Question 1

Which of the following is NOT a characteristic of a perfectly competitive market?

Accepted Answer

Firms produce differentiated products.

Question 2

A competitive firm is considered a price taker because:

Accepted Answer

It cannot significantly affect the market price for its output.

Question 3

Given the profit function $$\pi(q) = R(q) - C(q)$$, which of the following statements is true?

Accepted Answer

Profit is maximized when the difference $$R(q) - C(q) is $$greatest.

Question 4

Which rule should a competitive firm follow to determine its profit-maximizing output?

Accepted Answer

Set output where marginal cost equals marginal revenue: $$MC(q) = MR(q).$$

Question 5

Suppose a competitive firm faces a market price $$p$$ and its marginal cost at output $$q^* is$$ $$MC(q^*). $$What condition must hold for the firm to maximize profit?

Accepted Answer

$$MC(q^*) = p$$

Question 6

A firm should shut down in the short run if:

Accepted Answer

Its revenue is less than its avoidable variable cost: $$R(q) \u003c VC(q).$$

Question 7

If a competitive firm's bookkeeper discovers that the firm spent twice as much on its plant (a fixed cost) as previously thought, what should the manager do?

Accepted Answer

Not change the output level, since fixed costs do not affect the output decision.

Question 8

The short-run supply curve of a competitive firm is:

Accepted Answer

Its marginal cost curve above its minimum average variable cost.

Question 9

In the short run, if all firms in a competitive market are identical, the market supply at any price is:

Accepted Answer

$$n$$ times the supply of an individual firm, where $$n is $$the number of firms.

Question 10

If a per-unit tax $$t is $$imposed on all firms in a competitive market, what is the effect on the short-run equilibrium price?

Accepted Answer

The equilibrium price increases, but by less than $$t.$$

Question 11

In the long run, a competitive firm will shut down if:

Accepted Answer

It would make an economic loss by operating, since all costs are variable.

Question 12

The long-run supply curve of a competitive firm is:

Accepted Answer

Its long-run marginal cost curve above the minimum of its long-run average cost curve.

Question 13

Which of the following will cause the long-run market supply curve to slope upward?

Accepted Answer

Input prices rise as output increases.

Question 14

If the market has $$n$$ identical firms, the elasticity of demand facing Firm $$i is $$given by:

Accepted Answer

$$\varepsilon_i = n\varepsilon - (n-1)\$$eta_0$$

Question 15

A residual demand curve for a competitive firm is defined as:

Accepted Answer

$$D^r(p) = D(p) - S^o(p)$$

Question 16

In a market with free entry and exit, what happens if firms are making positive long-run economic profit?

Accepted Answer

New firms will enter the market, increasing supply and driving profit toward zero.

Question 17

Which of the following best describes economic profit?

Accepted Answer

The difference between total revenue and total economic cost, including both explicit and implicit costs.

Question 18

Suppose a competitive firm faces a per-unit tax $$t on $$its output. How does this affect its marginal cost curve?

Accepted Answer

The marginal cost curve shifts upward by $$t.$$

Question 19

In the long-run competitive equilibrium, the market price equals:

Accepted Answer

The minimum long-run average cost.

Question 20

If a large buyer, such as a country, demands a significant share of a good sold in the market, the market supply curve may slope upward because:

Accepted Answer

The residual supply curve reflects the quantity not consumed by other demanders at each price.

Competitive Firms and Markets: Chapter 8 Study Notes

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