Question 1

Which of the following best describes a perfectly competitive market?

Accepted Answer

A market with many buyers and sellers trading identical goods, where no individual can influence the price.

Question 2

In a competitive market, what is the condition for a firm to maximize its profit?

Accepted Answer

Produce the quantity where $$P = MC$$

Question 3

Suppose a bakery in a competitive market faces a market price of €2.35 per baguette. If the marginal cost of producing the 120th baguette is €2.35, what should the bakery do?

Accepted Answer

Produce and sell the 120th baguette, as profit is maximized when $$P = MC$$

Question 4

Which of the following statements about competitive equilibrium is correct?

Accepted Answer

Competitive equilibrium maximizes total gains from trade and is Pareto efficient.

Question 5

If a government imposes a tax on producers in a competitive market, what is the most likely immediate effect?

Accepted Answer

The supply curve shifts to the left, reducing equilibrium quantity and increasing the price paid by consumers.

Question 6

Which of the following best explains why deadweight loss (DWL) occurs when a tax is imposed in a competitive market?

Accepted Answer

Some mutually beneficial transactions between buyers and sellers no longer occur due to the tax.

Question 7

Suppose the demand for a product is highly inelastic and the supply is highly elastic. If a tax is imposed, who bears most of the tax burden?

Accepted Answer

Consumers bear most of the tax burden.

Question 8

A government wants to minimize deadweight loss while raising tax revenue. Which type of good should it tax?

Accepted Answer

A good with low price elasticity of demand.

Question 9

If a subsidy is given to producers in a competitive market, what happens to the equilibrium price and quantity?

Accepted Answer

Equilibrium quantity increases and the price received by producers increases.

Question 10

Which of the following is NOT a condition required for the competitive equilibrium to be Pareto efficient?

Accepted Answer

All buyers and sellers have market power.

Question 11

Suppose a price ceiling is set below the equilibrium price in a competitive market. What is the most likely outcome?

Accepted Answer

A shortage of the good and non-price rationing.

Question 12

In the market for second-hand textbooks, if students’ willingness to pay (WTP) increases due to a positive change in consumer beliefs about the product, what happens to the demand curve?

Accepted Answer

The demand curve shifts to the right.

Question 13

Which of the following government policies is most likely to create a surplus in a competitive market?

Accepted Answer

A binding price floor set above the equilibrium price.

Question 14

If the government imposes a minimum wage above the equilibrium wage in the labor market, what is the likely result?

Accepted Answer

A surplus of labor (unemployment).

Question 15

Which of the following best describes the effect of a subsidy in a competitive market?

Accepted Answer

It increases equilibrium quantity, decreases the price paid by consumers, and increases the price received by producers.

Question 16

Which of the following is a real-world example of a price floor?

Accepted Answer

Minimum legal wage laws.

Question 17

A competitive equilibrium is described as Pareto efficient. What does this mean?

Accepted Answer

No individual can be made better off without making someone else worse off.

Question 18

Suppose the government introduces a tax on a good that has many close substitutes. What is the likely effect on deadweight loss?

Accepted Answer

Deadweight loss will be large because demand is elastic.

Question 19

Which of the following is NOT a likely consequence of a binding price ceiling?

Accepted Answer

A surplus of the good.

Question 20

In a competitive market, what does the market supply curve represent?

Accepted Answer

The marginal cost of production for all sellers at each quantity.

Competitive Markets: Demand, Supply, Equilibrium, and Government Policies

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