Multiple Choice Questions

1) The market is $3, and the minimum average cost for all firms in this
perfectly competitive industry is $2.50.  Long run we would expect an
increase in:

a) each firm's output.
b) the number of firms.
c) each firm's profit.
d) each firm's average cost.


2) The result that perfectly competitive firms produce at the lowest
per-unit cost is derived from the assumptions of 

a) homogeneous products.
b) diminishing marginal returns.
c) free entry and exit.
d) numerous sellers.


3) A firm will shut down in the shortrun if

a) P < AVC.
b) P > AVC.
c) TR < TC.
d) P < ATC.


4) Each of the following is a characterisitic of long-run equilibrium in a
perfectly competitive industry except

a) total revenue equals total costs.
b) marginal costs are rising.
c) economic profits are zero.
d) firms are entering the industry.


5) A perfectly competitive firm's short-run supply curve is:

a) the segment of the variable cost curve below the total cost curve.
b) the price line.
c) the section of the marginal cost curve above the minimum of average
   variable cost.  
d) same as the market supply curve.


6) A perfectly competitive firm's demand curve is:

a) the segment of the variable cost curve below the total cost curve.
b) the price line.
c) the section of the marginal cost curve above the minimum of average
   variable cost.  
d) same as the market demand curve.


7) Assume that a competitive firm has the following cost and revenue
characterisitics at its current level of output: price=$8.00, average
variable cost=$6.00, and average fixed cost =$4.00.  This firm is

a) incurring a loss of $2.00 per unit and should shut down.
b) realizing only a normal profit.
c) realizing an economic profit of $2.00 per unit.
d) incurring a loss per unit of $2.00, but should continue to operate in
   the short run.


8) The concept of economies of scale implies that   

a) the average cost of production is lower when a larger plant is used.
b) short-run marginal cost curves slope upward eventually.
c) the average cost of production is the higher when a smaller plant is
   used.
d) both a and b.
e) both a and c.

9) The concept of diminishing marginal returns implies that   

a) the average cost of production is lower when a larger plant is used.
b) short-run marginal cost curves slope upward eventually.
c) the average cost of production is the higher when a smaller plant is
   used.
d) both a and b.
e) both a and c.

 
10) Perfect competition is allocatively efficient because

a) the short run shut down point occurs where AVC is at its minimum.
b) all firms end up in the long run producing at minimum average cost
   (P=min AC).
c) consumers end up paying for the product exactly what is the extra cost
   of providing it to them (P=MC).
d) marginal cost intersects average total cost at its minimum.
 

11) Perfect competition is efficient in production because

a) the short run shut down point occurs where AVC is at its minimum.
b) all firms end up in the long run producing at minimum average cost
   (P=min AC).
c) consumers end up paying for the product exactly what is the extra cost
   of providing it to them (P=MC).
d) marginal cost intersects average total cost at its minimum.
 

12) The efficient markets hypothesis is important in understanding why

a) firms enter a perfectly competitive industry if the current firms are
   making normal profit.
b) firms enter a perfectly competitive industry if the current firms are
   making economic profit.
c) perfectly competitive firms are price takers.
d) how firms decide the profit-maximizing output.

 

1) Match the concepts with the assumption that generates the concept.  All
concepts listed have a corresponding assumption.

Example:  Assumption of increasing opportunity cost leads to a "bowed out"
production possibility frontier.


ASSUMPTIONS				
I) Fixed costs do not vary with output.
II) The Law of Diminishing Margnial Returns.
III) Many firms selling homogeneous products.
IV) Free entry and exit.


CONCEPTS

A) Bowl-shaped ATC and AVC curves.
B) In long-run perfect competition, all firms make zero economic profit.
C) Marginal costs eventually start to increase.
D) The demand curve facing an individual perfect competitive firm is
   perfectly elastic.
E) AFC declines as output increases.
F) Perfectly competitive firms are price takers.


2. Think about which of these markets fits the perfect competitive
assumptions the best.

A) Wheat.
B) Soft drinks.
C) Toothpicks.
D) Tennis shoes.
E) Electricity.

3. Discuss the impact of technological improvement on the competitive
firm, the competitive market, and the long-run market supply curve.