Question 1

If a perfectly competitive firm's average total cost curve is below its demand schedule at any level of output, then the firm will earn ________ profits.
A) positive
B) break-even
C) negative
D) zero

Accepted Answer

If the average total cost curve is below the demand schedule at any level of output, the firm can charge a price that is higher than its cost. This means that the firm will be making a profit, and the profit will be positive.

Question 2

Economists do not consider the smartphone industry perfectly competitive because
A) the government strictly regulates entry and exit.
B) smartphones are heterogeneous.
C) smartphone manufacturers each have a small market share.
D) there are a large number of smartphone manufacturers.

Accepted Answer

Economists do not consider the smartphone industry perfectly competitive because smartphones are heterogeneous, meaning they are not identical products. This creates product differentiation and brand loyalty among consumers, which allows for some level of market power for individual manufacturers.

Question 3

Dominic sells pizza slices for $5 on the Santa Monica Pier. He currently sells 500 slices of pizza per day.This is a perfectly competitive business, and Dominic faces a perfectly price elastic demand curve. If he wants to try to increase daily revenues to $3,000, he should
A) raise the price of his pizza to $6 per slice and continue to sell 500 slices per day.
B) lower the price of his pizza to $4 per slice and try to sell 750 slices per day.
C) keep the price at $5 per slice and produce 600 slices per day.
D) do nothing since he can do nothing to increase revenue.

Accepted Answer

In a perfectly competitive market with perfectly price elastic demand, increasing output is the only way to increase revenue since price cannot be changed. Selling 600 slices at $5 each would yield $3,000 in revenue.

Question 4

A firm facing a ________ demand curve, ceteris paribus, will have zero quantity demanded if it raises its price above the market price.
A) perfectly inelastic
B) relatively elastic
C) relatively inelastic
D) perfectly elastic

Accepted Answer

A perfectly elastic demand curve means that consumers are extremely responsive to changes in price, and will only purchase at the market price. This means that if a firm raises its price even slightly above the market price, quantity demanded will drop to zero.

Question 5

Perfectly competitive firms
A) sell identical products.
B) are price makers.
C) are large relative to the size of the market.
D) All of the above are correct.

Accepted Answer

Perfectly competitive firms sell identical products, meaning that they cannot differentiate themselves through branding or product features. They are price takers, not price makers, because they must accept the market price for their product. They can be small or large relative to the size of the market.

Question 6

If a firm in a perfectly competitive industry lowers its price below the market price, its
A) total revenue will increase.
B) profit will decrease.
C) sales will drop to zero.
D) demand curve will become downward sloping.

Accepted Answer

In a perfectly competitive market, firms are price takers, meaning they have no control over the market price. If a firm lowers its price below the market price, it will sell its product at a loss compared to the market price, thereby decreasing its profit. Other choices do not accurately reflect the outcomes in a perfectly competitive market.

Question 7

It is ________ for a corn producer in a perfectly competitive corn industry to make excess profits because entry into the corn industry is free.
A) expected
B) very easy
C) likely
D) difficult

Accepted Answer

In a perfectly competitive market, there are a large number of small firms producing a homogeneous product, and entry and exit are free for firms. Therefore, any excess profits made by a firm will attract new firms to enter the market, increasing the supply of the product and driving down the price until firms are making only normal profits. Hence, it is difficult for a corn producer in a perfectly competitive industry to make excess profits.

Question 8

Free exit implies that
A) a perfectly competitive firm can never earn a profit.
B) if an industry's existing firms make excessively high losses, firms are likely to exit the industry.
C) the government regulates the number of firms it allows in an industry.
D) firms will always earn below normal profit, as firms can exit the industry at any time they like.

Accepted Answer

Free exit implies that firms can leave the industry if they are making excessively high losses. This leads to a reduction in the number of firms in the industry, allowing the remaining firms to earn a normal profit in the long run. A perfectly competitive firm can still earn a profit in the short run, but not in the long run, due to free entry and exit in the market. Option A is incorrect. Option C is incorrect because free exit implies that the government does not restrict the number of firms in an industry. Option D is incorrect because firms can earn normal profit in the long run, even though they can exit the industry at any time.

Question 9

A perfectly competitive firm ________ at the level of output where P = ATC.
A) earns an economic profit
B) suffers an economic loss
C) breaks even
D) shuts down

Accepted Answer

In a perfectly competitive market, when a firm's price (P) equals its average total cost (ATC), the firm is breaking even, meaning it is covering all its costs but not earning an economic profit.

Question 10

A firm in a perfectly competitive market has ________ control over price because each firm's product perfectly substitutes for every other firm's product.
A) total
B) moderate
C) limited
D) no

Accepted Answer

In a perfectly competitive market, each firm's product is a perfect substitute for every other firm's product, so no individual firm has control over the market price. Therefore, the correct answer is no (D).

Question 11

If there is an increase in industry supply while the industry demand remains the same, then an individual firm in a perfectly competitive industry currently earning negative profits will see its profits
A) increase.
B) not change.
C) decrease further.
D) impossible to determine

Accepted Answer

An increase in industry supply while demand remains constant will lead to a surplus of goods, which will lead to a decrease in the market price. In a perfectly competitive market, individual firms are price takers, meaning they cannot influence the market price. As a result, the firm's revenue will decrease due to the lower market price, which will cause profits to decrease further, potentially to negative levels. Therefore, the answer is (C) decrease further.

Question 12

If a perfectly competitive firm is currently producing where ________, then the firm will earn zero profits. A) P > MC and MC = ATC B) P = MC and MC = ATC C) P = MC and MC < ATC D) P < MC and MC > ATC

Accepted Answer

In a perfectly competitive market, firms earn zero profits in the long run, which occurs when P = MC and MC = ATC. If the firm is producing where P > MC, it could increase profits by producing more. If the firm is producing where P < MC, it could increase profits by producing less. Therefore, the only scenario where the firm is earning zero profits is when it is producing where P = MC and MC = ATC, which is option B.

Question 13

The closest example of a perfectly competitive industry is
A) casual dining restaurants.
B) cigarettes.
C) convenience stores.
D) alfalfa.

Accepted Answer

Alfalfa is the best choice as it is a commodity that is homogeneous, meaning it is identical in all aspects regardless of the producer. There are also many buyers and sellers in the market with low barriers to entry and exit, making it very competitive. Casual dining restaurants, cigarettes, and convenience stores do not have the same level of competition as alfalfa.

Question 14

An individual firm's demand curve in a perfectly competitive market is
A) downward sloping.
B) upward sloping.
C) perfectly elastic.
D) perfectly inelastic.

Accepted Answer

In a perfectly competitive market, each individual firm is a price taker, meaning that it has no control over the price of the product it sells. Therefore, the demand curve faced by the firm is perfectly elastic, meaning that it can sell any quantity of output at the market price but no more at a higher price.

Question 15

Perfectly competitive industries are characterized by a homogeneous product.

Accepted Answer

Perfectly competitive industries are characterized by a large number of small firms, easy entry and exit for firms, perfect information, and homogeneous products.

Question 16

If there is a decrease in industry supply while the industry demand curve remains the same, then an individual firm in a perfectly competitive industry currently earning profits will see its profits
A) increase.
B) not change.
C) decrease.
D) impossible to determine.

Accepted Answer

When there is a decrease in industry supply while demand remains constant, the market price will increase. In a perfectly competitive market, individual firms are price takers, so an increase in market price leads to higher revenues for the same quantity sold, thereby increasing profits for firms already earning profits.

Question 17

If P = MC and MC <ATC, then a perfectly competitive firm will earn ________ profits.
A) positive
B) zero
C) negative
D) break-even

Accepted Answer

In a perfectly competitive market, if the price (P) equals marginal cost (MC) and MC is greater than average total cost (ATC), the firm is selling its product at a price higher than the average cost of production, thus earning positive profits.

Question 18

The ________ part of a perfectly competitive firm's marginal cost curve is the firm's short-run supply curve.
A) rising
B) falling
C) horizontal
D) backward-bending

Accepted Answer

The rising part of a perfectly competitive firm's marginal cost curve is its short-run supply curve because the firm will increase production as long as the price (or marginal revenue) is above the marginal cost, which aligns with the upward slope of the marginal cost curve beyond the minimum point.

Question 19

If the corn industry is perfectly competitive, ________ for corn is downward sloping and ________ is horizontal.
A) the market demand curve; an individual corn producer's demand curve
B) an individual corn producer's demand curve; the marginal revenue curve
C) the marginal cost curve; the marginal revenue curve
D) marginal revenue curve; average total cost curve

Accepted Answer

In a perfectly competitive market, the market demand curve for the product is downward sloping because as the price of the product decreases, the quantity demanded by consumers increases. However, for an individual producer, the demand curve for their product is perfectly elastic or horizontal, meaning they can sell as much as they want at the market price. This is because in a perfectly competitive market, no individual producer has market power to influence the price of the product, and they must sell at the prevailing market price.

Question 20

A perfectly competitive firm will earn ________ economic profits in the range of output for which the firm's price is above its minimum average total cost.
A) positive
B) negative
C) zero
D) Any of the above answers could be correct.

Accepted Answer

In a perfectly competitive market, firms are price takers and must accept the market price. If a firm's price is above its minimum average total cost, it will earn positive economic profits in the short run. This is because the firm's revenue exceeds its total costs, including both explicit and implicit costs. However, in the long run, the entry of new firms will drive down the market price, causing economic profits to disappear.

Quiz 8: Short-Run Costs and Output Decisions

If a perfectly competitive firm's average total cost curve is below its demand schedule at any level of output, then the firm will earn ________ profits.

Economists do not consider the smartphone industry perfectly competitive because

Dominic sells pizza slices for $5 on the Santa Monica Pier. He currently sells 500 slices of pizza per day.This is a perfectly competitive business, and Dominic faces a perfectly price elastic demand curve. If he wants to try to increase daily revenues to $3,000, he should

A firm facing a ________ demand curve, ceteris paribus, will have zero quantity demanded if it raises its price above the market price.

Perfectly competitive firms

If a firm in a perfectly competitive industry lowers its price below the market price, its

It is ________ for a corn producer in a perfectly competitive corn industry to make excess profits because entry into the corn industry is free.

Free exit implies that

A perfectly competitive firm ________ at the level of output where P = ATC.

A firm in a perfectly competitive market has ________ control over price because each firm's product perfectly substitutes for every other firm's product.

If there is an increase in industry supply while the industry demand remains the same, then an individual firm in a perfectly competitive industry currently earning negative profits will see its profits

If a perfectly competitive firm is currently producing where ________, then the firm will earn zero profits.

The closest example of a perfectly competitive industry is

An individual firm's demand curve in a perfectly competitive market is

Perfectly competitive industries are characterized by a homogeneous product.

If there is a decrease in industry supply while the industry demand curve remains the same, then an individual firm in a perfectly competitive industry currently earning profits will see its profits

If P = MC and MC <ATC, then a perfectly competitive firm will earn ________ profits.

The ________ part of a perfectly competitive firm's marginal cost curve is the firm's short-run supply curve.

If the corn industry is perfectly competitive, for corn is downward sloping and is horizontal.

A perfectly competitive firm will earn ________ economic profits in the range of output for which the firm's price is above its minimum average total cost.