Microeconomics, Global Edition (Parkin)

Chapter 12 Perfect Competition

1 What Is Perfect Competition?

1) Perfect competition arises if the ________ efficient scale of a single producer is ________
relative to the demand for the good or service.
A) minimum; small
B) minimum; large
C) maximum; small
D) maximum; large
Answer: A
Topic: How Perfect Competition Arises
Skill: Conceptual
AACSB: Reflective thinking

2) 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.
Answer: D
Topic: How Perfect Competition Arises
Skill: Conceptual
AACSB: Reflective thinking

3) The smallest quantity of output at which long-run average cost is at a minimum is a firm's
________.
A) maximum efficient scale
B) profit-maximizing output point
C) minimum efficient scale
D) efficient output point
Answer: C
Topic: How Perfect Competition Arises
Skill: Conceptual
AACSB: Reflective thinking

1
4) If the minimum efficient scale of a firm is small relative to the demand for the good, then
A) many small firms can compete in the market.
B) several large firms will enter the market thereby reducing competition.
C) there will be no economic profits for any small firms, so no new firms will ever enter the
market.
D) the firms already in the market have lower average total cost than any new firm entering the
market.
Answer: A
Topic: How Perfect Competition Arises
Skill: Conceptual
AACSB: Reflective thinking

5) In perfect competition, the

A) market demand for the good or service is large relative to the minimum efficient scale of a
single producer.
B) market demand for the good or service is small relative to the minimum efficient scale of a
single producer.
C) market demand for the good or service can be small relative to the minimum efficient scale of
a single producer as long as the goods or services are not identical.
D) size of the market demand for the good or service relative to the minimum efficient scale of a
single producer does not affect competition.
Answer: A
Topic: How Perfect Competition Arises
Skill: Conceptual
AACSB: Reflective thinking

6) In perfect competition, ________.

A) there are restrictions on entry into the market
B) firms in the market have advantages over firms that plan to enter the market
C) only firms know their competitors' prices
D) there are many firms that sell identical products
Answer: D
Topic: Perfect Competition
Skill: Conceptual
AACSB: Reflective thinking

7) Perfect competition exists in a market if

A) there are many firms producing an identical product.
B) there are many firms producing a similar product, each of which may have unique features.
C) the firm is protected by a barrier to entry.
D) the firm is always at the break-even point where it is earning only a normal profit.
Answer: A
Topic: Perfect Competition
Skill: Conceptual
AACSB: Reflective thinking

2
8) A market is perfectly competitive if
A) each firm in it can influence the price of its product.
B) there are many firms in it, each selling a slightly different product.
C) there are many firms in it, each selling an identical product.
D) there are few firms in the market.
Answer: C
Topic: Perfect Competition
Skill: Definition
AACSB: Reflective thinking

9) In a perfectly competitive market, there are

A) many buyers and many sellers.
B) many buyers, but there might be only one or two sellers.
C) many sellers, but there might be only one or two buyers.
D) one firm that sets the price for the others to follow.
Answer: A
Topic: Perfect Competition
Skill: Definition
AACSB: Reflective thinking

10) In perfect competition, the product of a single firm

A) has many perfect substitutes produced by other firms.
B) has many perfect complements produced by other firms.
C) is sold under many differing brand names.
D) is sold to different customers at different prices.
Answer: A
Topic: Perfect Competition
Skill: Definition
AACSB: Reflective thinking

11) Which of the following is a defining characteristic of a perfectly competitive market?

A) advertisements by well-known celebrities
B) persistent economic profits in the long run
C) no restrictions on entry into the industry
D) higher prices being charged for certain name brands
Answer: C
Topic: Perfect Competition
Skill: Definition
AACSB: Reflective thinking

3
12) Which of the following is TRUE regarding perfect competition?
I. The firms are price takers.
II. Marginal revenue equals the price of the product.
III. Established firms have no advantage over new firms.
A) I and II
B) II and III
C) I, II and III
D) I only
Answer: C
Topic: Perfect Competition
Skill: Conceptual
AACSB: Reflective thinking

13) In perfect competition

A) many firms sell slightly different products to many buyers.
B) sellers are better informed about the prices than buyers.
C) firms face no restrictions on entry into market.
D) established firms have advantage over new ones.
Answer: C
Topic: Perfect Competition
Skill: Conceptual
AACSB: Reflective thinking

14) Perfect competition implies that

A) there are many firms in the market.
B) all firms are price takers.
C) all firms are producing the same identical product.
D) All of the above answers are correct.
Answer: D
Topic: Perfect Competition
Skill: Definition
AACSB: Reflective thinking

15) A perfectly competitive market is characterized by

A) high barriers to entry.
B) firms that are price setters.
C) firms facing a downward sloping demand curve.
D) no restrictions on entry into the market.
Answer: D
Topic: Perfect Competition
Skill: Conceptual
AACSB: Reflective thinking

4
16) In perfect competition, restrictions on entry into an market
A) apply to both capital and labor.
B) apply to labor but not to capital.
C) apply to capital but not to labor.
D) do not exist.
Answer: D
Topic: Perfect Competition
Skill: Definition
AACSB: Reflective thinking

17) Which of the following is NOT an assumption of perfect competition?

A) many firms
B) many buyers
C) restrictions on entry into the market
D) each firm sells an identical product
Answer: C
Topic: Perfect Competition
Skill: Definition
AACSB: Reflective thinking

18) Which of the following is NOT an assumption of perfect competition?

A) Firms compete by making their product different from products produced by other firms.
B) There are no restrictions on entry into the market.
C) Established firms have no advantage over new firms.
D) Sellers and buyers are well informed about prices.
Answer: A
Topic: Perfect Competition
Skill: Conceptual
AACSB: Reflective thinking

19) Which of the following is NOT an assumption of perfectly competitive markets?

A) many buyers and many sellers
B) no restriction on entry
C) complete information about prices
D) new entrants have higher costs
Answer: D
Topic: Perfect Competition
Skill: Conceptual
AACSB: Reflective thinking

5
20) Which of the following is NOT an assumption of perfect competition?
A) There are many firms, each selling an identical product.
B) There are many buyers.
C) The price each firm sets differs from the prices set by the other firms.
D) There are no restrictions on entry into the market.
Answer: C
Topic: Perfect Competition
Skill: Conceptual
AACSB: Reflective thinking

6
2 The Firm's Output Decision

1) At a firm's break-even point, its

A) total revenue equals its total opportunity cost.
B) marginal revenue exceeds its marginal cost.
C) marginal revenue equals its average variable cost.
D) marginal revenue equals its average fixed cost.
Answer: A
Topic: Break-Even Point
Skill: Conceptual
AACSB: Reflective thinking

2) When Sidney's Sweaters, Inc. makes exactly zero economic profit, Sidney, the owner
A) is taking a loss.
B) will shut down in the short run.
C) makes an income equal to his best alternative forgone income.
D) will boost output.
Answer: C
Topic: Break-Even Point
Skill: Conceptual
AACSB: Reflective thinking

3) The break-even point is defined as occurring at an output rate at which

A) total revenue equals total opportunity cost.
B) economic profit is maximized.
C) marginal revenue equals marginal cost.
D) total cost is minimized.
Answer: A
Topic: Break-Even Point
Skill: Conceptual
AACSB: Reflective thinking

4) A perfectly competitive firm that is producing a positive quantity of a good maximizes its
economic profit if it produces so that
A) total revenue = total cost.
B) marginal revenue = marginal cost.
C) average revenue = average total cost.
D) average total cost = average variable cost.
Answer: B
Topic: Profit-Maximizing Output
Skill: Definition
AACSB: Reflective thinking

7
5) The difference between a perfectly competitive firm's total revenue and its total cost is
A) always positive.
B) always negative.
C) always zero.
D) greatest at the profit-maximizing level of output.
Answer: D
Topic: Profit-Maximizing Output
Skill: Conceptual
AACSB: Reflective thinking

6) A perfectly competitive firm maximizes its profit by

A) setting its price so that it exceeds the marginal revenue.
B) choosing to produce the quantity that sets MC equal to MR.
C) cutting wages.
D) manipulating demand.
Answer: B
Topic: Profit-Maximizing Output
Skill: Conceptual
AACSB: Reflective thinking

7) A firm is producing the profit-maximizing amount of output when it is producing where its
________ curve intersects its ________ curve.
A) MC; MR
B) MC; AVC
C) MC; ATC
D) MC; TR
Answer: A
Topic: Profit-Maximizing Output
Skill: Conceptual
AACSB: Reflective thinking

8) A perfectly competitive firm's economic profit is maximized by producing the amount of

output such that
A) total revenue equals total variable cost.
B) marginal revenue equals marginal cost.
C) total revenue equals total cost.
D) marginal revenue is equal to total revenue.
Answer: B
Topic: Profit-Maximizing Output
Skill: Conceptual
AACSB: Reflective thinking

8
9) A perfectly competitive firm maximizes its profits by producing the amount of output such
that
A) MR = P.
B) MR = MC.
C) P = AVC.
D) P = ATC.
Answer: B
Topic: Profit-Maximizing Output
Skill: Conceptual
AACSB: Reflective thinking

10) A perfectly competitive firm maximizes its economic profit when it produces the quantity
that sets
A) MR = MC.
B) TR = TC.
C) MC =.AVC.
D) MC = ATC.
Answer: A
Topic: Economic Profit
Skill: Conceptual
AACSB: Reflective thinking

11) When the firm produces the quantity that sets marginal revenue equal to marginal cost, a
perfectly competitive firm is
A) determining the price it will set.
B) maximizing its revenues.
C) maximizing its profit.
D) establishing its shutdown point.
Answer: C
Topic: Profit-Maximizing Output
Skill: Conceptual
AACSB: Reflective thinking

12) As long as it does not shut down, a perfectly competitive firm earns the maximum profit as
long as it operates so that
A) its price exceeds its average total cost.
B) market demand is inelastic.
C) its price exceeds its marginal revenue.
D) its marginal revenue equals its marginal cost.
Answer: D
Topic: Profit-Maximizing Output
Skill: Conceptual
AACSB: Reflective thinking

9
13) As long as it does not shut down, a profit-maximizing perfectly competitive firm will
A) always earn an economic profit.
B) produce so that marginal revenue equals marginal cost.
C) produce so that price equals average cost.
D) never set its price equal to its marginal revenue.
Answer: B
Topic: Profit-Maximizing Output
Skill: Conceptual
AACSB: Reflective thinking

14) Charlie's Chimps is a perfectly competitive firm that produces cuddly chimps for children.
The market price of a chimp is $10, and Charlie's produces 100 chimps. The marginal cost of the
100th chimp is $9. Charlie's ________.
A) is maximizing its profit
B) will maximize its profit if it produces more than 100 chimps
C) will maximize its profit if it lowers the price to $9 a chimp
D) will maximize its profit if it produces fewer than 100 chimps
Answer: B
Topic: Profit-Maximizing Output
Skill: Analytical
AACSB: Reflective thinking

15) For a perfectly competitive firm, as its output increases its marginal revenue ________ and
its marginal cost ________.
A) changes; changes
B) changes; does not change
C) does not change; changes
D) does not change; does not change
Answer: C
Topic: Marginal Analysis
Skill: Conceptual
AACSB: Reflective thinking

Output Total Revenue Total Cost

0 $0 $25
1 $30 $49
2 $60 $69
3 $90 $91
4 $120 $117
5 $150 $147
6 $180 $180

10
16) In the above table, the price of the product is
A) $30.
B) $147.
C) $150.
D) $180.
Answer: A
Topic: Total Revenue
Skill: Analytical
AACSB: Analytical thinking

17) In the above table, the firm

A) must be in a perfectly competitive market because its marginal revenue is constant.
B) must be in a perfectly competitive market because its marginal cost curve eventually rises.
C) cannot be in a perfectly competitive market because its short-run economic profits are greater
than zero.
D) cannot be in a perfectly competitive market because its long-run economic profits are greater
than zero.
Answer: A
Topic: Total Revenue
Skill: Analytical
AACSB: Analytical thinking

18) In the above table, the marginal revenue from the fourth unit of output is
A) $30.
B) $147.
C) $150.
D) $180.
Answer: A
Topic: Marginal Revenue
Skill: Analytical
AACSB: Analytical thinking

19) In the above table, if the firm produces 2 units of output, it will
A) make an economic profit of $9.
B) make an economic profit of $60.
C) incur an economic loss of $9.
D) incur an economic loss of $60.
Answer: C
Topic: Profit-Maximizing Output
Skill: Analytical
AACSB: Analytical thinking

11
 Price Quantity demanded
(dollars per CD) (CDs per week)
8.00 30,000
8.50 25,000
9.00 20,000
9.50 15,000
10.00 10,000

Quantity Marginal cost

(CDs per week) (dollars per CD)
50 8.50
100 9.00
150 9.50
200 10.00
250 10.20

20) The first table shows the market demand schedule for CDs, and the second table shows the
cost structure of each firm. The CD market is perfectly competitive and there are 100 identical
firms. The market price of a CD is ________, and ________ CDs are produced and sold.
A) $9.00; 20,000
B) $9.50; 15,000
C) $10.00; 10,000
D) $8.50; 24,000
Answer: B
Topic: Profit-Maximizing Output
Skill: Analytical
AACSB: Analytical thinking

12
3 Output, Price, and Profit in the Short Run

1) If there are 1,000 rutabaga farms, all perfectly competitive, an increase in the price of fertilizer
used for growing rutabagas will
A) have no effect on the total quantity of rutabagas supplied, because no farm has enough market
power to raise the price.
B) have no effect on the total quantity of rutabagas supplied, because each farm's supply curve is
a vertical line.
C) decrease the total quantity of rutabagas supplied, because each farm's supply curve shifts
leftward.
D) reduce the total quantity of rutabagas supplied, because each farm's supply curve is a
horizontal line and will shift upward.
Answer: C
Topic: Change in Industry Costs
Skill: Analytical
AACSB: Reflective thinking

2) The short-run market supply curve for a perfectly competitive market is obtained by summing
the part of each firm's
A) AVC curve that lies above its MC curve.
B) MC curve that lies above its AVC curve.
C) AVC curve that lies below the MC curve.
D) MC curve that lies below the AVC curve.
Answer: B
Topic: The Short-Run Market Supply Curve
Skill: Conceptual
AACSB: Reflective thinking

3) In a perfectly competitive market, the market supply curve is the sum of the
A) supply curves of all the individual firms.
B) average variable cost curves of all the individual firms.
C) average total cost curves of all the individual firms.
D) average fixed cost curves of all the individual firms.
Answer: A
Topic: The Short-Run Market Supply Curve
Skill: Definition
AACSB: Reflective thinking

4) In the short run, a perfectly competitive firm's economic profits

A) must equal zero, that is, the firm earns a normal profit.
B) must be positive.
C) might be positive, negative (an economic loss), or zero (a normal profit).
D) must be negative, that is the firm must incur an economic loss.
Answer: C
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Conceptual
AACSB: Reflective thinking

13
5) In the short run, a perfectly competitive firm
A) can either make an economic profit, incur an economic loss, or make zero economic profit.
B) never incurs an economic loss larger than its average fixed costs.
C) produces at any price.
D) always makes an economic profit.
Answer: A
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Conceptual
AACSB: Reflective thinking

6) In the short run, a perfectly competitive firm

A) cannot shut down.
B) must make zero economic profit.
C) can make an economic profit, incur an economic loss, or make zero economic profit.
D) will not incur an economic loss if it shuts down.
Answer: C
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Conceptual
AACSB: Reflective thinking

7) In the short run, a perfectly competitive firm

A) might not make an economic profit.
B) will always make an economic profit.
C) chooses its optimal plant size.
D) is in equilibrium only when its economic profit is zero.
Answer: A
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Conceptual
AACSB: Reflective thinking

8) In the short run, a perfectly competitive firm will make an economic profit as long as
A) it maximizes its profit.
B) P > AVC.
C) P > AFC.
D) P > ATC.
Answer: D
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Conceptual
AACSB: Reflective thinking

14
9) In the short run, the firm makes zero economic profit when the price is ________ minimum
average total cost, makes an economic profit when the price is ________ minimum average total
cost, and incurs an economic loss when the price is ________ minimum average total cost.
A) equal to; higher than; lower than
B) equal to; lower than; higher than
C) higher than; equal to; lower than
D) lower than; equal to; higher than
Answer: A
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Conceptual
AACSB: Reflective thinking

10) A perfectly competitive firm is making an economic profit when

A) its total revenue is greater than its total cost.
B) the price is greater than the minimum of its average total cost.
C) the price is greater than the minimum of its average variable cost.
D) Both answers A and B are correct.
Answer: D
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Conceptual
AACSB: Reflective thinking

11) A perfectly competitive firm will have an economic profit of zero if, at its profit-maximizing
output, its marginal revenue equals its
A) average total cost.
B) marginal cost.
C) average variable cost.
D) average fixed cost.
Answer: A
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Definition
AACSB: Reflective thinking

12) In a perfectly competitive market, which of the following will increase the economic profit
the firms make in the short run?
A) a decrease in market demand
B) an increase in market demand
C) an increase in labor costs
D) an increase in the number of firms
Answer: B
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Conceptual
AACSB: Reflective thinking

15
13) In a perfectly competitive market in the short run, as the market demand increases, the firms
________ their output and their economic profit ________.
A) increase; increases
B) increase; decreases
C) decrease; decreases
D) decrease; increases
Answer: A
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Conceptual
AACSB: Reflective thinking

14) In the short run, an increase in demand for a good that is sold in a perfectly competitive
market
A) increases the number of firms in the market.
B) increases the economic profits of existing firms in the market.
C) has no effect on the price.
D) causes more firms to shut down.
Answer: B
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Conceptual
AACSB: Reflective thinking

15) Which of the following statements is TRUE?

A) The presence of positive economic profit in a perfectly competitive market is consistent with
the characteristics of a long-run competitive equilibrium.
B) When firms in a perfectly competitive market incur economic losses, some will exit in the
long run, thereby shifting the industry supply curve rightward.
C) If a profit-maximizing firm in a perfectly competitive market is making an economic profit,
then it must be producing at a level of output where price is greater than average total cost.
D) If a profit-maximizing firm in a perfectly competitive market is incurring an economic loss,
then it must be producing at a level of output where price is greater than average total cost.
Answer: C
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Conceptual
AACSB: Reflective thinking

Quantity Total cost, TC

(tattoos per (dollars per
hour) hour)
0 10
1 25
2 35
3 50
4 70
5 95
6 125

16
16) Archibald's Tattoos is a perfectly competitive firm. The firm's costs are shown in the table
above. If the market price of a tattoo is $17.50, what is the firm's economic profit?
A) zero
B) $2.50 per hour
C) $12.50 per hour
D) -$10.00 per hour
Answer: B
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Analytical
AACSB: Analytical thinking

Quantity Total cost

(gloves per day) (dollars)
0 80
1 100
2 105
3 135
4 170
5 210
6 270
7 350
8 450

17) The above table shows the per day total cost for Kiley's Baseball Glove Company. Each
glove is priced at $50 and Kiley's Baseball Glove Company is a perfectly competitive firm. At
which of the following amounts of output is the economic profit maximized for Kiley's Baseball
Glove Company?
A) 0
B) 2
C) 5
D) 8
Answer: C
Topic: Profit-Maximizing Output
Skill: Analytical
AACSB: Analytical thinking

18) The above table shows the per day total cost for Kiley's Baseball Glove Company. Each
glove is priced at $50 and Kiley's Baseball Glove Company is a perfectly competitive firm.
Between which two amounts of output does Kiley's Baseball Glove Company make an economic
profit?
A) 0 and 8
B) 1 and 8
C) 2 and 7
D) 3 and 6
Answer: D
Topic: Economic Profit
17
Skill: Analytical
AACSB: Analytical thinking

Quantity Total cost, TC

(pizzas per (dollars per
hour) hour)
0 10
1 18
2 30
3 48
4 70
5 98
6 120

19) Giuseppe's Pizza is a perfectly competitive firm. The firm's costs are shown in the table
above. If the market price is $15, how much economic profit does the firm make?
A) $0
B) $30
C) -$10
D) -$15
Answer: A
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Analytical
AACSB: Analytical thinking

20) Giuseppe's Pizza is a perfectly competitive firm. The firm's costs are shown in the table
above. If the market price is $20, how much economic profit does the firm make?
A) $0
B) $12
C) -$20
D) -$10
Answer: B
Topic: Economic Profits and Economic Losses in the Short Run
Skill: Analytical
AACSB: Analytical thinking

18
4 Output, Price, and Profit in the Long Run

1) If firms in a perfectly competitive industry are making zero economic profit, then
A) some of those firms will leave the industry, because firms cannot persistently go without
making economic profit.
B) new firms will enter the industry, because the new entrants would be ensured of doing as well
as in their best foregone alternative.
C) there is no incentive for either entry or exit.
D) some of the firms will temporarily shut down.
Answer: C
Topic: Long-Run Adjustments
Skill: Conceptual
AACSB: Reflective thinking

2) Today, firms in a perfectly competitive market are making an economic profit. In the long run,
firms will ________ the market until all firms in the market are ________.
A) exit; covering only their total fixed costs
B) enter; making zero economic profit
C) exit; producing at the minimum point on their long-run average cost curve
D) enter; making zero normal profit
Answer: B
Topic: Long-Run Adjustments; Entry
Skill: Conceptual
AACSB: Reflective thinking

3) Which of the following statements regarding the long-term equilibrium is TRUE?

A) As new firms enter a market, each existing firm increases the quantity it produces.
B) Firms leave a market if they are making zero economic profit.
C) Entry and exit stop when firms are making an economic profit.
D) Entry and exit stop when firms make zero economic profit.
Answer: D
Topic: Long-Run Equilibrium
Skill: Conceptual
AACSB: Reflective thinking

4) The firms in a perfectly competitive are making an economic profit when new firms enter.
The entry shifts the short-run market supply curve ________, the market price ________, and
each firm's economic profit ________.
A) leftward; rises; decreases
B) rightward; rises; increases
C) rightward; falls; decreases
D) leftward; falls; decreases
Answer: C
Topic: Long-Run Adjustments; Entry
Skill: Conceptual
AACSB: Reflective thinking

19
5) Suppose firms in a perfectly competitive industry are making economic profits. As a result
I. new firms enter the industry.
II. the market price falls.
III. the economic profits of the existing firms decrease.
A) I, II and III
B) I and II
C) II and III
D) I and III
Answer: A
Topic: Long-Run Adjustments; Entry
Skill: Conceptual
AACSB: Reflective thinking

6) Economic profit sends a signal to entrepreneurs by telling them where

A) price exceeds marginal cost.
B) there are many buyers and many sellers.
C) the shutdown point is.
D) an above normal return on investment can be earned.
Answer: D
Topic: Long-Run Adjustments; Entry
Skill: Conceptual
AACSB: Reflective thinking

7) In the long run, for a perfectly competitive market, if economic profit is

A) less than zero, then some firms will exit the market and the market supply curve will shift
leftward.
B) greater than zero, then some firms will enter the market and the market supply curve will shift
rightward.
C) equal to zero, then there is no entry or exit of firms into or out of the market.
D) All of the above answers are correct.
Answer: D
Topic: Long-Run Adjustments; Entry
Skill: Definition
AACSB: Reflective thinking

8) Entry in a perfectly competitive market

A) shifts the market supply curve rightward.
B) decreases the market price.
C) shifts the market supply curve leftward.
D) Both answers A and B are correct.
Answer: D
Topic: Long-Run Adjustments; Entry
Skill: Conceptual
AACSB: Reflective thinking

20
9) Suppose firms in a perfectly competitive market are earning an economic profit. As new firms
enter, the price ________ and the economic profit of each existing firm ________.
A) rises; increases
B) rises; decreases
C) falls; increases
D) falls; decreases
Answer: D
Topic: Long-Run Adjustments; Entry
Skill: Conceptual
AACSB: Reflective thinking

Quantity Total cost, TC

(pizzas per (dollars per
hour) hour)
0 10
1 18
2 30
3 48
4 70
5 98
6 120

10) Giuseppe's Pizza is a perfectly competitive firm. The firm's costs are shown in the table
above. If the market price is $15, the firm will
A) shut down.
B) leave the market in the long run.
C) stay in the market in the long run.
D) make an economic profit.
Answer: C
Topic: Long-Run Adjustments; Entry
Skill: Analytical
AACSB: Analytical thinking

11) Giuseppe's Pizza is a perfectly competitive firm. The firm's costs are shown in the table
above. If the market price is $22, the firm will
A) shut down.
B) leave the market in the long run.
C) stay in the market in the long run.
D) incur an economic loss.
Answer: C
Topic: Long-Run Adjustments; Entry
Skill: Analytical
AACSB: Analytical thinking

21
 Quantity Total variable
(dozens of sea cost
shells per day) (dollars)
200 60.00
201 61.00
202 62.50
203 64.00
204 66.00
205 68.50
206 72.00

12) Sue's Sea Shells by the Sea Shore is a perfectly competitive firm selling sea shells at the
market price of $2 per dozen. Sue's Sea Shells by the Sea Shore has fixed costs of $40 per day
and a variable cost schedule in the table above. The profit-maximizing level of output for Sue's
Sea Shells by the Sea Shore is
A) 202 dozen sea shells by the sea shore per day.
B) 204 dozen sea shells by the sea shore per day.
C) 205 dozen sea shells by the sea shore per day.
D) 206 dozen sea shells by the sea shore per day.
Answer: B
Topic: Profit-Maximizing Output
Skill: Analytical
AACSB: Analytical thinking

13) Sue's Sea Shells by the Sea Shore is a perfectly competitive firm selling sea shells at the
market price of $2 per dozen. Sue's Sea Shells by the Sea Shore has fixed costs of $40 per day
and a variable cost schedule in the table above. The maximum profit attainable by Sue's Sea
Shells by the Sea Shore is
A) $262.00 per day.
B) $262.50 per day.
C) $302.00 per day.
D) $302.50 per day.
Answer: C
Topic: Profit-Maximizing Output
Skill: Analytical
AACSB: Analytical thinking

22
14) Sue's Sea Shells by the Sea Shore is a perfectly competitive firm selling sea shells at the
market price of $2 per dozen. Sue's Sea Shells by the Sea Shore has fixed costs of $40 per day
and a variable cost schedule in the table above. Based on this information, we can expect the
number of firms in the sea shell market to
A) decrease.
B) increase.
C) remain constant.
D) It is impossible to say.
Answer: B
Topic: Long-Run Adjustments; Entry
Skill: Conceptual
AACSB: Analytical thinking

15) The above figure shows the cost curves for a perfectly competitive firm. If all firms in the
market have the same cost curves and the price equals $16 per unit
A) the market is in its long-run equilibrium.
B) over time, firms will leave this market.
C) the firm is making zero economic profit.
D) over time, the price will fall as new firms enter the market.
Answer: D
Topic: Long-Run Adjustments; Entry
Skill: Graphing
AACSB: Analytical thinking

23
16) The apple market is perfectly competitive and is in long-run equilibrium. Now a disease kills
50 percent of the apple orchards. In the short run, the price of a bag of apples ________ and the
remaining apple growers make ________ economic profit. In the long run, the ________.
A) increases; zero; price of apples will return to their original level
B) remains the same; zero; orchards will be replanted and growers will make normal profits
C) increases; zero; orchards will be replanted and economic profit will return to zero
D) increases; positive; orchards will be replanted and economic profit will return to zero
Answer: D
Topic: Long-Run Adjustments; Entry
Skill: Conceptual
AACSB: Analytical thinking

17) Homer's Holesome Donuts has determined that its profit-maximizing quantity is 10,000
donuts per year. Homer's earns $12,000 in revenue from the sale of those donuts. Homer's has
two costs. First he pays $16,000 in annual rental payments for its five-year lease on its store.
Second Homer incurs an additional cost of $5,000 for ingredients. Should Homer's exit the
market in the long run?
A) yes, because he is incurring an economic loss
B) yes, because all costs are fixed in the long run
C) no, because he is making an economic profit
D) no, because all costs are variable in the long run
Answer: A
Topic: Long-Run Adjustments; Exit
Skill: Analytical
AACSB: Analytical thinking

18) If firms in a competitive market are ________ then there is ________ for firms to ________
the industry.
A) incurring economic losses; an incentive; exit
B) incurring economic losses; no incentive; exit
C) making economic profits; no incentive; enter
D) making zero economic profit; an incentive; exit
Answer: A
Topic: Long-Run Adjustments; Exit
Skill: Conceptual
AACSB: Reflective thinking

19) Suppose some firms in a perfectly competitive market are incurring an economic loss. As a
result,
A) all the firms will eventually incur an economic loss.
B) some firms will leave the market and the price of the good will rise.
C) some firms will leave the market and the remaining firms' quantity will decrease.
D) the total market economic profit must equal $0.
Answer: B
Topic: Long-Run Adjustments; Exit
Skill: Conceptual
AACSB: Reflective thinking
24
20) Suppose firms in a perfectly competitive market are incurring an economic loss. As firms
exit, the price ________ and the economic loss of the surviving firms ________.
A) rises; increases
B) rises; decreases
C) falls; increases
D) falls; decreases
Answer: B
Topic: Long-Run Adjustments; Exit
Skill: Conceptual
AACSB: Reflective thinking

25
5 Changes in Demand and Supply as Technology Advances

1) If a perfectly competitive market is in long-run equilibrium and there is a permanent decrease

in demand, then
A) some firms will incur economic losses.
B) firms are no longer maximizing profits.
C) some firms must immediately exit.
D) each firm must produce less output in the new long run equilibrium and earn less economic
profit.
Answer: A
Topic: A Permanent Decrease in Demand
Skill: Conceptual
AACSB: Reflective thinking

2) If there is a permanent decrease in demand in a perfectly competitive market, then there is an

initial ________ in price and existing firms ________.
A) rise; make an economic profit
B) rise; incur an economic loss
C) fall; make an economic profit
D) fall; incur an economic loss
Answer: D
Topic: A Permanent Decrease in Demand
Skill: Conceptual
AACSB: Reflective thinking

3) Suppose a perfectly competitive market is in a long-run equilibrium when a permanent

decrease in the market demand occurs. In the long run, which of the following definitely occurs?
A) The price decreases.
B) The number of firms decreases.
C) The firms' marginal cost increases.
D) Marginal revenue increases.
Answer: B
Topic: A Permanent Decrease in Demand
Skill: Conceptual
AACSB: Reflective thinking

4) A perfectly competitive market is in long-run equilibrium. Then demand decreases. The

decrease in demand leads to
A) a rise in the price in the short run.
B) the firms' incurring an economic loss in the short run.
C) firms entering the market in the long run.
D) none of the above
Answer: B
Topic: A Permanent Decrease in Demand
Skill: Analytical
AACSB: Analytical thinking

26
5) In a perfectly competitive market, a permanent decrease in demand initially brings a lower
price, economic
A) loss, and entry into the market.
B) loss, and exit from the market.
C) profit, and entry into the market.
D) profit, and exit from the market.
Answer: B
Topic: A Permanent Decrease in Demand
Skill: Conceptual
AACSB: Reflective thinking

6) In a perfectly competitive market that is in long-run equilibrium, a permanent leftward shift in

the market demand curve
A) raises the price in the short run.
B) raises profits in the short run.
C) leads to new firms entering the market in the long run.
D) lowers the price at first but then raises it as firms leave the market.
Answer: D
Topic: A Permanent Decrease in Demand
Skill: Analytical
AACSB: Reflective thinking

7) In a perfectly competitive market that is in long-run equilibrium, a permanent leftward shift in

the market demand curve
A) raises the price in the short run.
B) raises profits in the short run.
C) leads to firms leaving the market in the long run.
D) raises the price at first but then returns it to its original level in the long run.
Answer: C
Topic: A Permanent Decrease in Demand
Skill: Analytical
AACSB: Analytical thinking

8) New reports indicate that eating turnips helps people remain healthy. The news shifts the
demand curve for turnips rightward. In response, new farms enter the turnip industry. During the
period in which the new farms are entering, the price of a turnip ________ and the economic
profit of each existing firm ________.
A) rises; rises
B) rises; falls
C) falls; rises
D) falls; falls
Answer: D
Topic: A Permanent Increase in Demand
Skill: Conceptual
AACSB: Analytical thinking

27
9) In a perfectly competitive market that is in long-run equilibrium, a rightward shift in the
market demand curve results in
A) the price falling in the short run.
B) the firms' economic profits falling in the short run.
C) firms leaving the industry in the long run.
D) none of the events listed above.
Answer: D
Topic: A Permanent Increase in Demand
Skill: Conceptual
AACSB: Analytical thinking

10) Suppose a perfectly competitive market is in long-run equilibrium. If there is a permanent

increase in demand,
A) at least in the short run, some firms will increase their output.
B) at least in the short run, the price will increase initially.
C) new firms will enter the market.
D) All of the above answers are correct.
Answer: D
Topic: A Permanent Increase in Demand
Skill: Conceptual
AACSB: Reflective thinking

11) The market for maple syrup is perfectly competitive. Suppose that the market is in long-run
equilibrium when the market demand for maple syrup increases. What happens in the short run?
A) Firms will enter the market.
B) Some of the existing firms shut down.
C) The firms decrease production.
D) The firms increase production.
Answer: D
Topic: A Permanent Increase in Demand
Skill: Analytical
AACSB: Reflective thinking

12) The market for maple syrup is perfectly competitive. Suppose that the market is in long-run
equilibrium when the market demand for maple syrup increases. After the demand increases, a
typical firm will
A) make zero economic profit.
B) make an economic profit.
C) incur an economic loss.
D) exit the market.
Answer: B
Topic: A Permanent Increase in Demand
Skill: Analytical
AACSB: Reflective thinking

28
13) The market for maple syrup is perfectly competitive. Suppose that the market is in long-run
equilibrium when the market demand for maple syrup increases. In the long run, firms will
________ the market and the market ________ will ________.
A) leave; supply; decrease
B) enter; supply; increase
C) leave; demand; decrease
D) enter; supply; decrease
Answer: B
Topic: A Permanent Increase in Demand
Skill: Analytical
AACSB: Reflective thinking

14) In a perfectly competitive market, a permanent increase in demand initially brings a higher
price, economic
A) loss, and entry into the market.
B) loss, and exit from the market.
C) profit, and entry into the market.
D) profit, and exit from the market.
Answer: C
Topic: A Permanent Increase in Demand
Skill: Analytical
AACSB: Reflective thinking

15) In a perfectly competitive market that is in long-run equilibrium, which of the following will
NOT occur?
A) Firms make only zero economic profit.
B) Firms' owners earn a normal profit.
C) The price equals the minimum average total cost.
D) Entrepreneurs want to enter this industry.
Answer: D
Topic: Long-Run Equilibrium
Skill: Definition
AACSB: Reflective thinking

16) In the long run, perfectly competitive firms make zero economic profit (their owners earn a
normal profit) because
A) any economic profit would attract newcomers to the industry.
B) the firms are incompetent.
C) any economic loss would increase the demand for the good, thereby raising its price.
D) there are many buyers and sellers.
Answer: A
Topic: Long-Run Equilibrium
Skill: Conceptual
AACSB: Reflective thinking

29
17) When a perfectly competitive market is in its long-run equilibrium, the fact that the firms
make zero economic profit will
A) encourage new firms to enter the market.
B) cause existing firms to shut down.
C) cause existing firms to leave the market.
D) mean that the firms' owners earn a normal return.
Answer: D
Topic: Long-Run Equilibrium
Skill: Conceptual
AACSB: Reflective thinking

18) In a perfectly competitive market, an increase in market demand

A) raises the price in the short run and attracts new firms in the long run.
B) raises the price in the short run and the long run.
C) lowers the price in the short run and in the long run.
D) has no effect on the price in either the short run or the long run because the firms are price
takers.
Answer: A
Topic: A Permanent Change in Demand
Skill: Analytical
AACSB: Reflective thinking

30
19) The figure above shows a typical perfectly competitive corn farm, whose marginal cost curve
is MC and average total cost curve is ATC. The market is initially in a long-run equilibrium,
where the price is $3.00 per bushel. Then, the market demand for corn decreases and, in the short
run, the price falls to $2.50 per bushel. In the new short-run equilibrium, the farm produces
________ bushels of corn and sells corn at ________ per bushel.
A) 250,000; $3.00
B) 250,000; $2.50
C) 300,000; $2.50
D) 200,000; $2.50
Answer: B
Topic: A Permanent Decrease in Demand
Skill: Graphing
AACSB: Analytical thinking

20) The figure above shows a typical perfectly competitive corn farm, whose marginal cost curve
is MC and average total cost curve is ATC. The market is initially in a long-run equilibrium,
where the price is $3.00 per bushel. Then, the market demand for corn decreases and, in the short
run, the price falls to $2.50 per bushel. In the new short-run equilibrium, the farm
A) incurs an economic loss of between $1 and $40,000.
B) makes zero economic profit.
C) incurs an economic loss of between $40,001 and $130,000.
D) incurs an economic loss of more than $130,001.
Answer: C
Topic: A Permanent Decrease in Demand
Skill: Graphing
AACSB: Analytical thinking

31
6 Competition and Efficiency

1) In the long-run equilibrium for a perfectly competitive market

A) the firms' economic profits are zero.
B) there is no incentive for entry or exit.
C) average total costs of production are minimized.
D) All of the above are correct.
Answer: D
Topic: Efficiency of Perfect Competition
Skill: Conceptual
AACSB: Reflective thinking

2) If the donut industry is perfectly competitive and is in long-run equilibrium, then the price of a
donut
A) is greater than marginal cost.
B) is greater than short-run average cost.
C) is greater than long-run average cost.
D) equals long-run average cost.
Answer: D
Topic: Efficiency of Perfect Competition
Skill: Conceptual
AACSB: Reflective thinking

3) In the long-run equilibrium, perfectly competitive firms produce the level of output such that
A) marginal cost is minimized.
B) average total cost is minimized.
C) marginal cost equals the price.
D) Both answers B and C are correct.
Answer: D
Topic: Efficiency of Perfect Competition
Skill: Conceptual
AACSB: Reflective thinking

4) In the long-run equilibrium, perfectly competitive firms produce where

A) marginal cost is minimized.
B) average total cost is minimized.
C) average revenue is zero.
D) All of the above are correct.
Answer: B
Topic: Efficiency of Perfect Competition
Skill: Conceptual
AACSB: Reflective thinking

32
5) The figure above shows the marginal revenue and long-run cost curves for a perfectly
competitive firm. Which of the following statements is TRUE?
A) The firm is producing at minimum long-run average cost.
B) Over time, this firm will leave this industry.
C) The firm is earning positive economic profit.
D) The firm will eventually decrease its production.
Answer: A
Topic: Efficiency of Perfect Competition
Skill: Graphing
AACSB: Analytical thinking

6) The figure above shows the marginal revenue and long-run cost curves for a perfectly
competitive firm. All other firms in the industry have identical curves. Which of the following
statements is TRUE?
A) The firm's average cost exceeds the price.
B) Over time, firms will enter this industry.
C) The firm is earning economic profit.
D) None of the above is true.
Answer: D
Topic: Efficiency of Perfect Competition
Skill: Graphing
AACSB: Analytical thinking

33
7) Consumer surplus ________.
A) equals total revenue minus marginal cost
B) is maximized when the market outcome is efficient
C) equals total revenue minus opportunity cost
D) plus producer surplus is maximized when resources are used efficiently
Answer: D
Topic: Efficiency of Perfect Competition
Skill: Conceptual
AACSB: Reflective thinking

8) In the long-run equilibrium in a perfectly competitive market, the firms produce at the
________ possible average total cost and the price equals the ________ possible average total
cost.
A) highest; highest
B) lowest; lowest
C) highest; lowest
D) lowest; highest
Answer: B
Topic: Study Guide Question, Efficiency of Perfect Competition
Skill: Conceptual
AACSB: Reflective thinking

34