4.1-Perfect competiton

Question 1

What is perfect competition?

Answer 1

A market structure where many firms offer a homogeneous product, and no single firm can influence the market price.

Question 2

True or False: In perfect competition, firms are price makers.

Answer 2

False

Question 3

What are the four main characteristics of perfect competition?

Answer 3

Many buyers and sellers, homogeneous products, perfect information, and free entry and exit.

Question 4

Fill in the blank: In a perfectly competitive market, firms face a __________ demand curve.

Answer 4

perfectly elastic

Question 5

What happens to the price in a perfectly competitive market when demand increases?

Answer 5

The price rises.

Question 6

What is the short-run equilibrium for a firm in perfect competition?

Answer 6

Where marginal cost equals marginal revenue.

Question 7

True or False: Firms in perfect competition can earn supernormal profits in the long run.

Answer 7

False

Question 8

What is the significance of the ‘invisible hand’ in perfect competition?

Answer 8

It describes how individual self-interest leads to positive societal outcomes.

Question 9

What is the primary goal of firms in a perfectly competitive market?

Answer 9

Maximizing profit.

Question 10

How do firms in perfect competition respond to economic losses?

Answer 10

They exit the market.

Question 11

What is a key implication of free entry and exit in perfect competition?

Answer 11

It leads to zero economic profits in the long run.

Question 12

Fill in the blank: In the long run, all firms in perfect competition earn __________ profits.

Answer 12

normal

Question 13

What is the formula for marginal revenue in perfect competition?

Answer 13

Marginal revenue equals price.

Question 14

True or False: Perfect competition leads to allocative and productive efficiency.

Answer 14

True

Question 15

What is allocative efficiency?

Answer 15

When resources are distributed according to consumer preferences.

Question 16

What is productive efficiency?

Answer 16

When goods are produced at the lowest possible cost.

Question 17

What determines the supply curve of a firm in perfect competition?

Answer 17

The portion of the marginal cost curve above the average variable cost.

Question 18

True or False: In perfect competition, firms can differentiate their products.

Answer 18

False

Question 19

What is the long-run adjustment process in a perfectly competitive market?

Answer 19

Firms enter or exit the market until profits are zero.

Question 20

What role does advertising play in perfect competition?

Answer 20

Minimal, as products are homogeneous.

Question 21

How do firms maximize profit in perfect competition?

Answer 21

By producing where marginal cost equals marginal revenue.

Question 22

What is the shape of the demand curve faced by an individual firm in perfect competition?

Answer 22

Horizontal line.

Question 23

What happens to the market supply curve when new firms enter a perfectly competitive market?

Answer 23

It shifts to the right.

Question 24

Fill in the blank: The long-run supply curve in perfect competition is __________ sloping.

Answer 24

upward

Question 25

What is the role of technology in perfect competition?

Answer 25

It can shift the supply curve and affect costs.

Question 26

True or False: Perfect competition results in the highest level of consumer surplus.

Answer 26

True

Question 27

What is the impact of externalities on perfect competition?

Answer 27

They can lead to market failure.

Question 28

What is the difference between short-run and long-run in perfect competition?

Answer 28

In the short-run, firms can earn supernormal profits; in the long-run, they earn normal profits.

Question 29

What does 'free entry' imply in a perfectly competitive market?

Answer 29

New firms can enter the market without restrictions.

Question 30

What is the effect of a decrease in demand on firms in perfect competition?

Answer 30

Firms may incur losses and some may exit the market.

Question 31

Fill in the blank: In perfect competition, the market price is determined by __________.

Answer 31

the intersection of market supply and demand.

Question 32

How do firms in perfect competition achieve productive efficiency in the long run?

Answer 32

By producing at the lowest point of the average cost curve.

Question 33

What is the market structure that contrasts with perfect competition?

Answer 33

Monopoly.

Question 34

What is the implication of perfect information in perfect competition?

Answer 34

All buyers and sellers have access to all relevant information.

Question 35

True or False: Firms in perfect competition can influence market prices through their sales.

Answer 35

False

Question 36

What are the implications of perfect competition for innovation?

Answer 36

Limited, as firms focus on efficiency rather than differentiation.

Question 37

What does a perfectly elastic demand curve indicate about consumer behavior?

Answer 37

Consumers will only buy at the market price.

Question 38

Fill in the blank: In the long run, firms in perfect competition will produce at the __________ of their average total cost curve.

Answer 38

minimum

Question 39

What is the role of government regulation in a perfectly competitive market?

Answer 39

Typically minimal, as the market is self-regulating.

Question 40

What is the impact of market entry on existing firms in perfect competition?

Answer 40

It reduces prices and profits for existing firms.