Question

Perfect Competition

Work Sheet #9

6. If a market is perfectly competitive, then:

     a. the market demand curve for the product is horizontal.

     b. the demand curve facing each individual seller is downward sloping.

     c. the   demand curve facing sellers as a group and each individual seller is horizontal.

     d. the demand curve facing an individual seller is horizontal.

7. Which of the following is characteristic of a purely competitive seller's (price taker's) demand

curve?

     a. It is the same as the market demand curve.

     b. Its elasticity is "1" at all levels of output.

     c. Average revenue is less than price.

     d. Price and marginal revenue are equal at all levels of output.

8. A competitive firm in   the   short   run can determine the profit‑maximizing (or loss‑minimizing) output by equating:

     a. price and marginal revenue.

     b. marginal revenue and marginal cost.

     c. price and average fixed cost.

     d. price and average total cost.

9. If a firm in a purely competitive industry is confronted with an equilibrium price of $5, its marginal revenue:

     a. will be greater than $5.

     b. will be less than $5.

     c. will be equal to $5.

     d. may be either greater or less than $5.

10. Which of the following is not characteristic of perfectly competitive markets?

     a. long run economic profits

     b. homogeneous products

     c. many sellers

     d. free entry and exit

Answer 1

6.

Since in the perfectly competitive firm, there are large number of buyers and sellers and they sell identical product and price is determined by industry and not by the firm. So any firm or any buyers can buy or sell any quantity of goods at the market price. It means there is no effect of the individual demand or supply of goods on the market price. It means production decisions cannot affect the market price.

This is the reason why the demand curve of the perfectly competitive firm is horizontal.

Therefore if a market is perfectly competitive, then the market demand curve for the product is horizontal.

Hence option a is the correct answer.

7.

The characteristic of a purely competitive seller's (price taker's) demand is Price and marginal revenue are equal at all levels of output. This is because Price is same for all level of output and it is the marginal revenue also.

Hence option d is the correct answer.

8.

Since a perfectly competitive firm short-run profit-maximizing condition are;

P=MC

Hence a competitive firm in   the   short   run can determine the profit‑maximizing (or loss‑minimizing) output by equating: Price = MC

Since P=MR in perfect competition, therefore this condition can also be written as

MR=MC

Hence option b is the correct answer.

9.

Since P=MR in perfect competition, therefore this condition can also be written as

MR=MC

Hence if a firm in a purely competitive industry is confronted with an equilibrium price of $5, its marginal revenue will be $5.

Hence option c is the correct answer.

C; will be equal to $5.

10.

Since long-run profit maximization occurs when

P=MC=AC

Therefore it can be said that in the long-run only perfectly competitive firm earns zero-economic profits.

Hence Long run economic profits is not characteristic of perfectly competitive markets

Hence option a is the correct answer.