TBChap 010

Chapter 10
Pure Competition in the Short Run
Multiple Choice Questions
1. Which market model assumes the least number of firms in an industry?
A. Monopolistic competition
B. Pure competition
C. Pure monopoly
D. Oligopoly
2. In which market model would there be a unique product for which there are no close substitutes?
B. Pure competition
C. Pure monopoly
D. Oligopoly
3. There would be some control over price within rather narrow limits in which market model?
B. Pure competition
C. Pure monopoly
D. Oligopoly
4. Mutual interdependence would tend to limit control over price in which market model?
B. Pure competition
C. Pure monopoly
D. Oligopoly
5. In which two market models would advertising be used most often?
A. Pure competition and monopolistic competition

B. Pure competition and pure monopoly
C. Monopolistic competition and oligopoly
D. Pure monopoly and oligopoly
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6. In which market model are the conditions of entry into the market easiest?
A. Pure competition
B. Pure monopoly
C. Monopolistic competition
D. Oligopoly
7. In which market model are the conditions of entry the most difficult?
B. Pure competition
C. Pure monopoly
D. Oligopoly
8. Local electric or gas utility companies mostly operate in which market structure?
B. Pure competition
C. Pure monopoly
D. Oligopoly
9. The fast-food restaurant industry would be an example of which market model?
B. Pure competition
C. Pure monopoly
D. Oligopoly
10. The market for agricultural products such as wheat or corn would best be described by which market
model?
B. Pure competition
C. Pure monopoly
D. Oligopoly
11. The soft-drink and automobile industries would be examples of which market model?
B. Pure competition
C. Pure monopoly
D. Oligopoly
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12. Which of the following is not a basic market model?
A. Pure competition
B. Free enterprise
C. Oligopoly
D. Monopoly
13. Which idea is inconsistent with pure competition?
A. Price-taking behavior
B. Product differentiation
C. Freedom of entry or exit for firms
D. A large number of buyers and sellers
14. Which characteristic would best be associated with pure competition?
A. Few sellers
B. Price takers
C. Nonprice competition
D. Product differentiation
15. If a firm has at least some control over the price of its product, then the firm cannot be in which market
model:
A. Oligopoly
B. Pure monopoly
C. Pure competition
D. Monopolistic competition
16. In a purely competitive industry, each firm:
A. Determines its own price

B. Produces a differentiated product
C. Can easily enter or exit the industry
D. Engages in various forms of nonprice competition
17. Which is a feature of a purely competitive market?
A. Price differences between firms producing the same product

B. Significant barriers to entry into the industry
C. The industry's demand curve is perfectly elastic
D. Products are standardized or homogeneous
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18. Which of the following is true under conditions of pure competition?
A. There are differentiated products

B. The market demand curve is perfectly elastic
C. No single firm can influence the market price by changing its output
D. Each individual firm has the ability to set its own price
19. Which of the following is a reason why individual firms under pure competition would not find it gainful to
advertize their product?
A. Firms produce a homogeneous product

B. The quantity of the product demanded is very large
C. The market demand curve cannot be increased
D. Firms do not make long-run profits
20. Price is taken to be a "given" by an individual firm selling in a purely competitive market because:
A. The firm's demand curve is downward-sloping

B. There are no good substitutes for the firm's product
C. Each seller supplies a negligible fraction of total market
D. Product differentiation is reinforced by extensive advertising
21. Which of the following is not a necessary characteristic of a purely competitive industry?
A. The industry- or market demand is highly elastic

B. Firms can enter or leave the industry
C. There are so many firms that none can influence market price
D. Consumers see no difference between the product of one firm and that of another
22. A purely competitive firm does not try to sell more of its product by lowering its price below the market
price because:
A. Its competitors would not permit it

B. It can sell all it wants to at the market price
C. This would be considered unethical price chiseling
D. Its demand curve is inelastic, so total revenue will decline
23. A purely competitive firm can be identified by the fact that:
A. There are other firms in the industry producing similar products

B. It is making only normal profits in the short run
C. Its average revenue equals its marginal revenue
D. It experiences diminishing marginal returns
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24. The demand curve faced by a purely competitive firm:
A. Has unitary elasticity

B. Yields constant total revenues even when price changes
C. Is identical to the market demand curve
D. Is the same as its marginal revenue curve
25. If the demand curve faced by an individual firm is downward-sloping, the firm cannot be a:
A. A monopoly firm
B. A purely competitive firm
C. An oligopolistic firm
D. A monopolistically competitive firm
26. In pure competition, the demand for the product of a single firm is perfectly:
A. Elastic because the firm produces a unique product

B. Inelastic because the firm produces a unique product
C. Elastic because many other firms produce the same product
D. Inelastic because many other firms produce the same product
27. If a firm is a price taker, then the demand curve for the firm's product is:
A. Equal to the total revenue curve

B. Perfectly inelastic
C. Perfectly elastic
D. Unit elastic
28. Xavier produces and sells tomatoes in a purely competitive market. This implies that Xavier's marginal
revenue from an extra unit of tomatoes is always equal to the:
A. Unit price
B. Average cost
C. Variable cost
D. Unit profit
29. Suppose that Joe sells pork in a purely competitive market. The market price of pork is $3 per pound. Joe's
marginal revenue from selling the twelfth pound would be:
A. $36
B. $3
C. 12 lbs.
D. 1 lb.
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30. In pure competition, each extra unit of output that a firm sells will yield a marginal revenue that is:
A. Equal to the price

B. Less than the price
C. Greater than the price
D. Equal to the average cost
31. Average revenue is conceptually equivalent to the:
A. Unit price of the product

B. Average cost of the product
C. Marginal cost of the product
D. Marginal revenue of the product
32. Average revenue and marginal revenue are equal at each output level in:
A. Pure competition
B. Monopolistic competition
C. Monopoly
D. Oligopoly
33. In a graph for a firm in pure competition with the quantity of output measured on the horizontal axis, the
total revenue curve is:
A. Downward-sloping
B. Horizontal
C. Vertical
D. Upward-sloping
34. The total revenue of a purely competitive firm from 8 units of output is $48. Based on this information,
total revenue for 9 units of output must be:
A. $52
B. $54
C. $58
D. $60
35. A purely competitive firm currently producing 20 units of output earns marginal revenues of $12 from each
extra unit of output it sells. If it sells 30 units, then its total revenues would be:
A. $120
B. $240
C. $360
D. Indeterminate based on the given information
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36. Assume the price of a product sold by a purely competitive firm is $5. Given the data in the accompanying
table, at what output level is total profit highest in the short run?
A. 20
B. 30
C. 40
D. 50
37. In the standard model of pure competition, a profit-maximizing firm will produce the output quantity in the
short run where the gap between:
A. Marginal revenue and marginal cost is the largest, with revenue higher than cost
B. Average revenue and average cost is the largest, with revenue higher than cost
C. Total revenue and total cost is the largest, with revenue higher than cost
D. Average revenue and average variable cost is the largest
38. In the standard model of pure competition, a profit-maximizing firm will shut down in the short run if price
is below:
A. Marginal cost
B. Average cost
C. Average fixed cost
D. Average variable cost
39. In the standard model of pure competition, a profit-maximizing firm will shut down in the short run if:
A. Marginal cost is greater than average revenue

B. Average cost is greater than average revenue
C. Average fixed cost is greater than average revenue
D. Total revenue is less than total variable cost
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40. Given the table below, what is the short-run profit-maximizing level of output for the firm?
A. 2 units
B. 3 units
C. 4 units
D. 5 units
41.
Refer to the above graph for a purely competitive firm in the short run. The firm would suffer losses if it
operates at which of the following range of output?
A. 0A
B. A
B
C. BC
D. Any level below C
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42.
Refer to the above graph for a purely competitive firm in the short run. Profits would be maximized if the
firm produces which level of output?
A. A
B. B
C. C
D. Greater than C
43.
Refer to the above graph for a purely competitive firm in the short run. The price of the firm's product is
given by:
A. 0F/0C
B. 0G/0C
C. 0F/0B
D. 0E/0A
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44.
Refer to the above graph for a purely competitive firm in the short run. What minimum output level should
the firm produce just for it to break even?
A. A
B. B
C. C
D. Greater than C
45.
Refer to the above graph for a purely competitive firm in the short run. If the firm increases its output level
from B to C, then its total profits will be:
A. Negative and decreasing

B. Negative and increasing
C. Positive and increasing
D. Positive and decreasing
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46. The table shows the total costs for a purely competitive firm.
Refer to the above table. If the firm shuts down in the short run, the total cost will be:
A. $1,350
B. $2,500
C. $2,700
D. $3,100
Refer to the above table. If the product sells for $1,200 a unit, the firm's profit-maximizing output is:
A. 2
B. 3
C. 4
D. 5
48. Answer the question based on the table below.
At what quantity would a purely competitive firm cover all of its costs and earn only normal profits?
A. Q = 5
B. Q = 10
C. Q = 15
D. Q = 20
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49. Let us suppose Harry's, a local supplier of chili and pizza, has the following revenue and cost structure:
A. Harry's should stay open in the long run

B. Harry's should shut down in the short run
C. Harry's should stay open in the short run
D. Harry's should shut down in the short run but reopen in the long run
50.
Refer to the above graph. Which of the output levels is the profit-maximizing output level for this firm?
A. Q1
B. Q2
C. Q3
D. Q4
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51.
Refer to the above graph. The amount of profit is measured by the difference between:
A. a and c
B. b and c
C. d and e
D. a and f
52.
In a typical graph for a purely competitive firm, at the point where the total cost and total revenue curves
intersect, the firm:
A. Earns some economic profit

B. Suffers some economic loss
C. Earns some normal profit
D. Suffers some accounting loss
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53. Use the table below to answer the question for a purely competitive firm.
Refer to the above table. The market price of the product in the short run is:
A. $40
B. $80
C. $120
D. $160
Refer to the above table. The marginal revenue from the third unit of output is:
A. $40
B. $50
C. $120
D. $160
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Refer to the above table. When the firm produces 3 units of output, it makes an economic:
A. Profit of $3
B. Loss of $3
C. Profit of $9
D. Loss of $9
56. As president and owner of the Sour Grapes Lemonade Company, you know that you face:
To maximize your financial well-being, you should:
A. Continue to operate in the short run because rent is less than sales
B. Shut down because variable costs exceed fixed costs
C. Shut down because the company is losing money
D. Continue operating in the short run
57. A profit-maximizing firm in the short run will expand output:
A. Until marginal cost begins to rise

B. Until total revenue equals total cost
C. Until marginal cost equals average variable cost
D. As long as marginal revenue is greater than marginal cost
58. If a firm increases its output quantity when marginal revenue is less than marginal cost then its profits will:
A. Be positive
B. Increase
C. Decrease
D. Be negative
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59. Farmer Jones is producing wheat, and must accept the market price of $6.00 per bushel. At this time, her
average total costs and her marginal costs both equal $8.00 per bushel. Her average variable costs are $5
per bushel. In order to maximize profits or minimize losses, farmer Jones should:
A. Increase output
B. Increase selling price
C. Produce zero output and close down
D. Continue producing, but reduce output
60. Which of the following is true for a purely competitive firm in short-run equilibrium?
A. The firm is making only normal profits

B. The firm's marginal cost is greater than its marginal revenue
C. The firm's marginal revenue is equal to its marginal cost
D. A decrease in output would lead to a rise in profits
61. Which is necessarily true for a purely competitive firm in short-run equilibrium?
A. Marginal revenue minus marginal cost equals zero

B. Price minus average total cost equals zero
C. Total revenue minus total cost equals zero
D. Marginal revenue is zero
62. A purely competitive firm's output is currently such that its marginal cost is $4 and marginal revenue is $5.
Assuming profit maximization, the firm should:
A. Cut its price and raise its output

B. Raise its price and cut output
C. Leave price unchanged and raise output
D. Leave price unchanged and cut output
63. A firm sells a product in a purely competitive market. The marginal cost of the product at the current output
of 1,000 units is $2.50. The minimum possible average variable cost is $2.00. The market price of the
product is $2.50. To maximize profits or minimize losses, the firm should:
A. Continue producing 1,000 units

B. Continue production, but produce less than 1,000 units
C. Increase production to more than 1,000 units
D. Shut down
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of 800 units is $3.50. The minimum possible average variable cost is $3.00. The market price of the
A. Continue producing 800 units

B. Continue production, but produce less than 800 units
C. Increase production to more than 800 units
D. Shut down

D. Shut down
A. Continue to produce 200 units

D. Shut down
is $4.00 and the market price is $4.50. What should the firm do?
A. Shut down if the minimum possible average variable cost is below $4.50
B. Decrease output if the minimum possible average variable cost is below $4.50
C. Increase output if the minimum possible average variable cost is below $4.50
D. Decrease output if the minimum possible average variable cost is above $4.50
68. T-Shirt Enterprises is selling in a purely competitive market. It is producing 3000 units, selling them for
$2.00 each. At this level of output, the average total cost is 2.50 and the average variable cost is $2.20.
Based on these data, the firm should:
A. Shut down in the short run

B. Decrease output to 2500 units
C. Continue to produce 3000 units
D. Increase output to 3500 units
10-17
69.
Given the diagram above, which level of output should the entrepreneur choose?
A. Either X1 or X3 since the profit level will be the same

B. X3 since any increase in output will reduce profits
C. X1 since any decrease in output will reduce profits
D. X2 since at this level the difference between MR and MC is maximized
70.
Refer to the above graph. To maximize profits, the firm should produce the quantity:
A. 0A
B. 0B
C. 0C
D. 0K
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71.
Refer to the above graph. The firm should shut down if the quantity of output that it could sell falls below:
A. 0A
B. 0B
C. 0C
D. 0K
72. The table shows cost data for a firm that is selling in a purely competitive market.
Refer to the above cost table. The firm will produce its output only if the price is at least equal to what
minimum level?
A. $3
B. $4
C. $6
D. $9
10-19
Refer to the above cost table. If the price of the product is $6, what output level will the firm produce?
A. 0
B. 12
C. 14
D. 16
74. The following table shows cost data for a firm that is selling in a purely competitive market.
Refer to the above table. If the market price for the firm's product is $80, the firm will:
A. Produce 4 units
B. Produce 5 units
C. Produce 6 units
D. Shut down
10-20
Refer to the above table. If the market price for the firm's product is $180, the competitive firm will
produce:
A. 5 units and earn economic profits of $100

B. 6 units and earn economic profits of $120
C. 7 units and earn economic profits of $238
D. 8 units and earn economic profits of $278
Refer to the above table. If the product price is $290, the per-unit economic profit at the profit-maximizing
output is:
A. $0
B. $76
C. $119
D. $152
10-21
Refer to the above table. Now assume there are 100 identical firms in this industry, each of which has the
same cost data as the single firm described above. Suppose too that the demand curve for this industry is as
shown below:
The equilibrium price will be:
A. $140
B. $180
C. $230
D. $290
10-22
78.
Refer to the above graph. At the profit-maximizing level of output, the firm earns profits given by the area:
A. 0AHE
B. ACFH
C. BCFG
D. ABGH
79. A purely competitive firm is currently in short-run equilibrium and its MC exceeds its ATC at its current
output level. It can be concluded that:
A. Firms will leave the industry in the long run

B. The firm is realizing an economic profit
C. The firm is suffering a loss
D. The firm will shut down in the short run
80. The Campus Crustacean Company receives $2 per box for its crawfish and is selling 1,600 boxes to
maximize its profits. What is the profit per box of crawfish at this equilibrium level of output if the average
variable cost is $1 per box and fixed costs are $1,200?
A. $.25
B. $.50
C. $1.00
D. $1.25
10-23
81.
Refer to the above graph. The firm will earn maximum total profits if it produces and sells quantity:
A. 0A
B. 0B
C. 0C
D. 0K
82.
Refer to the above graph. At what level of output will the firm earn a maximum unit-profit margin (or
profit per unit)?
A. 0A
B. 0B
C. 0C
D. 0K
10-24
83.
Consider the purely competitive firm pictured above. The firm is earning:
A. Normal profits, since its price is above AVC

B. Economic profits, since its price is above AVC
C. Normal profits, since its price just covers ATC
D. Losses, since it is operating at the shutdown point
84.
Consider the purely competitive firm pictured above. At its short-run equilibrium point, the firm is
earning:
A. Zero normal profits

B. Zero economic profits
C. Zero accounting profits
D. We can say nothing about this firm's profit or loss situation
10-25
85. A purely competitive firm is producing at the point where its marginal cost equals the price of its product.
If the firm increases its output, then total revenue will:
A. Increase and profits will increase

B. Decrease and profits will increase
C. Increase and profits will decrease
D. Decrease and profits will decrease
86. A firm should continue to operate even at a loss in the short run if:
A. Its output is above the break-even point

B. Its revenues are less than its fixed costs
C. It can cover its variable costs and some of its fixed costs
D. It has some fixed costs that cannot be brought down to zero
87.
Refer to the above graph for a purely competitive firm. When the firm is in equilibrium in the short run, its
average fixed cost is:
A. EH
B. DE
C. DH
D. DB
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88.
Refer to the above graph for a purely competitive firm. When the firm is in equilibrium in the short run, the
amount of economic profit per unit is:
A. EH
B. DE
C. DH
D. DB
89.
Refer to the above graph for a purely competitive firm operating at a loss in the short run. Which area in the
graph represents the portion of total costs that the firm can recoup by continuing to produce rather than
shutting down?
A. 0beg
B. 0cdg
C. acdf
D. abef
10-27
90.
Refer to the above graph for a purely competitive firm operating at a loss in the short run. Which area in the
graph represents the amount of economic loss for the firm?
A. 0beg
B. bcde
C. acdf
D. abef
91.
Refer to the above graph for a purely competitive firm operating at a loss in the short run. Which of the
following changes in its market would allow the firm to earn positive profits again?
A. An increase in the market demand

B. An increase in the wages of workers in the industry
C. A decrease in the price of raw materials used by firms in the industry
D. A decrease in the price of the industry's product
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92.
Refer to the above graph. At output level H, the area:
A. 0CGH represents the firm's total cost of production

B. ACGE represents the firm's economic profit
C. 0AEH represents the firm's economic profit
D. BCGF represents the firm's fixed cost of production
93. A purely competitive firm will be willing to produce even at a loss in the short run, as long as:
A. The loss is smaller than its total variable costs

B. The loss is smaller than its marginal costs
C. The loss is smaller than its total fixed costs
D. Price exceeds marginal costs
10-29
94.
Refer to the above graph. It shows the cost curves for a competitive firm. If the market price falls to $0.55,
the optimal output rate is:
A. 0
B. 15
C. 20
D. More than 20, but less than 35
95.
Refer to the above graph. It shows the cost curves for a competitive firm. What is the lowest price at which
the firm will start producing output in the short run?
A. $1.25
B. $1.05
C. $0.90
D. $0.60
10-30
96.
Refer to the above graph. It shows the cost curves for a competitive firm. If the market price of the product
is $1.05 per unit, then the firm will produce how many units in the short run?
A. Between 0 and 15
B. Between 15 and 20
C. Between 20 and 35
D. Above 35
97.
Refer to the above graph. It shows short-run cost curves for a competitive firm. At what price would the
firm face the same profit or loss whether it chooses to produce or not?
A. P1
B. P2
C. P3
D. P4
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98.
Refer to the above graph. It shows short-run cost curves for a competitive firm. At what minimum price
would the firm be willing to product some output in the short run?
A. P1
B. P2
C. P3
D. P4
99.
firm break even?
A. P1
B. P2
C. P3
D. P4
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100. The short-run supply curve for a competitive firm is the:
A. Entire MC curve
B. Segment of the MC curve lying below the AVC curve
C. Segment of the MC curve lying above the AVC curve
D. Segment of the AVC curve lying to the right of the MC curve
101.
Given the above graph, the competitive firm's supply curve is the:
A. MC curve above F
B. MC curve above G
C. MC curve above H
D. MC curve above J
102.
Refer to the above graph. This pure competitive firm will not produce unless price is at least:
A. $2
B. $5
C. $7
D. $10
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103.
Refer to the above graph. At what price will the firm make an economic profit?
A. $2
B. $5
C. $7
D. $10
104.
Refer to the above graph. At what price will the firm make just a normal profit?
A. $2
B. $5
C. $7
D. $10
10-34
105.
Refer to the above graph. Which point is definitely not on the competitive firm's short-run supply curve?
A. A
B. B
C. C
D. D
106.
Refer to the above graph. Which point is the break-even point for the firm?
A. A
B. B
C. C
D. D
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107.
Refer to the above graph. Which point is the shutdown point for the firm?
A. A
B. B
C. C
D. D
108.
Refer to the cost table above. If a competitive firm faced with these costs finds that it can sell its product at
$60 per unit, it will:
A. Produce 5 units and incur a loss of $50

B. Produce 6 units and incur a loss of $30
C. Produce 7 units and realize a profit of $32
D. Close down in the short run
10-36
109.
Refer to the cost table above. If price of the product were $30 per unit, the firm would:

C. Produce 7 units and realize a loss of $32
D. Shut down in the short run
10-37
110.
Refer to the cost table above. Based on the cost data given, which of the following price-quantity tables
correctly represents the firm's short-run supply schedule?
A. Table a
B. Table b
C. Table c
D. Table d
10-38
111.
Refer to the cost table above. Now suppose that there are 600 identical firms in this industry, each with the
same cost data as the single firm discussed above. Suppose, too, that the demand curve for this industry is
as follows:
Based on all these data, the equilibrium price of the product in the market will be:
A. $60
B. $95
C. $120
D. $75
10-39
112.
as follows:
When the market is in equilibrium, each of the firms will be producing:
A. 5 units
B. 6 units
C. 7 units
D. 9 units
10-40
113.
as follows:
At equilibrium, each firm will realize:
A. An economic profit of $155

B. An economic profit of $35
C. A loss of $45
D. A loss of $135
10-41
114.
Refer to the above graph. All data are for the short run. The firm represented in this diagram is selling
under conditions of:
A. Pure monopoly
B. Pure competition
D. Oligopoly
115.
Refer to the above graph. All data are for the short run. If the product price is P2, the firm will:
A. Close down to avoid a loss

B. Produce Q2 units and make an economic profit
C. Produce Q5 units and break even
D. Produce Q2 units and suffer a loss
10-42
116.
Refer to the above graph. All data are for the short run. Which of the following statements is correct?
A. Production is profitable only when price is above P3

B. Average fixed cost is P1 P3 at output Q1
C. The firm will produce an output of Q1 when price is P1
D. At price P1, the firm will close down
117. In the short run, fixed costs for a profitable firm are:
A. Zero
B. Negative
C. Important determinants of the output level
D. Irrelevant in determining the optimal level of output
10-43
118.
If the supply and demand curves above represent the market supply and demand for a purely competitive
industry, then the demand curve that an individual firm in the industry faces:
A. Is identical to the market demand

B. Is equal to the marginal-revenue curve which is a flat line at P0
C. Is more elastic than the market demand but has a marginal-revenue curve lying below it
D. Has the same slope as the market demand, but at P0 its quantity demanded is only a fraction of Q0
119. In pure competition, price is determined where the industry:
A. Demand and supply curves intersect

B. Total cost is greater than total revenue
C. Demand intersects the individual firm's marginal cost curve
D. Average total cost equals total variable cost
120. If the market demand for the product increases, in the short run a purely competitive firm:
A. Will not change its output quantity because there are so many firms that the individual firm will not be
affected by the change
B. Will earn higher profits or experience smaller losses as a result of the change in the market
C. Will experience no change in costs as it steps up production in response to the change in the market
D. Can employ more inputs and increase the size of its plant, to respond to the change in the market
121. The wage rate increases in a purely competitive industry. This change will result in a(n):
A. Decrease in average total cost for a firm in the industry

B. Decrease in average variable cost for a firm in the industry
C. Increase in the marginal cost curve for a firm in the industry
D. Increase in short-run supply curve for a firm in the industry
10-44
122. Technological advance improves productivity in a purely competitive industry. This change will result in a
shift:
A. Down of the individual firm's MC curve, causing the market supply curve to shift to the left
B. Down of the individual firm's MC curve, causing the market supply curve to shift to the right
C. Up of the individual firm's MC curve, causing the market supply curve to shift to the left
D. Up of the individual firm's MC curve, causing the market supply curve to shift to the right
123. The resource cost falls in a purely competitive industry. This change will result in a(n):
A. Increase in marginal cost for firms in the industry and an increase in the industry supply curve
B. Decrease in marginal cost for firms in the industry and a decrease in the industry supply curve
C. Decrease in marginal cost for firms in the industry and an increase in the industry supply curve
D. Increase in marginal cost at each output level for firms in the industry and an increase in the industry
supply curve
124. The average wage of workers increases in a purely competitive industry. This change will result in a(n):
D. Increase in marginal cost for firms in the industry and a decrease in the industry supply curve
True / False Questions
125. If there are many firms in an industry, then it must be a purely competitive market.
True False
126. The basic difference between pure competition and monopolistic competition is in the number of firms in
the industry.
True False
127. Competitive firms are price takers largely because of intensive advertising by their competitors.
True False
128. For a purely competitive firm, the demand curve facing it is the same as its marginal revenue curve.
True False
129. In pure competition, the industry demand curve is infinitely price elastic.
True False
10-45
130. For an individual firm in pure competition, the firm's average revenue and marginal revenue at any output
level are both equal to the product's price.
True False
131. If a purely competitive firm is producing a level of output greater than its profit-maximizing output, then
its profits must be negative.
True False
132. As long as its total revenues are greater than its total costs, a firm will earn positive economic profits.
True False
133. If the firm produces an output level below its break-even point, then the firm will earn negative economic
profits.
True False
134. If a purely competitive firm is producing a level of output where the marginal revenue is less than the
marginal cost, then its profits must be negative.
True False
135. As long as an additional unit of output yields a marginal revenue larger than its marginal cost it will be
adding to total profits of the firm.
True False
136. If MR > MC for a competitive firm, it should reduce its level of output in order to make MR equal to MC.
True False
137. In the short run, a competitive firm will not produce unless price is at least equal to average total costs.
True False
138. In the short run, fixed costs are important in determining a firm's optimal level of output.
True False
139. In pure competition, a competitive firm‘s supply curve is that section of its marginal cost curve above ATC
and at any price below the average cost, the firm will produce nothing.
True False
10-46
Chapter 10 Pure Competition in the Short Run Answer Key
Multiple Choice Questions
1. Which market model assumes the least number of firms in an industry?
B. Pure competition
C. Pure monopoly
D. Oligopoly
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-01 Give the names and summarize the main characteristics of the four basic market models.
Topic: Four Market Models
2. In which market model would there be a unique product for which there are no close substitutes?
B. Pure competition
C. Pure monopoly
D. Oligopoly
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
3. There would be some control over price within rather narrow limits in which market model?
B. Pure competition
C. Pure monopoly
D. Oligopoly
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
10-47
4. Mutual interdependence would tend to limit control over price in which market model?
B. Pure competition
C. Pure monopoly
D. Oligopoly
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
5. In which two market models would advertising be used most often?
A. Pure competition and monopolistic competition

B. Pure competition and pure monopoly
C. Monopolistic competition and oligopoly
D. Pure monopoly and oligopoly
AACSB: Analytic
Blooms: Understand
6. In which market model are the conditions of entry into the market easiest?
A. Pure competition
B. Pure monopoly
D. Oligopoly
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
7. In which market model are the conditions of entry the most difficult?
B. Pure competition
C. Pure monopoly
D. Oligopoly
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
10-48
8. Local electric or gas utility companies mostly operate in which market structure?
B. Pure competition
C. Pure monopoly
D. Oligopoly
AACSB: Analytic
Blooms: Apply
9. The fast-food restaurant industry would be an example of which market model?
B. Pure competition
C. Pure monopoly
D. Oligopoly
AACSB: Analytic
Blooms: Apply
10. The market for agricultural products such as wheat or corn would best be described by which market
model?
B. Pure competition
C. Pure monopoly
D. Oligopoly
AACSB: Analytic
Blooms: Apply
11. The soft-drink and automobile industries would be examples of which market model?
B. Pure competition
C. Pure monopoly
D. Oligopoly
AACSB: Analytic
10-49
Blooms: Apply
12. Which of the following is not a basic market model?
A. Pure competition
B. Free enterprise
C. Oligopoly
D. Monopoly
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
13. Which idea is inconsistent with pure competition?
A. Price-taking behavior
B. Product differentiation
C. Freedom of entry or exit for firms
D. A large number of buyers and sellers
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-02 List the conditions required for purely competitive markets.
Topic: Pure Competition: Characteristics and Occurrence
14. Which characteristic would best be associated with pure competition?
A. Few sellers
B. Price takers
C. Nonprice competition
D. Product differentiation
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
10-50
15. If a firm has at least some control over the price of its product, then the firm cannot be in which market
model:
A. Oligopoly
B. Pure monopoly
C. Pure competition
D. Monopolistic competition
AACSB: Analytic
Blooms: Understand
16. In a purely competitive industry, each firm:
A. Determines its own price

B. Produces a differentiated product
C. Can easily enter or exit the industry
D. Engages in various forms of nonprice competition
AACSB: Analytic
Blooms: Understand
17. Which is a feature of a purely competitive market?
A. Price differences between firms producing the same product

B. Significant barriers to entry into the industry
C. The industry's demand curve is perfectly elastic
D. Products are standardized or homogeneous
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
18. Which of the following is true under conditions of pure competition?
A. There are differentiated products

B. The market demand curve is perfectly elastic
C. No single firm can influence the market price by changing its output
D. Each individual firm has the ability to set its own price
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
10-51
19. Which of the following is a reason why individual firms under pure competition would not find it
gainful to advertize their product?
A. Firms produce a homogeneous product

B. The quantity of the product demanded is very large
C. The market demand curve cannot be increased
D. Firms do not make long-run profits
AACSB: Analytic
Blooms: Understand
20. Price is taken to be a "given" by an individual firm selling in a purely competitive market because:
A. The firm's demand curve is downward-sloping

B. There are no good substitutes for the firm's product
C. Each seller supplies a negligible fraction of total market
D. Product differentiation is reinforced by extensive advertising
AACSB: Analytic
Blooms: Understand
21. Which of the following is not a necessary characteristic of a purely competitive industry?
A. The industry- or market demand is highly elastic

B. Firms can enter or leave the industry
C. There are so many firms that none can influence market price
D. Consumers see no difference between the product of one firm and that of another
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-03 Explain how demand is seen by a purely competitive seller.
Topic: Demand as Seen by a Purely Competitive Seller
10-52
22. A purely competitive firm does not try to sell more of its product by lowering its price below the market
price because:
A. Its competitors would not permit it

B. It can sell all it wants to at the market price
C. This would be considered unethical price chiseling
D. Its demand curve is inelastic, so total revenue will decline
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
23. A purely competitive firm can be identified by the fact that:
A. There are other firms in the industry producing similar products

B. It is making only normal profits in the short run
C. Its average revenue equals its marginal revenue
D. It experiences diminishing marginal returns
AACSB: Analytic
Blooms: Understand
24. The demand curve faced by a purely competitive firm:
A. Has unitary elasticity

B. Yields constant total revenues even when price changes
C. Is identical to the market demand curve
D. Is the same as its marginal revenue curve
AACSB: Analytic
Blooms: Remember
25. If the demand curve faced by an individual firm is downward-sloping, the firm cannot be a:
A. A monopoly firm
B. A purely competitive firm
C. An oligopolistic firm
D. A monopolistically competitive firm
AACSB: Analytic
Blooms: Remember
10-53
26. In pure competition, the demand for the product of a single firm is perfectly:
A. Elastic because the firm produces a unique product

B. Inelastic because the firm produces a unique product
C. Elastic because many other firms produce the same product
D. Inelastic because many other firms produce the same product
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
27. If a firm is a price taker, then the demand curve for the firm's product is:
A. Equal to the total revenue curve

B. Perfectly inelastic
C. Perfectly elastic
D. Unit elastic
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
28. Xavier produces and sells tomatoes in a purely competitive market. This implies that Xavier's marginal
revenue from an extra unit of tomatoes is always equal to the:
A. Unit price
B. Average cost
C. Variable cost
D. Unit profit
AACSB: Analytic
Blooms: Understand
10-54
29. Suppose that Joe sells pork in a purely competitive market. The market price of pork is $3 per pound.
Joe's marginal revenue from selling the twelfth pound would be:
A. $36
B. $3
C. 12 lbs.
D. 1 lb.
AACSB: Analytic
Blooms: Understand
30. In pure competition, each extra unit of output that a firm sells will yield a marginal revenue that is:
A. Equal to the price

B. Less than the price
C. Greater than the price
D. Equal to the average cost
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
31. Average revenue is conceptually equivalent to the:
A. Unit price of the product

B. Average cost of the product
C. Marginal cost of the product
D. Marginal revenue of the product
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
32. Average revenue and marginal revenue are equal at each output level in:
A. Pure competition
B. Monopolistic competition
C. Monopoly
D. Oligopoly
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
10-55
33. In a graph for a firm in pure competition with the quantity of output measured on the horizontal axis, the
total revenue curve is:
A. Downward-sloping
B. Horizontal
C. Vertical
D. Upward-sloping
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
34. The total revenue of a purely competitive firm from 8 units of output is $48. Based on this information,
total revenue for 9 units of output must be:
A. $52
B. $54
C. $58
D. $60
AACSB: Reflective Thinking

Blooms: Analyze
Difficulty: 3 Hard
35. A purely competitive firm currently producing 20 units of output earns marginal revenues of $12 from
each extra unit of output it sells. If it sells 30 units, then its total revenues would be:
A. $120
B. $240
C. $360
D. Indeterminate based on the given information

Blooms: Analyze
Difficulty: 3 Hard
10-56
36. Assume the price of a product sold by a purely competitive firm is $5. Given the data in the
accompanying table, at what output level is total profit highest in the short run?
A. 20
B. 30
C. 40
D. 50
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 10-04 Convey how purely competitive firms can use the total-revenue-total-cost approach to maximize profits or
minimize losses in the short run.
Topic: Profit Maximization in the Short Run: Total-Revenue - Total-Cost Approach
37. In the standard model of pure competition, a profit-maximizing firm will produce the output quantity in
the short run where the gap between:
A. Marginal revenue and marginal cost is the largest, with revenue higher than cost
B. Average revenue and average cost is the largest, with revenue higher than cost
C. Total revenue and total cost is the largest, with revenue higher than cost
D. Average revenue and average variable cost is the largest
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
38. In the standard model of pure competition, a profit-maximizing firm will shut down in the short run if
price is below:
A. Marginal cost
B. Average cost
C. Average fixed cost
D. Average variable cost
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
10-57
39. In the standard model of pure competition, a profit-maximizing firm will shut down in the short run if:
A. Marginal cost is greater than average revenue

B. Average cost is greater than average revenue
C. Average fixed cost is greater than average revenue
D. Total revenue is less than total variable cost
AACSB: Analytic
Blooms: Understand
40. Given the table below, what is the short-run profit-maximizing level of output for the firm?
A. 2 units
B. 3 units
C. 4 units
D. 5 units
AACSB: Analytic
Blooms: Apply
10-58
41.
Refer to the above graph for a purely competitive firm in the short run. The firm would suffer losses if it
operates at which of the following range of output?
A. 0A
B. A
B
C. BC
D. Any level below C
AACSB: Analytic
Blooms: Understand
10-59
42.
Refer to the above graph for a purely competitive firm in the short run. Profits would be maximized if
the firm produces which level of output?
A. A
B. B
C. C
D. Greater than C
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
10-60
43.
Refer to the above graph for a purely competitive firm in the short run. The price of the firm's product is
given by:
A. 0F/0C
B. 0G/0C
C. 0F/0B
D. 0E/0A

Blooms: Analyze
Difficulty: 3 Hard
10-61
44.
Refer to the above graph for a purely competitive firm in the short run. What minimum output level
should the firm produce just for it to break even?
A. A
B. B
C. C
D. Greater than C
AACSB: Analytic
Blooms: Understand
10-62
45.
Refer to the above graph for a purely competitive firm in the short run. If the firm increases its output
level from B to C, then its total profits will be:
A. Negative and decreasing

B. Negative and increasing
C. Positive and increasing
D. Positive and decreasing
AACSB: Analytic
Blooms: Understand
Refer to the above table. If the firm shuts down in the short run, the total cost will be:
A. $1,350
B. $2,500
C. $2,700
D. $3,100
AACSB: Analytic
Blooms: Understand
10-63
Refer to the above table. If the product sells for $1,200 a unit, the firm's profit-maximizing output is:
A. 2
B. 3
C. 4
D. 5
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
48. Answer the question based on the table below.
At what quantity would a purely competitive firm cover all of its costs and earn only normal profits?
A. Q=5
B. Q = 10
C. Q = 15
D. Q = 20
AACSB: Analytic
Blooms: Apply
10-64
49. Let us suppose Harry's, a local supplier of chili and pizza, has the following revenue and cost structure:
A. Harry's should stay open in the long run

B. Harry's should shut down in the short run
C. Harry's should stay open in the short run
D. Harry's should shut down in the short run but reopen in the long run
AACSB: Analytic
Blooms: Apply
50.
Refer to the above graph. Which of the output levels is the profit-maximizing output level for this firm?
A. Q1
B. Q2
C. Q3
D. Q4
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
10-65
51.
Refer to the above graph. The amount of profit is measured by the difference between:
A. a and c
B. b and c
C. d and e
D. a and f
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
52.
In a typical graph for a purely competitive firm, at the point where the total cost and total revenue
curves intersect, the firm:
A. Earns some economic profit

B. Suffers some economic loss
C. Earns some normal profit
D. Suffers some accounting loss
AACSB: Analytic
10-66
Blooms: Understand
Refer to the above table. The market price of the product in the short run is:
A. $40
B. $80
C. $120
D. $160
AACSB: Analytic
Blooms: Apply
Refer to the above table. The marginal revenue from the third unit of output is:
A. $40
B. $50
C. $120
D. $160
AACSB: Analytic
Blooms: Apply
Learning Objective: 10-05 Explain how purely competitive firms can use the marginal-revenue-marginal-cost approach to maximize profits
or minimize losses in the short run.
Topic: Profit Maximization in the Short Run: Marginal-Revenue-Marginal-Cost Approach
10-67
Refer to the above table. When the firm produces 3 units of output, it makes an economic:
A. Profit of $3
B. Loss of $3
C. Profit of $9
D. Loss of $9
AACSB: Analytic
Blooms: Apply
56. As president and owner of the Sour Grapes Lemonade Company, you know that you face:
To maximize your financial well-being, you should:
A. Continue to operate in the short run because rent is less than sales
B. Shut down because variable costs exceed fixed costs
C. Shut down because the company is losing money
D. Continue operating in the short run
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
10-68
57. A profit-maximizing firm in the short run will expand output:
A. Until marginal cost begins to rise

B. Until total revenue equals total cost
C. Until marginal cost equals average variable cost
D. As long as marginal revenue is greater than marginal cost
AACSB: Analytic
Blooms: Remember
58. If a firm increases its output quantity when marginal revenue is less than marginal cost then its profits
will:
A. Be positive
B. Increase
C. Decrease
D. Be negative
AACSB: Analytic
Blooms: Understand
59. Farmer Jones is producing wheat, and must accept the market price of $6.00 per bushel. At this time,
her average total costs and her marginal costs both equal $8.00 per bushel. Her average variable costs
are $5 per bushel. In order to maximize profits or minimize losses, farmer Jones should:
A. Increase output
B. Increase selling price
C. Produce zero output and close down
D. Continue producing, but reduce output
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
10-69
60. Which of the following is true for a purely competitive firm in short-run equilibrium?
A. The firm is making only normal profits

B. The firm's marginal cost is greater than its marginal revenue
C. The firm's marginal revenue is equal to its marginal cost
D. A decrease in output would lead to a rise in profits
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
61. Which is necessarily true for a purely competitive firm in short-run equilibrium?
A. Marginal revenue minus marginal cost equals zero

B. Price minus average total cost equals zero
C. Total revenue minus total cost equals zero
D. Marginal revenue is zero
AACSB: Analytic
Blooms: Understand
62. A purely competitive firm's output is currently such that its marginal cost is $4 and marginal revenue is
$5. Assuming profit maximization, the firm should:
A. Cut its price and raise its output

B. Raise its price and cut output
C. Leave price unchanged and raise output
D. Leave price unchanged and cut output
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
10-70
63. A firm sells a product in a purely competitive market. The marginal cost of the product at the current
output of 1,000 units is $2.50. The minimum possible average variable cost is $2.00. The market price
of the product is $2.50. To maximize profits or minimize losses, the firm should:
A. Continue producing 1,000 units

B. Continue production, but produce less than 1,000 units
C. Increase production to more than 1,000 units
D. Shut down
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
output of 800 units is $3.50. The minimum possible average variable cost is $3.00. The market price of
the product is $4.00. To maximize profits or minimize losses, the firm should:

D. Shut down
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard

D. Shut down
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
10-71
A. Continue to produce 200 units

D. Shut down
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
output is $4.00 and the market price is $4.50. What should the firm do?
A. Shut down if the minimum possible average variable cost is below $4.50
B. Decrease output if the minimum possible average variable cost is below $4.50
C. Increase output if the minimum possible average variable cost is below $4.50
D. Decrease output if the minimum possible average variable cost is above $4.50
AACSB: Analytic
Blooms: Apply
68. T-Shirt Enterprises is selling in a purely competitive market. It is producing 3000 units, selling them for
$2.00 each. At this level of output, the average total cost is 2.50 and the average variable cost is $2.20.
Based on these data, the firm should:
A. Shut down in the short run

B. Decrease output to 2500 units
C. Continue to produce 3000 units
D. Increase output to 3500 units
AACSB: Analytic
Blooms: Apply
10-72
69.
Given the diagram above, which level of output should the entrepreneur choose?
A. Either X1 or X3 since the profit level will be the same

B. X3 since any increase in output will reduce profits
C. X1 since any decrease in output will reduce profits
D. X2 since at this level the difference between MR and MC is maximized
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
70.
Refer to the above graph. To maximize profits, the firm should produce the quantity:
A. 0A
B. 0B
C. 0C
D. 0K
AACSB: Analytic
Blooms: Apply
10-73
Difficulty: 1 Easy
71.
Refer to the above graph. The firm should shut down if the quantity of output that it could sell falls
below:
A. 0A
B. 0B
C. 0C
D. 0K
AACSB: Analytic
Blooms: Apply
10-74
Refer to the above cost table. The firm will produce its output only if the price is at least equal to what
minimum level?
A. $3
B. $4
C. $6
D. $9
AACSB: Analytic
Blooms: Apply
Refer to the above cost table. If the price of the product is $6, what output level will the firm produce?
A. 0
B. 12
C. 14
D. 16
AACSB: Analytic
Blooms: Apply
10-75
Refer to the above table. If the market price for the firm's product is $80, the firm will:
A. Produce 4 units
B. Produce 5 units
C. Produce 6 units
D. Shut down
AACSB: Analytic
Blooms: Apply
Refer to the above table. If the market price for the firm's product is $180, the competitive firm will
produce:
A. 5 units and earn economic profits of $100

B. 6 units and earn economic profits of $120
C. 7 units and earn economic profits of $238
D. 8 units and earn economic profits of $278
AACSB: Analytic
Blooms: Apply
10-76
Refer to the above table. If the product price is $290, the per-unit economic profit at the profit-
maximizing output is:
A. $0
B. $76
C. $119
D. $152
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
10-77
Refer to the above table. Now assume there are 100 identical firms in this industry, each of which has
the same cost data as the single firm described above. Suppose too that the demand curve for this
industry is as shown below:
The equilibrium price will be:
A. $140
B. $180
C. $230
D. $290
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
10-78
78.
Refer to the above graph. At the profit-maximizing level of output, the firm earns profits given by the
area:
A. 0AHE
B. ACFH
C. BCFG
D. ABGH
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
79. A purely competitive firm is currently in short-run equilibrium and its MC exceeds its ATC at its
current output level. It can be concluded that:
A. Firms will leave the industry in the long run

B. The firm is realizing an economic profit
C. The firm is suffering a loss
D. The firm will shut down in the short run
AACSB: Analytic
Blooms: Apply
10-79
80. The Campus Crustacean Company receives $2 per box for its crawfish and is selling 1,600 boxes to
maximize its profits. What is the profit per box of crawfish at this equilibrium level of output if the
average variable cost is $1 per box and fixed costs are $1,200?
A. $.25
B. $.50
C. $1.00
D. $1.25
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
81.
Refer to the above graph. The firm will earn maximum total profits if it produces and sells quantity:
A. 0A
B. 0B
C. 0C
D. 0K
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
10-80
82.
Refer to the above graph. At what level of output will the firm earn a maximum unit-profit margin (or
profit per unit)?
A. 0A
B. 0B
C. 0C
D. 0K
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
10-81
83.
Consider the purely competitive firm pictured above. The firm is earning:
A. Normal profits, since its price is above AVC

B. Economic profits, since its price is above AVC
C. Normal profits, since its price just covers ATC
D. Losses, since it is operating at the shutdown point
AACSB: Analytic
Blooms: Understand
10-82
84.
Consider the purely competitive firm pictured above. At its short-run equilibrium point, the firm is
earning:
A. Zero normal profits

B. Zero economic profits
C. Zero accounting profits
D. We can say nothing about this firm's profit or loss situation
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
85. A purely competitive firm is producing at the point where its marginal cost equals the price of its
product. If the firm increases its output, then total revenue will:
A. Increase and profits will increase

B. Decrease and profits will increase
C. Increase and profits will decrease
D. Decrease and profits will decrease
AACSB: Analytic
Blooms: Remember
10-83
86. A firm should continue to operate even at a loss in the short run if:
A. Its output is above the break-even point

B. Its revenues are less than its fixed costs
C. It can cover its variable costs and some of its fixed costs
D. It has some fixed costs that cannot be brought down to zero
AACSB: Analytic
Blooms: Understand
87.
Refer to the above graph for a purely competitive firm. When the firm is in equilibrium in the short run,
its average fixed cost is:
A. EH
B. DE
C. DH
D. DB
AACSB: Analytic
Blooms: Apply
10-84
88.
Refer to the above graph for a purely competitive firm. When the firm is in equilibrium in the short run,
the amount of economic profit per unit is:
A. EH
B. DE
C. DH
D. DB
AACSB: Analytic
Blooms: Apply
10-85
89.
Refer to the above graph for a purely competitive firm operating at a loss in the short run. Which area in
the graph represents the portion of total costs that the firm can recoup by continuing to produce rather
than shutting down?
A. 0beg
B. 0cdg
C. acdf
D. abef
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
10-86
90.
Refer to the above graph for a purely competitive firm operating at a loss in the short run. Which area in
the graph represents the amount of economic loss for the firm?
A. 0beg
B. bcde
C. acdf
D. abef
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
10-87
91.
Refer to the above graph for a purely competitive firm operating at a loss in the short run. Which of the
following changes in its market would allow the firm to earn positive profits again?
A. An increase in the market demand

B. An increase in the wages of workers in the industry
C. A decrease in the price of raw materials used by firms in the industry
D. A decrease in the price of the industry's product
AACSB: Analytic
Blooms: Apply
92.
Refer to the above graph. At output level H, the area:
A. 0CGH represents the firm's total cost of production

B. ACGE represents the firm's economic profit
C. 0AEH represents the firm's economic profit
D. BCGF represents the firm's fixed cost of production
AACSB: Analytic
10-88
Blooms: Apply
Difficulty: 3 Hard
93. A purely competitive firm will be willing to produce even at a loss in the short run, as long as:
A. The loss is smaller than its total variable costs

B. The loss is smaller than its marginal costs
C. The loss is smaller than its total fixed costs
D. Price exceeds marginal costs
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-06 Explain why a competitive firm's marginal cost curve is the same as its supply curve.
Topic: Marginal Cost and Short-Run Supply
94.
Refer to the above graph. It shows the cost curves for a competitive firm. If the market price falls to
$0.55, the optimal output rate is:
A. 0
B. 15
C. 20
D. More than 20, but less than 35
AACSB: Analytic
Blooms: Understand
10-89
95.
Refer to the above graph. It shows the cost curves for a competitive firm. What is the lowest price at
which the firm will start producing output in the short run?
A. $1.25
B. $1.05
C. $0.90
D. $0.60
AACSB: Analytic
Blooms: Understand
10-90
96.
Refer to the above graph. It shows the cost curves for a competitive firm. If the market price of the
product is $1.05 per unit, then the firm will produce how many units in the short run?
A. Between 0 and 15
B. Between 15 and 20
C. Between 20 and 35
D. Above 35
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
10-91
97.
firm face the same profit or loss whether it chooses to produce or not?
A. P1
B. P2
C. P3
D. P4
AACSB: Analytic
Blooms: Apply
10-92
98.
Refer to the above graph. It shows short-run cost curves for a competitive firm. At what minimum price
would the firm be willing to product some output in the short run?
A. P1
B. P2
C. P3
D. P4
AACSB: Analytic
Blooms: Apply
10-93
99.
firm break even?
A. P1
B. P2
C. P3
D. P4
AACSB: Analytic
Blooms: Apply
100. The short-run supply curve for a competitive firm is the:
A. Entire MC curve
B. Segment of the MC curve lying below the AVC curve
C. Segment of the MC curve lying above the AVC curve
D. Segment of the AVC curve lying to the right of the MC curve
AACSB: Analytic
Blooms: Remember
10-94
101.
Given the above graph, the competitive firm's supply curve is the:
A. MC curve above F
B. MC curve above G
C. MC curve above H
D. MC curve above J
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
102.
Refer to the above graph. This pure competitive firm will not produce unless price is at least:
A. $2
B. $5
C. $7
D. $10
AACSB: Analytic
Blooms: Understand
10-95
103.
Refer to the above graph. At what price will the firm make an economic profit?
A. $2
B. $5
C. $7
D. $10
AACSB: Analytic
Blooms: Understand
10-96
104.
Refer to the above graph. At what price will the firm make just a normal profit?
A. $2
B. $5
C. $7
D. $10
AACSB: Analytic
Blooms: Apply
105.
Refer to the above graph. Which point is definitely not on the competitive firm's short-run supply
curve?
A. A
B. B
C. C
D. D
AACSB: Analytic
Blooms: Remember
10-97
Difficulty: 1 Easy
106.
Refer to the above graph. Which point is the break-even point for the firm?
A. A
B. B
C. C
D. D
AACSB: Analytic
Blooms: Understand
10-98
107.
Refer to the above graph. Which point is the shutdown point for the firm?
A. A
B. B
C. C
D. D
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
108.
Refer to the cost table above. If a competitive firm faced with these costs finds that it can sell its product
at $60 per unit, it will:

C. Produce 7 units and realize a profit of $32
D. Close down in the short run
AACSB: Analytic
Blooms: Apply
10-99
Difficulty: 3 Hard
109.
Refer to the cost table above. If price of the product were $30 per unit, the firm would:

C. Produce 7 units and realize a loss of $32
D. Shut down in the short run
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
10-100
110.
Refer to the cost table above. Based on the cost data given, which of the following price-quantity tables
correctly represents the firm's short-run supply schedule?
A. Table a
B. Table b
C. Table c
D. Table d
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
10-101
111.
Refer to the cost table above. Now suppose that there are 600 identical firms in this industry, each with
the same cost data as the single firm discussed above. Suppose, too, that the demand curve for this
industry is as follows:
Based on all these data, the equilibrium price of the product in the market will be:
A. $60
B. $95
C. $120
D. $75
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
10-102
112.
When the market is in equilibrium, each of the firms will be producing:
A. 5 units
B. 6 units
C. 7 units
D. 9 units
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
10-103
113.
At equilibrium, each firm will realize:
A. An economic profit of $155

B. An economic profit of $35
C. A loss of $45
D. A loss of $135
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
10-104
114.
Refer to the above graph. All data are for the short run. The firm represented in this diagram is selling
under conditions of:
A. Pure monopoly
B. Pure competition
D. Oligopoly
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
10-105
115.
Refer to the above graph. All data are for the short run. If the product price is P2, the firm will:
A. Close down to avoid a loss

B. Produce Q2 units and make an economic profit
C. Produce Q5 units and break even
D. Produce Q2 units and suffer a loss
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
116.
Refer to the above graph. All data are for the short run. Which of the following statements is correct?
A. Production is profitable only when price is above P3

B. Average fixed cost is P1 P3 at output Q1
C. The firm will produce an output of Q1 when price is P1
D. At price P1, the firm will close down
AACSB: Analytic
10-106
Blooms: Apply
117. In the short run, fixed costs for a profitable firm are:
A. Zero
B. Negative
C. Important determinants of the output level
D. Irrelevant in determining the optimal level of output
AACSB: Analytic
Blooms: Remember
118.
If the supply and demand curves above represent the market supply and demand for a purely
competitive industry, then the demand curve that an individual firm in the industry faces:
A. Is identical to the market demand

B. Is equal to the marginal-revenue curve which is a flat line at P0
C. Is more elastic than the market demand but has a marginal-revenue curve lying below it
D. Has the same slope as the market demand, but at P0 its quantity demanded is only a fraction of Q0
AACSB: Analytic
Blooms: Apply
10-107
119. In pure competition, price is determined where the industry:
A. Demand and supply curves intersect

B. Total cost is greater than total revenue
C. Demand intersects the individual firm's marginal cost curve
D. Average total cost equals total variable cost
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
120. If the market demand for the product increases, in the short run a purely competitive firm:
A. Will not change its output quantity because there are so many firms that the individual firm will not
be affected by the change
B. Will earn higher profits or experience smaller losses as a result of the change in the market
C. Will experience no change in costs as it steps up production in response to the change in the market
D. Can employ more inputs and increase the size of its plant, to respond to the change in the market

Blooms: Understand
121. The wage rate increases in a purely competitive industry. This change will result in a(n):
A. Decrease in average total cost for a firm in the industry

B. Decrease in average variable cost for a firm in the industry
C. Increase in the marginal cost curve for a firm in the industry
D. Increase in short-run supply curve for a firm in the industry
AACSB: Analytic
Blooms: Apply
122. Technological advance improves productivity in a purely competitive industry. This change will result
in a shift:
A. Down of the individual firm's MC curve, causing the market supply curve to shift to the left
B. Down of the individual firm's MC curve, causing the market supply curve to shift to the right
C. Up of the individual firm's MC curve, causing the market supply curve to shift to the left
D. Up of the individual firm's MC curve, causing the market supply curve to shift to the right
AACSB: Analytic
10-108
Blooms: Understand
123. The resource cost falls in a purely competitive industry. This change will result in a(n):
D. Increase in marginal cost at each output level for firms in the industry and an increase in the
industry supply curve
AACSB: Analytic
Blooms: Apply
124. The average wage of workers increases in a purely competitive industry. This change will result in a(n):
D. Increase in marginal cost for firms in the industry and a decrease in the industry supply curve
AACSB: Analytic
Blooms: Apply
True / False Questions
125. If there are many firms in an industry, then it must be a purely competitive market.
FALSE
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
126. The basic difference between pure competition and monopolistic competition is in the number of firms
in the industry.
FALSE
AACSB: Analytic
10-109
Blooms: Remember
Difficulty: 1 Easy
127. Competitive firms are price takers largely because of intensive advertising by their competitors.
FALSE
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
128. For a purely competitive firm, the demand curve facing it is the same as its marginal revenue curve.
TRUE
AACSB: Analytic
Blooms: Remember
129. In pure competition, the industry demand curve is infinitely price elastic.
FALSE
AACSB: Analytic
Blooms: Understand
130. For an individual firm in pure competition, the firm's average revenue and marginal revenue at any
output level are both equal to the product's price.
TRUE
AACSB: Analytic
Blooms: Understand
131. If a purely competitive firm is producing a level of output greater than its profit-maximizing output,
then its profits must be negative.
FALSE
AACSB: Analytic
Blooms: Apply
10-110
132. As long as its total revenues are greater than its total costs, a firm will earn positive economic profits.
TRUE
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
133. If the firm produces an output level below its break-even point, then the firm will earn negative
economic profits.
TRUE
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
134. If a purely competitive firm is producing a level of output where the marginal revenue is less than the
marginal cost, then its profits must be negative.
FALSE
AACSB: Analytic
Blooms: Understand
135. As long as an additional unit of output yields a marginal revenue larger than its marginal cost it will be
adding to total profits of the firm.
TRUE
AACSB: Analytic
Blooms: Understand
136. If MR > MC for a competitive firm, it should reduce its level of output in order to make MR equal to
MC.
FALSE
AACSB: Analytic
Blooms: Understand
10-111
137. In the short run, a competitive firm will not produce unless price is at least equal to average total costs.
FALSE
AACSB: Analytic
Blooms: Remember
138. In the short run, fixed costs are important in determining a firm's optimal level of output.
FALSE
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
139. In pure competition, a competitive firm‘s supply curve is that section of its marginal cost curve above
ATC and at any price below the average cost, the firm will produce nothing.
FALSE
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Topic: Profit Maximization in the Short Run
10-112

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Chapter 10

Pure Competition in the Short Run

Multiple Choice Questions

1. Which market model assumes the least number of firms in an industry?

5. In which two market models would advertising be used most often?

A. Pure competition and monopolistic competition

9. The fast-food restaurant industry would be an example of which market model?

13. Which idea is inconsistent with pure competition?

14. Which characteristic would best be associated with pure competition?

16. In a purely competitive industry, each firm:

A. Determines its own price

17. Which is a feature of a purely competitive market?

A. Price differences between firms producing the same product

A. There are differentiated products

A. Firms produce a homogeneous product

A. The firm's demand curve is downward-sloping

A. The industry- or market demand is highly elastic

A. Its competitors would not permit it

23. A purely competitive firm can be identified by the fact that:

A. There are other firms in the industry producing similar products

A. Has unitary elasticity

A. Elastic because the firm produces a unique product

A. Equal to the total revenue curve

A. Equal to the price

31. Average revenue is conceptually equivalent to the:

A. Unit price of the product

A. Marginal cost is greater than average revenue

A. Negative and decreasing

48. Answer the question based on the table below.

A. Harry's should stay open in the long run

A. Earns some economic profit

To maximize your financial well-being, you should:

57. A profit-maximizing firm in the short run will expand output:

A. Until marginal cost begins to rise

A. The firm is making only normal profits

A. Marginal revenue minus marginal cost equals zero

A. Cut its price and raise its output

A. Continue producing 1,000 units

A. Continue producing 800 units

A. Continue producing 500 units

A. Continue to produce 200 units

A. Shut down in the short run

A. Either X1 or X3 since the profit level will be the same

A. 5 units and earn economic profits of $100

The equilibrium price will be:

A. Firms will leave the industry in the long run

A. Normal profits, since its price is above AVC

A. Zero normal profits

A. Increase and profits will increase

A. Its output is above the break-even point

A. An increase in the market demand

Refer to the above graph. At output level H, the area:

A. 0CGH represents the firm's total cost of production

A. The loss is smaller than its total variable costs

A. Produce 5 units and incur a loss of $50

A. Produce 5 units and incur a loss of $50

When the market is in equilibrium, each of the firms will be producing:

At equilibrium, each firm will realize:

A. An economic profit of $155

A. Close down to avoid a loss

A. Production is profitable only when price is above P3

A. Is identical to the market demand