Chapter 18 — Quiz

Multiple choice

Q1. Which is NOT an assumption of perfect competition? a) Many buyers and sellers b) Identical products c) Barriers to entry d) Perfect information

Q2. A "price taker" is a firm that: a) Sets the market price b) Accepts the market price as given and cannot influence it c) Always charges the lowest price d) Negotiates prices with each buyer

Q3. For a competitive firm, marginal revenue equals: a) Average total cost b) Marginal cost c) The market price d) Zero

Q4. The profit-maximizing rule for a competitive firm is: a) Produce where ATC is minimized b) Produce where P = MC (as long as P ≥ AVC) c) Produce where revenue is maximized d) Produce where fixed costs are covered

Q5. Economic profit is zero when: a) The firm has no revenue b) The firm earns the same return its owners could earn elsewhere (P = min ATC) c) The firm is bankrupt d) Total revenue equals variable cost

Q6. In the long run, if firms in a competitive market are earning positive economic profit: a) Nothing happens b) New firms enter, supply increases, price falls, profit falls to zero c) Existing firms raise prices d) The government intervenes

Q7. The firm's short-run supply curve is: a) The ATC curve b) The MC curve above AVC c) The demand curve d) A horizontal line at the market price

Q8. "Zero economic profit" means: a) The firm is losing money b) The firm should shut down c) The firm is earning a normal return on investment d) The firm has no revenue

Q9. If the market price is below a competitive firm's minimum AVC, the firm should: a) Continue producing b) Raise prices c) Shut down (produce zero) d) Increase output

Q10. The competitive model is useful as a benchmark because: a) All real markets are perfectly competitive b) It identifies the efficient outcome (P = MC) against which other structures are measured c) It predicts exact prices in real markets d) It was the first model invented

Short answer

SA1. State the four assumptions of perfect competition.

SA2. Distinguish economic profit from accounting profit.

SA3. Why does free entry drive economic profit to zero in the long run?

SA4. What is the firm's supply curve in perfect competition, and why?

SA5. Why is perfect competition useful even though no real market is perfectly competitive?

True / False

TF1. In perfect competition, firms can influence the market price. (True / False)

TF2. Zero economic profit means the firm should exit the industry. (True / False)

TF3. The competitive firm's supply curve is its MC curve above AVC. (True / False)

TF4. In long-run competitive equilibrium, P = min ATC. (True / False)

TF5. Perfect competition is common in real-world markets. (True / False)

Selected answers in appendices/answers-to-selected.md.