Firms In Competitive Markets! Microeconomics Trivia Quiz
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Questions and Answers
- 1.
The only requirement for a market to be perfectly competitive is for the market to have many buyers and sellers.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
A market being perfectly competitive requires more than just many buyers and sellers. It also requires that all participants have perfect information, there are no barriers to entry or exit, products are homogeneous, and there is no market power. Simply having many buyers and sellers does not guarantee these conditions, hence the statement is false.Rate this question:
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- 2.
For a competitive firm, marginal revenue equals the price of the goods it sells.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
The statement is true because in a perfectly competitive market, a firm is a price taker and has no control over the price of the goods it sells. The firm can only sell at the prevailing market price. Therefore, the marginal revenue, which is the additional revenue earned from selling one more unit of the good, is equal to the price of the goods it sells.Rate this question:
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- 3.
If a competitive firm sells three times the amount of output, its total revenue also increases by a factor of three.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
When a competitive firm sells three times the amount of output, its total revenue increases by a factor of three. This is because in a competitive market, the firm is a price taker and sells its products at the market price. Therefore, when the firm increases its output, it sells more units at the same market price, resulting in a proportional increase in total revenue.Rate this question:
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- 4.
A firm maximizes profit when it produces output up to the point where marginal cost equals marginal revenue.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
A firm maximizes profit when it produces output up to the point where marginal cost equals marginal revenue. This is because when marginal cost is equal to marginal revenue, the firm is producing the optimal level of output where the additional cost of producing one more unit is equal to the additional revenue earned from selling that unit. Beyond this point, producing more units would result in higher costs than the revenue generated, leading to a decrease in profit. Therefore, it is true that a firm maximizes profit when marginal cost equals marginal revenue.Rate this question:
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- 5.
If the marginal cost exceeds marginal revenue at a firm's current level of output, the firm can increase profit if it increases its level of output.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
If the marginal cost exceeds marginal revenue at a firm's current level of output, it means that the cost of producing an additional unit is higher than the revenue generated from selling that unit. In this scenario, increasing the level of output would only result in further losses for the firm, as the cost of production would outweigh the revenue generated. Therefore, the statement is false.Rate this question:
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- 6.
A competitive firm's short-run supply curve is the portion of its marginal cost curve that lies above its average-total-cost curve.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
In the short run, a competitive firm's supply curve is determined by its marginal cost curve, not its average total cost curve. The marginal cost curve represents the additional cost of producing one more unit of output, while the average total cost curve represents the average cost per unit of output. Therefore, the correct answer is false.Rate this question:
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- 7.
A competitive firm's long-run supply curve is the portion of its marginal-cost curve that lies above its average-variable-cost curve.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
In the long run, a competitive firm's supply curve is determined by its marginal cost curve. The firm will only supply goods at a price that covers its marginal cost. The average variable cost curve represents the average variable cost per unit of output, while the marginal cost curve represents the additional cost of producing one more unit. Therefore, the long-run supply curve of a competitive firm is the portion of its marginal-cost curve that lies above its average-total-cost curve, not its average-variable-cost curve.Rate this question:
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- 8.
In the short run, if the price a firm receives for a good is above its average variable costs but below its average total costs of production, the firm will temporarily shut down.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
In the short run, if the price a firm receives for a good is above its average variable costs but below its average total costs of production, the firm will not temporarily shut down. Instead, it will continue to produce in the short run, even if it is not covering all of its costs. This is because the firm is able to cover its variable costs and contribute towards its fixed costs, which it cannot avoid in the short run. Shutting down would only be considered if the price falls below the average variable costs.Rate this question:
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- 9.
In a competitive market, both buyers and sellers are price takers.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
In a competitive market, both buyers and sellers are price takers because they do not have the power to influence the price of goods or services. Instead, they must accept the prevailing market price determined by the forces of supply and demand. Buyers have limited bargaining power as they cannot negotiate lower prices, while sellers have limited pricing power as they cannot set higher prices without losing customers to competitors. This characteristic of a competitive market ensures that prices are determined by market forces rather than individual participants.Rate this question:
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- 10.
In the long run, if the price firms receive for their output is below their average total costs of production, some firms will exit the market.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
If the price that firms receive for their output is lower than their average total costs of production, it means that they are not making enough profit to cover their expenses. In the long run, this situation is unsustainable for firms, and they will be forced to exit the market. This is because they cannot continue operating at a loss indefinitely. Therefore, it is true that if the price firms receive for their output is below their average total costs of production, some firms will exit the market.Rate this question:
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- 11.
In the short run, the market supply curve for a good is the sum of the quantities supplied by each firm at each price.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
In the short run, each firm in a market has a fixed level of production capacity, which means that the quantity supplied by each firm is fixed at different prices. The market supply curve is derived by horizontally summing the individual supply curves of all firms in the market. This means that at each price level, the market supply curve represents the total quantity supplied by all firms combined. Therefore, the statement is true.Rate this question:
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- 12.
The short-run market supply curve is more elastic than the long-run market supply curve.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
In the long run, firms have more flexibility to adjust their production levels and inputs, such as labor and capital. This means that they can respond more easily to changes in market conditions, resulting in a more elastic supply curve. In the short run, however, firms may have fixed inputs that cannot be easily adjusted, limiting their ability to respond to changes in demand. As a result, the short-run market supply curve is generally less elastic than the long-run market supply curve. Therefore, the given statement is false.Rate this question:
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- 13.
In the long run, perfectly competitive firms earn small but positive economic profits.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
In the long run, perfectly competitive firms do not earn economic profits because in a perfectly competitive market, there are no barriers to entry or exit for firms. This means that if firms are earning economic profits, new firms will enter the market, increasing competition and driving down prices. As prices decrease, the economic profits for firms will also decrease until they reach zero. Therefore, perfectly competitive firms earn zero economic profits in the long run, not small but positive economic profits.Rate this question:
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- 14.
In the long run, if firms are identical and there is free entry and exit in the market, all firms in. the market operate at their efficient scale.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
In a market where firms are identical and there is free entry and exit, all firms will operate at their efficient scale in the long run. This means that each firm will produce the quantity of output that minimizes its average total cost. If a firm operates below its efficient scale, it will have higher average total costs and will be less competitive. On the other hand, if a firm operates above its efficient scale, it will have excess capacity and will not be utilizing its resources efficiently. Therefore, in a perfectly competitive market with identical firms and free entry and exit, all firms will eventually operate at their efficient scale.Rate this question:
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- 15.
If the price of a good rises above the minimum average total cost of production, positive economic profits will cause new firms to enter the market, which drives the price back down to the minimum average total cost of production.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
When the price of a good rises above the minimum average total cost of production, it means that firms are making economic profits. This attracts new firms to enter the market, hoping to also make profits. As more firms enter, the supply of the good increases, which causes the price to decrease. Eventually, the price will be driven back down to the minimum average total cost of production, where firms are making normal profits and there is no incentive for new firms to enter. Therefore, the statement is true.Rate this question:
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- 16.
Which of the following is not a characteristic of a competitive market?
- A.
There are many buyers and sellers in the market
- B.
The goods offered for sale are largely the same
- C.
Firms can freely enter or exit the market
- D.
Firms generate small but positive economic profits in the long run
- E.
All of the above are characteristics of a competitive market
Correct Answer
D. Firms generate small but positive economic profits in the long runExplanation
In a competitive market, firms are not expected to generate small but positive economic profits in the long run. Instead, in a competitive market, firms are expected to earn zero economic profits in the long run due to the presence of many buyers and sellers, homogeneous goods, and the ability for firms to freely enter or exit the market. The absence of economic profits in the long run is a key characteristic of a competitive market as it indicates that there are no barriers to entry or exit and that firms are operating at their efficient scale.Rate this question:
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- 17.
Which of the following markets would most closely satisfy the requirements for a competitive market?
- A.
Gold bullion
- B.
Electricity
- C.
Cable television
- D.
Soda
- E.
All of the above represent competitive markets
Correct Answer
A. Gold bullionExplanation
Gold bullion would most closely satisfy the requirements for a competitive market because it is a widely traded commodity with many buyers and sellers. In a competitive market, there is a large number of participants, low barriers to entry and exit, perfect information, and homogeneous products. Gold bullion meets these criteria as it can be bought and sold by numerous individuals and institutions, there are no significant barriers to entering or exiting the market, information about gold prices is readily available, and gold bullion is a standardized product.Rate this question:
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- 18.
For a competitive firm, marginal revenue is
- A.
Equal to the price of the good sold
- B.
Average revenue divided by the quantity sold
- C.
Total revenue divided by the price
- D.
Equal to the quantity of the good sold
Correct Answer
A. Equal to the price of the good soldExplanation
In a competitive market, a firm is a price taker, meaning it has no control over the price of the good. The firm can only sell at the prevailing market price. Therefore, the marginal revenue, which is the additional revenue earned from selling one more unit of the good, will be equal to the price of the good sold.Rate this question:
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- 19.
The competitive firm maximizes profit when it produces output up to the point where
- A.
Marginal cost equals total revenue
- B.
Marginal revenue equals average revenue
- C.
Marginal cost equals marginal revenue
- D.
Price equals average variable cost
Correct Answer
C. Marginal cost equals marginal revenueExplanation
The correct answer is "marginal cost equals marginal revenue." In order to maximize profit, a competitive firm should produce output up to the point where the additional cost of producing one more unit (marginal cost) is equal to the additional revenue earned from selling that unit (marginal revenue). This is because producing more units beyond this point would result in higher costs than the revenue generated, leading to a decrease in profit. Therefore, equating marginal cost and marginal revenue ensures that the firm is operating at the optimal level of production.Rate this question:
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- 20.
If a competitive firm is producing a level of output where marginal revenue exceeds marginal cost, the firm could increase profits if it
- A.
Increased production
- B.
Decreased production
- C.
Maintained production at the current level
- D.
Temporarily shut down
Correct Answer
A. Increased productionExplanation
If a competitive firm is producing a level of output where marginal revenue exceeds marginal cost, it means that the additional revenue generated from producing one more unit is greater than the additional cost incurred. This implies that the firm is not yet maximizing its profits and can still increase profits by producing more. By increasing production, the firm can continue to earn more revenue than the cost of producing each additional unit, resulting in higher overall profits.Rate this question:
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- 21.
If a competitive firm is producing a level of output where marginal revenue exceeds marginal cost, the firm could increase profits if it
- A.
Increased production
- B.
Decreased production
- C.
Maintained production at the current level
- D.
Temporarily shut down
Correct Answer
A. Increased productionExplanation
If a competitive firm is producing a level of output where marginal revenue exceeds marginal cost, it means that the firm is generating more revenue from each additional unit produced than the cost of producing that unit. Therefore, increasing production would allow the firm to earn even more revenue and potentially increase profits.Rate this question:
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- 22.
In the short run, the competitive firm's supply curve is the
- A.
Entire marginal-cost curve
- B.
Portion of the marginal-cost curve that lies above the average-total-cost curve
- C.
Portion of the marginal-cost curve that lies above the average-variable-cost curve
- D.
Upward-sloping potion of the average-total-cost curve
- E.
Upward-sloping portion of the average-variable-cost curve
Correct Answer
C. Portion of the marginal-cost curve that lies above the average-variable-cost curveExplanation
In the short run, the competitive firm's supply curve is the portion of the marginal-cost curve that lies above the average-variable-cost curve. This is because in the short run, the firm can only vary its variable inputs, such as labor, while its fixed inputs, such as capital, remain constant. As a result, when the price of the product exceeds the average variable cost, the firm will continue to produce in order to cover its variable costs. However, if the price falls below the average variable cost, the firm will shut down and produce nothing. Therefore, the supply curve of a competitive firm in the short run is determined by the portion of the marginal-cost curve that lies above the average-variable-cost curve.Rate this question:
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- 23.
In the long run, the competitive firm's supply curve is the
- A.
Entire marginal-cost curve
- B.
Portion of the marginal-cost curve that lies above the average-total-cost curve
- C.
Portion of the marginal-cost curve that lies above the average-total-cost curve
- D.
Upward-sloping portion of the average-total-cost curve
- E.
Upward-sloping portion of the average-variable-cost curve
Correct Answer
B. Portion of the marginal-cost curve that lies above the average-total-cost curveExplanation
The correct answer is "portion of the marginal-cost curve that lies above the average-total-cost curve." This is because in the long run, a competitive firm will continue to produce as long as the price is above the average total cost. If the price is above the average total cost, the firm will be making a profit and will continue to produce. The supply curve represents the quantity of output that a firm is willing and able to produce at different price levels, and in the long run, the firm's supply curve will correspond to the portion of the marginal cost curve that is above the average total cost curve.Rate this question:
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- 24.
A grocery store should close at night if the
- A.
Total costs of staying open are greater than the total revenue due to staying open
- B.
Total costs of staying open are less than the total revenue due to staying open
- C.
Variable costs of staying open are greater than the total revenue due to staying open
- D.
Variable costs of staying open are less than the total revenue due to staying open
Correct Answer
C. Variable costs of staying open are greater than the total revenue due to staying openExplanation
If the variable costs of staying open are greater than the total revenue due to staying open, it means that the expenses incurred by the grocery store during its operation at night (such as electricity, staff wages, etc.) exceed the income generated from staying open (such as sales revenue). In this case, it would be financially unwise for the grocery store to remain open at night as it would result in a net loss. Therefore, the grocery store should close at night.Rate this question:
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- 25.
The long-run market supply curve
- A.
Is always more elastic than the short-run market supply curve
- B.
Is always less elastic than the short-run market supply curve
- C.
Has the same elasticity as the short-run market supply curve
- D.
Is always perfectly elastic
Correct Answer
A. Is always more elastic than the short-run market supply curveExplanation
In the long run, firms have more flexibility to adjust their production capacity and inputs compared to the short run. This means that they can respond more easily to changes in market conditions and adjust their quantity supplied accordingly. As a result, the long-run market supply curve is more elastic than the short-run market supply curve. This means that a small change in price will lead to a relatively larger change in quantity supplied in the long run compared to the short run.Rate this question:
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- 26.
In the long run, some firms will exit the market if the price of the good offered for sale is less than
- A.
Marginal revenue
- B.
Marginal cost
- C.
Average revenue
- D.
Average total cost
Correct Answer
D. Average total costExplanation
In the long run, firms will exit the market if the price of the good offered for sale is less than the average total cost. This is because if the price is lower than the average total cost, the firm will not be able to cover its production costs and will incur losses. In order to remain profitable, firms need to ensure that the price is higher than the average total cost, allowing them to generate a profit margin. If the price falls below this threshold, it becomes economically unviable for the firm to continue operating, leading to their exit from the market.Rate this question:
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- 27.
If all firms in a market have identical cost structures and if inputs used in the production of the good in that market are readily available, then the long-run market supply curve for that good should be
- A.
Perfectly elastic
- B.
Downward sloping
- C.
Upward sloping
- D.
Perfectly inelastic
Correct Answer
A. Perfectly elasticExplanation
If all firms in a market have identical cost structures and if inputs used in the production of the good in that market are readily available, then the long-run market supply curve for that good should be perfectly elastic. This is because in a perfectly competitive market, firms can easily enter or exit the market without any barriers. Therefore, if there is an increase in demand for the good, new firms can easily enter the market and increase the supply, causing the supply curve to be perfectly elastic. Similarly, if there is a decrease in demand, firms can easily exit the market, reducing the supply and again resulting in a perfectly elastic supply curve.Rate this question:
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- 28.
If an input necessary for production is in limited supply so that an expansion of the industry raises costs for all existing firms in the market, then the long-run market supply curve for a good could be
- A.
Perfectly elastic
- B.
Downward sloping
- C.
Upward sloping
- D.
Perfectly inelastic
Correct Answer
C. Upward slopingExplanation
If an input necessary for production is in limited supply and an expansion of the industry raises costs for all existing firms, it implies that the cost of production will increase as the industry expands. This increase in costs will result in higher prices for the good in the long run. As a result, the quantity supplied by firms will also increase, leading to an upward sloping market supply curve.Rate this question:
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- 29.
If the long-run market supply curve for a good is perfectly elastic, an increase in the demand for that good will, in the long run, cause
- A.
An increase in the price of the good and an increase in the number of firms in the market
- B.
An increase in the price of the good but no increase in the number of firms in the market
- C.
An increase in the number of firms in the market but no increase in the price of the good
- D.
No impact on either the price of the good or the number of firms in the market
Correct Answer
C. An increase in the number of firms in the market but no increase in the price of the goodExplanation
If the long-run market supply curve for a good is perfectly elastic, it means that firms can easily enter or exit the market without affecting the price. Therefore, an increase in demand for the good will not lead to an increase in price because new firms can enter the market to meet the increased demand. However, the increase in demand will attract new firms to enter the market, resulting in an increase in the number of firms in the market. Hence, the correct answer is that there will be an increase in the number of firms in the market but no increase in the price of the good.Rate this question:
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- 30.
In long-run equilibrium in a competitive market, firms are operating at
- A.
The minimum of their average-total-cost curves
- B.
The intersection of marginal cost and marginal revenue
- C.
Their efficient scale
- D.
Zero economic profit
- E.
All of the above
Correct Answer
E. All of the aboveExplanation
In long-run equilibrium in a competitive market, firms are operating at the minimum of their average-total-cost curves because they have optimized their production processes and are minimizing costs. They are also operating at the intersection of marginal cost and marginal revenue, which means that they are producing the quantity where the additional cost of producing one more unit is equal to the additional revenue generated from selling that unit. Additionally, they are operating at their efficient scale, which is the level of production where they are maximizing efficiency and minimizing waste. Lastly, in long-run equilibrium, firms are earning zero economic profit, which means that they are covering all their costs but not making any extra profit.Rate this question:
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ABM 311 Intermediate Microeconomics Theory Preliminary Examination
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