Economics 210 – Review Questions Chapter 6 - Competition

(1) Suppose a perfectly competitive firm increases its output. In order to sell this additional output the firm:

(a) can sell it at the market price.

(b) must lower its price to sell the additional output.

(c) will not be able to sell the additional output at the existing market price due to competitive firms capturing market share.

(d) can raise its price to sell additional output.

(2) If a competitive firm is producing a rate of output for which price exceeds marginal cost:

(a) the firm can increase its profits by cutting price and increasing sales.

(b) the firm can increase its profits by increasing output.

(c) the firm can increase its profits by decreasing output.

(d) the firm is maximizing profits.

(3) Which of the following conditions always characterizes a firm that is maximizing profits or minimizing losses in the short run?

(a) Price = Marginal Cost.

(b) Price = Average Total Cost.

(c) Price = Total Cost.

(d) Total Revenue = Quantity times Price

(4) The market supply curve is calculated by:

(a) averaging the individual supply curves.

(b) summing the prices from the individual supply curves.

(c) averaging the individual margin cost curves below average total cost curve.

(d) summing the marginal cost curves of all firms.

(5) If economic profits are earned in a competitive market, in the long run:

(a) more firms will enter the market.

(b) the market supply curve will shift to the left.

(c) equilibrium market price will increase.

(d) None of the above are true.

(6) The exit of firms from a market:

(a) shifts the market supply curve to the left.

(b) reduces profits of existing firms in the market.

(c) increases the equilibrium output in the market.

(d) decreases the market price.

Consider Figure 1 in answering Questions (7), (8), and (9).

Figure 1

D(3)

D(4)

Quantity

q(1) q(2) q(3) q(4)

(7) If the market demand in Figure 1 is D(4), the market price will be:

(a) P(1).

(b) P(2).

(c) P(3).

(d) P(4).

(8) At P(1) in Figure 1, in the long run:

(a) firms will enter the market.

(b) firms will exit the market.

(c) economic profits exist.

(d) None of the above are true.

(9) If the demand curve is D(2) in Figure 1, then in the long run:

(a) economic losses will occur, and firms will exit from the market.

(b) economic profits will be realized, and firms will enter the market.

(c) there will be zero economic profits, and there will be no entry to or exit from the market.

(d) None of the above are true.

(10) Which of the following is a characteristic that distinguishes a competitive market?

(a) Economic profits exist in the long run.

(b) Each firm faces a horizontal demand curve at the existing market price.

(c) Each firm produces a unique (not identical) good or service.

(d) High barriers to entry exist in the market.