Chapter 10

Question 1

____ competition is considered to be rare in the real world.

Answer 1

pure

Question 2

Firms within pure competition are considered to be price ____.

Answer 2

takers

price taker: a seller (or buyer) that is unable to affect the price at which a product or resource sells by changing the amount it sells (or buys)

Question 3

A basic feature of the purely competitive market is the presence of ____.
* a large number of sellers
* differentiated products
* high barriers to entry
* differentiated prices

Answer 3

a large number of sellers

Question 4

A price-taking firm is one of a ____ number of firms producing a product that is identical to that of every other firm in the industry and providing ____ of total market supply.

Answer 4

large; only a fraction

the competitive firm is a price taker: it cannot change the market price; it can only adjust to it. thus the indiviedual competitive producer is at the mercy of the market

Question 5

Which of the following explains why a purely competitive firm is a price taker?
* A purely competitive firm produces all of total market supply and therefore must accept the price determined by the market
* A purely competitive firm offers a large fraction of total market supply and therefore determines market price
* A purely competitive firm offers only a negligible fraction of total market supply and therefore must accept the price determined by the market
* A purely competitive firm offers only a negligible fraction of total market supply and therefore must set the price for the market

Answer 5

A purely competitive firm offers only a negligible fraction of total market supply and therefore must accept the price determined by the market

Question 6

____ is relatively rare in the real world, although this market model is highly ____ to several industries.

Answer 6

pure competition; relevant

Question 7

Which factors illustrate that the demand curve for a purely competitive firm is perfectly elastic? (More than one answer may be correct.)
* The firm produces only a small fraction of the total industry output.
* The firm does not need to lower its price to increase its sales volume.
* The firm has no legal or financial barriers for entering or exiting the industry.
* The firm cannot obtain a higher price by restricting its output.

Answer 7

• The firm does not need to lower its price to increase its sales volume.
• The firm cannot obtain a higher price by restricting its output.

the firm is a price taker, not a pricemaker

Question 8

Which of the following are conditions necessary to have pure competition?
* very large number of firms or seller
* free entry and exit
* price searchers
* barriers to entry
* standardized product

Answer 8

• very large number of firms or sellers
• free entry and exit
• standardized product

Question 9

In a purely competitive market, price per unit to a buyer equals: ____.

Answer 9

average revenue to a seller

to say that all buyers must pay $131 per unit is to say that the revenue per unit, or average revenue received by the seller, is $131. price and average revenue are the same thing for a purely competitive firm.

Question 10

Which of the following are features of a purely competitive market? (More than one answer may be correct.)
* Sales in both national and international markets
* One seller dominating the market
* Major restrictions on where products can be sold
* Many independently acting sellers

Answer 10

• sales in both national and international markets
• many independently acting sellers

Question 11

A firm’s total revenue is calculated as ____ times quantity produced.

Answer 11

price

Question 12

A firm operating in a purely competitive market is a price taker because it ____.

Answer 12

cannot change the market price; it can only adjust to it

Question 13

A purely competitive firm’s demand schedule is equal to which of the following?
* marginal revenue
* quantity supplied
* average revenue
* total revenue

Answer 13

• marginal revenue
• average revenue

Question 14

In a perfectly competitive market, the demand curve for an individual firm is perfectly ____ at the market price.

Answer 14

elastic, horizontal, flat, constant, or fixed

D = MR = AR

Question 15

In a purely competitive market, price per unit to the purchaser is synonymous with ____per unit or ____ revenue to a seller. (Enter one word per blank.)

Answer 15

revenue/cost; average/marginal

Question 16

A purely competitive firm can maximize its economic profit (or minimize its loss) by adjusting only its output because it ____.

Answer 16

is a price taker

Question 17

From an economic standpoint, the break-even point is the level of output at which a firm makes a(n) ____ profit.

Answer 17

normal

Question 18

____ revenue is the additional revenue that an additional unit of ____ would add to total revenue.

Answer 18

marginal; output, production, or product

Question 19

A(n) ____ competitive firm’s average-revenue schedule is also known as its demand schedule. (Enter one word in the blank.)

Answer 19

purely

Question 20

A firm would not produce a unit of output where ____.
* marginal cost exceeds average revenue
* marginal cost exceeds marginal revenue
* marginal revenue exceeds marginal cost
* marginal cost equals marginal revenue

Answer 20

marginal cost exceeds marginal revenue

if the marginal cost of a unit of output exceeds its marginal reevenue, the firm should not produce that unit. producing it would add more to costs than to revenue, and profit would decline or loss would increase

Question 21

In the short run, a purely competitive firm can maximize its economic profit (or minimize its loss) by adjusting its ____.

Answer 21

output, production, supply, or quantity

Question 22

Which of the following best describes the economic break-even point?
* The point where total revenues exceed those of the strongest competitor in the industry.
* The point where total revenue covers all costs, but there is no economic profit.
* The point where total revenue covers fixed costs but not variable costs.
* The point where total revenue exceeds total costs and economic profits are realized.

Answer 22

the point where total revenue covers all costs, but there is no economic profit

Question 23

Which of the following is a method of calculating economic profit in pure competition?
* Total revenue minus marginal cost divided by quantity
* Price minus average variable cost multiplied by quantity
* Price minus average total cost plus quantity
* Price minus average total cost multiplied by quantity

Answer 23

Price minus average total cost multiplied by quantity

profit = (P - A) x Q in which A = ATC

Question 24

In pure competition, to calculate economic profit, we first calculate the difference between ____ and average total cost and then multiply it by output. (Type only one word in the blank.)

Answer 24

price or prices

Question 25

The quantity of a product supplied by a firm in pure competition should ____ as long as price rises.

Answer 25

increase ## Footnote according to the supply schedule of the competitive firm, there is a direct relationship between price and quantity supplied

Question 26

In a purely competitive industry, at the profit-maximizing or loss-minimizing level of output, marginal ____ is equal to ____.

Answer 26

cost; price, revenue; marginal cost, revenue; price

Question 27

Which of the following factors will alter costs and shift the marginal cost or short-run supply curve to a new location? * prices of variable inputs * technology * availability of product substitutes * consumer preferences

Answer 27

* prices of variable inputs * technology ## Footnote changes in such factors as the prices of variable inputs or in technology will alter costs and shift the MC or short-run supply curve to a new location

Question 28

If price is below a firm's minimum average variable ____ cost, the firm will not operate. (Insert only one word in the blank.)

Answer 28

variable

Question 29

The entry and the exit of firms in an industry are considered to be long ____-run adjustments.

Answer 29

long

Question 30

Changes in ____ and changes in prices of variable inputs alter costs and shift the marginal cost or short run supply curve.

Answer 30

technology

Question 31

In the long run, every purely competitive firm tends to operate at its:

Answer 31

minimum ATC

Question 32

Which of the following occur only in the long run? * The expansion or contraction of plant capacity * The reduction of output to zero * Price changes in response to demand * The entry and exit of firms

Answer 32

* the expansion or contraction of plant capacity * the entry and exit of firms

Question 33

A constant-cost industry is one where ____ will not affect resource prices and production costs. * inflation or interest rates * investment or capital * expansion or contraction * supply or demand

Answer 33

* expansion or contraction

Question 34

After all long-run adjustments are completed in a perfectly competitive market, output will occur at each firm's minimum average ____. * variable cost where product price is equal to marginal revenue * total cost where product price is equal to marginal revenue * total cost where product price is less than marginal revenue * total cost where product price is greater than marginal revenue

Answer 34

* total cost where product price is equal to marginal revenue ## Footnote after all long-run adjustments are completed in a purely competitive industry, product price will be exactly equal to, and production will occur at, each firm's minimum average total cost

Question 35

All firms in a(n) ____ industry share the same basic efficiency characteristics.

Answer 35

purely competitive

Question 36

What is the firm's most likely response if price is exactly equal to minimum average variable cost?

Answer 36

Indifference to producing or shutting down

Question 37

There is no incentive for firms to enter or exit the industry in the long run when: (More than one answer may be correct.) * firms earn a normal profit * MR = MC * firms earn a loss * price equals minimum average total cost

Answer 37

* firms earn a normal profit * MR = MC * price equals minimum average total cost

Question 38

____ efficiency means that goods are produced in the least costly way.

Answer 38

productive ## Footnote productive efficiency: the production of a good in the least costly way; occurs when production takes place at the output level at which per-unit production costs are minimized

Question 39

An industry where expansion or contraction will not affect resource prices and production costs is known as a(n) ____.

Answer 39

constant-cost industry

Question 40

Whether a purely competitive industry is a constant-cost industry or an increasing-cost industry, the final long-run equilibrium position of all competitive firms share which of the following characteristics? * Price or marginal revenue will settle where it is equal to minimum average variable cost. * Price or marginal revenue will settle where it is equal to minimum average total cost. * Price or marginal revenue will settle where it is equal to minimum average total cost. * In the long run, an equality occurs where price equals marginal revenue, which equals minimum average total cost.

Answer 40

* Price or marginal revenue will settle where it is equal to minimum average total cost. * In the long run, a multiple equality occurs where price equals marginal cost which equals the minimum average total cost. * In the long run, an equality occurs where price equals marginal revenue, which equals minimum average total cost.

Question 41

Which of the following statements are true about allocative efficiency? * It is impossible to produce net gains for society by altering the mix of goods and services produced. * Producer surplus is maximized and consumer surplus is minimized. * The goods and services produced are those that society most wants to consume. * The marginal cost and marginal benefit of producing each unit of output is equal.

Answer 41

* It is impossible to produce net gains for society by altering the mix of goods and services produced. * The goods and services produced are those that society most wants to consume. * The marginal cost and marginal benefit of producing each unit of output is equal.

Question 42

What does the concept "consumer surplus" mean?

Answer 42

It is the difference between the maximum price that consumers are willing to pay for a product and the market price for that product.

Question 43

A constant-cost industry is one where ____ will not affect resource prices and production costs.

Answer 43

expansion or contraction

Question 44

In purely competitive markets, efficiency can be temporarily disrupted and then restored by changes in: * consumer and producer surplus * technological changes * resource supplies * consumer tastes

Answer 44

* technological changes * resource supplies * consumer tastes

Question 45

What are the effects of the "invisible hand" in a purely competitive economy? * Inefficient depletion of scarce resources * Resource allocation that maximizes consumer satisfaction * Maximum profits for individual producers * A lack of incentive for innovation or product improvement

Answer 45

* Resource allocation that maximizes consumer satisfaction * Maximum profits for individual producers

Question 46

____ efficiency means that resources are distributed among firms and industries to yield a mix of goods and services that is most wanted by society.

Answer 46

allocative ## Footnote allocative effeciency: The apportionment of resources among firms and industries to obtain the production of the products most wanted by society (consumers); the output of each product at which its marginal cost and marginal benefit are equal, and at which the sum of consumer surplus and producer surplus is maximized.

Question 47

What must be eliminated or avoided if the "invisible hand" is to produce socially optimal outcomes in purely competitive markets?

Answer 47

externalities

Question 48

Strategies attempted by firms for increasing their profits include: (More than one answer may be correct.) * developing a new product that is popular with consumers. * increasing product prices to increase revenues. * lowering production costs through improved business organization. * lowering production costs through better technology.

Answer 48

* developing a new product that is popular with consumers. * lowering production costs through improved business organization. * lowering production costs through better technology.

Question 49

Creative ____ captures the idea that the creation of new products and new production methods erodes the market positions of firms committed to existing products and old ways of doing business.

Answer 49

destruction ## Footnote creative destruction: The hypothesis that the creation of new products and production methods destroys the market power of firms committed to existing products and older ways of doing business.

Question 50

What will happen to a firm that finds a way to lower production costs through better technology or improved organization?

Answer 50

its profits will increase