Perfect Competition and Monopoly

1) Perfect competition exists in a market if

A) there are many firms producing an identical product.
B) there are many firms producing a similar product, each of which may have unique features.
C) the firm is protected by a barrier to entry.
D) the firm is always at the break-even point where it is earning only a normal profit.

2) Which of the following is a defining characteristic of a perfectly competitive market?

A) advertisements by well-known celebrities
B) persistent economic profits in the long run
C) no restrictions on entry into the industry
D) higher prices being charged for certain name brands

3) Which of the following is NOT an assumption of perfect competition?

A) Firms compete by making their product different from products produced by other firms.
B) There are no restrictions on entry into the market.
C) Established firms have no advantage over new firms.
D) Sellers and buyers are well informed about prices.

4) When a firm is considered to be a "price taker" that means that the firm
A) can charge any price that it wants to charge, that is, "take" any price it wants.
B) pays a fixed price for all of its inputs.
C) will accept ("take") the lowest price that its customers offer.
D) cannot influence the market price of the good that it sells.

5) The difference between a firm's total revenue and its total opportunity cost is the firm's
A) normal profit.
B) economic profit.
C) marginal profit.
D) marginal revenue.
6) In perfect competition, a firm that maximizes its economic profit will sell its good at a price
that is
A) below the market price.
B) at the market price.
C) above the market price.
D) below the market price if its supply curve is inelastic and above the market price if its supply
curve is elastic.

Quantity sold Price

5 $15
6 $15
7 $15

7) In the above table, if the firm sells 5 units of output, its total revenue is
A) $15.
B) $30.
C) $75.
D) $90.

8) In the above table, if the quantity sold by the firm rises from 5 to 6, its marginal revenue is
A) $15.
B) $30.
C) $75.
D) $90.

9) In perfect competition, the marginal revenue of an individual firm

A) is zero.
B) is positive but less than the price of the product.
C) equals the price of the product.
D) exceeds the price of the product.

10) When Sidney's Sweaters, Inc. makes exactly zero economic profit, Sidney, the owner,
A) is taking a loss.
B) will shut down in the short run.
C) makes an income equal to his best alternative forgone income.
D) will boost output.

11) A firm is producing the profit-maximizing amount of output when it is producing where its
________ curve intersects its ________ curve.
A) MC; MR
B) MC; AVC
C) MC; ATC
D) MC; TR
12) As long as it does not shut down, a profit-maximizing perfectly competitive firm will
A) always earn an economic profit.
B) produce so that marginal revenue equals marginal cost.
C) produce so that price equals average cost.
D) never set its price equal to its marginal revenue.

13) Charlie's Chimps is a perfectly competitive firm that produces cuddly chimps for children.
The market price of a chimp is $10, and Charlie's produces 100 chimps at a marginal cost of $9 a
chimp. Charlie's ________.
A) is maximizing its profit
B) will maximize its profit if it produces more than 100 chimps
C) will maximize its profit if it lowers the price to $9 a chimp
D) will maximize its profit if it produces fewer than 100 chimps

14) For a perfectly competitive firm, as its output increases its marginal revenue ________ and
its marginal cost ________.
A) changes; changes
B) changes; does not change
C) does not change; changes
D) does not change; does not change

Price Quantity demanded

(dollars per CD) (CDs per week)
8.00 30,000
8.50 25,000
9.00 20,000
9.50 15,000
10.00 10,000

Quantity Marginal cost

(CDs per week) (dollars per CD)
50 8.50
100 9.00
150 9.50
200 10.00
250 10.20

15) The first table shows the market demand schedule for CDs, and the second table shows the
cost structure of each firm. The CD market is perfectly competitive and there are 100 identical
firms. The market price of a CD is ________, and ________ CDs are produced and sold.
A) $9.00; 20,000
B) $9.50; 15,000
C) $10.00; 10,000
D) $8.50; 24,000
16) In the above figure, by increasing its output from Q1 to Q2, the firm
A) reduces its marginal revenue.
B) increases its marginal revenue.
C) decreases its profit.
D) increases its profit.

17) In the above figure, by increasing its output from Q2 to Q3, the firm
A) reduces its marginal revenue.
B) increases its marginal revenue.
C) decreases its profit.
D) increases its profit.
 Total fixed Total variable
Quantity cost, TFC cost, TVC
(dollars) (dollars)
0 500 0
1 500 100
2 500 180
3 500 220
4 500 300
5 500 390
6 500 500
7 500 640
8 500 800
9 500 1000
10 500 1250

18) The table above shows some of the costs for a perfectly competitive firm. The firm will
produce 9 units of output if the price per unit is
A) $1750.
B) $200.
C) $300.
D) $500.

19) In the above figure, the line represented by the "2" is the
A) average fixed cost.
B) average variable cost.
C) total cost.
D) average total cost.
20) In the above figure, the line represented by the "1" is the
A) average fixed cost.
B) marginal revenue.
C) total cost.
D) average total cost.

21) In the above figure, the line represented by the "4" is the
A) average fixed cost.
B) marginal revenue.
C) average total cost.
D) marginal cost.

22) In the above figure, the firm will produce

A) 0 units.
B) 5 units.
C) 15 units
D) 20 units.

23) A perfectly competitive firm's short-run shutdown point is the level of output at which
A) price equals average total cost.
B) price equals average fixed cost.
C) price equals the minimum average variable cost.
D) price is above the minimum average total cost but below the minimum average fixed cost.
24) In the short run, a perfectly competitive firm will shut down if at the profit maximizing
quantity the
A) P < AVC.
B) AVC < ATC.
C) P > ATC.
D) P > MC.

25) A firm that shuts down and produces no output incurs a loss equal to its
A) total fixed costs.
B) total variable costs.
C) marginal costs.
D) marginal revenue.

26) In the short run, a perfectly competitive firm NEVER

A) earns an economic profit.
B) incurs a loss greater than its total fixed costs.
C) produces where MR = MC.
D) earns a normal profit.

27) A perfectly competitive firm will operate and incur an economic loss in the short run if
A) the loss is smaller than its total fixed costs.
B) it knows it can recoup the loss in the long run.
C) shareholders do not know about the loss.
D) the loss can offset future profits.

Output Total cost

(tons of rice (dollars per
per year) ton)
0 $1,000
1 $1,200
2 $1,600
3 $2,200
4 $3,000
5 $4,000

28) Based on the table above which shows Chip's costs, if rice sells for $600 a ton, Chip's profit-
maximizing output is
A) less than one ton.
B) between two and three tons.
C) between three and four tons.
D) between one and two tons.
 Quantity Total cost, TC
(tattoos per (dollars per
hour) hour)
0 10
1 25
2 35
3 50
4 70
5 95
6 125

29) Archibald's Tattoos is a perfectly competitive firm. The firm's costs are shown in the table
above. What is Archibald's shut-down point?
A) $10.00
B) $16.67
C) $15.00
D) $12.50

30) The figure above shows a perfectly competitive firm. In the short run, the firm will shut
down
A) only if the AVC of producing 10 units is less than $20.
B) only if the AVC of producing 10 units is more than $20.
C) only if the AVC curve reaches its minimum before 10 units are produced.
D) always.
31) Consider the perfectly competitive firm in the above figure. The profit maximizing level of
output for the firm is equal to
A) 0 units.
B) 14 units.
C) 17 units.
D) 19 units.

32) Consider the perfectly competitive firm in the above figure. At the profit maximizing level of
output, the firm is
A) incurring an economic loss equal to $119.00.
B) incurring an economic loss equal to $123.50.
C) incurring an economic loss equal to $187.00.
D) making zero economic profit.

33) Consider the perfectly competitive firm in the above figure. The shutdown point occurs at a
price of
A) $11.00.
B) $12.00.
C) $16.00.
D) $22.00.

34) Consider the perfectly competitive firm in the above figure. What will the firm choose to do
in the short-run and why?
A) shut down because the firm incurs an economic loss
B) stay in business because the firm is making an economic profit
C) stay in business because the firm's economic loss is less than fixed costs
D) stay in business because it is making zero economic profit
35) A perfectly competitive firm's short-run supply curve is the same as its
A) ATC curve.
B) MR curve.
C) AVC curve.
D) MC curve above the minimum of the AVC curve.

36) In the above figure, the perfectly competitive firm's shutdown point is at a price of
A) $4 per unit.
B) $8 per unit.
C) $12 per unit.
D) $16 per unit.

37) In the above figure, if the price is $16 per unit, how many units will a profit maximizing
perfectly competitive firm produce?
A) 0
B) 20
C) 30
D) 35

38) In the above figure, if the price is $12 per unit, how many units will a profit maximizing
perfectly competitive firm produce?
A) 0
B) 20
C) 30
D) 35
39) In the above figure, if the price is $8 per unit, how many units will a profit maximizing
perfectly competitive firm produce?
A) 5
B) 20
C) 30
D) 35

40) Which of the following statements is TRUE?

A) The presence of positive economic profit in a perfectly competitive market is consistent with
the characteristics of a long-run competitive equilibrium.
B) When firms in a perfectly competitive market incur economic losses, some will exit in the
long run, thereby shifting the industry supply curve rightward.
C) If a profit-maximizing firm in a perfectly competitive market is making an economic profit,
then it must be producing at a level of output where price is greater than average total cost.
D) If a profit-maximizing firm in a perfectly competitive market is incurring an economic loss,
then it must be producing at a level of output where price is greater than average total cost.

41) In the above figure, at what price does a perfectly competitive firm make zero economic
profit?
A) $4 per unit
B) $8 per unit
C) $12 per unit
D) $16 per unit
42) In the above figure, if the price is $16 per unit, a profit maximizing perfectly competitive
firm will
A) shut down.
B) incur an economic loss but continue to operate.
C) make zero economic profit.
D) make an economic profit.

43) If firms in a perfectly competitive industry are making zero economic profit, then
A) some of those firms will leave the industry, because firms cannot persistently go without
making economic profit.
B) new firms will enter the industry, because the new entrants would be ensured of doing as well
as in their best foregone alternative.
C) there is no incentive for either entry or exit.
D) some of the firms will temporarily shut down.

44) The firms in a perfectly competitive are making an economic profit when new firms enter.
The entry shifts the short-run market supply curve ________, the market price ________, and
each firm's economic profit ________.
A) leftward; rises; decreases
B) rightward; rises; increases
C) rightward; falls; decreases
D) leftward; falls; decreases

45) In the long run, for a perfectly competitive market, if economic profit is
A) less than zero, then some firms will exit the market and the market supply curve will shift
leftward.
B) greater than zero, then some firms will enter the market and the market supply curve will shift
rightward.
C) equal to zero, then there is no entry or exit of firms into or out of the market.
D) All of the above answers are correct.

46) Entry in a perfectly competitive market

A) shifts the market supply curve rightward.
B) decreases the market price.
C) shifts the market supply curve leftward.
D) Both answers A and B are correct.
47) The above figure shows the cost curves for a perfectly competitive firm. If all firms in the
market have the same cost curves and the price equals $16 per unit,
A) the market is in its long-run equilibrium.
B) over time, firms will leave this market.
C) the firm is making zero economic profit.
D) over time, the price will fall as new firms enter the market.

48) The apple market is perfectly competitive and is in long-run equilibrium. Now a disease kills
50 percent of the apple orchards. In the short run, the price of a bag of apples ________ and the
remaining apple growers make ________ economic profit. In the long run, the ________.
A) increases; zero; price of apples will return to their original level
B) remains the same; zero; orchards will be replanted and growers will make normal profits
C) increases; zero; orchards will be replanted and economic profit will return to zero
D) increases; positive; orchards will be replanted and economic profit will return to zero

49) Suppose some firms in a perfectly competitive market are incurring an economic loss. As a
result,
A) all the firms will eventually incur an economic loss.
B) some firms will leave the market and the price of the good will rise.
C) some firms will leave the market and the remaining firms' quantity will decrease.
D) the total market economic profit must equal $0.
50) A perfectly competitive firm initially is earning zero economic profit. Then, a decrease in
demand for the firm's product occurs. Of the following, in the long run which action listed below
is the firm most likely to take?
A) Increase the quantity it produces.
B) Increase its advertising to increase the demand for its product.
C) Exit the market.
D) Increase the size of its plant.

51) Fast Copy is a perfectly competitive firm. The figure above shows Fast Copy's cost curves.
The current market price is 4 cents per page. With no change in demand and technology, in the
long run, the price will
A) remain unchanged.
B) rise to 5 cents per page.
C) fall to 2 cents per page.
D) fall to 1 cent per page.

52) A monopoly has two key features, which are ________.

A) barriers to entry and no close substitutes
B) franchises and barriers to entry
C) barriers to entry and close substitutes
D) close substitutes and no barriers to entry

53) Which of the following is NOT a characteristic of a monopoly?

A) a single firm
B) no close substitutes for the product produced
C) barriers to entry
D) easy entry and exit
54) A copyright creates a monopoly by restricting ________.
A) the prices that can be charged
B) demand for the product
C) entry into the market
D) the number of creators and inventors

55) A single-price monopoly is characterized by a marginal revenue curve that is

A) upward sloping.
B) downward sloping.
C) horizontal.
D) vertical.

56) For a single-price monopolist, price is ________ marginal revenue.

A) less than
B) greater than
C) equal to
D) less than or equal to but never more than

57) In the monopoly, the firm's marginal revenue curve is ________, while in a perfectly
competitive market, each firm's marginal revenue curve is ________ .
A) downward sloping; horizontal
B) horizontal; downward sloping
C) upward sloping; horizontal
D) downward sloping; upward sloping

58) Monopolies can make an economic profit in the long run because there
A) are close substitutes for the product.
B) is free entry and exit.
C) is inelastic demand from consumers.
D) is a barrier to entry.
59) In the figure above, the curve labeled "X" can be a
A) monopoly's demand curve.
B) monopoly's marginal revenue curve.
C) perfectly competitive firm's demand curve.
D) perfectly competitive firm's marginal revenue curve.

60) In the figure above, the curve labeled "W" can be a

A) monopoly's demand curve.
B) monopoly's marginal revenue curve.
C) perfectly competitive firm's demand curve.
D) perfectly competitive firm's marginal revenue curve.

61) The figure above shows the cost, demand, and marginal revenue curves for a monopoly. The
firm
A) will make an economic profit of $20.
B) will charge a price of $10 per unit.
C) will produce 20 units per day.
D) is a natural monopoly.
62) The above figure illustrates a single-price unregulated monopolist. If the monopolist
maximizes its profit, the consumer surplus equals ________.
A) $20,000
B) $10,000
C) $45,000
D) $40,000

63) The above figure illustrates a single-price unregulated monopolist. If the monopolist
maximizes its profit, the deadweight loss equals ________.
A) $10,000
B) $20,000
C) $45,000
D) $40,000