Competitive Firms and Markets: Multiple Choice

Chapter 8
Competitive Firms and Markets
Multiple Choice
1) Economists define a market to be competitive when the firms

(a) spend large amounts of money on advertising to lure customers away from the competition.
(b) watch each other’s behavior closely.
(c) are price takers.
(d) All of the above.
Answer: C
Difficulty: 0
Topic: Competition
Question Status: Revised
2) A market’s structure is described by

(a) the number of firms in the market.
(b) the ease with which firms can enter and exit the market.
(c) the ability of firms to differentiate their product.
(d) all of the above.
Answer: D
Difficulty: 0
Topic: Competition
Question Status: New
3) If consumers view the output of any firm in a market to be identical to the output of any other firm
in the market, the demand curve for the output of any given firm
(a) will be identical to the market demand curve.
(b) will be horizontal.
(c) will be vertical.
(d) cannot be determined from the information given.
Answer: B
Difficulty: 0
Topic: Competition
158 Jeffrey Perloff • Microeconomics, Third Edition
4) In the absence of any government regulation on price, if a firm has no power to set price on its own,
one can safely conclude
(a) the demand curve for the firm’s product is horizontal.
(b) there are many firms in the industry.
(c) the market is in long-run equilibrium.
(d) the firms in this industry are not profitable.
Answer: A
Difficulty: 2
Topic: Competition
5) In a perfectly competitive market,

(a) firms can freely enter and exit.
(b) firms sell a differentiated product.
(c) transaction costs are high.
Answer: A
Difficulty: 0
Topic: Competition
6) In a competitive market, if buyers did not know all the prices charged by the many firms,
(a) all firms still face horizontal demand curves.
(b) firms sell a differentiated product.
(c) demand curves can be downward sloping for some or all firms.
(d) the number of firms will most likely decrease.
Answer: C
Difficulty: 1
Topic: Competition
7) Many car owners and car dealers describe their different cars for sale in the local newspapers and
list their asking price. Many people shopping for a used car consider the different choices listed in
the paper. The market for used cars could be described as
(a) competitive.
(b) perfectly competitive.
(c) non-competitive.
(d) having high transaction costs.
Answer: A
Difficulty: 1
Topic: Competition
Chapter 8 Competitive Firms and Markets 159
8) Many car owners and car dealers describe their different cars for sale in the local newspapers and
list their asking price. Many people shopping for a used car consider the different choices listed in
the paper. The absence of which condition prohibits this market from being described as perfectly
competitive?
(a) Buyers and sellers know the prices.
(b) Firms freely enter and exit.
(c) Transaction costs are low.
(d) Consumers believe all firms sell identical products.
Answer: D
Difficulty: 1
Topic: Competition
9) A special license is required to operate a taxi in many cities. The number of licenses is restricted.
More drivers want licenses than are issued. This describes a non-perfectly competitive market
because
(a) taxi services are very different.
(b) firms cannot freely enter and exit the market.
(c) transaction costs are high.
(d) the government generates revenue from the licenses.
Answer: B
Difficulty: 0
Topic: Competition
10) If a firm operates in a perfectly competitive market, then it will most likely
(a) advertise its product on television.
(b) settle for whatever price is offered.
(c) have a difficult time obtaining information about the market price.
(d) have an easy time keeping other firms out of the market.
Answer: B
Difficulty: 1
Topic: Competition
11) If a firm happened to be the only seller of a particular product, it might behave as a price taker as
long as
(a) buyers have full information about the firm’s price.
(b) the transaction costs of doing business with this firm are low.
(c) there are many buyers.
(d) there is free entry and exit.
Answer: D
Difficulty: 2
Topic: Competition
12) The demand curve an individual competitive firm faces is known as its
(a) excess demand curve.
(b) market demand curve.
(c) residual demand curve.
(d) leftover demand curve.
Answer: C
Difficulty: 0
Topic: Competition
13) If a firm makes zero economic profit, then the firm

(a) has total revenues greater than its costs.
(b) must shut down.
(c) can be earning positive business profit.
(d) must have no fixed costs.
Answer: C
Difficulty: 1
Topic: Profit Maximization
14) A small business owner earns $50,000 in revenue annually. The explicit annual costs equal $30,000.
The owner could work for someone else and earn $25,000 annually. The owner’s business profit is
___ and the economic profit is ___.
(a) $20,000, $5,000
(b) $20,000, −$5,000
(c) $25,000, −$5,000
(d) $45,000, −$5,000
Answer: B
Difficulty: 1
15) If marginal revenue equals marginal cost, the firm is maximizing profits as long as
(a) the resulting profits are positive.
(b) marginal cost exceeds marginal revenue for greater levels of output.
(c) the average cost curve lies above the demand curve.
(d) All of the above are required.
Answer: B
Difficulty: 2
Figure 8.1
16) Figure 8.1 shows the cost curves for a competitive firm. If the firm is to earn economic profit, price
must exceed
(a) $0.
(b) $5.
(c) $10.
(d) $11.
Answer: C
Difficulty: 1
17) Figure 8.1 shows the cost curves for a competitive firm. If the firm is to operate in the short run,
price must exceed
(a) $0.
(b) $5.
(c) $10.
(d) $11.
Answer: B
Difficulty: 1
18) Figure 8.1 shows the cost curves for a competitive firm. If the market price is $15 per unit, the firm
will earn profits of
(a) $0.
(b) $4.
(c) $40.
(d) $160.
Answer: D
Difficulty: 1
19) A firm will shut down in the short run if

(a) total fixed costs are too high.
(b) total revenue from operating would not cover all costs.
(c) total revenue from operating would not cover variable costs.
(d) total revenue from operating would not cover fixed costs.
Answer: C
Difficulty: 1
20) If a competitive firm maximizes short-run profits by producing some quantity of output, which of
the following must be true at that level of output?
(a) p = MC.
(b) MR = MC.
(c) p > AVC.
Answer: D
Difficulty: 1
21) If a competitive firm maximizes short-run profits by producing some quantity of output, which of
the following must be true at that level of output?
(a) p > MC.
(b) MR > MC.
(c) p > AVC.
Answer: C
Difficulty: 1
22) If a firm finds that it maximizes short-run profits by shutting down, which of the following must be true?
(a) p < AVC for all levels of output.
(b) p < AVC only for the level of output at which p = MC.
(c) p < AVC only if the firm has no fixed costs.
(d) The firm will earn zero profit.
Answer: A
Difficulty: 1
23) If a profit-maximizing firm finds that, at its current level of production, MR > MC, it will
(a) earn greater profits than if MR = MC.
(b) increase output.
(c) decrease output.
(d) shut down.
Answer: B
Difficulty: 1
24) If a profit-maximizing firm finds that, at its current level of production, MR < MC, it will
(a) decrease output.
(b) increase output.
(c) shut down.
(d) operate at a loss.
Answer: A
Difficulty: 1
25) A firm should always shut down if its revenue is

(a) declining.
(b) less than its average fixed costs.
(c) less than its total costs.
(d) less than its avoidable costs.
Answer: D
Difficulty: 0
26) The competitive firm’s supply curve is equal to

(a) its marginal cost curve.
(b) the portion of its marginal cost curve that lies above AC.
(c) the portion of its marginal cost curve that lies above AVC.
(d) the portion of its marginal cost curve that lies above AFC.
Answer: C
Difficulty: 1
Topic: Competition in the Short-run
27) If a firm is a price taker, then its marginal revenue will always equal
(a) price.
(b) total cost.
(c) zero.
(d) one.
Answer: A
Difficulty: 1
Topic: Competition in the Short Run
28) An increase in the cost of an input will result in

(a) a leftward shift in the firm’s supply curve.
(b) an upward shift of the firm’s marginal cost curve.
(c) a leftward shift of the market supply curve.
Answer: D
Difficulty: 1
29) When the production of a good involves several inputs, an increase in the cost of one input will
cause total costs to
(a) rise more than in proportion.
(b) rise less than in proportion.
(c) remain unchanged.
(d) rise by the exact amount of the input price increase.
Answer: B
Difficulty: 1
Topic: Competition in the Short-Run
30) If a competitive firm is in short-run equilibrium, then

(a) profits equal zero.
(b) it will not operate at a loss.
(c) an increase in its fixed cost will have no effect on profit.
(d) an increase in its fixed cost will have no effect on output.
Answer: D
Difficulty: 1
31) Suppose TC = 10 + (0.1 * q2). If p = 10, the firm’s profits will be

(a) 240.
(b) 250.
(c) 260.
(d) –10 because the firm will shut down.
Answer: A
Difficulty: 1
32) Suppose TC = 10 + (0.1 * q2). If there are 100 identical firms in the market, the market supply curve
is
(a) Q = 1000 * p.
(b) Q = 500 * p.
(c) Q = 100 * p.
(d) Q = 10.
Answer: B
Difficulty: 1
Figure 8.2
33) Figure 8.2 shows the cost curves for a typical firm in a market and three possible market supply
curves. If there are 100 identical firms, the market supply curve is best represented by
(a) curve A.
(b) curve B.
(c) curve C.
(d) Either curve A or B, but definitely not C.
Answer: C
Difficulty: 1
34) If a firm is currently in short-run equilibrium earning a profit, what impact will a lump-sum tax have
on its production decision?
(a) The firm will decrease output to earn a higher profit.
(b) The firm will increase output but earn a lower profit.
(c) The firm will not change output but earn a lower profit.
(d) The firm will not change output and earn a higher profit.
Answer: C
Difficulty: 1
35) Suppose that once a well is dug, water flows out of it continuously without any additional effort.
Customers collect their water and pay a per gallon fee when they leave the site of the well. In the
short run, the competitive firm in this market
(a) will not shut down because variable costs are zero.
(b) has no fixed costs.
(c) faces diminishing marginal returns.
(d) can act as a price setter.
Answer: A
Difficulty: 1
36) Suppose that once a well is dug, water flows out of it continuously without any additional effort.
Customers collect their water and pay a per gallon fee when they leave the site of the well. In the
short run, the competitive firm in this market
(a) has no variable costs.
(b) has no fixed costs.
(c) will shut down.
(d) can produce water at no cost.
Answer: A
Difficulty: 2
37) If a competitive firm cannot earn profit at any level of output during a given short-run period, then
which of the following is LEAST likely to occur?
(a) It will shut down in the short run and wait until the price increases sufficiently.
(b) It will exit the industry in the long run.
(c) It will operate at a loss in the short run.
(d) It will minimize its loss by decreasing output so that price exceeds marginal cost.
Answer: D
Difficulty: 2
38) In deciding whether to operate in the short run, the firm must be concerned with the relationship
between price of the output and
(a) total cost.
(b) average variable cost.
(c) total fixed cost.
(d) the number of buyers.
Answer: B
Difficulty: 1
39) There are currently N identical firms in a market. If it is a perfectly competitive market, the short-run
market supply curve at any given price is
(a) N times the supply of an individual firm.
(b) N − 1 times the supply of an individual firm.
(c) N plus the supply of an individual firm.
(d) Cannot be determined from the information provided.
Answer: A
Difficulty: 1
40) Markets with hit-and-run entry and exit experience

(a) barriers to entry.
(b) firms entering whenever they can make a profit and exiting when they cannot make a profit.
(c) steady long-run economic profit.
(d) a very steady number of firms.
Answer: B
Difficulty: 0
Topic: Competition in the Long Run
41) In the long run, profits will equal zero in a competitive market because of
(a) constant returns to scale.
(b) identical products being produced by all firms.
(c) the availability of information.
(d) free entry and exit.
Answer: D
Difficulty: 1
42) Assuming a horizontal long-run market supply curve, which of the following statements is (are)
TRUE about competitive firms in the long run?
(a) p = MC
(b) p = AC
(c) profit = 0
Answer: D
Difficulty: 1
43) Long-run market supply curves are upward sloping if

(a) firms are identical.
(b) the number of firms is restricted in the long run.
(c) input prices fall as the industry expands.
Answer: B
Difficulty: 1
44) Long-run market supply curves are downward sloping if

(a) firms are identical.
(b) the number of firms is restricted in the long run.
(c) input prices fall as the industry expands.
Answer: C
Difficulty: 1
45) If firms in a competitive market are not identical, then the long-run market supply curve will be
(a) horizontal.
(b) upward sloping.
(c) downward sloping.
(d) undetermined.
Answer: B
Difficulty: 1
46) Suppose that for each firm in the competitive market for potatoes, long-run average cost is minimized at
$0.20 per pound when 500 pounds are grown. If the long-run supply curve is horizontal, then
(a) some firms will enjoy long-run profits because they operate at minimum average cost.
(b) the long-run price will be $0.20 per pound.
(c) each consumer will purchase $100 worth of potatoes.
(d) the long-run price will be set just above $0.20 per pound.
Answer: B
Difficulty: 1
47) Suppose that for each firm in the competitive market for potatoes, long-run average cost is minimized
at $0.20 per pound when 500 pounds are grown. The demand for potatoes is Q = 10,000/p. If the long-
run supply curve is horizontal, then how many firms will this industry sustain in the long run?
(a) 0
(b) 100
(c) 50,000
(d) There is not enough information to answer.
Answer: B
Difficulty: 1
at $0.20 per pound when 500 pounds are grown. The demand for potatoes is Q = 10000/p. If the long-
run supply curve is horizontal, then how much will consumers spend, in total, on potatoes?
(a) $0
(b) $500
(c) $10,000
(d) $50,000
Answer: C
Difficulty: 1
at $0.20 per pound when 500 pounds are grown. The demand for potatoes is Q = 10000/p. If the long-
run supply curve is horizontal, then how many pounds of potatoes will be consumed in total?
(a) 0
(b) 500
(c) 10,000
(d) 50,000
Answer: D
Difficulty: 1
50) A firm that generates zero economic profit usually faces

(a) negative business profit.
(b) zero business profit.
(c) positive business profit.
(d) business profit equal to half the total revenue.
Answer: C
Difficulty: 0
Topic: Zero Profit for Competitive Firms in the Long Run
51) In the long run, competitive firms MUST be profit maximizers because if they do not maximize
profits
(a) they will not survive.
(b) they will not be price takers.
(c) they will attract entry.
(d) the profits that they do earn will only cover variable costs.
Answer: A
Difficulty: 1
52) Long-run economic rent or profit do not exist for fixed factors like land because,
(a) bidding drives up the price of the factor until no economic rent exists.
(b) there is no market for such factors.
(c) these factors have L-shaped isoquants.
(d) these factors will earn economic profits.
Answer: A
Difficulty: 1
True/False/Explain
1) A market is perfectly competitive even if firms have the ability to set their own price as long as the
price difference reflects differences in the product.
Answer: False. If the market is perfectly competitive, there are no differences in the product.
Difficulty: 0
Topic: Competition
2) If transaction costs are high, then it is more likely a firm’s demand curve is downward sloping.
Answer: True. Transaction costs increase the costs for consumers to find a new firm. Thus, high
transaction costs allow a firm to charge more than others.
Difficulty: 1
Topic: Competition
3) Even though fixed costs do not affect the output decision, an increase in fixed costs results in a
wider range of prices for which the firm operates at a loss.
Answer: True. An increase in fixed costs will shift AC upward but leave AVC unchanged. The gap
between AVC and AC represents prices at which the firm will operate at a loss.
Difficulty: 1
4) If a firm cannot earn profits in the short run, it will shut down.
Answer: False. A firm will operate at a loss if the loss incurred from production is less than the loss
incurred from shutting down. Even if the firm shuts down, it still must pay its fixed costs.
Difficulty: 1
5) A competitive firm’s supply curve is identical to its marginal cost curve.

Answer: False. The statement is only partly correct. The supply curve is only that portion that lies
above AVC.
Difficulty: 1
6) If firms in a competitive market are identical, the long-run market supply curve is horizontal.
Answer: False. The horizontal long-run supply curve also requires that factor prices do not increase
with industry expansion and that the number of firms is not restricted.
Difficulty: 1
7) If entry is limited due to a limited input, firms in that market earn long run economic profit.
Answer: False. The price of the limited input will be bid up until zero economic profits result in the
market that uses the input.
Difficulty: 1
Problems
1) Suppose there are 20 competitive firms in a market. The supply curve of each firm is q = 2p. The
market demand is Q = 200 − 2p. What is the residual demand curve facing a typical firm?
Answer: The residual demand curve is equal to the market demand curve minus the supply of all the
other firms. The supply of the other 19 firms is 38p. The residual demand is 200 − 40p.
Difficulty: 2
2) Explain why individual firms in competitive markets face more elastic demand curves than the
market as a whole.
Answer: In a competitive market, if an individual firm increases its price it will lose all of its
customers, as consumers simply buy from another firm. However, if the price of the good increases
for all firms some consumers will not continue to buy the good, but for many prices some consumers
will continue to purchase the good.
Difficulty: 2
Topic: Competition
3) If a firm operates at a loss, the loss is equal to TC − TR. If the firm shuts down instead, its loss is
equal to FC. Given this, show that price must exceed AVC for the firm to operate at a loss and not
shut down.
Answer: The firm operates at a loss if TC − TR < FC. Adding TR − FC to both sides yields
VC < TR. Dividing by q yields AVC < p. That is, the firm will operate at a loss as long as AVC < p.
Difficulty: 1
4) Suppose a firm has the following total cost function TC = 100 + 2q2. If price equals $20, what is the
firm’s output decision? What are its short-run profits?
Answer: MC = 4q. To maximize profit, set 20 = 4q, or q = 5. Profit = TR − TC = (20 * 5) −
(100 + 50) = −50. Since FC = 100, the firm will produce 5 units and operate at a loss of 50 rather
than shutting down and incurring a loss of 100.
Difficulty: 1
5) Suppose a firm has the following total cost function: TC = 100 + 4q2. What is the minimum price
necessary for the firm to earn profit? Below what price will the firm shut down in the short run?
Answer: AC = 100/q + 4q. This is minimized when dAC/dq = 0, or −100/q2 + 4 = 0. Solving yields
q = 5 and AC = 40. Thus, a price greater than $40 is required for the firm to earn profit.
AVC = 4q and MC = 8q. Since AVC is below MC for levels of output, AVC will be less than price
for all levels of output. The firm will not shut down in the short run.
Difficulty: 1
Figure 8.3
6) Figure 8.3 shows the cost curves for a typical firm in a competitive market. Note that if p = 10, then
MC = p at both q = 5 and q = 60. Can they both yield maximum profit? Explain.
Answer: No, at q = 5, p = MC, but this is not profit maximization; it is profit minimization. Profits
expand as output increases since MR > MC for higher levels of output. At q = 60, an increase or decrease
in output causes profits to fall, so this is the profit-maximizing q. Thus, one way of wording the “second
order condition” for profit maximization is that MC must cut the demand curve from below.
Difficulty: 2
7) Figure 8.3 shows the cost curves for a typical firm in a competitive market. From the graph, estimate
the firm’s profits when price equals $10 per unit.
Answer: When price = 10, p =MC when q = 60. TR = 600. The AC is just above 8.5, say 8.6. This
yields TC = 516. The firm’s profit is estimated to be around $84.
Difficulty: 1
Topic: Competition in the Short-run
8) Figure 8.3 shows the cost curves for a typical firm in a competitive market. If there are 200 identical
firms, estimate the market quantity supplied when p = 4, 8, and 10.
Answer: When p = 4, p < AVC so no firms will produce. At p = 8, each firm produces 50 units at a
loss. At p = 10, each firm produces 60 units. The market quantity supplied at each price is:
p Q
4 0
8 10,000
10 12,000
Difficulty: 1
Figure 8.4
9) Draw a graph that shows how the short-run shut-down price changes when an input price increases.
Answer: See figure 8.4
Difficulty: 1
10) Suppose there are 1000 identical wheat farmers. For each, TC =10 + q2. Derive the market supply
curve.
Answer: For each MC = 2q and AVC = q. Thus MC > AVC for all levels of output. The firm sets
p = 2q or q =0.5p. Since there are 1000 firms each producing q, market supply equals Q = 500p.
Difficulty: 1
11) Suppose there are 1000 identical wheat farmers. For each, TC =10 + q2. Market demand is Q =
600,000 − 100p. Derive the short-run equilibrium Q, q, and p. Does the typical firm earn a short-run
profit?
Answer: The firm’s supply is q = 0.5p; market supply is Q = 500p. Market equilibrium can be found
as 500p = 600,000 − 100p, or 600p =600,000, so p =1,000 and Q = 500,000. q = 0.5p = 500. Profit =
(500* 1,000) − (10 + 250,000) = 249,990. Each firm earns a profit.
Difficulty: 1
12) If the shut down rule, p<AVC, is the same in the short run and the long run, explain why the shut
down prices may be different.
Answer: In the long run all costs are variable. In the long run the average variable costs is usually
higher than in the short run.
Difficulty: 1
Figure 8.5
13) Figure 8.5 shows the long-run cost curves for a typical firm in a competitive market. If the number
of firms is unrestricted and input costs are constant, derive the long-run market supply curve.
Answer: The long-run market supply curve is horizontal at a price of $10 per unit.
Difficulty: 0
14) All the supply of peppermint oil is produced from mint plants grown in one county by several
competitive growers (the number of growers is not limited). The quality of land in the county varies
greatly. Would you expect the long-run market supply curve to slope upward, downward, or remain
constant? Why?
Answer: The long-run market supply curve will slope up because the growers have different costs.
Those growers with poor-quality land have a higher average cost of production. The horizontal sum
of the individual supply curves will slope up.
Difficulty: 1
Figure 8.6
15) Suppose an industry has no fixed costs. Draw two graphs side by side for the industry. In the left
graph draw a U-shaped average cost curve and the corresponding marginal cost curve. In the right
graph, draw a downward sloping market demand curve. Also in the right graph, draw a short-run
supply curve that would generate positive profit, and the long-run supply curve that would result.
Answer: See Figure 8.6.
Difficulty: 2
Question Status: Previous edition
16) Suppose all firms in a competitive market are currently in both short-run and long-run equilibrium.
What impact will a lump sum tax have on each firm in the short run? in the long run?
Answer: In the short run, the lump sum tax represents a fixed cost. The firm’s output decision is
unchanged, but its profits decrease. In the long run, the tax raises the LRAC of each firm, but not
MC. Minimum AC is higher, so price is higher. With a higher price, each firm produces a greater
quantity, but the higher price means less quantity is demanded in total; thus, the number of firms
will decrease.
Difficulty: 2
17) Suppose market demand is Q = 1000 − 4p. If all firms have LRAC = 50 − 5q + q2, how many firms
will there be when this industry is in long-run equilibrium?
Answer: The long-run market supply curve is horizontal at the minimum LRAC. LRAC is
minimized when −5 + 2q = 0 or q = 2.5. At this level of output, LRMC = LRAC = 43.75. At this
price, 825 units are demanded. If each firm produces 2.5 units in the long run, then 330 firms will be
in this market.
Difficulty: 2
18) Even if two competitive firms in the same market have different production technologies, they will
each earn long-run zero profits. Why?
Answer: The firm that has more productive resources will have the cost of those resources bid up by
the marketplace. The more productive the resource, the more expensive it will be. This price is bid
up until the firm’s profits are zero. The firm with less productive resources will also have zero
profits because it is not paying as much for its resources. There is no such thing as a free lunch or a
free productivity gain.
Difficulty: 2

Competitive Firms and Markets: Multiple Choice

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What is the definition of a competitive market?

What is the definition of a competitive market?

What are some characteristics of a perfectly competitive market?

What are some characteristics of a perfectly competitive market?

Chapter 8

Competitive Firms and Markets

1) Economists define a market to be competitive when the firms

2) A market’s structure is described by

5) In a perfectly competitive market,

13) If a firm makes zero economic profit, then the firm

19) A firm will shut down in the short run if

25) A firm should always shut down if its revenue is

26) The competitive firm’s supply curve is equal to

28) An increase in the cost of an input will result in

30) If a competitive firm is in short-run equilibrium, then

31) Suppose TC = 10 + (0.1 * q2). If p = 10, the firm’s profits will be

40) Markets with hit-and-run entry and exit experience

43) Long-run market supply curves are upward sloping if

44) Long-run market supply curves are downward sloping if

50) A firm that generates zero economic profit usually faces

5) A competitive firm’s supply curve is identical to its marginal cost curve.

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