Question 1

The perfectly competitive firm can raise the price of their product because they are able differentiate their product from all others.

Accepted Answer

The characteristic of perfectly competitive markets is that firms cannot differentiate their products from those of their competitors. Therefore, they cannot raise the price of their product above the market price.

Question 2

Under perfect competition, there are many small firms, and the individual firm takes the market price as a given.

Accepted Answer

In perfect competition, there are many small firms and each individual firm is a price-taker, meaning it has no power to influence market price and must accept the market price as given.

Question 3

Market conditions for the perfectly competitive firm can produce four possible short-run results including normal profit, greater than normal profit, operating loss, or cessation of operations.

Accepted Answer

This statement is true. In the short run, a perfectly competitive firm can either make normal profit, earn greater than normal profit, incur an operating loss or cease operations if it cannot cover its fixed costs.

Question 4

In a market that is characterized by free exit, profit serves the function of causing some firms to leave when it is less than normal.

Accepted Answer

In a competitive market, firms that are not earning a normal profit may choose to exit the market, which reduces supply and drives up prices for the remaining firms. This process continues until all remaining firms are earning a normal profit. Therefore, profit serves as a signal for firms to stay or exit the market.

Question 5

In a market that is characterized by free entry and exit, profit serves the function of drawing new firms into the industry when it is greater than normal and causing some firms to leave when it is less than normal.

Accepted Answer

In a market with free entry and exit, potential profits attract new firms while lower than normal profits cause firms to exit the industry. This is a key mechanism for maintaining equilibrium in the long run.

Question 6

In the short run, as long as SMC = MR = P, if price is greater than average variable cost, the firm should shut down.

Accepted Answer

If price is greater than average variable cost, the firm should continue operating in the short run, even if it is experiencing losses. This is because the firm is able to cover its variable costs and can therefore minimize its losses by continuing to produce. However, if price falls below average variable cost, then the firm should shut down in the short run to minimize its losses.

Question 7

The demand curve for the homogeneous product of a perfectly competitive industry is determined by the preferences of consumers.

Accepted Answer

In a perfectly competitive market, producers are price takers and the demand curve is determined by the consumers' willingness to pay for the product. The preferences and behavior of consumers ultimately determine the demand for the product, which in turn affects the market price.

Question 8

Because there are many buyers in the market willing to pay the going price, the firm will raise the price to increase their total revenue.

Accepted Answer

In a competitive market with many buyers willing to pay the going price, a single firm typically does not have the power to raise prices without losing customers to competitors, as buyers can easily switch to other sellers offering lower prices.

Question 9

Since, over the long run, there would be no output produced if a firm's owners did not receive at least a normal return on investment, normal profit is considered to be a cost of production.

Accepted Answer

Normal profit is the return required by owners to continue investing in the business. It is considered a cost of production because without it, there would be no incentive for owners to continue producing goods or services.

Question 10

The demand curve of the perfectly competitive firm is a straight horizontal line at the market price of its product, and this price, P_e, is the industry equilibrium price.

Accepted Answer

In a perfectly competitive market, the individual firm is a price taker, meaning it has no control over the market price of its product. Therefore, the demand curve of a perfectly competitive firm is perfectly elastic, or a horizontal line at the market price. The market price is determined by the intersection of the industry's supply and demand curves, and all firms in the industry sell their product at this market price.

Question 11

The demand curve of the perfectly competitive firm is equal to its average revenue curve.

Accepted Answer

In a perfectly competitive market, the firm is a price taker, meaning that it must accept the market price for its product. Therefore, the demand curve that the firm faces is perfectly elastic (horizontal), which is also equal to its average revenue curve.

Question 12

As long as the output of an individual firm in a perfectly competitive market is very small with respect to the total industry market for the product, the individual firm has no control over the price it charges for its product.

Accepted Answer

In a perfectly competitive market, all firms are price takers and have no control over the price. The market sets the price based on the intersection of supply and demand. If an individual firm tries to charge a higher price, customers will simply choose to buy from another firm that offers a lower price. Therefore, the size of the output of an individual firm does not affect its ability to control the price.

Question 13

Under perfect competition, even though there are many small firms, the individual firm has some influence over the market price.

Accepted Answer

Under perfect competition, each individual firm is a price taker and has no influence over the market price. They must accept the prevailing price and adjust their quantity supplied accordingly.

Question 14

In the long run, because of the entry and exit of firms in the marketplace, a perfectly competitive firm can expect only normal profits.

Accepted Answer

In the long run, if there are no barriers to entry and exit, existing firms will earn only normal profits because new firms will enter the market, increasing competition and driving down prices and profits for existing firms. Similarly, if existing firms are earning below normal profits, some may exit the market, decreasing competition and allowing remaining firms to earn higher profits.

Question 15

In a market that is characterized by free entry and exit, profit serves the function of drawing new firms into the industry when it is less than normal and causing some firms to leave when it is greater than normal.

Accepted Answer

In a market with free entry and exit, profit above normal levels attracts new firms into the industry, while profit below normal levels causes some firms to leave.

Question 16

The demand curve of the perfectly competitive firm is a horizontal line.

Accepted Answer

In perfect competition, a firm is a price taker, which means that it cannot influence the price of its product. Therefore, the demand curve the firm faces is a horizontal line at the prevailing market price.

Question 17

In a market that is characterized by free entry, profit serves the function of drawing new firms into the industry when it is greater than normal.

Accepted Answer

In a market with free entry, potential profit is a signal for new firms to enter the industry and compete for a share of the profits. This mechanism helps to ensure that profits in the long run are not excessive and are kept at a normal level.

Question 18

The demand curve of the perfectly competitive firm is equal to its marginal revenue curve.

Accepted Answer

In a perfectly competitive market, the demand curve facing the firm is perfectly elastic, which means that the price is the same regardless of the quantity produced. So, the marginal revenue curve and demand curve are the same, and both show the same price for each unit sold.

Question 19

In the short run, as long as SMC = MR = P, if price is greater than average variable cost, the firm should continue to operate.

Accepted Answer

As long as the price is greater than the average variable cost, the firm is earning a profit in the short run and should continue to operate. If the price falls below the average variable cost, the firm may need to shut down as it is not able to cover its variable costs.

Question 20

An equilibrium price is one that equates quantity demanded in a market with quantity supplied so that there is no surplus or shortage of the product traded.

Accepted Answer

This is the definition of an equilibrium price.

Quiz 8: Perfect Competition and Monopoly