Activity in Market Equilibrium and the Perfect Competition Model

ANSWER KEY

Multiple Choice. Choose the best answer.

1. The perfect competition model assumption where the seller is the price-taker.
a. The market consists of many buyers.
b. The market consists of many sellers.
c. The market consists of many buyers and sellers.
d. The market consists of more sellers than buyers.

Answer:____

2. Perfect competition or ____ is an idealized market condition where many sellers compete to
offer the best prices and large sellers have no advantages over smaller ones.
a. Real competition
b. Ideal competition
c. Theoretical competition
d. Pure competition

Answer:____

3. All exchanges in a perfectly competitive market will quickly converge to a higher price.
a. True
b. False

Answer:____

4. In a perfectly competitive market, the demand curve as seen by an individual seller is _.

a. Downward slope
b. Upward slope
c. Flat
d. Vertical

Answer:____

5. In theory, due to competition, homogeneous goods, and perfect information, firms will
continue to match and undercut other firms on the price, until the price drops to the point
where all remaining firms make an economic profit of one
a. True
b. False

Answer:____

6. Firms operating at a minimum efficient scale could charge a price __ to that minimum
average cost and still be viable.
a. Equal
b. Not equal

Answer:____
7. This curve segment provides an analogue to the demand curve to describe the best
response of sellers to market prices and is called the _ supply curve.
a. Market
b. Demand
c. Firm
d. Can't identify

Answer:____

8. Firm supply curve and Market supply Curve are generally __ sloping
a. flat
b. downward
c. curve
d. Upward

Answer:____

9. What happens when the market price is below the equilibrium price?
a. Shortage of goods.
b. Surplus of goods.
c. Prices will decrease further.
d. The quantity demanded will decrease.

Answer:____

10. A market is in equilibrium when...

a. There is a surplus of goods.
b. The price is at its highest possible level.
c. There are no buyers without sellers.
d. Consumers have no incentive to buy more goods.

Answer:____

11. The market demand curve indicates the minimum price that buyers will pay to purchase a
given quantity of the market product.
a. True
b. False

Answer:____

12. In what direction does the curve move when it increases?

a. Right
b. Left

Answer:____

13. Price change of a product changes the curve.

a. True
b. False
Answer:____

14. What does deadweight loss represent?

a. A gain in producer surplus.
b. A loss of economic efficiency when the equilibrium outcome is not achievable or not
achieved.
c. A decrease in demand.
d. An increase in consumer surplus.

Answer:____

15. What happens when the price in a market is above the equilibrium price?
a. Consumer surplus increases.
b. Producer surplus decreases.
c. Deadweight loss is created.
d. Total surplus increases.

Answer:____

16. This means that while all sellers in the market sell a similar good that serves the same basic
need of the consumer, some sellers can make slight variations in their version of the good
sold in the market.
a. Perfect Competition
b. Monopolistic Competition

Answer:____

17. Due to free entry and perfect information in monopolistic competition, the successful firm will
not be able to stop the copycats.
a. True
b. False

Answer:____

18. In a contestable market structure, once it is clear that firms are able to sustain a pact to
maintain above cost prices, price competition will drive the price to where firms will get zero
economic profits.
a. True
b. False

Answer:____

19. Any firm trying to sell at a higher price will lose all its customers or will need to match the
lowest price when they are in a contestable market structure
a. True
b. False

Answer:____

20. It is a strategy where firms keep their costs below the costs of other sellers.
a. Cost Leadership
b. Product Leadership
c. Product Differentiation
d. Cost Differentiation

Answer:____

21. It is a strategy where firms keep their product distinguishable from the competitors.
a. Cost Leadership
b. Product Leadership
c. Product Differentiation
d. Cost Differentiation

Answer:____

22. What is one disadvantage of perfect competition in the long run?

a. Firms are incentivized to innovate extensively
b. Prices are too high for consumers to afford
c. Product variety is limited due to lack of differentiation
d. Resources are inefficiently allocated

Answer:____

23. What determines the quantity a firm supplies in a perfectly competitive market?
a. The firm's total revenue
b. The firm's fixed costs
c.The point where price equals marginal cost
d.The firm's demand curve

Answer:____

24. In a long-run perfect competition market, why do firms earn zero economic profit?
a. Firms collude to keep prices stable
b. Homogeneous products and high competition force prices to match production costs
c. Government regulations impose price controls
d. Consumers are willing to pay higher prices for differentiated products

Answer:____

25. What happens to a firm's production if the price falls below its shutdown point?
a.Temporary Shutdown
b. Maximize production

Answer:____

26. What is the term for the lowest price at which a firm can cover its variable costs and decide
to continue production in the short run?
a. Optimal Point
b. Shutdown point

Answer:____
27. In a perfectly competitive market, what is the name of the curve that represents the total
quantity all firms are willing to supply at various price levels?
a. Firm supply curve
b. Market supply curve

Answer:____

28. What are the two variants of focus strategy?

a. Cost Focus and Differentiation Focus
b. Leadership Focus and Differentiation Focus
c. Cost Focus and Product Focus
d. Leadership Focus and Product Focus

Answer:____

29. Qd < Qs implies that

a. There is a shortage of goods.
b. There is a surplus of goods.
c. Prices will increase further.
d. The quantity demanded will increase.

Answer:____

30. In a particular market, the demand and supply functions for a good are given by:
Demand function: Qd = 100 − 2P
Supply function: Qs = 3P
What is the market equilibrium price and quantity?
a. Equilibrium price = 20, Equilibrium quantity = 60
b. Equilibrium price = 60, Equilibrium quantity = 20
c. Equilibrium price = 20, Equilibrium quantity = 50
d. Equilibrium price = 15, Equilibrium quantity = 45

Answer:____

31. What mechanism guides the market in a perfect competition to move towards equilibrium?
a. Invisible palm
b. Invisible hand
c. Adam Smith
d. Excess demand

Answer:____

32. The point where the market demand curve intersects with the market supply curve is called
the ____.
a. Surplus
b. Price
c. Shortage
d. Market Equilibrium

Answer:____
33. Pursuing both cost leadership and product differentiation strategies is more beneficial than
pursuing merely one of the strategies.
a. True
b. False

Answer:____

34. The market supply curve indicates the maximum price that suppliers would accept to be
willing to provide a given supply of the market product.
a. True
b. False

Answer:____

35. What happens to the price and quantity when the supply and demand curve move to the
right?

Price Quantity

a. Decreases; Increases
b. Indeterminate; decreases
c. Increases; decreases
d. Indeterminate; increases

Answer:____