Quiz #5 Market Forms and Product Pricing

Does a real-world market have to meet all the assumptions of the theory of perfect competition before it is considered a perfectly competitive market?

• No, probably no real-world market meets all the assumptions of the theory of perfect competition. All that is necessary is that a real-world market behave as if it satisfies all the assumptions.

• Yes, if a real-world market does not meet the assumptions, then it cannot be considered a perfectly competitive market.

• Yes, unless it is a new market such as the computer market. New markets are not held to the same assumptions as old, more established markets.

• No, but it does have to meet the assumption of producing and selling a homogeneous product. It does not have to fully meet the other assumptions.

A "price taker" is a firm that

• does not have the ability to control the price of the product it sells.

• does have the ability, although limited, to control the price of the product it sells.

• can raise the price of the product it sells and still sell some units of its product.

• sells a differentiated product.

Which of the following statements is false?

• The perfectly competitive firm's demand curve is horizontal at the market price.

• The theory of perfect competition is completely and accurately descriptive of most real-world firms.

• If Firm X does not strictly meet all the assumptions of the theory of perfect competition, but behaves as if it does, then the theory of perfect competition is relevant to it.

• In perfect competition, the market price is established at the intersection of the market demand and market supply curves.

If a company decides to produce the quantity of output at which marginal revenue (MR) equals marginal cost (MC), is it guaranteed maximum profit or minimized loss?

• Yes, when MR = MC, it follows that MR - MC = 0, and thus the firm maximizes profit and minimizes losses.

• No, at the quantity of output at which MR = MC, it could be the case that average variable cost is greater than price and the firm would do better to shut down.

• Yes, when the firm produces the quantity at which MR = MC, it has maximized both revenue and profit.

• Yes, because if the MC curve is rising, the average total cost curve always lies below it and thus profit is earned.

Which of the following conditions does not characterize long-run competitive equilibrium?

• Economic profit is zero.

• Price is greater than marginal cost.

• No firm has an incentive to change its plant size.

• No firm has an incentive to produce more or less output.

Suppose one firm in a perfectly competitive industry experiences an increase in its costs of production. Which of the following best describes the most likely long run adjustment to this situation?

• Eventually, all firms in the industry will also experience this same increase in costs.

• Eventually, the price of the product will increase, and consumers will pay for the increase in costs.

• The firm in question may suffer losses and exit the industry.

• Eventually, all firms in the industry will experience decrease in costs.

The theory of monopoly assumes that the monopoly firm

• faces a downward-sloping supply curve that is the same as its marginal revenue curve.

• faces a downward-sloping demand curve.

• produces more than the perfectly competitive firm under identical demand and cost conditions.

• produces a product for which there are many close substitutes.

Public franchises, patents, and government licenses are examples of __________ barriers to entry.

• social

• legal

• cultural

• geographic

A price searcher is

• a person who actively seeks out the best price for a product that he or she wishes to buy.

• a firm that seeks out buyers who are willing to pay the price that the seller is asking for the product.

• a firm that has the ability to control to some degree the price of the product it sells.

• actually any firm or consumer, because each market "player" searches for the best price at which it can sell or buy.

In a local market, a single seller has complete control over the price of a product. In order for the seller to be earning a profit, the price must be greater than

• average total cost.

• marginal revenue.

• total cost.

• marginal cost.