Chapter: The Firm and the Industry under Perfect Competition
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1. A perfectly competitive firm is a
a. price giver.
b. price taker.
c. price maker.
d. price leader.

2. The result that perfectly competitive firms produce at the lowest per-unit cost is derived from all of the following assumptions except
a. homogeneous products.
b. few sellers.
c. firms facing horizontal demand curves.
d. free entry and exit.

3. Figure 1 below shows demand and short-run cost curves for a perfectly competitive firm. In the short run, this firm would

Figure 1

a. earn positive economic profits.
b. earn economic losses.
c. go out of business.
d. cannot be determined with the information given.

4. In the short run, perfectly competitive firms can
a. make an economic profit.
b. take a loss.
c. break even.
d. All of the above are correct.

5. In Figure 2 below shows the industry's supply and demand curves in panel (1) and the cost curves of a firm in the industry in panel (2). At S3, the firm is

Figure 2

a. shut down.
b. breaking even.
c. earning zero economic profits.
d. earning economic profit greater than zero.

6. The quantity which a firm will supply in the short run
a. can be read from its average cost curve.
b. can be read from its average variable cost curve.
c. can be read from the firm's marginal cost curve above average variable cost.
d. is always zero above minimum average variable cost.

7. We expect the demand curve in the perfectly competitive industry to be
a. negatively sloped.
b. vertical.
c. horizontal.
d. perfectly elastic.

8. Long-run average cost of the perfectly competitive firm
a. includes the cost of raw materials per unit of output.
b. includes the opportunity cost of labor per unit of output.
c. includes the opportunity cost of capital per unit of output.
d. includes all of the items in answers a, b, and c.

9. A perfectly competitive industry in long-run equilibrium is described as efficient because
a. firms produce at the low point on their average cost curve.
b. firms produce where marginal cost yields equals average variable cost.
c. firms earn no more than the cost of capital.
d. firms are not profitable.

10. A subsidy to firms intended to reduce pollution in an industry
a. would shift the LRAC curve upward.
b. would have the same impact on the firm as a tax.
c. would likely drive some existing firms from the industry.
d. would likely have the paradoxical effect of increasing pollution in the industry in the long run.



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