PERFECT COMPETITION
Multiple Choice
M1 Demand is given by P = 1,000 – 10Q and supply by P = 400 + 20Q. Equilibrium price
and output under perfect competition are
a. P = $600 and Q = 10 units.
b. P = $700 and Q = 30 units.
c. P = $800 and Q = 20 units.
d. P = $1,000 and Q = 30 units.
e. P = $800 and Q = 10 units.
M2 If for some reason the price of a good is below the equilibrium price, then
a. Finding inventories building up, suppliers will cut output, and raise prices.
b. Finding inventories depleted, suppliers will increase output and raise prices.
c. The demand curve shifts left until equilibrium is established at the existing price.
d. The supply curve shifts right until equilibrium is established at the existing price.
e. Consumers will bid up the good’s price, but there will be no increase in output.
M3 A favorable shift in the demand curve occurs when
a. Suppliers place more goods on the market.
b. The price of a good rises.
c. Time passes. Next year’s demand will be very different than this year’s.
d. The price of the good falls.
e. Consumers want to buy more than before at a given price.
M4 A shift in the demand for sailboats due to an increase in income will typically cause
a. Higher prices of sailboats.
b. Lower prices of sailboats.
c. A shift in the supply curve for sailboats.
d. Lower output of sailboats.
e. No change in the price of sailboats.
M5 A shift in the supply curve of bicycles resulting from higher steel prices will lead to
a. Larger output of bicycles.
b. Lower prices of bicycles.
c. A shift in the demand curve for bicycles.
d. Lower output of bicycles.
e. No change in the price of bicycles.
M6 We observe that the price of food rises and the quantity purchased also rises. Thus the
a. Supply curve has shifted to the left.
b. Demand curve has shifted to the right.
c. Demand curve has shifted to the left.
d. Supply curve has shifted to the right.
e. Demand curve happens to be upward sloping.
M7 As a result of standardized products, under perfect competition
a. Firms are confronted by diminishing returns.
b. Firms will seek to attain quality advantages.
c. Firms face perfectly elastic individual demand curves.
d. Firms face perfectly inelastic demand curves.
e. Firms are forced to advertise.
M8 A firm under perfect competition sells 100 units of output at $7 per unit. If it expands
production to 120 units, its marginal revenue is
a. $3.50 per extra unit sold.
b. More than $7 per extra unit sold.
c. $700 in total.
d. Exactly $7 per extra unit sold.
e. Impossible to determine without further information.
M9 An accurate description of a perfectly competitive industry is
a. A limited number of firms producing standardized products.
b. A large number of small firms producing standardized products.
c. A large number of small firms producing differentiated products.
d. A small number of large firms producing either standardized or differentiated
products.
e. Large-scale firms producing at minimum average cost per unit.
M10 In order to maximize profit, a firm under perfect competition should continue production
until the extra cost of producing the last unit of output
a. Is stabilized.
b. Begins to rise.
c. Begins to decline.
d. Is equal to average variable cost.
e. Is equal to the market price.
M12 The demand curve faced by a firm in a perfectly competitive industry is
a. The same as the market demand.
b. The same as the market supply.
c. The same as the market price.
d. Always above the marginal revenue curve.
e. Downward sloping.
Short Problems and Questions
S5 In a perfectly competitive market, the equilibrium price is $20. What is the demand curve
faced by a typical firm? If one firm decided to charge P = $19.90, what would be the
firm’s demand? The demand for the other firms in the market?
S6 Describe a perfectly competitive firm’s short-run supply curve. On what is it based?
Longer Problems and Discussion Questions
L1 Which of the following industries are likely to be perfectly competitive? Of those that are
not, explain why they are not.
a. Food retailing
b. Automobile manufacturing
c. National agricultural markets
d. Local banking
L2 Suppose that in some market, demand can be described with the equation Q = 900 - 5P
and supply can be described with the equation Q = 100 + 5P. Complete the following
table, and determine the equilibrium price and quantity.
Price Quantity Demanded Quantity Supplied Surplus/Shortage
100
95
90
85
80
75
70
65
65
L3 In a competitive industry, the short run average variable cost of a firm (producing output q)
is: AVC = 600 – 20q +.5q2.
a. Derive the firm’s short run supply equation.
b. Determine the minimum possible price for the firm in the short run.
L4. A perfectly competitive firm has total cost function as follow: TC ($) = 2Q2 + 5Q + 10
a) Assuming that the market price is $45, should the firm produce? Why? What is the price
and quantity that firm decides to maximize profit?
b) What are the firm’s break-even output and price?
c) What are the firm’s shutdown output and price?
d) What is the supply curve of the firm?
