P8

1. Which of the following is true regarding a perfectly competitive firm?

• A) The firm can charge a lower price than its competitors and thereby sell more output and increase its profits.

• B) The firm always earns a normal profit.

• C) The firm's marginal revenue continually decreases.

• D) The firm's minimum efficient scale is small relative to the market demand.

• E) None of the above.

2. You are the manager of a firm that sells its product in a competitive market at a price of $250. Your firm's total cost function is C = 30 + 5Q², marginal cost function is MC=10Q. The profit-maximizing output for your firm is

• A) 25.

• B) 10.

• C) 8.45.

• D) 7.07.

• E) None of the above.

3. If a competitive firm produces an output where its average total cost is $40, and marginal revenue and marginal cost are $50, in the short run this firm

• A) maximizes profit but makes only a normal profit.

• B) maximizes profit and makes an economic profit.

• C) can still increase profit.

• D) has a declining profit.

• E) makes an economic loss.

4. If a firm’s minimum average variable cost is $15 per unit of output and it faces a market price of $20, it should

• A) shut down temporarily.

• B) continue production in the short run.

• C) continue but reduce production in the short run.

• D) continue production as long as average total cost exceeds the price.

• E) shut down temporarily in order to reduce its losses.

5. As new firms enter a competitive industry, the output of each firm and price fall. In the long run, each firm

• A) earns a positive economic profit.

• B) earns a zero normal profit.

• C) earns a zero economic profit.

• D) receives a market price above the minimum average total cost.

• E) receives a market price below the minimum average total cost.

6. The amount of output that a firm decides to sell has no effect on the market price in a competitive industry because

• A) the market price is determined (through regulation) by the government

• B) the firm supplies a different good than its rivals

• C) the firm's output is a small fraction of the entire industry's output

• D) the short run market price is determined solely by the firm's technology

• E) the demand curve for the industry's output is downward sloping

7. 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.

• E) None of the above

8. A price-taking firm faces a

• A) perfectly inelastic demand.

• B) downward-sloping marginal revenue curve.

• C) downward-sloping supply curve.

• D) perfectly elastic demand.

• E) downward-sloping demand curve.

9. The implication of the long-run equilibrium in the competitive industry is that

• A) resources are allocated efficiently.

• B) price of the product is the lowest price possible.

• C) there is no incentive for firms to enter or leave the industry.

• D) All of the above.

• E) None of the above.

10. Which of the following is not an assumption of perfect competition?

• A) The number of suppliers is large enough that no one produces a significant proportion of the output, and all demanders and suppliers are price-takers.

• B) All individuals have perfect knowledge.

• C) The products sold by all firms in the market are homogeneous.

• D) Each firm faces a downward-sloping demand curve.

• E) All the above are assumptions of perfect competition.