ID NUMBER: ______________________________

Chapter 8 and 9: Cost , Output and Perfect Competition: SR AND LR

1. To determine whether a market is perfectly competitive, economists examine the

a. number of firms in the market.
b. similarities among the products of the different firms in the market.
c. ease of entry and exit by firms in the market.
d. All of the above are correct.

2. Which of the following is closest to the economist's definition of perfect competition?

a. the airline industry
b. the soft drink industry
c. the fishing industry
d. the long-distance telephone service

3. The result that perfectly competitive firms produce at the lowest per-unit cost is derived from the
assumptions of
a. homogeneous products.
b. few sellers.
c. firms facing horizontal demand curves.
d. free entry and exit.

4. In a market with perfectly competitive firms, the market demand curve is usually ____ and the demand curve
facing each individual firm ____.
a. upward sloping; horizontal
b. downward sloping; horizontal
c. horizontal; downward sloping
d. downward sloping; downward sloping

5. A firm facing a horizontal demand curve

a. cannot affect the price it receives for its output.
b. always produces at an output at which P = MR.
c. faces perfectly elastic demand for its product.
d. All of the above are correct.

6. For a perfectly competitive firm, marginal revenue equals average revenue because the
a. firm's supply curve is horizontal.
b. industry's demand curve is horizontal.
c. firm's demand curve is horizontal.
d. industry's supply curve is horizontal.

7. At a perfectly competitive firm's short-run equilibrium level of output,

a. P = MR = MC.
b. P = MR, but MR does not equal MC.
c. P = MC, but MR does not equal MC.
d. MR = MC and P < MR.

8. In short-run equilibrium, a perfectly competitive firm

a. may earn a profit or a loss.
b. always earns a profit.
c. never earns a profit.
d. earns a profit only if the firm has no fixed cost.

9. A firm in short-run equilibrium always earns positive profits if

a. SRAC > P > SRAVC.
b. SRAR > SRAC.
c. MR = MC.
d. SRAC > MC.
10. A firm will shut down if
a. TR - TC > TFC.
b. TR + TC > TFC.
c. TC - TR > TFC.
d. TFC + TVC > TR.

Figure 10-1

11. If the profit-maximizing firm depicted in Figure 10-1 is perfectly competitive, how much output should it
produce?
a. A
b. B
c. C
d. D

12. A firm earns a profit of exactly zero at its optimal output level only if
a. P = MR.
b. P = MC.
c. P = AC.
d. P = SR AVC.

Table 10-1

Q (in units) AFC (in dollars) AVC (in dollars) MC (in dollars)
0 C C C
2 2.5 18 10
4 1.25 14 14
6 0.83 18 42
8 0.63 30 94
10 0.5 50 170

13. In Table 10-1 are the short-run cost schedules of a perfectly competitive firm. If the market price of output is
$50, the firm will produce ____ units and earn a profit of ____.
a. 6; $187.02
b. 6; $48
c. 8; $154.96
d. 8; $245.04

14. The quantity which a firm will supply in the short run
a. can be read from its average cost curve.
b. can be read from its average variable cost curve.
c. can be read from the firm's marginal cost curve above average variable cost.
d. is always zero above minimum average variable cost.
 Figure 10-2

15. Figure 10-2 shows demand and short-run cost curves for a perfectly competitive firm. At its profit-
maximizing level of output, the firm's short-run TC is represented by area
a. ADFO.
b. BGHC.
c. BGIO.
d. ADGIO.

16. Figure 10-2 shows demand and short-run cost curves for a perfectly competitive firm. At its profit-
maximizing output, the firm's total ____ is represented by area ____.
a. loss; GBHC
b. profit; ADGHC
c. loss; ADEC
d. profit; EGH

17. Figure 10-2 shows demand and short-run cost curves for a perfectly competitive firm. In the short run, this
firm would
a. earn positive economic profits.
b. earn economic losses.
c. go out of business.
d. Cannot be determined with the information given.

18. In the short run, perfectly competitive firms can

a. make an economic profit.
b. take a loss.
c. break even.
d. All of the above are correct.

19. The supply curve for a perfectly competitive industry is obtained by

a. making an empirical study of historical data.
b. vertically summing the supply curves of firms in the industry.
c. horizontally summing the average cost curves of firms in the industry.
d. horizontally summing the supply curves of firms in the industry.
 Figure 10-3

20. In Figure 10-3, the profit maximizing firm will operate at a level of
a. OJ.
b. OG.
c. OI.
d. OH.

21. In Figure 10-3, the perfectly competitive firm is realizing a

a. loss equal to ABCE.
b. profit equal to ABCE.
c. profit equal to ABDF.
d. loss equal to ABDF.

Figure 10-4

22. Figure 10-4 shows the industry's supply and demand curves in panel (1) and the cost curves of a firm in the
industry in panel (2). At S1, the firm is
a. shut down.
b. incurring losses.
c. earning zero economic profits.
d. earning economic profit greater than zero.

23. Figure 10-4 shows the industry's supply and demand curves in panel (1) and the cost curves of a firm in the
industry in panel (2). At S2, the firm is
a. shut down.
b. incurring losses.
c. earning zero economic profits.
d. earning economic profit greater than zero.
24. Figure 10-4 shows the industry's supply and demand curves in panel (1) and the cost curves of a firm in the
industry in panel (2). At S3, the firm is
a. shut down.
b. incurring losses.
c. earning zero economic profits.
d. earning economic profit greater than zero.

Figure 10-5

25. In Figure 10-5, points which lie on the firm's short-run supply curve are
a. A, B, C.
b. C, D, H.
c. F, E, G.
d. A, C, H.

26. The long run for the industry is defined as a period of time long enough for
a. any new firm that desires to enter the industry.
b. any old firm that desires to leave the industry.
c. all aspects of production to vary, including the number of firms in the industry.
d. All of the above are correct.

27. Which of the following statements is not true in a perfectly competitive industry in long-run equilibrium?
a. A profit-maximizing firm may produce any output level at which P < LRAC.
b. Every firm produces at an output level at which MC = LRAC.
c. There is no entry or exit from the industry.
d. No firm earns an economic profit.

28. The entry of firms into a perfectly competitive industry causes the supply curve to
a. increase its slope.
b. decrease its slope.
c. move farther toward the right.
d. move toward the left.

29. The long-run supply curve of an industry equals the industry's

a. long-run marginal cost curve.
b. the horizontal sum of all firms' supply curves at any point in time.
c. long-run average cost curve.
d. long-run total variable cost curve.
 Figure 10-6

30. In Figure 10-6, the price at long-run equilibrium is

a. $5.
b. $10.
c. $20.
d. $35.
STRUCTURE QUESTIONS

1. The following table contains information for a price taking competitive firm.
Complete the table and determine the profit maximizing level of output (round
your answer to the nearest whole number).

Output Total Marginal Fixed Average Total Average Marginal

Cost Cost Cost Cost Revenue Revenue Revenue

0 25 25 0
1 35 25 40
2 60 25 80
3 100 25 120
4 185 25 160
5 285 25 200
6 405 25 240

2. Complete the following table and determine the point of profit maximization.

Quantity Total Rev- Marginal Marginal Total Cost Profit Marginal

enue Revenue Cost Profit
100 500 200 300
101 504.95 204.5 300.45
102 509.85 209.10 300.75
103 514.70 213.80 300.9
104 519.50 218.60 300.9
105 524.25 223.50 300.75
106 528.95 228.50 300.45
107 533.60 233.60 300
108 538.20 238.80 299.4
109 542.75 244.10 298.65
110 547.25 249.50 297.75
3. Given Fixed cost is RM3000, and variable cost is 10Q, such as shown in the
following diagram.

Cost
VC = 10Q

3000
FC

20
Output (Q)

i) Calculate the total cost at production of output is equal to 20

ii) Calculate the average cost at production of output is equal to 20

iii) Calculate the Average Fixed cost when the output is 20

iv) Calculate the marginal cost

4. Answer the following question based on the diagram below

Cost
MC AC

50 AV
40
30
25

40 50
Output (Q)

Production of Firm A

i) What is the maximum output can be produce by firm A if it is oper-

ated under Perfect competition market?

ii) Calculate the profit at production such as in question (i).

iii) If price drop to RM25, what happen to firm A.