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Perfect Competition Practice

1. Which of the following is a characteristic of perfectly competitive markets?

A. restricted entry to new firms

B. homogeneous goods

C. market power

D. slightly differentiated goods

E. firms set the price they charge

2. Which of the following best describes a firm’s demand curve in a perfectly competitive market?

A. downward sloping

B. straight and horizontal

C. upward sloping

D. straight and vertical

E. downward sloping then upward sloping

3. Which of the following best describes the profit-maximizing rule for a perfectly competitive firm?

A. Choose the price where its marginal revenue is highest.

B. Choose the price where average total cost equals average revenue.

C. Choose the quantity where marginal cost equals average total cost.

D. Choose the quantity where marginal cost equals price.

E. Choose the quantity where marginal revenue equals average total cost.

This graph shows the cost curves and marginal revenue curves for a firm.

4. How much is this firm’s profit?

A. -\$135,000

B. \$450,000

C. \$950,000

D. \$360,000

E. \$400,000

Twilly enterprises produces watches in a perfectly competitive market. Its cost and revenue curves are shown in this graph.

5. What quantity will this firm produce, and what price will it charge, in the short run?

A. Q=8000, P=\$75

B. Q=6000, P=\$80

C. Q=8000, P=\$48

D. Q=6000, P=\$48

E. This firm will Shut down

This graph shows the cost curves and marginal revenue curves for a firm.

6. How much is this firm’s short-run profit?

A. \$75,000

B. -\$600,000

C. -\$284,000

D. -\$124,000

E. 0

This graph illustrates cost and revenue curves for a firm in a perfectly competitive market.

7. What is the quantity that this firm will produce, and what price will it charge?

A. Q= 1000; P= \$110

B. Q= 400; P= \$32

C. Q= 1000; P= \$60

D. Q= 600; P= \$110

E. Q= 600; P= \$50

Perfect Competition in the Short Run and Long Run Practice:

8. If a firm produces the quantity where the private marginal cost of the last unit produced equals the private marginal benefit of the last good consumed, which of the following must also be true?

A. All firms are making losses

B. All firms are earning a profit

C. The firm is cost-efficient.

D. The quantity produced is allocatively efficient.

E. The market is in long-run equilibrium

9. Eggs are a normal good sold in a perfectly competitive market that is currently in long-run equilibrium. How will price, output, and profit change if consumer incomes increase?

A. price decreases; output increases; profit decreases

B. price increases; no change in output; no change in profit

C. price decreases; output decreases; profit increases

D. price increases; output increases; profit increases

E. price increases; no change in output; profit increases.

This graph shows the average total cost (ATC), marginal cost (MC), and average variable cost (AVC) cost curves for a typical firm in a perfectly competitive market

10. At which price is there no incentive for firms to enter or exit this market?

A. P3

B. P1

C. P2

D. P5

E. P4

11. Fried Breads Revisited is a food truck in a perfectly competitive industry. Its total cost of producing 100 donuts is \$300 and the market price for a donut is \$4.

If this firm is representative of a typical firm in the market, which of the following can be inferred?

A. The marginal cost of the 100th unit is greater than \$4.

B. Firms will enter this market in the long run.

C. There is no incentive for firms to enter or exit this market.

D. This firm is earning economic loss.

E. This firm should lower its price to increase its sales.

12. If a firm in a perfectly competitive market chooses its profit-maximizing quantity, which of the following MUST be true?

A. MR> MC

B. P= MC

C. MC> ATC

D. MR

E. P> ATC

13. Which of the following is true if typical firms in a perfectly competitive market are allocatively efficient and produce at the lowest possible cost per unit?

A. Firms are making economic losses and more firms will exit this industry.

B. Firms will decrease their average total costs if they increase output

C. The market is in long-run equilibrium.

D. The market supply will shift right

E. Firms are earning economic profits and more firms will enter this industry.

14. Which of following best describes a perfectly competitive firm in the short run and the long run?

A. Short run: productively efficient only; long run: allocatively efficient only

B. Short run: neither allocatively efficient nor productively efficient; long run: neither allocatively efficient nor productively efficient

C. Short run: allocatively efficient; long run: allocatively efficient and productively efficient

D. Short run: allocatively efficient and productively efficient; long run: neither allocatively efficient nor productively efficient

E. Short run: neither allocatively efficient nor productively efficient; long run: allocatively efficient and productively efficient

The market for happy face stickers is perfectly competitive, and the market price for these stickers is greater than the average total cost (ATC) of a typical firm.

A. Firms are earning positive economic profits and more firms will enter this industry.

B. Firms are producing an allocatively inefficient quantity and firms will exit this industry.

C. Firms are charging prices higher than the marginal cost of producing stickers.

D. Firms are producing a cost-efficient quantity

E. Firms are earning zero economic profits and the market is in long-run equilibrium

Firms Short Run Decisions to Produce and Long-Run Decisions to Enter or Exit the Market.

Bailey runs a water sports service in a perfectly competitive beach town. The price she is able to charge for her services varies from day to day, but she has no control over that price. Her cost and revenue curves for a perfectly competitive industry are shown in this graph:

16. What is the lowest price at which Bailey would be willing to produce in the short run?

A. \$55

B. \$140

C. \$40

D. \$147

E. \$90

Khan is a consultant for an economic advisory service. He currently produces 10 hours per week of consultancy services. The price of an hour of his services is \$60 and the market for consultancy services is perfectly competitive. The table below shows his costs associated with producing 10hours of services:

17. If Khan wants to maximize profit, what is his best course of action in the short run?

A. exit the industry

B. decrease output

C. do not change output

D. shut down

E. increase output

The cost and marginal revenue curves for a firm in a perfectly competitive market are shown in this graph.

18. What price will convince other firms to enter this industry?

A. \$214

B. \$20

C. \$130

D. \$35

E. \$80

19. Which of the following best describes the shutdown rule?

A. Exit the industry when P < Average variable cost

B. Chose the Q where MC (Q) = MR (Q) if P > ATC

C. Chose Q = 0 when P > Average variable cost

D. Chose Q = 0 when P < Average variable cost

E. Exit the industry when P < Average total cost

The cost and revenue curves for a perfectly competitive industry are shown in this graph:

20. What best describes how a firm would respond in the short-run?

A. Shut down

B. Charge a higher price

C. Increase output to decrease average total cost

D. Increase output to increase revenue

E. Exit the industry

Perfect Competition Practice

1.

Which of the following is a characteristic of perfectly competitive markets?

A.

restricted entry to new firms

B.

homogeneous goods

C.

market power

D.

slightly differentiated goods

E.

firms set the price they charge

2.

Which of the following best describes a firm’s demand curve in a perfectly competitive market?

A.

downward sloping

B.

straight and horizontal

C.

upward sloping

D.

straight and vertical

E.

downward sloping then upward sloping

3.

Which of the

following best describes the profit

-

maximizing rule for a perfectly competitive firm?

A.

Choose the price where its marginal revenue is highest.

B.

Choose the price where average total cost equals average revenue.

C.

Choose the quantity where marginal cost equals a

verage total cost.

D.

Choose the quantity where marginal cost equals price.

E.

Choose the quantity where marginal revenue equals average total cost.

This graph shows the cost curves and marginal revenue curves for a firm.

4.

How much is this firm’s profit?

A.

-

\$135,000

B.

\$450,000

C.

\$950,000

D.

\$360,000

E.

\$400,000

Perfect

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