Chapter 8

Practice Quiz
Perfect Competition
1. A perfectly competitive market is not characterized by
a. many small firms.
b. a great variety of different products.
c. free entry into and exit from the market.
d. any of the above.
ANS:
b. Perfect competition is characterized by goods that cannot be distinguished from one
another.
2. Which of the following is a characteristic of perfect competition?
a. Entry barriers.
b. Homogeneous products.
c. Expenditures on advertising.
d. Quality of service.
ANS:
b. A homogeneous product is one that cannot be distinguished from the others, for
example, one potato looks just like another potato.
3. Which of the following are the same at all levels of output under perfect competition?
a. Marginal cost and marginal revenue.
b. Price and marginal revenue.
c. Price and marginal cost.
d. All of the above.
ANS:
b. Price equals marginal revenue because each unit is sold at the same price; therefore,
every additional unit sold adds the price to total revenue.
4. If a perfectly competitive firm sells 100 units of output at a market price of $100 per
unit, its marginal revenue per unit is
a. $1.
b. $100.
c. more than $1, but less than $100.
d. less than $100.
ANS:

b. Marginal revenue is defined as the addition to total revenue when selling one unit.
5. Short-run profit maximization for a perfectly competitive firm occurs when the firms
marginal cost equals
a. average total cost.
b. average variable cost.
c. marginal revenue.
d. all of the above.
ANS:
c. Profits are maximized or losses are minimized at the unit of output where MR = MC. If
MR were > than MC, an additional unit would be produced. If MR were < MC, that last
unit would not be produced.
6. A perfectly competitive firm sells its output for $100 per unit, and the minimum
average variable cost is $150 per unit. The firm should
a. increase output.
b. decrease output, but not shut down.
c. maintain its current rate of output.
d. shut down.
ANS:
d. As shown in the next slide, at this output a firms losses exceed its fixed costs; it would
therefore lose more money by staying open than by closing down.
7. A perfectly competitive firms supply curve follows the upward-sloping segment of its
marginal cost curve above the
a. average total cost curve (ATC).
b. average variable cost curve (AVC).
c. average fixed cost curve (AFC).
d. average price curve (APC).
ANS:
b. The supply curve, which is the MC curve, does not extend below the AVC curve
because below this price the firm would close down and supply nothing. See Exhibit 15.

8. Assume the price of the firms product in Exhibit 15 is $15 per unit. The firm will
produce
a. 500 units per week.
b. 1,000 units per week.
c. 1,500 units per week.
d. 2,000 units per week.
e. 2,500 units per week.
ANS:
d. This is the number of units in which MR = MC.
9. The lowest price in Exhibit 15 at which the firm earns zero economic profit in the
short-run is
a. $5 per unit.
b. $10 per unit.
c. $20 per unit.
d. $30 per unit.
ANS:
b. This is the minimum point of the ATC curve at which P = ATC. Exactly a normal
profit is being made, that is, zero economic profit.

10. Assume the price of the firms product in Exhibit 15 is $6 per unit. The firm should
a. continue to operate because it is earning an economic profit.
b. stay in operation for the time being even though it is incurring an economic loss.
c. shut down temporarily.
d. shut down permanently.
ANS:
b. At this price, the firms losses are less than its fixed costs; it will therefore lose less
money by staying open than closing.
11. Assume the price of the firms product in Exhibit 15 is $10 per unit. The maximum
profit the firm earns is
a. zero.
b. $5,000 per week.
c. $1,500 per week.
d. $10,500 per week.
ANS:
a. In perfect competition, Price = AR = MR = the firms short-run demand curve. When P
= ATC, the firms revenues equal its costs, so zero economic profits are made. Normal
profit is included as a part of the firms cost data because it is a necessary expense of
operating the business.
12. In Exhibit 15, the firms total revenue at a price of $10 per unit pays for
a. a portion of total variable costs.
b. a portion of total fixed costs.
c. none of the total fixed costs.
d. all of the total fixed costs and total variable cost.
ANS:
d. At a price of $10, the firm is making an economic profit, which is more than enough
money is being made to meet its fixed costs.
13. As shown in Exhibit 15, the short-run supply curve for this firm corresponds to
which segment of its marginal cost curve?
a. A to D and all points above.
b. B to D and all points above.
c. C to D and all points above.
d. B to C only.
ANS:

b. A supply curve shows how many units will be produced at various prices. The firms
supply curve is its MC curve which lies above its AVC curve because it will always
produce where MR (AR, P) = MC.
14. In long-run equilibrium, the perfectly competitive firms price equals which of the
following?
a. Short-run marginal cost.
b. Minimum short-run average total cost.
c. Marginal revenue.
d. All of the above.
ANS:
d. Long-run equilibrium is at the price in which a normal profit is being made. Normal
profit is when P(AR) = ATC in long-run equilibrium.
15. In a constant-cost industry, input prices remain constant as
a. the supply of inputs fluctuates.
b. firms encounter diseconomies of scale.
c. workers become more experienced.
d. firms enter and exit the industry.
ANS:
d. A constant-cost industry is when the entry or exit of firms has little impact on a firms
cost curves.
16. Suppose that, in the long run, the price of feature films rises as the movie production
industry expands. We can conclude that movie production is a (an)
a. increasing-cost industry.
b. constant-cost industry.
c. decreasing-cost industry.
d. marginal-cost industry.
ANS:
a. An industry in which the expansion of industry output by the entry of new firms
increases the firms cost curves.
17. Which of the following is true of a perfectly competitive market?
a. If economic profits are earned, then the price will fall over time.
b. In long-run equilibrium, P=MR=SRMC=SRATC=LRAC.
c. A constant-cost industry exists when the entry of new firms has no effect on their cost
curves.
d. All of the above.

ANS:
d. All of the above statements are true.
18. Suppose that in a perfectly competitive market, firms are making economic profits. In
the long run, we can expect to see
a. some firms leave.
b. the market price rise.
c. market supply shift to the left.
d. economic profits become zero.
e. production levels remaining the same as in the short run.
ANS:
d. In the long run, economic profits attract firms to enter the industry until zero economic
profits are earned and firms are no longer attracted to the industry.
19. Assume the short-run average total cost of a perfectly competitive industry decreases
as the output of the industry expands. In the long run, the industry supply curve will
a. have a positive slope.
b. have a negative slope.
c. be perfectly horizontal.
d. be perfectly vertical.
ANS:
b. In a decreasing-cost industry, the short-run average total cost curve (SRATC) shifts
lower and the equilibrium price decreases as output increases. The result is a negative
slope for the long run supply curve.
20. The long-run supply curve for a competitive constant-cost industry is
a. horizontal.
b. vertical.
c. upward sloping.
d. downward sloping.
ANS:
a. In a constant-cost industry, both the short-run average total cost curve (SRATC) and
the equilibrium price remain constant as output increases. The result is a zero slope for
the long-run supply curve.