Question 1

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

Accepted Answer

There are significant barriers to entry

Question 2

In the short run, a perfectly competitive firm will maximize profit by producing the quantity where:

Accepted Answer

$$MR = MC$$

Question 3

If the market price falls below a firm’s minimum average variable cost (AVC), what should the firm do in the short run?

Accepted Answer

Shut down production temporarily

Question 4

Why is the marginal cost (MC) curve above the minimum AVC considered the firm’s short-run supply curve in perfect competition?

Accepted Answer

Because it shows the minimum price at which the firm will produce each quantity

Question 5

Suppose a perfectly competitive firm faces a market price of $$P = 81$$ and its minimum AVC is $$74. $$Should the firm produce in the short run?

Accepted Answer

Yes, because $$P \u003e AVC$$

Question 6

In the long run, what happens in a perfectly competitive industry if firms are earning economic profits?

Accepted Answer

New firms enter, increasing supply and lowering prices

Question 7

Which of the following best describes allocative efficiency in perfect competition?

Accepted Answer

Producing where $$P = MC$$

Question 8

A monopoly differs from perfect competition in that:

Accepted Answer

It has significant barriers to entry

Question 9

Which of the following is a barrier to entry that can create a monopoly?

Accepted Answer

Economies of scale

Question 10

For a monopolist, marginal revenue (MR) is:

Accepted Answer

Always less than price

Question 11

A monopolist maximizes profit by producing the quantity where:

Accepted Answer

$$MR = MC$$

Question 12

Which of the following is true about the economic effects of monopoly compared to perfect competition?

Accepted Answer

Monopoly results in higher prices and lower output

Question 13

If a government regulator sets the price for a natural monopoly at $$P = MC$$, what is a likely outcome?

Accepted Answer

The firm will incur losses

Question 14

Which of the following is an example of creative destruction?

Accepted Answer

A new smartphone technology makes older models obsolete

Question 15

In a constant-cost industry, long-run entry and exit of firms will:

Accepted Answer

Leave resource prices unchanged

Question 16

Suppose a pharmaceutical company’s patent expires and generic drugs enter the market. What is the likely effect?

Accepted Answer

Prices will fall and consumer surplus will rise

Question 17

Which of the following is NOT a legitimate government policy option for dealing with monopolies?

Accepted Answer

Subsidizing monopolies to increase their profits

Question 18

A perfectly competitive firm is producing at a level where $$P = MC = ATC. $$What is true about its profit?

Accepted Answer

It is earning a normal profit

Question 19

Which of the following best describes the long-run adjustment process in a perfectly competitive industry experiencing losses?

Accepted Answer

Firms exit, supply decreases, and price rises

Question 20

Which of the following is a key difference between the demand curve faced by a perfectly competitive firm and a monopolist?

Accepted Answer

The competitive firm faces a horizontal demand curve, while the monopolist faces a downward-sloping demand curve

Perfect Competition and Monopoly: Market Structures and Firm Behavior

Study Guide - Practice Questions