Perfect Competition

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Who can influence the market price in perfect competition?
Any individual buyer

Any individual seller

No individual buyer or seller (correct)
In a perfectly competitive market, which of the following is correct?
The firm's demand curve is perfectly elastic (correct)

The market demand curve is upward sloping

The firm's demand curve is downward sloping
​The profit-maximizing choice for a perfectly competitive firm will occur where marginal revenue is equal to ________.
Marginal cost (correct)

Fixed cost

Variable revenue
Recall that in perfect competition a firm's demand curve is a horizontal line drawn at the market price level and that P=MR. With this in mind, based on the figure below, total revenues are:
$220

$264

$240 (incorrect)

$200
A perfectly competitive firm should not shut down immediately as long as the price is:
Lower than the zero-profit point

Higher than the average variable cost (correct)

Higher than the average total cost (incorrect)

Lower than the average variable cost (incorrect)
Which of the following statements accurately explains why profits for firms in a perfectly competitive industry tend to vanish in the long run?
The demand for products falls over time, so firms are unable to generate revenue

Firms that experience losses try to increase supply to cover their costs, leading to zero profits

Prices drop when other perfectly competitive firms see an opportunity to earn profits and enter the market (correct)
Suppose there is a perfectly competitive market for grapefruit. If the price for grapefruit is lower than the marginal cost of producing grapefruit, what will happen in the long run, in order for the market to achieve productive and allocative efficiency?
Fewer grapefruit will be produced (correct)

More grapefruit will be produced

The same amount of grapefruit will continue to be produced
Perfect Competition
When the following conditions occur: (1) many firms produce identical products; (2) many buyers are available to buy the product, and many sellers are available to sell the product; (3) sellers and buyers have all relevant information to make rational decisions about the product being bought and sold; and (4) firms can enter and leave the market without any restrictions—in other words, there is free entry and exit into and out of the market.
each firm faces many competitors that sell identical products
perfectly competitive firm (aka. price taker)
A firm in a perfectly competitive market that must take the prevailing market price as given. The pressure of competing firms forces them to accept the prevailing equilibrium price in the market
Firms in a perfectly competitive market are said to be "price takers"—that is, once the market determines an equilibrium price for the product, firms must accept this price. If you sell a product in a perfectly competitive market, but you are not happy with its price, would you raise the price, even by a cent?
Yes, you would raise the price enough to meet your target pricing

Yes, you would raise the price slightly

No, you would not raise the price (correct)
Which of the following are assumptions of perfect competition?
The products are identical (correct)

There are many buyers and sellers (correct)

Consumers have all the relevant information to make rational buying decisions (correct)
Perfectly Competitive Industry Characteristics
1) A large number of small firms
2) Identical products sold by all firms
3) Perfect resource mobility or the freedom of entry into and exit out of the industry
4) Perfect knowledge of prices and technology
In perfectly competitive market, which of the following is correct?
The firm's demand curve is downward sloping and the market demand curve is downward sloping

The market's demand curve is flat and the firm's demand curve is downward sloping

The market demand curve is downward sloping and the firm's demand curve is flat (correct)
Does this graph show the demand curve for a perfectly competitive firm, a perfectly competitive industry, or neither?
Perfectly competitive firm (correct)

Neither

Perfectly competitive industry
Pete owns a firm that produces wheat in a purely competitive market. The firm's demand curve is a:
Vertical Line

Horizontal line (correct)

Downward sloping line
​The demand curve for a firm in a perfectly competitive market is different from that of the entire market. The market demand curve ________, while the perfectly competitive firm's demand curve ________.​
Slopes upward: is a horizontal line

Slopes downward: is a horizontal (correct)

Is a horizontal line: slopes upward
Perfectly Competitive Firm
Has only one major decision to make—namely, what quantity to produce
Profit formula
Profit = Total Revenue-Total Cost
= (Price)(Quantity Produced)-(Average Cost)(Quantity Produced)
Marginal Revenue formula
Marginal Revenue = Change in total revenue/Change in quantity
Marginal Cost Formula
Change in total cost/Change in quantity
How is the total revenue calculated in a perfectly competitive firm?
Quantity of goods sold times the market price (correct)

Quantity of goods sold times the market price, minus the fixed costs

Quantity of goods sold minus the production costs
Given the data provided in the table below, what will the fixed costs equal for production at quantity (Q) level 4?
$35.00

$4.00

$36.00

$9.00 (correct)
If a perfectly competitive firm is producing output at a point where marginal revenue is equal to marginal cost, then it should:
Stick with that level of production in order to maximize profits (correct)

Increase output in order to maximize profits

Decrease output in order to maximize profit
What is the shape of a marginal revenue curve for a perfectly competitive firm?
It slopes upward

It slopes downward (incorrect)

It is flat *
Recall that in perfect competition a firm's demand curve is a horizontal line drawn at the market price level and that P=MR. With this in mind, based on the figure below, total costs are:
$200

$264 (correct)

$240

$220
Refer to the graph below. Total profit is:
$144 (correct)

$132

$243

$288
Recall that in perfect competition a firm's demand curve is a horizontal line drawn at the market price level and that P=MR. With this in mind, based on the figure below, total revenues are:
$220

$264

$240 *

$200 (incorrect)
Recall that in perfect competition a firm's demand curve is a horizontal line drawn at the market price level and that P=MR. With this in mind, based on the figure below, total variable costs are:
$720

$660

$432 (correct)

$576
Even if it is making economic losses, a perfectly competitive firm should keep operating in the short run so long as the price is not:
Higher than the average variable cost

Lower than the average total cost

Lower than the average variable cost (correct)
The point where the marginal cost curve crosses the average cost curve is called the:
Shut-down point

Zero-profit point (correct)

Profit-maximizing point
Entry
When new long-un process of firms entering an industry in response to increased industry profits
Exit
The long-run process of reducing production and shutting down in response to a sustained pattern of industry losses
Constant Cost Industry
Whenever there is an increase in market demand and price, then the supply curve shifts to the right with new firms' entry and stops at the point where the new long-run equilibrium intersects at the same market price as before
Increasing Cost Industry
As the market expands, the old and new firms experience increases in their costs of production, which makes the new zero-profit level intersect at a higher price than before
Decreasing Cost Industry
As the market expands, the old and new firms experience lower costs of production, which makes the new zero-profit level intersect at a lower price than before. In this case, the industry and all the firms in it are experiencing falling average total costs
In long run equilibrium, firms ________.
Earn negative economic profit

Earn positive economic profit

Neither enter nor exit the industry (correct)
For a perfectly competitive firm in the long run, all of the following conditions hold EXCEPT:
Price=MC (marginal cost)

Price=minimum ATC (average total cost)

Price=AFC (average fixed cost) (correct)

MC=minimum ATC (average total cost)
Long-run equilibrium
Where all firms earn zero economic profits producing the output level where P = MR = MC and P = AC
Marginal Revenue
The additional revenue gained from selling one more unit
Market Structure
The conditions in an industry, such as number of sellers, how easy or difficult it is for a new firm to enter, and the type of products that are sold
Shutdown Point
Level of output where the marginal cost curve intersects the average variable cost curve at the minimum point of AVC; if the price is below this point, the firm should shut down immediately
The term ________ refers to a firm operating in a perfectly competitive market that must take the prevailing market price for its product.
Price setter

Business entity

Price taker (correct)

Trend setter
Firms operating in a market situation that creates ________, sell their product in a market with other firms who produce identical or extremely similar products.
A free-market

Perfect competition (correct)

An oligopoly

A perfect monopoly
Recall that in perfect competition a firm's demand curve is a horizontal line drawn at the market price level and that P=MR. With this in mind, based on the figure below, total revenues are:
$660

$720

$432

$576 (incorrect)
Refer to the diagram below. Based on the information illustrated in this graph, which of the following is an accurate statement?
Because this is a perfectly competitive firm, the profit maximizing rule is not P=MR

Production should keep expanding because MR is always less than MC

Profits will be reduced by expanding production to the zone where MC exceeds MR (correct)

Because this is a perfectly competitive firm, the profit maximizing rule is not P=MC
If a firm's revenues do not cover its average variable costs, then that firm has reached its ________.​​
Opportunity margin

Price-taking point

Shutdown point (correct)
For a perfectly competitive firm, the marginal cost curve is identical to the firm's ________.
Supply curve

Average variable cost curve

Demand curve

Average total cost curve (incorrect)
If a firm is producing so that the point chosen along the production possibility frontier is socially preferred, then that firm is said to have achieved:
Allocative efficiency (correct)

Productive efficiency

Utility-maximizing efficiency
In perfect competition if firms produce where P=MC they ensure ________ because the social benefits of production as measured by the price that people are willing to pay, are in balance with the ________ to society of that production.
Economic efficiency: total revenues

Allocative efficiency: marginal costs (incorrect)

Economic efficiency: Marginal revenues

Allocative efficiency: costs
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