Figure ) In figure 11.1, the firms total profit is equal to A) 180. B) 45. C) 225. D) MR - MC.

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1 Topic 6 test MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) In a perfectly competitive market, the profit maximizing firm will A) never set its price equal to its marginal revenue. B) always produce so that marginal revenue equals marginal cost. C) always produce so that price equals average cost. D) always earn profits. 2) By assuming that each firm sells an identical product, the model of perfect competition assumes that A) each firm's output is a perfect substitute for the output of any other firm. B) each firm can expect to earn some economic profit. C) the demand for each firm's product is perfectly inelastic. D) each firm will try to cut prices to increase its market share. 3) In a perfectly competitive market in the short run, as market demand increases, A) the perfectly competitive firm decreases output and profits will typically decrease. B) the perfectly competitive firm decreases output and profits will typically increase. C) the perfectly competitive firm increases output and profits will typically fall. D) the perfectly competitive firm increases output and profits will typically increase. Figure ) In figure 11.1, the firms total profit is equal to A) 180. B) 45. C) 225. D) MR - MC. 5) In a perfectly competitive market, the demand for a single firm's product is perfectly elastic A) only in the long-run. B) because this firm's output is a perfect substitute for any other firm's output. C) because this firm is a price taker. D) because there are many buyers in this market. 6) Which of the following would be closest to being a perfectly competitive firm A) an Australian car producer. B) an Australian wheat farmer. C) a big city newspaper. D) a pay TV company. 7) Which of the following is NOT an assumption of perfectly competitive markets? A) unrestricted entry B) complete information about prices C) new entrants have higher costs D) many buyers and many sellers 8) A perfectly competitive firm maximizes profits by 1

2 A) setting the right price. B) manipulating demand. C) cutting wages. D) choosing the right level of output. 9) If a firm's accounting profit is negative, it A) cannot be earning an economic profit. B) could not possibly be a profit maximizer. C) is earning zero economic profit. D) can still be earning an economic profit. Figure ) Figure 11.2 show the cost curves for a perfectly competitive firm. If price equals $20, which of the following statements is TRUE? A) Over time, firms will leave this industry. B) Over time, market price will fall. C) The firm is earning zero economic profit. D) The industry is in long run equilibrium. SHORT ANSWER. Write the word or phrase that best completes each statement or answers th e question. 11) Why is the demand for the perfect competitor's product perfectly elastic even though the market demand is not? 12) What is a normal profit? 13) List the three conditions for resources to be used efficiently. 14) Define the shutdown point. Explain why the firm shuts down in the short run if price falls below this point. 15) What are the four assumptions of perfect competition? TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 16) In long-run equilibrium, perfectly competitive firms cannot earn economic profit. 17) Perfectly competitive firms will sometimes operate even though they incur an economic loss in the short run. 18) Entry of new firms into a perfectly competitive market raises the product's price. 2

3 19) In perfectly competitive markets, many firms sell an identical product. 20) A profit maximizing perfectly competitive firm will set price equal to marginal cost. 3

4 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) B 2) A 3) D 4) B 5) B 6) B 7) C 8) D 9) A 10) B SHORT ANSWER. Write the word or phrase that best completes each statement or answers th e question. 11) Each firm takes the market price as given. Because each firm's product can be perfectly substituted with any other firm's product, consumers will only pay the market price. Hence, any deviation above the market price causes the firm's sales to plunge to zero and any deviation below causes the firm's sales to soar to the entire amount sold in the market. 12) : A normal profit is the return a firm's owner could obtain in the best alternative business. As a result, it is an opportunity cost to the firm. 13) The three conditions for efficiency are: producer efficiency; consumer efficiency; and exchange efficiency. 14) The shutdown point is the point at which the price equals minimum average variable cost. If the price were to fall further, the firm would not even cover variable costs. Its loss would exceed the loss of just shutting down. 15) The four assumptions are: many firms selling an identical product; many buyers; no restrictions on entry into the industry; and complete information about prices of each firm's product. TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 16) TRUE 17) TRUE 18) FALSE 19) TRUE 4

5 20) TRUE 5