but fewer than he would at a price of $4 B) more than he would at a price of $4 C) just as many as he would at a price of $4 D) none E) More information is needed about the prices charged by the other perfectly competitive wheat farmers. Topic: Demand Skill: Level 4: Applying models

9 Chapter 13 Perfect Competition ) How does the demand for any one seller's product in perfect competition compare to the market demand for that product? A) They are identical. B) The demand for any one seller is proportionally smaller but otherwise identical to the market demand. C) The demand for any one seller's product is perfectly elastic while the market demand curve is downward sloping. D) There is no demand for any one seller's competitively sold product. E) The demand for any one seller's product is not perfectly elastic while the market demand is perfectly elastic. Topic: Demand 25) Corn farmers are forced to accept the price that milling and vegetable companies are willing to pay. As a result, the demand curve for the corn produced by one farmer A) is nonexistent. B) slopes downward, as is the normal case. C) is vertical. D) is horizontal. E) has an upward slope. Topic: Demand

10 556 Bade/Parkin œ Foundations of Economics, Third Edition 26) If the market price of a product is $14 and all sellers are price takers, then which of the following is correct? A) Each seller's total revenue line is graphed as an upward-sloping straight line. B) The demand curve for each seller's product is a downward-sloping straight line. C) Each seller can earn more total revenue by raising the price he or she charges above $14. D) The demand curve for each seller's product is a downward-sloping but not necessarily a straight line. E) Each seller's total revenue is graphed as an upside-down U-shaped curve. Topic: Total revenue 27) In perfect competition, marginal revenue A) increases as more is sold. B) decreases as more is sold. C) is equal to the market price. D) is zero. E) is always greater than marginal cost. Topic: Marginal revenue 28) The marginal revenue curve for a perfectly competitive firm is A) horizontal. B) vertical. C) upward sloping. D) downward sloping. E) a straight line coming out of the origin with a 45 degree slope. Topic: Marginal revenue

11 Chapter 13 Perfect Competition ) In the above, a marginal revenue curve for a perfectly competitive firm is shown in Figure. A) W B) X C) Y D) Z E) X and Figure Z Topic: Marginal revenue Author: CD

12 558 Bade/Parkin œ Foundations of Economics, Third Edition 30) As a perfectly competitive firm produces more and more of a good, its economic profit A) constantly increases. B) constantly decreases. C) first decreases, then increases. D) first increases, then decreases. E) does not change. Topic: Profit maximization 31) As a perfectly competitive firm's output increases, its total revenue and its total cost. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) does not change; increases Topic: Profit maximization

13 Chapter 13 Perfect Competition 559 Quantity (bushels of rutabagas) Total revenue (dollars) Total cost (dollars) ) The above table has the total revenue and total cost schedule for Omar, a perfectly competitive grower of rutabagas. When Omar produces 2 bushels of rutabagas, his total profit equals A) $0. B) $20. C) $28. D) -$8. E) $48 Topic: Profit maximization Author: CD 33) The above table has the total revenue and total cost schedule for Omar, a perfectly competitive grower of rutabagas. Omar's total profit is maximized when he produces bushels of rutabagas. A) 3 B) 5 C) 6 D) 8 E) 7 Topic: Profit maximization Author: CD

14 560 Bade/Parkin œ Foundations of Economics, Third Edition 34) The above table has the total revenue and total cost schedule for Omar, a perfectly competitive grower of rutabagas. When Omar maximizes his profit, Omar's profit equals A) $80. B) $11. C) $30. D) $16. E) $105. Topic: Profit maximization Author: CD 35) For a perfectly competitive firm, profit is maximized at the output level where i. total revenue exceeds total cost by the largest amount. ii. marginal revenue equals marginal cost. iii. price equals marginal cost. A) i only. B) ii only. C) ii and iii. D) i and ii. E) i, ii, and iii. Answer: E Topic: Profit maximization 36) For a perfectly competitive firm, profit maximization occurs when output is such that A) total revenue (TR) is maximized. B) total cost (TC) is minimized. C) marginal revenue (MR) = marginal cost (MC). D) average total cost (ATC) is minimized. E) total revenue (TR) equals total cost (TC). Topic: Profit maximization

15 Chapter 13 Perfect Competition ) To increase its profit, a perfectly competitive firm will produce more output when A) price is greater than average fixed cost. B) price is greater than marginal cost. C) marginal cost is less than average total cost. D) average variable cost is greater than average fixed cost. E) price is greater than average variable cost. Topic: Profit maximization 38) If a perfectly competitive firm's marginal revenue is greater than its marginal cost, as it increases its output, its profit and the price it can charge for its product. A) increases; does not change B) decreases; falls C) increases; falls D) decreases; rises E) decreases; does not change Topic: Profit maximization 39) A perfectly competitive firm is producing at the quantity where marginal cost is $6 and average total cost is $4. The price of the good is $5. To maximize its profit, this firm should A) raise its price. B) lower its price. C) increase its output. D) decrease its output. E) increase the price it charges for its product. Topic: Profit maximization

16 562 Bade/Parkin œ Foundations of Economics, Third Edition 40) Suppose that a perfectly competitive firm's marginal revenue equals $12 when it sells 10 units of output. If the marginal cost of producing the 10th unit is $14, to maximize its profit the firm should A) do nothing because it is already maximizing its profit. B) decrease its production. C) increase its production. D) shut down. E) increase the price it charges for its product. Topic: Profit maximization Author: CD 41) Henry, a perfectly competitive lime grower in Southern California, notices that the market price of limes is greater than his marginal cost. What should Henry do? A) expand his output to increase profits B) shut down and incur a loss equal to his total fixed cost C) advertise his limes to be able to sell more output D) look for the output level where marginal revenue minus marginal cost is maximized E) shut down and earn no profit but also incur no loss Topic: Profit maximization 42) In a perfectly competitive market, the market price is $23. At the current level of output, a firm has a marginal cost of $28. What should the firm do? A) produce a larger output to earn more profit B) nothing, it is currently maximizing profit C) produce less output to earn more profit D) shut down E) raise the price of its product Topic: Profit maximization

17 Chapter 13 Perfect Competition ) Jerry's Jellybean Factory produces 2,000 pounds of jellybeans per month and sells them in a perfectly competitive market. The marginal cost is $3 per pound, the average variable cost is $2 per pound, and the beans sell for $4 per pound. Jerry A) is maximizing profit. B) is incurring an economic loss and should shut down. C) could increase his profit by producing more beans. D) could increase his profit by producing fewer beans. E) could increase his profit by raising the price of his beans. Topic: Profit maximization 44) A perfectly competitive firm is earning an economic profit when total fixed costs increase. Assuming the firm does not shut down, in the short run the firm will A) charge a higher price. B) produce more output so the extra revenue will cover the increased costs. C) produce less output to decrease total costs. D) continue producing the same quantity as before but will earn less economic profit. E) continue producing the same quantity as before and continue earning the same economic profit as before. Topic: Profit maximization Skill: Level 4: Applying models 45) If a firm shuts down, it A) earns zero economic profit. B) incurs an economic loss equal to its total variable cost. C) incurs an economic loss equal to its total fixed cost. D) earns a normal profit. E) might earn an economic profit, a normal profit, or incur an economic loss. Topic: Shut down

18 564 Bade/Parkin œ Foundations of Economics, Third Edition 46) A perfectly competitive firm will continue to operate in the short run when the market price is below its average total cost if the A) marginal revenue is greater than marginal cost. B) price is at least equal to the minimum average variable cost. C) total fixed costs are less than total revenue. D) marginal cost is minimized. E) price is also less than the minimum average variable cost. Topic: Shut down 47) The largest loss a profit-maximizing perfectly competitive firm can incur in the short run equals its A) average variable cost multiplied by output. B) total fixed cost. C) marginal cost multiplied by the number of units produced. D) average total cost multiplied by the number of units produced. E) total variable cost. Topic: Shut down 48) Under which of the following conditions will a profit-maximizing perfectly competitive firm shut down in the short run? A) when it is earning a normal profit B) whenever its marginal cost is less than its marginal revenue C) when the price is less than its minimum average variable cost D) whenever its total cost is greater than its total revenue E) when the price is less than its minimum average total cost Topic: Shut down

19 Chapter 13 Perfect Competition ) If the price is less than a perfectly competitive firm's minimum average variable cost, the firm A) earns an economic profit. B) operates and incurs an economic loss equal to total fixed cost. C) operates and incurs an economic loss equal to average variable cost. D) shuts down and incurs an economic loss equal to total fixed cost. E) shuts down and incurs an economic loss equal to average variable cost. Topic: Shut down Author: CD 50) Which of the following is true if a firm shuts down? i) The price is less than minimum average variable cost. ii) The firm is able to avoid an economic loss. iii) The firm incurs a loss equal to its total variable cost. A) i only. B) i and ii. C) i and iii. D) ii and iii. E) iii only. Topic: Shut down Author: CD 51) Suppose a firm's minimum average variable cost is $3 at an output level of 50. If the price is $2, the firm should A) continue to operate at an output level of 50. B) increase output beyond 50. C) continue to produce, but decrease output to below 50. D) shut down. E) continue to operate, but to determine the amount of production needs more information than is given. Topic: Shut down

20 566 Bade/Parkin œ Foundations of Economics, Third Edition 52) The firm's supply curve is its A) marginal cost curve above the average variable cost curve. B) marginal cost curve below the average variable cost curve. C) average variable cost curve above the marginal cost curve. D) average total cost curve above the marginal cost curve. E) marginal revenue curve above the average total cost curve. Topic: Firm's short-run supply curve 53) Which of the following will increase a perfectly competitive seller's short-run supply and shift the firm's short-run supply curve rightward? A) an increase in the market price B) a decrease in average fixed costs C) a decrease in marginal cost D) Both answers A and B are correct. E) Both answers A and C are correct. Topic: Firm's short-run supply curve 54) The four market types are A) perfect competition, imperfect competition, monopoly, and oligopoly. B) oligopoly, monopsony, monopoly, and imperfect competition. C) perfect competition, monopoly, monopolistic competition, and oligopoly. D) oligopoly, oligopolistic competition, monopoly, and perfect competition. E) perfect competition, imperfect competition, monopoly, and duopoly. Topic: Market types Skill: Level 1: Definition

21 Chapter 13 Perfect Competition ) A requirement of perfect competition is that i. many firms sell an identical product to many buyers. ii. there are no restrictions on entry into (or exit from) the market, and established firms have no advantage over new firms iii. sellers and buyers are well informed about prices. A) i only. B) i and ii. C) iii only. D) i and iii. E) i, ii, and iii. Answer: E Topic: Perfect competition, definition Skill: Level 1: Definition 56) A perfectly competitive firm is a price taker because A) many other firms produce the same product. B) only one firm produces the product. C) many firms produce a slightly differentiated product. D) a few firms compete. E) it faces a vertical demand curve. Topic: Price takers 57) The demand curve faced by a perfectly competitive firm is A) horizontal. B) vertical. C) downward sloping. D) upward sloping. E) U-shaped. Topic: Demand Skill: Level 1: Definition

22 568 Bade/Parkin œ Foundations of Economics, Third Edition 58) For a perfectly competitive corn grower in Nebraska, the marginal revenue curve is A) downward-sloping. B) the same as the demand curve. C) upward-sloping. D) U-shaped. E) vertical at the profit maximizing quantity of production. Topic: Marginal revenue 59) A perfectly competitive firm maximizes its profit by producing where A) total revenue equals total cost. B) marginal revenue is equal to marginal cost. C) total revenue is equal to marginal revenue. D) total cost is at its minimum. E) total revenue is at its maximum. Topic: Profit maximization 60) If the market price is lower than a perfectly competitive firm's average total cost, the firm will A) immediately shut down. B) continue to produce if the price exceeds the average fixed cost. C) continue to produce if the price exceeds the average variable cost. D) shut down if the price exceeds the average fixed cost. E) shut down if the price is less than the average fixed cost. Topic: Shut down

23 Chapter 13 Perfect Competition ) One part of a perfectly competitive trout farm's supply curve is its A) marginal cost curve below the shutdown point. B) entire marginal cost curve. C) marginal cost curve above the shutdown point. D) average variable cost curve above the shutdown point. E) marginal revenue curve above the demand curve. Topic: Firm's short-run supply curve 13.2 Output, Price, and Profit in the Short Run 1) If there are 1,000 identical rice farmers who are each willing to supply 200 bushels of rice at $2 per bushel, what price and quantity combination is a point on the market supply curve for rice? A) $2 and 200 bushels B) $2 and 200,000 bushels C) $2,000 and 200,000 bushels D) $2,000 and 1,000 bushels E) $2 and 1,000 farmers. Topic: Market supply Objective: Checkpoint ) If Henry, a perfectly competitive lime grower in Southern California, can sell his limes at a price greater than his average total cost, Henry will A) incur an economic loss. B) suffer an accounting loss. C) have an incentive to shut down. D) earn an economic profit. E) earn just a normal profit. Topic: Economic profit Objective: Checkpoint 13.2

24 570 Bade/Parkin œ Foundations of Economics, Third Edition 3) A perfectly competitive firm is producing 50 units of output, which it sells at the market price of $23 per unit. The firm's average total cost is $20. What is the firm's total revenue? A) $23 B) $150 C) $1,000 D) $1,150 E) $20. Topic: Economic profit, total revenue Objective: Checkpoint ) A perfectly competitive firm is producing 50 units of output and selling at the market price of $23. The firm's average total cost is $20. What is the firm's total cost? A) $23 B) $150 C) $1,000 D) $1,150 E) $20. Topic: Economic profit, total cost Objective: Checkpoint ) A perfectly competitive firm is producing 50 units of output and selling at the market price of $23. The firm's average total cost is $20. What is the firm's economic profit? A) $23 B) $150 C) $1,000 D) $1,150 E) $50 Topic: Economic profit Objective: Checkpoint 13.2

25 Chapter 13 Perfect Competition 571 6) Suppose that marginal revenue for a perfectly competitive firm is $20. When the firm produces 10 units, its marginal cost is $20, its average total cost is $22, and its average variable cost is $17. Then to maximize its profit in the short run, the firm A) should stay open and incur an economic loss of $20. B) must increase its output to increase its profit. C) must decrease its output to increase its profit. D) should shut down. E) should not change its production because it is already maximizing its profit and is earning a normal profit. Topic: Economic profit Objective: Checkpoint 13.2 Author: CD 7) In the short run, a perfectly competitive firm can experience which of the following? i. an economic profit ii. an economic loss but it continues to stay open iii. an economic loss equal to its total fixed cost when it shuts down A) only i. B) i and ii. C) i and iii. D) ii and iii. E) i, ii, and iii. Answer: E Topic: Short-run equilibrium Objective: Checkpoint 13.2

26 572 Bade/Parkin œ Foundations of Economics, Third Edition 8) If a perfectly competitive seller is maximizing profit and is earning only a normal profit, which of the following will this seller do? A) go to work in the next-best earning opportunity B) shut down, with a loss equal to total fixed cost C) continue at the current output, earning a normal profit D) increase production in order to earn an economic profit E) remain open but decrease production in order to earn an economic profit Topic: Short-run equilibrium Objective: Checkpoint ) If the market supply curve and market demand curve for a good intersect at 600,000 units and there are 10,000 identical firms in the market, then each firm is producing A) 600,000 units. B) 60,000,000,000 units. C) 60,000 units. D) 60 units. E) 10,000 units. Topic: Market supply Objective: Checkpoint ) A perfectly competitive firm definitely earns an economic profit in the short run if price is A) equal to marginal cost. B) equal to average total cost. C) greater than average total cost. D) greater than marginal cost. E) greater than average variable cost. Topic: Economic profit Objective: Checkpoint 13.2

27 Chapter 13 Perfect Competition ) If a perfectly competitive firm is maximizing its profit and earning an economic profit, then i. price equals marginal revenue ii. marginal revenue equals marginal cost iii. price is greater than average total cost A) i only B) i and ii only C) ii and iii only D) i and iii only E) i, ii, and iii Answer: E Topic: Economic profit Objective: Checkpoint ) The market for watermelons in Alabama is perfectly competitive. A watermelon producer earning a normal profit could definitely earn an economic profit if the A) average total cost of selling watermelons does not change. B) average total cost of selling watermelons increases. C) average total cost of selling watermelons decreases. D) marginal cost of selling watermelons does not change. E) marginal cost of selling watermelons increases. Topic: Economic profit Objective: Checkpoint ) Juan's Software Service Company is in a perfectly competitive market. Juan's total fixed cost is $25,000, his average variable cost at 1,000 service calls is $45, and marginal revenue is $75. Juan's makes 1,000 service calls a month. What is his economic profit? A) $5,000 B) $25,000 C) $45,000 D) $75,000 E) $50,000 Topic: Economic profit Objective: Checkpoint 13.2

28 574 Bade/Parkin œ Foundations of Economics, Third Edition 14) If a perfectly competitive firm finds that price is less than its ATC, then the firm A) will raise its price to increase its economic profit. B) will lower its price to increase its economic profit. C) is earning an economic profit. D) is incurring an economic loss. E) is earning zero economic profit. Topic: Economic loss Objective: Checkpoint ) A perfectly competitive video-rental firm in Phoenix incurs an economic loss if the average total cost of each video rental is A) greater than the marginal revenue of each rental. B) less than the marginal revenue of each rental. C) equal to the marginal revenue of each rental. D) equal to zero. E) less than the price of each video. Topic: Economic loss Objective: Checkpoint ) In the short run, a perfectly competitive firm A) must make either an economic profit or a normal profit. B) must suffer an economic loss. C) must earn a normal profit. D) might make an economic profit, incur an economic loss, or make a normal profit. E) must earn an economic profit. Topic: Short-run equilibrium Objective: Checkpoint 13.2

29 Chapter 13 Perfect Competition Output, Price, and Profit in the Long Run 1) In the long run, a perfectly competitive firm A) can make either an economic profit or a normal profit. B) must suffer an economic loss. C) must earn a normal profit. D) might make an economic profit, an economic loss, or a normal profit. E) must earn an economic profit. Topic: Long-run equilibrium 2) In the long run, perfectly competitive firms produce at the output level that has the minimum A) marginal cost. B) average total cost. C) average variable cost. D) average fixed cost. E) total revenue. Topic: Long-run equilibrium 3) If new firms enter a perfectly competitive industry, the market supply A) does not change. B) becomes more price elastic. C) becomes more price inelastic. D) increases. E) decreases because each firm produces less than before the entry. Topic: Long-run equilibrium, entry

30 576 Bade/Parkin œ Foundations of Economics, Third Edition 4) If perfectly competitive firms are making an economic profit, then A) the market must be in long-run equilibrium but cannot be in a short-run equilibrium. B) some firms will exit the market. C) new firms will enter the market. D) the market might be in a long-run equilibrium but not a short-run equilibrium. E) the market cannot be in either a short-run or a long-run equilibrium. Topic: Long-run equilibrium, entry 5) When new firms enter a market, the market supply curve shifts and the price. A) rightward; falls B) rightward; rises C) leftward; falls D) leftward; rises E) rightward; does not change Topic: Long-run equilibrium, entry 6) To eliminate losses in a perfectly competitive market, firms exit the industry. This exit results in A) an increase in market supply. B) a decrease in market supply only. C) an increase in market demand. D) a decrease in market demand only. E) a decrease in both the market supply and the market demand. Topic: Long-run equilibrium, exit

31 Chapter 13 Perfect Competition 577 7) Suppose a perfectly competitive market is in short-run equilibrium. Firms that are incurring a economic loss. A) persistent; increase their output to increase their profit B) temporary; exit the industry C) temporary; decrease their production but definitely stay open D) persistent; exit the industry and shift the market supply curve leftward E) persistent; exit the industry and shift the market supply curve rightward Topic: Long-run equilibrium, exit Author: CD 8) Suppose a perfectly competitive market is in a short-run equilibrium. If some firms exit the market, the profit of the remaining firms ; if some firms enter the market, the profit of each existing firm. A) decreases; is unchanged B) increases; decreases C) increases; is unchanged D) is unchanged; is unchanged E) decreases; increases Topic: Long-run equilibrium, entry and exit Author: CD 9) One reason why the price of personal computers has fallen over the last 20 years is that A) the demand for computers has increased. B) firms entered the market in response to economic profit. C) computers today are much more powerful than computers 20 years ago. D) firms exited the market in response to economic loss. E) firms entered the market because they thought they could avoid the economic loss being earned by the firms that were already in the market. Topic: Eye on the U.S. economy, entry in personal computers, exit in farm machines

32 578 Bade/Parkin œ Foundations of Economics, Third Edition 10) In the long run, a perfectly competitive firm will A) be able to earn an economic profit. B) produce but incur an economic loss. C) earn a normal profit. D) not produce and will have an economic loss equal to its total fixed cost. E) not produce but not have an economic loss. Topic: Long-run equilibrium 11) If perfectly competitive firms are maximizing their profit and are making an economic profit, the market in a short-run equilibrium and in a long-run equilibrium. A) is; is B) is; is not C) is not; is D) is not; is not E) is; might be Topic: Permanent change in demand 12) A market is initially in a long-run equilibrium and there is a permanent increase in demand. After the new long-run equilibrium is reached, there A) are more firms in the market. B) are fewer firms in the market. C) are the same number of firms in the market. D) probably is a different number of firms in the market, but more information is needed to determine if the number of firms rises, falls, or perhaps does not change. E) is no change in the market. Topic: Permanent change in demand

33 Chapter 13 Perfect Competition ) A permanent decrease in demand definitely A) shifts a firm's average total cost curve downward. B) creates diseconomies for individual firms. C) lowers the market price. D) decreases the number of firms in the industry. E) shifts a firm's average total cost curve upward. Topic: Permanent change in demand Author: CD 14) The rutabaga market is perfectly competitive. Research is published claiming that eating rutabagas leads to gaining weight and so the demand for rutabagas permanently decreases. The permanent decrease in demand results in a A) lower price, economic losses by rutabaga farmers, and entry into the market. B) lower price, economic losses by rutabaga farmers, and exit from the market. C) higher price, economic profits for rutabaga farmers, and entry into the market. D) higher price, economic losses by rutabaga farmers, and exit from the market. E) lower price, economic profits for rutabaga farmers, and entry into the market. Topic: Permanent change in demand 15) Technological change A) usually requires an investment in a new plant. B) is implemented in the short run. C) almost always increases the costs of production. D) almost always increases the variable costs of production. E) cannot help a firm to earn an economic profit in either the short run or the long run. Topic: Technological change

34 580 Bade/Parkin œ Foundations of Economics, Third Edition 16) When a firm adopts new technology, generally its A) cost curves shift upward. B) cost curves shift downward. C) cost curves are unaffected. D) supply curve shifts leftward. E) production permanently decreases. Topic: Technological change 17) In a market undergoing technological change, firms that A) adopt the new technology temporarily incur an economic loss. B) adopt the new technology temporarily earn an economic profit. C) do not adopt the new technology temporarily earn an economic profit. D) do not adopt the new technology increase their market share. E) do not adopt the new technology continue to earn a normal profit. Topic: Technological change 18) In the long run, new firms enter a perfectly competitive market when A) normal profits are greater than zero. B) economic profits are equal to zero. C) normal profits are equal to zero. D) economic profits are greater than zero. E) the existing firms are weak because they are incurring economic losses. Topic: Long-run equilibrium, entry

35 Chapter 13 Perfect Competition ) In a perfectly competitive market, if firms are earning an economic profit, the economic profit A) attracts entry by more firms, which lowers the market price. B) can be earned both in the short run and the long run. C) is less than the normal profit. D) leads to a decrease in market demand. E) generally leads to firms exiting as they seek higher profit in other markets. Topic: Long-run equilibrium, entry 20) If firms in a perfectly competitive market are earning an economic profit, then A) the market is in its long-run equilibrium. B) new firms enter the market and the equilibrium profit of the initial firms decreases. C) new firms enter the market and the equilibrium profit of the initial firms increases. D) firms exit the market and the equilibrium profit of the remaining firms decreases. E) firms exit the market and the equilibrium profit of the remaining firms increases. Topic: Long-run equilibrium, entry 21) As a result of firms leaving the perfectly competitive frozen yogurt market in the 1990s, the market A) supply curve shifted leftward. B) supply curve did not change. C) demand curve shifted rightward. D) supply curve shifted rightward. E) demand curve shifted leftward. Topic: Exit

36 582 Bade/Parkin œ Foundations of Economics, Third Edition 22) Firms exit a competitive market when they incur an economic loss. In the long run, this exit means that the economic losses of the surviving firms A) increase. B) decrease until they equal zero. C) decrease until economic profits are earned. D) do not change. E) might change but more information is needed about what happens to the price of the good as the firms exit. Topic: Long-run equilibrium, exit 23) If firms in a perfectly competitive market have economic losses, then as time passes firms and the market. A) enter; demand curve shifts leftward B) enter; supply curve shifts rightward C) exit; demand curve shifts leftward D) exit; supply curve shifts rightward E) exit; supply curve shifts leftward Answer: E Topic: Long-run equilibrium, exit 24) In the long run, a firm in a perfectly competitive market will A) earn zero economic profit, that is, it will earn a normal profit. B) earn zero normal profit but it will earn an economic profit. C) remove all competitors and become a monopolistically competitive firm. D) incur an economic normal loss but not earn a positive economic profit. E) remove all competitors and become a monopoly. Topic: Long-run equilibrium Skill: Level 1: Definition

37 Chapter 13 Perfect Competition ) Technological change brings a to firms that adopt the new technology. A) permanent economic profit B) temporary economic profit C) permanent economic loss D) temporary economic loss E) temporary normal profit Topic: Technological change

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