Core Economics 3e

Perfect Competition in the Short Run and Long Run

Multiple Choice Questions

After watching the Perfect Competition in the Short Run and Long Run video lecture, consider the question(s) below. Then “submit” your response.

Question

1. A market structure describes the nature of an industry based on the:

size of the industry and number of firms.

number and size of firms in the industry.

type of products produced by the industry.

size of firms in the industry.

Question

2. A perfectly competitive industry is characterized by:

many small firms each producing different products and low barriers to entry.

a few large firms each taking into account the behavior of competitors and high barriers to entry.

many small firms each producing identical products and no barriers to entry.

a single firm that satisfies virtually all of the market’s needs for a product with effective barriers to entry.

Question

3. A firm is a _____ if its actions have no impact on the market price of a good.

price taker

price maker

price creator

price manipulator

Question

4. Firms in perfectively competitive industries earn _____ economic profits.

positive

negative

zero

excessive

Question

5. In a perfectly competitive market, each firm’s demand curve is:

horizontal.

vertical.

downward-sloping.

upward-sloping.

Question

6. The price charged by a firm in a perfectly competitive market always equals its:

total revenue.

marginal cost.

marginal revenue.

average cost.

Question

7. The profit-maximizing level of output for a firm in a perfectly competitive market occurs where:

total revenue exceeds total cost.

marginal revenue equals marginal cost.

marginal revenue exceeds marginal cost.

marginal revenue equals total cost.

Question

8. If firms in a perfectly competitive market are earning positive economic profits in the short run, one would expect that in the long run:

existing firms would leave the market and market prices would decrease.

existing firms would leave the market and market prices would increase.

new firms would enter the market and market prices would increase.

new firms would enter the market and market prices would decrease.

Question

9. A firm earning a zero economic profit is _____ the financial expectations of its investors.

exceeding

meeting

not meeting

gaining

Question

10. The firms in a perfectly competitive market produce _____ products.

different

cooperative

identical

complementary

True/False Questions

After watching the Perfect Competition in the Short Run and Long Run video lecture, consider the question(s) below. Then “submit” your response.

Question

1. In a perfectly competitive industry, one would expect that a natural disaster that decreases the production of a significant number of firms in the industry would cause market prices to rise.

True

False

Question

2. A perfectively competitive industry’s market demand curve is a horizontal line.

True

False

Question

3. A firm in a perfectly competitive market maximizes its profits when its marginal cost equals its total revenue.

True

False

Short Answer/Discussion Questions

After watching the Perfect Competition in the Short Run and Long Run video lecture, consider the question(s) below. Then “submit” your response.

Question

1. What circumstance might lead a firm in a perfectly competitive market to realize a positive, short-run, economic profit?

Suggested solution: Once a firm has selected its profit-maximizing output level (where marginal revenue equals marginal cost), the optimal output level for the firm is known. At this output level, the firm can determine its average total cost per unit. If the market price per unit is above the average total cost per unit (which includes all the firm’s opportunity costs), the firm is earning a positive short-run economic profit.

Question

2. Why is the marginal revenue of a firm in perfect competition equal to the market price?

Suggested solution: Since there are many small firms in a perfectly competitive market, the quantity produced by any one firm is a very small percent of the market’s overall output. This means the individual firm’s output decisions have no meaningful effect on the market’s overall output level or the market price. Consequently, the additional revenue (marginal revenue) gained by the firm as it increases output is equal to the market price.

Question

3. Explain the importance of the absence of barriers to entry in perfectly competitive markets to long-run pricing in these markets.

Suggested solution: Because perfectly competitive markets have no barriers to entry, when existing firms in the market realize positive economic profits in the short run, firms outside the industry are attracted to the profit opportunity and choose to enter the market in the long run. This entry causes an increase in the market’s supply; the increase in supply reduces the market equilibrium price, eliminating the short-run profits.