Chapter 8
Perfect Competition
Exhibit 15 Marginal revenue and cost per unit curves
1. As shown in Exhibit 15, suppose the firm's price is OB. The firm's total economic profit at this price is equal to the area of
a. CJID.
b. BFHD.
c. AEXD.
d. CGHD.
e. zero.
ANS
a. Incorrect. This is a meaningless area.
b. Incorrect. If the price were OD, this would be the economic profit.
c. Incorrect. This a meaningless area.
d. Incorrect. This a meaningless area.
e. Correct. At OB, the price equals the minimum point on the ATC curve.
2. The firm shown in Exhibit 15 will
a. produce where marginal cost equals marginal revenue.
b. be a price taker.
c. not produce below a price of OA.
d. all the answers above are correct.
ANS
a. Incorrect. Each answer is correct.
b. Incorrect. Each answer is correct.
c. Incorrect. Each answer is correct.
d. Correct. Each answer is correct.
3. As shown in Exhibit 15, if the price is OD, a perfectly competitive firm maximizes profit at which point on its marginal cost curve?
a. E.
b. F.
c. I.
d. Between E and I.
ANS
a. Incorrect. No profit is made at this point.
b. Incorrect. No profit is made at this point.
c. Correct. At point I, the price equals MR = MC.
d. Incorrect. Between E and F, no profit is made.
4. As shown in Exhibit 15, if the price is OB, the firm's total cost of producing at its most profitable level of output is
a. YF.
b. XL.
c. OYFB.
d. OXEA.
ANS
a. Incorrect. This is the average total cost at the most profitable output.
b. Incorrect. This is a meaningless line.
c. Correct. This area is total cost at the most profitable output.
d. Incorrect. This area is total variable cost and not at the most profitable output of Y.
5. As shown in Exhibit 15, if the price is OD, the firm's total revenue at its most profitable level of output is
a. OZID.
b. OYHD.
c. OXLD.
d. OYFB.
ANS
a. Correct. This area is total revenue at the most profitable output of Z where price = MR = MC.
b. Incorrect. This is a meaningless area at the price of OD.
c. Incorrect. This is a meaningless area at the price of OD.
d. Incorrect. This is a meaningless area at the price of OD.
6. As shown in Exhibit 15, suppose the firm's price is OB. The firm's total economic profit at this price is equal to the area of
a. CJID.
b. BFHD.
c. AEXD.
d. CGHD.
e. zero.
ANS
a. Incorrect. This area is meaningless.
b. Incorrect. This area equals profit.
c. Incorrect. This area is meaningless.
d. Incorrect. This area is meaningless.
e. Correct. Price OB equals ATC at point F so price exactly covers ATC and economic profit is zero.
7. As shown in Exhibit 15, if the price is OB, the firm's total cost of producing at its most profitable level of output is
a. YF.
b. XL.
c. OYFB.
d. OXEA.
ANS
a. Incorrect. This is the ATC at Y output.
b. Incorrect. This is the MR at X output.
c. Correct. The firm operates where price (OB) or MR equals MC which corresponds to a total cost of OYFB.
d. Incorrect. This total average cost at X output.
8. The firm shown in Exhibit 15 will
a. produce where marginal cost equals marginal revenue.
b. be a price taker.
c. not produce below a price of OA.
d. all of the answers above are correct.
ANS
a. Incorrect. Answers a., b., and c. are correct.
b. Incorrect. Answers a., b., and c. are correct.
c. Incorrect. Answers a., b., and c. are correct.
d. Correct. All of the above are correct.
9. Perfect competition is defined as market structure in which
a. there are many small sellers.
b. the product is homogeneous.
c. it is very easy for firms to enter or exit the market.
d. all of the answers are correct.
ANS
a. Incorrect. All of the answers are correct.
b. Incorrect. All of the answers are correct.
c. Incorrect. All of the answers are correct.
d. Correct. All of the answers are correct.
10. Under perfect competition, which of the following are the same (equal) at all levels of output?
a. Price and marginal cost
b. Price and marginal revenue
c. Marginal cost and marginal revenue
d. All of the answers above are correct.
ANS
a. Incorrect. Price equals marginal cost at the profit-maximizing output.
b. Correct. In perfect competition only, price equals marginal revenue.
c. Incorrect. Price equals marginal cost at the profit-maximizing output.
d. Incorrect. Answers a. and c. are incorrect.
11. A portrait photographer produces output in packages of 100 photos each. If the output sold increases from 600 to 700 photos, total revenue increases from $1,200 to $1,400. The marginal revenue per photo is
a. $200.
b. $100.
c. $20.
d. $2.
e. $1.
ANS
a. Incorrect. See the correct calculation in answer d.
b. Incorrect. See the correct calculation in answer d.
c. Incorrect. See the correct calculation in answer d.
d. Correct. The change in total revenue is $200 ($1,400 - $1,200) divided by 100 units is $2 per photo.
12. In the short run, a perfectly competitive firm is producing at a price below average total cost, its economic profit is
a. positive.
b. zero.
c. negative.
d. normal.
ANS
a. Incorrect. The price must exceed average total cost for economic profit to be positive.
b. Incorrect. The price must equal average total cost for economic profit to be zero.
c. Correct. If the firm does not cover its average total cost with its price, then its economic profit is negative.
d. Incorrect. The price must equal average total cost for economic profit to be zero.
Exhibit 16 Total revenue and total cost graph
13. In Exhibit 16, if output is 200 units per week, economic profit for the firm is
a. zero.
b. at its minimum.
c. at its maximum.
d. none of the answers above are correct.
ANS
a. Correct. At 200 units, total revenue (TR) equals total cost (TC) and economic profit is zero.
b. Incorrect. At 200 units, total revenue (TR) equals total cost (TC) and economic profit is zero. Below 200 units and above 300 units economic profit is negative.
c. Incorrect. At 200 units, total revenue (TR) equals total cost (TC) and economic profit is zero, at 250 units it is maximum.
d. Incorrect. Answer a. is correct.
14. In Exhibit 16, economic profit for the firm is at a maximum when output per week equals
a. zero units.
b. 100 units.
c. 200 units.
d. 250 units.
ANS
a. Incorrect. At 250 units per week, the maximum distance between total revenue (TR) and total cost (TC) means economic profit is maximum.
b. Incorrect. At 250 units per week, the maximum distance between total revenue (TR) and total cost (TC) means economic profit is maximum.
c. Incorrect. At 250 units per week, the maximum distance between total revenue (TR) and total cost (TC) means economic profit is maximum.
d. Correct. At 250 units per week, the maximum distance between total revenue (TR) and total cost (TC) means economic profit is maximum.
15. The point of maximum profit for a business firm is where
a. P = AC.
b. TR = TC.
c. MR = AR.
d. MR = MC.
ANS
a. Incorrect. The profit maximum output corresponds to the point where MR = MC.
b. Incorrect. The profit maximum output corresponds to the point where MR = MC.
c. Incorrect. The profit maximum output corresponds to the point where MR = MC.
d. Correct. The profit maximum output corresponds to the point where MR = MC.
16. Above the shutdown point, a competitive firm's supply curve coincides with its
a. marginal revenue curve.
b. marginal cost curve.
c. average variable cost curve.
d. average total cost curve.
ANS
a. Incorrect. The firm’s supply curve coincides with its marginal cost curve.
b. Correct. Above the shutdown point, a competitive firm's supply curve coincides with its marginal cost curve.
c. Incorrect. The firm’s supply curve coincides with its marginal cost curve.
d. Incorrect. The firm’s supply curve coincides with its marginal cost curve.
17. A perfectly competitive firm's shortrun supply curve is the
a. average total cost curve.
b. demand curve above the marginal revenue curve.
c. same as the market supply curve.
d. marginal cost curve above the average variable cost curve.
ANS
a. Incorrect. A perfectly competitive firm's shortrun supply curve is the marginal cost curve above the average variable cost curve.
b, Incorrect. A perfectly competitive firm's shortrun supply curve is the marginal cost curve above the average variable cost curve.
c. Incorrect. The market supply curve does not exclude the portion below AVC.
d. Correct. A perfectly competitive firm's shortrun supply curve is the marginal cost curve above the average variable cost curve.
18. A perfectly competitive firm's shortrun supply curve is the
a. segment of the marginal cost curve above average fixed cost.
b. segment of the marginal cost curve above the minimum level of average variable cost.
c. upwardsloping segment of the marginal cost curve.
d. both a and b.
ANS
a. Incorrect. A perfectly competitive firm's shortrun supply curve is the segment of the marginal cost curve above the minimum level of average variable cost.
b. Correct. A perfectly competitive firm's shortrun supply curve is the segment of the marginal cost curve above the minimum level of average variable cost.
c. Incorrect. A perfectly competitive firm's shortrun supply curve is the segment of the marginal cost curve above the minimum level of average variable cost.
d. Incorrect. Answer a. is not correct.
19. In longrun equilibrium, the perfectly competitive firm sets its price equal to which of the following?
a. Shortrun average total cost.
b. Shortrun marginal cost.
c. Longrun average cost.
d. All of the answers above are correct.
ANS
a. Incorrect. Answers a., b., and c. are correct.
b. Incorrect. Answers a., b., and c. are correct.
c. Incorrect. Answers a., b., and c. are correct.
d. Correct. All of the answers are correct.
20. If there is a permanent increase in demand for the product of a perfectly competitive industry, the process of transition to a new long-run equilibrium will include
a. the entry of new firms.
b. temporarily higher profits.
c. both a and b are correct.
d. neither a nor b are correct.
ANS
a. Incorrect Temporary higher profits will attract the entry of new firms into this industry.
b. Incorrect Temporary higher profits will attract the entry of new firms into this industry.
c. Correct. Temporary higher profits will attract the entry of new firms into this industry.
d. Incorrect Both a. and b. is correct.
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