Perfect Markets

All of the following are essential characteristics of a perfectly competitive industry EXCEPT:

• All products produced by the firms in the industry are homogeneous.

• All firms in the industry are price takers.

• Price is equal to marginal revenue for every firm in the industry.

• There are barriers to entry into and exit from the industry.

Perfect competition is best described as a market with

• few firms producing essentially the same product

• many firms producing essentially the same product

• many firms producing very different products

• few firms producing very different products

In a perfectly competitive market, a firm

• commands a large share of a very small market

• can only control how much it decides to produce at the prevailing market price

• has some market power due to high barriers to entry into the market

• can influence demand across the market through advertising

A profit-maximizing, perfectly competitive firm has economic losses in the short run. If the firm continues to produce and sell its goods, then which of the following must be true?

• The firm is covering all of its fixed and variable costs of production.

• The firm is covering all of its fixed costs but not all of its variable costs of production.

• The firm must have raised the price of its goods in order to minimize its losses.

• The firm is covering all of its variable costs but not all of its fixed costs of production.

For a perfectly competitive firm producing the profit-maximizing quantity, the ATC is $10 and the AVC is $8. At a market price of $10, which of the following is true?

• It is earning zero economic profit and will remain in business.

• It is sustaining a loss and should exit the industry in the long run.

• It will temporarily shut down until price rises.

• The firm is earning positive economic profit.

Total Revenue (minus) Explicit and Implicit cost =

• Accounting Profit

• Economic Profit

• Economic Cost

• Total Profit

Select all that apply: When should a firm decide to shutdown?

• When their demand curve is below AVC

• When their MR curve is below AVC

• When the price is below the AVC

• When the MC is below the AVC

The demand curve for a perfectly competitive firm is:

• perfectly inelastic at the market quantity

• downward sloping just like the industry demand curve

• perfectly elastic at the market price

• relatively but not perfectly elastic

Which of the following indicates that a perfectly competitive firm is in long run equilibrium?

• Price equals marginal cost
• Price equals average revenue
• Price equals marginal cost, which equals average total cost
• Price equals average revenue, which equals marginal revenue
• Price equals average fixed cost

Suppose that price in a perfectly competitive industry decreases and it is now below ATC but remains above AVC. Which of the following will occur in the short run?

• Firms will increase output so that marginal revenue equals the new price.

• Firms will produce the output at which average total cost is at a minimum.

• Firms will not produce at all, since they will be unable to cover all their costs.

• Firms will produce the output at which marginal cost equals the new price.