Chapter Seven: Perfect competition

Question 1

A firm in any market structure will maximize profit in the short run where:

	a)	It sets MC = MR; MC cuts MR from above; and price exceeds average variable cost.
	b)	It sets AC = price; AC is at a minimum; and price exceeds average total cost.
	c)	It sets MC = MR; MC cuts MR from below; and price exceeds average variable cost.
	d)	It sets MC = MR; MC cuts MR from below; and price exceeds average fixed cost.
	e)	It sets AC = AR; AC cuts AR from below; and price exceeds average variable cost.
Correct.Incorrect. The answer is c) It sets MC = MR; MC cuts MR from below; and price exceeds average variable cost.Your answer has been saved.

Question 2

The long-run supply curve in a perfectly competitive industry, assuming all firms have the same technology, will be:

	a)	Positively sloped if input prices fall as production increases.
	b)	Negatively sloped if input prices fall as production increases.
	c)	Horizontal if input prices rise as production increases.
	d)	Negatively sloped if input prices rise as production increases.
	e)	Horizontal if input prices fall as production increases.
Correct.Incorrect. The answer is b) Negatively sloped if input prices fall as production increases.Your answer has been saved.

Question 3

Which one of the following is true for the long-run supply curve of an industry under perfect competition, where all firms have identical cost structures and there are no entry barriers?

	a)	The long-run industry supply curve will be horizontal if input prices rise as new firms enter the industry.
	b)	The long-run industry supply curve will be upward sloping as all firms have rising marginal costs.
	c)	The long-run industry supply curve will be upward sloping only if input prices fall as output expands as a result of new firms entering the industry.
	d)	The long-run industry supply curve will be negatively sloped only if input prices fall as output expands as a result of new firms entering the industry.
	e)	The long-run industry supply curve will be horizontal if input prices fall as new firms enter and the falling input prices offset the rising marginal costs of each firm.
Correct.Incorrect. The answer is d) The long-run industry supply curve will be negatively sloped only if input prices fall as output expands as a result of new firms entering the industry.Your answer has been saved.

Question 4

A firm can sell its product for £30 each in a competitive output market. Its total cost of production for the production range of 100 units to 105 units is given below:

	a)	101
	b)	102
	c)	103
	d)	104
	e)	105
Correct. Incorrect. The answer is a) 101Your answer has been saved.

Question 5

A firm can sell its product for £20 each in a competitive output market. Its total cost of production for the production range of 200 units to 205 units is given below:

What is the profit maximising level of production?

	a)	201
	b)	202
	c)	203
	d)	204
	e)	205
Correct.Incorrect. The answer is b) 202.Your answer has been saved.

Question 6

Which one of the following is not true for the long-run equilibrium position of a firm and industry under perfect competition, where all firms have identical costs and there are no entry barriers?

	a)	All firms will produce the output for which average variable cost is at a minimum.
	b)	Each firm will produce the output for which price is equal to marginal cost.
	c)	Each firm will make zero pure (economic or excess) profits.
	d)	Each firm will produce at the minimum point of its average total cost curve.
	e)	Each firm will be producing at a point where marginal cost is equal to average total cost.
Correct.Incorrect. The answer is a) All firms will produce the output for which average variable cost is at a minimum.Your answer has been saved.

Question 7

A firm can sell its product for £40 each in a competitive output market. Its total cost of production for the production range of 100 units to 105 units is given below:

What is the profit maximising level of production?

	a)	101
	b)	102
	c)	103
	d)	104
	e)	105
Correct.Incorrect. The answer is c) 103.Your answer has been saved.

Question 8

Which one of the following best describes the profit maximizing short-run equilibrium position of a firm that is in a perfectly competitive market?

	a)	It will produce the output for which price is equal to average variable cost.
	b)	It will produce the output for which price is equal to marginal cost.
	c)	It will produce the output for which average variable cost is at a minimum.
	d)	It will produce the output that maximizes total revenue.
	e)	It will produce the output for which marginal revenue is zero.
Correct.Incorrect. The answer is b) It will produce the output for which price is equal to marginal cost.Your answer has been saved.

Question 9

A firm can sell its product for £10 each in a competitive output market. Its total cost of production for the production range of 200 units to 205 units is given below:

What is the profit maximising level of production?

	a)	201
	b)	202
	c)	203
	d)	204
	e)	205
Correct.Incorrect. The answer is c) 203.Your answer has been saved.

Question 10

Which one of the following is not true for a profit maximising firm producing an identical product in two different plants (factories) where the firm is a price taker in its output market? It should:

	a)	Close down a plant for which the product price does not exceed its average variable cost at any range of production.
	b)	Operate so that average costs are equal in the two plants.
	c)	Operate both plants at a production level where marginal costs are equal in the two plants.
	d)	Operate the plants so that the sum of profits from the two plants is as great as possible.
	e)	Close down both plants if neither can cover its average variable cost at any range of production.
Correct.Incorrect. The answer is b) Operate so that average costs are equal in the two plants.Your answer has been saved.

Question 11

The equilibrium for each firm in a perfectly competitive industry in the long run (that is where there is no further incentive for entry or exit of firms) will be characterised by which of the following:

	a)	It sets MC = MR; price exceeds average total cost, and it makes positive economic profit (also know as abnormal or excess profit).
	b)	It sets MC = price; average variable cost is at its minimum; and price exceeds average total cost.
	c)	It sets MC = MR; it produces at the minimum point of average total cost curve and makes zero economic profit.
	d)	It sets MC = MR; MC cuts MR from above; and price exceeds average fixed cost.
	e)	It sets average fixed cost at a minimum; average variable cost is equal to price; and economic profit is positive.
Correct.Incorrect. The answer is c) It sets MC = MR; it produces at the minimum point of average total cost curve and makes zero economic profit.Your answer has been saved.

Question 12

Below are five possible statements about rules for profit maximization for any firm in the short run.

i) Marginal cost must be equal to marginal revenue.
ii) The marginal cost must be rising relative to marginal revenue at the optimum.
iii) The marginal revenue must be rising relative to marginal cost at the optimum.
iv) The product price must exceed average variable cost for some range of production.
v) Average fixed cost must be at its minimum point.

Which one combination of these conditions is correct?

	a)	i, iv and v
	b)	i, ii and iv
	c)	ii, iii and iv
	d)	iii, iv and v
	e)	i, iii and v
Correct.Incorrect. The answer is b) i, ii and ivYour answer has been saved.