Laguardia Community College Market Structures Competitive Markets

QUESTION 1

• A firm should always shut down if it is earning negative profits.

True

False

4 points

QUESTION 2

• If marginal revenue is less than marginal cost, a firm should:

		increase output.
		decrease output.
		hold output steady.
		lower its price.

3 points

QUESTION 3

• Profit = (P – MC) × Q.

True

False

4 points

QUESTION 4

• Which statement about cost is correct?

		MC is always falling.
		AC always declines.
		AC is U-shaped.
		MC is always constant.

4 points

QUESTION 5

• Refer to the four panels in the figure. Which panel shows a competitive firm making economic losses?

		Panel B
		Panel A
		Panel C
		Panel D

3 points

QUESTION 6

• Firms in competitive industries should adhere to: (1) expanding output if MR > MC, and (2) reducing output if MC > MR.

True

False

3 points

QUESTION 7

• Refer to the figure. What is the optimal quantity for this firm to produce?

		170
		120
		50
		0

3 points

QUESTION 8

• The long run in the market for electrical engineers is 2-3 months.

True

False

3 points

QUESTION 9

• Use the figure. At a market price of $20, this competitive firm earns profit of:

	a.	$75
	b.	$300
	c.	$225
	d.	$0, because P=MC at P=$20.

3 points

QUESTION 10

• At a small town located over one hour from NYC, there is only one grocery store and it charges

prices more than 500 percent above the typical retail prices. In the long run, we would expect that

another store will open that will charge equally high prices since competition is low.

True

False

3 points

QUESTION 11

• In a competitive equilibrium in the long run, firms earn ______ economic profits.

		zero
		positive
		negative
		abnormal

3 points

QUESTION 12

• Refer to the four panels in the figure. Which panel shows a competitive firm making zero economic profits?

		Panel B
		Panel A
		Panel C
		Panel D

3 points

QUESTION 13

• Refer to the figure. The change in total cost from producing the eightieth unit of output is ______, and the change in total revenue from producing the seventh unit of output is ______.

		$5; $14
		$10; $14
		$10; $70
		$5; $10

3 points

QUESTION 14

• An industry is said to be perfectly competitive when:

		each firm has virtually no influence over the price of its product.
		demand in the industry is high.
		supply in the industry is highly elastic.
		there are many buyers and sellers, and each is large relative to the total market.

3 points

QUESTION 15

• Tom produces 400 gallons of oatmilk a day in a very competitive industry. The market price for a gallon of

oatmilk is $3. Tom’s marginal revenue per gallon of oatmilk is:

		$3
		$0
		$1,200
		$700

3 points

QUESTION 16

• Price times quantity minus total cost equals:

		marginal revenue.
		marginal cost.
		profit.
		total cost.

3 points

QUESTION 17

• Marginal revenue is always equal to the price of the product for a competitive firm.

True

False

4 points

QUESTION 18

• Refer to the figure. What is their total profit or loss?

		$680
		$2,380
		$1,700
		0

3 points

QUESTION 19

• A perfectly competitive industry exists under which of the following conditions?

I. The product sold is similar across firms.
II. There are many sellers, each small relative to the total market.
III. There are many sellers, each with total assets less than $2 million.
IV. The threat of competition exists from potential sellers that have not yet entered the market.

		I and II only
		I, II, III only
		I, III, and IV only
		I, II, and IV only

3 points

QUESTION 20

• Use the figure. At a market price of $20, this profit-maximizing firm faces an average cost of:

	a.	$15
	b.	$20
	c.	$75
	d.	$0, because P=MC at P=$20.

3 points

QUESTION 21

• In a constant cost industry, P = AC = $20. Which sequence of events follows an increase in demand?

		P < AC, firms suffer an economic loss, existing firms reduce output, new firms enter the industry, the short-run supply curve shifts right, price falls until profits exceed $0
		P > AC, firms make a positive economic profit, existing firms expand output, new firms enter the industry, the short-run supply curve shifts right, price falls until profits return to $0
		P = AC, firms make no economic profit, existing firms leave output unchanged, new firms enter the industry, profits remain normal, P = AC = $20
		P > AC, firms make an economic profit, existing firms expand output, new firms enter the industry, the short-run supply curve shifts left, price falls until profits return to $0

3 points

QUESTION 22

• When the level of production is relatively low, the average cost per unit of output would ________ if output

increased.

		either increase or decrease depending on marginal cost
		remain constant
		increase
		decrease

3 points

QUESTION 23

• What condition is necessary in a constant cost industry?

		Prices of the industry’s inputs decline as the industry expands.
		Prices of the industry’s inputs rise as the industry expands.
		There are barriers that prevent new firms from entering such an industry.
		Prices of the industry’s inputs do not change as the industry expands.

3 points

QUESTION 24

• Refer to the figure. In the long run, what do you expect this competitive firm’s economic profit or loss to be?

		$680
		-$2,380
		$1,700
		$0

3 points

QUESTION 25

• Which of the following statements is TRUE?

		Positive profits in an industry give entrepreneurs an incentive to enter that industry.
		Fixed costs fall as firms produce more output, the so called “spreading of the costs.”
		A firm should enter an industry if average costs are less than producer surplus.
		Entry and exit from an industry depend on the firm’s market share.

6 points

QUESTION 26

• In the small town of Beaconville, there is only one grocery store. Given that everyone needs food, we would

expect that this grocery store:

		prices competitively.
		faces a perfectly inelastic demand.
		is a monopoly and hence highly profitable.
		charges exorbitant prices.

3 points

QUESTION 27

• If Susan sells 500 masks for $7 and has an average cost of $5, what is her profit?

		$1,000
		$2,500
		$500
		$3,500

3 points

QUESTION 28

• In order to maximize profits, a firm in a highly competitive industry should set its price:

		at the market price.
		it depends: sometimes at the market price but sometimes higher or lower.
		lower than the market price.
		higher than the market price.

6 points

QUESTION 29

• Refer to the four panels in the figure. Which panel shows a competitive firm making positive economic profits?

		Panel B
		Panel A
		Panel C
		Panel D

3 points

QUESTION 30

• Refer to the figure. At the profit-maximizing level of output in this diagram, the firm’s average cost is _______.

		$10
		$4
		$14
		$0