Chapter 12 Perfect Competition

1) Perfect competition arises if the ________ efficient scale of

a single producer is ________ relative to the demand for the
good or service.
A) minimum; small
B) minimum; large
C) maximum; small
D) maximum; large

2) In perfect competition, ________.

A) there are restrictions on entry into the industry
B) firms in the industry have advantages over firms that plan to
enter the industry
C) only firms know their competitors' prices
D) there are many firms that sell identical products

3) Perfect competition implies that

A) there are many firms in the industry.
B) all firms are price takers.
C) all firms are producing the same identical product.
D) All of the above answers are correct.

4) Which of the following is NOT a characteristic of a

perfectly competitive industry?
A) There are many firms.
B) There are no restrictions on entry into the industry.
C) Each firm produces a slightly differentiated product.
D) Each firm takes price as given, determined by the
equilibrium of industry supply and industry demand.

5) In perfect competition, the market demand for the good

________ perfectly elastic and the demand for the output of
one firm ________ perfectly elastic.
A) is; is
B) is; is not
C) is not; is
D) is not; is not

6) In perfect competition, the elasticity of demand for the

product of a single firm is
A) 0.
B) between 0 and 1.
C) 1.
D) infinite.

7) Economic profit is ________.

A) included in the firm's total opportunity cost
B) equal to normal profit minus total opportunity cost
C) equal to total revenue minus marginal cost
D) equal to total revenue minus total opportunity cost

8) In perfect competition, a firm that maximizes its economic

profit will sell its good at a price that is
A) below the market price.
B) at the market price.
C) above the market price.
D) below the market price if its supply curve is inelastic and
above the market price if its supply curve is elastic.

9) The firm's goal is to

A) maximize its normal profit.
B) maximize its economic profit.
C) maximize its total revenue.
D) maximize its industry's revenue.

10) In perfect competition, the marginal revenue of an

individual firm
A) is zero.
B) is positive but less than the price of the product.
C) equals the price of the product.
D) exceeds the price of the product.
11) The above figure shows a firm's total revenue line. The
firm must be in a market with
A) perfect competition.
B) monopolistic competition.
C) monopoly.
D) oligopoly.

12) The figure above portrays a total revenue curve for a

perfectly competitive firm. The firm's marginal revenue
from selling a unit of output
A) equals $0.50.
B) equals $1.00.
C) equals $2.00.
D) cannot be determined.

13) The figure above portrays a total revenue curve for a

perfectly competitive firm. The price of the product in this
industry
A) equals $0.50.
B) equals $1.00.
C) equals $2.00.
D) cannot be determined.

14) In the above figure showing a perfectly competitive

firm's total revenue line, the firm's marginal revenue
A) falls as output increases.
B) does not change as output increases.
C) rises as output increases.
D) cannot be determined.

Total Price
revenue (dollars per Quantity
(dollars) unit) (units)
90 10 9
100 10 10
110 10 11

15) Based on the table above, what is the marginal revenue

of the tenth unit of output?
A) $190
B) $100
C) $10
D) $9

16) A perfectly competitive firm maximizes its economic

profit if it produces so that
A) total revenue = total cost.
B) marginal revenue = marginal cost.
C) average revenue = average total cost.
D) average total cost = average variable cost.

17) The profit maximizing condition for a perfectly

competitive firm is
A) MR = P.
B) P = MC.
C) P = ATC.
D) TR = TC.

18) If marginal revenue exceeds marginal cost, to increase its

profit the firm will
A) decrease its output.
B) increase its output.
C) keep its output the same.
D) shut down.

19) In the above figure, by increasing its output from Q1 to

Q2, the firm
A) reduces its marginal revenue.
B) increases its marginal revenue.
C) decreases its profit.
D) increases its profit.

20) The above figure illustrates a firm's total revenue and

total cost curves. Which one of the following statements is
FALSE?
A) Economic profit is the vertical distance between the total
revenue curve and the total cost curve.
B) At output Q1 the firm makes zero economic profit.
C) At an output above Q3 the firm incurs an economic loss.
D) At output Q2 the firm incurs an economic loss.

21) A perfectly competitive firm will shut down in the short

run when the price is less than
A) marginal cost.
B) average total cost.
C) average fixed cost.
D) average variable cost.

22) In the above figure, the line represented by the "2" is the
A) average fixed cost.
B) average variable cost.
C) total cost.
D) average total cost.

23) In the above figure, the line represented by the "1" is the
A) average fixed cost.
B) marginal revenue.
C) total cost.
D) average total cost.

24) A firm's shutdown point is the output and price at which

the firm just covers its
A) total fixed cost.
B) total variable cost.
C) total cost.
D) marginal cost.

25) The owners will shut down a perfectly competitive firm

if the price of its good falls below its minimum
A) average total cost.
B) average marginal cost.
C) average variable cost.
D) wage rate.

26) A perfectly competitive firm's shutdown point occurs

when the firm's
A) average total cost equals average variable cost.
B) revenue just equals its average variable cost.
C) revenue just equals its average total cost.
D) revenue just equals its total variable cost.

Average total
Output
cost
(sandwiches per
($ per
hour)
sandwich)
17.00 1
10.00 2
8.00 3
8.00 4
8.80 5
10.00 6

27) The table above shows output and costs of Evan's Subs, a
typical perfectly competitive firm in a local market for
sandwiches. Evan's fixed cost is $9 per hour. The current
market price of a sandwich is $6. What is Evan's marginal
revenue from the 2nd sandwich sold?
A) $10.00
B) $13.50
C) $3.00
D) $6.00

28) The table above shows output and costs of Evan's Subs, a
typical perfectly competitive firm in a local market for
sandwiches. Evan's fixed cost is $9 per hour. The current
market price of a sandwich is $6. If Evan's sells the 5th
sandwich, the marginal cost is ________ the marginal
revenue, so the firm's profit ________.
A) greater than; decreases
B) greater than; increases
C) less than; increases
D) less than; decreases

29) The figure above shows a perfectly competitive firm. In

the short run, the firm will shut down
A) only if the AVC of producing 10 units is less than $20.
B) only if the AVC of producing 10 units is more than $20.
C) only if the AVC curve reaches its minimum before 10 units
are produced.
D) always.
30) Consider the perfectly competitive firm in the above
figure. The profit maximizing level of output for the firm is
equal to
A) 0 units.
B) 14 units.
C) 17 units.
D) 19 units.

31) Consider the perfectly competitive firm in the above

figure. At the profit maximizing level of output, the firm is
earning
A) an economic loss equal to $119.00.
B) an economic loss equal to $123.50.
C) an economic loss equal to $187.00.
D) a normal profit.

32) Consider the perfectly competitive firm in the above

figure. The shutdown point occurs at a price of
A) $11.00.
B) $12.00.
C) $16.00.
D) $22.00.

33) Consider the perfectly competitive firm in the above

figure. What will the firm choose to do in the short-run and
why?
A) shut down because the firm incurs an economic loss
B) stay in business because the firm is making an economic
profit
C) stay in business because the firm's economic loss is less than
fixed costs
D) stay in business because it is earning a normal profit

34) A perfectly competitive firm's short-run supply curve is

the same as its
A) ATC curve.
B) MR curve.
C) AVC curve.
D) MC curve above the minimum of the AVC curve.

35) In the above figure, the vertical distance between the

ATC and AVC curves is
A) the marginal cost.
B) the total cost.
C) the average fixed costs.
D) None of the above answers are correct.

36) Consider the perfectly competitive firm in the above

figure. At the profit maximizing level of output, the total
costs is
A) $187.
B) $485.
C) $391.
D) $204.

37) Consider the perfectly competitive firm in the above

figure. At the profit maximizing level of output, the total
average costs is
A) $285.
B) $485.
C) $391.
D) $204.

38) Consider the perfectly competitive firm in the above

figure. At the profit maximizing level of output, the total
fixed costs is
A) $187.
B) $204.
C) $285.
D) $200.
Numeric and Essay Questions
1) What are the requirements for perfect competition?
Answer: The requirements are: many firms selling an identical
product; many buyers; no restrictions on entry into the industry;
established firms have no advantages over new entrants; and
sellers and buyers have good information about prices of each
firm's product.

2) What is a normal profit?

Answer: 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

Profit or Total
loss revenue Total cost Quantity
(dollars) (dollars) (dollars) (wreaths)
1 0
10 1
18 2
24 3
28 4
33 5
40 6
49 7
60 8
73 9

3) The above table gives Amy's total cost schedule for

producing holiday wreaths. Amy is a perfect competitor and
can sell each wreath for $9.
a) Complete the table by calculating Amy's total revenue and
her profit or loss schedule.
b) When Amy is producing 4 wreaths, what is her total cost?
What is her total revenue? What is her economic profit or
economic loss?
c) What number of wreaths maximizes Amy's profit?

Answer:

Profit or Total
loss revenue Total cost Quantity
(dollars) (dollars) (dollars) (wreaths)
-1 0 1 0
-1 9 10 1
0 18 18 2
3 27 24 3
8 36 28 4
12 45 33 5
14 54 40 6
14 63 49 7
12 72 60 8
8 81 73 9

a) The completed table is above.

b) When Amy is producing 4 wreaths, her total cost is $28,
her total revenue is $36, and her economic profit is $8.
c) Amy can produce 6 or 7 wreaths, with a maximum
economic profit of $14.
4) The above figure shows the cost curves of a profit-
maximizing perfectly competitive firm. If the price equals
$7,
a) how much will the firm produce?
b) how much is the firm's average total, average variable, and
marginal costs?
c) how much is the firm's total, total variable, and total fixed
costs?
d) how much is the firm's total revenue and economic profit?

Answer:

a) The firm will produce 40 units of output because that is

where the marginal revenue equals the marginal cost.
b) The firm's average total cost equals $4, its average variable
cost equals $3, and its marginal cost equals $7.
c) The firm's total cost is $160 (= $4 × 40), its total variable cost
is $120 (= $3 × 40), and its total fixed cost is $40 (= $160 -
$120).
d) The firm's total revenue is $280 (= $7 × 40) and its economic
profit is $120 (= $280 - $160).