Competition Test Bank Answers Chapter 6 - Essentials of Economics 11e Schiller Test Bank by Bradley R. Schiller, Karen Gebhardt. DOCX document preview.
Chapter 06 Test Bank KEY
1. The number and relative size of firms in an industry defines the type of
A. firm ownership.
B. perfectly competitive market.
C. market structure.
D. monopoly market.
2. Market structure is determined by
A. the equilibrium price in a specific market.
B. the level of government regulation in a specific market.
C. whether or not a firm is able to alter its output.
D. the number and relative size of firms in a specific market.
3. An individual competitive firm
A. has a large advertising budget.
B. produces a small proportion of output relative to the market.
C. can alter the market price of the good(s) it produces.
D. can raise its price to increase profit.
4. Competitive firms cannot individually affect market price because
A. there is an infinite demand for their goods.
B. the market demand curve is flat or horizontal.
C. their individual production is insignificant relative to the production of the industry.
D. the government exercises control over the market power of competitive firms.
5. A perfectly competitive firm
A. can sell all of its output at the prevailing price.
B. has some market power.
C. can sell some output at a price above the market price.
D. can sell more output only if it reduces its price.
6. In a perfectly competitive market
A. a single firm may dominate the supply side of the market.
B. a single consumer can impact the market price.
C. no seller has market power.
D. the buyers with the most money have the most market power.
7. Which of the following is an example of perfect competition?
A. One large firm supplies the entire product to the market.
B. Two firms supply the entire market and compete with each other for customers.
C. Many small firms all produce the same good.
D. Many firms supply similar products, but each has significant brand loyalty.
8. Which of the following is concerning a monopoly?
A. A single consumer can impact the market price.
B. The largest firm is a price taker.
C. The largest firm has significant market power.
D. Many small firms sell the same good.
9. Which of the following is an example of a monopoly?
A. One large firm supplies all quantity to a specific market.
B. One firm supplies 60 percent of all quantity to a specific market and there are two smaller rival firms.
C. Many firms supply the same good to the market, but each has significant brand loyalty.
D. A few large firms supply all quantity to the market.
10. Market power
A. is the same for all market structures.
B. means that a firm is a price taker, not a price setter.
C. is the ability to alter the market price of a good or service.
D. only exists for a monopoly.
11. If a firm can change market prices by altering its output then it
A. has market power.
B. is a price taker.
C. faces a horizontal demand curve.
D. is a competitive firm.
12. Which list has market structures in the correct order from the most to the least market power?
A. perfect competition, oligopoly, monopolistic competition, monopoly
B. monopoly, monopolistic competition, oligopoly, perfect competition
C. monopoly, oligopoly, monopolistic competition, perfect competition
D. oligopoly, perfect competition, monopolistic competition, monopoly
13. An industry in which only two firms compete to supply a particular product is best characterized by which of the following market structures?
A. duopoly
B. monopoly
C. monopolistic competition
D. oligopoly
14. If Pepsi and Coca-Cola are the only two soft drink producers, they could be considered
A. a duopoly.
B. a monopoly.
C. an oligopoly.
D. perfectly competitive firms.
15. An industry in which a few large firms supply most or all of a product is known as
A. perfect competition.
B. a monopoly.
C. monopolistic competition.
D. an oligopoly.
16. If there are only four companies that produce tennis balls, the market could be considered
A. a duopoly.
B. a monopoly.
C. an oligopoly.
D. perfectly competitive.
17. Which of the following is an example of monopolistic competition?
A. One large firm supplies the entire market.
B. One firm supplies 60 percent of output to the market and there are three other rival firms.
C. Many firms supply similar products, each with some consumers who show significant brand loyalty.
D. Two firms supply the entire market.
18. Which of the following is least likely to be an example of monopolistic competition?
A. lettuce farmers
B. fast-food restaurants
C. convenience stores
D. gasoline stations
19. An industry in which many firms produce similar products, but each firm has significant brand loyalty, is known as
A. perfect competition.
B. a monopoly.
C. monopolistic competition.
D. an oligopoly.
20. Which of the following is NOT characteristic of a perfectly competitive market?
A. firms are price takers
B. a significant degree of brand loyalty for each firm
C. low barriers to entry
D. many firms
21. Which of the following is characteristic of perfectly competitive markets?
A. differentiated products
B. a large number of firms
C. prices set below marginal cost
D. significant barriers to entry
22. Which of the following is characteristic of a perfectly competitive market?
A. Firms are price setters (makers).
B. A few firms dominate the market.
C. There are low barriers to entry.
D. The market demand curve is horizontal.
23. A perfectly competitive firm is a price taker because
A. it has no control over the market price of its product.
B. it has market power.
C. market demand is downward sloping.
D. its products are differentiated.
24. In which of the following industries is the firm referred to as a price taker?
A. monopolistic competition
B. monopoly
C. perfect competition
D. oligopoly
25. An individual wheat farmer has no market power because
A. it can differentiate its wheat.
B. it can alter the market price.
C. its output is a large portion of the entire market.
D. it must accept the equilibrium market price.
26. Which of the following is the best example of a perfectly competitive market?
A. the automobile industry
B. the soft drink industry
C. dairy farming
D. fast-food restaurants
27. Which of the following is the best example of a perfectly competitive market?
A. the breakfast cereal industry
B. the textbook industry
C. the plasma TV market
D. the apple market
28. Suppose a perfectly competitive firm wants to increase its level of output profitably. To do this, the firm needs to
A. find a way to lower its marginal cost.
B. should raise its price to sell any additional output.
C. should lower its price to sell any additional output.
D. will not be able to sell the additional output at any price because of the many other competitive firms that exist.
29. A perfectly competitive firm currently sells 30,000 cartons of eggs at $1.25 each. If the firm wants to sell one more carton of eggs, the firm
A. should raise its price above $1.25.
B. cannot sell an additional carton at any price because there are other egg farmers in the market.
C. must sell the carton for less than $1.25.
D. should price the carton at $1.25.
30. If one perfectly competitive firm is the only one to raise its price above the market price, it will
A. sell some output, but less than previously.
B. not sell any output.
C. sell more output than previously.
D. sell the same amount of output as previously.
31. A horizontal demand curve for a firm indicates that
A. the firm has no market power.
B. the Law of Demand does not apply in the market.
C. price equals average total cost.
D. the firm is a monopoly.
32. In the perfectly competitive catfish market, the market demand curve is
A. flat (horizontal).
B. the same as the demand curve faced by the firm.
C. vertical.
D. downward-sloping.
33. Which of the following characterizes a perfectly competitive market?
A. a downward-sloping demand curve facing the firm
B. a horizontal demand curve for the market
C. all firms setting their price at the market-established equilibrium price
D. a few firms that compete by changing price
34. The equilibrium price for a perfectly competitive firm always occurs
A. where price equals minimum average total cost.
B. at the unique price that equalizes market supply and market demand.
C. where a firm's marginal cost equals total revenue.
D. at the point where profit is maximized.
35. A catfish farmer in a perfectly competitive market
A. is able to keep other potential catfish producers out of the market.
B. might like to keep other potential catfish producers out of the market, but cannot do so.
C. will not care if more catfish producers enter the market.
D. is powerless to alter their own rate of production.
36. The production decision is the
A. selection of the short-run rate of output.
B. selection of the long-run rate of output.
C. choice of whether to enter or exit the industry.
D. choice of factory or plant size.
37. Which of the following would be considered a short-run production decision for a competitive firm?
A. deciding whether to build an additional factory or not
B. choosing a rate of output using the existing plant and equipment
C. changing the scale of operations
D. deciding what price to charge for its product
38. In making a production decision, a business owner
A. decides whether to enter or exit the market.
B. makes a long-run decision about output and revenues.
C. decides whether to buy or lease new plant and equipment.
D. decides the short-run rate of output.
39. From the firm perspective, the price of a good multiplied by the quantity sold equals
A. total profit.
B. total revenue.
C. marginal revenue.
D. marginal cost.
40. If a perfectly competitive firm produces and sells more output, its _______ will definitely increase.
A. total profit
B. total revenue
C. average total cost
D. marginal revenue
41. Total profit is equal to
A. the difference between total revenue and total cost.
B. average cost times quantity sold.
C. the difference between price and average total cost.
D. the difference between marginal revenue and marginal cost.
42. The goal of most business firms is to
A. maximize total revenue.
B. maximize total profit.
C. maximize both total revenue and total profit at the same time.
D. produce as much output as possible.
43. Economists assume that the principal motivation of producers is
A. profit maximization.
B. competition in society.
C. a sense of well-being.
D. individual desires.
44. If a perfectly competitive firm wanted to maximize its total revenues, it would produce
A. the output where marginal cost equals price.
B. as much output as it is capable of producing.
C. the output where the average total cost curve is at a minimum.
D. the output where the marginal cost curve is at a minimum.
45. A perfectly competitive producer tries to maximize profits by operating at an output where
A. marginal cost equals price.
B. price minus average total cost is greatest.
C. marginal revenue is greater than marginal cost.
D. the profit per unit is greatest.
46. If price equals average total cost AND marginal cost then
A. producers will want to increase output.
B. new firms will enter the market.
C. economic profits would be zero.
D. the firm would be operating at a loss.
47. Marginal cost is
A. the change in total costs because of a one-unit increase in output.
B. total cost divided by the rate of output.
C. total revenue minus total cost.
D. the average profit divided by the quantity sold.
48. Marginal costs
A. are the additional costs incurred in producing one more unit of output.
B. fall as the rate of output increases.
C. are constant for a perfectly competitive firm.
D. are equal to total costs divided by total output.
49. Suppose market price is currently below the average total cost and at the current firm's rate of production. If the marginal cost is also less than the market price, an increase in output would
A. cause economic profits to be positive.
B. cause economic profits to be zero.
C. increase profitability, but economic profits would still be negative.
D. increase profitability and economic profits would be positive.
50. The law of diminishing returns helps to explain why
A. marginal cost increases, in the short run, as more output is produced.
B. the demand curve for a competitive firm is perfectly elastic.
C. the total cost curve diminishes as long as output increases.
D. marginal cost decreases as more output is produced.
51. If marginal cost equals price, then _____ is at a maximum.
A. total cost
B. profit
C. total revenue
D. marginal cost
52. A profit-maximizing competitive firm wants to _____ the rate of output when price _____ marginal cost.
A. expand; exceeds
B. reduce; exceeds
C. expand; is less than
D. reduce; equals
53. If price is greater than marginal cost, a competitive firm should increase output because additional units of output will
A. cause marginal costs to fall.
B. add to the firm's profits (or reduce losses).
C. add to the firm's fixed costs.
D. cause price to rise.
54. A profit-maximizing producer wants to produce where
A. profit per unit is maximized.
B. average total cost is minimized.
C. price equals marginal cost.
D. price is greater than marginal cost.
55. Profit per unit equals
A. price minus average total cost.
B. average revenue divided by average total cost.
C. total revenue minus total cost.
D. total revenue minus variable cost divided by quantity.
56. The ability and willingness to sell specific quantities of a good at alternative prices in a given period of time, ceteris paribus, defines
A. demand.
B. equilibrium price.
C. supply.
D. economic profit.
57. A rightward shift in market supply curve could be caused by
A. an improvement in technology.
B. an increase in the market price.
C. an increase in wages.
D. the expectation that the market price will fall in the future.
58. For a competitive firm, the marginal cost curve
A. is the short-run supply curve at all viable production levels.
B. shifts to the upward when new firms enter the market.
C. shifts upward when wages decrease.
D. is the short-run demand curve.
59. Which of the following is NOT for a competitive firm?
A. the marginal cost curve is the short-run supply curve
B. the marginal cost curve is horizontal at the equilibrium price
C. the marginal cost curve shifts downward when productivity increases
D. the marginal cost curve shifts upward when wages increase
60. If the level of productivity increases, then
A. the marginal cost curve shifts upward.
B. market price increases.
C. the marginal cost curve shifts downward.
D. the firm will supply less output.
61. Ceteris paribus, if the marginal cost of paper increases for book publishers, book publishers should do which of the following to maximize profits?
A. increase output
B. produce the same level of output since price has not changed
C. decrease price
D. decrease output
62. Ceteris paribus, if the cost of insecticide decreases for tomato farmers, tomato farmers should do which of the following to maximize profits?
A. increase price
B. produce the same level of output since price has not changed
C. increase output
D. decrease output
63. If the cost of production rises for all the firms in a perfectly competitive industry
A. each firm will supply less output at any given price.
B. total revenue increases.
C. the marginal cost curve shifts downward.
D. total profit increases.
64. Which of the following is a determinant of market supply but will not influence the marginal cost curve of an individual firm?
A. the price of factor inputs
B. the number of firms in the market
C. improvements in technology
D. individual consumer desires
65. The segment of the firm's marginal cost curve that is
A. above the average total cost is its supply curve.
B. rising is equal to rising marginal physical product.
C. above the market price is equal to per unit profit.
D. above the average variable cost is its supply curve.
66. The market supply curve is calculated by
A. summing the marginal cost curves of all firms at each price.
B. averaging the individual supply curves.
C. summing the prices from individual supply curves.
D. averaging the individual marginal cost curves below average total cost.
67. The position of the firm's supply curve depends on
A. the number of firms in the industry.
B. the market demand curve.
C. summing the prices from individual supply curves.
D. the taste of the buyers.
68. Market supply in a competitive market is determined by
A. income.
B. the number of buyers.
C. the cost of factor inputs.
D. consumer preferences.
69. Equilibrium price refers to the
A. price at which most producers are willing to sell their product.
B. price at which the quantity demanded of a good equals the quantity supplied.
C. price that equals marginal cost.
D. balance between what producers want to charge and what the government will allow.
70. If perfectly competitive firms earn economic profit in the short run, then we would expect that in the long run
A. new firms will enter the market.
B. existing firms will leave the market.
C. supply will decrease.
D. demand will decrease.
71. In a perfectly competitive industry, firms are likely to
A. exit when there are economic profits because they know the profits will not last.
B. reduce the level of production when there are economic profits.
C. supply will decrease.
D. enter when price is equal to the minimum average total cost.
72. In a perfectly competitive market with positive short-run economic profits
A. firms will enter until accounting profits are zero.
B. firms will enter until economic profits are zero.
C. firms will exit until economic profits are zero.
D. no entry or exit will occur.
73. In a competitive market with economic profits, equilibrium
A. price will rise as new firms enter the market.
B. price will fall as new firms enter the market.
C. quantity will fall as new firms enter the market.
D. quantity will remain the same as new firms enter the market.
74. When a new firm enters a perfectly competitive market, it
A. pushes the equilibrium price upward.
B. reduces the profits of existing firms.
C. shifts the market supply curve to the left.
D. shifts the market demand curve to the left.
75. In a perfectly competitive market where firms are earning economic loss, which of the following is likely as the industry moves toward long-run equilibrium?
A. a lower price and fewer firms
B. a higher price and fewer firms
C. a lower price and more firms
D. a higher price and more firms
76. Over the long run, a perfectly competitive market equilibrium
A. price equals the minimum of average total cost.
B. price equals the maximum of average total cost.
C. marginal cost equals the maximum of total revenue.
D. marginal cost equals the minimum of total revenue.
77. Economic profits disappear when
A. price is greater than marginal costs.
B. price falls to the level of minimum average total cost.
C. price is greater than average variable cost.
D. firms exit an industry.
78. Which of the following is consistent with competitive long-run equilibrium?
A. Economic profits are maximized.
B. Average total costs of production are minimized.
C. Price equals the maximum of average total cost.
D. Marginal costs are minimized.
79. Assume that for an individual firm marginal cost equals average variable cost at $6. Furthermore, marginal cost equals average total cost at $10. If the current price is $12, then the firm will operate
A. at a loss.
B. where economic profits are negative
C. at a point where firms will leave the market.
D. where economic profits are positive.
80. Over the long run, a perfectly competitive market equilibrium, price equals the _______ and economic profit is _______.
A. minimum of average variable cost; greater than zero
B. minimum of average total cost; zero
C. maximum of marginal cost; zero
D. minimum of fixed cost; greater than zero
81. In the long run, a perfectly competitive market with economic losses will experience
A. an increase in equilibrium price as firms exit.
B. an increase in equilibrium quantity as firms exit.
C. the entry of firms until economic profits are zero.
D. no change in equilibrium price or quantity.
82. When firms exit an industry, price _______ and industry output _______.
A. decreases; increases
B. increases; decreases
C. increases; increases
D. decreases; decreases
83. When firms exit a market, all of the following occurs except
A. the market supply shifts to the left.
B. profits increase for firms that remain in the market.
C. the equilibrium price level rises.
D. the market demand curve shifts to the right.
84. Obstacles that make it difficult or impossible for additional producers to begin producing or selling in a new market are referred to as
A. barriers to exit.
B. barriers to entry.
C. barriers to competition.
D. blockades to exit.
85. Which of the following is considered a barrier to entry?
A. price taking
B. standardized products
C. brand loyalty
D. economic profit
86. Which of the following is NOT considered a barrier to entry?
A. marginal cost pricing
B. control of scarce resources
C. patents
D. price controls
87. Which of the following is NOT considered a barrier to entry?
A. control of essential factors of production
B. equilibrium pricing
C. import quotas
D. brand loyalty
88. Which of the following market structures has the lowest barriers to entry?
A. perfect competition
B. monopoly
C. monopolistic competition
D. oligopoly
89. Which of the following market structures has the highest barriers to entry?
A. perfect competition
B. monopoly
C. monopolistic competition
D. oligopoly
90. Which of the following is consistent with a perfectly or monopolistically competitive market?
A. a small number of firms
B. exit of small firms when profits are high for large firms
C. zero economic profit for firms in the long-run
D. marginal revenue lower than price for each firm
91. Which of the following does NOT characterize a perfectly competitive market?
A. marginal cost equals price
B. zero economic profit in the long run
C. identical products
D. high barriers to entry
92. Which of the following does NOT characterize a perfectly competitive market?
A. many firms
B. advertising by individual firms
C. low barriers to entry
D. zero economic profit in the long run
93. Which of the following does NOT characterize a perfectly competitive market?
A. a few firms
B. no market power
C. identical products
D. marginal cost equals price
94. In a perfectly competitive market, maximum efficiency is achieved because of
A. competitive pressure on prices.
B. differentiated products.
C. high barriers to entry.
D. significant market power.
95. Competition in markets results in
A. economic losses in the long run.
B. differentiated products.
C. prices being as close to marginal cost as possible.
D. an undesirable allocation of resources.
96. In a competitive market, economic losses indicate that
A. consumers want resources to be reallocated.
B. the barriers to entry are too high.
C. additional firms will enter the market.
D. more of the product should be produced.
97.
Refer to the graph. If the market price is $30 for this perfectly competitive firm
A. the firm should produce 24 units.
B. no entry or exit will occur.
C. the firm should produce 15 units.
D. economic profits will be greater than zero.
98.
Refer to the graph. If the market price is $20 for this perfectly competitive firm
A. the firm should produce 19 units.
B. there will be economic losses.
C. there will be economic profits.
D. the firm will expand production.
99.
Refer to the graph. If the market price is $46 for this perfectly competitive firm
A. the firm should produce 19 units.
B. there will be economic losses.
C. there will be economic profits.
D. economic profits equal zero.
100.
Refer to the graph. This perfectly competitive firm earns zero economic profit at a price of
A. $8.
B. $20.
C. $30.
D. $46.
101.
Refer to the figure. If price is $4, the profit-maximizing rate of output for this perfectly competitive firm is
A. 43 units.
B. 38 units.
C. 32 units.
D. 25 units.
102.
Refer to the figure. If price is $8, this perfectly competitive firm is
A. earning an economic profit.
B. in long-run equilibrium.
C. maximizing efficiency.
D. unable to sell any output.
103.
Refer to the figure. If price is $6, this perfectly competitive firm is
A. earning an economic profit.
B. unable to sell any output.
C. maximizing efficiency.
D. earning an economic loss.
104.
Refer to the figure. If price is $4, this perfectly competitive firm is
A. in long-run equilibrium.
B. earning an economic loss.
C. maximizing efficiency.
D. earning an economic profit.
105.
Refer to the figure. If price is $10, this perfectly competitive firm is
A. in long-run equilibrium.
B. earning an economic loss.
C. maximizing efficiency.
D. earning an economic profit.
106. From the NEWSWIRE article, " Catfish Farmers Quitting", the expected economic profit from the catfish market
A. is enough to attract entry.
B. is less than zero because firms are exiting the industry.
C. is zero because there are significant barriers to entry.
D. is so high that even inefficient firms are attracted to the industry.
107. Based on the NEWSWIRE article, "Catfish Farmers Quitting", what should happen to the equilibrium price and quantity of catfish over time?
A. Equilibrium price and quantity should both go up.
B. Equilibrium price should go up, and equilibrium quantity should go down.
C. Equilibrium price should go down, and equilibrium quantity should go up.
D. Equilibrium price and quantity should both go down.
108. The NEWSWIRE article in the text titled "Catfish Farmers on the Hook" says that rising costs have made some companies consider switching their production. Which of the following is a likely reason for this switch?
A. Market supply has shifted to the left because more firms have entered the market.
B. Firm marginal cost has risen and so firms can make higher profits switching their production to a different good or service.
C. Firms have exited the market because profits were positive.
D. The government decided to regulate the market and it established a price floor in competing markets which caused catfish farmers to switch their production.
109. The NEWSWIRE article in the text is titled "The T-Shirt Business: Too Much Competition." If T-shirt shops are perfectly competitive firms, then
A. there are few T-shirt shops.
B. the shops sell identical products.
C. the barriers to entry are high.
D. the shops have market power.
110. Market structure is determined by the number and relative size of the firms in the industry.
Economists group industries into four distinct market structures based on how large firms are and their relative competitiveness.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-01 Identify the unique characteristics of perfectly competitive firms and markets.
Topic: Market Structure
111. Market structure is determined by the asset size of the industry.
In general, as the market structure moves from perfect competition to monopoly, the firms tend to get larger but this is not always so.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 06-01 Identify the unique characteristics of perfectly competitive firms and markets.
Topic: Market Structure
112. A perfectly competitive firm has some competitors but it is still able to influence the market price.
A perfectly competitive firm has many competitors so that each individual firm's output is small relative to total market output. This makes each firm a price taker and so they are unable to influence market price.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 06-01 Identify the unique characteristics of perfectly competitive firms and markets.
Topic: Market Structure
113. A monopoly is a single firm that effectively produces the entire market supply of a particular good or service.
In its pure form, monopoly, which is characterized by an absence of competition, leads to high prices and a general lack of responsiveness to the needs of consumers as that firm controls the entire market supply.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-01 Identify the unique characteristics of perfectly competitive firms and markets.
Topic: Market Structure
114. In monopolistic competition, firms charge the same price as other firms in the market since they produce identical products.
In monopolistic competition, firms try to differentiate their products so that they are less subject to price competition and can employ market power.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 06-01 Identify the unique characteristics of perfectly competitive firms and markets.
Topic: Market Structure
115. In monopolistic competition, firms do not have the ability to alter market price.
Monopolistic competitors try to differentiate their product through advertising and trademarks in order to have some ability to alter price. Because consumers view their products as different, these efforts have some effect.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 06-01 Identify the unique characteristics of perfectly competitive firms and markets.
Topic: Market Structure
116. In perfect competition, price is determined by the market and individual firms have no control over price.
In perfect competition, the product is standardized and there are low barriers to entry which ensure no ability to control the price.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 06-01 Identify the unique characteristics of perfectly competitive firms and markets.
Topic: Perfect Competition
117. In perfect competition, individual firms have some control over market price.
In perfect competition, the product is standardized and there are low barriers to entry which ensure no ability to control the price.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 06-01 Identify the unique characteristics of perfectly competitive firms and markets.
Topic: Perfect Competition
118. In a perfectly competitive industry, each producer contributes a very small percentage of total market output.
In a perfectly competitive market with many firms, each individual firm's output is small relative to the total market output.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 06-01 Identify the unique characteristics of perfectly competitive firms and markets.
Topic: Perfect Competition
119. If a perfectly competitive firm raises its price above the market price, it will lose all its customers.
Since a perfectly competitive firm's product is standardized, it would not retain any customers if it raised the price on its product as all consumers would simply buy the same thing from a competitor.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 06-01 Identify the unique characteristics of perfectly competitive firms and markets.
Topic: Perfect Competition
120. In perfect competition, the market demand curve for a product is horizontal.
In perfect competition, the demand curve that an individual firm faces is horizontal but the market demand curve is downward-sloping.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 06-01 Identify the unique characteristics of perfectly competitive firms and markets.
Topic: Perfect Competition
121. In perfect competition, the demand curve for an individual firm is horizontal.
In perfect competition, the demand curve that an individual firm faces is horizontal, but the market demand curve is downward-sloping.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 06-01 Identify the unique characteristics of perfectly competitive firms and markets.
Topic: Perfect Competition
122. Choosing the rate of output with existing plant and equipment is known as the production decision.
Choosing the rate of output involves altering the variable factors of production.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-01 Identify the unique characteristics of perfectly competitive firms and markets.
Topic: The Firm's Production Decision
123. The production decision is a choice about long-run supply.
Choosing the rate of output is a short-run production decision.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-01 Identify the unique characteristics of perfectly competitive firms and markets.
Topic: The Firm's Production Decision
124. Total profit is the difference between total revenue and total cost.
Total revenue minus total cost is equal to profit, which can be negative or positive.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 Illustrate how total profits change as output expands.
Topic: The Firm's Production Decision
125. Marginal cost is the change in total costs because of a one-unit increase in output.
The extra cost of producing one more unit of output is marginal cost.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-03 Describe how the profit-maximizing rate of output is found.
Topic: Profit Maximization
126. As long as price is greater than marginal cost, an increase in the rate of output will decrease profit.
If the additional revenue (price) is greater than the additional cost, then profit will increase.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 06-02 Illustrate how total profits change as output expands.
Topic: Profit Maximization
127. If price is less than marginal cost, increases in the rate of output will increase profit.
If the additional revenue (price) is less than the additional cost, then profits will decline.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 06-02 Illustrate how total profits change as output expands.
Topic: Profit Maximization
128. Short-run profits are maximized if a perfectly competitive firm produces where marginal cost equals price.
At the point where the additional revenue (price) is equal to the additional cost profit will be maximized.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 06-03 Describe how the profit-maximizing rate of output is found.
Topic: Profit Maximization
129. Perfectly competitive firms will adjust the quantity supplied until marginal cost equals price.
At the point where the additional revenue (price) is equal to the additional cost, profit will be maximized.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 06-04 Recite the determinants of competitive market supply.
Topic: Profit Maximization
130. Portions of the marginal cost curve are the short-run supply curve for a firm.
The part of the marginal cost curve above average variable cost is the short-run supply curve for the firm.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 06-04 Recite the determinants of competitive market supply.
Topic: Profit Maximization
131. If productivity increases, the marginal cost curve will shift upward.
If productivity increases, the marginal cost curve will shift downward since each level of output can be achieved at a lower cost.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 06-04 Recite the determinants of competitive market supply.
Topic: Profit Maximization
132. For a perfectly competitive industry, as long as an economic profit is attainable, new firms will enter the market.
Since a perfectly competitive industry is characterized with low barriers to entry if economic profit exists, new firms can quickly enter the market.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 06-05 Explain why profits get eliminated in competitive markets.
Topic: Industry Entry and Exit
133. In a perfectly competitive industry, if the buyers expect the price to rise in the future, economic profits will increase.
If buyers believe that the price will rise in the future they will demand more today. In a competitive industry this would increase the current market price giving the industry temporary economic profits and induce new entrants into the market.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 06-05 Explain why profits get eliminated in competitive markets.
Topic: Industry Entry and Exit
134. Competitive firms can earn an economic profit in the long run.
Since a competitive market has low barriers to entry, if competitive firms are earning economic profits then new firms will enter the market and push prices down. This will reduce profits for all existing firms in the market.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 06-05 Explain why profits get eliminated in competitive markets.
Topic: Industry Entry and Exit
135. In a perfectly competitive market, firms are price takers and will earn zero economic profit in the long-run.
Since a competitive market has low barriers to entry if competitive firms are earning economic profits then new firms will enter the market. As a result, the market supply curve will increase (shift right) which causes more output at a lower price so each firm loses some profitability. This happens until profits are equal to zero for each firm.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 06-05 Explain why profits get eliminated in competitive markets.
Topic: Industry Entry and Exit
136. If a firm is operating at a point where marginal cost is greater than price it will attempt to cut back production.
As it cuts back production, its costs will decline while revenues will either stay the same per unit or decline at a slower rate. No matter what, profits will increase from this choice.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 06-05 Explain why profits get eliminated in competitive markets.
Topic: Industry Entry and Exit
137. When economic profits exist in a perfectly competitive market, the number of suppliers will increase and the market price will fall in the long run.
Since a competitive market has low barriers to entry if competitive firms are earning economic profits then new firms will enter the market. As a result, the market supply curve will increase (shift right) which causes more output at a lower price so each firm loses some profitability. This happens until profits are equal to zero for each firm.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 06-05 Explain why profits get eliminated in competitive markets.
Topic: Industry Entry and Exit
138. When economic losses exist in a perfectly competitive market, the number of suppliers will increase and the market price will fall.
Since a competitive market has low barriers to exit if competitive firms are earning economic losses then existing firms will choose to leave the market. As a result, the market supply curve will decrease (shift left) which causes less output at a higher price.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 06-05 Explain why profits get eliminated in competitive markets.
Topic: Industry Entry and Exit
139. There are high barriers to entry in a perfectly competitive market.
Any firm with very little capital can enter the market.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 06-01 Identify the unique characteristics of perfectly competitive firms and markets.
Topic: Industry Entry and Exit
140. High profits in a specific industry indicate that consumers are satisfied with the mix of output.
High profits in a specific industry indicate that economic profits exist and that consumers would like the aggregate mix of output to include a greater mix of that particular product.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 06-01 Identify the unique characteristics of perfectly competitive firms and markets.
Topic: Policy Perspectives
141. When some firms are forced out of a market due to economic losses, the result is a better use of our scarce resources.
Economic losses indicate that the market is overproducing the product and so some firms will exit which will decrease supply in that market as firms exit—meaning that less will be produced at a higher price.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 06-01 Identify the unique characteristics of perfectly competitive firms and markets.
Topic: Policy Perspectives
142. Suppose that consumers learn that eating apples can significantly reduce a person’s chance of getting cancer. Comment on what the apple producers would notice in terms of their marginal cost versus marginal revenue if they operate in a perfectly competitive market. In the short run, what would you expect them to do and what would happen to the market price and quantity produced. In the long run what do you expect would happen to the market price and quantity?
Since apple producers operate in a perfectly competitive market, as market demand rose, equilibrium price for apples would rise with it. Each producer faces a horizontal demand curve at market price that also represents its marginal revenue for each unit. This would mean marginal revenue for the firm would rise with market price, causing marginal revenue to be greater than marginal cost at the current rate of output. In the short run, the producers would increase output until the marginal costs again equaled marginal revenue and both market price and output would increase. In the long run, the advent of a positive economic profit and the low barriers to entry would encourage new producers to enter the market which would then shift the market supply curve to the right and bring the price back down to the original level with a higher industry output.
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 06-05 Explain why profits get eliminated in competitive markets.
Topic: Industry Entry and Exit
143. Briefly describe some of the key characteristics of a perfectly competitive market. Explain the impact of the number of firms and the type of product that is produced. Also comment on what effect advertising has on a competitive market.
A perfectly competitive market has a number of distinguishing characteristics including many firms, which means that each individual firm’s market output is small relative to the total market output. Firms produce a standardized product which means each firm is a price taker or without enough market power to manipulate the price when combined with the number of competitive firms. Finally a competitive market has low barriers to entry. It take relatively a small amount of capital to enter the market which means any excess economic profit is quickly siphoned off with the entry of new firms. If a firm were to attempt to advertise, there would be no individual effect as firms are unable to differentiate themselves in the eyes of the consumer in these markets.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-01 Identify the unique characteristics of perfectly competitive firms and markets.
Topic: Perfect Competition
144. Distinguish the difference between the market demand curve and the demand curve that a particular firm in the industry faces. Why are the two curves different?
The market demand curve is downward-sloping, indicating an inverse relationship between the market price and the quantity demanded. It reflects the fact that as the price of a good falls, consumers demand more because their real income increases and as price in one market falls, they substitute more quantity demanded into the now relatively cheaper good. However, in a competitive market, the demand curve for an individual appears horizontal because its output as compared to the total market output is so small that it sees no change in the price when it changes production levels. Each firm is so small relative to the size of the market that it could produce as much as it wanted without impacting the market price.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-01 Identify the unique characteristics of perfectly competitive firms and markets.
Topic: Perfect Competition
145. Most producers are concerned with total profits, which can be written as the difference between current price charged and average total costs, all multiplied by the current level of production. Why would most producers never seek to maximize per-unit profits?
When a producer seeks to maximize profits, it operates at a point where marginal revenue equals marginal cost. Per-unit profit would exclusively compare marginal cost and price for each unit. At very low levels of output, it is likely that price is far greater than marginal cost and so the firm would be missing out on potential additional total profits were it to execute this strategy.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 06-03 Describe how the profit-maximizing rate of output is found.
Topic: Profit Maximization
146. If market supply decreases, what may have generated this effect?
In order for the market supply curve to decrease (shift left) one of the determinants of market supply will have to change in a certain direction. In order to cause this effect: technology declined, factor costs increased, prices of substitute goods in production increased, prices of complement goods in production decreased, taxes increased, subsidies decreased, expectations became more positive about the future (so firms withhold supply today), or the number of firms decreased.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 06-04 Recite the determinants of competitive market supply.
Topic: Supply Behavior
147. In a perfectly competitive market, if the market price is less than average total cost, and the market price equals the marginal cost, then the firm will
A. observe positive profits.
B. observe negative profits.
C. observe zero profits.
D. observe more sellers entering the market.
148. If the market price is $50, marginal cost equals $45, and average total cost equals $40, the firm should
A. increase output.
B. decrease output.
C. not change output.
D. accept a loss in the short run.
149. If the market price is less than marginal cost, then the perfectly competitive firm should increase production.
If price is less than marginal cost, the firm is overproducing and should decrease production to where price is equal to marginal cost.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 06-03 Describe how the profit-maximizing rate of output is found.
Topic: Profit Maximization
150. Because of the ease of entry into the market of monopoly, profits are competed away by the new firms.
It is difficult for competitors to enter the monopoly market because of barriers to entry and monopolies generally are able to maintain profits.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-01 Identify the unique characteristics of perfectly competitive firms and markets.
Topic: Market Structure
151. Whenever losses are incurred in a perfectly competitive industry, consumers are sending signals to the market that they want a better allocation of resources.
Losses in a perfectly competitive industry could be due to overproduction of goods and services and/or an inefficient allocation of resources. In this situation, consumers are not purchasing enough of the producers' output. This is a signal for the producers to produce less, find more cost effective ways of combining the available resources, or exit the market.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 06-01 Identify the unique characteristics of perfectly competitive firms and markets.
Topic: Industry Entry and Exit
152. Explain why producers in a perfectly competitive industry face so much competition, particularly when profits are occurring. Why can't producers in this market have market power?
The barriers to entry for a perfectly competitive industry are very low, thus allowing many to enter the industry especially when there are available profits. Because there are so many producers, it is virtually impossible for the supply to be restricted, which would raise market prices and allow firms to exert market power. Firms are also price takers because consumers view each firm's product as identical as the next.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-01 Identify the unique characteristics of perfectly competitive firms and markets.
Topic: Market Structure
153. The term market structure refers to the
A. amount of market power each firm in the industry possesses.
B. method used to produce the industry's products.
C. total sales of a particular industry.
D. way in which firms in the industry are legally organized.
154. A perfectly competitive firm
A. becomes dominant in an industry through successful competition.
B. produces such a small share of industry output that it has an insignificant influence on industry price.
C. can influence industry output in a significant way, but cannot influence industry price.
D. can influence industry price in a significant way, but cannot influence industry output.
155. Perfectly competitive firms
A. produce different products but charge similar prices.
B. produce identical products and charge identical prices.
C. produce different products and charge different prices, depending on market conditions.
D. compete based on service rather than price.
156. Which of the following answers correctly ranks market structures from most competitive to least competitive?
A. monopoly, oligopoly, duopoly, monopolistic competition
B. perfect competition, oligopoly, monopolistic competition, monopoly
C. monopolistic competition, monopoly, duopoly, oligopoly
D. perfect competition, monopolistic competition, oligopoly, monopoly
157. Which of these market structures is correctly matched with its example?
A. oligopoly—fast-food restaurant industry
B. monopoly—local or regional electric utilities
C. perfect competition—auto industry in the United States
D. monopolistic competition—farming industry
158. Market power refers to
A. the use of market prices and sales to signal desired outputs.
B. the ability and willingness to sell specific quantities of a good.
C. the ability of a firm to alter the market price of a good or service.
D. None of these choices are correct.
159. In a perfectly competitive industry
A. the market demand curve is horizontal.
B. marginal cost equals price.
C. entry and exit are limited.
D. both the market demand is horizontal and marginal cost equals price.
160. For a firm operating in a perfectly competitive industry
A. an improvement in technology will reduce marginal cost.
B. an improvement in technology will shift the firm and industry supply curve to the left.
C. controlling the market price is easily achievable.
D. both an improvement in technology will reduce marginal cost and shift both the firm and industry supply curve to the left.
161. If firms in a competitive industry were earning short-run economic profits
A. one would expect the market demand curve to shift to the right.
B. one would expect the market supply curve to shift to the right.
C. one would expect nothing to change.
D. this circumstance would represent an impossibility because competition always keeps profit at zero in a competitive industry.
162. Perfect competition has a ______ number of relatively ______ firms.
A. large; large
B. small; small
C. large; small
D. small; large
163. If firms in an industry are experiencing economic losses, firms will ______ the industry and the price of the good will ______.
A. enter; increase
B. enter; decrease
C. leave; increase
D. leave; decrease
164. The marginal cost curve is a competitive firm's short-run _____ curve.
A. demand
B. supply
C. revenue
D. total cost
165. If the number of catfish farms in Arkansas fell over the course of 5 years, this would suggest that
A. firms are exiting due to reductions in economic profits.
B. prices are decreasing in this industry.
C. firms are entering the market, causing prices to fall.
D. demand is increasing.
166. The profitable range of output occurs when total revenue _____ total cost.
A. equals
B. is greater than
C. is less than
D. None of these choices are correct.
167. You own Willow’s Whatsit Factory, which is described in the chart below:
Total Output | Total Cost | Marginal Cost |
0 | $10 | -- |
1 | $15 | $5 |
2 | $22 | $7 |
3 | $31 | $9 |
4 | $44 | $13 |
If the price of a whatsit is $10, then you should produce _____ to maximize your company’s profits.
A. 4 units
B. 3 units
C. 2 units
D. 1 unit
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Accessibility: Keyboard Navigation | 167 |
Blooms: Analyze | 18 |
Blooms: Apply | 6 |
Blooms: Remember | 35 |
Blooms: Understand | 108 |
Difficulty: 1 Easy | 71 |
Difficulty: 2 Medium | 65 |
Difficulty: 3 Hard | 31 |
Learning Objective: 06-01 Identify the unique characteristics of perfectly competitive firms and markets. | 83 |
Learning Objective: 06-02 Illustrate how total profits change as output expands. | 11 |
Learning Objective: 06-03 Describe how the profit-maximizing rate of output is found. | 28 |
Learning Objective: 06-04 Recite the determinants of competitive market supply. | 19 |
Learning Objective: 06-05 Explain why profits get eliminated in competitive markets. | 26 |
Topic: Industry Entry and Exit | 36 |
Topic: Market Structure | 30 |
Topic: Perfect Competition | 28 |
Topic: Policy Perspectives | 18 |
Topic: Profit Maximization | 27 |
Topic: Supply Behavior | 15 |
Topic: The Firm's Production Decision | 12 |
Topic: The Firm's Profit Decision | 1 |
Document Information
Connected Book
Essentials of Economics 11e Schiller Test Bank
By Bradley R. Schiller, Karen Gebhardt