Chapter 10 Flashcards
____ competition is considered to be rare in the real world.
pure
Firms within pure competition are considered to be price ____.
takers
price taker: a seller (or buyer) that is unable to affect the price at which a product or resource sells by changing the amount it sells (or buys)
A basic feature of the purely competitive market is the presence of ____.
* a large number of sellers
* differentiated products
* high barriers to entry
* differentiated prices
a large number of sellers
A price-taking firm is one of a ____ number of firms producing a product that is identical to that of every other firm in the industry and providing ____ of total market supply.
large; only a fraction
the competitive firm is a price taker: it cannot change the market price; it can only adjust to it. thus the indiviedual competitive producer is at the mercy of the market
Which of the following explains why a purely competitive firm is a price taker?
* A purely competitive firm produces all of total market supply and therefore must accept the price determined by the market
* A purely competitive firm offers a large fraction of total market supply and therefore determines market price
* A purely competitive firm offers only a negligible fraction of total market supply and therefore must accept the price determined by the market
* A purely competitive firm offers only a negligible fraction of total market supply and therefore must set the price for the market
A purely competitive firm offers only a negligible fraction of total market supply and therefore must accept the price determined by the market
____ is relatively rare in the real world, although this market model is highly ____ to several industries.
pure competition; relevant
Which factors illustrate that the demand curve for a purely competitive firm is perfectly elastic? (More than one answer may be correct.)
* The firm produces only a small fraction of the total industry output.
* The firm does not need to lower its price to increase its sales volume.
* The firm has no legal or financial barriers for entering or exiting the industry.
* The firm cannot obtain a higher price by restricting its output.
- The firm does not need to lower its price to increase its sales volume.
- The firm cannot obtain a higher price by restricting its output.
the firm is a price taker, not a pricemaker
Which of the following are conditions necessary to have pure competition?
* very large number of firms or seller
* free entry and exit
* price searchers
* barriers to entry
* standardized product
- very large number of firms or sellers
- free entry and exit
- standardized product
In a purely competitive market, price per unit to a buyer equals: ____.
average revenue to a seller
to say that all buyers must pay $131 per unit is to say that the revenue per unit, or average revenue received by the seller, is $131. price and average revenue are the same thing for a purely competitive firm.
Which of the following are features of a purely competitive market? (More than one answer may be correct.)
* Sales in both national and international markets
* One seller dominating the market
* Major restrictions on where products can be sold
* Many independently acting sellers
- sales in both national and international markets
- many independently acting sellers
A firm’s total revenue is calculated as ____ times quantity produced.
price
A firm operating in a purely competitive market is a price taker because it ____.
cannot change the market price; it can only adjust to it
A purely competitive firm’s demand schedule is equal to which of the following?
* marginal revenue
* quantity supplied
* average revenue
* total revenue
- marginal revenue
- average revenue
In a perfectly competitive market, the demand curve for an individual firm is perfectly ____ at the market price.
elastic, horizontal, flat, constant, or fixed
D = MR = AR
In a purely competitive market, price per unit to the purchaser is synonymous with ____per unit or ____ revenue to a seller. (Enter one word per blank.)
revenue/cost; average/marginal
A purely competitive firm can maximize its economic profit (or minimize its loss) by adjusting only its output because it ____.
is a price taker
From an economic standpoint, the break-even point is the level of output at which a firm makes a(n) ____ profit.
normal
____ revenue is the additional revenue that an additional unit of ____ would add to total revenue.
marginal; output, production, or product
A(n) ____ competitive firm’s average-revenue schedule is also known as its demand schedule. (Enter one word in the blank.)
purely
A firm would not produce a unit of output where ____.
* marginal cost exceeds average revenue
* marginal cost exceeds marginal revenue
* marginal revenue exceeds marginal cost
* marginal cost equals marginal revenue
marginal cost exceeds marginal revenue
if the marginal cost of a unit of output exceeds its marginal reevenue, the firm should not produce that unit. producing it would add more to costs than to revenue, and profit would decline or loss would increase
In the short run, a purely competitive firm can maximize its economic profit (or minimize its loss) by adjusting its ____.
output, production, supply, or quantity
Which of the following best describes the economic break-even point?
* The point where total revenues exceed those of the strongest competitor in the industry.
* The point where total revenue covers all costs, but there is no economic profit.
* The point where total revenue covers fixed costs but not variable costs.
* The point where total revenue exceeds total costs and economic profits are realized.
the point where total revenue covers all costs, but there is no economic profit
Which of the following is a method of calculating economic profit in pure competition?
* Total revenue minus marginal cost divided by quantity
* Price minus average variable cost multiplied by quantity
* Price minus average total cost plus quantity
* Price minus average total cost multiplied by quantity
Price minus average total cost multiplied by quantity
profit = (P - A) x Q in which A = ATC
In pure competition, to calculate economic profit, we first calculate the difference between ____ and average total cost and then multiply it by output. (Type only one word in the blank.)
price or prices
The quantity of a product supplied by a firm in pure competition should ____ as long as price rises.
increase
according to the supply schedule of the competitive firm, there is a direct relationship between price and quantity supplied
In a purely competitive industry, at the profit-maximizing or loss-minimizing level of output, marginal ____ is equal to ____.
cost; price, revenue; marginal cost, revenue; price
Which of the following factors will alter costs and shift the marginal cost or short-run supply curve to a new location?
* prices of variable inputs
* technology
* availability of product substitutes
* consumer preferences
- prices of variable inputs
- technology
changes in such factors as the prices of variable inputs or in technology will alter costs and shift the MC or short-run supply curve to a new location
If price is below a firm’s minimum average
variable ____ cost, the firm will not operate. (Insert only one word in the blank.)
variable
The entry and the exit of firms in an industry are considered to be
long ____-run adjustments.
long
Changes in ____ and changes in prices of variable inputs alter costs and shift the marginal cost or short run supply curve.
technology
In the long run, every purely competitive firm tends to operate at its:
minimum ATC
Which of the following occur only in the long run?
* The expansion or contraction of plant capacity
* The reduction of output to zero
* Price changes in response to demand
* The entry and exit of firms
- the expansion or contraction of plant capacity
- the entry and exit of firms
A constant-cost industry is one where ____ will not affect resource prices and production costs.
* inflation or interest rates
* investment or capital
* expansion or contraction
* supply or demand
- expansion or contraction
After all long-run adjustments are completed in a perfectly competitive market, output will occur at each firm’s minimum average ____.
* variable cost where product price is equal to marginal revenue
* total cost where product price is equal to marginal revenue
* total cost where product price is less than marginal revenue
* total cost where product price is greater than marginal revenue
- total cost where product price is equal to marginal revenue
after all long-run adjustments are completed in a purely competitive industry, product price will be exactly equal to, and production will occur at, each firm’s minimum average total cost
All firms in a(n) ____ industry share the same basic efficiency characteristics.
purely competitive
What is the firm’s most likely response if price is exactly equal to minimum average variable cost?
Indifference to producing or shutting down
There is no incentive for firms to enter or exit the industry in the long run when: (More than one answer may be correct.)
* firms earn a normal profit
* MR = MC
* firms earn a loss
* price equals minimum average total cost
- firms earn a normal profit
- MR = MC
- price equals minimum average total cost
____ efficiency means that goods are produced in the least costly way.
productive
productive efficiency: the production of a good in the least costly way; occurs when production takes place at the output level at which per-unit production costs are minimized
An industry where expansion or contraction will not affect resource prices and production costs is known as a(n) ____.
constant-cost industry
Whether a purely competitive industry is a constant-cost industry or an increasing-cost industry, the final long-run equilibrium position of all competitive firms share which of the following characteristics?
* Price or marginal revenue will settle where it is equal to minimum average variable cost.
* Price or marginal revenue will settle where it is equal to minimum average total cost.
* Price or marginal revenue will settle where it is equal to minimum average total cost.
* In the long run, an equality occurs where price equals marginal revenue, which equals minimum average total cost.
- Price or marginal revenue will settle where it is equal to minimum average total cost.
- In the long run, a multiple equality occurs where price equals marginal cost which equals the minimum average total cost.
- In the long run, an equality occurs where price equals marginal revenue, which equals minimum average total cost.
Which of the following statements are true about allocative efficiency?
* It is impossible to produce net gains for society by altering the mix of goods and services produced.
* Producer surplus is maximized and consumer surplus is minimized.
* The goods and services produced are those that society most wants to consume.
* The marginal cost and marginal benefit of producing each unit of output is equal.
- It is impossible to produce net gains for society by altering the mix of goods and services produced.
- The goods and services produced are those that society most wants to consume.
- The marginal cost and marginal benefit of producing each unit of output is equal.
What does the concept “consumer surplus” mean?
It is the difference between the maximum price that consumers are willing to pay for a product and the market price for that product.
A constant-cost industry is one where ____ will not affect resource prices and production costs.
expansion or contraction
In purely competitive markets, efficiency can be temporarily disrupted and then restored by changes in:
* consumer and producer surplus
* technological changes
* resource supplies
* consumer tastes
- technological changes
- resource supplies
- consumer tastes
What are the effects of the “invisible hand” in a purely competitive economy?
* Inefficient depletion of scarce resources
* Resource allocation that maximizes consumer satisfaction
* Maximum profits for individual producers
* A lack of incentive for innovation or product improvement
- Resource allocation that maximizes consumer satisfaction
- Maximum profits for individual producers
____ efficiency means that resources are distributed among firms and industries to yield a mix of goods and services that is most wanted by society.
allocative
allocative effeciency: The apportionment of resources among firms and industries to obtain the production of the products most wanted by society (consumers); the output of each product at which its marginal cost and marginal benefit are equal, and at which the sum of consumer surplus and producer surplus is maximized.
What must be eliminated or avoided if the “invisible hand” is to produce socially optimal outcomes in purely competitive markets?
externalities
Strategies attempted by firms for increasing their profits include: (More than one answer may be correct.)
* developing a new product that is popular with consumers.
* increasing product prices to increase revenues.
* lowering production costs through improved business organization.
* lowering production costs through better technology.
- developing a new product that is popular with consumers.
- lowering production costs through improved business organization.
- lowering production costs through better technology.
Creative ____ captures the idea that the creation of new products and new production methods erodes the market positions of firms committed to existing products and old ways of doing business.
destruction
creative destruction: The hypothesis that the creation of new products and production methods destroys the market power of firms committed to existing products and older ways of doing business.
What will happen to a firm that finds a way to lower production costs through better technology or improved organization?
its profits will increase
